Littelfuse Inc (LFUS) 2013 Q3 法說會逐字稿

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

third quarter fiscal 2013 conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, and good morning, and welcome to the Littelfuse third quarter 2013 conference call.

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

So as you saw in the news release, this was another very good quarter for Littelfuse.

The record sales were on track with our guidance, and our margins and cash flow were at near record levels.

Electronics, Automotive and Electric fuse businesses all performed very well this quarter, helping to offset the impact of a continued downturn in global mining.

I will discuss the third quarter performance 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.

Thanks, Gordon, and good morning, everyone.

Before we proceed let me remind everyone comments made during this call include forward-looking statements based on the environment as we currently see it, and as such do slide risks and uncertainties.

Please refer to the 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 the forward-looking statements.

Sales for the third quarter of 2013 were $201 million, which was up 16% year-over-year, and as Gordon said, consistent with our guidance.

GAAP earnings for the third quarter $1.19 per diluted share.

This included a foreign exchange loss from balance sheet revaluation and costs related to the Hamlin acquisition.

Without these special items earnings were $1.26 per diluted share, which was near the high end of our guidance.

We had another strong margin performance in the third quarter, as margins improved in both the Automotive and Electrical businesses and continued strong in Electronics.

The main drivers of these high margins were excellent execution across most of our businesses, operating leverage in what is typically our peak seasonal quarter, and help from the strong euro and relatively low commodity prices.

Cash flow was outstanding for the third quarter, as we generated almost $47 million of cash from operations to bring the nine month total to $86 million, which is 13% ahead of last year.

Capital expenditures through nine months are $25 million, compared to $12.8 million last year, the increase due to several capacity expansion projects in support of the Company's growth plans and new product introductions, which Gordon will give more color on in a moment.

So now I will turn it back to Gordon for some color on the businesses and performance and market trends.

Thanks, Phil.

I will begin the segment reports with the Electrical business unit.

Electrical sales account for about 15% of total Littelfuse sales, and there are two parts to the Electrical business.

The Electrical fuse business that has been part of Littelfuse for many years, and the protection relay and custom products business that we built through acquisitions over the past five years.

Total Electrical sales were $29.6 million in the third quarter, a 10% decrease from the third quarter of last year.

Our core Electrical fuse business had another very strong quarter, with a double digit increase in third quarter sales year-over-year.

Unfortunately, this excellent performance wasn't enough to offset the decrease in sales of protection relays and custom products, which will I cover in a few minutes.

The strong performance in Electrical fuses was driven by continued growth in our focus areas of solar and HVAC as well as additional distributor conversions.

During the quarter we received initial orders for the first in the market line of 1,500-volt DC solar string fuses that we discussed on prior calls.

The orders came from several industry-leading inverter, combiner box and wire harness manufacturers, and we expect to see the order flow continue to ramp up as this product gains traction in the market.

On the distributor side we added a large broadline electrical distributor in the Midwest during the quarter that is expected to generate full year revenues of $500,000.

Distributor converses are a major growth strategy for the Electrical fuse business, and we are benefiting from our growing product line, product availability and excellent reputation for end user customer support.

In addition to these positive developments, the construction market appears to be improving somewhat, and industrial activity is better than has been this time last year.

So overall the outlook for the Electrical fuse business is positive.

Moving on to protection relays and custom products.

Third quarter protection relay sales were essential flat, and custom product sales down substantially due to the continued slow down in pot ash mining in Canada.

As we discussed on prior calls, we are working to diversify this business beyond pot ash mining into the industrial markets, oil and gas, and other types of mining.

We are making good progress on this strategy.

Looking at protection relays first, the North American mining market the largest segment of our relay business.

North American relay sales were down 6%, but we continue to see growth in Europe, Asia and South America.

And given the sizable downturn in the mining industry, you'd expect relay sales to be down substantially as well, and the fact the sales were flat is a direct result of new products like the Arc-Flash relay and industrial Shock-Block developed specifically for the general industrial and oil and gas markets.

Another reason our relay sales did not reflect the overall downturn in mining is that regardless of the economy, companies are still spending on safety products.

Protecting relays perform a critical function, protecting employees and equipment from dangerous electrical shocks.

And this is an important area that companies are reluctant at the present time to pull back on.

So while our diversification strategy is still in the early strategies, some recent wins in non-mining segments are good examples of the variety of opportunities we have to grow the relay business.

We recently sold a significant quantity of Arc-Flash relays to a US utility company located in the Midwest.

Our relationship with this customer started six months as a small trial.

They like ease of installation, the excellent product performance, and acceptable pricing, and are now installing the Arc-Flash relays at all of their generating facilities.

This design win will generate $200,000 in total sales just to with this one customer.

Our team is active in targeting many similar customers.

We've also had encouraging success in penetrating the Brazilian mining margin market with our first significant order for neutral grounding resister monitors for a niobium mine.

Niobium is used primarily in alloys such as special steel for gas pipelines, and this particular application improves the productivity and the safety of the mine.

While grounding resistive monitors are required in North American mining, they are relatively new in emerging markets, and we believe this trend that contribute significantly to future revenues for our relay business.

And as we move forward with our diversification strategy, we are also working to further expand the product line, both organically and through acquisitions.

So that brings us to the custom built portable electrical centers or custom products, which as we anticipated, had a challenging quarter.

The pot ash market is in transition due to the completion of major capacity expansion projects, delays on potential new projects, and market uncertainties regarding future pricing.

We knew more than a year ago that the slowdown was coming, and as with our protection relays began working to diversify beyond pot ash mining.

We took a long-term approach and invested in building our team and steadily pursuing opportunities outside of pot ash mining.

Unlike our other businesses, the sales and design cycle for custom products is quite long.

It took some time but our patience is beginning to pay off.

Our first significant win occurred at the end of the second quarter in the oil and gas market, and building on that we secured a second order from a prominent Canadian oil company in the third quarter.

Together the two orders for this customer amount to over $500,000.

We believe that the third quarter was the bottom for our custom products business, and we expect to see a pickup in sales in the fourth quarter.

We are actively pursuing a number of very good projects beyond mining and expect to land some of these in the near future.

Longer term we continue to believe custom products is a good business to be in.

Mining is cyclical.

However, our diversification strategy will help to offset downturns with increased business in other vertical segments.

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

Third quarter Automotive sales of $70.4 million were up 36% from the same quarter last year.

Excluding acquisitions, year-over-year third quarter sales increased 11%.

The increases were primarily due to the strong sales of passenger car fuses and ACCEL sensors.

Automotive sales remained strong in China, Europe, and the US, as the North American and European OEMs continue to be successful in exporting and producing in China.

We also had some positive currency effects in Europe.

Although car production in Europe continued to be weak, our European Automotive sales were up 13% in constant currency.

The increase was driven by launch of several new platforms where we have high content, including the new BMW 4 series.

We also designed the high current product to do a major Land Rover platform that had peak production in the third quarter.

In addition, premium cars from Audi, BMW and Porsche have high fuse content and are produced in Europe and exported to China and the US.

In China we had some ramp-ups of new local mods in the third quarter.

We are also working on several new projects with local Chinese OEMs such as Geely and Great Wall that would start production in 2015 and 2016.

This includes opportunities to introduce our innovative technology, as the local Chinese companies add more popular features to their cars in order to more effectively compete with the Western and Japanese OEMs, and this is good for us, as we are seeing a 10% to 15% increase in fuse content every new car model.

We had two record quarters in China the first half of the year, and while the third quarter was up more than 10% year over year, it was down about 5% sequentially.

Dealers are reducing inventories following the strong production in the first half of the year, and we are also seeing some headwinds developing as more than ten cities are controlling new car sales in order to reduce traffic and pollution.

As a result, we believe the fourth quarter will be similar to the third and with low double digit growth anticipated in 2014.

In the US we outperformed the market with an 8% increase in sales.

This was primarily driven by sales of our new high current fuses, with a nice ramp-up of the Chrysler Liberty.

We also started delivering or hue microfuses into the Chrysler Ram project -- program.

We are continuing to work with customers in the Electrical vehicle segment.

Our most recent project with a tier one customer in the US where we are developing a high voltage fuse that can be plugged into the master disconnect box for a new hybrid vehicle that will launch in 2015.

And we had another noteworthy win with a tier one supplier of our low, medium and high current fuses for the next Ford pickup platform that launches in late 2014.

Our high current fuses were specifically developed to meet customers needs for smaller sized fuse boxes because space is limited with all of the added content in today's vehicles.

And finally, we are very excited about a new design win for the small footprint, high voltage ceramic fuse coming from the Electronics business.

The fuse will go into the front and back junk boxes of two new global high-performance electric vehicle programs.

The total content of the vehicle is seven news and will ramp up to $700,000 in annual revenue when full production volumes are reached in 2015.

An interesting aspect of this win is that this is the same technology that is also being used across many other segments, such as data center power distribution and solar applications, and this design highlights how our investment in a successful technology and product design can generate revenues across a range of markets and applications.

Looking ahead we expect our Automotive fuse business to end the year with double digit growth that will outperform the market by at least 8%.

Moving on to commercial vehicle products, sales were up 5% from a weak third quarter in 2012.

So while the market has improved somewhat, it is still suffering from continued declines in new Class 8 truck builds and the global downturn in mining.

Within this environment we continue to move forward with some the solid wins we had in previous quarters.

These include a major program in John Deere in Europe and North America and new win for Navistar that we discussed last quarter.

Both programs are expected to begin production early next year.

We are also working on several new products that will be introduced in 2014.

The ACCEL sensors had a good quarter, with sales up 15%.

And this reflected increased solar sensor sales to General Motors and increased sales of seatbelt buckle sensor is and steering wheel switches to a leading global automotive sensor.

So in summary, our Automotive business continues to win new business and introduce new technologies, and we are optimistic about the growth prospects for this business.

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

Third quarter Electronic sales of $101 million increased 10% sequentially and 15% year-over-year.

Excluding Hamlin, Electronic sales up 3% sequentially and 4% year-over-year.

The third quarter is normally our highest revenue quarter.

This year the increase was a bit lower than typical.

We saw a broad-based upturn across many vertical segment in customers in North America, Europe and China.

However, revenues in Taiwan, China, Korea and Japan were lower than expected due to the slowdown in consumer products such as TVs and personal computers.

While the order rate was healthy through the first two months of the quarter, it slowed in September, resulting in a book to bill ratio at the start of the fourth quarter of just slightly below one.

Channel inventory levels have increased in line with the anticipated demand for shipments in October and November in advance of the holiday season.

We believe our channel inventory level will work itself back down during the fourth quarter and into January.

Looking at some of the key Electronics market segments, while sales of products such as PCs and TVs are down, we did make some share gains in this segment with our semiconductor TVS diodes and diode array of products.

Our products are also used across many other segments that have remained strong or are emerging.

Industrial markets, LED lighting and cellular infrastructure are a few examples, and I will touch on those next.

We've talked about LED lighting before, where our products are used to protect the sockets for LED bulbs and outdoor luminaires.

There is a growing trend toward replacing standard florescent tube lights with LED tube lights.

We are engaged with the leading suppliers in all three of these applications, with products typically including a fuse and a metal oxide varistor.

We expect to do about $9 million in sales in this segment in 2013, up from $6.8 million last year.

Outdoor LED lighting is another growing area.

Our new LED SPD varistor module is targeted for this market.

Since we launched the new module in the second quarter, we've achieved four design wins and have begun production on a small scale.

We expect the growth of the jut door lighting segment to generate an additional $1 million to $2 million in sales in 2014.

One of our focused growth areas is the smart meter market.

This segment is extending into a number of geographic regions, including Japan where about 4.5 million electric meters are expected to be converted to smart meters by 2015.

Our ability to provide higher end solutions resulted in the TMOV designed into smart meters produced by Panasonic, one of the leading companies supporting the conversion.

Another segment with positive momentum is the mobile telecom infrastructure market.

We've targeted this market as an excellent opportunity for the higher value add products like our small footprint high surge cartridge fuse that is a great fit for base station power supply applications.

One of our first major wins in this market was with Huawei.

We now designed a similar fuse into the base station power supply of another leading mobile telecom customer.

Potential revenue from this new opportunity is $300,000 annually.

In the consumer Electronics segment we continue to focus on premium niche applications, where technology and performance are crucial to our customer's brand.

An example of this is the new bladeless fans from a leading manufacturer that uses our compact surface mount nanofuse to protect sensitive circuits.

Besides its the small size, nanofuse offers higher breaking capacity.

It's an innovative solution that meets the robust requirements of this new product.

Potential revenue from this win is estimated at $400,000 a year.

Our overall business with this customer will exceed $1.5 million next year and also includes products used in vacuum cleaners and high dryers -- hand dryers.

Also in the consumer market, we have seen an increase in sales of our diode array of products that provide ESD protection in game consol and accessories such as headsets and controllers.

Our revenue in this category over $1 million annually.

So to wrap up this section, our Electronics business continues to win new business in growing target markets.

These new business wins are contributing to the successful profitability of this business segment.

We anticipate another solid performance in the fourth quarter.

So as we look at all three of our business units, the strength in growing markets such as passenger cars, automotive sensors, solar, and LED lighting more than offset the markets that we knew would be weaker, such as mining and heavy trucks.

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

The integration is progressing on schedule, and our combined Littelfuse Hamlin Electronics and Automotive sales teams are winning exciting new business.

In the Electronics area, Hamlin and Littelfuse have strong positions with numerous joint customers and are pursuing new business for both product lines.

This past quarter the combined team was successful with a leading manufacturer of ATM machines in designing in a custom surface mount read switch that detects when the currencies trays are inserted into the ATM.

The white goods market has always been a strong focus for Hamlin, and we designed a custom sensor and actuator for a high-end residential white goods manufacturer for one of their ovens.

The sensor detects when the oven door is closed and sends a signal, which then activates the LED lamp and oven latch system.

We also have opportunities for Hamlin's read switches in the solar market, which is a strategic growth area for Littelfuse.

We recently won new business with a Canadian solar tracking systems manufacturer for a custom sensor and magnet actuator set that detects the end of the daylight cycle and reset the panel to the optimum morning light.

These moveable panels improve solar efficiency by 40% over fixed position panels.

So together all three of these Electronic up wins should generate $1.2 million in incremental annual revenues.

On the Automotive side we have an excellent opportunity for a combined design win for Hamlin and ACCEL.

The application is a seatbelt buckle sensor for a leading Automotive safety system supplier in North America that would be on a GM platform.

This is the first inquiry that we have received for ACCEL from this customer in North America and illustrates how our strategy to build a global sense of platform is paying off.

We also won new Hamlin business for a transmission speed sensor for a new Chinese OEM and tail lift position sensor for a major European OEM.

As we've discussed on prior calls, the Hamlin acquisition builds on the acquisition of ACCEL last year and is a major step forward to establishing our new sensor platform, a key element of our growth strategy.

We're a little over a year into this new platform, and we are very pleased with the business and progress we've made.

We are also continuing to invest in our existing businesses, with about $11 million in capital expenditures in the third quarter.

Major projects included facility expansions and process improvements at our facilities in Mexico and China to support our growth and new product development initiatives.

In addition, we are in the process of consolidating the R&D activities from three sites into one state of the art location near our corporate headquarters here in Chicago.

Approximately 40 engineers will work in the new 24,000 square foot tech center.

The new facility will enable this team to collaborate on the research and design of the next generation Electronic and Automotive products.

So to sum it all up, we are pleased with the progress we made this year towards our goal of doubling our revenues by 2017.

We continue to grow organically, with important new business wins in all three of our segments.

The Hamlin acquisition was a significant size that moved the dial for us as a company and expanded our capabilities in a fast-growing business.

We are actively pursuing additional acquisitions with a number of opportunities in the pipeline.

Underlying all of this is our company-wide lean initiative, which is focused on achieving double digit improvements in productivity, cycle times and quality.

We look forward to continuing this momentum in the fourth quarter.

And that is a perfect segue to Phil, who will provide the fourth quarter outlook, and then we will open the call for questions.

Thanks, Gordon.

For the fourth quarter we expect our core business to exhibit normal seasonality, which historically would have resulted in a high single digit sequential decline.

However, our diversification into power control and sensing is helping to moderate the seasonality such that the sequential decline this year is expected to be in the mid single digits.

With that said, our guidance for the fourth quarter is as follows.

Sales are expected to be in the range of $185 million to $195 million.

At midpoint this represents a 5% sequential decline but 20% growth compared to the prior year.

Earnings for the fourth quarter are expected to be in the range of $0.96 to $1.10, compared to prior year earnings before special items of $0.81.

At the midpoint this represents 27% year-over-year growth.

This concludes our prepared remarks.

Now, we would like to open it up for questions.

Thank you.

(Operator Instructions).

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

Peter, your line is open.

Good morning, gentlemen.

Good morning.

First question, Gordon, if you could just clarify on Electronics, I think you mentioned the inventory position in that business.

Sounded like maybe it was a bit high, or did I misread that?

Is the inventory position with distributors at a normal level given what you are seeing with order rates, or is there some excess there?

I think we would say it's normal level.

We just like to mention it because I think monitor it very carefully and it is a factor in -- the volatility of our business has always been caused by distributor corrections, and we so monitor that carefully.

And it is normal pattern to see it developing in this type of year, and we expect to see that sort of declining through the end of the quarter into January.

So I think that it is a normal pattern.

We would expect to see that get back down by the end of the year, as usually happens.

Yes, Pete, it's part of the reason that we almost always see a kind of a low double digit sequential decline in the Electronics business, is because almost every year in the fourth quarter that inventory position comes in at our distributors.

Right.

Okay.

And so by extension that actually was what I was wondering, was if you look at the fourth quarter sequentially, that revenue number ex the Hamlin impact ought to be down, correct, consistent with prior years?

Yes.

Okay.

Perfect.

Then just switching to auto.

The strong growth there and then the -- when you look at 2014 and some of the content wins you talked about Gordon, both for 2014 and 2015, with auto production -- let's say it is up mid single digits -- is it -- are you feeling comfortable that next year is another year where you've got the opportunity to grow the top line in excess of a mid single digit -- call it global automotive production number?

Yes.

I would feel comfortable.

I did summarize the Automotive business to say that we are gaining confidence all the time in this being a healthy growth business for the foreseeable future.

I think we are with the right OEMs, particularly the European OEMs that are doing very well in Asia and the critical Chinese OEMs.

China is certainly driving a lot.

The forecast is for 2014, 2015 still very strong for sales in China, and that is both locally made and also exported, but especially from Germany.

So we see this as a very healthy growth business for the next couple of years, combined with all of the new products that we designed in.

Usually when we're talking about those at a quarterly call, they are not going to come through to revenues until 18 months after we've won that design win and starts to ramp up.

So I think we're very confident about next year and year after in our Automotive business.

Okay.

And then if we look at Hamlin, you talked about the sensor platform being a double digit growth platform, and now that you had it in the portfolio for a little bit here, any leaning one way or another?

Maybe a little bit stronger growth, not as strong?

Sounds like you have gotten some contact wins and the platform is being leveraged well.

So I just want to make sure the comments on double digit growth there are pretty consistent?

Pete, I think we still feel confident about the growth prospects of Hamlin.

I think double digit growth for next year on the top line seems very achievable based on about everything we see now.

So really no real change from the guidance we have given there.

We have indicated that we believe we have opportunities over the next few years to improve profitability there.

The profit margins aren't as high as we like them to be or as high as we think they ultimately can be, and we'll be working on that.

And they're not as high as our core business at the moment, so that -- we do feel confident of the growth, but we have some work to do on the margin side.

Okay.

All right.

Perfect.

Thank you very much for the time and the information.

Thanks, Pete.

Our next question comes from Christopher Glynn of Oppenheimer.

Christopher, your line is open.

Thanks, good morning.

Hi, Chris.

A question or two about the margins.

The sequential margin lifted Automotive and Electrical.

Very nice.

The magnitude somewhat counterintuitive just given the Hamlin acquisition in one case and lower revs in the other.

So I was wondering if we could just peel back the onion on the nice movement.

On the Electrical side, most of what we saw there was just bounce-back to more normal margin levels.

As you may recall we had somewhat depressed margins in Electrical in Q2, in part because we had some one-time items that came through there.

And with those being largely behind us at this point, we saw the power fuse business, which is where those one-time items were.

They affect that business.

That business bounced back to more normal levels.

So I think on the Electrical side we will be somewhat dependent on our ability to get the custom business back and growing again, but we think the margin levels kind of in the lower 20s to maybe even a little higher than that, in the better quarters is -- we think that is very doable and sustainable.

On the Automotive side we did see some improvement both year-over-year and sequentially there as well.

That was largely driven by the Automotive circuit protection business.

The fuse business there did -- they had an extremely good quarter.

Very strong on the top line.

We were able to leverage that into very positive margins on the bottom line, and I think that we -- that business will continue to be very profitable.

I think we've mentioned we do have some work to do on the commercial vehicle business, where the margins aren't kind of similar to the sensor business.

That's a newer business for us.

The margins aren't where we would like them to be and where we ultimately think they can be.

And we think over the next couple of years we have opportunities to move those margins up to be more consistent with the overall Company margins.

Okay.

And what was the -- do you have the Hamlin impact on margins?

Hamlin would have been -- it would have certainly been dilutive to the operating margins, in part because the fundamental margins are just running lower, in part because there is a good slug of amortization that related to that acquisition that comes into play there.

But I think without Hamlin, the margins would have been -- the operating margins would have been at least 100 basis points higher than where they ended up.

Got it.

Thank you very much.

Yes.

Our next question comes from Shawn Harrison of Longbow Research.

Shawn, your line it open.

Hi, good morning.

This is [Goffia Chaudhry] calling on behalf of Shawn.

Just piggybacking on the last question about Hamlin, could you maybe give us an update on -- in terms of reaching corporate averages, where you are with the margins then?

Is this more of a second half of the year story for 2014, or would it be achievable to improve the margins the first half of the year?

Actually, I think it is a longer term story than even the second half of 2014.

We are just beginning some of the integration activities.

The initial focus has certainly been more on the sales opportunities and sales synergies.

And I think if we get the growth, ultimately we're going to get the margin, so we are very focused there.

I wouldn't expect to see significant margin improvement in 2014.

I think that is -- it's probably out in 2015 where we expect to start to see meaningful improvement there.

Hopefully we will -- we may start to see that start to show up a little bit in the second half, but it is mostly going to be at least a year out from now.

Okay.

Thank you.

And then also you mentioned some [terms] of distribution.

You exited the quarter with a book to bill that was below parity.

Has that improved at all in October?

Book to bill below parity, but it is actually a better book to bill than we have seen in the last couple of years going into the fourth quarter.

So actually it's relatively positive on the book to bill, and it's -- relative to prior years it's stayed, I would say, positive on a relative basis.

Okay.

Sounds good.

Thank you.

Yes.

And our next question comes from John Franzreb from Sidoti & Company.

John, your line is open.

Good morning, guys.

Good morning.

Gordon, you mentioned competitive pricing in the customs products market.

Could you talk a little bit about that pricing environment?

And you also mentioned that you want to move into some adjacent markets such as oil and gas.

What is the competitive landscape like there?

Yes, we are moving into a new segment.

We have had a great repetition and a leading position from those Startco custom products in the pot ash mining area, and as we try to diversify that to the other segments, we are clearly taking time.

We are a new player.

There are incumbents in there, and we have to show that the products that we made very successfully for pot ash can be used, or we can make the products that are needed in the oil and gas segment.

So it's a more competitive market, and we are having to establish ourselves there.

So naturally that is taking a little longer, and it is more competitive, and the margins are more challenging than the position that we had in pot ash, where we were clearly the leader for -- and still are the leader for many years, being situated there in Saskatoon in middle of the pot ash mining area.

So we expect that as we diversify to other industries, and oil and gas would be a good example, we going to have to take a long-term view for that business and expect to be building it gradually in a more competitive environment, and it may well be a little bit lower margins than what we've had in the past, but we still think we can have a very healthy business there.

So you guess then, considering Phil's comments about the ability to get the business in general up to the mid 20% op margin level, we are talking about -- this is unlikely to be a 2014 event then?

2014 to get the Electrical margins up?

Yes, back up to the mid 20s.

I'm not sure that -- it really depends on kind of the mix of the custom versus -- the fuse business is a very profitable business, and that's -- those margins are typically run in the low to mid 20s.

And as I said, they dropped off temporarily and back up to those levels.

I think where the relay and custom business ends up, it is going to depend some on the success landing the volumes and the new projects that Gordon talked about, but also at what margin we are able to get those.

Fundamentally it is still a very attractive business, as Gordon said, but --

Sure, sure.

I think that as we look for other areas outside of pot ash to grow the business, the margins aren't quite as high there.

I wouldn't necessarily plug in a mid 20s operating margin for the Electrical segment in the very near future.

I think we need to see a little bit more what develops on the custom side.

Right.

Okay, that makes sense, Phil.

Now you mentioned the R&D consolidation that you are undergoing, Gordon.

Should we expect R&D expense to come down going forward?

It is not really a cost saving.

When we move from our manufacturing facility that we used to have a few miles from here, we had three fragmented small R&D facilities, because we are not in an ideal office building for real lab equipment.

So it has really been a bit of a catch-up to get back to having a real tech center.

So it is done to improve, have people work together rather than being fragmented in different locations.

Improve efficiency and have a better working environment.

Not expected to be cutting R&D spending.

If we have the right programs -- and we do the R&D based on customer input, developing things with -- that the customers really want.

If we have the right programs from our customers, and a lot of the examples I talked about in Automotive where we developed products custom made for the emerging high current segment of automotive passenger car business, we are very prepared to invest more if we have to if [they are] customer driven programs.

So this was not a cost saving opportunity.

Looking at next year, I don't think R&D spending is going to be dramatically different from this year.

We did have a record number of new products released in both Electronics and Automotive this year, and we would expect to continue to drive that.

Okay.

And one last question.

Could you just give me a sense of what the geographic distribution is on the Automotive business?

The Automotive business overall?

Yes, Phil.

Just overall.

Including commercial vehicles?

Yes.

I can tell you what that is.

Including commercial vehicles and including the Automotive sensor business, it is -- let me just grab this here.

It is about a little bit more heavily weighted towards the Americas than the passenger car business is, because some of our newer business is, particularly the commercial vehicle business is much more US centric.

So it is about 45% Americas, it is about a third Europe and the rest Asia.

Okay.

Great.

Thank you very much, guys.

Appreciate the time.

Thanks, John.

(Operator Instructions).

Our next question comes from Gary Prestopino from Barrington Research.

Go ahead, Gary.

Hi, good morning, guys.

Most of the questions have been answered, but, Gordon, you mentioned that -- you said that the use of custom products appears to be bottoming.

Could you just (inaudible -- multiple speakers) -- okay.

Yes, that's true.

I did say it clearly that we -- this was a business that for the last couple of years has been a tremendous growth business based on a lot of pot ash mining expansion.

And a lot of those programs came to an end, and we have been talking for a year about this diversification into other segments.

There is still some ongoing maintenance programs and some small expansions being completed still in pot ash.

But we get quite a good lead time and a look into the quarterly shipments of that, because there is a lot of engineering goes on ahead of time from the time that you win the quote and then start to do the engineering before you build and ship the equipment.

So we get quite good visibility going into a quarter, so very confident that the fourth quarter will be above the third quarter, and we have got that building backlog for next year.

Okay.

Thank you.

And our next question from palisade capital management.

Please go ahead.

Hi, I just wanted to get a sense of where things stand on the M&A side and utilizing your balance sheet?

Yes, Garo, as Gordon said, we are very active working on a number of different projects there.

I think that we -- we're not -- we can't say a whole lot other than that.

But we feel like we set some pretty aggressive goals a year and a half ago, a year ago for our M&A program, and while we are not quite up to those levels yet, we feel pretty confident that we will be on track as we go through 2014 with some of -- with what we have in the pipeline and some of the things that we are currently working on.

So I think we are making good progress, we are happy with where we are, and we obviously have got plenty of cash to fund those programs.

And just size-wise and kind of management talent-wise how do you feel you guys are positioned?

Size wise the ones that we have done historically have been more in the $20 million to $50 million range, revenue size.

I think Hamlin was a little bigger than that.

I still think you will see the majority of things we are working on and the majority of things that I think will close in the next few years will probably be in that same range.

As we have said before, really to make our 10% M&A target number by 2017 we will have to find another couple of Hamlin-sized deals or one larger deal to get there.

But I think the bread and butter will continue to be the $20 million to $50 million revenue companies, and we have quite a few of those that we are working on.

And talent-wise the last two, ACCEL gave us some very good talent.

Very much a European organization, so from Sweden and Lithuania we got some very talented people, and that really helped us in building the next part of that platform, which was Hamlin, where we get more global people.

We get people in all areas with Hamlin.

So very pleased with the talent that we got from Hamlin and with ACCEL.

That is a critical part of our strategy.

So when we are looking at acquisitions, certainly the talent is a critical part of it.

Thank you.

Thank you.

At this time we have no further questions.

I would like to turn the call back over to Mr. Gordon Hunter for closing remarks.

Well, thank you for joining us on today's call.

With the new products and the new business wins and our strong financial position we believe we are very well positioned for continued improvement in the fourth quarter, and we look forward to talking with you then.

So have a great day.

Thank you.

Thanks you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.