Gordon B. Hunter - Chairman, Chief Executive Officer, President and Chairman of Technology Committee Philip G. Franklin - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer.

Gausia Chowdhury - Longbow Research LLC Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division John Franzreb - Sidoti & Company, Inc. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division Christopher Glynn - Oppenheimer & Co. Inc., Research Division Gary F.

Prestopino - Barrington Research Associates, Inc., Research Division.

Good day, everyone, and welcome to the Littelfuse Inc. Third Quarter 2014 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, sir..

Thank you, and good morning. Welcome to the Littelfuse Third Quarter 2014 Conference Call. And as always, joining me today is Phil Franklin, our Senior Vice President and Chief Financial Officer. As you saw on the news release, our third quarter results came in about as expected.

Year-over-year increases in sales and earnings were within the range of our guidance, and the operating margin, excluding special items, improved to 19% of sales. 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. 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 2014 were $218 million, which was up 8% year-over-year and just below the midpoint of our guidance.

GAAP earnings for the third quarter of 2014 were $1.32 per diluted share. Excluding $1 million of special items, earnings for the third quarter were $1.35, which was right on the consensus estimate. As Gordon mentioned, we achieved a 19% adjusted operating margin for the quarter.

This equaled our best margin performance in the last 3 years as the electronics business continues its outstanding performance and the electrical business began to show some improvement.

Cash flow, which has been consistently strong over the last few years, hit an all-time record in the third quarter, with $61 million of cash from operations and $55 million of free cash flow. In addition, we will be taking the opportunity to move $90 million of cash from overseas subsidiaries to the U.S.

in the fourth quarter of 2014 as part of the Hamlin post-merger integration and restructuring. This will improve our liquidity in the U.S. and put us in a stronger position to fund stock repurchases and dividend increases in conjunction with our ongoing M&A activities.

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

Thanks, Phil. I'll begin the segment report with the electronics business, which accounts for about half of total Littelfuse sales. Electronic sales were $107.8 million for the third quarter. This was a 7% increase over the prior year quarter.

Moreover, the operating margin for this segment was nearly 24% for the quarter, illustrating the strong operational execution and continued success of our strategy to develop smaller form factor products with performance characteristics that differentiate us in the marketplace.

The electronics business had strong year-over-year growth across almost all product categories, especially semiconductors. Fuse and ceramic products also performed well as did the electronic sensor business acquired from Hamlin. Next, I'd like to highlight some of our electronic growth markets and recent design wins.

As we mentioned last quarter, along with the continued growth of smartphones and tablets, has come to standardization of universal chargers that can be used for both devices. The new universal chargers use higher wattage in order to provide faster charging times. This also requires a higher level of protection against short-circuit threats.

We had an exciting new win in this area in the third quarter for our specially designed fuse for smartphone and tablet chargers. A Korea-based customer had been using a fusible resistor for its lower-power 5-watt charger.

As they moved to a 10-watt charger on all of their new smartphones and tablets, they found that the fusible resistor was not able to handle a higher level of surge in the required time frame under overcurrent conditions. And based upon our proprietary design and formulation, we developed a new fuse for the 10-watt charger application.

We achieved this in a 3.6x9 millimeter small form factor that fits into a smaller charger unit. We've now released this new charger fuse to the broader market to support similar applications for the smartphone and tablet manufacturers. As mentioned last quarter, we are seeing an increase in personal computer sales.

Many businesses are now upgrading their computers to newer software that also requires better hardware, and this has helped with the growth of our sales in Taiwan, where the majority of PCs are still built.

With more and more sophisticated electronics being embedded in today's consumer devices, there's a growing need for electrostatic discharge or ESD protection across a wide range of end products.

And while our previous success had been in traditional consumer electronic gadgets like tablets and other touch screen applications, we recently had an interesting design win for a different end product, LED lightbulbs for residential use.

A large manufacturer of LED lightbulbs has selected our diode arrays to protect the LED driver chip against both ESD and power surges.

This win will bring in annualized revenues of about $1 million, and this is on top of the $8 million to $9 million of annual revenue from the fuses and varistors that provide the AC and DC power unit protection inside the LED lightbulbs.

On the nonresidential side, we continue to see strong growth in outdoor LED lighting for streetlights, parking lot lights and other applications. The LED's surge protection modules released over the past 2 quarters are continuing to gain acceptance and generate key design wins.

Our sales into the outdoor LED segment are about $2.5 million today and are expected to double in the next 1 to 2 years. While the TV segment has been relatively flat, we found some nice new opportunities to further penetrate the market.

One of our major customers in Korea was facing increased returns on its TV modules due to surge and overcurrent events.

In the past, a fuse rated for this power board application provided less than the ideal protection for both surge and overcurrent, and our customer was compromising on the current specification in order to meet the surge requirement.

In order to achieve an ideal specification, we developed a fuse that is rated at a lower current, but can handle a higher surge event. And using our unique element design and alloy, we were the first company to achieve this ideal specification.

We launched the new fuse in the third quarter as our Korean TV customer started converting to this fuse for the Korea market, and we now plan to expand this lower-current, higher-surge protection fuse to various TV models globally, with potential revenues of $600,000 annually.

Data centers tied to cloud computing are another growing market segment for us. We saw the trend towards higher operating currents in data centers and recognized a need for a higher-current more reliable fuse. Our analysis was correct.

We now have several new design wins with major data center power supply and enterprise computing customers for the new NANO Fuse we specifically designed for these applications. Annual sales are currently about $8 million to $9 million and are growing at a high single digit rate.

In the telecom market, the 4G rollout continues in many parts of the world, particularly China and Europe. We've had several design wins into 4G base station equipment makers for our TVS diodes. Annual revenues from this segment will be approximately $4 million. Moving to our electronic sensor business.

One of our primary growth strategies is to pursue value add custom opportunities that solve unique application challenges and differentiate us from the competition. As a result of this strategy, we're working with a North America-based medical company that designs wall-mounted defibrillators.

The challenge was to develop a custom sensor designed into the unit that would automatically begin charging the defibrillator when it was mounted on the wall charger and automatically turn it on when it's removed. The solution we provided is based on our read sensor platform, but with the added value of a custom design and functionality.

The custom sensors sell for about $1 to $2 each, while the reed switch alone sells for only $0.20. So by providing a custom-designed sensor, we're generating more top line revenues and higher margins from an existing platform. To wrap up this session, the electronics business performed as expected in the third quarter.

We are participating in major global trends such as cloud computing, LED lighting and the 4G telecom rollout, with innovative new products specifically designed for these growing markets. The book-to-bill was 0.88 at the end of the third quarter compared to 0.95 last year, but has increased to above 1.0 for the month of October.

Next is our automotive business, which accounts for 37% of sales. Automotive sales of $80.6 million were up 15% from the third quarter of last year. We achieved strong growth across all product categories. Sales of passenger car fuses and sensors remained strong, and commercial vehicle products had a record third quarter.

As we anticipated, global passenger car production slowed in the third quarter compared to the second, due to the summer holiday season in some regions. Global passenger car production was up nearly 3% year-over-year, while our sales of passenger car fuses was up 8%. Geographically, our passenger car fuse sales in North America were up nearly 14%.

The increase was driven by new programs such as the Chrysler 200 midsize car platform; the Jeep Cherokee; and the GM light truck platform, where we have high content, including a Masterfuse and various standard fuses on each vehicle. Car production growth in China was a bit lower than expected at 9%.

In spite of that, we had our best quarter ever in China, with a 29% increase in sales. This growth reflects the high content we have on joint venture cars such as the SKODA Rapid and the Peugeot 2008 that ramped up this year. We also gained market share from competitors. Europe continue to be soft, especially for OEMs like Renault and Fiat.

In addition to the weaker European car market, exports to Russia and China were also reduced. Our European passenger car fuse sales declined by 1% year-over-year, which was the first year-over-year downturn after a long period of growth.

Korea was a bright spot, with sales up 18% as orders for a high-voltage fuse for a hybrid vehicle program kicked in again. Looking at new business. Masterfuse continues to be strong. We had a nice win for a GM model in Shanghai, with revenues of about $500,000 at peak.

We won new business for 2 Masterfuse products, a ZKS design and a standard design for the Chevrolet Camaro as well as a ZKS Masterfuse for the new Chevrolet Volt. In China, we had various design wins for standard fuses with Volvo and several local Chinese OEMs. And in Korea, our MICRO2 Fuse will be used on the Hyundai luxury car named the Equus.

The commercial vehicle products group followed its strong second quarter with a record third quarter. Sales increased 18% year-over-year and were up about 2% over the second quarter. The sequential growth reflects continued strength in U.S. Class 5 to 8 trucks, slightly offset by a weakening agriculture equipment market.

The year-over-year growth continues to be driven by improved overall market conditions and the successful execution of our new product development strategy. One interesting opportunity during the third quarter was to quickly support an OEM with fuse holders that solved a particular circuit protection problem that they identified.

The win will add about $500,000 in sales through 2015. As part of our new product development initiative, we launched a new liftgate battery charger for trailer-based power liftgate battery boxes. The new product provides a longer-lasting charge, which enables the driver to make more deliveries and also extends the trailer liftgate battery life.

Both of these benefits help to reduce customer costs. Incremental revenues are expected to be about $650,000 per year. Looking to the remainder quarter of the year, we expect to see continued strength from the North American heavy-duty truck business. At the same time, agricultural customer demand appears to be slowing in both North America and Europe.

Overall, commercial vehicle product sales are very solid, with many new products and applications in the pipeline. Moving on to automotive sensing products. Sales were up 25% from the third quarter of last year despite a slight impact from the summer slowdown in Europe and the weaker euro.

Last quarter, we talked about the 10 new sensing products we introduced. We introduced another 10 in the third quarter. Several of these will make significant contributions to revenues. Two speed sensors for U.S.-based OEMs will add annual revenues of about $2.5 million when the programs ramp up.

We expect to add another $1.5 million each year in sales for 2 new seatbelt buckle sensors. Five of the new products are a family of speed sensors for a global commercial vehicle products customer that will generate annual revenues of about $700,000 at peak.

And finally, we launched another new rotary sensor for a powered tailgate application for a European-based OEM, and annual revenues will be about $450,000. This was also a good quarter for our sensing product in terms of new business. We won the speed sensor content for a new continuously variable transmission for a major North American OEM.

This program will launch in 2017, and it will initially provide about $5 million in annual revenues for us, with the potential to reach $10 million per year longer term. We also booked new solar sensor content with the same OEMs across multiple vehicle platforms and won additional new business for our rotary sensor for powered tailgates.

As these new businesses -- business wins illustrate, the Accel and Hamlin acquisitions have significantly changed our automotive business in just a few quarters by enabling us to increase our content per vehicle. In the past, our automotive fuse products were used in low-current or high-current fuse boxes.

And now we still sell fuses but also provide seatbelt buckle sensors, solar sensors, speed and direction sensors and numerous other products to the same customers. We've also expanded our content with the qualification of several electronic product families for automotive applications. Another change is the types of vehicles where we have content.

Not too long ago, it was only passenger cars and light trucks. Now we also provide solutions for heavy trucks, agricultural equipment and construction equipment as well as hybrid electric vehicles. Each of these growth strategies has added new customers that have significantly enlarged the total available market for our automotive products.

In summary, our automotive business continues to perform well, with increasing sales in our key areas of automotive fuses, commercial vehicle products and sensors. That brings us to the electrical business unit, which accounts for about 13% of total Littelfuse sales.

Total electrical sales were $29.2 million for the third quarter, a 1% decrease from the third quarter of last year. Excluding SymCom, electrical sales were down 20%.

Electrical fuse sales bounced back from the weak second quarter, due mainly to a rebound in commercial construction, but were down 7% compared to the record quarter 1 year ago, due mainly to weakness in solar. Custom electrical products and protection relay sales continued to be impacted by the softness in the mining industry.

Looking at protection relay sales. We are continuing to expand into other markets besides mining such as the general industrial and oil and gas markets, as we've discussed in prior calls.

The general industrial market is a good fit with our electrical fuse line, and we are leveraging the strong distribution and established presence we already have in this market. One industrial segment, providing good growth opportunities for us is shore-to-ship power.

Due to growing environmental and regulatory requirements, crews and cargo ships must now shut down their diesel generators while idle in port. When this occurs, electrical power is provided from the port to the ship. We offer 2 protection relays that ensure the safety and reliability of this connection in this growing application.

The second growth area is applications for our industry-leading arc-flash detection relay. We had several new wins with OEM switch gear manufacturers for new industrial and utility applications as well as wins in the growing retrofit market.

We expect to see even more growth opportunities for these products as the industry continues to adopt more stringent safety standards. The integration of SymCom is going well. We've merged the SymCom and Littelfuse sales forces, added some new distribution for the SymCom products and are generating orders from our OEMs.

We believe these transition activities have put us in a good position for a significantly stronger growth year next year. We're also seeing some positive signs in the custom products business after a long period of bumping along the bottom of the cycle.

The demand for some of our core potash mining customers is showing some indications of recovery, and we received several million dollars in orders during the third quarter. These orders are expected to ship in the fourth quarter, which we believe will be the strongest quarter of the year for custom products.

We've also begun booking orders for 2015 and expect improvement from the very poor demand levels of 2014.

So as we look at the business, the growth of the industrial markets and commercial construction in the fuse business, signs of improvement in potash mining and our diversification strategies into other market segments all provide opportunities for increased sales over the longer term. That concludes the report on the business units.

But next, I'd like to highlight a growing focus area that is part of our 5-year corporate growth strategy, that is the general industrial market. We believe customers in this space value our breadth of technologies and critical understanding of their applications.

Overall, this vertical market has higher margins than some of our more highly competitive markets and allows us to offer more complex value-added solutions that often contain several of our product technologies.

Over the last few years, we've added many products and technologies such as protection relays, sensors and surge protection modules that will help us focus on this segment. Two recent awards highlight our product innovation and the value we bring to industrial customers.

The new outdoor lighting protection module was recently named the 2014 High Performance Component of the Year at IIC China, and we were also named Supplier of the Year for 2014 by Leviton, a major global electrical products manufacturer.

M&A continues to be a core part of our growth strategy, and we are currently working on several interesting transactions across a variety of market segments and geographies, but nothing that looks likely to close before the end of the year.

So 2 years into our 5-year plan, we will have had acquisition growth from Accel, Hamlin and SymCom, resulting in an 8% compound annual growth rate from acquisitions. While this is short of our 10% target, we are still optimistic about our ability to close the gap over the next 3 years.

That said, in this environment of rising M&A prices, we will remain disciplined and only do deals that meet our strategic fit and valuation criteria. So to wrap up my comments, the third quarter came in as we anticipated. We are very encouraged by many of the new design wins.

And with that, I'll turn the call over to Phil, who will provide the fourth quarter outlook, and then we'll take your questions..

Thanks, Gordon. We expect fourth quarter sales to be in the range of $201 million to $211 million. At the midpoint, this is down 5% sequentially and up 4% year-over-year. The sequential decline will be driven primarily by the typical seasonality of our electronics business, which now accounts for about 48% of total sales.

At the present time, distributor inventories are at normal levels, and order patterns are typical for this time of the year. We expect electrical sales to be up slightly sequentially, while automotive is expected to be down slightly, primarily related to the recent decline in the euro.

Operating margin for the fourth quarter is expected to be in the range of 16.5% to 17%, reflecting lower sales and operating leverage compared to the third quarter as well as the impact of the weaker euro. The tax rate for the fourth quarter is expected to be in the range of 26% to 27%, reflecting a higher percentage of U.S.

income compared to the first half of the year. Earnings for the fourth quarter are expected to be in the range of $1.05 to $1.19. Capital expenditures for the year are expected to be approximately $30 million.

Free cash flow for the year, that is cash from operations minus capital expenditures, is expected to be in the range of $115 million to $125 million. And even at the low end of that range, this -- that would still be a record free cash flow for the company.

We do not intend to give specific full year guidance for 2015, but I would like to comment on market trends, margins and tax rates as we see them heading into the year. After a relatively strong first half of 2014, electronics market growth has slowed. We see continuation of modest growth in 2015.

Global car build rates have moderated after several years of above-trend growth. We see this slower growth environment continuing through 2015. However, our program wins for fuses and sensors give us confidence that we can continue to grow our automotive sales faster than the market.

The overall electrical business is expected to have moderate growth in 2015, driven primarily by the beginnings of a recovery for custom products and ramp-up of new products at SymCom. We will have several major margin improvement initiatives underway in 2015. However, most of the margin improvement from these programs will not hit the P&L until 2016.

Although our tax rate has increased in the second half of 2014 primarily because of more income being earned in the U.S., we expect lower rates in 2015, resulting from the completion of several restructuring initiatives. At this point, we believe the 2015 effective tax rate will be between 23% and 24%. This concludes our prepared remarks.

Now we'd like to open it up for questions..

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

This is Gausia calling on behalf of Shawn. Within the mining business, you mentioned there were some 2015 quotes out there.

When do those become hard orders? And how big is the recovery potential in that business?.

I'm sorry. Yes, that question didn't come across.

Could you just repeat it one more time, please?.

Sure, sure. So within mining, you mentioned that there were some quotes out there for 2015.

I was wondering, when does that typically -- when would you see those turn into hard orders? And how big of a recovery potential are we talking about?.

Well, we've had really a very poor year this year. We had a huge cycle of expansion at -- that really ended, and we had clearly inventory with our customers that caused it to be extremely low for a couple of quarters.

And what we are seeing now in the fourth quarter, the orders and the expected shipments level is to be a more normalized level that we expect to see for some time. We are not predicting yet a big growth, and this is specific the potash mining.

We're not predicting a big expansion program, but getting back to regular maintenance [ph] levels of operation that will be significantly better than we've had this year..

Okay. And then my second question was within electronics, how much of the decline that you saw was seasonal? And then are you seeing anything abnormal by region? You said that the book-to-bill has recovered to above parity in October.

Is that rebound normal?.

Yes. I mean, we're seeing very typical seasonal patterns here. It's -- we think the distributor inventories are at normal levels for this time of the year and the current state of the market. The kind of electronic sequential decline in Q4 that we're expecting is very consistent with what it's been kind of on the average over the past 7 or 8 years.

So we're -- we feel pretty good that it's within very normal parameters at this point..

Our next question comes from Matt Sheerin from Stifel..

A couple of questions from me. Just on the outlook that you provided, Phil, looking into 2015. Looking at your growth rates, you've talked about a 5% organic growth rate. Looks like this quarter, you'll be just below that.

Could you talk about your outlook for next year? Do you think you'll still be able to keep to that 5%? Or should we be looking at something a little bit lower there?.

I think 5% is still realistic. So we're probably going to fall just short of 5% for this year even with a fairly dramatic decline in the mining-related business and in the overall electrical segment for the year, and we were able to offset that with kind of above trend growth in both automotive and electronics.

As we go into next year, the mining business, as Gordon said, isn't -- it isn't going to roaring back, but it'll at least be -- it'll be more of a tailwind on a year-over-year basis than it will be a headwind. So we expect to have at least positive year-over-year trending in that business.

And if we stay on track with automotive and electronics, we should be able to at least achieve our 5% organic target..

I know you've talked about kind of a high single digit growth in automotive due to the electronic content, due to the sensor content. It sounds like you're still comfortable with that..

Yes, something in the higher single digit seems reasonable. I think we're not going to have the strong tailwind that we had earlier in this year from the car build increases in a number of regions in the world -- key regions in the world. But even with a more moderate car build growth, we still should be able to grow in the higher single digits..

Okay. And the operating margins in the electronics business, obviously very strong there and seeing that's going to be down with the volumes.

As you look into next year, even at sort of a low single digit growth rate, do you think you can sustain margins in the low 20% range?.

That would be the goal, Matt. I think that as long as we can get reasonable organic growth, we should be able to sustain those margins. I wouldn't expect the margins to continue to increase like they have over the last couple of years, but I think sustaining those margins should be doable..

Okay. And just last one for me, regarding some of the cost savings initiatives with the acquisitions going into next year. You said the savings are going to kick in, in 2016.

Do you have a ballpark yet in terms of savings number? Are you going to just wait until you finalize that and share that with us later on?.

We'll be sharing that later on. As we've talked about for a while now, we have some major programs that we'll get -- give some more specificity on as soon as they're announced. And we'll talk about those in more detail at that time, but that will be coming up here in the not-too-distant future..

Our next question comes from John Franzreb from Sidoti & Company..

Gordon, you touched on the fact that your M&A's lagged maybe your initial expectations. Could you provide a bit of color on what the multiples are like out there and maybe what markets that you've been attracted to or just not panning [ph] through as much as you expected? Any color there would be helpful..

Sure. We've certainly seen multiples. I mean, we've made 2 very good acquisitions in the sensor space, and we've said that sensors are a strategically important segment for us. But I think you've probably followed also several sensor deals that have happened this year that have been at some very high multiples.

And so sensors are still very important to us. We're being very selective which areas of sensors that we're looking at and very selective, obviously, on the fit of those, but also the valuation. We also talked about commercial vehicles being an area where we're having a lot of success now. We've built up a strong portfolio of products.

That's an area that's very fragmented around the world, and we look at that as being an area that we're very interested in. And then we've also talked about this industrial market being very attractive to us, and that's an area that we think we may well be targeting. But clearly, being disciplined about this is important.

I mean, we're open to all geographies that can bring geographical strength to us, but there's several segments that we're currently looking at within these parameters..

Do you think it makes sense maybe to look at smaller acquisitions than larger ones given this environment?.

Yes, I think so. I think -- we've said in the past we've sort of got a sweet spot. But if we saw something, particularly if it was closer to our core that was large, we wouldn't be afraid of it. But we always said there's not a lot of those available, and I think looking at smaller acquisitions can clearly make sense for us..

Okay. And in regards to the electronics book-to-bill. I actually always thought that the normal seasonality was somewhere in the neighborhood of 6% to 8% drop sequentially. But, Phil, I think you kind of suggested that my number may be a little outdated. I just want to make sure I got it right historically.

And in -- within that, the current book-to-bill that we're seeing, are there any pockets of electronics end markets, be it datacom or mobile or consumer electronics, that are weaker than normal seasonally?.

So regarding your first question, 6% to 8%, that would probably be not far from kind of the overall company typical seasonal performance going from Q3 to Q4. The electronics seasonal performance has typically been in the kind of the low double digits, so somewhere between probably 10% and 15% is more typical there. So we're kind of right in that.

We're expecting something right in that range this time around. And with -- electronics has actually become a slightly smaller part of our total business than it was a few years ago. So kind of the overall sequential decline for the entire company would now maybe be a little bit less than that 6% to 8% that you mentioned.

Relative to the electronics markets, Gordon, I -- do you have any specific areas that you want to call out there?.

No. I think the segments that we talked about, we're sort of constantly looking at those growth segments. LED lighting is one, data centers, the charger market. There's a lot of segments within electronics that are small verticals that are attractive and a lot of geographies.

I just called out we've had a -- we continue to have very healthy electronics business in Europe, which sort of shows the vast industrial market and multiple segments there that are remaining strong for us..

I don't think -- I can't think of any area that we would call out as being unusually weak at the moment. I think it's -- I mean, it seems to be reasonably consistent across kind of a broad range of end markets that we're covering..

Okay, okay. That's fine. And one last question.

What gives you the confidence that the custom products are going to rebound next year in the electrical side of the business?.

Well, I mean, that's -- there's a pretty long lead time usually in getting orders for those. There's capital plans for the mining segment, particularly in potash, as we get to know that market very well. And so they have their maintenance plans and their capital expansion plans, and we work very closely with a limited number of customers.

So we have pretty good visibility in that business to feel that level of confidence. It certainly bumped along the bottom. And as I said earlier, that's partly due to the expansion that was dramatic for a couple of years and the inventory that was with our customers for them to continue their maintenance programs.

And now once that inventory is depleted, we see them getting back to normal operating levels, not big expansion levels. But that normal operating level is significantly better than that we have this year..

So Gordon, is this based on quotation activity? Or you actually have the orders to support that outlook?.

Well, it's both. It's certainly orders that were booked during the third quarter to make us very comfortable with the fourth quarter and the beginning of the year. Once it gets further out into 2015, it's really quotations that are not yet converted into orders, but we have a high level of confidence on those..

Even in some cases, as Gordon mentioned, the -- it's just -- particularly in the potash space, where there are only a few large customers, it's -- discussions with those customers that maybe haven't even turned into quotes yet, but we're pretty aware of what their plans are and what that would potentially mean for us..

Our next question comes from Tim Wojs from Baird..

I guess, just in the electrical business. The industrial portion of that business was down year-over-year, and I was wondering how that trended relative to expectations 3 months ago..

Yes. The electrical fuse business in particular was sort of a bit of a rebound, but we had a record quarter a year ago. So the electrical fuse business was still down. Solar was particularly weak in that area, but we look at that business as a business that certainly rebounded from a very poor second quarter..

Okay.

So really, just the fact that it's down year-over-year is really more of just a difficult comparison versus any underlying issue?.

Yes. I think we had an exceptional period of growth a year ago if you look at the electrical fuse business growing much faster than the market. And we had some segments that were very strong that we called out tremendous expansion in some customers, with HVAC and solar, and those were just not as strong this quarter..

Okay. That makes sense. And then, I guess, just looking at the repatriation of some of the cash from offshore.

I guess is that opportunistic just kind of in terms of timing? Or is that maybe a sign or a signal that you might be a little bit more aggressive on the buyback or dividend front?.

Well, it certainly is opportunistic. We had to do a fair amount of work in terms of structuring for the -- related to the Hamlin acquisition to really enable that cash to come back tax efficiently.

But now that we've done that certainly and we have more liquidity than we've had in a while in the U.S., that probably makes us think a little bit differently about our willingness to do share buybacks or larger share buybacks than we've done over the last couple of years. So we'll still be disciplined about that.

But certainly, we have much fewer liquidity constraints than we might have had before and then -- and so we could be more aggressive if we chose to without negatively impacting our M&A efforts..

Okay, okay. That's helpful. And then I guess just 2 other questions financially. Just nice to see free cash flow stronger than expected.

I guess what were the -- what are the drivers there? And is that sustainable going into 2015? And then how should we think about FX as we move into next year?.

Good question. So yes, the cash flow -- I mean, this is going to be in all likelihood a record year and maybe a record by a fair amount. I don't think anything particularly unusual about this year. I mean, we've had -- I mean, one thing that certainly helped us for the quarter is we had very strong receivables collections.

Our DSO at the end of the quarter, at 56 days, was the best we've had in quite a while. And I think that -- is that a sustainable number? I mean, I think we believe that that's a doable number.

I'm not sure that we're going to be able to achieve that every quarter, but I think that -- so certainly, third quarter was helped by a fairly significant reduction in DSO. But as we look out into next year, we've always said that we should be able to have free cash flow of something like 12% to 14% of revenues.

So these numbers that we're going to produce this year are not unusual, and we should sustain numbers maybe not exactly as high as this, but certainly in that general range going forward as well. So -- but nothing particularly unusual about this year's cash flow.

And I'm sorry, your second part of your question, Tim, was?.

Yes. If there's a way just in terms of FX, how should we -- is there a ballpark number we should maybe think about as a translation impact to revenue next year? And then just....

Yes. So I guess the -- yes. The biggest issue we have on the revenue side is the euro. I mean, that's by far our biggest long position. The others, we have a little bit in the Korean won and the Japanese yen, but those pale compared to the euro one.

So I think you should be focused on the euro, certainly the -- with the drop from the low- to mid-1.30s down to I think it's trading about $1.27 or so today. That's a meaningful hit. I mean, that -- I think we have about -- well, most of our European revenues, which we report what those are, are in euros, so you can do the math there.

And then there's a margin impact of that as well. So with the drop that we've seen recently, for example, going into the fourth quarter, that could be relative to the third quarter, that could be $0.03 maybe even $0.04 a share impact if the euro stays in the $1.26, $1.27 range..

[Operator Instructions] And our next question comes from Christopher Glynn from Oppenheimer..

So on the electronics margins, we got some color to kind of maintain current levels. And if we look at automotive and electrical, just to dive into those, I'm thinking it clearly seems electrical should see a pretty strong uptick.

And then automotive, could we get an update on the commercial vehicle consolidation benefits? I think sensors was a little further out in 2015 to get those benefits, but maybe CV was a little sooner?.

Yes. So we've made some real strong strides in commercial vehicles this year. And those don't completely show up in the automotive segment numbers because of -- I mean, it's not a huge piece of that, and we haven't made much progress this year in the other parts of that from a margin perspective -- other parts of automotive.

As we think about going into next year, there are going to be some puts and takes on the automotive side. We will be incurring some additional costs for some of these margin improvement activities that we mentioned, and we'll get more specific, as we said, about those in the not-too-distant future.

So there will be some additional costs, with most of the benefit accruing further out in 2016. So I think on the automotive side, overall, you're probably not going to see a lot of improvement next year. You'll see some puts and takes.

Although if we look at kind of over the next several years, automotive probably has the biggest opportunity for improvement, although, certainly, electrical, as that bounces back, we'll absolutely see improvements in those margins as well..

Okay. And then looking at the potash piece. I'm guessing that market this year is 2/3 or more off the peak.

Is back-to-normal maintenance kind of halfway back, somewhere in the middle there? Or any way to kind of gauge the thought there?.

Yes, okay. So I mean, just to get you kind of grounded on that, I think if we look at -- the custom business for this year is probably going to end somewhere in the $11 million to $12 million range. That's down from a few years ago. It was more like $40 million to $50 million. So it's down quite a bit.

I would say we're not going to get halfway back to those peak numbers, but we should be up. I think 50% up from this year's level would not be too much of a stretch..

Our next question comes from Shawn Harrison (sic) [Gausia Chowdhury] from Longbow Research..

Just had a follow-up. I was wondering about margins, specifically for electrical.

How should we be thinking about it for both the fourth quarter and then just into 2015?.

Yes. So the margins in electrical are going to depend largely on what we're able to do revenue-wise there. And most of the products that we have in the electrical segment are high-margin products, and we have a fair amount of operating leverage there. So to the extent that we're able to improve the top line, the margins will definitely improve.

I'm not going to give a margin number. But certainly, directionally, you can think about a segment where the incremental margins for most of the products in there at north of 50%, probably not quite that high for the custom products. But for all the other products, they're well north of 50%.

So the margins will closely follow the incremental revenue that we see..

Our next question comes from Gary Prestopino from Barrington Research..

Most have been answered, but I wanted to just make sure I heard you right, either Phil or Gordon. You had mentioned that you didn't see any weakness in Europe this past quarter other than the normal seasonal weakness that you see because it basically shuts down.

Is that correct?.

Well, 2 areas. One, automotive. I did actually say that the year-over-year for automotive passenger car was a 1% decline, and that's the first time in many years that we've had a year-over-year decline in any quarter in automotive.

It's been extremely strong, and a lot of that, as I've remarked on previous calls, was due to exports from Europe, but we've seen that even slow down. So certainly, the automotive business was slower. Electronics has continued to be very strong across multiple segments. I mean, I called out some such as the 4G telecom infrastructure.

But in general industrial areas, our electronics business continues to be very strong, and we do not see a weakness in the electronics business at this stage..

But if you look at our European business, the majority of our European business is the automotive business. So the -- we -- our European sales will be impacted by the weakness that we're seeing there..

Could you just remind us how much of your top line, your revenues is exposed to the euro?.

It's just about all of the European part of our sales, which is a little less than 20% of our total sales. 90% of that is euro-based or more..

And we're showing no further questions. I will now turn the call back over to Mr. Gordon Hunter for closing remarks..

Well, thank you for joining us on today's call. We believe that our growth strategies are working and our overall performance is on track, and so we look forward to another good year for Littelfuse. Thank you very much..

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