Good day, everyone, and welcome to the Littelfuse Inc. Third Quarter 2012 Conference Call. Today's call is being recorded. At this time, I will turn the call over to Chairman, President and Chief Executive Officer, Mr. Gordon Hunter. Please go ahead.

[Audio Gap] third quarter conference call, and joining me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer. And as you saw in the news release, our third quarter sales and earnings were consistent with our guidance even though the overall environment weakened as the quarter progressed. The third quarter is typically our strongest quarter, but the uncertainty in the global economy was felt virtually across-the-board. And as we anticipated, the greatest impact was in electronics, but key end markets in our other 2 businesses were also affected. I'll discuss our performance and other topics 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.

Thank you, 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 the forward-looking statements. So sales for the third quarter of 2012 were $172.7 million, which was down 1% year-over-year and 2% sequentially and in line with our guidance. As expected, our electronics business did not show the usual seasonal strength as key end markets remained soft and distributors continue to manage inventories tightly. In addition, the commercial vehicle market has clearly weakened over the last 3 or 4 months. Despite this difficult macro environment, we continue to execute well and deliver solid margins and earnings. Operating margin, adjusted for onetime charges, improved from 18.3% in the second quarter to 18.8% in the third quarter, and earnings per share of $1.13 was at the high end of our guidance and our best result in the last 4 quarters. Operating cash flow was near record levels at $43.5 million, reflecting the solid earnings and effective working capital management. With capital expenditures having been reduced from our original plan due to pushout of a few capacity-related additions, our free cash flow for the year is expected to approach $100 million. Now, I'll turn it back to Gordon for some comments on market trends and business performance.

Thanks, Phil. Now let's move on to the review of our 3 business units. And as always, I'll be highlighting the markets, products and design wins for each business to give you an overview of the many ways we are benefiting from our broad and deep product portfolio and executing on our growth strategies. I'll also comment on the fourth quarter outlook for each business. So let's start with electrical, which accounted for 19% of total Littelfuse sales in the third quarter. Electrical sales were $33 million for the third quarter, a 10% increase from the third quarter of 2011. Compared to year-over-year sales increases of 19% in the first quarter and 25% in the second quarter, we saw a slowing of our growth momentum in the third quarter. Sales of our custom electrical products continued to lead the year-over-year growth with an increase of 14.8%. Protection relay sales increased 3.4% and core fuse product sales were up 9.4%. Our protection relay sales were impacted by the softness in the global mining industry and slowdowns in the general market. Our custom product sales remained strong. As we've discussed on prior calls, the primary market for our protection relays and custom products is the Canadian potash mining market where our products are used to protect equipment and personnel from electrical hazards. Several of the leading Canadian potash producers have multi-billion dollar expansion projects underway and we expect to benefit from this increased capacity as it comes in line over the next few years. Another bright spot in mining is the Canadian oil sands. This segment is being driven by increased domestic consumption and the demand from the U.S. and Asia. The infrastructure that is being placed for extracting, refining and transporting oil from the Canadian oil sands is making the area…

Thanks, Gordon. So here's a recap of the guidance for sales and earnings that we gave in the press release. Sales for the fourth quarter are expected to be in the range of $152 million to $162 million and this reflects a more-than-seasonal sequential decline in electronics and continued weakness in the commercial vehicle market. The middle of this range represents 7% growth compared to the prior year. Earnings for the fourth quarter are expected to be the range of $0.75 to $0.90 per diluted share before special items. This implies an operating margin in the 15% to 16% range and a tax rate in the mid-20s. This concludes our prepared remarks. Now, we'd like to open it up for questions.

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

The -- I guess, my first question -- thanks, again, for all the granular commentary in each of the segments. If we look at electrical and we think about some of the growth factors that you mentioned, Gordon, like oil and gas as an example, how might that impact the margin for the business as you look forward to 2013? Should we see any significant change from current run rates as some of the composition of the business mix changes?

I don't really think so. We are citing those as markets that we are targeting, that we're just getting started in. We've stated we wanted to diversify from the very successful potash segment we've been in and we believe there's other attractive segments that we've got investment that we are relatively small players today. Our protection relay as we do sell into the oil sands area and the margin profile has not really been any different there, so we look at that as an attractive segment. But until we get really significant chunks of our business there, I don't think it would make any difference to the margin impact.

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

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

Yes. I think it's going to be tough to state that. Really, the -- clearly, we've seen in this quarter, as I cited, the growth rates in the first half of the year were much stronger than what we saw in the third quarter. So we're clearly seeing, with the macroeconomic picture, a slowing rate there. And I think that's going to be one of the factors we're going to have to consider. And hence, the strategy of trying to get more global expansion, talking about South America, about Asia, China, Australia, places we've talked about trying to take our electrical business to another vertical segments, other mining segments and other industrial segments and so it's really going to mean we're going to have to accelerate the growth in those other areas where we have very little penetration. But it's certainly looking that the challenges of the macro story are really going to impact this business also.

Okay, all right. And then last question, if I could. Just on the acquisition comment that you put in the press release, can you give us a little bit more color behind that? It sounds like maybe more sizable deals in the pipeline? And then if you can, corollary to that question, just talk about sensors versus other perhaps more traditional electrical products and what might be in the pipeline there?

Yes. So obviously, we don't get too specific or too granular when we talk about acquisitions. But I can, Pete, I give you a few general comments. And we are -- as the press release indicated, we are looking at probably more larger acquisitions than we have in the, certainly, in the recent past. We're currently looking at several companies that are in the kind of $50 million to $75 million revenue range as opposed to more the $25 million to $50 million has been kind of the sweet spot of where we've been in the last 5 years. We're also looking at 1 or 2 companies that are north of $100 million in revenues. So there are some bigger things in the pipeline. It's always hard to predict if and when those might hit. But don't be surprised in the next 6 to 9 months if you see maybe another -- a larger acquisition or 2.

Our next question is from Shawn Harrison of Longbow Research.

Just, I guess, back to that prior question. What is the typical EBIT margin profile of the companies you're looking at? Would it be accretive to the corporate average or is that kind of #1 goal? Is it more just kind of in line with the good profitability you are already seeing?

Yes, it's a bit all over the map. Although if you look at the last 4 or 5 deals we've done, they generally tend to be reasonably profitable companies. Not always quite as profitable as Littelfuse. I think as we ventured into commercial vehicles with the acquisition of Cole Hersee, as an example, we started with a company that we knew had the potential to get to Littelfuse type margins. But when we acquired it, it was more in the neighborhood of 10% operating margin and we've been able to move that margin north, more in line with Littelfuse margins over the 1.5 years that we've owned that company, but -- so there will be some that will be lower. There'll be some that are in line with our margins up in the high teens. There are lots of companies that we look at that are significantly higher than where we are. But generally speaking, most of the companies we're looking at have at least double-digit operating margins.

Okay. In Terra Power, where was the profitability of that company?

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

Okay. And then 2 follow-ups. I guess if you could just kind of talk in terms of what you're seeing from the distribution environment here during October in terms of relative to, say, the trends to exit at the end of the third quarter whether you've seen any stability there? And then, I was just hoping I could get a repeat of the growth stats within the electrical businesses for the 3 sub-division sides. I missed that at the beginning of the call.

Okay, I can go back to that. When you're talking distribution, Shawn, I assume you meant electronics?

Yes, I did. Sorry about that.

Yes, yes. I don't think there's really much change. I think we're sort of in line with what we're hearing in the rest of the industry. I think we feel it's end-market caution that's driving the whole electronics industry into a slow period and not a distribution correction, which we've often cited as being the reason for us. Inventories have been pretty flat and I think that the distribution channels are just very cautious. And I think when inventories are at this low level and when things are not looking great, it's often difficult to think of how an uptick can happen. But when we're at low inventory levels, once an uptick starts to happen, it can accelerate pretty quickly. And I think we're in that period of people waiting to see when that might happen and I think the uncertainty of a change of regime in China, an election here and Europe still needing to fix things, I think people are really thinking it's going to be early next year before we see things picking up. So I'd say distribution is, I'd say, pretty stable on most things at the moment. And then just to go back to our electrical business. We had a 10% increase from the third quarter of 2011 and the custom electrical products year-over-year growth was 14.8%; protection relays, 3.4%; and our core fuse products were up 9.4%.

Our next question is from Matt Sheerin of Stifel, Nicolaus.

Just back to the guidance that you gave for down -- for the business. It sounds like the electronics will be down greater than seasonal, so probably in the low double digits. It also sounds like your automotive business will be down sequentially. But electrical, will that be sort of flattish? I know you're going to still have very nice growth year-over-year, but is that decelerating growth, which implies it could be down sequentially?

Yes, so Matt, the automotive business, we're certainly expecting the commercial vehicle business to take another step down. That would be some normal seasonality, some just overall market weakness for the time being. The passenger vehicle market should be relatively flat quarter-to-quarter, could be down slightly, but I think relatively flat is about right. The electrical business is going to have strong year-over-year growth. But typically, we do see a seasonal fourth quarter decline in electrical, both in our power fuse business, also in the protection relay and custom businesses, primarily based on the holidays around Christmastime and things kind of slowing down around that time frame. So I would expect that we'd see a sequential decline there. But still good year-over-year growth.

Got you. And could you remind us on the auto business the percentage of sales from the commercial vehicle market?

Yes. It's about -- I mean, it's about 2/3 passenger, 1/3 commercial.

Okay. And then just also jumping around a little bit on the PC business and the Ultrabook business, which would hopefully we'll see demand pick up next year with consumer and then corporate adoption of Windows 8. What's the dollar content do you see? Is that increasing from typical notebook or tablet content, Gordon?

Yes. It's not too different from notebooks, and we generally said that a notebook is usually more content than a tablet. Although the recent developments in the higher-energy density batteries and lower-profile batteries and what I was talking about with our leadership position in very low-resistivity polymer PTC devices, than the tablet market has become a little more attractive with those devices that we have. Not a huge difference -- different applications, more battery strength in tablets, more port protection in laptops, Ultrabooks. Not a huge difference in content per unit, I would say.

Okay. And then lastly, on the CapEx guidance, down a little bit from your previous expectations, $20 million versus $25 million. Where are the pushouts occurring?

It mostly has to do with -- we talked -- about at the beginning of the year, we talked about a number of major projects. Some of those hadn't been fully formulated in terms of their schedules yet. One was the building expansion for capacity reasons up in Canada where the -- for the custom products business serving the mining industry. Another was the Mexico -- an expansion that we're doing down in our Mexico site to accommodate automotive and our electrical power fuse business. And the third one was in the Philippines to provide, again, for future capacity for some of our electronic fuses. Several of those programs have pushed out to varying degrees and we will still be moving forward with them. But it will be more of that spending will end up being in the 2013 as opposed to 2012. So I would expect 2013 to tick up some for CapEx. It's not going to be a huge dramatic CapEx year, but in all likelihood, because of this major projects, the spending pushing out will be higher than 2012.

Our next question is from Tony Kure of KeyBanc.

I just want to -- I had a quick question first on electronics. In the third quarter, sequentially down a little bit, but margins look like they were up substantially. Could you just talk about what drove the margin improvement sequentially for electronics in the third quarter?

Well, yes. I think -- I mean, substantially, as I recall, it was like a couple hundred basis points maybe, I think. It was largely that we continue to very good operating efficiencies across most of our electronics business, particularly with our Wuxi wafer fab. We've been talking about for a while the final consolidation of all of our semiconductor products into that facility. We now have made the final step of the TVS diodes that were being made -- manufactured in Taiwan into Wuxi and they're just driving some nice -- now that we have everything there, that we're focused on operations rather than transfers, we're driving some nice improvements from the operating side and I think that's really what drove most of the margin expansion from Q3 to Q4 -- or Q2 to Q3.

Okay. And staying on electronics, just trying to make sure I understand. It sounds like there are a lot of puts and takes as far as what the expectation is for the quarter. But I thought that sort of the end takeaway it was normal seasonality decline or is it going to be maybe a sharper seasonal decline into the fourth quarter?

We expect it to be a little bit sharper this year and it's really, I think, it's a combination of really nothing happening in the end markets that we see as being a catalyst for driving end demand, at least as early as the fourth quarter in combination with -- we talked about inventories being relatively low. But distributors in this kind of uncertain macro environment, they tend to operate pretty much hand-to-mouth. And in this kind of environment they tend, particularly the public companies, the large public distributors, tend to try to drive their inventories down coming in to the end of the year. So I think we're seeing some of that affecting the business as well. So it should be a little bit more than seasonal. It'll be into the double digits -- below double-digits.

So it's usually that's like high single digits and now...

Yes, probably 5% to 10% or 6% to 10%, something like that. It'll be more than that for sure.

Got you, okay. And then the benefit that you're getting in the Japanese OEMs, the whole tension between China and Japan. Are you, in your auto business, sort of assuring that dynamic continues or that'd just be upside of that -- those problems persist there in that part of the world?

Yes, that's a tough question. I really don't know. I think that could just be a temporary skirmish between a couple of countries over some islands. But it's reflected in the fact that when the Japanese -- all their production suffered a setback some time ago with the tsunami and now we've got a specific situation in China, we really benefit because we don't have that real penetration into the Japanese players. And so generally, we do a lot better with the Korean and U.S. and European manufacturers. Whether or not that's long term, who knows.

Okay. But you're not factoring in that benefit in the fourth quarter?

No.

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

I mean, we're typically looking at the -- projecting forward to the end of the year and trying to make sure we are accruing at an appropriate rate based on our latest thinking. So I wouldn't expect a significant impact from Q3 to Q4. I think, if you think about operating expenses being fairly similar to the Q3 levels, excluding onetime charges, I think that's probably the way you ought to be thinking about it.

[Operator Instructions] And our next question is from Alek Gasiel of Barrington Research.

Just a couple of little questions. One, Phil, what was the margins for Q4? Was it 15% to 18% kind of the range you're expecting?

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

Okay. You mentioned the tax rate would be in the mid-20s?

Yes.

For fiscal '13, what would be a reasonable tax rate to kind of guide to?

It's a good question. I mean, as we talked about for a while now, we are doing some things to bring our overall tax rate down. And I think if you look at -- for the full year 2012, I think we're going to be right around 26% for an effective tax rate. I would expect 2013 to be not too much different than that, probably somewhere in that range. The 26%, we did have some favorable onetime adjustments in 2012. We will have some overall improvements in our tax situation going into 2013, but we can't count on having a repeat of those favorable adjustments. So I think for now, I would count on something in the 26% range.

Okay. And you guys provided some comments on the tablet business and mentioned that revenue for '12 was going to be $12 million, then you implied about another product that, for 2013, will generate $8 million. So are we looking then for another additional doubling of revenue in tablet or from $12 million to $18 million, something like that or...

This was specific to tablets?

Right. Tablet and eReaders, just kind of...

We expect that -- I don't think I said specifically that we'd see a doubling of it, but we certainly -- the market research reports certainly indicate that tablets are a very healthy growing segment. And we'll continue to grow on -- we're quite well positioned there, so we'd expect to see growth from tablets for us as a good segment, absolutely.

Okay. And one last thing, I know you guys have announced that you're going to be having an Analyst Day. I don't remember when the last time you had one and I know there were some details provided in the press release. But can just kind of give us some color of why you're going to have one or -- if possible.

Well, yes, I think we are doing an Analyst Day. I think you all should have received notice of that. We'll be sending out formal invitations in the very near future there. It's going to be in December, December 10 in New York City. And it's going to be probably roughly a 3-hour program where we'll have our entire senior executive team there. And really, the purpose here is -- it's really severalfold. It's to give analysts and investors an opportunity to be exposed to people other than just Gordon and myself. There are a lot of other people who drive this business forward and we'd like you to meet some of those folks and hear them talk about the areas of the business that they're responsible for. And we also are -- we've also talked about that we're in a kind of final stages of [Technical Difficulty]

Mr. Gordon Hunter and Phil, the line was muted. You are free to talk again.

We didn't mute our line.

So we didn't mute the line here. Did you not hear the question? Can I ask Alek if you didn't hear the question -- the answer to your question about the Analyst Day?

Yes, Gordon, Phil, you've provided enough on it. I appreciate it.

Okay. Well, we look forward to that and hope you'll be there.

And our next question is a follow-up from Shawn Harrison of Longbow Research.

Two brief follow-ups. Phil, the $1.5 million acquisition charge in the quarter, was that an SG&A or where was that at?

That would have been all in SG&A. No, I'm sorry. Yes, there was a -- I think we detailed that in the press release. I believe it was all SG&A.

Okay. Sorry, I missed that. And then, secondary, the commentary on $100 million of free cash flow. Are you just -- I guess, for the year, are you stating that's pre-dividend or post-dividend, just so I'm on the same page with you?

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

Going back to your other question, there was a small amount of that $1.5 million that, I think, it was about around $400,000 it was actually in cost of goods sold. It was the purchase accounting adjustment to the inventory for the Accel acquisition. The rest it would have been SG&A.

And we have no further questions at this time. I will now turn the call back over to Mr. Gordon Hunter.

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

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