Good day everyone, and welcome to the Littelfuse First Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed..

Good morning, and welcome to the Littelfuse First Quarter 2022 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO.

Yesterday, we reported results for our first quarter, and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers.

Our discussion today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website.

I will now turn the call over to Dave..

Thank you Trisha. Good morning. And thanks for joining us today. Let's start with Slide 4. Building on our noteworthy success in 2021, our global teams delivered tremendous performance, substantially above our expectation to start this year.

We achieved record revenues and earnings per share growth as we successfully executed on our strategy and continued to outperform the markets we serve. Across our electronics, commercial vehicle, and industrial businesses, we attained double-digit organic growth compared to last year.

While our passenger car business outperformed global Carville, broad in-market demand continues to remain strong and our team has resiliently managed supply chain disruptions. Our organic growth trajectory combined with our strategy led acquisitions continue to strengthen and diversify our business.

As a result of our persistent execution, we remain extremely well-positioned to further capitalize on current and future growth opportunities within the global structural themes of sustainability and activity and safety.

That said, we are operating within a more volatile macro environment compared to 90 days ago, given events related to COVID and the war in the Ukraine. In particular, the shutdowns in China due to COVID-19 have impacted our operations, which will impact our second-quarter sales and earnings.

Our teams achieved outstanding results driven by increased -- increasing demand, creation across the industrial, transportation, and electronic markets we serve, and worldwide execution.

I would like to recognize and thank all of our associates around the world for their ongoing determination to drive record growth by winning new business, making significant strides with additional strategic acquisitions and meeting customer demand within a challenging macro-environment.

Our strong performance through these unprecedented times is truly a reflection of our great people and the strength of our business. Moving on to performance within our segments. Our electronics product segment achieved remarkable results.

We drove significant revenue growth across all regions, driven by our diverse product offering, far-reaching go-to-market strategy, and our team's ability to overcome ongoing macroeconomic challenges.

Demand for our products was driven by a broad range of applications, including data centers, telecom infrastructure, industrial automation, appliances, and automotive electronics. We expect to capitalize on the ongoing themes around connectivity, automation, and electrification.

Exiting the first quarter, our electronics book-to-bill remained above one and weeks of inventory at our distribution partners are within our normal range, underscoring sustained, strong ongoing demand. This demand setup is positive. But we are working through the resurgence of COVID-19 in China, which directly impacts our electronics business.

Our teams continue to maintain focus on this dynamic environment. Our transportation product segment delivered solid performance within a challenging supply chain environment. Our passenger vehicle business was impacted by OEM shutdowns and a lower production levels driven by the ongoing materials shortages and the war in the Ukraine.

Withstanding this, we continued to outperform global cargo given our increasing product content and passenger vehicles. We see a number of ongoing content growth opportunities and expect to continue our market out-performance despite lower global cargo projections.

Our commercial vehicle business drove strong demand for our combined portfolio of legacy and Carling technologies, products driven by our deeper and broader presence across material handling, heavy-duty truck, bus, construction and agriculture equipment, marine and power sports markets.

We have a strong order backlog, which sets up our continued performance. Turning to our Industrial Products segment. Our strong performance was an outcome of our global team's ability to serve new customer applications, increase new product sales, and leverage a broader product portfolio.

We saw a robust demand in our strategic markets, including industrial safety, HVAC, and renewables. In North America, we are seeing improving trends in oil and gas in non-residential construction, with sustained strength in mining and in industrial MRO markets, while electrical distributors inventories remain lean.

Meenal will provide additional color on our strong financial performance. Our ongoing results and successes reflect both the strength of our team's execution and the power of our strategy, which is shown on Slide 5. Since launching our five-year growth strategy in early 2021, we have aggressively advanced our strategic business initiatives.

We are investing for growth, both organically and through acquisitions, within the structural growth themes of sustainability, connectivity, and safety. These investments include resources to partner with our customers as they deploy their applications related to these themes.

We have expanded our product content and captured share gains globally in high-growth markets. During 2021, we also completed two acquisitions aligned closely with our strategic goals. Hartland Controls in HVAC and Carling Technologies in commercial vehicles, telecom infrastructure, and renewables.

All higher growth end markets, adding approximately $300 million in annualized sales. In April, we announced two additional acquisitions, C&K Switches and Embed. Turning to Slide 6. We're looking forward to welcoming C&K employees to the Littelfuse team upon closing of our announced acquisition.

C&K is a leading designer and manufacturer of high-performance electromechanical switches and interconnect solutions with annualized sales of over $200 million and has historically had EBITDA margins of approximately 20%.

In addition of C&K expands our product portfolio, addressable market, and growth globally across industrial, automotive and Datacom markets, serving as a platform for continued growth. Our complementary go-to-market models will continue to strengthen our partnerships with distribution channels.

C&K is technology leadership in high precision manufacturing, miniaturization, haptics, and operational footprint will broaden our capabilities. We expect to close the transaction late in the second quarter and look forward to getting the integration underway. Moving on to Slide 7. Let me begin also by welcoming Embed team to Littelfuse.

Embed is a proven provider of embedded software and firmware developed for a broad range of application. This acquisition will help us to better serve our customers by expanding our software design, engineering, and technical expertise.

This capability is critical given the complexity of vehicle electronification and electrification, as well as the proliferation of communications and applications driven by IOT trends in the industrial market.

We now have additional capability to deliver broader hardware and software solutions to our customers, such as electronic control modules and systems for transportation applications, or out of [Indiscernible] and controls for industrial applications.

The addition of Embed will unlock new growth opportunities across the transportation and industrial markets we serve.

Since early 2021, we are on track to deploy $1 billion in capital for acquisitions aligned with our long-term growth strategy, adding approximately $500 million in annualized sales to further diversify and strengthen the end markets we serve and expand our organic growth opportunities.

Our disciplined approach towards M&A positions us so that newly acquired businesses accelerate our success in higher growth markets through diversification, expand our geographic presence, and leverage our core competencies creating value for all of our stakeholders.

We're very excited about these businesses and they're close aligned with our strategic and financial objectives. Now, let's move on to highlight the design wins in the end markets we serve. In our industrial end markets on Slide 8, we continue to generate increased business wins across a broad range of applications to grow our business.

We have developed technologies to address new electrical safety standards and expanded our portfolio with acquisitions. During the first quarter, we captured business in the commercial kitchen and food and beverage industries that enable our customers to meet tighter safety requirements.

Our ability to provide strong technical support across a broad set of high-voltage products have allowed us to secure a global design wins. As a result, we secured business in renewables across a variety of applications, including solar, wind, and energy storage systems. In HVAC, we continue to secure more business with our expanded product portfolio.

With the breadth of our high-quality offerings, we're increasing product content with leading customers and we expect this to continue given our global brand and their sustained focus on safety and sustainability. Turning to our transportation end markets on Slide 9. We continue to increase our product content to outperform the market.

Within electronification, our high-voltage products secured global business for battery management systems and onboard charging applications in passenger vehicles. In commercial vehicles, we captured business for power distribution in two wheelers, onboard charging in buses, and rail traction for trains.

We also expanded our business and electric vehicles charging infrastructure applications. With increasing complexity of vehicles, we secured business based on our engineering capabilities for heavy-duty trucks, material handling, and construction and agriculture environment.

We're also leveraging products from a successful integration of Carling to grow our business in these end markets. Within safety, comfort, and [Indiscernible] applications, we captured wins based on our product performance.

With our investments for growth and expanded capabilities and portfolio with the additions of Carling and Embed, we are very well-positioned for continued growth within transportation applications. Moving onto Slide 10 electronics, end-markets, we are seeing significant growth from innovative products targeting key end markets.

During the quarter, we capitalize on the proliferation of electronics content across a wide range of application centered around connectivity. We secured business for data centers and telecom infrastructure with our responsiveness to customized solutions.

In appliances, we expanded our presence with existing customers based on our long-term engagement. In addition, our product features won us business for building security systems and general purpose electronics. Our ongoing success of winning business and our announced acquisition of C&K will serve as a platform for continued growth.

Across the high-growth industrial transportation and electronic end markets we serve, our pipeline of new business opportunities is very active and we are confident in the continued success we expect to have running this business.

Our organic growth from these new business wins, coupled with our acquisitions will enhance and sustain our growth and position us to continue expanding our market presence. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook..

Thanks, Dave. Good morning everyone, and thanks for joining us today. Let's start with Slide 12. Our team delivered a quarter of record financial performance that exceeded the high-end of our guidance. Revenue grew 34% year-over-year to $623 million with organic growth of 22%.

The Carling and Hartland acquisitions added 14% and foreign exchange reduced revenue by 2%. GAAP operating margins were 24.2%. Adjusted operating margins were 25.6%, 850 basis points higher versus last year. First quarter gas diluted earnings per share was $4.70. Adjusted diluted EPS was $4.99 up 87% over last year.

The strength of our results in the quarter was led by our electronic segment, where overall demand was stronger than we had expected, which included improved shipping rates as we work through logistics challenges.

We also risk-adjusted our first-quarter forecast for potential COVID related production slowdowns, but our teams were able to continue our operations during the first quarter, despite the COVID surges. Our operating margins reflected strong sales volume and related leverage.

We ended the quarter positive, on price cost, and our teams remain focused on offsetting ongoing inflationary headwinds. Given the current market conditions, and the ongoing customer discussions we're having on pricing, we expect to stay positive on price cost for the remainder of the year.

And as I've been referencing the past several quarters, we continue to have margin benefit from lower than typical discretionary spend, even as we continue to invest for growth across our businesses. We generated $52 million in operating cash flow in the quarter and $22 million in free cash flow.

This reflects the higher working capital and capital expenditure investments we've been making to support our revenue growth and higher cash compensation payments related to last year. We've also continued our strategic direction to carry higher inventory levels to help mitigate supply chain risk and sustained service levels to our customers.

Turning to Slide 13, our capital allocation priorities remain in full alignment with our growth strength. We continue to prioritize reinvesting in our business for both organic growth and for acquisitions to diversify and expand our value proposition to our stakeholders.

Since we shared our updated five-year strategy with you last year, we've committed to deploy $1 billion in capital to further our growth trajectory from acquisitions. Our constant focus on cash generation is allowing us to fund more than half of this deployment directly from our balance sheet.

While we plan to take on additional debt in the near-term for these acquisitions, our leverage will remain comfortably within our target levels. Moving onto our segments on Slide 14, let's start with electronics. Revenue in the quarter grew 28% and 29% organically.

Operating margins were 33%, reflecting strong price cost benefits, favorable regional and product mix, and ongoing volume leverage at these record revenue levels. Our teams continue to drive operational efficiencies and ongoing automation investments, adding to the margin expansion.

In these current market dynamics, we expect our Electronics segment to maintain an operating margin averaging in the mid 20% range. Moving onto Transportation, formerly known as our Automotive segment. Sales were up 44% and up 3% organically, the main difference being the Carling acquisition.

Sales in commercial vehicle were up 21% on an organic basis with positive market and content trends across our vertical. Sales across passenger vehicle were down 3%, excluding foreign exchange, on a mid-single-digit global car build decline.

Operating margins were 14.3% offsetting continued metals headwinds and dilution from the newly-acquired Carling. Sales in industrial grew 50% in a quarter and 32% organically with the main difference being the Hartland acquisition.

Operating margins were 17.1% as we drove improvements in operational performance, price increases offsetting cost headwinds, and strong volume leverage. Overall in the first quarter, we had excellent operational execution across the board and strong financial performance in what continues to be an uncertain and volatile macro environment.

Moving to Slide 15. We continue to see broad strength across the end markets we serve. This remains the case for automotive and consumer demand. The new and ongoing supply chain issues have dampened car build projection impacting us through our customers and suppliers.

Recent events from the tragic Ukraine invasion to China COVID have also elevated uncertainty across the macro environment. However, we continue to successfully manage through market challenges across a number of fronts. And have incorporated market conditions as we feed them today into our forecast.

For the second quarter outlook, we expect sales in the range of $594 to $608 million, a growth of 15% versus last year and 7% organic growth at midpoint. This includes about a 300 basis point currency headwind versus last year. At current foreign exchange rates, we expect an approximately $50 million sales headwind for the full year.

We're projecting second quarter adjusted EPS to be in the range of $3.95 to $4.11, up 18% at the midpoint. This assumes a 16.5% tax rate in the quarter. We are maintaining our full-year adjusted effective tax rate in the range of 16% to 18%.

The China COVID-driven lockdowns that began late in the first quarter are affecting some of our operations, largely in our electronics segment, as well as impacting some of our customers and suppliers. Due to these lockdowns, our guidance includes a 300 basis points sales headwind versus last year.

As well as costs, we are encouraged to support our operations and our employees. Consistent with our historical accounting convention, our second-quarter guidance also includes higher stock compensation expense in the quarter of approximately $0.30 in EPS.

We closed on the Embed acquisition in April, but don't expect it to have a material impact to the P&L or cash flow in the quarter. Our Q2 guidance excludes any financial impact for C&K Switches and for interest expense from new debt. Slide 16 includes some additional full-year forecast considerations.

We expect $50 million in non-cash amortization expense for the year, excluding C&K and we're projecting $18 million in interest expense excluding interest expense for new debt. We're maintaining our projection of 100% free cash flow conversion and estimate $110 to $120 million in capital expenditures for the year.

C&K Switches has annualized sales of over $200 million and has historically had EBITDA margins of approximately 20%. Dave discussed how C&K closely align with our target market and portfolio and it will also align well with our financial profile. We see a number of opportunities to enhance C&K’s growth in bottom-line performance.

We anticipate the transaction closing late in the second quarter and expect it to continue being earnings accretive after including non-cash deal amortization. I'd like to conclude by thanking our associates around the world for continuing to deliver on our commitments to our customers and shareholders amid stiff challenging times.

And with that, I'll turn it back to Dave for some final comments..

Thanks, Meenal. In summary on Slide 17, we've had an accelerated start to delivering on our five-year strategic goals.

With our ongoing develop -- deployment of resources and capital to enable customers’ applications, we remain extremely well-positioned to further capitalize on current and future growth opportunities within the global structural themes of sustainability, connectivity, and safety.

We continue to focus on what we can control to drive our performance in a volatile market, which is reflected in our second-quarter outlook of continued double-digit sales and earnings growth.

I am confident our talented associates around the world, investments for growth, and operational excellence will deliver ongoing value for all of our stakeholders. And with that, I will now turn the call back to the Operator for Q&A..

We will now begin the question-and-answer session. [Operator Instruction] The first question is from Luke Junk with Baird, please go ahead. Good morning..

Thank you for taking the questions.

First question probably for Meenal, just wanted to better understand the electronics margin from here and what elements of the current upside are sustainable, or more specifically, how you define the current market dynamics that were supporting mid-20s margin in this business? Alternatively, what has to go wrong if you will drive -- to drive the business back towards the low 20% level, you had previously assumed in you through the cycle margin target, is that still the right target for this business through the cycle? In light of the improved productivity and automation investments you referenced.

Thank you..

Thanks, Luke. Let me just step back for a second. We're in a market that really we've never seen before.

A lot of unique factors going on ranging from the demand increases that we've seen, pretty sharp demand increases, the inflationary environment, and then we're at a price realization mode versus the business that typically seeds price erosion every year.

So when you asked about, what are the market dynamics that are going on that have caused us to think about the margin profile, that's what I call the current market dynamics. I would say we have worked very hard on a couple of things, one around pricing.

And as I mentioned last year, we were working to catch up a little bit with the inflationary environment and we've done that now from a price perspective. But we've also done a lot of internal work really around productivity, efficiency, investing in automation.

So what I would say with these current market dynamics with what we've done right now for the foreseeable future, I see it's net mid - 20 percent range margin profile. I think we just need to continue monitoring the environment and see how things evolve over time..

Thank you for that. And then my follow-up question, also margin-related, and I'm wondering about the sustainability of transportation margins in the mid-teens. As you mentioned, number of headwind still this quarter, be it inflationary headwind, where the level of light vehicle production is right now.

Carling related impacts on the margin profile of that business right now. Let's take this to the second quarter guidance for the very near-term and is the outlook here for mid-term margins sustaining if we look at the next few quarters? Thank you..

Sure. I'd say our target profile for the segment remained mid-teens margins. As you're saying, this -- the business and a lot of the factors, there's a lot of choppiness going on. One of the biggest things that I've talked about in the past are things like input cost, especially metals, really impact this segment the most.

And we've seen a lot of choppiness, a lot of inflationary price increases there. I would say, again, our target remains the same.

It's going to depend on some -- a lot of the market dynamics more than anything else between things like car build, the continuation of growth that we're seeing around end markets not just in auto, but also in commercial vehicle.

And then we're doing what we do best, which is we're working on managing -- due to the environment, we're working on productivity initiatives, automation initiatives to work on mitigating it and working to keep it in that mid-teens margin..

Okay. Great. I will leave it there. Thank you so much..

Thanks Luke for your questions. We'll take our next caller, please..

The next question is from Nikolay Todorov of Longbow Research. Please go ahead..

Good morning, Nik..

Good morning everyone. And then congrats on great results and execution. Really impressive results. Questions first on China impact.

Can you help us understand the -- I assume the field impact sequentially both from a revenue and cost standpoint related to China lockdown?.

Nik, I'll talk a little bit on the revenue side and let Meenal speak to any cost issues associated with it. But we talked about that 300 basis points headwind in the second quarter that we're facing, and it really comes from a couple areas. Primarily it shows up in our electronics business, impacts our electronics business.

We have a couple of manufacturing sites in the greater Shanghai area that have been shut down for a few weeks, and we expect them to begin to ramp back up in the coming weeks. But it clearly has an impact on our ability on some smaller product lines that we have at those locations, so that's certainly a headwind for us.

And of course it has some indirect impacts on us with customers, on the auto side. But also on the electronic side that their supply chains are disrupted, their inability to operate impacts us as well. So that's really kind of what we incorporate in that 300 basis point headwind..

Sure. On the cost side, Nick, I'd say a couple of things. One is we're incurring operational costs right now. Dave mentioned that we've had a few plans shut down for a few weeks now.

We've got -- there are still a number of fixed costs going on that we're continuing to maintain, including continuing to pay our employees as well as we talked about providing employee support.

It's quite a difficult, personal, challenging time right now and so we're doing everything we can to support our employees personally as well in a lot of different areas.

So the combination of those two costs, I would say, a big chunk of our sequential earnings decline is really coming from what I'd call it a temporary situation with the China COVID shutdown.

That's very helpful. And then another question related to margins, we've seen this specifically in electronics, I would call it volatility. You've had this very strong third quarter margins and a little bit of moderation in 4Q. Now, you had a very strong first quarter margins. I'm guessing you mentioned mix played a major role.

Can you please help us understand what product families are driving that high accretion of -- in the electronics margins?.

It's a great question, Nick. I would say there's a few different things going on. I talked about it a few quarters ago, mix played outside its role in terms of our margin profile. For us, it's geographic mix, also that helps, some stronger margin profiles, as we think about North America, Europe, a little bit different in Asia. So mix was a piece there.

At the same time with the earlier question I answered, I mentioned we've been doing a lot of work to catch up with the inflationary environment around pricing, so I'd say the past few quarters, that's where we're seeing some bigger benefit as part of that catch-up.

And also just really around productivity and automation, the operational excellence that you count on us for, and we've been spending a lot of time and frankly, a lot of investment in making sure that we're doing what we need to at our own house to really improve our cost position.

That's really some of the dynamics there, I'd say what's adding to the choppiness frankly, is a lot of the supply chain environment.

I know an overused term, but especially around logistics, where we're moving product in many cases from Asia to North America or internally, and we saw some choppiness in the fourth quarter, which caused some of the margin decline.

We worked through that, it got better in the first quarter, but that's still -- I'd call it a day-to-day battle for us right now..

Very helpful. And if I can squeeze one more, just if you look at the organic growth, very strong 22% despite a tough comp. Can you help us understand how much of that is coming from pricing on a year-over-year basis? It sounds like you're also starting to gain traction on price to costs in the transportation and industrial markets this quarter.

So can you help us on a year-over-year basis how much of the 22% organic growth comes from pricing?.

I would say really this is -- overall, we have very strong in-market demand across our businesses that are really driving the bulk of the organic growth. It's really more related to end-market demand. Yes, pricing helps an uplift that to be in areas like electronics and in industrial, but the bulk of that is really in market demand driven..

I would add the work that we've been doing really to enable us to meet that end-market demand and I keep coming back to the investments we've been making both in our operational efficiency, the productivity, and then the automation investments.

And that -- honestly, that's allowed us to be able to meet the demand that we've seen in that pretty quick slope that we've seen..

Congrats. Thanks again on the results..

Thanks, Nic. Appreciate your questions. We'll take our next caller, please..

The next question is from Josh Buchalter of Cowen. Please go ahead..

Good morning, Josh..

Good morning, thank you for taking my questions. Congrats on the awesome results. Last quarter, I believe you mentioned that you thought your distribution partners [Indiscernible] to the point that it matched end demand.

I guess, given the China lockdowns, firstly, is that still the case? And secondly, should we then interpret the current resulting guide as a function of really just being pulled in by end demand and less so any sort of channel or distribution inventory builds?.

Great question. And it's a very dynamic environment across the businesses, but in the electronics distribution portion of our business, obviously we monitor inventory positions there very regularly.

What we would say is for the most part there, they're pretty much kind -- in a normal range in our business, with some particular product categories that continue to be [Indiscernible]. So we don't see a potential near-term problem with inventory positions in our distribution channels in electronics.

I mentioned in the prepared remarks that in the industrial portion of our business, actually electrical distributors, which we sell through particularly here in North America, their inventories are still quite lean. So we see inventory at something to watch, but we clearly aren't seeing an outsized inventory problem at all.

In fact, there are some areas where we're still lean and need to do more to fill those channels..

And maybe just adding one thing non-operationally. One of the headwinds we talked about year-over-year, even sequentially as foreign exchange with the, as the euro has gotten weaker, that's definitely a headwind for us on the top-line..

Got it. Thank you. And then also, you had previously mentioned that you -- that there could be some restocking that came into play for your [Indiscernible] growth in 2021, and since then I just saw your numbers, but again, your results came in well above expectation.

I guess, could you just walk us through some of the bigger, chunkier content growth drivers that you have that are allow -- that are insulating you from units, whether it's XEV related or it sounds like commercial vehicles in particular have been strong. Thank you..

Clearly, if you look at the transportation segment as we reported, it starts approaching kind of 50-50 on how much is passenger car versus commercial vehicle. And we saw tremendous organic growth on the commercial vehicle side of things. And quite frankly, I think our customers are limited by their supply chains. The demand remains pretty robust there.

And our ability also really, our revenues are driven by our ability to support them as well at times. We see really strong demand there, and it's really across-the-board. Heavy truck and bus, construction and agriculture, material handling.

These are all areas that we see quite strong demand for our products, which are component level, but also power distribution systems in those applications where we see nice growth. By the way, we're also beginning to see traction and electrification in the commercial vehicle side as well, which creates further content opportunities for us there.

On the passenger car side, it's still the big drivers for us that are in the electrification of vehicles are certainly a content increase for us. The product mix for our customers where they tend to be when they have limited supply chain focused on higher-end vehicles, which have slightly higher content for us.

Those are key areas that are driving kind of content and outside growth than the transportation section..

Thanks, guys, and congrats again..

Thanks..

Thanks, Josh. We'll take our next caller, please..

[Operator Instructions] The next question is from David Kelley of Jefferies. Please go ahead..

Good morning, David..

Hey, good morning, team. I wanted to double back to the revenue guidance and how you're thinking about trends in the second quarter. You pointed out the China disruptions, if we adjust for that 300 basis points headwind, I'm still coming up a bit below typical seasonal trend.

So can you walk us through some of the incremental headwind you're seeing in other markets or maybe there's an element of risk adjustment here similar to your first quarter guide?.

Yes, David. So what I'd say is in addition to the China headwind we talked about, I just mentioned on an earlier question the foreign exchange headwind, especially with the weaker euro that we've seen that's been impacting us on the top-line.

And I've said similar to China being a 300-basis point headwind in the quarter, same sort of range also from foreign exchange, I'd say that. And I would also say we had some really good strength in the first quarter, so I think some of the historic seasonal patterns that we've seen are -- had gotten thrown out a little bit.

But we feel good about -- really, we would've been pretty close to sequential, honestly, from Q1 to Q2, had it not been for these headwinds..

Got it. Thank you. And then maybe following up on the transfer discussion, how should we think about pricing offsets in that segment to potential metals inflation? We're hearing about pricing from a variety of Tier-1 suppliers, which happens frankly once every 10 to 15 years.

So curious if that's been a meaningful opportunity for you in the past couple of quarters, or maybe it's an opportunity going forward to help in -- offset some of that go -- ongoing via metals inflation I'm sure everyone is seeing..

Yeah. David, we've talked about in the past the differences in our ability to pass along cost increases in different segments and different customer bases. And what I would say is, if you look at our transportation segment, passenger car is probably the toughest place for us to be able to do that. We tend to have long-term contracts with our customers.

And so annually, you get a chance, obviously, to address those sorts of things in many cases. So that isn't -- in the pass car side is an area where we're not -- have not been able to keep pace, if you will, with cost increases. So it is still a headwind for us on the price cost mix in the passenger car portion of the business.

The commercial vehicle side of the business gives you a little more latitude and ability to pass along those inflationary costs to customers, so we've probably done a better job at trying to kind of neutralize that in the commercial vehicle side of it. But it's an ongoing battle.

You talked a lot of Tier-1s, but as a Tier 2, we continue to work with our customers to try to pass along where we can, but in some cases we're not able to close that gap..

Okay, great. That's fine. And maybe just one quick follow-up on our point of clarification on C&K.

Just getting their distribution channel exposure, the 20% EBITDA margin you referenced, is that a longer-term through cycle average or are they currently tracking at those levels?.

That's where they've been operating at in the recent past. So we have that data at this point. Obviously, the distribution channel exposure they have matches very well with the distribution exposure that we have in our electronics business.

We see that as certainly one of the areas for synergy as we continue to engage with and partner with our distribution partners to maximize the opportunity for growth there. So we think that's where they've been operating EBITDA area recently, but we think there's lots of opportunity for us..

Great. Thanks so much..

Thanks, David. Appreciate your questions. We'll take our next caller, please..

The next question is from Matt Sheerin of Stifel. Please go ahead..

Good morning, Matt..

Hi. Good morning. Just a couple of follow-ups from the previous questions. One on inventory, Dave, you talked about distribution channels being lean, but we're seeing other customer basis, specifically EMS and OEMs build inventory at record levels and we don't know exactly what that mix is.

So are you getting -- I know in the last quarter you talked about EMS inventories maybe creeping up, do you have any insight there on that inventory picture and how that plays out through the year in terms of your orders?.

Yeah. I think our view on that is, it's a little unusual in this cycle that the level of inventory build at the end customer EMS is as well as OEMs. Of course, it's an added thing to consider in the mix. I'm not sure that we have seen specifically any meaningful increases for our products in those areas in the last quarter.

The big questions come down to really what will be the behavior patterns over time. Our current view is what's the current volatilities in the market and supply chain activities, whether they're COVID-related, whether they're Ukraine War related, number of disruptions that have kind of impacted our industry, in the recent couple of years.

The question mark is; how long will it take to return to more normal kind of inventory environment? We don't see that changing in the near term. We do see that over time, will that begin to work its way down? Sure.

I think it will, but we see it as more of a long-term trend, not kind of a short-term because just like ourselves, even if we have supply available to us, we have less limitations. The volatility and the ability to ship products around the world and other disruptions; we're probably going to carry a heavier inventory for the foreseeable future.

We see that same trend with customers we're talking to as well..

Okay. Thank you for that. And then I just wanted to go back to the issue of pricing and how that's benefiting your business, specifically, electronics. Your electronics revenue grew, call it $24 million sequentially, but your operating income was up $40 plus million.

So clearly, the pricing environment is beneficial and I know you've put in through price increases as have your competitors, but could you quantify it for us and how much of that uplift was pricing versus leverage and other moving parts?.

Yeah.

We've been talking, Matt, really about what we're doing around the different levers that we've not gone into detail quantification, but what I would say is we've done a lot of work in the past few quarters really around catch-up, ride-out round, really making sure that the value we're bringing to our customers is recognized, given the fact that our costs have gone up due to a lot of market factors.

So there's a lot of work that was done in the past few quarters and we're seeing the benefits come through from our margins and really it's a catch-up. At the same time, a lot of work done to really improve our capacity through efficiency, through some automation investments, so I'd say both of those have been strong drivers for us on margin..

Thank you.

And then, given the headwind the manufacturing and production restrictions that you're seeing in the June quarter, I know it's hard to look beyond one quarter here, but are you expecting -- I would imagine your backlog is building and would you expect September to bounce back somewhat in electronics?.

It's really challenging to see. It's pretty volatile space out there, as you said. And our current view is that the current disruptions in China specifically impacting us in the greater Shanghai area, we're expecting those to moderate through the course of May and hopefully begin to get back towards normal by the end of the second quarter.

So I think that headwind will likely lessen for us. However, who knows? Our other parts of China or other regions that all going to get impacted by additional waves from COVID, it's just difficult to say at this point. So our strategy and our approach is to make sure that we have the capacity in place to respond to the demand as our customers need it.

The team is in place supporting that and just be prepared to react to changes in direction there. But we're hoping the specific problems we're talking about are behind us, certainly, by the third quarter..

Okay. Fair enough. Thanks very much..

Appreciate your questions, Matt. We'll take our next caller, please..

The next question is a follow-up from Luke Junk of Baird. Please go ahead..

Yeah. Just one follow-up question. Wondering if you could comment on the Carling acquisition, especially key observations now that you've had your first full quarter of ownership there.

What have you learned that you didn't necessarily know coming into making that deal? And if I zoom back and look at the strong organic results that we saw in the commercial vehicle part of the transportation portfolio this quarter that's certainly a strong outcome. To what extent is Carling already adding to what you're seeing there? Thank you..

I think first of all, we feel at least as strong, maybe stronger about the opportunity with Carling once we've had a chance to actually spend some time at the factory location, spend some time with the engineering teams and sales teams. So we feel very bullish about that. We like the commercial vehicles space.

We think it's a great place to operate in, lots of opportunity. The added scale of Carling certainly creates us being a more important supplier in the electrical systems for the commercial vehicle space better evolving, pretty rapidly and pretty dynamically.

Carling has some unique capabilities that have primarily focused in the Marine’s space with more sophisticated modules and systems. We think there's an opportunity longer term that takes some of that capabilities more broadly into the commercial vehicles space.

And by the way, the Embed acquisition we made, which is adding about 35 embedded firmware software engineers to our team, will help us enable those sorts of activities as well. So we see opportunities in commercial vehicle as well as the industrial side. So we feel pretty bullish about it..

Thank you for your follow-up question, Luke.

Do you have another question, Luke?.

No, that's all I have. Thank you..

All right. Thank you. We'll take our next question, please..

The next question is a follow-up from Nikolay Todorov of Longbow Research. Please go ahead..

Hi, Nik..

Yes. Hi, thanks for allowing the follow-backs. Question on OpEx, Meenal, how should we think about the OpEx into the second quarter? I'm asking because SG&A dipped versus the trend we've seen in the last three quarters. In 1Q, you talked about $0.30 incremental uptick in stock compensation.

Any color or additional or how should we think about absolute level of OpEx in 2Q? That will be helpful..

Sure. Great question. I think one, just on the trends a little bit. When I talk about things being choppy from quarter-to-quarter, we've seen that a little bit on the OpEx side also, a lot of that being an outcome, frankly, related to COVID.

Discretionary spend starts to tick up and then something happens and it comes back down again just because of can you get out, can you travel, can you see customers, can you go to sites? So that's been some of the waves that we've seen on our OpEx spend frankly, and that's also been -- right now I'd say in the current market dynamics, that's been one of the unique drivers that we're just not spending at the level we would in some areas on OpEx.

Specifically, that relates to the second quarter. The $0.30 of stock compensation accounting I mentioned, it's just a provision in some of our stock comp grants that we have out there related to retirement provisions. And rather than taking the cost for some parts of the stock comp over a few years, we have to take it all in the quarter.

So don't think of it as an outside additional cost but more just from a timing issue, and so we try to give everybody directionally what that is every year in the second quarter..

One question for Dave, a bigger picture question. Dave, obviously in the financial markets investors are getting worried about potential slowdown in economy and even recessions. And at the same time, you have an inflation potentially being persistent so creating a stagflation environment.

I guess I will be interesting to hear your views on how the business in the industry behave in an environment where we have stagflation potentially into not-so distant future..

Great question. When we talked about regularly and debate regularly, it's pretty difficult. It's been an abnormal situation for the last couple years and situations we're in today are a bit abnormal. So we talked about it regularly. We feel that the transportation particularly the past car area, is going to continue with increasing demand.

There's just been pent-up demand that hasn't been being able to be supplied because of supply chain disruptions. So we don't see -- even with the potential global financial trends changing, we see demand on the transportation side continuing to be quite strong for the foreseeable future. So we don't see that as a concern.

Obviously, if the balance between inflation and slowing in economies, those will have an impact on us. But we have not seen a lot of evidence of anything yet in the markets and in the spaces that we're operating. The demand patterns that are in customers continue to remain very, very strong..

Very helpful. Thanks. Appreciate it. Good luck..

Thanks..

Thanks for your follow-up questions, Nik. We'll take our next caller, please..

The next question is from a follow-up from Josh Buchalter of Cowen. Please go ahead..

Hi, Josh..

Thank you for the follow-up. Just one from me. I was seeing -- you called out the impact, the China lockdowns in the revenue guidance, I was wondering anything -- any impact to your inventories there? The reason I ask is a few of your peers have mentioned that they're able to build parts but not ship them due to logistic challenges in China.

So I was wondering if you saw any similar dynamic as well as we think about modeling inventory for the rest of the year. Thank you..

No. Limited impact on inventory that -- our challenge really that's impacting us directly is we have factories who are in lockdown and shutdown. So we're not producing. It is difficult to ship in and out of Shanghai. So other locations we're finding ways to ship other routes in and out of China rather than through the Shanghai port.

But our impacts are more directly related to our ability to produce. So I think it's less impactful on the inventory.

And I would say the elevated inventory that we've been carrying to service customers eventually paid off a little bit and mitigated our revenue headwind for the quarter because we've been able to ship out of inventory right now.

That's been part of the mitigation that we've been working through unfortunate to be able to continue to help our customers continue business..

Appreciate the color. Thank you..

Thanks, Josh. We appreciate your follow-up question. Thank you for joining us on today's call and your interest in Littelfuse. We look forward to talking with you again soon. Have a great day..

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