Good day, everyone, and welcome to Littelfuse Second Quarter 2012 Conference Call. Today's call is being recorded. At this time, I would now 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 Second Quarter 2012 Conference Call. And joining me today is Phil Franklin, our Vice President, Operations Support and Chief Financial Officer. As you saw on the news release, our second quarter sales were consistent with the guidance we provided in our call last quarter and were within $1 million of last year's record second quarter. Earnings per share exceeded our guidance for the second quarter, but were below last year's second quarter due to unfavorable currency effects. As we expected, the inventory correction in the electronics business is now behind us, as indicated by the strong sequential growth in electronics sales in the second quarter. Our focus on acquisitions in attractive markets adjacent to our core business is paying off. Strong sales of commercial vehicle products contributed to the year-over-year increase in automotive sales, along with the recently completed acquisition of Accel. And our protection relay and custom electrical products continue to drive the increase in electrical sales. I have more comments on the quarter on each of our business units. 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. 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 risks that may cause actual results to differ materially from those expressed in the forward-looking statements. Sales for the second quarter of 2012 were $175.9 million, which was up 10% sequentially and flat year-over-year. The strong sequential growth was driven primarily by recovery in the electronics business from the recent inventory correction. Margins and earnings for the second quarter also increased nicely compared to the first quarter and were above the high end of our guidance. Operating margin improved from 16.1% in the first quarter to 18.3% in the second quarter due to increased operating leverage and strong operational execution across all businesses. Earnings per share improved to $1.07 in the second quarter from $0.81 in the first quarter, but were still below second quarter 2011 earnings of $1.11 due to the effects of the weaker euro. Operating cash flow increased as expected, to $24.7 million in the second quarter compared to $7.9 million in the first quarter, as the first quarter was impacted by bonus payouts and pension contributions. Now I will turn it back to Gordon for some color on market trends and business performance.

Thanks, Phil. Now let's move on to the review of our 3 business units. As always, I will be highlighting the markets, the products and the design wins for each business to give you an overview of the many ways we are benefiting from our broad and deep product portfolio, our growth strategies and strong brand name. I'll also comment on the third quarter outlook for each business. Let's start with electrical, which accounted for 20% of total Littelfuse sales in the second quarter. Electrical sales were $34.9 million for the second quarter, a 25% increase from the second quarter of 2011. This business continues to be driven by significantly higher sales of protection relays and custom electrical products. Sales of protection relays were up 51% in the second quarter due in part to the addition of Selco last August. Sales of custom products increased 59% from last year's second quarter. As we've discussed in prior calls, the primary markets for our protection relays and custom products are mining, oil and gas, marine and general industrial applications. Our largest market, mining, has been very strong for some time. While demand is softening for some commodities due to macroeconomic concerns, global mining companies are projected to increase expenditures in 2012 and 2013 in the categories of health and safety services and equipment according to ICD Research Global Mining Survey. One bright spot of the mining industry right now is the Canadian potash market, which is expected to have a record year in 2012. We are well positioned with the leading Canadian potash mining companies and continue to benefit from the growth of the market. The Australian mining market has been a good source of growth for our protection relay business, and sales into this market are up almost 50% over the…

Thanks, Gordon. The following is our guidance for sales and earnings for the third quarter of 2012 and comments regarding cash flow for the remainder of the year. Sales for the third quarter are expected to be in the range of $170 million to $180 million. The middle of this range represents 1% growth compared to the prior year. Earnings for the third quarter are expected to be in the range of $1 to $1.15 per diluted share. As is typical for our business, we expect the operating cash flow to be stronger in the second half of the year than the first half. We expect capital expenditures to increase significantly over the next few quarters related to capacity expansions in support of our growth initiatives. Capital expenditures for the year are expected to be approximately $25 million. This is down from earlier guidance due to several projects starting later than originally anticipated. This concludes our prepared remarks. Now we'd like to open it up for questions.

[Operator Instructions] And our first question comes from Peter Lisnic from Robert W. Baird.

This is Josh Chan filling in for Pete. On your comments about mixed messages in the electronics business, are you noticing any differences in order patterns by geographic regions? And then, sort of to follow up on that, are you seeing any incremental pricing pressure that you would not normally expect to see?

Yes, Josh. Good questions. No, it's not really much different. Even though we know there's a macroeconomic weakness in Europe, actually Europe is not performing too badly. So it's pretty much just caution everywhere, I think. And I think we know that our distribution channels have got inventory levels at the right level. But they're just not, I would say, very confident about the near term, and they're ordering more cautiously. And it's pretty balanced around the world. And we haven't really seen any change in the pricing environment. We're not in a situation where there's a downturn and people are really being much more aggressive on pricing. There hasn't really been a change in that. I'd say it's in a very stable position right now.

All right. That sounds good. And in the feed -- switch gears to the automotive side. Curious on your outlook on the commercial vehicle market given some of the headwinds that -- the off-highway equipment manufacturers are facing, if you will. So is the outlook there still pretty positive for you based on some of the new products that you have?

Well, we've got a very small market share. I mean, the Cole Hersee acquisition, which has turned out to be a very good acquisition, was primarily a North America-focused business and didn't really have the channels around the world. And so when we look at getting into Asia and places like China and we've had a lot of success in Australia, we think that by getting more coverage -- and we've got some very good products, very well designed and being able to get those into channels around the world that even if the market is not so robust, there's really plenty of opportunity to take those products globally. And I think that's going to help us for quite some time.

Okay. And then last question is on the automotive margin for the quarter, which was a little bit below the same quarter last year. Did the acquisition purchase accounting have an impact on that? What were the drivers behind your margin?

It wouldn't be acquisition purchase accounting. It would have been almost entirely euro-related. I think we probably took about a $2 million hit relative to last year because of the change in the euro.

Our next question comes from Shawn Harrison from Longbow Research.

I wanted to just ask, I guess, on the consolidation of semiconductor manufacturing into China. What type of potential savings would you realize during the fourth quarter and into '13 from that move?

Yes, I think, Shawn, I think a lot of those savings have probably already been realized as we've wound down the workforce in Taiwan. We don't have a lot of people left there. There will be some savings from -- when we finally exit the facility there. And there are some -- I would say, at this point, a few production people and some administrative people left, that will ultimately go off the payroll. So there will be savings, but I don't think it will -- it won't be a material number. I mean, it could approach $1 million on an annual basis, but I don't think would be much more than that.

Okay. And then second, with the Accel acquisition, how much revenue did that contribute? If I'm -- I think it was $1 million in the second quarter. But how much of that will contribute into the third quarter?

So -- I mean, it's a business that's running at about a $20 million run rate. So if you just -- if you prorate that, it will be probably in the -- and probably with a little bit of the weakness in Europe at this point, I'd factor in something like $4 million or $5 million for Q3.

Okay. And then, I'm sorry I missed it. What did you say, Gordon, automotive production was for the second quarter, globally?

I believe I said it was down 3% from -- sequentially from the first quarter, I believe is what I said.

Okay. And then final question. Just on the electrical business, particularly great margins this quarter, back to peak. Is there much upside as you add capacity in that business? Or are we kind of at peak operating levels in terms of profitability currently?

Yes. I mean, I think that -- I wouldn't bake in a lot of upside on the margin. I mean, I think the real opportunity there is to continue to drive the top line and continue to -- if we can continue to execute, I think we can continue to deliver kind of mid-20s and to maybe even pushing upper-20s operating margins. But I wouldn't expect it to go a lot higher than that. I mean, we're going to be continuing to reinvest in that business in selling and technical resources. So I don't -- we're really not going to be focusing on driving that margin incrementally. We're going to be focusing on driving and continuing to drive the top line. That's really where the leverage is.

Our next question comes from Matt Sheerin from Stifel, Nicolaus.

So just following up on Shawn's question on the electrical business. Margins have been strong particularly last quarter. How much of that is driven by mix? Because you've got lots of different types of products and customers there versus volumes.

Interestingly, mix doesn't really have much of an impact there because as we -- if you look at our various product lines there: the fuse product line, the relay product line and the custom product line, they all deliver margins fairly similar to the range you're seeing there, so mix typically is not a factor. There's going to be some variation depending on what specific job shift in the custom business from -- because these are big, $100,000-plus jobs, and there'll be some variation in those jobs in terms of margin. But overall, it shouldn't be much of an impact on mix, and I think what you've typically seen is those margins seem to be pretty steady in the mid-20s.

Okay. That's helpful. And then in terms of exposure, particularly within the mining business. I know that the Canadian market and the potash market has been a big driver, but it looks like you've been diversifying. So what kind of exposure do you have specifically to the Canadian market versus other markets?

I think in a -- total Startco business is probably about 70%, I would guess, that's still Canadian. And we're expanding into all the places I've mentioned, China and Australia. And I've, in previous calls, talked about Latin America, Brazil, Chile, other mining countries. But it's still probably, I would guess, about 70% Canada. And we do think that Canada will continue to be strong, and we still invest there. But the share that we have in some of the other parts of the world is relatively small. And getting established there and developing customer relationships is really the key factor for us to win market share.

Yes, Gordon. So we have pushed into a lot of newer end markets and new geographies, but with the continued growth and very rapid growth in the Canadian potash business, we -- that percentage really has changed a little bit, to be a little bit less Canada-centric, but we're growing so fast there. It can continue to be heavily Canada for a while here. But as Gordon said, we do -- we are optimistic and we're pleased with the growth we've seen. And we expect the non-Canadian piece of that community to grow pretty rapidly.

Okay. And just lastly, Gordon, on the electronics business, you talked about obviously cautious stance, and we're seeing that across the board from a bunch of suppliers and distributors. Typically in the December quarter, at least the last 2 or 3 years, and of course, these cycles have been -- have not been so typical, but typically you are down a bit in the December quarter and -- off of a stronger September quarter, so obviously, visibility is limited. But looking into the December quarter, would you expect a normal sequential decline there?

I think it's pretty hard to say, frankly, Matt, at this time. I think that we certainly -- I'm wondering very carefully at distributor inventories, and it seems like they're not as enthusiastic as they normally would be this time of the year. So we're not going to see the typical growth in the third quarter. And maybe that we don't have the typical decline in the fourth quarter as much, I think is just very difficult to say. I think everyone is just being a little bit more cautious looking at end markets.

Our next question comes from John Franzreb from Sidoti.

Regarding the SG&A line, given the acquisition, is the current SG&A expense line, is that a good type of a number to use going forward? Or are there some kind of onetime items maybe built into that should kind of be considered one way or the other?

I don't think it's going to change dramatically. I mean the variations in -- I mean, SG&A we're continuing to make some investments there in some of our growth areas. I think that certainly depending on how our performance is for the rest of the year. There's some possibility that the bonus accrual may come down later in the year, if the weakness that we're seeing right now continues through the year-end. But I wouldn't anticipate any big changes there.

Okay. And surrounding the Accel purchase, getting into adjacent technologies, I guess notably the sensor market. Can you talk a little bit about your appetite for continued growth in that market? It sounds like you're setting up a fundamental platform to be a bigger grower in that product space. Is that the case? Or I'm just misreading this?

Well, that's correct. I think we have a healthy appetite, I would describe it. I think what we've seen with Startco in electrical, which was a very good adjacency, there's quite a lot of similarities in the size of Startco when we acquired it, age of the company. We've got, with Accel, a company that's over 20 years old, very good technology, very good engineering capability, and it took a little time to get the acceleration in the Startco business, but it's now a very healthy part of the company and we added the Startco Arc-Flash Relays, which complement very well the offering at Startco. And so we used Startco as the beginning of our platform in protection relays and custom products. And I could see Accel being the same, a $20 million company that doesn't really have global reach. It has very good operations in Lithuania, and I think we've got a good appetite to look for adjacent sensing products to those products that Accel makes. And we also believe that with our global reach with our customers, I mean we have a great sales force now in China and Korea, that we can take those products into geographies that Accel didn't have the reach for. So I think it's really the beginning of a platform, very much like we did with Startco.

And on that point -- aren't the multiples for M&A in the sensor market substantially higher than you would see in the Startco-related markets?

John, I think it depends. I mean, if you look at the publicly-traded companies that are more or less sensor pure plays, they are certainly trading at higher multiples. If you look at some of the companies that they've been acquiring, some of the smaller companies that they've been acquiring, I would say the multiples aren't that much higher than some of the stuff we've been buying. So it kind of depends on the size. It depends on how much competition there is, obviously. But I would say, generally speaking, the sensor business overall, the sensor market overall probably tends to trade a little bit higher multiple than some of our core markets because the growth is higher.

Right, right. Okay, and one last question back to the electrical business. You talked a little bit about how well the protection relays are doing and some of your custom products, I forgot the numbers, north of 50%, somewhere in the 60% growth. What products aren't doing so well that's offsetting some of those results?

Did you mean specifically in electrical or the company in general?

No, in electrical.

The electrical, I mean, the electrical -- as Gordon said, the electrical fuse business, which is until recently -- it's been over 1/2 of the business, now it's a little less than 1/2. That business has been pretty flat for a while because of the weakness in nonresidential construction and some of the issues of the challenges that we've had in solar. So that part of the business has been pretty flat. So basically we're talking about kind of the Startco products growing, 45%, 50%, and the fuse business being pretty flat. When you net all that out, you're at about a 25% growth rate.

Our next question comes from Tony Kure from KeyBanc.

Just wanted to sort of tie together the electrical CapEx spending and then the electrical growth rate going forward here, given that the capacity -- well, first, the CapEx, is it fair to assume -- as I think what we discussed in the past mostly around the custom products and the Startco businesses. So when that's complete -- it sounds like that's pushing out a little bit into the next year. But when that's complete, by my math over the last 6 quarters or so, this segment overall is growing in the low-teens. So when this is complete, will this actually accelerate that pace? Or are we getting to such large numbers that double-digit growth wouldn't be sort of in the cards as we move into next year?

Well, first of all, I think the -- you've talked about the CapEx. Certainly we're -- the electrical business overall is, over a long period of time, is going to be relatively low-CapEx business. It's going to be -- your point is right that we're spending -- I think we're spending more than $6 million or $7 million this year on a building expansion there. But other than just brick-and-mortar square footage to do assembly for custom products, there's not a lot of CapEx needs in that business going forward. But basically, we're providing capacity for pretty far out into the future here with some of the plans and some of the views we have of where that business can go. But I don't think you're going to see an acceleration in the growth rate. I mean, we're not really being constrained at the moment in any significant way in terms of how fast we're growing because we don't have the square footage. This is really merely looking out into the future and saying, "Over the next 5, 6, 7 years, what are we going to need to -- based on our growth plans here and what we think is possible?"

Okay. That's helpful. And I guess with the CapEx higher in the second half and then the expectation that Littelfuse generally has more free cash flow in the second half, do you still think you could get free cash flow ahead of -- above net income in 2012?

No. I think we said that the free cash flow was going to be -- I don't know if it will be ahead of net income because of the heavy CapEx this year. But it's probably going to be approaching net income. It's going to be a similar order of magnitude, let's put it that way, I would expect.

Okay. And then finally on the electronics side. You mentioned a lean inventory level at the distribution level and the caution, but I think you've commented in the past about your visibility into the distribution channel as far as their sales-out. How are those trending? And are those kind of hanging in there? Or has that -- has our caution been warranted and we're seeing sales-out decline in the third quarter?

Yes, I think that -- I'd say that probably best color I could provide [ph] is sort of flat. It's not that people are concerned that there's a big downturn. We're not in a market that's collapsing by any means. It's just that normally, seasonally, we would see distributors are having ordered a lot more, expecting production volumes to be going up during the third quarter for the holiday build. And so flat is a disappointment compared to the expected sort of good momentum we'd have this time of the year. So I think it's sort of characterized by caution and flatness, which, in other words, we'd normally be using this time of the year.

[Operator Instructions] Our next question comes from Alek Gasiel from Barrington Research.

Most of my questions have been asked. Just looking at the second half, providing any expectations on gross and operating margins.

It's going to be largely dependent on how the sales roll up. I mean, it's -- I mean, the biggest factor affecting that is always going to be operating leverage. With -- third quarter guidance, we have with sales and earnings per share being similar to Q2, I think you can assume that operating margins will also be similar to Q2. But Q4, we're not going to make any predictions at this point yet. It's just too early.

Okay. And I noticed a theme with some of these acquisitions. Before, a while back, it was concentrating on the electronics. Then with Startco, it was electrical. And now the theme has kind of been in the automotive, the commercial vehicle segment. I mean, is there a particular strategy or just kind of overall theme on this? Or do you still see some potential acquisitions in electronics? Or I don't know, if you can provide any color on that?

Yes. I think that's provided all the color. I think that probably the theme has been we've been buying what we call high-quality companies that have got a good technology and a good platform for growth. Probably the thing that characterizes, I would say, the last 5 acquisitions, so Concord in Taiwan, which was in electronics; certainly Startco; Selco; Cole Hersee; and now Accel, I'd say the thing that -- with all of those 5 is they're all private companies in sort of the $20 million-range, all of which had owners who are getting to an age where they were ready to sell the company. They didn't have a good succession plan. They've built a very good company. They've built good employees and good technology, and they were good adjacent fits for us. And the plan we had was to be able to take those companies more global and bring in some of our expertise in lean, and integrate those companies into our platform. So I'd say the characteristics -- we've looked across all of our markets, and the last 2 were in north of -- one in automotive and one in electrical, and then Cole Hersee and Startco. So I think we continue to look, all the time, at good acquisitions that are a good fit. And I think the point that was brought up earlier, could we see Accel being the beginning of the platform? I absolutely think that fits the platform, as Startco is a platform and we look for things to add on to the Startco success. So I think it's more looking for very good fit that are well-run companies that have good technology, and all of our markets are places where we are continuously looking.

I might've missed this. But on Accel, is the revenue primary from Europe?

Yes.

At this time, we have no further questions. I'll now turn the call back over to Mr. Gordon Hunter.

Okay. Well, thank you for joining us on today's call. We appreciate your interest in Littelfuse, and we look forward to talking with you again next quarter. Have a good day. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.