Littelfuse Inc (LFUS) 2013 Q2 法說會逐字稿

Good day everyone, and welcome to the Littelfuse, Incorporated second quarter fiscal 2013 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, sir.

Thank you and good morning.

Welcome to the Littelfuse second quarter 2013 conference call.

Joining me today is Phil Franklin, our Vice President of Operations, Support, and Chief Financial Officer.

As you saw in the news release, this was another solid quarter for Littelfuse.

Sales and earnings were on track with our guidance, and our three business units performed as we had anticipated.

I will discuss our second quarter performance and update you on the Hamlin acquisition 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.

Thanks, Gordon and 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 second quarter of 2013 were $187.8 million, which was up 7% year-over-year, and consistent with our most recent guidance.

This included one month of sales for Hamlin, which was approximately $7 million.

Excluding Hamlin, sales were up 3% year-over-year.

GAAP earnings for the second quarter of 2013 were $1.18 per diluted share.

This included a foreign exchange gain from balance sheet revaluation, partially offset by costs related to the Hamlin acquisition.

These special items when netted added approximately $0.03 to earnings per share.

Earnings before these items were $1.15 per share, which was consistent with our guidance.

Gross margin improved in the second quarter due primarily to the strong performance of the electronics business.

They have exited some unprofitable business, focused on higher margin niches, and executed well operationally.

On the other hand, margins in the electrical business declined due to negative operating leverage, and charges related to supplier quality problems, and scrapped inventory resulting from flooding in our Mexico plant.

While the negative operating leverage will continue to be an issue due to ongoing weakness in the mining sector, the quality and inventory issues should be nonrecurring.

Cash performance continues to be solid.

Through six months, we have generated $39 million of cash from operations compared to $33 million in the prior year.

Working capital continues under good control with both Accounts Receivable days and inventory turns near target levels.

As projected, capital expenditures have increased to $14 million for the first six months compared to $7 million last year.

The increase in capital spending is related to several capacity expansion projects in support of our growth initiatives.

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

Thanks, Phil.

And before I get into the review of the three business units, I would like to make a few observations about the quarter.

There is much discussion in the media about the continuing slowdown in the European economy, and its impact on companies in a broad range of industries.

But our experience in Europe has been quite different, with sales up nearly 24% in the second quarter, and 18% for the first half of the year compared to the same periods last year.

Much of this increase came from recent acquisitions, but nevertheless our core business in both automotive and electronics is very healthy.

Both business units benefited from design wins, as well as a strong customer base in the region.

The Electronics business was also helped by customer production moves from China to eastern Europe.

Another area of concern has been China, but we are also doing well there, with increased sales in both businesses.

In the Electronics business this is due to our broad range of customers and end markets.

And in the Automotive business it reflects our solid position with the local Chinese manufacturers.

So with that background, I will begin the segment reports starting with the Electrical business unit.

Electrical sales account for about 17% of total Littelfuse.

Total electrical sales were $31.8 million in the second quarter, a decrease of 9%.

There are two parts to our Electrical business unit.

One is the legacy fuse business that has been part of Littelfuse for many years, the second part is the protection relay and custom products business that we built through acquisitions, primarily the acquisition of Startco in 2008.

The revenues from the two parts are about equal.

The electrical fuse business had another very strong quarter with second quarter sales up 11% year-over-year.

However, protection, relay, and custom product sales were down 25% for the same period.

The decreases were due to the general slowdown in the global mining market, and the completion of several large potash capacity expansion projects, which I will discuss in more detail in a few minutes.

The continued growth in the electrical fuse business is a result of our investments in targeted growth areas, including solar and HVAC.

We also continue to convert more electrical distributors to Littelfuse, further broadening our customer base and geographic reach.

The solid performance of the fuse business is even more is significant when you consider the fact that nonresidential construction, which has historically been a large part for these products, has been down for several years.

Our solar business continues to grow with the second quarter sales up 25% over the same period last year.

The market continues to expand outside of Europe, which previously had been the leading market for solar product manufacturing.

We are leveraging our already solid position in the market with the recent release of a complete line of 1000-volt solar string fuses that range from 2 through 20 amps.

These fuses are used to protect solar panels and the individual DC power strings coming from the panels.

Using the fuses as an in-line component of the solar power cables can either augment the protection of the combiner box, or in some cases eliminate the combiner box entirely.

Earlier technologies used an inline holder and fuse combination or complete combiner boxes protecting multiple strings, adding both components and labor.

Our innovative in-line fuse reduces the total component cost and manufacturing time, in a market where cost reduction is a key driver towards technology acceptance.

Customer interest for the expanded string fuse line has been very high, and design wins are in progress at several wire harness manufacturers.

This new product line is an excellent example of how we put our engineering expertise to work in meeting specific customer needs.

We expect the new string fuse line to make significant contributions to our revenue later this year and into 2014.

This was also a strong quarter for us in the HVAC and lighting markets.

Two years ago, we converted two of nine manufacturing locations at one of the top five global HVAC OEMs to Littelfuse.

Since then we have converted another five locations, with the final two expected to be converted over the next 12 months.

We are having similar successes at two other large HVAC manufacturers.

And all of this growth has been driven by a combination of our unique product features, our application expertise, quality, and excellent ontime delivery performance.

The additional HVAC and lighting locations added in the second quarter are expected to contribute about $700,000 in incremental sales in 2013.

We also benefited from increased demand from manufacturers of irrigation products and white goods.

We had great success in securing design wins on new platforms, at customers where we were previously sharing specification positions with our competitors.

As our existing OEM fuse customers enter into new design cycles, we are winning additional fuse holder and fuse accessory business.

Many of these wins are due to our unique product features, such as integrated mounting, and built-in indicators in our fuse blocks that light up when a fuse is blown.

As we have indicated in prior calls, converting key electrical distributors to Littelfuse is critical to the future growth of the business.

We continue to make good progress with multiple conversions in the second quarter that will add another $250,000 to annualized revenues.

The ability to gain access to our protection relay line is helping to drive these important conversions.

The nonresidential construction market is finally beginning to show some signs of a rebound, with an increase in new construction anticipated during the second half of the year.

We are positioned with many of the major construction-oriented distributors that service that business, so we stand to benefit from any improvement in the market.

So, in summary, our electrical fuse business is performing very well, and will continue to be primarily driven by the industrial segment, with further growth in the solar, HVAC, and lighting markets.

Now let's move on to the protection relay and custom products business.

This has been a successful growing business for a number of years, but our sales into the mining industry, particularly Canadian potash mining, have slowed substantially over the past few quarters.

The mining slowdown has been well documented, and reflects a combination of factors including global economic uncertainty, falling commodity prices, and rising production costs.

As a result, mining companies around the world have slowed or canceled their expansion plans, and have reduced maintenance spending.

Our strategy for some time has been to reduce our dependence on Canadian potash mining by expanding into other vertical markets and geographical regions.

While we are achieving positive results as the numbers indicate, the gains we have made have been more than offset by the pullback in the mining industry.

The targeted growth area for protection relays is the industrial OEM segment, where we have invested in expanding our sales force and developing new products.

One of these new products is the industrial Shock Block ground fault circuit interrupter that we talked about last quarter.

This is a portable device that protects personnel from dangerous shocks and potential electrocution.

It is the first and only portable product in the market that is UL approved, to protect workers who use high voltage equipment in damp or wet conditions.

The response from the market has been very positive, with initial orders from industrial, mining, oil and gas, and municipal customers.

All indications are that this early success will continue to grow.

The industrial Shock Block joins two other products we have already introduced to the industrial market.

The Arc-Flash Relay that protects workers and equipment from dangerous arc flashes, and a new motor protection relay.

In terms of geographic expansion, we have continued to win new business in key regions around the globe.

Two wins with multinational switch gear manufacturers in China and Brazil will establish our protection relays as the standard for neutral grounding resistor monitoring at a large new mine in Mongolia, and in the utility substations of a large city.

Finally, we also secured a new position for our ground fault ground check relay at a leading European mining equipment manufacturer.

All three of these successes have primarily resulted from our new international safety approvals, along with expanded local sales force.

Together, we expect these wins to add $250,000 in annualized revenue, and provide excellent local references that can drive growth.

We continue to believe protection relays are a good long-term business for Littelfuse, because whether it is mining, industrial or oil and gas, customers are investing in products that protect their employees and equipment.

As with protection relays, we are working to also expand our custom product sales beyond potash mining.

After months of complex planning and engineering work, I am pleased to report that we won a major piece of new business in the Alberta oil sands market.

This customer is engaged in crude oil and natural gas exploration in western Canada and offshore eastern Canada, as well as the extraction and sale of synthetic crude oil from Alberta's oil sands.

We will be providing electrical equipment for the company's oil production facility.

This is the first major win we have had in the Alberta oil and gas market since opening our sales office in Calgary last year.

We are now in the detailed engineering design phase, and expect to report revenue from this project beginning in the fourth quarter.

The value of this project is over $1.2 million.

Building on this success, just last week we secured another project with one of Canada's biggest integrated oil companies.

This win is for a generator package that will supply power to a remote oil production site.

The design work is now in process, and we expect to ship in the fourth quarter.

The value of this added new business is about $250,000.

Another recent win is for a pump control panel for an OEM that supplies equipment to a number of petroleum companies, including a large Canadian oil producer that is majority-owned by a major US company.

While this win is not large in terms of sales, it is another step towards expanding our presence in the oil and gas segment.

As we mentioned last quarter, we are also pursuing a significant project that involves a multi-million dollar opportunity to produce portable dewatering substations for a Canadian mine.

Engineers at this mine have been using Startco products for many years, and our teams have been helping them to meet new equipment requirements.

If we are successful, we would expect to see this project awarded for delivery in the fourth quarter.

One aspect of the custom products business that is different from our other product lines in that we don't have standard product designs.

Each custom product requires months of design work and planning before the equipment can be produced and shipped.

This results in a longer time frame between when an order is received and when it ships and revenue is recognized.

While we may talk about some of these opportunities for several quarters, this lengthier sales and engineering process is standard for this business.

As we have discussed on prior calls, one of our potash mining customers will complete the next phase of its capacity expansion project this year.

Additional expansions are planned, but until the company moves forward with developing more capacity we expect to see temporary slowdowns in ordering patterns.

We anticipate that this customer slowdown will result in sequential decrease in third quarter sales of about $2 million to $3 million, with some improvement expected in the fourth quarter.

So in summary, while mining still remains our largest market segment, we believe we are just beginning to see the results of our investments in diversifying the protection relay and custom products business, and we look forward to updating you on our progress next quarter.

Next is our Automotive business, which accounts for about one-third of total Littelfuse sales.

Second quarter automotive sales of $64.5 million were up 25% from the second quarter of last year.

Excluding Hamlin, year-over-year second quarter sales increased 18%.

The increases were due to the ACCEL and Terra acquisitions, and a 9% increase in passenger vehicle fuse sales.

Automotive sales were strong in China, Europe, and the US.

Our commercial vehicle product sales were flat for the second quarter, but were up 4% sequentially as what has been a tough market is slowly recovering.

In addition, our automotive sensor business continues to perform very well.

Looking at the automotive fuse business, the slowdown in vehicle sales in Europe continued throughout the region.

But in contrast we had a very successful first half of 2013, with sales up 6% over last year in local currency.

As I indicated earlier, we benefited from our customer mix, design wins, and positive currency effects.

We have a good position on new models including the BMW 3 series, the new VW Golf platform, and the Jaguar Land Rover car lines which are brand new to the market, and taking market share from other brands.

According to LMC, European car production will bottom out in the third quarter, with a slight increase projected for the fourth quarter.

The forecast for the second half of the year is a 10% decrease in car production volumes compared to the first half, but we still expect to substantially outperform the market.

For 2014, LMC is projecting a very slight increase over 2013.

In response to the slowdown in European car demand, brands such as PSA and Renault are now expanding into China.

However, until their factories are ready for production, the companies are exporting their cars made in Europe into China.

The high end models from the European luxury brands are also being exported to China and both factors are helping to drive our higher European sales.

As we look to the second half of the year, there are some headwinds developing in China.

Inventory levels at the car dealerships are above what has typically been considered normal, so a decline in demand could significantly reduce vehicle production in China.

Production in China is already forecasted to be down 7% in the third quarter compared to the record second quarter, but it is still 10% above the third quarter of last year.

Feedback from our customers confirms this trend with some improvement expected in the fourth quarter.

We had two record quarters in China in the first half of the year that together amount to 40% year-over-year growth.

And while we anticipate some softness in the second half, the long-term outlook remains very positive.

In the US, car production was up about 4% in the first half year-over-year.

Our focus on implementing new electric architectures that utilizes our high current fuses resulted in another strong quarter for this product line.

In particular, we had ramp-ups for the Ford Fusion and GM Silverado platforms which we didn't expect until the third quarter or later.

Although these line fills occurred earlier than anticipated, we still expect to exceed our plan in the second half of the year.

In India, car production is still down significantly because of high interest rates and high fuel prices, as we talked about last quarter.

This has hit the local OEMs very hard.

Tata Motors' production is forecasted to be down nearly 40%, while Mahindra Motors is expected to be down 20% in 2013.

We have the potential to win a significant share in India's two wheeler, motor bike, and scooter market this year, with our new ATO Blade Fuse.

The wins for this new product are offsetting the weaknesses in passenger cars, and should help us to exceed our plan in India for the year.

A good example of how our technology expertise can improve our customers' bottom line, is our work with one of our major Tier 1 customers in the US to develop a high current fuse that can be will plugged into the harness, rather than screwed in.

This project is being implemented in close cooperation with GM, and will save production time in their assembly plant.

We signed a long-term agreement with the same Tier 1 that includes several additional platforms for our fuses, and is expected to result in a 25% increase in revenues from this customer between now and the end of 2015.

We won additional business in the US with Ford for one of our high current Single ZCASE products, that we specifically developed for the smaller car platforms.

This product is exceeding our expectations.

It was first used in a Chrysler platform and now has expanded to Ford, where we will see peak revenues of approximately $100,000 when production begins in 2015.

We also won new business for our standard low and medium current fuses in China for several programs beginning in 2014.

As the local Chinese OEMs are producing between 5,000 and 50,000 cars a year, none of these platforms can compete in revenue with the global platforms of the western or Japanese OEMs, but with our local presence in China, we have a good position in the market and continue to win new business.

The expected revenue from the combined local Chinese wins peak in 2015 is about $350,000.

In summary, the first half of 2013 was very successful for us in winning new business and introducing new technologies, and in spite of the weaknesses in Europe we were able to outperform the market in all regions of the world.

For the full year 2013, car production in Europe is expected to be down about 5%, while global car production as a whole should be up about 2%.

With our strong first half, and assuming Europe does not decline further, we expect our sales into the passenger car market to be up about 10% over 2012.

Moving on to commercial vehicle products.

That was the second consecutive quarter of sequential growth.

Sales increased in the heavy truck and agricultural markets, and were down slightly in construction compared to the first quarter.

We had a strong quarter in China for fuses sold through the distributor channel, and sales of electrical power centers to a major Chinese construction equipment manufacturer.

We also expanded our sales to a major North American retail chain that is increasing their focus on heavy duty equipment, and had a strong spring with a major marine products retailers.

This was also a good quarter for the new products and new business wins.

We began shipping a new custom power distribution module to Navistar for their line of Class A trucks, with annual peak volume eventually expected to reach 50,000 units.

We were also awarded an additional power chassis distribution model for Navistar that is targeted to start production in early 2014, also with expected annual peak volume of 50,000 units.

We had another nice win during the second quarter for our power distribution fuse box with John Deere.

There are four variations of these power distributor boxes that will be supplied for agricultural tractors manufactured in both Europe and North America.

Production is expected to start in 2015, with peak volumes of 24,000 units.

This contract was the result of our sales and engineering support teams working together globally to win this new business.

Growing our global power distribution module business is one of our strategic objectives.

The recent wins in North America and Europe, together with the previous wins in China, show our progress in penetrating major global commercial vehicle OEMs with new custom design wins.

This was also a good quarter for ACCEL, the automotive sensor company that was the first step in building our new sensing platform.

The second quarter sales increases were driven by solar sensor business at GM, Chrysler, and Daimler.

These customers are experiencing higher sales than planned which also helped ACCEL.

Several new business wins during the second quarter will contribute to future revenues.

We are designing our seat buckle sensors into several platforms, including Volvo's next generation car platform called The Spa.

This win is worth about $1.3 million per year.

The total Littelfuse content on this particular platform is about $23 per car, which is well in excess of our average content per car.

In addition to the seatbelt buckle sensors, other products in this platform include solar sensors and ZCASE master fuse and blade fuses, illustrating the opportunities we have to increase content per vehicle with our now expanded product line.

We also won additional seat buckle sensor business with BMW this quarter, and with Fiat.

To summarize the automotive report, while this business continues to be challenged by the slowdown in Europe, we are outperforming the market.

The ACCEL and Terra acquisitions are positive contributors to our overall performance, and we are encouraged by the improvement in the commercial vehicle products business.

With new business wins in each of these businesses, we are optimistic about the remainder of the year.

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

Excluding Hamlin, second quarter electronics sales of $91.5 million were down 2% from the second quarter of last year, but were up 11% sequentially.

The increase was due to the seasonal pickup we typically see in the second quarter, and similar to the first quarter, we saw a broad-based upturn across many vertical markets and customers in North America, Europe and China, that generated a significant increase in shipments.

While the order rate was healthy throughout the second quarter, the fact that we had such a large ramp-up in shipments resulted in a book to bill ratio at the start of the third quarter of just slightly above 1.

There has been a small increase in channel inventory levels in line with the anticipated market demand for the next two quarters.

And we believe our channel inventory is at the appropriate level for current business conditions, and our order rate for the first four weeks of the third quarter justifies the increase.

Looking at some of the key electronics markets segments, the continued decline of personal computer sales has been well documented.

The latest data from IDC showed a 12% decline in PC shipments in the second quarter of this year compared to a year ago.

This was the fifth straight quarter with declining PC shipment rates.

In turn, this caused our business to decline in Taiwan, Korea, and Japan.

Clearly the cannibalization by the tablet market is a key driver behind this, and so far the launch of Windows 8 has not created increased demand for PCs.

As we have indicated in prior calls, the tablet, e-reader and smartphone markets are continuing to grow at a fast pace, and we are focused on targeting these segments with new products.

Our overcurrent and ESD products are used in a variety of Tablet applications, protecting chargers, battery packs, inverter circuits, and data lines.

We have highlighted some of our significant design wins in this segment on prior calls.

These wins are now contributing to our revenues, and we expect this new business to exceed $10 million over the next 12 months.

The growth of this segment is driving a need for additional infrastructure to support the data delivery needs of all of these devices.

We are well-positioned to supply this market with ESD, lightning and power surge protection with our diode array, SIDACtor, and high amperage DC fuses.

We expect revenues from this segment to exceed $4 million in 2013.

An example of the growth potential we have in the telecom infrastructure segment is the technical collaboration between Littelfuse and Huawei, a leading Chinese telecom company, that we talked about last quarter.

This collaboration has led to the launch of a new 6 by 25 fuse that meets Hauwei's requirements for high surge protection in a smaller form factor.

Sales of this new product were $400,000 in the first half of the year, and we expect total sales to be about $1 million for the full year.

The same fuse product can also be used by many other telecom and datacom equipment suppliers, and we are currently engaged with them on new business opportunities that could be worth about $1.5 million a year.

To further expand this business, we are also working on designing a fuse holder for the same socket.

This fuse holder has some challenging requirements.

We are in the early stages of design with prototypes expected to be completed in the third quarter, and this could lead to another $1 million of additional revenue on an annual basis.

LED lighting is another area where our revenues continue to grow, as a result of design wins into the sockets that are used for LED bulbs and outdoor luminaires.

Last quarter we mentioned a design win for a 60-watt branded LED bulb being that is being marketed at a $10 price point.

Each bulb includes a Nano fuse and a metal oxide varistor.

Production is ramping up now, and this win is on track to deliver $700,000 of revenue in the next 12 months.

We are also continuing to gain traction with our LED-SPD module that is targeted for outdoor LED lighting.

Since the launch last quarter, we have achieved three design wins and begun production.

In addition, we are in the final qualification stage with two other outdoor luminaire customers.

These outdoor LED design wins, combined with additional new business opportunities, are projected to generate over $3 million in revenue over the life of the programs.

However, it may take a few quarters to ramp up to these levels.

In total, our sales into the LED lighting market were about $7 million in 2012, and are on track to achieve solid growth again this year.

It has been several quarters since we talked about the TV market segment.

The flat screen LCD TV market is generally saturated in the western world, and is still showing some growth in developing regions.

Overall there has not been much change in the technology over the past three years that would drive consumers to switch to new models.

At one point it was thought that 3D TVs might stimulate the market, but that has not happened.

However, you may have heard about the recent launch of a 55-inch organic LED television known as an OLED.

These TVs have a slightly curved screen that provides better viewing from all angles.

We have been working with the top TV manufacturers on these new models, and have designed in a number of our circuit protection components into each unit.

These include Nano and thin film fuse for overcurrent protection, TVS diodes for surge suppression, and silicon protection arrays and multi-layer varistors for ESD protection.

Based on preliminary volume from two of these manufacturers, we could generate an additional $700,000 of revenue in 2014, and this would be on top of the $20 million we sell into this segment right now.

Looking at new products, we are very pleased with the continued success of our TMOV series of varistor products.

The TMOV series continues to perform well over our standard varistor products, showing greater adoption across various market segments, including telecom, LED lighting, solar, and consumer electronics.

What makes this product unique is that it combines both surge protection and thermal safety protection into one device.

In the second quarter alone we had about $500,000 in new design wins for the TMOV line.

Now I would like to highlight several other exciting design wins across various market segments.

As some of you may have noticed, wearable electronics such as medical devices and fitness monitoring watches have caught the attention of consumers.

These devices enable you to record many parameters, such as workout time, heart rate and calories, as well as creating customized training programs.

All of the data in one place right on your wrist.

Within this segment, we work with one of our leading sports watch companies based in Finland to design in our thin film fuse into their fitness monitoring watch.

The small footprint of our fuse was an attractive solution that protects against overcurrent threats coming from data ports.

Estimated revenue from this win is projected to exceed $150,000, and we expect to win more new business with other companies in this growing segment.

We have talked on prior calls about our role in protecting the batteries of mobile phone, tablet, and laptop chargers and other devices.

Battery protection needs are expanding into other areas as well.

One of these is power tools for industrial applications.

A leading Chinese battery company recently selected our 40-amp surface mount Nano fuse for its power tool battery application because of its small footprint and high rated current protection.

This type of protection is typically only available in the larger cartridge type fuse.

Littelfuse is the only manufacturer in the market that produces a 40-amp surface mount fuse in this smaller footprint, giving us a distinct competitive advantage.

Estimated revenue from this win is expected to exceed $100,000.

As the portable electronics market continues to expand, universal chargers are becoming more attractive because they accommodate various devices, and are less hassle for consumers.

However, different electronic products have different power requirements, making it very important to coordinate the circuit protection within a single charger.

A leading manufacturer of small personal use appliances in Germany has recently designed our TR fuse into their universal charger.

This charger will accommodate both their shaver and toothbrush devices with anticipated revenues for Littelfuse of over $400,000.

And finally, we are excited to share our design wins in the next generation video game console designed in the US.

This new gaming system has more functionality and accessories, and therefore has a greater need for overcurrent port and ESD protection.

We successfully designed in our PulseGuard and diode array products for ESD protection, and our polymer PTC for overcurrent protection.

The combined revenue from these products is expected to exceed $4 million with production ramping up at the end of the fourth quarter.

As you can see, we continue to win new business in growing target markets such as tablets, smart phones, LED lighting, wearable devices, and battery protection.

Channel inventories are where we expect them to be at this point, and we are pleased with the double digit sequential sales increase in the second quarter.

As a result, we believe the electronics business will continue to perform well for the remainder of the year.

To summarize my review of these three business units, the strength in growing markets, such as passenger cars, consumer electronics, solar and LED lighting, more than made up for the markets that we knew would be weaker such as custom electrical mining products.

This is one of the benefits of being in so many segments and geographies.

Our diversity brings overall stability to our business, and as you heard provides a broad range of future growth opportunities.

Next I would like to give you an update on the Hamlin acquisition, which was completed at the end of May.

As we discussed last quarter, we are excited about the acquisition because of Hamlin's many synergies with Littelfuse, and the opportunities we have to grow both businesses.

To recap from last quarter, the acquisition of Hamlin is a major step forward in building our new sensing platform.

We launched the platform last year with the acquisition of ACCEL in Sweden and Lithuania, and have now significantly expanded it with Hamlin.

Hamlin makes safety, speed, direction, position and fluid level sensors, that are being integrated with ACCEL's products in our automotive business unit.

Hamlin also makes reed switches, relays, and other sensing products that are being combined into our electronics business unit.

Our integration team has developed a detailed transition plan, and the process is proceeding on schedule.

There are numerous growth synergies that we can achieve through the integration.

For example, we have many opportunities to sell the standard sensor products through the Littelfuse electronic distribution channel.

From an operations standpoint, we will be closing Hamlin's factory in Romania, and consolidating those operations with the ACCEL manufacturing facility in Lithuania.

This move should be completed by the first quarter of 2014.

Our sales teams are actively pursing topline opportunities and have already had some successful wins.

In the electronics business, Hamlin and Littelfuse have strong positions with numerous joint customers that are engaged at a high level in pursuing new business for both companies.

We talked earlier about battery protection for the mobile computing space like smart phones and tablets, and we are also finding great opportunities for both Littelfuse and Hamlin products in the battery charging and performance management circuit of electric vehicles, with recent multiple design wins with a North American electric vehicle OEM.

One of the most critical applications in an electric vehicle is the battery, and performance monitoring of the battery cells requires overcurrent protection throughout the battery system.

Our thin film fuse is an ideal solution because it provides quick response time in a small surface mount footprint.

In addition, our small footprint high voltage fuse and metal oxide varistor have been designed into the car charger to protect against AC line surge and overcurrent events.

We were able to realize great synergies with Hamlin sensors that were designed into the same vehicle for speed and direction, battery lid, and door lock applications.

The circuit protection content can amount to about $5 to $10 per car, and the sensing content can be about $20 per car, giving us very good revenue per vehicle.

Selling more content per vehicle is one of our growth strategies, and this is a great example of the potential we now have with Hamlin.

Another joint customer is a large coffee machine manufacturer in Europe.

We recently won new business for our electronic fuses on a variety of their home appliance and personal care products.

Hamlin is working with the same customer on fluid level sensors for a well-known brand of single pod coffee machines that has sales potential of over $500,000 next year.

Both businesses are also working with a high end blender manufacturer in North America.

The Littelfuse electronics business is supplying $1.1 million of TRI-X and SCRs, while Hamlin is working on designing in reed-based positioning sensors worth nearly $1 million.

In the automotive area, I mentioned our wins on the Volvo Spa platform, that includes several Littelfuse automotive fuse products, as well as ACCEL sensors.

We have excellent growth opportunities for the Hamlin products with the leading manufacturers of a variety of automobile sensing equipment.

We can now offer these customers a broader product portfolio that includes Hamlin's reed technology and mechanical switches.

Without the Hamlin acquisition, ACCEL would have had to develop these technologies, which would have been very costly, or in the case of the reed technology, nearly impossible.

The Hamlin sensor business also had several noteworthy wins during the second quarter.

One is with a market leader in fuel fluid systems to design in a new generation fluid level sensors based on pulse wave guide technology, a new technology that was launched at the Electronics Exhibition in Munich in late 2012.

This new product helps OEMs comply with emissions regulations that require SCR-based diesel emission reduction systems.

And while this opportunity is still in the early stages, it has the potential to generate more than $1 million in sales for Hamlin.

Another win was for a sensor that monitors the electric powered tailgate of the BMW X3 with Stabilus, a German manufacturer of springs and automatic drive systems for powered tailgates.

This BMW vehicle is manufactured in the United States.

We won the business because of our global footprint and ability to provide design expertise in the NAFTA region.

The total value of this win is approximately $1.3 million per year.

As these examples illustrate, there is a broad range of customers and end products that present future growth opportunities for our new sensing platform.

We are very pleased with the Hamlin acquisition, and its people, products and synergies with Littelfuse.

One additional item I would like to highlight is the 10% increase in the quarterly cash dividend to $0.22 per share.

We have increased the dividend by a double-digit percentage every year since we began paying cash dividends in 2010.

Our goal is to continue to increase our dividend each year, as we believe it is a Best-in-Class practice in respect to return of capital.

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

Thanks, Gordon.

As we look at the third quarter, it is shaping up to be very similar to the second quarter with the only significant difference being that we will have a full quarter of Hamlin.

So, including Hamlin, our guidance for the third quarter is as follows.

Sales are expected to be in the range of $195 million to $205 million.

At the middle of this range this represents 16% year-over-year growth.

Earnings for the third quarter of 2013 are expected to be in the range of $1.12 to $1.27 per diluted share.

This concludes our prepared remarks.

And we would like to open it up for questions.

Thank you.

We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from Peter Lisnic from Robert W. Baird.

Please go ahead.

Good morning, gentlemen.

Good morning.

First question on the Electronics business, Phil, I guess, can you give us a sense as to what the driver of the incremental margin was in that business?

If I look at the margins of 21.6%, significant improvement both sequentially and year-over-year on pretty relatively muted volume, or top line growth I should say.

Could you give us a flavor for what drove that, and then would those factors carry through in the back half of the year into 2014?

Sure, Pete.

So as we indicated in the press release, and also in some of my earlier comments, a lot of it just relates to execution.

There is a little bit of operating leverage there that we benefited from, but the majority of it is just execution, execution both on the operations side, our electronic plants both in China and the Philippines are operating very well.

As I mentioned in my earlier remarks too, we have also done a very nice job, and I think there is continued upside opportunity from really managing the product lines well.

Walking away from some low or no margin business and focusing our efforts on some higher value, higher margin niches.

I think the combination of those two things have really led to an uplift in the overall margin for the business.

So I think it is, there isn't any one thing that I can point to.

Operating leverage is always important but it is fundamentally it is coming down to good product management, and excellent performance from the operations in the plants and in the supply chain.

And I guess I would classify that as being mostly structural in nature when talking about being able to execute at the plant level.

Is there a way or maybe some productivity measures or something there that you can give us to give us a feel for plants did this in this quarter, versus whatever the number would be or measure would be in a prior quarter?

Yes, I mean there are whole range of operations measures.

We look at both on the supply chain side and the operations side, there are quality measures, there are productivity measures, none of them individually -- and they are different among the four different plants that we operate.

But, generally speaking, all of the major measures are moving in the right direction.

I think in trying to get at your question of sustainability, I think the margin certainly is as high as we have ever seen in electronics, and I am not going to guarantee it to stay exactly up at those levels, but I think that, overall, the general direction that we have seen of margins and the gains that we have been making over the last -- pretty steadily over the last year, I would say for the most part those are sustainable.

Okay, alright.

And then just a couple of quick ones on the electrical business.

I don't know if -- I may have missed it, but I don't know if you quantified the impact from the Mexican facility issue, the inventory et cetera, if you could do that?

And then obviously mining down, but I am wondering if yesterday's news on just a change in the potash cartel changes how you think about the mining comparisons over the next, call it two to six quarters, when you are thinking about that impact?

Yes, well, first, in terms of me quantifying the electrical, a couple of the one-time issues that I talked about, it is probably a little less than $1 million.

It's probably in the neighborhood of about $800,000 between the two issues, and there were a couple of other things as well, but we view those as pretty much one-time.

There may be a little bit of carryover of the supplier quality problem into Q3 but ultimately those issues will be fixed and go away.

So we will see an uplift.

I think even with the lower volumes that we are seeing in the mining sector, you should see over the next couple of quarters, you should expect electrical margins move up closer and probably approaching the 20% range, which is really where that business should be operating, given the current makeup of sales in that segment.

So expect a couple hundred point uplift in operating margins over there over the next couple of quarters.

Relating to your other question of mining, I will let Gordon make some comments there as well, but I think generally speaking it is a little bit too early to draw any great conclusions from some of the potash news that came out yesterday, relative to the step-up of Russian potash production.

At this point, I don't think it has really changed our view of anything that is going on in that market.

We were expecting challenges in the potash mining part of that market already.

I don't see this as really changing that.

And that is the reason that we are working so hard on trying to diversify that base.

Gordon gave a lot of great examples of some of the things that we are working on, and some of the successes we are beginning to have.

Alright.

That actually is very helpful.

Thank you for the time and the color.

You are welcome.

Our next question comes from Shawn Harrison from Longbow Research.

Good morning.

This is Gausia Chowdhury on behalf of Shawn.

My first question was just about the growth in EBIT margin for Hamlin for the second quarter.

Could you break that out?

And then what is implied in the third quarter guidance?

And also what should we expect for the incremental interest expense for the third quarter?

Well, the Hamlin, let me give some characterization of what we expect from Hamlin.

So we are looking at something probably a little north of $20 million per quarter for the next couple of quarters for Hamlin, so it is running at a little bit more than an $80 million run rate right now, and that should continue to ramp up on the sales side.

The margins are going to be probably a little bit depressed through the remainder of this year compared to what we ultimately expect.

First of all, there is a pretty significant noncash charge coming through the Hamlin P&L and ultimately the Littelfuse P&L, related to basically purchase accounting where we have had to step-up the fixed assets, and we have additional depreciation from that step-up coming through the P&L as well.

We have a pretty significant slug of amortization from the intangible assets that we acquired with that business.

In total, between the depreciation step-up and the amortization, it is about $1.6 million per quarter of noncash charges coming through the P&L.

That equates to about 7 or 8 points of margin.

700 to 800 basis points of margin.

So, with that, that is obviously going to be having an impact on margins from purely a GAAP standpoint.

Of course, these are all noncash charges so we will continue to highlight what those are.

Excluding those noncash charges that I just mentioned, we would expect operating margins to be running as I said a little bit below where we ultimately think they can be.

They are going to kind of be in the mid-teens, in the maybe 14% to 15% range, whereas we think ultimately as we get out into 2014 and 2015 those could be up into the higher teens, and we hope ultimately closer to 20% margins.

But we have got some integration costs that we are going to be incurring in the next couple of quarters that will keep that down as well.

We have talked about some profit improvement initiatives, including the consolidation of the Romanian plant that Gordon mentioned, that will help margins once that is complete later this year.

So I think the margins there are going to be a little bit dilutive to our overall margins for a while, but we think ultimately they should come up to very close to the corporate margins.

Great.

That is very helpful.

Thank you.

My second question is about the total Company gross margin.

It looks like it is about 41% implied.

So, given that the mining business is going to be weaker, and then the one-time issues going away with the electrical business, which other end markets are improving or are going to most offset that weakness?

From a margin perspective, I think the biggest thing that we are going to see on margins, excluding Hamlin for a minute, is just the operating leverage.

We are operating at gross margins as high as we have seen in the business right now.

I would expect Q3, again excluding Hamlin, to be similar to what we saw in Q2.

And it is really a function of just good execution on a lot of fronts, and we are starting to see our revenue come back in some of the businesses that have been depressed, like the electronics business, and it gives us operating leverage.

We are seeing nice growth in the automotive business.

We get some operating leverage off that.

So continue to expect it particularly in Q2 and Q3 where sales are at seasonally peak levels, seeing gross margins in the 40% range we think that is sustainable.

Okay.

Great.

Thanks.

Just a real quick one, sorry.

About the free cash flow goal for 2003 post-Hamlin, is there an update to that goal?

No, I don't think Hamlin is going to have too much of an impact there.

It may be a little bit, it will be slightly additive to the cash flow, but I think what we have talked about all along is still pretty much intact, that we expect cash flow from operations to be in the -- probably in the $120 million or so range.

Hamlin will probably add a little bit to that.

And CapEx roughly about $30 million, so free cash flow should be roughly $90 million or slightly better than that for the year.

Great.

Sounds good.

Thank you so much.

Appreciate it.

Okay, yes.

The next question comes from Matt Sheerin from Stifel.

Please go ahead.

Yes, thanks.

Just to get clarification on your revenues guidance for sort of flattish X the incremental revenue from Hamlin.

Typically you are sort of flat to down in the automotive business seasonally.

Sounds like the electrical business will be down.

Are you seeing some sequential, and correct me if I am wrong, are you seeing then some sequential improvements in the electronics business, or is it basically kind of flat across the board?

It is pretty flat.

But your comments were right, that the automotive business seasonally is typically down slightly in Q3.

We don't expect much down, but it will be down a little bit.

The electrical business, certainly the relay and custom part of that we are going to see another reasonable sequential drop there as Gordon mentioned.

However, we should see fuse, power fuse pick up in Q3, which is typically our strong quarter, and things are going well there, with some of the new wins that Gordon mentioned.

That will mostly offset the reduction in relay and custom, maybe not completely but mostly, and then we expect some very modest uptick in the electronics business.

We entered the quarter with a book to bill just slightly over 1, as we said in the press release.

Bookings have been a little bit stronger in July.

So I think we have got some support from the bookings, but it is probably not going be up much sequentially, it may be up a little bit Q2 to Q3 for electronics.

Overall, you are right -- excluding Hamlin, I would expect the down in automotive to be offset by the up in electronics, and the electrical business is going be relatively flat.

Okay.

And on the automotive your growth your operating margin was down a modestly quarter-to-quarter despite I think 8% or 9% revenue uptick, and I know a chunk of that came from Hamlin.

That was sort of the differential, the Hamlin impact of the lower margins on the margin degradation, or were there other issues?

No, no, no other issues there.

The operating margin X Hamlin ticked up a little bit.

The entire degradation would be due to Hamlin.

And just lastly, it seems like you are seeing some really significant encouraging signs on your sensor business as you have rolled up a couple of acquisitions here, and a little cross-selling opportunities, and I know you have talked about looking at other areas to expand.

What does the pipeline look like there, and if you could give us any idea of what you have been looking at?

We have talked about in the past and it hasn't changed that we have a pretty full funnel.

A lot of things in there not immediately actionable, but we think that there will be quite a few that will be over time.

We are currently working on a couple of deals, and I think that we have some that if everything goes well could close in the next six to nine months.

We are continuing to see a steady pace of new things coming in, a few things dropping out that we either decide aren't going to work for one reason or another.

But I would say we are in good position to execute on the five year target that we set.

I think we have gotten a good start on that, and I think we have potentially some new things coming in the next as I said the next six to 12 months.

We he feel pretty good about the acquisition pipeline overall.

Okay.

Thanks a lot, Phil.

The next question comes from John Franzreb from Sidoti & Company.

Please go ahead.

Good afternoon guys.

Phil, what is the timeline forgetting that Hamlin margin from 14% to 15% to 18% to 20%?

We will have to defer that I think for another quarter.

We really need to get in and understand, we are in the process of putting together the integration plans.

We need to understand a little bit better kind of the core margins on some of the new you business that is coming in that we don't fully understand yet.

So we will give a clearer picture of that I think over the next quarter or two.

But it is not going to be in the short-term.

I think that certainly we aren't going to see any improvement for the remainder of this year, and probably not in the first half of 2014 either.

It is probably going be out a year I would guess before we see it.

Give us another quarter or two, and we will start to lay that out a little bit more clearly.

Okay.

That is fine.

Could you just give us on what the revenue allocation was at Hamlin?

I know you split up between automotive and electronics.

What does that look like now?

We put the numbers in one of the attachments on the press release but I think it is between 50% and 55% automotive and the rest of it is in electronics.

A little over half automotive.

Alright.

Did I hear you correctly, did you say that the new businesses that Gordon new business awards that Gordon kind of pointed out on the electrical side, might be sufficient to offset the degradation you are seeing in the custom side of it?

Not necessarily new business awards.

But Q3 is typically the strongest seasonal quarter for the electrical power fuse business, so the combination between the strongest seasonal quarter, and we are on a pretty good growth trend and we have had roughly 10% growth for about four or five quarters in a row there.

The combination between that good growth trajectory and the strong seasonal quarter I think it may not fully offset the decline in custom and relay, but I think it will mostly offset that.

Great.

And one last question just to help me he understand, the book to bill last quarter was 1.18, but the legacy electronics revenue was only up 11%.

I didn't think that the lead times were so long.

What is the disconnect there?

I don't know if there is, I mean we saw a similar thing happen last year too.

Where when the business is starting to get into the stronger seasonal quarters, and there gets to be a little bit more optimism, or maybe less pessimism from our distributors, they tend to start placing orders further out is probably more the case than anything.

So they are layering those orders in probably three and four months out, as opposed to when things are tight and they are managing inventory very tightly, and it tends to be more two or three months.

So I think it probably reflects more the orders being placed out into the future, and that is why the book to bill at the end of Q2 was a little less robust than maybe what we would normally expect.

Part of that was just the carryover from the strong orders that we had placed in Q1, most of which went out into Q3 and some even into Q4.

Really, okay.

That makes perfect sense.

But you would still expect Q4 to have the normal 5% to 7% drop in electronics?

I would expect it to have probably normal seasonality.

With the way we seen orders get placed out there, if those orders don't get canceled maybe we could do a little better than that.

So far there is no reason to think it would be anything other than normal seasonality.

Thank you very much.

You are welcome.

Our next question comes from [Rob Crystals] from Goldman Sachs.

Please go ahead.

My question was asked and answered.

Thank you, though.

Thanks, Rob.

Thanks.

Thank you.

Our next question comes from Garo Norian from Palisade Capital Management.

Hi everybody.

I just wanted to get a point of clarification.

When you guys give your earnings guidance is that a GAAP number, or do you have other items in there?

It is essentially a GAAP number.

The only difference would be if we have charges like impairment charges that we would book during the quarter, and typically we wouldn't know those ahead of time or we would have already booked them.

Things like impairment charges, restructuring charges, we would take out of the numbers.

So but we are not, we don't pull out amortization, there isn't anything that we regularly pull out of the numbers, so essentially the number we gave is a GAAP number.

But if for example we were to have a restructuring charge or an impairment charge, we would be pulling that out and comparing the number that we actually do X those special items to the guidance that we have.

Does that make sense?

Yes, I guess we shouldn't expect kind of any further Hamlin-specific acquisition related charges, and then I am curious also on the foreign exchange gain, is that something that is likely to repeat in some way?

So on the Hamlin side in fact there probably will be a little bit of additional Hamlin charge that comes through.

We have this purchase accounting step-up of inventory that probably will come through that was not contemplated in the guidance.

So it is not exactly GAAP, but we don't for example, we don't pull out, typically pull out amortization out of that number or stock comp or anything else that some people typically do in their guidance.

If that makes sense.

Sure.

And there are no expected gains that you know of today that would be in that number?

No, no, there are no expected gains in that number for sure.

To answer your question on the FX gain that we had in Q2.

In typical quarters we have gains and losses on FX that we just don't call out, because they are not that material.

We felt and typically we would not call those out, but this time we felt it was is such a big number that we felt like we needed to call that out and pull it out of the numbers.

So are we expecting that to recur, no, in fact it could go back the other way in a quarter, and if it went back the other way in a big way, we would call it out and pull it out of the numbers.

If it is $300,000 or $400,000 which is more typical of what it is, we would probably just absorb it and move on.

Then just a broad question.

The overall kind of trend towards wireless as opposed to wired connected type of devices, how is that likely to play through your business overall on a net basis?

Well, we have over the years studied that and thought that maybe the lack of connected wires in the, for example the wired telephone network, would actually decrease circuit production content, and it really hasn't happened.

There has been so much proliferation of devices that have increased the need for mobility protection, battery protection, ESD protection, and then as I mentioned, the infrastructure build out of the wireless network, gives lots of product opportunities.

So the growth of the overall market in wireless has actually been a positive for our business, and maybe ten years ago we might have been concerned about it, and that just has not happened.

Okay.

And then just last question on the non-res construction market you guys made a comment on, and I was just curious do you have any real good confidence that the back half is going be picking up there, or is it more the signals suggest it might?

These are signals from publications that we are reading.

We have a very strong position there.

Used to be a very significant part of our electrical fuse business.

It has been down for several quarters now.

And we have managed to make that up with great initiatives in all of the OEM areas I mentioned.

And it is never going to stay down forever, and we are starting to see some initial signs that it may start at the second half of the year, but that is just reading publications that give leading indicators of that.

Even if non-res were to pick up in the second half of the year we wouldn't see any benefit of that into well out in 2014, because our stuff is some of the last stuff that goes into the build.

We are kind of late cycle on that.

So the earliest we are going to see any benefit is probably a year from now, even if it started picking up today.

Got you.

Okay.

Thanks very much.

Thank you.

We are probably over our time but if there is one last question, if there is a question in queue.

Thank you.

The last question will come from [John Lopez] from Vertical Group.

Hi, thanks so much.

Actually I have a couple.

Most of them are real quick, so if you don't mind.

Feel free to cut me off if you need to.

The first question is, last year I believe it was just a step period from ACCEL, and Terra wasn't until September, I was just wondering if you were to take Hamlin, Terra and ACCEL out from this current quarter, were revenues up or down year-on-year?

They were roughly flat if you took out all acquisitions.

It was within a percent about of being flat.

Got you.

The second one, I think someone asked this, but for calendar Q3 can you give us a feel for the interest expense assumption or burden requirement from the calendar Q3, and also the tax rate?

The interest expense we are at, you can do the math.

We borrowed $145 million on Hamlin at about two-thirds of the way through the second quarter.

We will obviously have that for the full third quarter, and we are paying LIBOR plus 125 on that.

So you can add that interest expense to the quarter and figure out.

I don't have the number in front of me.

Okay.

But that would be how the math would work.

On the tax rate, we think tax rate is going to be somewhere between 25% and 26%.

Could be a little higher than Q2, but not going to be a whole lot different than it has been for the first two quarters.

Got you.

The third one, I don't know if you have quantified this historically, I think you mostly talked qualitatively, but you did reference that channel inventories went up a little bit, can you just give us some metrics around that relative to say through the calendar first quarter?

We track the channel inventories very carefully, and we track the sell-through the POS from all of our distribution channels, and there is a little more optimism, a little bit of pickup in distribution channels, but very consistent with the sell-through POS.

We are very comfortable that these channel inventories are at the appropriate levels.

Okay.

But like by half a week, a week, is there anything you can tell us in terms of what it increased relative to the prior quarter?

It wasn't a lot.

If it was a week, it probably wasn't any more than that.

Got you.

Got you.

In the electronic segment can you quantify or give us a feel broadly if you took the combination of PCs, smart phones and tablets, what do those three markets in combination comprise in the electronics segment?

If we look at all consumer electronics, including the ones that you mentioned, plus TV and game consoles, and everything that would be categorized as digital consumer, it is about 40% of electronics, or about 20% of our total business.

Got you.

And then just as it relates to the smartphone and the tablet markets, there has been some indication in the supply chain, like Taiwan Semiconductor for example, that there was some excess inventory staged through the first half of the year, and that appears to be in the process of unwinding in the second half of the year.

Is that broadly consistent with how you are contemplating calendar Q3 and calendar Q4 for that portion of your business where it would be relevant?

Yes.

We have seen real weakness and commented on it, in places lien Taiwan and Korea.

In large part because I think that there has been some inventory, and demand has not been great for some of the products you just mentioned.

I think we are assuming some slight improvement in that, but it is not going to be that significant, so it is going to be modest uptick from the current low levels.

Got you.

Makes sense.

Two last quick ones, I am sorry.

On the China automotive stuff that you detailed a little bit earlier.

I am curious the one thing you didn't reference, is there is a reasonable amount of speculation I guess may not be the right word, but the China CAM has come out and said, there is a decent chance that the pollution curves would expanded I think from two or three cities now to perhaps eight in the second half of the year.

Is that something that has any implication to your business to the extent that it is put in motion?

Not really.

I think we will have to cut it off here.

We are running out of time.

Thanks so much for taking all of the questions.

I really appreciate it.

Alright.

Thanks a lot.

Thanks everyone for joining us.

As I said the at the beginning, the second quarter came in as anticipated.

We are continuing to win new business, and we are making very good progress on the integration of Hamlin into Littelfuse, and we look forward to giving you a much bigger update on that next time.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for participating.

You may now disconnect.