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Operator
Good day, everyone, and welcome to the Littelfuse, Inc.'s Third Quarter 2011 Conference Call.
Today's call is being recorded.
At this time time I'll turn the call over to the Chairman, President and Chief Executive Officer, Mr.
Gordon Hunter.
Please go ahead, sir.
Gordon Hunter - President and CEO
Thank you, and good morning, and welcome to the Littelfuse Third Quarter2011 Conference Call.
Joining me today is Phil Franklin, our Vice President of Operation Support and Chief Financial Officer.
As you probably saw in the news release, our sales were above the middle of the range we stated in our last call, and earnings were above expectations.
Both our Automotive and Electrical businesses continued to perform very well.
However, our electronic sales were down for the quarter, due to pullbacks in the distribution channel that we expect will continue into the fourth quarter.
I'm going to begin today's report with an overview of third quarter results in our Automotive and Electrical businesses.
Then I'll provide a more in-depth report on the Electronics business, followed by our outlook for the fourth quarter.
But first I'll turn the call over to Phil Franklin, who will give the Safe Harbor statement and a brief summary of the news release.
Phil Franklin.
Thank you, Gordon.
Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environment as we currently see it and as such do include various risks and uncertainties.
Please refer to our press release and SEC filings for more information on the specific risk factors that may cause actual results to differ materially from those expressed in forward-looking statements.
Sales for the third quarter of 2011 were $174.0 million, which was up 6% year-over-year due to continued growth in the Electrical and the Automotive businesses and the addition of Cole Hersee partially offset by lower electronic sales.
GAAP earnings for the third quarter were $1.12 per diluted share, which included and $0.08 charge related primarily to impairment of legacy real estate assets.
Non-GAAP earnings were $1.20 per share compared to $1.13 in the prior year.
The year-over-year earnings improvement resulted primarily from a favorable tax rate in the currency translation effects.
Cash flow from operating activities was strong once again in the third quarter at $36.7 million.
Through nine months, we have now generated $84 million in cash from operating activities, and have spent only $12.4 million in CapEx, putting this on pace to exceed $100 million in free cash flow for the year.
The book-to-bill ratio for electronics was 0.73 for the third quarter reflecting distributors' desire to reduce inventories heading into an uncertain economic environment in the seasonally slower part of the year.
Now I will turn it back to Gordon for some color on market trends and business performance.
Gordon Hunter - President and CEO
Thanks, Phil.
Now let's move on to the review of the three business units, starting with automotive.
Third quarter automotive sales of $47.7 million were 27% of total Littelfuse sales.
Year-over-year automotive sales increased 39% in the third quarter.
Excluding Core Hersey last December, automotive sales were up 5% over last year's third quarter.
The increase was due to increased demand in Asia and Europe and the effects of a stronger Euro.
Third-quarter automotive sales were down about 5% from the second quarter as we predicted in our last conference call.
This is typical for this business as car production slows down due to plant shutdowns over the summer vacation period.
Global car production for the third quarter was approximately flat from the second quarter.
And the difference between the global number and our 5% decline is primarily the impact of increased production of Japanese vehicles.
Japanese car manufacturers are now back to normal production after several months of declines resulting from the March earthquake and its aftermath.
As we don't have a significant market share with Japanese OEMs, we didn't participate in this rebound.
However, we do have a strong relationship with one of the leading global Japanese Tier 1 suppliers.
This company is in the process of transferring some of its production out of Japan to other locations.
And our ability to support this customer around the globe has enabled us to not only retain the business, but grow it.
We are now beginning to see double-digit increases in sales to this Tier 1 customer on an annualized basis.
The majority of our customer base supplies vehicle manufacturers in North America, in Europe as well as Korean and Chinese OEMs.
Overall, we outperformed these segments in the third quarter.
A bright spot for us was a double-digit sales increase in China.
This was mainly driven by an increase in inventory by a major Tier 1 supplier in preparation for the strong September to December sales period that typically occurs before year-end changes in government subsidies.
But this year was different, however, as the government tightened up its subsidy policy on fuel efficient cars effective October 1st.
This generated a huge surge in car sales in September.
In fact, September was the biggest month for car sales in China since January, when sales began to cool after two very strong years.
Going forward, we expect we will continue to see substantial growth in China.
In addition to the stricter subsidy policy, car sales in China are also being impacted by higher interest rates and tighter credit that make vehicle purchases more difficult.
And remember, China is now the world's most biggest auto market with nearly 10 million cars sold through September alone, so even a 1% increase is significant.
On a global basis, fourth-quarter car production is forecasted to be flat with the third quarter, and inventories are currently at targeted levels.
During the third quarter, we focused on strengthening strategic partnerships with our leading global Tier 1 customers.
We signed a new three year agreement with one of our Top 5 customers, and are working on a first-time agreement with another fast-growing customer.
Both customers expect to outperform their market segment over the next few years.
In the area of green car initiatives, we continue to see a growing interest in our new high-current fuse products, including our new high-performing fuse for the electric vehicle market.
The feedback from OEMs on our technology approach and solution has been very positive, especially because we're helping to solve some of the challenges they currently face.
We expect to deliver the first samples of our new high-current fuse products during the fourth quarter.
With the introduction of this new product line, we are well-positioned to take a leadership role in the future of the electric vehicle segment.
Moving to design wins and new business awards, we won new business for our MasterFuse, with a well-established Tier 1 supplier for the GM Holden Platform in Australia.
This platform launches in 2014.
We're also well-positioned to win new business in Brazil through our plant in Mexico, which has a tax advantage as part of a Latin America Trade Zone agreement.
Cole Hersee made a solid contribution to our third quarter sales and earnings.
Third-quarter sales were up 5% versus the previous quarter, and up nearly 7% year-to-date.
Increased heavy duty aftermarket and Solenoid product sales drove the results for the quarter.
Integration of Cole Hersee products into the Littelfuse global sales channels is going well.
During the third quarter, we introduced the Cole Hersee products to our commercial vehicle customers in China.
As a result of these efforts, we won new business at [Sanei] China for a master disconnect switch on a new Crane platform.
Sanei is a major construction equipment manufacturer in China.
This business will start during the fourth quarter and ramp-up during 2012 to approximately $400,000 in annual revenues.
In Europe we won new business at John Deere for our flexible electrical [center].
This new business which will start at the end of 2013 and ramp-up during 2014 will be about $200,000 annually.
In North America we had a very strong growth with Caterpillar, which is our largest customer.
And in addition, we had a new design win for a power control module that will help integrate new telematics functions into a school bus.
This business will start in the second half of 2012.
This new product solution integrates product technologies from both Littelfuse and Cole Hersee, and highlights one of the many benefits of this acquisition.
Looking ahead, we're seeing forecasts of strong growth in the heavy truck segment in North America, as well as continued growth in other commercial vehicle segments, such as construction equipment.
As part of the integration process, we are enhancing our quality and delivery performance so that we are ready to meet the increased demands of the growing commercial vehicle product segment.
In summary, our automotive business is very healthy and is strong in all geographies.
We believe we will continue to outperform the market as a result of our new business wins, new products and strategic positioning.
Now let's move on to our Electrical business unit, where the overall results also continue to be very positive.
Third-quarter sales of $30 million were up 17% from the third quarter of 2010.
Our Electrical business now accounts for 17% of total Littelfuse sales for this quarter.
The continued growth in protection relays and custom electrical products more than offset a decline in electrical fuse sales for the quarter.
Sales for the base fuse business were down 6.7% from the third quarter of last year.
The biggest impact on base fuse sales was the over-production in the solar market which has been well documented globally.
There's a glut of solar inverters in the system and many of our customers continue to burn off our products which are in the pipeline.
Our solar fuses were down in Europe where cuts in tariffs supporting investment in renewable energy technology have reduced demand.
But other markets continue to grow, including North America and China, where increased sales helped to offset the decline in Europe.
We continue to view the inventory adjustment in the solar business as a temporary occurrence and remain confident about the positive long-term outlook for this segment.
As we mentioned on our last call, we launched a major new product for the solar market in the second quarter.
We entered the third quarter with one large European manufacturer in the design stage, and by the end of the quarter we added five US and three Chinese central inverter and s ray combiner box manufacturers to the total.
Key features of our product that are helping to drive sales are its compact size, wide range of ampere ratings, and the multiple installation configurations that are available.
We expect the end customer ramp-ups for these solar product sales to begin early next year.
Total sales will be over $1 million when the full production begins in mid-2012.
We also had a good win during the quarter for our Class T Electrical fuses, fuse blocks and covers with a customer that manufactures material forming equipment.
The customer requires that all fuses be covered for added safety, and we are the only fuse manufacturer that offers a cover for this type of fuse.
So even though non-residential construction remains down, there is softness in the solar market, the base fuse business is holding fairly steady, and our new solar products positions us well for the rebound in this market when it occurs.
The other two product families in our Electrical business are protection relays and custom electric products.
Sales of these products increased 54% from the third quarter of last year due to the strength of the worldwide wide binding industry, the fast-paced growth of our protection relay product line, and the Selco acquisition.
Our custom electrical distribution products grew by 39% compared to the third quarter of last year.
This business specializes in producing extremely reliable power distribution equipment for use in harsh underground environments.
The Canadian potash mines are some of our largest customers, and they have been expending their operations to meet the growing worldwide demand for potash.
As a primary supplier to this industry, we've benefited from their capacity expansions and significantly increased our production output over 2010 levels.
We also continue to grow sales of our protection relays in several targeted markets.
We took market share in the North America mining segment, and further expanded sales in international markets, including South America and Asia.
The oil and gas markets were also strong drivers for protection relay sales in the third quarter.
We continue to win new business for our protection relays from a variety of customers.
We had a very good win for a high-resistance grounding project used in an offshore oil platform operated by British Petroleum.
And while we're pleased with this order, the real value is that the order helped us become an approved vendor for BP, opening the door to other potential projects, including those in Alaska.
We secured several substantial orders from a large open pit coal mine in China.
We were competing against a much less expensive, lower quality Chinese relay company.
So it's clear that the quality and performance of our products is a competitive advantage.
This is a huge mine which should now become a regular customer.
An Xstrata Group mining project in Peru has standardized on our ground fault monitors and motor protection relays.
We've already received several medium-sized orders and expecting more in 2012 and beyond.
In addition to all of this new business, in August we completed the acquisition of Selco, which we mentioned in our second-quarter call.
Selco is a Danish company that specializes in protection relays and engine-control products that are used in marine and power generation applications.
The integration is going very well.
We're moving forward with our strategies to increase revenues, like cross-selling the products of both companies to existing and new customers.
International expansion is another growth strategy for our relay business, and Selco's presence in Europe and the Middle East gives us a solid foundation to build on in these markets.
As the numbers indicate, the custom electrical products and the protection relay businesses are extremely successful.
Both are growing fast organically and through acquisitions, and we are executing on our stated strategies to expand both internationally and in the new vertical markets.
For the balance of 2011, we expect that the base fuse business will continue to be driven by the industrial OEM and MRO segments.
Commercial construction is not expected to improve until 2012 and therefore remains a drag on the overall momentum of our fuse products.
For the protection relay and custom electrical products, we anticipate further growth in international markets and deeper penetration for our new Arc-Flash relay we launched last quarter into the North American industrial customer base.
That completes the review of the Automotive and Electrical businesses, which together account for about 45% of our sales.
Both of these businesses are performing very well and we are pleased with the acquisitions we've made to expand their presence in targeted markets.
In our Automotive business we targeted the offshore -- the off-road truck and bus market as a growth area for Littelfuse.
And the acquisition of Cole Hersee builds on the base we already had in the segment and provides a strong foundation for what we now call our commercial vehicle products business.
In the Electrical business we entered the highly-successful custom electrical products and production relay markets through the acquisition of Startco three years ago.
We developed additional protection relay products and further expanded this product line with the Selco acquisition I talked about earlier.
As a result of these steps, our Automotive and Electrical businesses are very healthy and are positioned for even further growth.
Now let's focus on the other 55% of our sales.
The Electronics business for the third quarter was not as robust.
Electronic sales were $96.3 million for the third quarter, a 7% decline from the third quarter of 2010, and a 2% sequential decrease from the second quarter.
As we discussed in prior calls this year, we have a difficult year-over-year comparison because of the strong inventory replenishment throughout the supply chain we experienced last year.
You can see that reflected in the comparison to last year's third quarter.
However, before I get into a further discussion of inventory levels in the channel, I'd like to first focus on end demand.
Overall, end demand was not as seasonally strong in the third quarter as it has been in prior years, although there are pockets of strength or weakness depending upon the segment.
Both Intel and AMD reported sales growth in PCs, particularly into emerging markets, where display search estimated over half of the Notebook PCs are now sold.
However, Gartner Research reports that third-quarter PC sales increased by 3.2% over the previous year as compared to a prior forecast of 5.1%, reflecting below normal seasonality with weaker back-to-schools in mature markets.
This has resulted in our channel partners in Taiwan carefully managing inventory of our electronic components going into computing applications, including our fuses and TVS diodes.
There's an emerging computing segment called the Ultrabook.
This is a category of thin and lightweight ultra portable laptops.
Since these are lower profile machines, the demand is for low profile electronic components.
Littelfuse has a broad offering of fuses, PTCs and TVS diodes that are being designed into these machines, just as we have done for PCs, notebooks and netbooks.
This new Ultrabook segment may grow at the expense of notebook, but we are well-positioned to capture revenue either way.
Tablets continue to penetrate the market, although at a slower pace.
According to Digitimes, tablet shipments of approximately $19 million in the third quarter grew only 27% sequentially as compared to 61% sequential growth in the second quarter.
As tablets and eReaders continue to grow, so do sales of Littelfuse electronic products.
We have a position with fuses in the iPad 2, in the Samsung Galaxy tablet, as well as ESD protection in leading eReader and tablet products.
Consumer electronics applications are not as strong, however.
Customers in Asia that purchase our circuit protection products used in power supplies and chargers are telling us that they anticipate a slower fourth quarter than normal, and in response our distributors are trimming inventory levels.
Consistent with these messages, DigiTimes reports that Taiwan-based PC board manufacturer demand is forecasted to slip 15% sequentially.
To highlight another consumer electronic application where demand forecasts have been reduced, let's turn to TVs.
According to DisplaySearch, 2011 LCD TV shipments are expected to grow 6%, to a little over 200 million units.
And while still growing, this is down from the prior forecast growth rate of approximately 9% and down from the 30%-plus growth rates that flat panel TVs have enjoyed in each of the last several years.
While TV shipments to emerging markets have been strong, demand has weakened in the mature markets of North America, Western Europe and Japan.
We expect continued growth in LCD TVs in the coming years, and we have good penetration with our fuse and overvoltage circuit protection products.
However, the slowing growth rate in the latter half of 2011 has contributed to weaker demand in the near term.
Demand has also slowed for our products going into data communications equipment with our leading customers in China, Europe and the US.
Sales into these applications were down sequentially in the third quarter as compared to the second quarter.
Lastly, and confirming expectations for reduced demand in the second half of the year, Gartner and iSupply have reduced expectations for full-year 2011 semiconductor component sales to be approximately flat to 2010.
The tragedy in Japan in March and the resulting disruption to the Japanese manufacturing base has continued to be a factor for our electronic product performance, with an estimated impact of $1.5 million per quarter.
And, while there's been some improvement, our sales in this region are still 20% below the level of the prior year.
The strong yen has also slowed recovery in Japan, as Japanese exports have become more expensive.
The recent flooding that has occurred in Thailand will also have a small impact on our business, and, while we do not expect a direct impact on sales to our customers in the affected region, we were utilizing a subcontract package assembler for some semiconductor components.
We're actively working on ramping up volume at other assembly partner locations, but there is potential for a quarterly impact to sales of approximately $0.5 million starting in the fourth quarter of this year.
We remain watchful, but it is difficult to estimate whether there will be any additional impact on our sales due to the reduction in the supply of hard disk drives or vehicles from the affected region.
These data points of weaker than expected demand in the latter half of 2011 have understandably caused our distribution channel partners to reduce inventory levels.
Although a significant amount of our design-in efforts are with the end OEM, approximately 80% of our electronic products are fulfilled through our distribution channel partners.
This has had and will continue to have a significant impact on our near-term revenue levels, with forecasted fourth quarter electronic segment revenues estimated to be down approximately 25% sequentially from the third quarter.
Slowing end demand or slower than forecasted demand causes a backup of inventory in the supply chain and has an even more pronounced effect on our near-term sales.
From inventory on retailer shelves and warehouses to inventory on the floor and warehouses of electronics manufacturing services companies, all the way back to inventory held by electronic component distributors, all of these levels must be worked down to more closely match current and anticipated end demand levels.
In turn, this causes a decline in our sales of electronic products until inventory levels have been corrected.
Reflecting this reality and the weaker order trend that we've seen since May and discussed in our second quarter call, our book-to-bill ratio was 0.73 to 1 in the third quarter, and although shipment levels are lower than in the third quarter, as I indicated, we saw a stabilization of orders in the month of October, with a book-to-bill ratio of approximately 1 to 1.
Looking ahead, we expect a challenging start to 2012, as inventory corrections we've seen in the past usually last a quarter or two.
Despite these headwinds, we continue to focus on new design wins, and I'd like to highlight a few of our wins in the third quarter.
Last quarter we talked about growth in our barrier fuse networks.
Our line of hazardous area barrier network fuses is designed to enable greater safety in operating electronic equipment within potentially explosive environments.
Key customers include MTL Instruments in the UK and Pepperl+Fuchs in Germany.
Both of these companies provide protection equipment to the oil and gas industries.
We saw strong sales of our barrier fuses in the second and third quarters, and we expect this momentum to continue with a 10% sequential increase in the fourth quarter, earning approximately $1.1 million of incremental revenue in 2011.
The LED lighting market continues to grow, providing new opportunities for Littelfuse products.
Each LED bulb has an AC/DC power supply built into it, and many agencies require circuit protection for these bulbs.
We are continuing our success in getting our fuses designed into these LED fixtures.
Last quarter we talked about successful design wins with Osram, Philips, Lighting Science Group and Sharp, and we've now secured design wins at Lights of America and Samsung, totaling additional upside of $1 million in 2012.
We expect this market to generate sales of approximately $350,000 in the fourth quarter, with a nice increase expected next year.
We've also talked in the past about our broad-based successes in penetrating the overvoltage protection market with our TVS diodes in consumer, data communications and industrial applications.
Another growth area is in high reliability segment, where we've expanded TVS diode sales into an aerospace application.
Working to uphold safety and reliability in mission-critical systems, a leading maker of electronic control systems has turned to Littelfuse for TVS diodes to protect engine control modules from damaging overvoltage events that could render the system inoperable.
This company has been a customer for our fuses for some time and expanded their relationship with us to include the qualification of our TVS diodes earlier this year.
This aerospace customer is pleased with our product quality and responsiveness and has ramped up to over $750,000 as we continue to identify additional opportunities to support them.
Although the market conditions remain challenging, we remain optimistic about the future of our electronics business.
That completes my review of our three business units.
So, to summarize, our automotive and electrical businesses are performing very well.
In the electronics business, the issue is in the inventory correction by distributors.
The base business is solid, and the outlook for our ultimate end markets, including a vast array of consumer electronics products, remains positive.
We've made excellent progress with our growth initiatives and strategic acquisitions, with successful acquisitions including Cole Hersee in the automotive business and first Startco and now Selco in the electrical business.
We continue to benefit from our increased operational efficiency and leaner cost structure.
We are carefully controlling discretionary spending and inventory in the light of the headwinds in electronics business.
However, we are not pulling back on our major growth initiatives such as new product development.
Cash flow remains strong, with cash from operating activities at $84 million through the nine months.
We used some of the capital to repurchase 859,000 shares of our common stock in the third quarter at an average price of $43.18 per share.
At the end of October the Board increased the share repurchase authorization from 1 million to 1.5 million shares, and this gives us the ability to purchase about 640,000 additional shares by April 30.
I'll now turn the call back to Phil, who will provide the outlook for the fourth quarter, and then we'll open the call for questions.
Phil Franklin - Vice President of Operation Support and CFO
Thank you, Gordon.
The following is our guidance for the fourth quarter.
Sales for the fourth quarter of 2011 are expected to be in the range of $140 million to $150 million.
At the midpoint, this represents a 17% sequential decline compared to a normal seasonal decline of about 5% to 7%, primarily reflecting inventory destocking by our electronic distributors.
Operating margin for the base business -- that's excluding Cole Hersee and Selco -- is expected to be between 14% and 15%, reflecting negative operating leverage at these lower sales levels.
Including Cole Hersee and Selco, operating margin is expected to be between 13% and 14% for the quarter.
Earnings for the fourth quarter of 2011 are expected to be in the range of $0.60 to $0.70 per diluted share.
Capital spending for the year 2011 is now expected to be $16 million to $19 million, down from the previous estimate of $25 million to $28 million, due to some large projects that were pushed out into 2012.
These pushouts are expected to result in increased capital spending in 2012.
Despite the expected slow start to 2012 due to the lingering effects of the inventory correction, we believe we can still grow both sales and earnings for the year.
This concludes our prepared remarks.
Now we'd like to open it up for questions.
Operator
(Operator Instructions).
And your first question comes from the line of Shawn Harrison, with Longbow Research.
Please proceed.
Shawn Harrison - Analyst
Hi.
Good morning.
I wanted to delve back into the weakness within the electronics business, then, against the commentary that October has seen some stabilization at least with your partners.
The key question is the run rate you're seeing currently, how much different is that than, say, the middle of the quarter?
I mean, it looks like right now you're seeing about $24 million, $25 million of monthly revenues out of the electronics business in terms of what you're forecasting.
How much lower is that than, say, it was during August and September?
Phil Franklin - Vice President of Operation Support and CFO
Yes, so, I mean, the trend generally, Shawn, was that I think we first started talking about a declining order trend back as early as the second quarter.
I think it was about the May/June time frame where we first saw that trend start to emerge.
And it continued, orders continued to decline all the way through September and into the early part of October, where we saw things stabilize.
Over the last three to four weeks we've seen some improvement in that.
I'm not going to give specific up-and-down numbers there, but we have seen a pretty significant improvement that is still not the levels we'd like it to be but much improved over where it was just a few weeks ago.
Shawn Harrison - Analyst
Maybe another way to look at it is Littelfuse delivered something close to $100 million in electronics revenues in the June quarter.
You're going to be maybe in the $70 million range for this quarter.
How much of that, I guess, is true demand versus the inventory adjustment that you think, or that the market is seeing?
Phil Franklin - Vice President of Operation Support and CFO
Yes, so, we're down.
I mean, we're calling obviously for a very steep decline in our electronics sales in Q4, up in the mid 20s, 25%, 26%.
Certainly end demand has not dropped off anything close to that.
In fact, many of our markets end demand has held in there pretty solid.
So I think it's safe to say that the majority of that decline is inventory-related.
Normally we would expect a seasonal decline of 5% to 7%, somewhere in that range.
The much bigger decline there, you can attribute the majority of that to the inventory situation.
Shawn Harrison - Analyst
Okay.
And within that you're not seeing any odd pricing dynamics right now?
This is solely just an inventory adjustment?
Phil Franklin - Vice President of Operation Support and CFO
No, we're not seeing anything unusual on the pricing side at all.
Shawn Harrison - Analyst
Okay.
Then as a follow-up, SG&A, even after backing out the charges this quarter, was a little higher than I thought it would be.
I guess maybe what is the expectation through the end of the year and into early 2012?
Phil Franklin - Vice President of Operation Support and CFO
Yes, so, we've -- I mean, a couple of things.
Obviously, we've brought in a couple of new businesses during the year, Cole Hersee at the beginning of the year, Selco coming in in the third quarter.
As we've mentioned, Selco has a -- relative to the size of the business today has a pretty high SG&A structure.
We're confident that we're going to grow the top line there and hold the structure constant, and in the not-too-distant future we expect those ratios to become more in line, but right now that's having somewhat of an impact.
But other than taking on a full quarter of Selco SG&A going forward I wouldn't expect there to be major SG&A increases.
I think we would expect SG&A to be pretty flat from Q3 levels.
Shawn Harrison - Analyst
Very helpful.
Thanks so much.
Phil Franklin - Vice President of Operation Support and CFO
Yes.
Operator
Your next question comes from the line of Peter Lisnic, with Robert W.
Baird.
Please proceed.
Peter Lisnic - Analyst
Good morning, gentlemen.
Phil Franklin - Vice President of Operation Support and CFO
Good morning, Pete.
Peter Lisnic - Analyst
I guess first question, if I look at the fourth quarter op margin forecast, 13% to 14% all in, can you give us a sense, is that just simply volume deleverage or are there any other sort of one-time costs that might be driving that margin down a bit?
Phil Franklin - Vice President of Operation Support and CFO
No, I mean, if you really do the math on that, again, you have to look at the impacts of Selco and Cole Hersee, which have about, I think, three quarters, or about 700 or 800 basis points impact on that margin.
If you look at basically the base business and look at the decline that we're seeing in the base business from Q3 to Q4, it pretty much can be all attributed to operating leverage in terms of the declines.
There aren't any other significant factors that we're baking into that projection.
Peter Lisnic - Analyst
Okay, perfect.
And then, by extension, I would assume that as you look at 2012, depending upon what our volume assumption is, that the incremental margins should be comparable to kind of what you've laid out as historical rules of thumb.
Is that the right way to think about it?
In other words, nothing nonrecurring?
Phil Franklin - Vice President of Operation Support and CFO
That's the right way to think about it, yes.
I think we implied in our kind of general guidance for 2012 is the fact that certainly we would expect to do no worse than sustain the current margin levels going into 2012, if not improve them.
Peter Lisnic - Analyst
Okay, all right.
And then, separate question, on the -- when we look at the share buyback in the third quarter in the context of capital allocation going forward, what does that tell us in terms of acquisition environment and priorities for capital allocation?
Phil Franklin - Vice President of Operation Support and CFO
Certainly the -- as we've always stated, the number one priority for our free cash is good strategic fit accretive acquisitions, and that's still the case, and we're still looking heavily in the areas of the commercial vehicle products, building on the Cole Hersee acquisition and further into the Startco products, particularly the protection relays, where we've identified a number of potential acquisitions there and we continue to hunt in those areas and then just be also alert for other consolidation opportunities that might come our way.
Peter Lisnic - Analyst
Okay, so no real change there on the capital allocation front.
Phil Franklin - Vice President of Operation Support and CFO
None at all.
Peter Lisnic - Analyst
Okay.
And then, I mean, with the sales decline in the fourth quarter, how should we think about the fourth quarter free cash flow?
Will you be able to take down working capital by any significant degree relative to what you've historically been able to do in the quarter?
Phil Franklin - Vice President of Operation Support and CFO
Yes, I would expect -- certainly the part of cash flow coming from profit is going to be way down from Q3, but we should make that up in the working capital reduction.
We should see a reduction in both receivables and inventories going into Q4.
So I would expect at the end of the day that the cash flow in Q4 would look -- at least operating cash flow would look very similar to Q3.
Peter Lisnic - Analyst
Okay.
And, not to make you forecast '12, but to the extent that you are willing, free cash flow conversion in 2012 comparable to '11?
Phil Franklin - Vice President of Operation Support and CFO
I would say operating cash flow will be comparable to '11.
We did indicate that we have had some CapEx -- some pretty significant CapEx pushouts into 2012 for a variety of reasons, and mainly for that reason we would expect 2012 CapEx to be significantly higher than what the number's going to end up in 2011.
Still, if you take the two years together it's going to be consistent with, I think, what we've been talking about all along, which is CapEx in kind of the $25 million to $30 million range.
But we're going to underspend that by almost $10 million in 2011, so I would expect a slightly higher CapEx than that range in 2012.
Peter Lisnic - Analyst
Got it.
Okay.
That is very helpful.
Thank you for your time.
Phil Franklin - Vice President of Operation Support and CFO
You're welcome.
Operator
Your next question comes from the line of Anthony Kure, with KeyBanc.
Please proceed.
Anthony Kure - Analyst
Hey, good morning, gentlemen.
Phil Franklin - Vice President of Operation Support and CFO
Hi, Tony.
Anthony Kure - Analyst
Hi.
Just a couple of quick questions.
Phil, I just wanted to follow up on your comment about you expect no worse than the current margin level if not improve them.
By that, just to clarify, you mean what sort of is implied by fourth quarter midpoint guidance and then full year for 2010?
Is that the levels that you're talking about?
Phil Franklin - Vice President of Operation Support and CFO
Yes, I think really you have to kind of ignore the fourth quarter number.
I mean, we think that's going to be a bit of an anomaly.
And, of course, we indicated an expectation of a fairly slow start to 2012, as well.
So, we'll probably see some subnormal margins there.
But as we get into the rest of the year and the year taken as a whole I would expect to see very similar margins to what we saw for the full year 2011 and what we've seen through nine months in 2011.
Anthony Kure - Analyst
Okay, thanks.
That's helpful.
Phil Franklin - Vice President of Operation Support and CFO
Yes.
Anthony Kure - Analyst
And then, along with the destocking, well, you had this rebound in orders into October, but with the potential for more destocking.
Do you think the first quarter of '12 -- I mean, you mentioned a couple of times, or the comment was made that you could see -- these things tend to linger more than a quarter -- so do you think it could result in another step down in electronics sequentially from fourth quarter to first quarter?
Gordon Hunter - President and CEO
Yes, Tony, this is Gordon.
I don't think so.
I think we kind of said we think it'll be probably flat.
I think we've seen it stabilizing now and I think we've seen several of these over the years that's why we say it tends to take more than a quarter it's usually and we started to see it happening at the end of the second quarter.
And I think that we expect this to be a couple of quarter's phenomenon and I think we're starting to see stabilization happening now.
Anthony Kure - Analyst
Okay.
And then as far as 2012 goes, the comment in the press release was modest growth, modest earnings growth and modest top line growth.
Does that -- now that we're in the context of that comment got some easier comps, so to speak, now in 2011 because of this destock.
I mean, broadly speaking do you think you grow the electronics business next year?
Phil Franklin - Vice President of Operation Support and CFO
I think we certainly would have a plan that would call for some growth.
It's going to start out negative in the first quarter more than likely, but as we get further in the year we're definitely planning on growth and we would hope and expect to show at least some modest growth for the year-over-year number.
Anthony Kure - Analyst
Okay.
And then I guess to follow-up on the other two segments, do you think sort of a mid single-digit expectation then would be fair there factoring in flattish type growth for electronics?
Phil Franklin - Vice President of Operation Support and CFO
Yes, I think on balance I think the electrical business should be a little bit higher than that, and the automotive could be slightly low too in that range would be my guess.
Anthony Kure - Analyst
Okay.
And then just the last question on the fourth quarter expectation -- actually, I'm sorry, for next year's expectation for earnings growth.
Does that assume finishing out the share repurchase or does it not?
Phil Franklin - Vice President of Operation Support and CFO
I don't believe -- we really had not -- we haven't refined a number to the degree that that would make a huge difference, but I would say generally our comments don't presume any significant change in share count from where it is today.
Anthony Kure - Analyst
Okay, great.
Thank you.
Phil Franklin - Vice President of Operation Support and CFO
You're welcome.
Operator
Your next question comes from the line of Matt Sheerin with Stifel.
Please proceed.
Matt Sheerin - Analyst
Yes, thanks.
Could you tell me what the revenue run rate for Selco is on a quarterly basis?
Phil Franklin - Vice President of Operation Support and CFO
Yes, it's about -- it's running at around a $9 million annual run rate, so a little over $2 million a quarter.
Matt Sheerin - Analyst
Okay.
So I understood the guidance for the electronics business with the distribution exposure but your guidance for the electrical and for the automotive segments year-over-year was basically ex certain acquisitions.
So on apples to apples basis, are you expecting -- what kind of growth are you expecting on the auto and the electrical side?
Phil Franklin - Vice President of Operation Support and CFO
The auto there should be no -- unless we do an acquisition that we haven't announced yet, there would be no impact from acquisitions since we had Cole Hersee for the entire year in 2011.
On the electrical side, the comments that I made that we expect at minimum mid single-digit growth, but it'll almost certainly be higher based on the momentum that we have in the Startco products.
That was excluding any additional help that we'll get from the full year of Selco.
Matt Sheerin - Analyst
Okay.
Well then I'm talking, Philip, about the December quarter where you did have a Cole Hersee from -- that acquisition was, what, the beginning of this year or very late last year, right, so you get that benefit.
So ex that you're still looking at pretty strong growth, right?
Phil Franklin - Vice President of Operation Support and CFO
Yes, ex that we're -- year-over-year there would certainly be a likelihood of growth in --
Matt Sheerin - Analyst
Okay, but sequentially you're seeing a little bit of growth there it looks like on auto.
Phil Franklin - Vice President of Operation Support and CFO
From Q3 to Q4, usually Q3 to Q4 auto is fairly flat.
And typically the electrical business seasonally is a little slower in Q4 because of holidays and we would expect that to be the case this year as well.
Matt Sheerin - Analyst
Okay.
So it's down but then you've got that acquisition helping.
Phil Franklin - Vice President of Operation Support and CFO
Right, exactly.
Matt Sheerin - Analyst
Okay.
So net-net maybe up a little bit.
And then -- so to get -- just backing into the electronics number and flowing it through, assuming less than seasonal in the March quarter because there's still some work down in distribution.
But flowing that through, even if you give very high single-digit sequential growth or double-digit in next March and June, you're still going to be down year-over-year unless there's another big snapback.
And, of course, there would be an over correction on the downside in inventories like there seems to be every few quarters or so.
But it looks like it's going to be tough to grow that business next year for you.
Phil Franklin - Vice President of Operation Support and CFO
For the electronics business?
Matt Sheerin - Analyst
Yes.
Phil Franklin - Vice President of Operation Support and CFO
I think it's very dependent on when we see the inventory correction and if we can get through that in the first quarter, which is our best guess right now, we still think we can show flattish to maybe even modest growth in that business next year.
If it bleeds into Q2 then it's going to be tough.
Matt Sheerin - Analyst
Okay.
And you talked about seeing some CapEx push-outs for next year because of some projects.
Are those customer related projects that got pushed out or are you just being proactive?
Phil Franklin - Vice President of Operation Support and CFO
No, it's mostly -- the big projects we have teed up for next year.
We are doing some brick and mortar expansion in a few places.
Up in Canada for the Startco business to build more square footage for the custom products business that is -- we've got a big backlog and we've got lots of growth opportunity there so we're providing capacity for future growth there.
And we're also space constrained in a few of our other facilities, including the Philippines where we need a small expansion to that facility.
So we do have some bricks and mortar going on.
Some of that was scheduled to start in 2011 but it won't -- we won't really have any spend on any of those until 2012 at this point.
Matt Sheerin - Analyst
Okay.
That's all, Phil, thanks.
Phil Franklin - Vice President of Operation Support and CFO
Okay, Matt.
Operator
Your next question comes from the line of Alex Paris with Barrington Research.
Please proceed.
Alex Paris - Analyst
Hi, Phil.
Hi, Gordon.
Just a couple little things.
One, on the tax rate for the quarter looking out at Q4 into fiscal '12 what would be kind of a realistic tax rate?
Phil Franklin - Vice President of Operation Support and CFO
Our tax rates really bounced around so I hesitate a little bit, but we still think that something certainly in the 25% to 30% range and it's been edging down over time as we earn more income in some of our low tax jurisdictions, particularly over in Asia.
So I would -- if you were modeling in the kind of 27% to 28% range that would probably be a reasonable guess.
Alex Paris - Analyst
Okay.
And then one line item, on other income of 1.9 is that just all related to the FX?
Phil Franklin - Vice President of Operation Support and CFO
It's the majority of it, yes.
I mean, there are a lot of things that go into that line but the big swing factor that is very difficult to predict would -- that's all balance sheet translation so that would be, for example, assets that we have in foreign currencies that revalue at the end of the quarter and that could go either direction, obviously.
Alex Paris - Analyst
Okay.
One last question and I know you might have provided some of this detail on the conference call.
Just looking at -- I'm wondering if you guys could just comment on the three different geographies and what you're seeing.
Are you seeing panic in Europe and that?
Gordon Hunter - President and CEO
Actually Europe in the electronics area was sort of the first to actually start correcting and we've seen the POS the sell through in Europe actually remain reasonably robust.
So it hasn't really affected the end market so much, but we did see the correction happening early there.
We've certainly seem some slowdown, as I mentioned, in China.
The rate of inflation there has got the government to take pretty quick steps and tightening credit and concerns about a housing bubble.
And so while we've seen a couple of years of dramatic growth in car sales and we take that as a proxy for other things that people are buying, consumer electronics, white goods, it really peaked in January and then sort of cooled off for a while.
And then there was the real peak in the month of September as they wanted to buy cars while they had the subsidies from the government, which the government has turned off.
So it's a little bit slower in China but it's still I would say a very healthy business but we have a government that really wants to make sure that they are controlling and not letting things get out of hand there.
So I think we see sort of healthy growth there and I think the examples that I gave of TVs and computers we're seeing more and more of the sales being in the developing world.
So TV production sales have been at 30% growth levels over the last few years have now dropped down to about 6% and it's possible that number is almost flat in the western world.
And so there's still growth in these things at lower levels but also in different geographies.
So I think we expect to see computer growth and TV growth to continue strong in the developing world, but those markets are certainly much more flat here.
Alex Paris - Analyst
Okay.
Thank you so much.
Operator
Your next question comes from the line of Rob Crystal with Goldman Sachs.
Please proceed.
Rob Crystal - Analyst
My question's been answered.
Thank you.
Operator
Your next question comes from the line of Shawn Harrison with Longbow Research.
Please proceed.
Shawn Harrison - Analyst
Just a quick follow-up.
The automotive business, I believe the forecast was for the market to be flat sequentially in terms of production or the fourth calendar quarter.
Given I guess some of the earlier than normal inventory build you saw in Japan, is your expectation that you'd underperform that a little bit?
Phil Franklin - Vice President of Operation Support and CFO
It's possible, but I think typically the passenger vehicle business is reasonably flat from Q3 to Q4.
It's possible that we may see some slight underperformance there but I wouldn't expect it to be much.
The Cole Hersee business is generally seasonally down in Q4 so that business we would expect to show a slower Q4, but the passenger vehicle business should look fairly similar to the Q3 number.
Shawn Harrison - Analyst
Okay, that's helpful.
Thanks so much.
Operator
(Operator Instructions).
Your next question comes from the line of Ted Morrow with WJB Capital Group.
Please proceed.
Ted Morrow - Analyst
Yes, good morning.
How are you?
Phil Franklin - Vice President of Operation Support and CFO
Hi, Ted.
Ted Morrow - Analyst
I know Gordon covered this, but I just wanted to get some sense of the impact from the Japan situation and the recovery, subsequent recovery and how much really did that impact the quarter, and is there any subsequent rebound that we would expect from recovery in Japan or is that pretty much stabilized.
And is there other -- the Thailand situation and other abnormalities in other markets, are they incorporated into your guidance going ahead.
Gordon Hunter - President and CEO
No, I think the estimates, Ted, that we made some time ago we said $1.5 million impact per quarter from Japan and that still seems to be the case.
Certainly customers in Japan still -- the impact of them is still impacted by the strength of the yen.
For them being the global electronics successes that they've had in the past is certainly being impacted by tougher competition with the strength of the yen they have.
But I think our own estimates of the ramping back up from problems in the supply chain to problems with the end market the estimates that we had of $1.5 million per quarter are still accurate.
And then I think with Thailand we're just sort of being I think conservative and stating that we think the best estimate right now is about $500,000 a year of impact that they can have to our business.
Phil Franklin - Vice President of Operation Support and CFO
Half a million dollars a quarter.
Gordon Hunter - President and CEO
A quarter, sorry.
Phil Franklin - Vice President of Operation Support and CFO
I think while initially I think some people expected Japan to have more of a snapback once they got through some of the supply chain problems I think, as Gordon indicated, we haven't seen much of a snapback there or much of an improvement there.
So I think the lower Japan sales could potentially linger into 2012 as well.
Ted Morrow - Analyst
So your estimates for the quarterly dislocation from Japan is ongoing into 2012 then?
Phil Franklin - Vice President of Operation Support and CFO
Right.
And I don't think all of that is supply chain interruption and disaster related.
I think some of it's related to just the general malaise in Japan and the strong yen and some of the other things that are causing problems for particularly the electronics guys over there.
Ted Morrow - Analyst
Great, thanks.
Operator
Your next question comes from the line of John Franzreb with Sidoti & Company.
Please proceed.
John Franzreb - Analyst
Good morning, guys.
I apologize in advance if this has already been asked but I've been bouncing back and forth between conference calls.
I just want to touch on the depth and duration of the pullback in electronics.
It's been going on for we'll say last quarter and this quarter at the very least, and given the severity of the pullback in orders I'm curious what the POS data is telling you that you would think it would persist so much into the first quarter and wouldn't have any more pronounced recovery.
Is POS data that bad or what's going on there?
Phil Franklin - Vice President of Operation Support and CFO
First of all, while the order rate declined dramatically during Q3, our sales for Q3 were actually not that affected by the inventory correction.
So we didn't see a lot of correcting in Q3 we saw a little bit, but we were still only down slightly from the Q2 number in electronics.
John Franzreb - Analyst
That's only sequentially -- you would have a sequentially positive book to bill in that quarter.
Phil Franklin - Vice President of Operation Support and CFO
Right, so we had a couple percent decline as opposed to maybe a 3% or 4% favorable.
So we did have some correction there but that really -- I mean that barely put a dent in the inventory.
I think the fourth quarter we expect to be by far the most impacted.
And then it's hard to project how long that's going to last and how much it's going to linger into 2012.
The best guess at this point is that we see some impacts that bleed into the first quarter.
The hope is, and I think our expectation is, that by the end of the first quarter we should be through it.
And I think we are expecting a slightly stronger Q1 than Q4 because of the impact not being quite as much in Q1.
But that's about as definitive as we can get here.
POS is still solid and that's what gives us at least some confidence that this is largely related to inventory and it will pass and it generally passes within a couple of quarters.
John Franzreb - Analyst
Okay.
Thanks a lot, guys.
Phil Franklin - Vice President of Operation Support and CFO
You're welcome.
Operator
At this time, we have no further questions.
I would like to turn the call back over to Mr.
Gordon Hunter for any closing remarks.
Sir?
Gordon Hunter - President and CEO
Well, thank you for joining us on today's call and for your questions and comments.
As we discussed, we have three strong businesses in attractive end markets with excellent long-term growth potential.
The automotive and electrical businesses are performing very well.
And while the electronics business is facing some headwinds, we've been through distributor inventory corrections before and we expect we will work again through this one and get back to growing the business during 2012.
So we look forward to updating you on our progress again next quarter.
And as always, we appreciate your interest and support.
Have a good day.
Operator
Thank you for your participation in today's conference.
This concludes the presentation.
You may now disconnect and have a great day.