Littelfuse Inc (LFUS) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Inc. third-quarter 2015 conference call. Today's call is being recorded. At this time I will turn the call over Chairman, President, and Chief Executive Officer, Mr. Gordon Hunter. You may begin, sir.

Thank you and good morning. Welcome to the Littelfuse third-quarter 2015 conference call. As always, joining me today is Phil Franklin, our Executive Vice President and Chief Financial Officer.

We had a strong third quarter despite a challenging economic environment. Total sales were down 1% but were up 4% in constant currency. We finished the quarter with an adjusted operating margin of 19.5%, our best in recent history and a testament to our excellent execution. Our adjusted EPS of $1.43 was a record and was $0.13 higher than the midpoint of our guidance.

As we look across our segments, electronics sales declined slightly in a sluggish environment that continued into the fourth quarter. Automotive had another very good quarter, although slowing car builds in China tempered growth; and our electrical business continued to steadily improve on both the top and bottom lines. Operating cash flow was outstanding, and manufacturing performance continues to improve.

I'll discuss the third-quarter performance in more detail in a few minutes, but first I'll 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 third quarter of 2015 were $216 million, which was down 1% year-over-year but up 4% in constant currency. GAAP earnings for the third quarter included a $30 million non-cash pension charge. Including that charge, they were $0.50 per diluted share compared to $1.32 for the prior year.

Excluding special items, earnings for the third quarter were $1.43 per diluted share, which was up 6% compared to the prior year and $0.13 above the midpoint of guidance. This strong performance for the quarter reflected excellent manufacturing execution, good expense control, success of higher-margin new products, weaker currencies in the countries in which we manufacture, and several favorable one-time items.

We also had another strong quarter for cash flow, even after making our final pension contribution of over $9 million. Through nine months we have now generated cash from operations of $114 million, which is up 9% compared to last year's record cash performance. Capital expenditures of $35 million for the first nine months are also well ahead of last year's $19 million, primarily reflecting spending on the Philippines plant and capacity additions for new automotive products.

During the third quarter we took advantage of a temporary dip in our stock price to repurchase 350,000 shares at an average price of just over $89 per share. In the third quarter we also completed the final settlement of our US pension plan, for which we transferred full administrative and payment responsibility on a nonrecourse basis to an insurance company.

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

Thanks, Phil. I'll begin with electronics segment, which accounts for about 48% of total Littelfuse sales. Electronics sales were down 2% in constant currency compared to the third quarter of last year. This was primarily due to continued adjustments in channel inventory and continued capacity constraints for our electronic sensor products as we transfer production to the Philippines.

Electronics channel inventories were down slightly at the end of the third quarter compared to the second quarter, with the decrease primarily in North America. We see this trend continuing into the fourth quarter as we continue to see signs of sluggishness in the global markets. Some of this reflects reduced lead times across the industry, resulting in channel partners being comfortable with current inventory levels.

Our strongest region was Europe, where third-quarter year-over-year sales were up 14% in constant currency. Much of this growth is coming from green initiatives such as smart metering and LED lighting.

Smart metering is a growth opportunity for us, as Europe plans to replace 80% of its existing power meters or approximately 250 million units by the year 2020. Smart meters are more complex and require higher level of protection. Two large European manufacturers have approved our thermally protected TMOV metal oxide varistors for their smart meters, which is expected to add over $500,000 in incremental revenue next year.

Similar to smart metering, LED lighting is also driven by the need to save energy. And during the third quarter we added new LED lighting customers in Europe, Asia, and the Americas that we expect will generate more than $500,000 in annualized incremental revenue. Global sales of all of our LED-related products now total more than $15 million.

While the slowing China market has been well reported, we are still experiencing modest growth. Several of our key China markets are down for the year, but sales into our targeted market segments are flat to up.

Our broadest wins in China have come from the automotive electronics and industrial market segments, where we have won $3.5 million in new business this year. We have been particularly successful in applications for electric vehicles and high-speed rail systems, where our differentiated products set us apart.

Another key market is telecom infrastructure, where we continue to win new business with major Chinese OEMs for our TVS diode, TVS diode array and fuse product lines. This includes a win for our high-current, high-voltage cartridge fuse for the leading Chinese telecom equipment manufacturer. Our product provides the performance of a larger and more expensive power fuse in a smaller and more economical package. It will be used in a power distribution unit, and this design win alone will bring in annualized revenues of $250,000. So, overall, we believe our solid position with leading Chinese OEMs and EMS companies manufacturing in China will help us continue to manage our growth in a sluggish economic environment.

Earlier I mentioned our telecom infrastructure wins in China. We also had a nice win in Korea for our new surface-mount NANO fuse that provides high-current and high-voltage protection in a very small package. Our fuse will protect a receiver/repeater being designed by a large Korean telecom equipment company.

Another growing area is our new custom sensor product line that is used in a variety of industrial and commercial end products to detect position, flow, and level. An interesting new application is for data center servers, where airflow is extremely important. A recent design win was with a major data center manufacturer for our reed switch sensor, which is being used to detect when a cover that is critical to airflow is in the correct position.

We also had a number of successful design wins for our semiconductor products. In the automotive electronics market, we are providing protection for the CAN bus in powertrain and body control modules as well as for infotainment systems.

Another growth area is the Internet of Things. Two recent wins are for our diode arrays in remote-controlled smart air purifiers and thermostats. Total revenues for these applications will total about $800,000 this year.

Overall, we believe our electronics business outperformed our peer group in the third market. We attribute this to the breadth of our end markets, such as LED lighting, data centers, smart meters, and automotive electronics that help to diversify our business beyond consumer electronics.

And in regions like Korea and Japan, which are typically strong in consumer electronics, we continue to explore opportunities to further expand into industrial business segments. So in summary, our electronics business is well-established in the market. Our strategy to develop new products that provide higher performance in a smaller package is generating new business from both existing and new customers. We believe all of these factors provide a solid foundation for continued growth.

Next is our automotive business, which accounts for 38% of sales. Third-quarter automotive sales were up 8% in constant currency, and we continue to make progress on our goal of improving profit margins.

Before I get into more details on the quarter, I'd like to address the questions many of you have about the potential impact on Littelfuse as a result of the VW diesel emissions issue. We believe if car buyers avoid purchasing a VW diesel vehicle because of the emissions issue, they will select another VW model or a car from another manufacturer.

Our content in a VW diesel vehicle is about the same as in a VW gas vehicle. We also have content on vehicles produced by most of the other large global OEMs. As a result, we do not expect any reduction in VW's diesel sales to have a significant impact on our revenue.

Getting back to the results of the quarter, we saw continued growth in passenger car revenues, with a 3% increase in fuse sales and sensor sales growth of almost 30%, both in constant currency. At the same time global car production grew less than 1%.

Geographically, Europe was our strongest performer due to new models being produced by Jaguar, Land Rover, and Volvo, where we have very high content; and MasterFuse and BF Inline fuse content on vehicles from VW, Audi, Skoda, and Opal.

In North America our sales of passenger car fuses continue to be strong, as pickup trucks and full-size SUVs continue to sell well. In Asia our passenger car fuse sales were down moderately in constant currency, driven by weakness in China, where car builds were down 5% in the third quarter according to LMC, who track this data.

We won new business in all three geographic regions, particularly for our new MKS Plus fuse and our standard blade fuses. The new MKS Plus fuse is strategically important for our future growth. We are the only Company to offer this type of fuse, which is designed for medium-current fuse applications that enable customers to introduce a new, lower-cost box architecture. Medium-current is a growing market segment, and our unique position is a distinct advantage.

In North America new business included a win for our CablePro for GM midsize pickups and SUVs. In Europe the MKS plus fuse is being designed into the new Nissan micro-subcompact model and the new Land Rover Discovery Sport. Other wins in Europe include blade fuses for Ford's midsize car platform and the new Jaguar XE. We also won new business for our high-voltage fuse for new Jaguar Land Rover hybrid SUVs.

Design wins in Asia include standard fuses for Jeep and various local OEMs in China, surface mount fuses for battery management systems made in Korea that will go into two Renault models, a CablePro win for GM in Thailand, and standard fuses for various Tier 1 suppliers in India. The total value of all these third-quarter wins is over $4.4 million annually at peak.

Looking at the fourth quarter, we expect continued growth in North America. In Europe we are well-positioned with many of the leading OEMs, the climate still seems positive, but we are anticipating a lower growth rate than in the third quarter due to timing of orders.

In Asia we expect to end the year with another slow quarter. The Chinese government recently announced an incentive program to reduce the consumer tax on cars with small engines by 50%, but we don't expect to see any impact on this program until 2016.

Our automotive sensor business had another very good quarter. Third-quarter sales almost matched our second-quarter record in what is traditionally a weaker quarter. One of the drivers was robust demand for seatbelt and solar sensors sold into the still-strong North American market. Our automotive sensor revenues are growing faster than the market as we continue to win new business and launch new products.

The growth driver for the sensing business, and one of the reasons behind our strategy to build a global sensing platform, is the increasing demand for complex electronics systems in vehicles that help to improve environmental performance, passenger comfort, and occupant safety. During the third quarter we expanded our line of automotive sensors with the acquisition of SIGMA, an Italian company that produces sensors used in gas and diesel engine fuel systems, as well as urea level and quality sensors used in diesel emission reduction systems. SIGMA's annual revenues are about $6 million.

Sales in the commercial vehicle products group, or CVP, were down about 4% in constant currency compared to last year's third quarter. The North American heavy-duty truck market, the largest market we serve, had been increasing since the third quarter of last year and reached record production in the second quarter. Now it's begun to modestly taper as truck sales return to a more normal run rate.

New business wins this quarter include a low-current switch for a North American material handling customer and the high-current switch and power distribution module for two North American agricultural customers, with total annual revenue over $500,000. In addition, two previously announced new programs for agricultural customers have started production and will contribute over $600,000 in annual revenue at peak.

In summary, the overall automotive business is performing very well. We are executing on our growth strategies, are positioned for long-term growth, and continue to focus on profitability improvements.

Next is the electrical business unit, which accounts for about 14% of total Littelfuse sales. We saw continued improvement in the third quarter, with sales up 12% in constant currency. Sales of electrical fuses and custom products both increased, while protection relay sales remained soft.

An improvement in the commercial construction segment and strong solar performance globally were the main drivers behind the increase in electrical fuse sales. This more than offset weaker sales in the core US industrial distribution market. Solar sales for the third quarter increased $2.5 million year-over-year as some of the innovative products we introduced last year continue to build momentum, and we have a strong backlog entering the fourth quarter.

The fuse business had several significant design wins in the third quarter, including one with the world's largest manufacturer of industrial drive and motion control products. This opportunity opens the door for sales of some of our new high-speed semiconductor fuse products.

Looking at protection relays, our sales are still down due to the soft mining and oil and gas segments. But as part of our diversification strategy, we recently completed development testing of a new product that will move us into a new market -- that of power control. The product is a new, energy-efficient automatic transfer switch, or ATS, with communications capability.

The ATS was developed in conjunction with an industry-leading customer in the data center market that wanted to ensure uninterrupted power for its global data center operations. We have already been awarded multiple orders totaling over $600,000 for this new product.

Moving onto custom electrical products, our sales were up significantly from the low point in 2014. Potash orders are gradually returning to more normal levels, as evidenced by orders totaling about $5 million from four major potash mining companies in the third quarter.

Our third-quarter sales also benefited from the acquisition of JRS Manufacturing earlier this year. As you may recall, JRS fabricates e-houses which contain electrical equipment for a plant or utility. With the addition of JRS, our combined expertise continues to generate new business. Based on recent orders, we expect to enter 2016 with a strong backlog.

So overall, our electrical segment continues to move in a positive direction. The solar market is strong; potash mining is improving; and we are leveraging the synergies between JRS and our existing custom products business. So that concludes the update on each of the business units.

Now I'd like to cover several other topics. First is China's slower growth rate and its impact on Littelfuse. With an overall third-quarter sales increase in China in the single digits, we believe we are performing better than many other companies within a challenging economic environment.

We attribute this to our growth in targeted markets such as LED lighting, solar, and automotive electronics that are still robust. While our automotive business had a difficult third quarter in China, we are moving forward with strategies to expand our market share and secure new business, such as the recent win with Jeep. We are also working with the local Chinese OEMs to specify more of our fuses and new technologies that will increase our overall content on these models. We believe these opportunities, combined with our well-established relationships and high content with the Western OEMs, will drive our continued growth in China over the long-term.

The second area I'd like to comment on is Europe, where our third-quarter sales increased 14% in constant currency. All three business segments grew double digits in Europe this quarter, also in constant currency. Many manufacturers in growing markets, such as LED lighting, solar, and other green products are located in Europe. And on the automotive side, some of our largest customers are the European OEMs. And while much has been written about the slow European economy, we believe our targeted growth strategies are helping us to perform well within this environment.

Next is an update on our production transfers. The largest is the transfer of reed switch sensor production to our new 100,000 square-foot plant in the Philippines. We are on schedule with our move and expect the capacity issues we've been experiencing to ease beginning early next year. We are on schedule to complete the transfer in the first half of next year, with savings expected to reach the full $5 million run rate about the same time.

In addition, the consolidation of our Cincom plant in New York and our South Dakota site is on track to be completed by year-end, with projected annual savings of $1.5 million. At our Piedras Negras plant in Mexico, our initiatives to improve productivity and reduce costs made a positive contribution to the margin improvements in both our passenger car and electrical fuse product lines. There is still more work to be done, but we are making good progress.

And, finally, I'd like to comment on our M&A strategy. Earlier I mentioned the SIGMA acquisition, which is a small but strategic acquisition to our sensor product line. We are working on several other opportunities and are optimistic that we will have more to announce before the end of the year.

As previously stated, we will be revisiting our capital allocation targets between now and year-end, and any changes to these targets will depend on what progress we are making on the acquisition front. So with that, I'll turn the call back over to Phil, who will provide the fourth-quarter outlook. And then we will take your questions.

Thanks, Gordon. So far in the fourth quarter we are seeing continued softness in electronic sales and orders, but automotive and electrical demand is holding up fairly well. In the press release we indicated the fourth quarter this year includes 14 weeks instead of the usual 13. Including this extra holiday-shortened week, our guidance for the fourth quarter is as follows.

Sales are expected to be in the range of $212 million to $222 million. Earnings for the fourth quarter are expected to be in the range of $1.12 to $1.24 per diluted share.

This concludes our prepared remarks. Now we would like to open it up for questions.

(Operator Instructions) Matt Sheerin, Stifel.

Good morning, guys. A couple of questions. Just on that extra week, Phil, in the December quarter -- it doesn't sound like you're getting a full week there, because it's the end of the quarter. And presumably your customers will be cutting inventory and orders at that point. But if you look -- but you will get a full week of costs. So trying to figure out the difference there. And then also, looking into the March quarter, then, would you expect it to be down a little bit more than seasonal because of that extra week going away, or because of inventory refresh and the fact that you're seeing below seasonal in some markets for December that it may be a little bit different?

It's a little bit hard to call the first quarter at this point, but I think the way I would look at that is: as we roll into next year -- and if you're looking at kind of a normal sequential progression from Q4 to Q1 -- you'd need to take the $10 million that we say that the extra week is going to contribute to Q4 out of that number. So that would be my guidance there. But relative to some of the other trends you talked about, I think we are not -- we don't have enough visibility into Q1 at this point to really have much comment on that.

Yes, okay. You have seen some nice -- some margin improvements year-over-year in automotive, and electronic continues to chug along. And I know some of that is getting the execution you talked about, but also some of the benefits from some of the cost-cutting initiatives. So how far along are you there? And how much benefit should you get from that over the next few quarters?

Yes, so the cost-cutting -- particularly the plant consolidations that Gordon referred to -- we haven't really gotten any benefit from that yet. In fact, there will be -- there will continue to be some negative impact for that, even into the fourth quarter, as we get close to completing particularly the Philippines move.

As we roll into 2016, we will start to see those benefits. And they will start out slow in the first quarter, and then they will start to ramp up from there. And we had talked about -- we talked about for a while -- Gordon reiterated it: we are looking at about $5 million of benefit from the Philippines transfer. Again, that hasn't kicked in at all yet. And about $1.5 million from the Cincom consolidation into the South Dakota plant.

So those will start -- probably you will see a little bit of that in the first quarter of next year. And it will ramp up and should be close to full contribution by the middle of the year. So the improvement that we saw this quarter really doesn't relate to those things; it relates to some of the other things that we mentioned. And certainly we've seen -- we saw some decent top-line leverage; we saw some benefit from very good manufacturing performance, including improvement in the Mexico facility, which we had cited as a weakness a few quarters ago.

We saw pretty favorable product mix this quarter. We had a number of things that I think contributed good expense control. And we did have a few small one-time items that weren't worth pointing out individually, but in total probably added something on the order of 50 basis points of margin to the quarter. So I wouldn't look at that 19.5% margin as being a sustainable number, but certainly margin improvement trends, we think, are well-established and should get better next year as we start to get contribution from some of those big restructuring projects.

Okay. That's helpful. And just last quick question regarding the commentary, Gordon, on revisiting your capital allocation strategy going into the end of the year here. I suppose that's contingent on the M&A activity and whether -- what your pipeline looks like, and whether you get deals done or not?

Yes, Matt, that's exactly right. We had indicated that we have a number of deals that we are working on right now. Depending on our success on those, that will directly reflect in our capital allocation strategy. So we will make some decisions on that by the end of this year. And probably most likely we will talk about that at the fourth-quarter -- on the fourth-quarter conference call in January.

Okay. All right, thanks a lot.

Josh Chan, Baird.

Could you talk about the cadence of demand that you saw in the electronics business -- kind of the order patterns as you went through different months of the quarter, and maybe bridging into what you are seeing in October? Just how the months sort of fold there?

I don't think we really saw much change in the patterns. We have talked about sluggishness in electronics for a few quarters now. I think the one thing we did indicate is we had probably a slightly better than typical book-to-bill for Q3; but by the same token, I think our seasonal pattern for Q3 for shipments wasn't particularly strong. And we did indicate that we saw some weakness in October in the electronics business.

So -- but no real major changes there. We haven't seen a lot of change in distributor behavior in terms of their ordering patterns. They continue to order on short lead times. The end markets I would characterize at this point as really neither improving noticeably or getting any worse noticeably. And we did indicate that while China has certainly weakened, we think our China business has held up maybe better than some of our competitors have.

Okay. So it's more of a steady pattern compared to earlier in the year, then, I guess. So when you talk about normal seasonality into the fourth quarter -- still in electronics -- are you talking about kind of a 7% to 10% decline from Q3 that -- I think that's sort of the average over the last few years? Would that be in the right ballpark?

Yes, so -- I think the overall Company would be more in the mid-single-digit declines, but the electronics business would be probably closer to 10% or maybe even a little bit above that. But, of course, that gets a little bit masked by the extra week as well. So I think if you take out the $10 million that we said that the extra week adds, I think we would expect pretty normal seasonality for the electronics business.

Great, that's helpful. And if I can switch to the electrical business, it looks like that solar contributed significantly to the growth in the quarter. Is that something that we can count on to keep contributing to growth at a similar rate? Or should we assume that probably won't contribute at as high of a rate, and therefore the segment could grow at a more modest level?

Well, I think we are still extremely bullish about our solar business. It was probably very strong, because we introduced a lot of new products that got very good traction. So we saw a particular bump, which was the reason we called that out as a particular step-up in the third quarter.

So it may not be quite at that level. It would depend on the end market. But we think we've got a very good set of products; we have got some industry-leading products. And we are having very good global traction. We've got success in many other parts of the world. So I think we are very confident about it -- maybe not at the growth rates of the third quarter, but I think at the -- a very solid outlook for next year.

Okay. My last question is on the pension settlement. Is there an income statement benefit at some point in the future because of the pension settlement, or how should we look at that?

Not significant. I'd say that the benefit that we get ongoing -- because we haven't really been taking significant charges through the P&L on an ongoing basis there -- where we will benefit is all the administrative costs of the pension that will now be -- you know, those have moved over to the insurance company. So we won't have the actuarial fees; we won't have all the other administrative costs that relate to that. And that could be -- it's not millions of dollars, but it could be $0.5 million to $1 million a year kind of number that we would have some savings for.

Great. Thank you for your time and congrats on the quarter.

Shawn Harrison, Longbow Research.

I guess just a couple clarifications on my end. First, if I remember correctly, last quarter there was two censor companies that you'd -- I don't know if you'd signed a memorandum of understanding for acquisitions, or something along that line. But I saw only one closed this quarter. Maybe you could give me an update on the second company?

Yes. So we indicated we have a number of things in the pipeline that we are fairly optimistic about. There was one sensor company that we had a signed deal with quite a few contingencies on that did not happen. And that -- it's not completely dead, but it's probably not going to happen. But there are some other things in the pipeline that we feel pretty good about. So stay tuned on those.

Okay, and then just a couple clarifications on guidance -- expectation for the tax rate for the fourth quarter and kind of CapEx for the year.

Yes. The tax rate we said should be about/around the 24% that we've been running. I think certainly we expect that to improve materially next year. We talked about something in the very low 20s next year, so there will be a big change, but that won't happen. We won't see that start to come through until the first quarter of next year.

On the CapEx, I think we haven't really changed our view there. I think we are about on track; we spent about $35 million so far this year. We always said something in the $40 million to $45 million range. And we still will likely be somewhere in that range for the full year.

Okay. And then as, I guess, the final question: some of your supply-chain peers have talked about, within China automotive, either seeing a discrepancy between local OEM production levels versus the multinational production levels -- and while citing down 5%, some side of production down substantially more than that. If you could just talk about what you are seeing within China automotive production -- is there excess inventory; where do you expect production to go, even in the first half of 2016, based upon what you're seeing right now?

Yes, Shawn, you're right. The data we have -- which we get from an independent source -- shows the production levels were down significantly double digit for the Western OEMs and also at the Korean OEMs into that group. But there was fairly good growth, almost 5% of growth for the local OEMs.

So there was quite a change in the market. And there was a lot of new vehicles coming out made by the local OEMs, who really brought out some new vehicles that have got some good features, particularly in the small SUV segment. And so I think for a long time, we have thought that eventually the local OEMs would start to catch up, or get a better brand image, better quality. And I think that's starting to happen.

So it's much tougher competition for the Western OEMs. So our data shows total production down 5%, but you really need to get to the next level to understand what really happened in the market. And although we have more content on the Western OEM vehicles, we are increasing the content in those local OEMs. So for us over the long-term, staying very close to all those local OEMs is critically important. Even if we don't have as much content per vehicle, we think that will increase over time.

Does the dramatic variance between multinational and local production shift at all as you move into 2016, so that maybe you'll see something a bit more favorably in terms of just the overall mix of growth?

I think it's pretty hard to tell. I think for a long time -- and we follow this pretty closely -- there's been a feeling that some of the Chinese OEMs might go into consolidation; they might have more success. And yet it's been amazing how the Chinese public has still preferred to have a Western brand.

And it seems that what we are seeing now is the brand image and the quality of the vehicles from the local OEMs improving. Whether they can continue that through next quarter, I think, is going to depend on the Chinese consumers. I think it's quite hard to predict that. But my feeling is, and what we've seen recently is, that there's going to be a strong performance over the long-term from the Chinese OEMs once they get their brand image and their quality up to Western levels.

Gordon, very helpful. Thank you very much.

Christopher Glynn, Oppenheimer.

Just as we think, kind of very generally, about 2016 at this point, relative to your long-term growth targets, anything structurally or cyclically that you could help us contemplate -- and maybe in particular around the implications of the market share, transitions of China automotive, and if in electronics there's any early handicapping to be done?

I think we've said for a while that -- and we certainly saw it this quarter -- that kind of the overall -- certainly the overall car build that's been -- we've been benefiting from the last few years, we're certainly expecting that to be much more modest, probably low single-digit kind of numbers for next year. So for our automotive growth we are going to have to depend on the content play that we have, and in the sensor area probably some market share gains as well as we bring on new programs, new platforms, new OEMs.

But that's how we're going to get the growth is through that content play. We are pretty optimistic about that. We still think automotive is probably not going to grow double digits next year because of the much lower car build, but we think certainly mid- to high single-digit growth is very doable based on our content there.

Electronics is pretty hard to handicap at this point. I think we are still optimistic that -- because inventory levels are low, and that, I think, right now distributors are being very careful, but at some point they're going to go back to kind of more standard, more normal behavior. And that will benefit us when it happens. In terms of the end markets, I'm not sure we have a clear view of that yet.

And then on the electrical side, we've been showing good progress there, certainly. We have become more optimistic on our relay business with some of the opportunities that Gordon mentioned. The power fuse business has rebounded nicely, and certainly things like solar that Gordon talked to our helping that out.

And the orders that we have been receiving for custom has been encouraging in that segment, as well as with some recovery in the potash market, with some of the new opportunities from JRS. I think electrical should be positioned pretty well for growth in 2016 as well.

Thanks, that's all interesting. And then on the $10 million from the extra week, is that localizing more so in one of the segments, or kind of proportional?

You know, it's probably -- it's not completely proportional. I would say the businesses that have more Asia business will be less impacted, so electronics would -- you know, they would have something that looked a little bit more like a normal week, because over 60% of their business is in Asia, so certainly less affected by the Christmas holidays. Probably on the other end of that spectrum, the electrical business, which is the majority of their business -- the vast majority of their business is North America. That would probably be most impacted. And automotive would be somewhere in between.

Okay. And then you gave a good high-level comment on the 19.5% margins and 50 basis points of help. In particular, auto really kind of surged the margins there. So I'm wondering if we could talk about -- you know, it sounds like mix was negative because sensors outpaced fuses. But maybe some of the mix efforts you've been making within sensors was a big deal in the quarter?

Yes, we did see a nice step-up in our sensor margins for the quarter, which did help the overall automotive margins. I'm not sure all of that -- you know, and most of that was related to more favorable mix that we have been talking about. I think the mix was probably a little more favorable than we can expect for the near-term there. So I do think that -- I wouldn't count on the third-quarter automotive margin being kind of the new normal.

I think we will probably see that margin come back down again. But we do expect steady improvement, like, through next year and even into 2017 with some of the initiatives that we have talked about previously, and some of the benefits from some of the cost programs that we have, and the manufacturing improvement programs that we have starting to kick in.

Great, thanks.

(Operator Instructions) John Franzreb, Sidoti and Company.

Just regarding the M&A pipeline, can you just talk about the size of these acquisitions that you're hoping to close between now and year-end? Are they the size of SIGMA? And secondly, SIGMA has a urea quality sensor. I know that was at one time a sizable opportunity in Europe. Can you talk a little bit about SIGMA's position in that product line?

I think it's probably a little too early to talk about that. Certainly we are not typically going to spend the time and effort to acquire a $6 million revenue company unless we think there is significant growth opportunity there. So I'll leave the comment at that.

We bought that company for the technology and the products, not for the $6 million of revenue. So we feel good about that.

I think that we have talked about in the past that we're -- we had some larger potential deals in the pipeline. That is still the case. I'm not going to give any more update other than that. But there are still some of those that we are working on, and there are some other kind of smaller to midsize deals, all of which are bigger than SIGMA are, that we are working on now as well. Hopefully we will have at least some news before the end of the year on one of these ones that we are working on currently.

Let me just add a couple of words on SIGMA since I visited the plant. It's a highly automated plant. Extremely talented technical and operations-focused founder and leader of the business, very good team of people.

But a small company like that really only has the scope to be able to contact European customers, so their base of customers is quite small in Europe. And as we are doing with the rest of our automotive sensor business since we are growing so much is taking those businesses we acquired globally and being able to take the products to customers that we have relationships around the world.

And that explains part of the growth we're having our automotive sensor business overall. So we look at this is very good technology, very good team, and being able to take those products to other customers as being the way to grow that business.

Fair enough. And on your automotive commentary about maybe tempered expectations in 2016, how much does that encompass the likelihood -- or at least what we are hearing is lower commercial vehicle product sales next year? How much is that built into your expectations?

That's clearly built into our thinking as well. I think that a number of other of our other peer companies have commented on trends in that segment, and that market for us has been buoyed up over the last year more by the strength in the heavy truck market.

Obviously that market is -- those growth rates have slowed down significantly, and we don't expect a recurrence of that strength in 2016. And there hasn't been any great signs that construction, or ag, or some of the other markets there are coming back. So I would say while we always have opportunities for new programs, and new wins, and new products, the overall market overlay for commercial vehicles, I would say, is going to be weaker next year than it has been for the past couple of years.

Okay. And one last question. Could you just give me a sense of the size of the solar business for you, especially in light of the fact that the end of 2016 those tax incentives go away in solar, and maybe we should be thinking about how the business is going to be post that transition?

It's now well north of $10 million. And it depends on the -- you know, it's going to be shy of $15 million but north of $10 million. Let's put it that way.

Okay. Fair enough. Thank you very much, Phil.

Gary Prestopino, Barrington Research.

Most of my questions have been answered, but they revolved around China in the automotive business. But if you said the car build was down about 5% in China in the quarter, could you give us some idea of what your revenues were like in the quarter? Or do you break it down that granularity to what was the increase or decrease relative to that build?

We don't normally break it down to that level of granularity, but I did say that we were down more than the car build, so more than 5%. And the reason for that is really the lower content that we have on the Chinese OEM -- the indigenous manufacturers compared to the Western manufacturers that we work with. So the content per vehicle is what drove our sales below that 5% decline.

Okay, thank you.

We have no further questions at this time. I'll now turn it back over to Mr. Gordon Hunter for closing remarks.

Thank you for joining us on today's call. We do believe we are performing well in a challenging economic environment, and we certainly look forward to next quarter and updating you at the end of the quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.