Littelfuse Inc (LFUS) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse Inc.

third-quarter 2012 conference call.

Today's call is being recorded.

At this time, I will turn the call over to Chairman, President, and Chief Executive Officer, Mr. Gordon Hunter.

Please go ahead.

Third-quarter 2012 conference call and joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer.

As you saw in the news release, our third-quarter sales and earnings were consistent with our guidance even though the overall environment weakened as the quarter progressed.

The third quarter is typically our strongest quarter but the uncertainty in the global economy was felt virtually across the board.

As we anticipated, the greatest impact was in electronics but key end markets in our other two businesses were also affected.

I will discuss our performance and other topics in more detail in a few minutes, but first I will turn the call over to Phil, who will give the Safe Harbor statement and a brief summary of the news release.

Thank you, Gordon.

Good morning.

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 2012 were $172.7 million, which was down 1% year-over-year and 2% sequentially and in line with our guidance.

As expected, our electronics business did not show the usual seasonal strength as key end markets remained soft and distributors continue to manage inventories tightly.

In addition, the commercial vehicle market has clearly weakened over the last three or four months.

Despite this difficult macro environment, we continue to execute well and deliver solid margins and earnings.

Operating margins adjusted for one-time charges improved from 18.3% in the second quarter to 18.8% in the third quarter and earnings per share of $1.13 was at the high end of our guidance and our best result in the last four quarters.

Operating cash flow was near record levels at $43.5 million reflecting the solid earnings and effective working capital management.

With capital expenditures having been reduced from our original plan due to push out of a few capacity-related additions, our free cash flow for the year is expected to approach $100 million.

Now I will turn it back to Gordon for some comments on market trends and business performance.

Thanks, Phil.

Let's move on to the review of our three business units and as always I will be highlighting the markets, products, and design wins for each business to give you an overview of the many ways we are benefiting from our broad and deep product portfolio and executing on our growth strategies.

And also comment on the fourth-quarter outlook for each business.

Let's start with electrical, which accounted for 19% of total Littelfuse sales in the third quarter.

Electrical sales were $33 million for the third quarter, a 10% increase from the third quarter of 2011.

Compared to year-over-year sales increases of 19% in the first quarter and 25% in the second quarter, we saw a slowing of our growth momentum in the third quarter.

Sales of our custom electrical products continued to lead the year-over-year growth with an increase of 14.8%.

Protection relay sales increased 3.4% and core fuse product sales were up 9.4%.

Our protection relay sales were impacted by the softness in the global mining industry and slowdowns in the general market.

Our custom product sales remain strong.

As we've discussed on prior calls, the primary market for our protection relays and custom products is the Canadian potash mining market where our products are used to protect equipment and personnel from electrical hazards.

Several of the leading Canadian potash producers have multibillion-dollar expansion projects underway and we expect to benefit from this increased capacity as it comes in line over the next few years.

Another bright spot in mining is the Canadian oil sands.

This segment is being driven by increased domestic consumption and the demand from the US and Asia.

The infrastructure that is being put in place for extracting, refining, and transporting oil from the Canadian oil sands is making the area more attractive to mining companies which in turn provides growth opportunities both for protection relays and custom products.

One segment of the mining industry that is not doing so well is coal.

On a global basis, the slowdown in China's growth is affecting the steel industry and therefore the metallurgical coal producers.

In the Eastern US, where a large portion of our relays are used, the market remains soft.

Last year's mild winter cut demand for electricity leaving utilities with high-coal stockpiles and low natural gas prices and environmental regulations against coal have also reduced the demand.

Our protection relay sales into the Eastern US coal market have been impacted along with this sector but we remain cautiously optimistic about our other coal mining markets.

Our custom products business produces portable power to distribution equipment for heavy-duty environments such as those found in the mining and oil and gas industries.

Similar to our protection relay line, the strength of the potash mining is driving sales of our custom products and we expect this product line to also benefit from the capacity expansions I mentioned earlier.

As discussed on prior calls, we are expanding our production facility in Saskatoon for the long-term global demand for our custom electrical products and to enable us to expand into other markets such as the Canadian oil sands and above ground mining.

The additional capacity will be available early next year.

Moving on to new business wins, our arc flash relay is continuing to build momentum.

These relays detect dangerous electrical arcs that could potentially harm employees and cause severe damage to equipment.

And recent wins for our arc flash relays include projects for leading companies in the paper industry, Chinese utility market, as well as a major switch gear manufacturer in Brazil and several copper mines in Chile and Peru.

Our new ground fault protection systems are also winning new business with a recent new project with a leading oil company valued in excess of $300,000.

This is our first success with this company in just one of their geographical regions and we believe there will be further opportunities with this customer in the future.

Other wins for our ground fault relays include orders from a large South Korean industrial conglomerate and another large automation company in Brazil, which now uses Littelfuse ground fault relays as its standard protection.

And as these wins illustrate, we are making good progress on our strategy to expand beyond the core mining business into other market segments and geographies.

Now let's move on to the core electrical fuse business.

Here our momentum continued with another strong quarter in the solar segment, with orders from several solar accounts as well as a new solar OEM.

Other contributors to the higher third-quarter electrical sales include substantial orders resulting from the conversion of a key mainline electrical distributor and significant orders from two large HVAC accounts.

The industrial segment has begun to pull back although it is still expected to show some growth for the full year and the commercial construction picture remains very negative.

We are encouraged by the rebound in the solar business from the slowdowns experienced in 2011.

Our investments in developing a broad new line of high-performance products are quickly establishing Littelfuse as the circuit protection technology leader in this field.

One of these new products is our SPFI in-line spring fuse, a first in the market approach to protecting solar power systems.

This innovative design lowers the total system cost by providing a highly reliable method of protection with less costly combiner boxes and fewer connection points.

Initial orders are already in process and we expect significant sales of this new product in 2013.

We also extended the amperage range of our popular 1000 volt array of combiner fuses from 125 down to 70 amps.

Only days after the launch, we secured our first orders of this product for an application worth in excess of $100,000.

The demand for solar products is shifting from markets in Europe to markets in the US, China, and India, and India in particular is now emerging with local manufacturers of solar equipment which is very encouraging for us.

A global team of sales engineers has been able to very successfully track and secure new solar opportunities as this industry evolves.

In summary, we expect further growth from our electrical business in addition to the growing potash market, other drivers for our protection relays and custom products include increased penetration into the oil and gas industry, further international, and end market expansion, and increased sales of new products such as the arc flash relay.

The base fuse business will continue to be driven by the industrial segment, although it is expected to remain slower in the fourth quarter and by further inroads with our new products in the solar market.

Overall our electrical business is well-positioned for the increasing global focus on safety and reliability.

These trends are very prominent in developed countries and will continue to expand in emerging markets as well.

Moving to our automotive business, third-quarter automotive sales of $51.9 million were 30% of total Littelfuse sales.

Year-over-year automotive sales increased 9% in the third quarter.

As mentioned in the news release, the increase includes ACCEL which we acquired in June.

Excluding ACCEL, automotive sales were down 2% due to the weaker euro and softer sales of commercial vehicle products.

These factors were somewhat offset by increased passenger car sales in all regions except Europe, where they were flat.

The slowdown in Europe continued throughout the region and we expect to see further reduction in production volumes as inventories at OEMs and dealers reach target levels.

Virtually all of the OEMs selling into Europe have been affected.

Only the premier European brands such as Porsche, Audi, and BMW that export heavily into Asia and North America are performing well.

We believe the slowdown in Europe will continue through the rest of the year and in fact many OEMs have already announced standard holiday closures for 2012.

The softer market combined with the weak euro will continue to present a short-term challenge for our automotive business in this region.

In contrast, we had a very solid third quarter in Asia.

We're well-positioned with localized Western OEMs in China.

Demand for cars produced by these manufacturers increased during the third quarter while demand for cars produced by Japanese OEMs declined.

This was a positive development for us as we have less penetration with the Japanese manufacturers and this shift is a response to the territorial dispute between China and Japan that is leading Chinese customers to choose products from countries other than Japan.

We had record sales in China in the third quarter and the long-term outlook remains very positive.

General Motors, Volkswagen, and Hyundai are all growing in China and we are participating in this growth.

The indigenous Chinese manufacturers however are in a weaker position.

The growth forecast for 2012 from LMC and others for China-based manufacturers was 17% a year ago but has been adjusted down to 7%.

In India, we are in the ramp-up phase of a project for Tata Motors that will significantly -- will gain significant revenue for us.

However, labor strikes at several OEMs have slowed the industry as a whole so while the short-term outlook is challenging, the long-term outlook remains very positive.

Last quarter I mentioned that most of the major manufacturers are moving from a single car model to a global platform development.

As this transition occurs, we are working closely with our customers to predefine their global electrical architecture and the new products that will be needed.

Our involvement in the early stage of the process gives us a distinct advantage in new product development and time to market.

There is another industry trend that is also providing good opportunities for Littelfuse.

As more and more car manufacturers produce hybrid versions of existing models, the space for equipment placed into the engine compartment becomes more and more limited.

One of the key features of our new high and low current fuse products is their smaller size, which puts us in a good position to win further business.

Looking at new projects who want additional business in the US was one of our fastest-growing Tier 1 customers for Chrysler's next-generation car platform that includes the Jeep Liberty.

This win for a low current fuse product will have peak revenue of about $400,000 per year.

In Europe, we began the first deliveries of high current fuses for a new PSA group medium class platform that will launch in the first quarter.

This is PSA's highest volume car platform that is expected to reach up to 600,000 cars per year in peak.

The platform has global production facilities on three continents -- Europe, South America, and Asia -- and includes the C4 and DS series vehicles which are similar in size to the VW Golf and the Ford Focus.

Other wins for our high current fuse line include a win for our master fuse with a growing Tier 1 customer in China for Volkswagen.

This program launches in 2013 and is expected to generate peak revenues of about $1 million per year.

One of the major reasons we won this business is that our production is localized in China, which is becoming more and more important.

This is a good example of how our strategy to locate production close to our customers is generating results.

Now let's move onto commercial vehicle products, which had mixed results for the quarter.

From a sales standpoint, the market was down significantly and so were our sales but from a new business and acquisition viewpoint, this was an excellent quarter.

Historically third quarter CVP sales are down about 10% from the second quarter.

This year however our sales were down 16% from the second quarter and 11% year-over-year.

Several unanticipated slowdowns in the CVP market started very early in the third quarter.

Our biggest customer, Caterpillar, significantly reduced assembly during the quarter, resulting in a 28% decline in our sales to this company.

In addition, the Class 8 heavy truck segment reported a large decrease in new truck orders in the third quarter, which had an immediate effect on production numbers and our sales.

Together, these slowdowns resulted in lower orders for most of our CVP products in the third quarter.

A bright spot was sales of our sealed solid-state power relay to the US manufacturer of self-propelled sprayers for the agricultural industry that I mentioned last quarter.

Moving on to the positive aspects of the quarter, we had several design wins for our power distribution modules.

One was with a major European forklift manufacturer for a new power distribution box and in the US, we won new business with John Deere for our new Flexible Electrical Center product line.

And at a major North American truck manufacturer, we are providing a new custom power distribution module for the new common chassis Class 8 truck.

All of these programs are expected to start production in 2013.

As the news release indicated, we close on the acquisition of Terra Power Systems in September.

Terra Power, which is located in Bellingham, Washington, designs and manufactures specialty electrical distribution products such as power distribution modules, fuse holders, high current relays, and battery disconnect switches.

The Company specializes in products for the Classic 8 truck segment and this makes it an excellent fit for our current CVP business, which focuses more on the construction and agriculture markets.

On our last call, I discussed the acquisition of ACCEL AB based in Sweden with a manufacturing facility in Lithuania.

ACCEL's sensors and switches are custom-made for a particular OEM car or truck model and as a result, ACCEL sales typically reflect the market.

This acquisition is off to a great start with a very nice win for the Company's solar sensors with a major European OEM that is also a new customer.

This new business is expected to generate about $11 million in total revenues with peak revenues of about approximately $2.7 million per year.

Production will start in 2015.

In summary, despite the headwinds of the weaker euro and the slowdown in Europe, we have good growth opportunities in the core automotive business, in the commercial vehicle segment and with our sensors from ACCEL.

With our investments in new product development, and established relationships with key customers, we believe we will continue to outperform the market.

That brings us to our electronics business, which accounts for the other half of total Littelfuse sales.

Third-quarter electronic sales of $87.8 million were down 2% sequentially from the second quarter and were down 9% from the third quarter of last year.

As we indicated on prior calls, we experienced an inventory correction in the distribution channels in the first quarter.

Since then there's been no significant increase or decrease in channel inventory levels.

Overall, the electronics market deteriorated during the third quarter, resulting in a book to bill ratio of 0.89 for the quarter.

The lower sales were a result of the economic slowdown which started in Europe but now also includes other major global economies such as North America, Greater China, Korea, and Japan.

We expect these factors will also add to the normal seasonal sequential drop in sales we typically see in the fourth quarter.

Let's review some of the key electronics market segments.

As we've indicated on prior calls, personal computer growth has been limited by saturation in the mature markets.

This was expected to improve in the second half of the year in response to new Ultrabook introductions and the release of Windows 8. Unfortunately this hasn't happened.

The latest reports from IDC and Gartner indicate PC shipments fell more than 8% in the third quarter from a year earlier.

At the same time, the Ultrabook segment is taking market share from the notebook PCs.

IDC anticipates that about 25 million Ultrabooks will be sold this year compared to less than one million last year.

This jump in sales reflects the improved performance, pricing, and popularity of these thin, lightweight ultraportable laptops.

These developments combined with the launch of Windows 8 last week had been expected to create new consumer interest in PCs, particularly Ultrabooks.

But now with the weakening economy, it's not so clear if Windows 8 will generate enough consumer interest to create strong demand for Ultrabooks in the fourth quarter and into the first quarter of 2013.

The good news is that we have a broad offering of fuses, PTCs and TVS diodes designed into these products to stand to benefit from the ramp up in sales as the cycle picks up during 2013.

We've talked on several prior calls about the fast-paced growth of the tablet and e-reader markets worldwide.

Best estimates today are that about 120 million tablets will be sold in 2012.

This number may grow to 400 million by 2017 according to DisplaySearch.

We are continuing to work with engineers at key OEMs to design our over current and ESD product into the next-generation tablet platforms where they protect chargers, battery packs, inverter circuits, and data lines.

This activity is expected to deliver about $6 million in revenue from this segment in 2012, nearly double the level of 2011.

The significant feature of tablets that consumers really like is the long battery life between charges.

Tablets can now run from eight to 11 hours on a single charge.

Battery pack design engineers are continually working to improve this even further with longer-lasting and lighter weight designs that demand ultralow resistance and low-profile circuit protection components.

These requirements also apply to the battery packs for smartphones.

Our products meet these needs and we've been working to leverage our already strong position in this market.

A few weeks ago we introduced our latest polymer PTC offering that boasts the lowest resistance and the smallest form factor in the market today.

We expect our battery protection business in the smartphone and smaller tablet segment to more than double next year to over $8 million from about $4 million this year.

The growth of the smartphone and tablet market is also driving increased sales of several other Littelfuse electronics products.

One of these is our 3.6 by 10 cartridge fuse that offers superior performance in a small form factor.

The product was initially selected by the leading tablet makers for use in their wall chargers that operate at 10 watts and higher.

Many other smartphone and tablet manufacturers are now also specifying this product.

As this market grows, so does the need for increased mobile broadband capacity and as a result, sales of our high-powered TVS diodes and TMOV devices that are used in 4G, LTE base stations continue to increase.

We are also winning new business in other growing segments and for a wide range of applications.

One of these that we have highlighted on prior calls is LED lighting.

We have numerous wins for products including AC line fuses, metal oxide varistors, and TVS diodes with the leaders in the retrofit bulb market as well as in the commercial luminary placement market.

We expect our sales into the LED lighting market will be about $6 million in 2012, up from $3 million in 2011.

We plan to further grow this business with new products targeted for the outdoor street lighting market, which is the fastest-growing segment of the LED lighting space.

Beyond lighting, our innovative TMOV metal oxide varistor series is adding value in the speaker system market.

Bose recently designed our TMOV product into their CineMate speaker system to prevent abnormal overvoltage threats.

Traditional metal oxide varistor technology was not sufficient for this particular application but our integrated and thermally protected TMOV offered the additional functionality that was needed.

Total revenue for this win is expected to exceed $400,000 per year.

Incidentally, the innovative technology of the new TMOV varistors was recently recognized as a winner of the 2012 Chicago Innovation awards.

This program recognizes the most innovative new products or services brought to market each year from companies in the Chicago region.

Other third-quarter successes included a win of our telecom protection device, the SIDACtor.

Our product is more robust than the competitive designs, making it the ideal solution for the Ethernet connection on a new Lenovo desktop computer.

The total revenue for this new business win is expected to exceed $500,000 per year.

So to summarize, the electronic revenues are stable.

We're winning new business in a few segments that are growing including Ultrabooks, tablets, and LED lighting.

However, these bright spots are not enough to offset the uncertainty in the economy and the normal fourth-quarter seasonal decline.

So that completes my review of the three business units.

To sum up the quarter, the macroeconomic outlook continues to be one of caution in all three of our businesses but as you heard, there are bright spots, LED lighting, solar, tablets and smartphones, our position on passenger car vehicles and also the electrical business.

We continue to win new business by providing the circuit protection and safety solutions our customers need for their new products and to meet increasing safety and liability concerns.

Our business model is very profitable even in today's challenging economy and with our strong financial position and cash flow, we can pursue acquisition opportunities that we believe will further enhance our business.

There is one more topic I would like to update you on, our Lean program.

Lean is the foundation of our strategic objectives.

Our goal is to maintain or improve lead times, cycle times, productivity, and quality by engaging our associates and applying Lean to their work areas.

For the past year, we have significantly ramped up our efforts to accelerate the implementation of Lean.

We now have 50 associates around the globe dedicated full time to Lean and over 300 Lean projects have been completed; more than 125 of these were structured three to four day kaizen events that focused on a particular process or activity and how it could be improved.

More than 3100 associates which is more than half of our total employment have participated in Lean training, a Lean project or both.

We are making these investments because we believe that through Lean we can build on the improvements we have achieved as a result of our restructuring program.

Lean is already making a positive impact in our business and we expect to achieve even greater long-term benefits as we continue to expand Lean to more functions and more locations across Littelfuse.

On that positive note, I will turn the call back over to Phil, who will provide the outlook for the fourth quarter, and then we will open the call for questions.

Thanks, Gordon.

Here's a recap of the guidance for sales and earnings that we gave in the press release.

Sales for the fourth quarter are expected to be in the range of $152 million to $162 million and this reflects a more than seasonal sequential decline in electronics and continued weakness in the commercial vehicle market.

The middle of this range represents 7% growth compared to the prior year.

Earnings for the fourth quarter are expected to be in the range of $0.75 to $0.90 per diluted share before special items.

This implies an operating margin in the 15% to 16% range and a tax rate in the mid-20s.

This concludes our prepared remarks.

Now we would like to open it up for questions.

(Operator Instructions).

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

I guess the first question, thanks again for all the granular commentary in each of the segments.

If we look at electrical and we think about some of the growth factors that you mentioned, Gordon, like oil and gas as an example, how might that impact the margin for the business as you look forward to 2013?

Should we see any significant change from current run rates as some of the composition of the business mix changes?

I don't really think so.

We are citing those as markets that we are targeting that we're just getting started in.

We have stated we want to do -- diversify from the very successful potash segment we have been in and we believe there's other attractive segments that have got investments that we are relatively small players today.

Our protection relay as we do sell into the oil sands area and the margin profile has not really been any different there.

So we look at that as an attractive segment but until we get really significant chunks of our business there, I don't think it would make any difference to the margin impact.

Generally speaking, growth in electrical is a positive thing for margins because that generally is our highest margin segment.

Right, right, on that same front, these new business wins that you detailed, is it safe to say that those can help you keep the growth rate, the organic growth rate in that business in double-digit territories as you look to 2013?

I think it's going to be tough to state that.

Really clearly we've seen in this quarter as I cited, the growth rates in the first half of the year were much stronger than what we saw in the third quarter, so we are clearly seeing with the macroeconomic picture, a slowing rate there.

And I think that's going to be one of the factors we're going to have to consider and hence, the strategy of trying to get more global expansion, talking about South America, about Asia, China, Australia, places we've talked about trying to take our electrical business to and other vertical segments, other mining segments, and other industrial segments.

And so it's really going to mean we're going to have to accelerate the growth in those other areas where we have very little penetration.

But it is certainly looking that the challenges of the macro story are really going to impact this business also.

All right, last question if I could just on the acquisition comment that you put in the press release, can you give us a little bit more color behind that?

It sounds like maybe more sizable deals in the pipeline.

And then if you can corollary to that question just talk about sensors versus other perhaps more traditional electrical products and what might be in the pipeline there?

So obviously we don't get too specific or too granular when we talk about acquisitions but, Pete, I can give you a few general comments.

We are -- as the press release indicated, we are looking at probably more larger acquisitions than we have certainly in the recent past.

We are currently looking at several companies that are in the kind of $50 million to $75 million revenue range as opposed to more the $25 million to $50 million has been kind of the sweet spot of where we have been the last five years.

We are also looking at one or two companies that are north of $100 million in revenues, so there are some bigger things in the pipeline.

It's always hard to predict if and when those might hit, but don't be surprised in the next six to nine months if you see maybe another -- a larger acquisition or two.

All right, that is perfect.

I appreciate the help.

Shawn Harrison, Longbow Research.

Good morning.

Just I guess back to that prior question, what is the typical EBIT margin profile of the companies you are looking at?

Would it be accretive to the corporate average?

Or is that kind of the number one goal?

Is it just more kind of in line with the good profitability you are already seeing?

Yes, it's a bit all over the map although if you look at the last four or five deals we've done, they generally tend to be reasonably profitable companies, not always quite as profitable as Littelfuse.

I think as we have entered into commercial vehicles with the acquisition of Cole Hersee as an example, we started with a company that we knew had the potential to get to Littelfuse type margins but when we acquired it, it was more in the neighborhood of 10% operating margin.

We have been able to move that margin north more in line with the Littelfuse margins over the year and a half that we've owned that company.

So there will be some that will be lower.

There will be some that are in line with our margins up in the high teens.

There aren't lots of companies that we look at that are significantly higher than where we are, but generally speaking, most of the companies we are looking at have at least double-digit operating margins.

Okay.

And Terra Power, where was the possibility of that company?

It's a very small entity and it's going to be largely how profitable that is -- it's going to be largely reflective of how good a job we do integrating it into the Cole Hersee business but generally speaking, those margins were probably similar to maybe slightly better than the Cole Hersee margins.

Okay, then two follow-ups.

I guess if you could just kind of talk in terms of what you are seeing from the distribution environment here during October in terms of relative to, say, the trends to exit at the end of the third quarter, whether you're seeing any stability there?

And then I was just hoping I could get a repeat of the growth stats within the electrical businesses for the three subdivisions cited.

I missed that at the beginning of the call.

Okay, I can go back to that.

When you are talking distributions, I assume you meant electronics.

Yes, I did.

Sorry about that.

Yes, I don't think there's really much change.

I think we are sort of in line with what we are hearing in the rest of the industry.

I think we feel it's end market caution that driving the whole electronics industry into a slow period and not a distribution correction, which we have often cited as being the reason for us.

Inventories have been pretty flat and I think that -- I'd say the distribution channels are just very cautious and I think when inventories are at this lower level and when things are not looking great, it's often difficult to think of how an uptick can happen.

But when we are at low inventory levels, once an uptick starts to happen it can accelerate pretty quickly and I think we are in that period of people waiting to see when that might happen and I think the uncertainty of a change of regime in China, an election here and Europe still needing to fix things, I think people are really thinking it's going to be early next year before we see things picking up.

So I would say a distribution is I'd say pretty stable on most things at the moment.

Then just to go back to our electrical business, we had a 10% increase from the third quarter of 2011 and the custom electrical products year-over-year growth was 14.8%.

Protection relays 3.4%, and our core fuse products were up 9.4%.

Okay, thanks so much for that.

Matt Sheerin, Stifel Nicolaus.

Thanks and good morning.

So just back to the guidance that you gave for down for the business, it sounds like the electronics will be downgraded and seasonal so probably in the low double digits.

And it also sounds like your automotive business will be down sequentially, but electrical, will that be sort of flattish?

I know you're going to still have very nice growth year-over-year but is that decelerating growth, which implies it could be down sequentially?

Yes, Matt, the automotive business, we are certainly expecting the commercial vehicle business to take another step down.

That would be some normal seasonality, some just overall market weakness for the time being.

The passenger vehicle market should be relatively flat quarter-to-quarter, could be down slightly, but I think relatively flat is about right.

The electrical business is going to have strong year-over-year growth but typically we do see a seasonal fourth-quarter decline in electrical both in our power fuse business, also in the protection relay and custom businesses, primarily based on the holidays around Christmas time and things kind of slowing down around that timeframe.

So I would expect that we would see a sequential decline there but still good year-over-year growth.

Got you.

Could you remind us on the auto business the percentage of sales from the commercial vehicle market?

It's about two-thirds passenger, one-third commercial.

Okay, then just also jumping around a little bit on the PC business and the Ultrabook business, which hopefully will see demand pick up next year with consumer and corporate adoption of Windows 8, what is the dollar content and is that increasing from typical notebook or tablet content, Gordon?

Yes, it's not too different from notebooks and we have generally said that a notebook is usually more content than a tablet.

Although the recent developments in higher energy density batteries and lower profile batteries and what I was talking about with our leadership position in very low resistivity polymer PTC devices, then the tablet market has become a little more attractive with those devices that we have.

So not a huge difference.

Different applications, more battery strength in tablets, more port protection in laptops, Ultrabooks, not -- not a huge difference in content per unit, I would say.

Okay, lastly on the CapEx guidance for down a little bit from your previous expectations, $20 million versus $25 million, where are the push-outs occurring?

It mostly has to do with -- we talked about at the beginning of the year, we talked about a number of major projects.

Some of those hadn't been fully formulated in terms of their schedules yet.

One was the building expansion for capacity reasons up in Canada for the custom products business serving the mining industry.

Another was the Mexico, an expansion that we are doing down in our Mexico site to accommodate automotive and our electrical power fuse business.

The third one was in the Philippines to provide again for future capacity for some of our electronic fuses.

Several of those programs have pushed out to varying degrees and they -- we will still be moving forward with them but it will be more of that spending will end up being in 2013 as opposed to 2012.

So I would expect 2013 to kick up some for CapEx.

It's not going to be a huge dramatic CapEx here but it will probably in all likelihood because of these major projects, the spending pushing out will -- it will be higher than 2012.

Got it, okay, thanks very much.

Tony Kure, KeyBanc.

Good morning, gentlemen.

I just wanted -- I had a quick question first on electronics.

In the third quarter, sequentially down a little bit but margins looked like they were up substantially.

Could you just talk about what drove the margin improvement sequentially for electronics in the third quarter?

I think substantially as I recall, it was like a couple hundred basis points maybe I think.

It was -- it was largely that we continue to get very good operating efficiencies across most of our electronics business particularly with our Wuxi wafer fab.

We have been talking about for a while the final consolidation of all of our semiconductor products into that facility.

We now have made the final step of the TVS diodes that were being made -- manufactured in Taiwan into Wuxi and they are just driving some nice -- now that we have everything there that we are focused on operations rather than transfers, we are driving some nice improvements from the operating side.

And I think that is really what drove most of the margin expansion from Q3 to Q4 or Q2 to Q3.

Staying in electronics just trying to make sure I understand, it sounds like there were a lot of puts and takes as far as what the expectation is for the quarter but I thought sort of the end take away, it was normal seasonality decline or is it going to be maybe a sharper seasonal decline into the fourth quarter?

We expect it to be a little bit sharper this year.

And it's really I think it's a combination of really nothing happening in the end markets that is going to -- that we see as being a catalyst for driving end demand at least as early as the fourth quarter in combination with -- we talked about inventories being relatively low but distributors in this kind of uncertain macro environment, they tend to operate pretty much hand to mouth and in this kind of environment, they tend particularly the public companies, the large public distributors tend to try to drive their inventories down coming into the end of the year.

So I think we are seeing some of that affecting the business as well.

So it should be a little bit more than seasonal.

It will be into the double digits, the low double digits.

So it is usually -- I was just going to say usually that's like high single digits and now (multiple speakers)?

Probably 5% to 10% or 6% to 10%, something like that, it will be more than that for sure.

Got you, okay.

And then the benefit that you're getting on the Japanese OEMs, the whole tension between China and Japan, are you in your auto business sort of assuming that dynamic continues or there would just upside if that -- if those problems persist there in that part of the world?

That's a tough question.

I really don't know.

I think that could just be a temporary skirmish between a couple of countries over some islands but it's just reflected in the fact that when the Japanese order production suffered a setback sometime ago with the tsunami and now we've got a specific situation in China, we really benefit because we don't have that real penetration into the Japanese players.

And so generally we do a lot better with the Korean and US and European manufacturers, whether or not that's long-term, who knows?

Okay, but you're not factoring in that benefit in the fourth quarter?

No, no, absolutely not.

Okay, that's what I was trying to -- okay, and then my last question is just -- I think last quarter you talked about a potential bonus accrual could or could not happen but just kind of given where you are at or where the third quarter came in and where the fourth quarter is implied, does the fourth quarter show maybe the absence of a bonus accrual or can you maybe just talk about how that might impact the margin expectations?

We are typically looking at -- projecting forward to the end of the year and trying to make sure we are accruing at an appropriate rate based on our latest thinking.

So I wouldn't expect a significant impact from Q3 to Q4.

I think if you think about operating expenses being fairly similar to the Q3 levels excluding one-time charges, I think that is probably the way you ought to be thinking about it.

All right, great.

Thank you.

(Operator Instructions).

Alek Gasiel, Barrington Research.

Good morning, guys.

Just a couple of little questions.

One, Phil, what was the margin for Q4?

Was it 15% to 18% kind of the range you are expecting?

We said implied in the guidance, it would be 15% to 16% and really all driven by operating leverage, pretty much from Q3 to Q4.

Okay, you mentioned the tax rate would be in the mid 20s.

Yes.

For fiscal 2013, what would be a reasonable tax rate to kind of guide to?

It's a good question.

As we have talked about for a while now, we are doing some things to bring our overall tax rate down.

And I think if you look at for the full year 2012, I think we're going to be right around 26% for an effective tax rate.

I would expect 2013 to be not too much different than that probably somewhere in that range.

The 26%, we did have some favorable one-time adjustments in 2012.

We will have some overall improvements in our tax situation going into 2013 but we can't count on having a repeat of those favorable adjustments.

I think for now I would count on something in the 26% range.

Okay, and you guys provided some comments on the tablet business and mentioned that revenue for 2012 is going to be $12 million.

Then you implied about another product that for 2013 will generate $8 million.

So are we looking then for another additional doubling of revenue in tablet or from $12 million to $18 million or something like that or --?

This was specific to tablets?

Right, tablets, e-readers.

We expect that -- I don't think I said specifically that we would see a doubling of it but we certainly -- the market research reports certainly indicate that tablets are a very healthy growing segment and will continue to grow and we're quite well positioned there.

So we would expect to see growth from tablets for us as a good segment, absolutely.

Okay, one last thing.

I know you guys have announced that you're going to be having an analysts day and I don't remember when the last time you had one.

I know there were some details provided in the press release, but just kind of give us some color of why you are going to have one or if possible?

I think we are doing an analyst day.

I think you all should have received notice of that and we will be sending out formal invitations in the very near future there.

It's going to be in December, December 10, in New York City.

And it's going to be probably roughly a three-hour program where we will have our entire senior executive team there and really the purpose here is it's really several fold.

It is to give the analysts and investors an opportunity to be exposed to people other than just Gordon and myself.

There are a lot of other people who drive this business forward and we would like you to meet some of those folks and hear them talk about the areas of the business that they are responsible for.

We also are -- we have also talked about that we are in the kind of the final stages of (technical difficulty)

Pardon me.

Mr. Gordon Hunter and Phil, the line was muted.

You are free to talk again.

We didn't mute our line.

We didn't mute the line here.

Did you not hear the question?

Can I ask Alek if he didn't hear the question -- the answer to your question about the analyst day?

Alek, your line is open again as well.

Yes, Gordon, Phil, you provided enough on it.

I appreciate it.

Okay, we look forward to that and hope you will be there.

Shawn Harrison, Longbow Research.

Two brief follow-ups.

Phil, the $1.5 million acquisition charge in the quarter, was that in SG&A or where was that at?

That would have been all in SG&A.

I'm sorry, there was -- I think we detailed that in press release.

I believe it was all SG&A.

Sorry, I missed that.

Then second, the commentary on $100 million of free cash flow, are you just I guess for the year, are you stating that it's pre-dividend or post-dividend, just so I'm on the same page with you?

That would be pre-dividend, so yes, we would define free cash flow as just operating cash flow less CapEx.

That's very helpful.

Thanks so much.

Going back to your other question, there was a small amount of that $1.5 million that I think it was about -- it was around $400,000 that was actually in cost of goods sold that was the purchase accounting adjustment to the inventory for the ACCEL acquisition.

Got you, okay.

Thanks so much.

The rest of it would have been SG&A.

Okay?

We have no further questions at this time.

I will now turn the call back over to Mr. Gordon Hunter.

Okay, thank you for joining us in today's call.

We appreciate your interest in Littelfuse and we look forward to talking with you again next quarter.

Have a good day.

Thank you, ladies and gentlemen.

This concludes today's conference.