Good day, everyone, and welcome to the Littelfuse, Inc. Second Quarter 2014 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 second quarter 2014 conference call. As always, joining me today is Phil Franklin, our Senior Vice President and Chief Financial Officer. As you saw on the news release we issued this [ph] quarter, both our electronics and automotive businesses had record sales for the quarter, helping to offset the impact of the continued weakness in the mining sector and lower sales of electrical fuse products. Excluding a number of special items, earnings for the second quarter came in at the lower end of our guidance. I'll discuss the second 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. Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environment as we currently see it and, as such, do include various risks and uncertainties. Please refer to our press release and SEC filings for more information on the specific risk factors that may cause actual results to differ materially from those expressed in forward-looking statements. Sales for the second quarter of 2014 were $221 million, which was up 18% year-over-year and consistent with our guidance. GAAP earnings for the second quarter of 2014 were $1.08 per diluted share. This included purchase accounting adjustments related to the SymCom acquisition, restructuring charges and noncash foreign exchange losses. Without these special items, earnings were $1.26 per diluted share, which was at the lower end of our guidance. Earnings for the quarter were negatively impacted by higher scrap and inventory obsolescence charges and a large decrease in stock -- a large increase in stock compensation expense. The scrap and obsolescence problems were primarily from 2 sources: first, quality and performance issues at one of our Mexico plants; and secondly, the downturn in our mining industry, which caused us to take a reserve for certain slow-moving inventory. We believe both of these issues are largely behind us at this point. The increase in stock compensation expense relates to a technical accounting issue, which causes us to recognize over 40% of our stock compensation expense for the year in the second quarter. Stock comp expense will be approximately $1.8 million lower in both Q3 and Q4. The company continues to generate strong cash flow as cash from operating activities in the second quarter was $31 million compared to $23 million for the same quarter last year. As usual, we expect cash flow to increase as we progress through the year. For the first time in over 2 years, we repurchased shares during the quarter as we took advantage of the mid-quarter pullback in the stock price. Now I will turn it back to Gordon for more color on business performance and market trends.

Thanks, Phil. I'll begin the segment reports with the electronics business, which accounts for about half of total Littelfuse sales. Electronics had a record second quarter with sales of $110 million. This was a 20% increase over the prior year quarter. We had strong growth across all product lines, especially semiconductors. Fuse and ceramic products also performed well, and we continue to benefit from the Hamlin acquisition. Excluding acquisitions, second quarter electronic sales were up 13%. Electronics channels inventories increased about 10% from the end of the first quarter to the end of the second quarter. At the same time, end market customer sales were up about 7%. We're comfortable that our channel inventories are at appropriate levels based on current market conditions. And consistent with normal seasonality, we expect inventories to work their way down during the end of the third quarter and into the fourth quarter. Typically, the third quarter is slightly stronger than the second. However, given our record second quarter sales, we anticipate this year's third quarter will be approximately flat sequentially. The market is also being strong, with the most significant growth coming from Europe, China and Southeast Asia. The growth in China came from our local design wins, as well as design wins in North America. Some of our competitors are reporting extended lead times, but we've been carefully managing capacity to keep up with demand. This has also helped us to gain market share. The growth in Europe came from the rollout of 4G wireless networks, as well as a general market recovery across multiple segments. Now I'd like to highlight some of the focused markets, as well as some of our recent design wins. Along with the continued growth of smartphones and tablets has come the standardization of universal charges that can…

Thanks, Gordon. We project third quarter sales to be essentially flat with the second quarter as sequential growth in the electrical business is expected to offset the typical seasonal decline in automotive. Electronics after a particularly strong second quarter is expected to be roughly flat sequentially. Operating margin for the third quarter, excluding special items, is expected to improve by 150 to 200 basis points compared to the second quarter. Earnings for the third quarter is expected to be in the range of $1.29 to $1.43. Capital expenditures for the year are expected to be approximately $35 million. Free cash flow for the year is expected to be in the range of $100 million to $115 million. This concludes our prepared remarks. Now we'd like to open it up for questions.

[Operator Instructions] The first question comes from Shawn Harrison from Longbow Research.

This is Gausia calling on behalf of Shawn. I was wondering, within the electronics business, it looks like you beat your old operating margin record. How should we think about that about -- for the second half of this year and going forward? Is it sustainable? How -- so if could you provide some more color on that.

Yes. I would expect that the gains we've made in operating margin certainly as we look at the back half of the year, those should be sustainable improvements. Now I think that the -- obviously, the steady improvement that we've seen over the last several years, as those margins get well up into the 20s, that it becomes harder to see those margins go higher and higher. But certainly, for the next several quarters, which is about as far as we can see at this point, I would expect to see similar margins as we've seen in the prior 2 quarters.

Okay, great. And then second question was just about some of the restructuring that you announced. So one, where are you with the Hamlin contract negotiation? And then last quarter, you announced the SymCom restructuring. I believe you had said about $2 million of savings per quarter beginning in mid-2015. Are you still on track with that? And are there any announcements yet to come with those businesses?

Yes. So we announced -- I mean, the only new announcement this quarter was that we did some restructuring of the labor agreement down in that Hamlin Mexico plant that it was going to allow us to save somewhere in the neighborhood of $1.5 million a year, and those savings will start in Q3. We -- as we've alluded to for a while, we still expect additional restructuring efforts at Hamlin. Those -- we will be announcing some of those probably at the next call as we get a little further along in our integration process. And so we'll have to wait to hear those. But we have indicated that over time, we expect to be able to get the Hamlin margins up to levels approaching the overall company average, and they're quite a long way from that right now. So the restructuring we announced in the quarter will be a start, but there'll be more actions to come there. And then regarding the SymCom plant consolidation that we announced last quarter, we expect that that's on track and should begin to deliver savings somewhere in the second half of next year.

All right. And sorry, just one clarification. So the labor agreements, are you finished with the negotiations there? Have you already reached an agreement? Or is that still in progress?

No, that -- we've finished those. And those are -- that's done, and those savings will occur.

The next question comes from Matt Sheerin from Stifel. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: A question on the electrical business, Gordon. You talked about returning to growth this year. Obviously, with the first 2 quarters down, you're looking at potentially double-digit sequential growth in the next couple of quarters. Is that coming primarily from the electrical side where you're seeing a recovery in end markets related to weather and other issues? Or are there new programs ramping there, too?

Well, there's several things actually, specifically to our fuse business that's had several quarters, a couple of years now of continuous growth, and it's helped offset the downturn in mining. But we had a very weak quarter that was a bit of an anomaly in the second quarter for our fuse business. And as I mentioned, it was sort of a hangover through our distributors who would -- had a tough time in the first quarter for weather-related, this is almost exclusively a North America business. And the wintertime had really impacted them in the first quarter, and that meant that they were not really buying from us in the second quarter. And then I mentioned specifically a large solar company customer that we had lost some business in the second quarter. Both of those, we think, were really anomalies happening in 1 quarter. We expect that business to pick back up in the solar area, and we expect construction, the nonresidential construction area to be picking up and certainly to be growth year-over-year. So very positive signs about the nonresidential construction part. And then specifically in the custom products, as part of the electrical segment, they were very highly tied to the Canadian potash mining. We did have some success in diversifying that, as I mentioned in June, shipping into the Canadian oil and gas market some product. But we expect the potash mine to continue very weak in the third quarter. But the orders that we are starting to see, we'll start to see shipments of those in the fourth quarter. So we expect this business to start coming off the bottom that it's been bouncing along right now in the fourth quarter and more optimistic about next year for that. And then our protection relays, very similar story. The majority of that having been shipped into the potash mining has had a couple of very difficult quarters. But the diversification has been growing and so selling our protection relays into other segments. And certainly, SymCom helps in that because they are mainly selling their products in the industrial markets. So we expect to see our protection relay business similarly picking up in the fourth quarter and into next year. So it's a message of different product lines, different technologies and different end markets. But I think the fuse business has held up so well. It was really a 1-quarter anomaly that we expect to be recovering from.

Matt, you had alluded to double-digit sequential growth in the next 2 quarters. I don't think I would expect that. I mean, I think we will have sequential growth or expect to have sequential growth in Q3 and then again in Q4 in the overall electrical segment. But it's going to be kind of mid- to higher single-digit. It's not going to be double digits. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, well, yes. Okay, but like 8% to 10% growth will still you get you to sort of flat to up for the year then, it looks like.

Yes. I'm not sure we're going to be flat to up for the year, but we'll be approaching that anyway. [indiscernible] Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. I thought Gordon said you were going to be up. Okay.

Yes. I don't -- I think he might have been alluding to a specific part, maybe the construction section...

Yes, construction.

Which only affects us, so... Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Oh, I got you, got you. Clarified. Okay, okay, that's helpful. And then on...

Wait, let me just -- a bit, Matt, just one other point, so I'll just add one other thing. So we -- and we also would expect the electrical margins to bounce back to something closer to the first quarter levels after the big dip that they took in Q2. And that was mostly related to some of these onetime and nonrecurring issues. So I do expect the margin -- a meaningful margin improvement in Q3 and Q4. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, that's helpful. And then on the electronics business that you talked, looked like there was a little bit of inventory build at customers and which is one reason why you're calling for sort of flattish this quarter when it's typically up. But -- and you, in terms of what you're seeing in terms of point of sale and sell-through and bookings within the channel, do you still -- are you still seeing sort of seasonal trends instead of -- in terms of sellout?

Yes, well, I think we're very much in control of that. I think that -- I think the reason we are seeing it more sequentially flat is the profile of ordering in the second quarter was very strong at the beginning of the quarter. And then as we got towards the end of the quarter, it was really softening a little bit. So I think we are going to see more of -- I think we had a particularly strong second quarter, extremely strong second quarter. We expect it to be more similar in the third quarter. But certainly, the inventory levels and the sell-through, I think, are very healthy. I think we're -- year-over-year, we'll be very healthy again in the third quarter but just probably not going to see the usual jump from the second quarter to the third quarter. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And just lastly if I may, just regarding the issues you had with the materials in your Mexico facility. Was that within the electronics or the automotive business? And have those issues been resolved in terms of execution issues?

Yes. So we alluded to a number of different issues. I think the issues in Mexico are certainly, we had some quality issues that went back to things that happened a while back. And we think we're through those, and we are also expecting improvement in overall performance in the plant. So I'd say largely, those issues are behind us. As well, we had a -- and those issues affected both electrical, and there was some electrical issues and some automotive issues. So it impacted both divisions. We also had -- additionally affecting the electrical business, we had -- we alluded to some inventory charges related to the downturn in the mining industry. And that would have been up in -- inventory up in our Saskatchewan facility that we took a significant, almost $0.5 million write-off of inventory there, and that would have been a lull against the electrical business. So electrical was probably most impacted by the quality and performance issues, but automotive was a piece of that as well. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. But that sounds like that's -- you're behind that.

We would not expect those issues to reoccur in Q3 and 4.

We have a question from John Franzreb from Sidoti & Company. John Franzreb - Sidoti & Company, LLC: Just to stick on the electrical theme here, you alluded to the fact that, x the items, that the margin be much improved. Can you give us a sense, Phil, what the up margin would have been in electrical x all those onetime puts and takes?

Yes, I mean, it still would have been probably a drop from the Q1 levels. But I think rather than trying to say exactly what that margin is, just probably the guidance that I gave previously that said that now that we've got most of those issues behind us, I would expect the Q3 margins to go back to something looking much more like the Q1 margins. So in the kind of lower teens, 13% or so, up from the low single digits that they were in, in Q2. John Franzreb - Sidoti & Company, LLC: Okay. I think Gordon mentioned that you're starting to have some success on the custom side of that business outside of the potash market. I think last quarter, you warned us that the competitive landscape in that business a little bit tougher and the margin profile would not be similar. Is that part of the reason maybe we should tap down our expectations on the margins in electrical going forward?

Yes, I think that's still consistent. We were pleased to be shipping one into the oil and gas market in the second quarter. But I think, as I said last quarter, the margin profile for the non-potash mining is not going to be at the levels that we had in potash. The good thing is we're starting to see more activity in potash, but -- activity and talking about planning capacity expansions and placing orders happens today, but that's not going to be delivering any product for a couple of quarters out there. John Franzreb - Sidoti & Company, LLC: Okay. Sounds like you had some nice new sensing applications in the auto side of the business. I guess 2 questions here. One, is the margin profile in the sensing business significantly above the margin profile of the "legacy" auto business? Or are you seeing some kind of price pushback on -- when you roll out new products in sensors in the auto side?

Generally, I mean, at this point, as we've said, the margin profile is lower for sensors than it is for our legacy automotive business. We're -- with some of the actions that we're taking, we expect those margins to come up meaningfully over the next couple of years, but it's going to take a while for all that to happen. And the other thing that's going to help is we win more business and ramp up larger volumes on some of these lines and technologies. We're going to see operating leverage on that as well. And so we have reasonable incremental margins on the sensor products, but the overall margins are still quite a bit lower than the legacy business at this point. John Franzreb - Sidoti & Company, LLC: Okay. Even on the new products, Phil, right?

Yes, even -- well, on the newer products, they are as well. Although if you look at it on a variable basis, we have -- we definitely have reasonable variable margins. So the variable margins are not bad at all on those. It's just that we have a lot of costs that we need to work through, through the integration.

The next question comes from Christopher Glynn from Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: I was just wondering with the $1.9 million of scrap in inventory costs and the $2.3 million sequential increase in the stock comp. To what extent was that considered in guidance when it was first issued?

None of the $1.9 million of scrap and obsolescence was -- certainly, a portion of the stock comp expense was considered in the guidance. We -- you may recall, we did guide towards higher SG&A spend in Q2 related to that stock comp issue. But it was -- it ended up being a bit higher than what we thought. As well, there were a few other smaller items that contributed to higher SG&A in the quarter, so -- but we would expect those issues to normalize in Q3 and Q4. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And electronics seemed to clearly be getting a nice component of relative strength from your commercial win rates. So as we approach tougher comparisons in the fourth quarter and into '15, wondering what these wins give you in terms of sustainability and growth as the comps really change pretty dramatically.

Yes. So yes, it's-- I mean, it's a good question. Certainly, we've -- the last 3 quarters or so, we've had some tailwinds in the electronics business. And as we know, having been through a few cycles here, those don't continue forever. So at some point, we're going to start facing some tougher market conditions. And what we said historically -- what we said in the past, and I think -- I don't think we've really changed our view of that, is that the overall electronics business probably is -- it's not going to be a double-digit growth business, and it's not going to be a high-single-digit growth business. It's going to probably be at best kind of a mid-single-digit growth business over the -- through the cycle and over the longer term and maybe even a little bit below mid-single digits. I think a little bit higher on the semiconductor side, probably a little bit lower on some of the fuse and other more mature products. So that -- we've been doing a lot of things right recently, and we've got a lot of momentum. And so for a while, we may be able to continue at higher-than-normal growth rates. But eventually, I think those are going to normalize to something more like mid-single digits. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then just lastly, if you could comment how your acquisition pipeline is looking.

So yes, the acquisition pipelines, so we've got a number of projects that are active right now. We have some smaller ones. We have one that I'd characterize as more midsize, and then we even have a larger one that's a potential recent opportunity. I would not say any of those are imminent. We're working on the number. We're still optimistic about the funnel that we have, but it's certainly not a certainty that we're going to close deals between now and the end of the year. But we have a number of them that we're working on, and we still feel pretty good about the whole -- the overall M&A program. Were we not to close another deal at the end of the year -- before the end of the year, we'd end up at about a 13% year-over-year growth rate, which would be a couple points below our target. And so we do have a little bit of work to do to hit that target for the year to stay on track with our 15%.

The next question comes from Tim Wojs from Baird & Co. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Just I guess turning back to auto a little bit, the incremental margins there over the last couple of quarters have been kind of low to mid-teens. And so just given the content wins and the growth you've seen there, how should we think of incremental margins going forward? I know you have some cost savings in 2015. Just some color there would be helpful.

Yes. Certainly, the sensor areas where we have the biggest opportunity to improve margins, I would -- and -- but that's going to take -- we've said that a lot of -- we'll have some savings next year. A lot of those savings will be out in the 2016 timeframe. But we -- I would expect to see better margins in the second half of this year than what we saw in the first half even though volumes may not -- seasonally, volumes tend to be a little bit lower second half versus first half. And we're expecting that that'll most likely be the case this year as well. But even with that, I think we should see some margin improvement, in part because of some of the onetime items that we referred to that hit us in Q2, in part because we'll start to get some benefit from some of the recently announced restructurings that we did. So we'll see some modest improvement there, but the big improvement in automotive should be out in the 2016 timeframe. But I would expect over the next 1.5 years or so, 2 years until we get there that we'd be putting margins at least closer to 15% to 16% rather than the kind of 13%, 14% that we've seen the last couple of quarters. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Great. Okay, that's really helpful. And then I guess just on -- it looks like you upped your free cash flow guidance a little bit, and I think CapEx is down a little. But I'm just curious what the drivers were there, if it's just working capital and if that, I guess, is sustainable going forward.

Yes. I mean, I think that we continue to generate a lot of cash. I think the guidance that we gave would be pretty much on target with kind of a long-term cash-generating capability that we've alluded to in our investor presentations, 12% to 14% of revenue from free cash flow. This would put it right in that range, the most recent guidance. So yes, I mean we did back off on our CapEx a little bit. Just I think that's more of a timing issue, so that was part of the reason that the guidance is a little higher, plus we had a pretty good second quarter for both operating cash and free cash. So I would say we incrementally moved the guidance up just because we were a little closer to the end of the year, and we had a second -- good second quarter, and we have pulled back a little bit on our CapEx projection for the year. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then I guess it sounds like the pipeline on the M&A side, sounds pretty healthy. But then at the same -- on the same -- on a different side, you actually bought back some stock this quarter. So I guess is it possible -- I guess, the change in cadence by you guys in terms of can you do stock buybacks at the same time that you're looking at M&A? Is one -- can you do one relative to the other? Do you think you guys can actually do both?

I think we've said all along that we can do both. We -- but we've also said that stock buyback will be very opportunistic. So I think as we see dips in the stock price that we think are opportunities, we certainly have enough balance sheet capacity and free cash flow to do -- I wouldn't say large stock repurchases but small to midlevel stock repurchases. But we will be opportunistic about that when we do that. But we absolutely do have kind of plugged into our overall model some stock repurchase kind of over the 5-year time horizon, alongside a more aggressive M&A strategy. And certainly, our cash flow and balance sheet can support that.

The next question comes from Gary Prestopino from Barrington.

Most questions have been answered, but it looks like the tax rate was down couple hundred basis points year-over-year. And what kind of tax rate, Phil, should we use for modeling purposes?

Yes, so it's a good question, Gary. And we've historically said, use somewhere between 25% and 26%. It's now looking for the year like the rate is probably going to be a bit below 25%. But I think I would -- at least at this point, I'd model the out quarters probably at something around 25%. Hopefully, we could -- we can do a little bit better than that, but that's probably a conservative number. And we'll be talking about this more as we get further along. But we think there's some opportunities to bring that tax rate down over the next couple of years, even a little bit below where it is today. We're working on some planning things that might allow us to do that, as well as bring back some cash. So we'll talk more about that as we get further along on some of those initiatives.

Okay. And then just lastly, the gross margin looked like it was down about 160 basis points. Some of that is attributed to the high scrap and inventory charge, correct? And...

Yes, most of it.

What about was there any of that increase in stock comp put into that cost of goods sold number?

There'd be a very little bit, but the majority of that shows up in SG&A.

The next question comes from Garo Norian from Palisade Capital.

I remember, I think, back to the analyst day in the electronics side at Samsung, is it reasonably sized customer for you guys? And I feel like I've heard some recent commentary that their supply chain has slowed down a little bit. Is that anything that -- how can I understand how that may impact you guys?

It's, as we've said, a significant customer, but our business is really built around there's no one customer that's really so significant. There's lots of new applications. I talked about the universal charger application as an example that we'll expect to sell across the whole market segment. So I think the tablet market was characterized in the second quarter by the announcements that the iPad went backwards, but -- and Samsung was flat, and there was a complete change that Lenovo, and lots of low-priced tablets were really gaining market share. So I think the market is always changing, and one key customer doesn't significantly impact our business. We have a very successful electronics business across a whole range of customers. So I wouldn't say we're really impacted much by that or concerned by it. It's still a good customer for us across multiple segments.

Great. And then just secondly, switching gears to the automotive side, broadly speaking, I mean, it seems like there's perhaps an acceleration in trends to hybrid and electric from where I sit. I was curious, what are you guys seeing on that side of things?

I think that's very true. I think that's what we see, the more adoption of all electric vehicles and certainly hybrids. It's still a very small percentage of total costs, so we try to play that down a little bit because although we have much more content per vehicle in a hybrid or electric vehicle, it's not significantly moving the dial for our automotive performance. The vast majority are still gasoline- and diesel-powered engines. And the content play that we have, as I explained, and the electrical architecture in vehicles are really significant for us. So I think in the out years, hybrid volumes, they get to a level where it's something that we would attribute to our performance. But at the moment, it's still a relatively small amount. I think we might have time if there's one last question in queue, but I think we're coming up to 1 hour and about to end the call.

The last question will be from Edison Chu from G2 Investment.

Just want to go back to some of the comments you made within the electronics bookings trends. And can you -- the slowdown towards the end of the quarter, would you characterize that as very atypical? And I guess when you look forward to -- or -- and can you comment on how things have looked in July? And just trying to get a little bit more color on your thoughts on why the slowdown in bookings. And if it's been broad-based, is it relegated to specific end markets? Any other color would be helpful.

I think it's actually quite typical that around this time of the year, probably starting in -- somewhere June, July, you'd start to see those orders slow down as we approach kind of the peak months for some of the consumer builds. And usually, most of those orders get placed in kind of the March, April timeframe. And as we start to approach the summer months, we almost always see a drop in our book-to-bill ratio, and it's typically below 1 for the third quarter. So nothing particularly surprising there. I mean, the -- probably the only thing that was a little surprising is that it was 1.08 for the second quarter, which is above normal. But I think as Gordon said, most of that overperformance happened early in the quarter, and it got weaker as we would have expected as the quarter went on.

Okay. And quick second question on -- just thinking about modeling the cost of goods for the September quarter. And it sounds like the obsolete inventory charges of $1.9 million shouldn't repeat in the September quarter. I just want to make sure you also have a full benefit of that $1.5 million in cost savings from the Hamlin renegotiations. Is that so?

Yes. That'll -- we'll get a full quarter of that $1.5 million. That's an annual number, right? So...

It's an annual number, okay.

Yes, yes.

Okay. Well, thank you for joining us on today's call. With a 19% increase in sales and strong increase in earnings in the first half of the year, we believe our overall performance has been very solid. And we look forward to updating you again next quarter. So thanks, and have a good day.

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