Q3 2021 Littelfuse Inc Earnings and Acquisition of Carling Technologies Inc Call

Good day, everyone and welcome to the fifth third quarter 2021 earnings conference call. Today's call is being recorded at this time I will turn the call over to the head of Investor Relations.

Please proceed.

Good morning, and welcome to the Little P is third quarter 2021 earnings conference call.

With me today are Dave Heinzmann, President and CEO, and Neil Stefano Executive Vice President and CFO.

Yesterday, we reported results for our third 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 two 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 Form 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 four.

We delivered a quarter of outstanding performance with our ability to effectively execute within this challenging supply chain environment.

Building on our strength over the past several quarters, our highly skilled teams are continuously improving our global operations to meet customer demand.

And our results reflect the commitment and hard work.

We achieved record third quarter performance with sales of $540 million and adjusted EPS of $3 95.

We will provide additional color on our strong financial results.

Moving on to performance within our segments.

During the third quarter, our electronics product segment experienced strong revenue growth.

Our performance was driven by our ongoing operation operational execution and capacity additions coming online to work and to work through our customer backlog.

We drove exceptional production volumes and high shipments to North America, our bookings have been strong.

Globally, we continued strength across a broad range of applications, including data center and telecom infrastructure.

Factory building automation appliances, and automotive electronics, driven by EV applications.

Global sales remained strong and exiting the third quarter, our electronics book to Bill remained above one but.

But we do see some slowing in bookings in China.

There's some evidence of electronics and new customers building inventory and distribution partners are working to increase inventory levels. However weeks of inventory remained weak.

Moving onto our automotive products segment, we achieved solid growth within a difficult supply chain environment for the passenger and commercial vehicle space. Thanks to the hard work of our global teams.

Our third quarter performance was impacted by customer shutdowns and all regions with the ongoing chip shortage.

Despite this our passenger vehicle business grew at 13% versus last year, while global car build decline.

Our growth was driven by our continued content growth in electric vehicles.

<unk> mix of higher end vehicles and share gains in China on low voltage systems.

Although a less significant factor. We are also seeing some customer inventory build coming from partially built cars not reflected in car build data.

And some inventory build at tier ones.

There continues to be strong demand across our commercial vehicle end markets. However, we are seeing similar supply chain disruptions across suppliers and customers.

Man for our commercial vehicle products was driven by strength in material handling truck and bus and construction and agricultural equipment markets.

Looking ahead, we expect ongoing supply shortages customer shutdowns.

This is further validated by the significantly lower industry car build forecast of 75 million cars, which reflects nearly flat car builds year on year.

Beyond this noisy backdrop, we see a number of ongoing content growth opportunities across the passenger car and commercial vehicle end markets we serve.

Turning to our industrial products segment, a number of our core markets continued to show strength during the third quarter, primarily HVAC AC renewables energy storage and general industrials.

Mining continues to improve and nonresidential construction and North America oil and gas markets are seeing pockets of recovery.

Going forward, we expect continued solid demand with typical seasonal softness in HVAC and MRO markets.

Turning now to acquisition activity on slide five I'm.

I am pleased to report that knocked on October 20th we made further progress on our growth strategy with our announcement to acquire Carling technologies, a global leader in switching circuit protection and power distribution technologies.

With its strong brand name and a long history of innovation quality and reliability Carling enhances our presence and growth in commercial vehicle and telecom infrastructure markets.

Our primary engineering capabilities application expertise and product portfolios.

This will allow us to drive deeper engagement with a broader base of customers and distribution partners enhancing our platform for future growth.

We are excited to welcome Carling employees to the little juice team and expect to close the transaction during the fourth quarter of 2021.

Carlin will operate within our commercial vehicle business incorporated it in our automotive products segment.

We look forward to discussing further during our fourth quarter earnings call.

Now, let's move on to key design wins in the end markets we serve.

Within our industrial end markets on slide six we are seeing strong design wins with the growing momentum in sustainability.

Hvac's applications, we continue to benefit from the integration of our Heartland controls acquisition.

In North America, we had design win for an industrial refrigeration application and leveraged a product from the heartland controls portfolio to secure design win for an energy storage application.

We also captured new business for energy storage and renewable energy applications across Asia, Europe, and North America.

With our reputation for service reliability and support we also had industrial safety design wins in North America for oil and gas and mining applications.

As well as a ground fault protection win with the U S equipment manufacturer.

Turning to our transportation end markets on slide seven.

We leveraged our strong customer relationships and technical Knowhow closeout dozens of business opportunities in the quarter.

We continue to invest in E mobility and are seeing robust design activity in the EV space and secured several strategic wins in the quarter.

In India, we had wins for two and three wheel EV applications with protection products as well as the temperature sensor for EV battery management system.

We also secured onboard high voltage E V wins in Korea, and Europe, as well as a major win for charging for a charging application in Europe.

Within commercial vehicles, we had an important design win for our high voltage power distribution module with a European electric bus manufacturer.

We secured this win based on our engineering capabilities and successful record on our previous project.

We expect the ongoing push towards electrification to drive significant new business opportunities for us and we're excited to be a key enabler of a more sustainable and safer world.

Globally as new OEM programs for traditional passenger vehicles continue to drive greater content for our reliable protection products, we secured a wide range of design wins with a broad set of customers.

With the ongoing electronic vacation of transportation applications, we had an automotive electronics wins in the quarter, securing new business in Asia for led lighting.

Dash board and camera applications.

In Japan, and China, we had design wins to protect window door and seat motor applications.

Also secured an automotive sensor win in Europe for our solar sensor applications.

We think commercial vehicles, we had several design wins in the quarter and construction equipment applications.

Our strong customer relationships and ability to respond to customers' needs help secure a win in North America with a global manufacturer and in China based on our high quality product performance over a lower cost alternative.

We also secured a sensor assembly win in Europe for heavy truck fuel heater application and.

In addition design activities and material handling remains solid.

With our deep partnerships, we leveraged that success of a prior win to expand our business with a European forklift manufacturer.

On to slide eight.

With a strong mix of product features and our reputation for industry, leading technical support we continue to see robust design wins across a wide spectrum of applications and our electronics end markets.

Driven by the ongoing trend towards a more connected world. We had two strategic data center wins in Asia, one for a network server application and the other for an uninterruptible power supply applications.

We secured appliance wins during the quarter in Asia, and Europe and are building solutions win in North America.

At the power tool market shifts from combustion engines to electrification with the focus on sustainability.

We are seeing expanded content opportunities for our products.

With rapid technical support.

Design wins for power tools, and Asia and in North America.

And separately in Europe, we secured a silicon carbide opportunity for power supply applications on a semi conductor manufacturing tool.

Across the high growth industrial transportation and electronics applications, we target serve and support.

We're building a pipeline of new business opportunities that aligns with our long term growth strategy.

As we continue to work closely with our customers, we remain well positioned to provide innovative solutions and technical expertise they required power of sustainable connected and safer world.

These value added attributes will enable us to secure our new business opportunities and ultimately grow our collective businesses for the long term.

I will now turn the call over to Neal 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 10.

Sales in the quarter were a record $540 million growing 38% versus prior year and 3% sequentially.

GAAP operating margins were 22, 3%, while adjusted operating margins were 22, 8% up 330 basis points sequentially.

Operating margins in related Incrementals were exceptionally strong this quarter driven by strong performance from our electronics segment.

Third quarter GAAP diluted earnings per share was $3 69, and adjusted diluted EPS was $3 95.

3% over prior year and 16% sequentially.

This included a GAAP effective tax rate of 19% and an adjusted effective tax rate of 17, 6% 160 basis points higher than our forecast due to the mix of income across geographies.

While we see ongoing supply chain challenges in the marketplace, we've been able to meet demand needs through capacity additions and the exceptional performance of our operating teams globally.

Input costs from metals and other materials as well as transportation costs continued to be the biggest headwind and we expect the full year impact of about 300 basis points for me.

We are mitigating about half of these headwinds through our pricing actions with some additional offsets coming from lower than typical levels of discretionary spend in the <unk>.

Ongoing COVID-19 environment.

We generated $114 million in operating cash flow and $89 million in free cash flow in the quarter year.

To date, we generated $183 million in free cash flow of 79% conversion from net income.

While our working capital metrics remain in line with our expectations in this environment cash generation year to date has been moderated by about $100 million from working capital.

<unk> holding additional stock of critical raw materials.

With the level of sales growth driving the increased working capital, we expect our free cash flow conversion to be lower than 100% with net income for the year on our five year free cash flow conversion target of 100% remains unchanged.

Moving onto our segment on slide 11, I'll start with electronics.

Were a record $347 million up 36% versus last year and up 7% sequentially.

Sales were stronger than we expected as we work through backlog largely across our passive component while driving continued growth.

Operating margins in the quarter were 28, 9%.

Our strong margins, where we felt that favorable regional and product mix at these robust volume levels as well as benefits from price realization.

Automotive sales were $124 million in the quarter up 19% versus last year, but down 7% sequentially.

Growth across our commercial vehicle products with 38% over last year.

Continued strength across a number of commercial vehicle markets, especially North America, India.

Mitigated in part by customer supply chain challenges.

Sales in our passenger vehicle products grew 13% versus last year. Despite card, though declining over the same period due to the ongoing chip shortage.

We continued to benefit from strong content growth due to both the vehicle mix and growth in electric vehicles as well as some customers maintaining additional inventory of our products.

Operating margin for this segment were 12, 7%.

<unk> high metal prices affected margins by over 300 basis points.

Last year.

As we've discussed in the past this segment is impacted the most by higher commodity prices can get product content.

Sales for the industrial segment at $68 million grew 116% and 5% sequentially with operating margins of nine 7%.

This segment experienced some supply disruptions in the quarter that unfavorably impacted production levels and margins.

Excluding heartland margins for this segment grew in the low teens range.

We are working towards our high power.

We are working towards our high teens margin target for this segment as we continue our integration efforts for Heartland.

Turning to our fourth quarter outlook on slide 12, and customer demand remains strong.

Incorporated currently known challenges across manufacturing and supply chain operations into our forecast, including across our customers and suppliers.

We also assume there are no new material disruptions from Covid.

We expect fourth quarter sales in the range of $503 million to $517 million up 27% versus last year.

We expect to be down 5% sequentially at the midpoint closer to our typical seasonality with sales down across all of our segments.

We project fourth quarter adjusted EPS to be in the range of $2 80 to.

The $2 96 at this.

This assumes an adjusted effective tax rate of 18, 5% for the quarter.

The fourth quarter, EPS midpoint is down 27% sequentially and up 29% over prior year.

Our forecast reflects the impact of sequentially reduced volumes across all of our businesses and more typical product and geographical mix across the electronics segment.

Our forecast also includes a 14th week due to our reporting calendar.

And this is during holiday, we expect sales and profitability to be lower than normal.

Also our forecast does not include any impact from the pending Carling acquisition, and we don't expect it to have a material impact to our fourth quarter results.

We'll share further details on Carlin during our fourth quarter earnings call.

For the full year, we are projecting a tax rate of 17, 5% and capital expenditures.

<unk> $80 million to $85 million.

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

Thanks.

Before concluding as highlighted on slide 13.

Like to mention that we have published our 2020 sustainability report, which is available in the Investor Relations section of our website.

<unk> highlights our commitment to environmental social and governance initiatives.

We have focused our efforts on creating a solid foundation for our sustainability program to ensure future success as we work towards the goals discussed throughout the report.

We are pleased to share our progress and look forward to providing future updates as we strive for continuous improvement on our sustainability journey.

In summary on slide 14 year to date, we have delivered exceptional performance within an ongoing challenging environment we.

We continue to closely monitor supply chain challenges across our suppliers and customers and have proven our sound business fundamentals enable us to strategically crop.

As we near the end of a challenging 2021.

Pleased to achieve significant revenue and earnings growth for this year and remain well positioned to deliver ongoing superior value for our stakeholders.

And with that I will now turn the call back to the operator for Q&A.

Thank you.

Quick question, you will need to press star one on your telephone to withdraw your question just press the pound key once again Thats star one for questions one moment for questions.

Yeah.

Our first question will come from the line of Luke junk from Baird you may begin.

Good morning.

Thanks for taking my questions first maybe a question for me and I'm wondering if it'd be possible to provide just a high level margin walk from a longer term range for electronics margins to this quarter's results I don't know if you can put some of the factors that you spoke to in the prepared remarks into buckets, essentially what I'm trying to tease out here is what might be sustainable.

We will have higher absolute levels of activity persist versus what was likely more onetime in nature of this quarter. Thanks.

Sure.

So just stepping back when we had definitely very John sales very strong margins across electronics segments for the quarter.

I call on all the stars aligned really for the quarter on this to your point on bucket hygiene.

I've mentioned favorable product mix, both geographic or regional product mix and as well as on the product side I think that was about two thirds COVID-19 and I would say that was atypical for us but really dwelled.

That strong margin profile, we had I'd say no.

Third came from the combination of the stronger volumes that we saw much higher than we expected.

A big part of that was coming from us really working to clear out backlog that we've had as well as just with all the supply chain Choppiness going on we had seven.

Late in the quarter, we had some deliveries that basically came through the customers and so revenue got recognized it probably would've been in the fourth quarter on that and then I would say part of that last third also price realization, we've been talking about pricing that we've been taking pricing actions and <unk>.

You can see the benefit of that.

Both significantly any of them.

Just because of our go to market strategy there.

Okay. That's really helpful. Thank you for that detail maybe a question for Dave in terms of distributors in the electronics segment and just wondering your view on the appetite for inventory restocking you'd mentioned inventory at distributors and your comments.

That might look like as the industry.

Theoretically catches up to demand from a supply standpoint distributors, obviously, a big part of the electronics business. What are you hearing from them and ultimately how meaningful the job or could this be if we start looking out into 2022.

Alright, thanks, Thanks Lou.

Obviously within electronics, we watch very carefully to look for kind of signs of inventory building and things like that we've talked openly about the fact that on average for our distribution partners and electronics portion of our business weeks of inventory as kind of normal range is 11% to 14.

It remains lean today, obviously, our distribution partners would like to build more inventory and they have orders on us to do that in some cases.

But sell through continues to be very robust so really.

Theres not a lot of inventory build yet and the channels there with that said there clearly is some evidence that.

Some of the EMS partners and some Oems are trying to carry some heavier inventory positions than normal. So there are pockets out there where theres some inventory build right now it's not really <unk>.

Our distribution partnerships.

So we continue to watch that so there is certainly they have an appetite.

To try to increase that.

So we'll see how that develops in the coming quarters.

David Thanks.

Yes. Thanks, Luke appreciate your questions, we'll take our next caller please.

Our next question comes from the line.

Ackerman Cowen May begin.

Good morning, Paul.

Hey, good morning. Thanks, Thanks, everyone. Congrats on the results.

If I may I'd also like to discuss electronics.

How much of the uplift in electronics is coming from automotive.

Electronics being sold into battery electric vehicles and hybrids.

I guess, what I'm trying to understand is how much of the uplift in electronics operating profit. This year and also this quarter has been driven by new product set.

Arguably carry higher than corporate average profitability.

Today, but also going forward.

Yes, I'll take that Carl.

I think clearly we're seeing automotive electronics.

Being one of the growth drivers within our electronics segment, along with several other end markets that are quite robust whether it's.

Datacom applications telecom infrastructure those appliances.

Building and home automation sorts of things, there's a lot of end markets that are pretty robust automotive electronics is certainly there and while on broad based applications car builds are pretty soft obviously, a lot of that growth is coming from electrification applications here.

I would not say that the automotive electrification opportunities have a margin profile above our norm.

So.

New products are always important for us to sustain high margins in our business and electronics, so continually rolling out new versions, new products and new introductions.

Keeps our margins.

That's a key part of our strategy, but I don't think automotive electronics is kind of out driving that at this point.

Understood Thanks for that.

If.

I wanted to shift to free cash flow and balance sheet, if I may.

Inventory days on your balance sheet rose.

I think roughly 10% sequentially. That's 96 days it appears to be largely in line with where inventory has been in the past and so I guess my question is.

Hi.

Are you comfortable with the amount of inventory you have on your balance sheet today to support.

Existing customer demand.

And then secondarily, how might we think about working capital flow through.

Both in the calendar Q4, and early part of 2022 as you start to it.

<unk> some of that order backlog from customers. Thank you.

Sure.

In generally I talked about in the prepared remarks that we've seen about $100 million.

Our cash flow tied up in working capital since the beginning of the year.

About 70% of that coming from inventory and we've seen about a 10 day increase in our days of inventory on hand.

Just from a dollar perspective.

About a third of that increase is really just because of that higher level of sales. We have so that doesn't impact the game and I would say the rest its really two main drivers one being again to the prepared remarks, I mentioned with raw materials. We are we aren't checking our businesses and then come back to hold excess inventory of critical parts.

Exactly so we can support customers for.

Things that are a little harder data, where we feel like there are some supply chain issues that we want to get ahead of and then the second piece is just with all again supply chain Choppiness.

Seeing a quite Florida transportation time, some logistics bottlenecks, we have where we can.

From a cost perspective migrated transport the ocean as well and so that extends the amount of inventory sitting out there. So that's really the other factor that's out there.

Things start to normalize.

And some of those areas.

All the work on bringing that down.

And then really last question on just other types of working capital I would say the rest of the working capital build largely in receivables, which are in line with sales at this point our metrics are well in line with what they've been in the past on base sales outstanding and set up the circuit level, we'll see a more.

Even from a cash flow perspective.

Very helpful. Thank you.

Thanks, Paul I appreciate your questions, we'll take our next caller please.

Your next question comes from the line.

<unk> from Oppenheimer.

Good morning, Chris.

Hey, good morning, Congrats on some final numbers there.

So I'm surprised.

I haven't heard you call out kind of mixed to this extent at electronics.

Have a little little bit of a fundamental secular cause it to.

And.

That may be the case at automotive right now.

But given over 100% sequential incrementals in.

Approximately a 100% decrementals implied <unk>.

I'm curious if we could just spend a little more time on that.

Sure Chris.

Similar to the earlier question, we got about this let me say again, the bulk of the outsized margin that we experienced with aircraft electronics segment really once again I'll call. It the stars aligning.

A lot of people talk about mix, but perhaps in terms of the product mix within this segment. We've got a lot of different product lines and when you have to just see some stronger sales and a more favorable margin product lines that we have and then also David commented in his prepared remarks, we had some stronger demand in North America, and again thats favorable mix for us.

Just happened to be with the competition in the quarter that was really good.

Bulk of the statements ability that came through and I would also say the comment on volumes and we're guiding sequentially down, which again is very typical for us and with normal seasonality.

Buying patterns work and so we had some outside outsized volume again comes through this time with the transportation Choppiness going.

Some customer received clear in the third quarter, we were expecting wouldn't happen until the fourth quarter.

I come back to we've always talked about our target margin profile can easily sometimes be over 20%, but we never closed here. We're always going to have the same margin every quarter. This segment goes through up cycles down cycles, and so we're looking at a multiyear multi quarter average, which.

It can be around 20% or so and we're going to have some outside downsides quarter part of that.

Okay great.

The silicon carbide when caught my ear I'm curious if you could just put that into context of your overall overall initiative around CCAR.

Yes, yes, silicon carbide I've talked about that in the past, we see that as a critical part of our product offering in our power semiconductor business.

So as we talk target medium and high power applications Silicon carbide obviously.

Some advantages within that.

We're not kind of all in if you will on silicon carbide going after the kinds of capabilities and volumes to support maybe traction drives and passenger car target. These other areas.

We bring unique value of this happened to be in the case of <unk>.

Conductor manufacturing equipment.

We've got a nice design win in the power supply systems within that.

Certainly a growing market.

Phase and so it was a good win there where we brought some unique value.

Thanks, just last one if I may as you look for electronics, if you look at your book to Bill.

Fulfillment and sell through various factors how would you assess the signals for.

Yeah early read on top line expansion prospects for 'twenty two.

Yeah.

Certainly those are all the questions, but we happen to have an event last night with many of our senior leaders from distribution partners in Rep partners and.

So we had a lot of discussions around that and what I would say is unknown underlying drivers of the demand profile continue to look pretty robust. So we don't really see.

Near term changes to those fundamental drivers.

Obviously, it's a pretty hot market right now and the.

Shortages out there and things so we watch very carefully for inventory builds and things like that like I spoke about earlier.

Right now I think we're pretty optimistic.

About what 2022 looks like in the electronics side of the business as well as the overall business, but certainly electronics tend to be.

Pretty optimistic about next year.

Thanks for the candor.

My first question.

Our next question will come from the line of Nick Todorov from Longbow Research you may begin.

Yeah, Hi, thanks, Yeah, Thanks, and good morning.

Congrats on great results.

I also have a question around the whole electronics.

Margin in kind of a step down sequentially in the fourth quarter. So if we look at and compare the results versus the June quarter, which are kind of comparable in terms of volume to the December quarter, It still looks like.

The decremental on the gross margin and operating margin line, it's about 80%, which is quite a bit above normal and I think you spoke about a third of the improvement coming up from price.

Doesn't show up at least.

In the December quarter are you seeing incremental price pressure into the December quarter, or how should we square. The fact that you know.

Margin operating margin is coming down all the way to give it about 18%.

<unk> versus <unk> 19, and a half in the June quarter.

Sure. So on the Decrementals when you are looking at it from a company perspective, we gave just some general color at all of our segments would be sequentially down on sale.

But the Decrementals are really total company, but I would say is if you look at Q2 versus Q4, a couple of big factors that we've been talking about one is with sales down our production volumes are also down versus the second quarter. So we've talked about a number of times, we get good leverage on production so when.

Option levels are down not just necessarily electronics, but also.

Motive segment as well as our industrial I think we're seeing the unfavorable leverage impact on that and if you look at the trend on both metals pricing, our metals, which is.

A big headwind for us that had been talking about for some time.

Costs are up also over that period of time as well as the logistics cost.

Those have gone up over the past couple of quarters as well.

I would say lastly, I talked about the fact that our reporting calendar concludes that 14th week, which we expect to be pretty weekend sales.

Pretty weak and profitability as well because you take an entire week of expenses.

Sotheby's.

So the combination of all of that is really what's driving that.

Decrementals to look at there.

Okay. It makes sense.

Also can you talk about.

Cost increases so I think you mentioned that you've passed the house of the inflation cost you've seen is that across the company or is that in certain segments.

Costs have you pass through in automotive it and how much do you expect to pass through at the beginning of 'twenty two.

Potentially negotiate a new contract.

Yeah. So the numbers I quoted were really total company bite into the recap and talked about for the year from where things are at right. Now we're looking about 300 basis point headwind.

Due to the metal and metal pricing year over year as well as just the increased costs from a logistics standpoint again from a company perspective, we're offsetting about half of that price.

Still consistent with what I've mentioned, the past couple of quarters.

Let me see.

Much more of a pricing benefit coming through our electronics segment again, because if I go to market strategy there.

Heavy heavier and distribution, where we're the price the price increase that came through.

Other end of the spectrum, it's across the automotive segment, whether that's in our passenger vehicle and commercial vehicle businesses lot of long term contracts in place with a number of different Oems.

Pricing moves a lot slower and yes, as we go through contract negotiations as they are coming to <unk> looking at we're looking at all of the pricing and causes all of that but we're going through those contract by contract. So it definitely moves a lot slower.

Okay, and maybe a last question how should we think about the carbon technologies accretion and impact on profitability at once it comes on board and also can you talk about what products that are coming from carbon or incremental to your portfolio and what it's complementary.

Okay, Yes.

Yes.

Let me talk a little bit about the products and what's complementary.

For our business.

Speak to the financial aspects of it but currently we are quite excited about the acquisition we think it's a.

Strong fit into our business towards strategy it will roll up into our commercial vehicle portion of our business, which is within the automotive segment.

The product technology as they bring their one of the leading.

Brands and companies and switching for the commercial vehicle space and particularly strong here in North America, but also pretty strong in Europe and Asia.

We have a switching offering within our commercial vehicle today. It enhances that specifically it really takes out a leadership position now the commercial vehicle space. They also do some power distribution systems within commercial vehicles also an area, where we've been growing nicely. So it's very complementary there they are.

Also have an offering.

Of circuit Breakers that are really largely targeted to the telecom infrastructure space again another.

Market, where our business is very focused.

It's very well enhances add scale allows us to bring more capabilities to our customers.

Yeah.

And the question on financials.

The point in the transaction that we just signed the deal we're in the midst of regulatory approval right now and so as can't answer but right now two companies were operating independently and so.

Really our plan is to provide a lot of the financial details I know you and others are looking for in our fourth quarter earnings.

Right.

Thanks, Nick appreciate your questions, we'll take our next caller please.

Our next question comes from the line of Matt Sheerin from Stifel. You may begin.

Good morning, Matt.

Yeah good morning.

One question just regarding your comment about capacity adds.

Certainly being beneficial.

Could you be more specific about what you are in terms of where you've been adding capacity and how that is impacting your lead times, because I know lead times in electronics across your portfolio have been stretched.

And that's led to obviously very strong bookings and book to Bill and perhaps some double ordering so I'm wondering what <unk> looked like and how you expect bookings to adjust accordingly.

Yes, Matt.

Clearly, having the capacity in place to serve our customers.

This.

As a critical partner.

Our business so.

I've talked about this maybe in the past where.

Our business is not particularly capital intensive. So therefore part of our strategy is always to try to have some flex capacity in place. So when we do see in cyclical markets and uptick in.

Demand that we can flex up better than most.

Because what we find is we'll pick up some share during the up cycle and while we won't necessarily maintain all of that because of our better ability to serve we do some of that share we retain when the cycle normalizes. So it's a key part of the strategy, we've been adding capacity really kind of across the board.

All segments of the business, we've been adding capacity quite frankly, if we could get delivery of some of the components and equipment that we need we would add it faster.

But just like.

Just like other parts of the pets limited on the ability to add the capacity and speed you, we'd like to with that said we begin we're beginning to get some of that capacity online and although our lead times have stretched.

Yep.

They're kind of flat.

So they are no longer today stretching further so they're kind of leveled off.

And we think Thats kind of the first time right and so.

So I think we generally are a pretty healthy healthy and our ability to serve that.

Okay, Great and do you have one other question just regarding your Opex, which was down sequentially and you talked about the reasons behind that.

As we looked at the December quarter, you've got an extra week.

<unk> expenses as you said, so should we expect actually.

Absolute inventory Im sorry, opex dollars could be up sequentially.

Yes, Thats also in general partner.

Margin decremental question that I answered earlier, it's going to be a little bit higher expenses than we would normally see just because of the weak sales quarter. When you look on a percentage basis correct.

Okay. Thank you.

Thanks, Matt for your questions.

Yeah.

Sure.

Some questions. Our next question comes from the line of David Kelley from Jefferies.

Good morning, David.

Hey, good morning team.

Thanks for taking my questions I believe you noted some tier one and partial vehicle builds in autos, just curious as to how meaningful.

Do you think that build is it maybe put another way do you see any change to your targeted outgrowth algorithm in autos in the coming quarters.

Sure.

Yes.

Certainly, it's well known that there are a lot of vehicles that have been produced.

Minus maybe some modules and things like that that are sitting out there gonna have finished or or 90% finished.

So clearly in those types of vehicles most of our products are in those vehicles ready to go but theyre not reported as cargo. So it affects kind of that growth over car build number.

And while we don't think it was a significant part of our third quarter.

In fact, there was some inventory impact there.

If you look back at over the last 12 months.

So, let's say the last four quarter as a whole. So that's why we kind of started to see some of this and I think if you look back.

We began to talk a little bit about this in the fourth quarter last year.

It's an imperfect.

Number because you're kind of off the back your way into it we don't have perfect visibility, but we would probably estimate that from inventory builds within the automotive market.

Over the last 12 months, it's probably in that $20 million, maybe as high as $25 million with the.

Inventory builds during that period of time.

We're usually level loaded across that time.

Necessarily all done in one quarter.

So clearly theres a higher level of inventory there some of that will kind of get cleared out and the math when they finished vehicles and put them on the lots.

And then the others really sitting mainly of tier ones, where they have been instructed by the Oems.

To carry a heavier inventory position in order to support the ability to ramp up as quickly as possible.

Some of that will work itself back out over time, we don't really know when that might be.

And our conjecture right now is it probably doesn't all work itself back out some level of that becomes a bit of a new normal of how to operate.

And a and a pretty <unk>.

Disruptive environment.

Supply chain. So we will see some of that kind of work its worked its way back out over time.

But as far as impacting our outgrowth sort of algorithm. If you will we've had very strong outgrowth, certainly some of that coming from distribution or not distribution, but inventory.

But also vehicle mix the focus on higher end vehicles to focus on <unk>. Those are all higher content for us that's been quite favorable for us.

We've got some.

Yeah.

Wins that have allowed us to actually gain some market share in some pockets as well.

So I think we're in a positive trend is certainly on our outgrowth.

<unk>.

Okay got it. Thank you that's really really helpful color and then just switching gears to sizeable acquisitions now year to date, how should we think about ongoing M&A appetite just given your earnings power and what feels like really strong free cash flow visibility here.

Yeah.

We've been talking about for a while that.

Back in 2020, we will make sure we were gearing up and we had the balance sheet, so that as the M&A activity pick back up over the past.

12, 15 months that we were going to be ready for that and so.

Two acquisitions that's what.

Hoping for it to find some nice nice acquisitions to take which we have and really there's no change to our ongoing strategy on acquisitions. We continue to look at the balance sheet remains strong.

Leverage perspective still quite low so it gives us the opportunity to really take a look at a lot of different assets out there and I think we talked about a number of different end markets that we would look at.

Ranging from commercial vehicles, we talked about industrial end markets of course need to look at electronics type businesses that tuck into what we have today and so we continue with our with our activity on.

So our priority and that's our goal our first use of cash is acquisitions.

Okay, great. Thanks, so much I appreciate it.

Thanks for your question, David we'll take our next caller please.

Our next question comes from the line of Christopher Glynn from Oppenheimer, you may begin.

I was just looking for an update on the capacity shift and expansion for electronics into the Philippines, how that's going and how we might consider that.

Either cost savings or product.

<unk> throughput.

Impact.

As the timeline progresses.

Yes, so clearly that's a lot of footprint work, we've been doing it the power semiconductor business and we've talked about that quite a bit.

The new factory location has been completed.

We've been qualifying lines as we've been importing them.

I would say, it's a challenging environment.

To do that ramp up first of all to get the equipment as quickly as you'd like.

Secondly, customer approvals can take a long time and in today's world that is all done virtually.

Get customers in for visits because of the Covid situation.

So that kind of puts some challenges, but with that said we're kind of.

Pretty pretty well on track we see that.

<unk> into the Philippines, and getting the bulk of that kind of mid to late next year and so the bulk of the impact from the pick up from that will happen going into 2023.

And there is ongoing work beyond that as well as we continue to work on our footprint and our and our cost position to be as competitive as possible in the power semiconductor side.

Great. Thank you.

Thanks, Chris for your follow up question.

That concludes today's call. Thank you for joining us and your interest in little pieces. We look forward to speaking with you during the Baird and Stifel conferences.

Have a great day.

Yes.

[music].

Okay.

[music].

[music].

Good day, everyone and welcome to the fifth third quarter 2021 earnings conference call. Today's call is being recorded at this time I will turn the call over to the head of Investor Relations Tricia. Please proceed.

Good morning, and welcome to the little fuels third quarter 2021 earnings Conference call.

With me today are Dave Heinzmann, President and CEO, and Neil Stefano Executive Vice President and CFO.

Yesterday, we reported results for our third 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 two far 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 Form 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 on 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 four.

We delivered a quarter of outstanding performance with our ability to effectively execute within this challenging supply chain environment.

Moving on our strength over the past several quarters, our highly skilled teams are continuously improving our global operations to meet customer demand.

Our results reflect their commitment and hard work.

We achieved record third quarter performance with sales of $540 million and adjusted EPS of $3 95.

Minerva will provide additional color on our strong financial results.

Moving on to performance within our segments.

During the third quarter, our electronics products segment experienced strong revenue growth.

Our performance was driven by our ongoing operation operational execution and cost.

Passing the additions coming online to work and to work through our customer backlog.

We drove exceptional production volumes and high shipments to North America, our bookings have been strong.

Globally, we continued strength across a broad range of applications, including data center and telecom infrastructure.

Factory building automation appliances, and automotive electronics, driven by EV applications.

Global sales remained strong and exiting the third quarter, our electronics book to Bill remained above one but.

But we do see some slowing in bookings in China.

There's some evidence of electronics and the customers building inventory and distribution partners are working to increase inventory levels. However weeks of inventory remained Lee.

Moving on to our automotive products segment, we achieved solid growth within a difficult supply chain environment for the passenger and commercial vehicles space. Thanks to the hard work of our global teams.

Our third quarter performance was impacted by customer shutdowns and all regions with the ongoing the chip shortage.

Despite this our passenger vehicle business grew at 13% versus last year, while global car build decline.

Our growth was driven by our continued content growth in electric vehicles.

Favorable mix of higher end vehicles and share gains in China on low voltage systems.

Although a less significant factor. We are also seeing some customer inventory build coming from partially built cars not reflected in car build data.

And some inventory build at tier ones.

There continues to be strong demand across our commercial vehicle end markets. However, we are seeing similar supply chain disruptions across suppliers and customers.

Man for our commercial vehicle products was driven by strength in material handling truck and bus and construction and agriculture equipment markets.

Looking ahead, we expect ongoing supply shortages customer shutdowns.

This is further validated by the significantly lower industry car build forecast of 75 million cars, which reflects nearly flat <unk> year on year.

Beyond this noisy backdrop, we see a number of ongoing content growth opportunities across the passenger car and commercial vehicle end markets we serve.

Turning to our industrial products segment, a number of our core markets continue to show strength during the third quarter, primarily HVAC AC renewables energy storage and general industrials.

Mining continues to improve and nonresidential construction and North America oil and gas markets are seeing pockets of recovery.

Going forward, we expect continued solid demand with typical seasonal softness in HVAC and MRO markets.

Turning now to acquisition activity on slide five I'm pleased to report that on October 20th we made further progress on our growth strategy with our announcement to acquire Carling technologies, a global leader in switching circuit protection and power distribution technologies.

With its strong brand name and a long history of innovation quality and reliability Carling enhances our presence and growth in commercial vehicle and telecom infrastructure markets.

Our primary engineering capabilities application expertise and product portfolios.

This will allow us to drive deeper engagement with the broader base of customers and distribution partners enhancing our platform for future growth.

We are excited to welcome Carling employees to the little juice team and expect to close the transaction during the fourth quarter of 2021.

Carlin will operate within our commercial vehicle business incorporated in our automotive products segment.

We look forward to discussing further during our fourth quarter earnings call.

Now, let's move on to key design wins in the end markets we serve.

Within our industrial end markets on slide six we are seeing strong design wins with the growing momentum in sustainability.

Our HVAC applications, we continue to benefit from the integration of our Heartland controls acquisition.

In North America, we had design win.

In industrial refrigeration application and leveraged a product from the heartland controls portfolio to secure design win for an energy storage application.

We also captured new business for energy storage and renewable energy applications across Asia, Europe, and North America.

With our reputation for service reliability and support we also had industrial safety design wins in North America for oil and gas and mining applications as well as a ground fault protection win with a U S equipment manufacturer.

Turning to our transportation end markets on slide seven.

We leveraged our strong customer relationships and technical Knowhow closeout dozens of business opportunities in the quarter.

We continue to invest in E mobility and are seeing robust design activity in the EV space and secured several strategic wins in the quarter.

In India, we had wins for two and three wheel EV applications with protection products as well as the temperature sensor for an EV battery management system.

We also secured onboard high voltage <unk> in Korea, and Europe, as well as a major win for charging for a charging application in Europe.

Within commercial vehicles, we add an important design win for our high voltage power distribution module with a European electric bus manufacturer with.

We secured this win based on our engineering capabilities and successful record on our previous projects.

We expect the ongoing push towards electrification to drive significant new business opportunities for us and we're excited to be a key enabler of a more sustainable and safer world.

Globally.

As new OEM programs for traditional passenger vehicles continue to drive greater content for our reliable protection products, we secured a wide range of design wins with a broad set of customers.

With the ongoing electronic vacation of transportation applications, we had automotive electronics wins in the quarter, securing new business in Asia for led lighting.

Dashboard and camera applications.

In Japan, and China, we have design wins to protect window door and seat motor applications.

We also secured an automotive sensor win in Europe for our solar sensor applications.

Within commercial vehicles, we had several design wins in the quarter and construction equipment applications.

Our strong customer relationships and ability to respond to customers' needs helped secure win in North America with the global manufacturer and in China based on our high quality product performance over a lower cost alternative.

We also secured a sensor assembly line in Europe, where our heavy truck fuel heater application and.

In addition design activities and material handling remains solid.

With our deep partnerships, we leveraged that success of a prior win to expand our business with a European forklift manufacturer.

On to slide eight.

With a strong mix of product features and our reputation for industry, leading technical support we continue to see robust design wins across a wide spectrum of applications and our electronics end markets.

Driven by the ongoing trend towards a more connected world. We had two strategic data center wins in Asia, one for a network server application and the other for an uninterruptible power supply applications.

We secured appliance wins during the quarter in Asia, and Europe and are building solutions win in North America.

As the power tool market shifts from combustion engines to electrification with the focus on sustainability.

We are seeing expanded content opportunities for our products.

With rapid technical support.

<unk> wins for power tools, and Asia and in North America.

And separately in Europe, we secured a silicon carbide opportunity for our power supply applications on a semi conductor manufacturing tool.

Across the high growth industrial transportation and electronics applications, we target serve and support we are building a pipeline of new business opportunities that aligns with our long term growth strategy.

As we continue to work closely with our customers, we remain well positioned to provide innovative solutions and tech.

Technical expertise they required a power of sustainable connected and safer world.

These value added attributes will enable us to secure new business opportunities and ultimately grow our collective businesses for the long term.

I will now turn the call over to Neal 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 10.

Sales in the quarter were a record $540 million growing 38% versus prior year and 3% sequentially.

GAAP operating margins were 22, 3%, while adjusted operating margins were 22, 8% up 330 basis points sequentially.

Operating margins in related Incrementals were exceptionally strong this quarter driven by strong performance from our electronics segment.

Third quarter GAAP diluted earnings per share was $3 69, and adjusted diluted EPS was $3 95.

83% over prior year and 16% sequentially.

This included a GAAP effective tax rate of 19% and an adjusted effective tax rate of 17, 6% 160 basis points higher than our forecast due to the mix of income across geographies.

While we see ongoing supply chain challenges in the marketplace, we've been able to meet demand needs through capacity additions and the exceptional performance of our operating teams globally.

Input costs from metals and other materials as well as transportation costs continued to be the biggest headwind and we expect the full year impact of about 300 basis points from me.

We are mitigating about half of these headwinds through our pricing actions with some additional offsets coming from lower than typical levels of discretionary spend in the ongoing COVID-19 environment.

We generated $114 million in operating cash flow and $89 million in free cash flow in the quarter.

Year to date, we've generated $183 million in free cash flow of 79% conversion from net income.

While our working capital metrics remain in line with our expectations in this environment.

Cash generation year to date has been moderated by about $100 million.

Working capital cost, including holding additional stock of critical raw materials.

With the level of sales growth driving increased working capital, we expect our free cash flow conversion to be lower than 100 presented net income for the year on our five year free cash flow conversion target of 100% remains unchanged.

Moving on to our segments on slide 11, I'll start with electronics.

Sales were a record $347 million up 36% versus last year and up 7% sequentially.

Sales were stronger than we expected as we work through backlog largely across our passive components, while driving continued growth.

Operating margins in the quarter were 28, 9%.

Our strong margins were a result of favorable regional and product mix at the robust volume levels as well as benefits from price realization.

Automotive sales were $124 million in the quarter up 19% versus last year and down 7% sequentially.

Growth across our commercial vehicle products was 38% over last year.

We saw continued strength across a number of commercial vehicle markets, especially North America and Europe, So mitigated in part by customer supply chain challenges.

Sales in our passenger vehicle products grew 13% versus last year. Despite car builds declining over the same period due to the ongoing chip shortage.

We continued to benefit from strong content growth due to both the vehicle mix and growth in electric vehicles as well as some customers maintaining additional inventory of our products.

Operating margins for this segment were 12, 7%.

Continued high metal prices affected margins by over 300 basis points versus last year.

As we've discussed in the past this segment is impacted the most by higher commodity prices given the product content.

Sales for the industrial segment of $68 million grew 116% and 5% sequentially with operating margins of nine 7%.

This segment experienced some supply disruptions in the quarter that unfavorably impacted production levels and margins.

Excluding heartland margins for this segment grew in the low teens range.

We are working towards our high power.

We are working towards our high teen margin target for this segment as we continue our integration efforts for Heartland.

Turning to our fourth quarter outlook on slide 12, and customer demand remains strong.

We've incorporated currently known challenges across manufacturing and supply chain operations into our forecast, including across our customers and suppliers.

We also assume there are no new material disruptions from Covid.

We expect fourth quarter sales in the range of $503 million to $517 million up 27% versus last year.

We expect to be down 5% sequentially at the mid point closer to our typical seasonality with sales down across all of our segments.

We project fourth quarter adjusted EPS to be in the range of $2 80 to.

To $2 96 at this.

This assumes an adjusted effective tax rate of 18, 5% for the quarter.

The fourth quarter, EPS midpoint is down 27% sequentially and up 29% over prior year.

Our forecast reflects the impact of sequentially reduced volumes across all of our businesses.

And more typical product and geographical mix across the electronics segment.

The forecast also includes a 14th week due to our reporting calendar.

And this is during the holidays, we expect sales and profitability to be lower than normal.

Also our forecast does not include any impact from the pending Carling acquisition, and we don't expect it to have a material impact to our fourth quarter results.

We'll share further details on Carlin during our fourth quarter earnings call.

For the full year, we are projecting a tax rate of 17, 5% and capital expenditures of approximately $80 million to $85 million.

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

Thanks Camille.

Before concluding as highlighted on slide 13.

Like to mention that we have published our 2020 sustainability report, which is available in the Investor Relations section of our website.

<unk> highlights our commitment to environmental social and governance initiatives.

We have focused our efforts on creating a solid foundation for our sustainability program to ensure future success as we work towards the goals discussed throughout the report.

We are pleased to share our progress and look forward to providing future updates as we strive for continuous improvement on our sustainability journey.

In summary on slide 14 year to date, we have delivered exceptional performance within an ongoing challenging environment we.

We continue to closely monitor supply chain challenges across our suppliers and customers and our Peru proven our sound business fundamentals enable us to strategically crop.

As we near the end of a challenging 2021.

Always to achieve significant revenue and earnings growth for this year and remain well positioned to deliver ongoing superior value for our stakeholders.

And with that I will now turn the call back to the operator for Q&A.

Thank you.

Quick question, you will need to press star one on your telephone to withdraw your question press the pound key once again Thats star one for questions one moment for questions.

Our first question will come from the line of Luke junk from Baird you may begin.

Good morning.

Thanks for taking the questions first maybe a question for me and I'm wondering if it'd be possible to provide just a high level margin walk from a longer term range for electronics margins to this quarter's results I don't know if you can put some of the factors that you spoke to in the prepared remarks into buckets, essentially what I'm trying to tease out here is what might be sustainable.

You'll have higher absolute levels of activity persist versus what was likely more onetime in nature this quarter. Thanks.

Sure.

So just stepping back right, we had definitely very John sales very strong margins across electronics segments for the quarter.

I'll start with the line really for the quarter on this to your point on bucket Tyson.

I've mentioned favorable product mix, both geographic or regional product mix and as well as on the product side I think that was about two thirds of that and I would say that was atypical for us which really drove.

That strong margin profile, we had I'd say no.

Third came from a combination of the stronger volumes that we saw much higher than we expected.

Big part of that was coming from us really working to clear out backlog that we've had as well as just with all the supply chain Choppiness going on we had seven.

Very very late in the quarter, we had some deliveries that basically came through to customers and so revenue got recognized it probably would've been in the fourth quarter on that and then I'd say part of that last third also price realization, we've been talking about pricing that we've been taking pricing actions and you can see the burner.

Set of that.

Most significantly in Europe segment, just because of our go to market strategy there.

Okay. That's really helpful. Thank you for that detail maybe a question for Dave in terms of distributors in the electronics segment and just wondering your view on the appetite for inventory restocking.

You mentioned inventory at distributors in your comments, what that might look like as the industry theoretically catches up to demand from a supply standpoint distributors obviously.

Part of electronics business, what are you hearing from them and ultimately how meaningful the Java could this be if we start looking out into 2022.

Sure. Thanks, Thanks Lou.

Obviously within electronics, we watch very carefully to look for signs of inventory building and things like that.

<unk> talked openly about the fact that on average for our distribution partners and electronics portion of our business weeks of inventory kind of normal range is 11% to 14.

It remains lean today, obviously, our distribution partners would like to build more inventory and they have orders on us to do that in some cases.

But sell through continues to be very robust so really.

Theres not a lot of inventory build yet and the channels there with that said there clearly is some evidence that.

Some of the EMS partners at some Oems are trying to carry some heavier inventory positions than normal. So there are pockets out there where theres. Some inventory build right now is not really in our in our distribution partnerships.

Yes.

So we continue to watch that so there is certainly they have an appetite.

Try to increase that.

So we'll see how that develops in the coming quarters.

David Thanks.

Yes. Thanks, Luke appreciate your questions, we'll take our next caller please.

Our next question comes from the line Ackerman Cowen May begin.

Good morning, Paul.

Hey, good morning, Thanks, Thanks, everyone and congrats on the results.

If I may I'd also like to discuss electronics.

How much of the uplift in electronics is coming from automotive.

Electronics being sold into battery electric vehicles and hybrids.

I guess, what I'm trying to understand is how much of the uplift in electronics operating profit. This year and also this quarter has been driven by new products that arguably.

Arguably carry higher than corporate average profitability.

Today, but also going forward.

Yes, I'll take that Carl.

I think clearly we're seeing automotive electronics.

Being one of the growth drivers within our electronics segment, along with several other end markets that are quite robust whether it's.

Datacom applications telecom infrastructure those appliances.

Building and home automation sorts of things Theres a lot of end markets that are pretty robust automotive electronics is certainly there and while on broad based applications car builds are pretty soft obviously, but a lot of that growth is coming from electrification applications here.

I would not say that the automotive electrification opportunities have a margin profile above our norm.

So.

New products are always important for us to sustain high margins in our business and electronics, so continually rolling out new versions, new products and new introductions.

Keeps our margins up.

That's a key part of our strategy, but I don't think automotive electronics is kind of out driving that at this point.

Understood Thanks for that.

Yes.

I wanted to shift to free cash flow and balance sheet, if I may.

Inventory days on your balance sheet rose.

I think roughly 10% sequentially. That's 96 days it appears to be largely in line with where inventory has been in the past and so I guess my question is.

<unk>.

Are you comfortable with the amount of inventory you have on your balance sheet today to support it.

Existing customer demand.

And then secondarily, how might we think about working capital flow through.

Both in the calendar Q4, and early part of 2022 as you start to.

Attained some of that order backlog from customers. Thank you.

Sure.

So in generally I talked about in the prepared remarks that we see.

Think about $100 million of.

Cash flow tied up in working capital since the beginning of the year.

About 70% of that coming from inventory and we've seen that a 10 day increase in our days of inventory on hand.

It changes from a dollar perspective.

About a third of that increase is really just because of that higher level of sales. We have so that doesn't impact impact the game and I would say the rest its really two main drivers one being again in the prepared remarks, I mentioned with raw materials. We are checking our businesses and then come back to hold excess inventory of critical part.

Exactly so we can support customers for.

Things that are a little harder data, where we feel like there are some supply chain issues that we want to get ahead of and then the second piece is just with all again supply chain Choppiness.

We're seeing a quite longer transportation time, and logistics bottlenecks, we have where we can.

From a cost perspective migrated transport to ocean as well and so that extends the amount of inventory sitting out there. So that's really the other factor that's out there.

Things start to normalize.

And some of those areas, we will definitely work on bringing that down.

And then really last question.

Other parts of working capital I would say the rest of the working capital build largely in receivables, which are in line with sales at this point our metrics are well in line with what they've been in the past on base sales outstanding et cetera.

<unk> will see a more.

Even in slow from a cash flow perspective.

Very helpful. Thank you.

Thanks, Paul I appreciate your questions, we'll take our next caller please.

Our next question comes from the line haul.

Glenn Greene from Oppenheimer.

Good morning, Chris.

Hey, good morning, Congrats on some final numbers there.

So.

Yes.

I haven't heard you call out kind of mix to this extent electronics.

Sometimes mix.

Have a little little bit of a fundamental secular.

Two.

That may be the case at automotive right now.

But given over 100% sequential incrementals in <unk>.

Approximately a 100% decrementals implied <unk> for Q.

I'm curious if we could just spend a little more time on that.

Sure Chris So similar to the earlier question. We got about this let me say again, the bulk of the outsized margin that we experienced with aircraft electronics segment really once again I'll call. It the stars aligning.

A lot of people talk about mix, but perhaps in terms of the product mix within this segment, we've got a lot of different product lines.

Happy to see some stronger sales and a more favorable margin product lines that we have and then also David commented in his prepared remarks, we had some stronger demand in North America, and again Thats favorable mix for us. So it just happened to be with the competition in the quarter that was really the bulk of the <unk> that came through.

I would also say the comment on <unk>.

Volumes, and we're guiding sequentially down, which again is very typical for us and with normal seasonality.

Buying patterns work and so we had some outside outsized volumes again comes through this time with the transportation Choppiness going on and we had some customer receipts clear in the third quarter, we were expecting wouldn't happen until the fourth quarter.

That's why I come back to we've always talked about our target margin profile can easily sometimes be over 20%, but we never called Hey, we're always going to have the same margin every quarter.

It goes through up cycles down cycles, and so we're looking at the multi year multi quarter average, which.

Can be around 20% or so and we're going to have some outsized downsides quarter part of that.

Okay great.

The silicon carbide.

Cut me Im curious if you could just put that into context of your overall overall initiative around CCAR.

Yes, yes, silicon carbide I've talked about that in the past, we see it as a critical part of our product offering in our power semiconductor business.

So as we talk to target medium and high power applications Silicon carbide obviously.

Some advantages within that.

Phil we're not kind of all in if you will on silicon carbide going after the kinds of capabilities and volumes to support maybe traction drives and passenger car target. These other areas.

Where we bring unique value of this happen to be in the case of semiconductor manufacturing equipment.

We've got a nice design win in the power supply systems within that certainly a growing market.

Phase and so it was a good win there.

Got some unique value.

Just last one if I might as you look for electronics, if you look at your book to Bill.

Fulfillment and sell through various factors how would you assess the signals for.

Yes early read on topline expansion prospects for 'twenty two.

Certainly those are all the questions. We are happy to have an event last night with many of our senior leaders from distribution partners in Rep partners and.

So we had a lot of discussions around that and what I would say is.

Unknown underlying drivers of the demand profile continue to look pretty robust. So we don't really see.

Near term changes to those fundamental drivers.

Obviously, it's a pretty hot market right now and there are shortages out there and things. So we watch very carefully for inventory builds and things like that like I spoke about earlier.

Right now I think we're pretty optimistic.

About what 2022, it looks like in the electronics side of the business as well as the overall business, but certainly in electronics.

We tend to be.

Pretty optimistic about next year.

Thanks for the candor.

And then the first question.

Our next question will come from the line of Nick Todorov from Longbow Longbow Research you may begin.

Yeah, Hi, thanks, Yeah, Thanks, and good morning.

Congrats on great results.

I also have a question around the whole electronics.

Margin in kind of a step down sequentially in the four quarter. So if we look and compare their results versus the June quarter, which are kind of comparable in terms of volume to the December quarter, It still looks like.

The decremental on the gross margin and operating margin line, it's about 80%, which is quite a bit above normal and I think you spoke about a third of the improvement coming up for price.

Doesn't show up at least in.

In the December quarter are you seeing incremental price pressure into the December quarter, or how should we square the fact that.

Margin operating margin is coming down all the way to give it about 18%.

Versus 19, and a half in the June quarter.

Sure. So on the Decrementals when Youre looking at is from a company perspective, we gave just some general color at all of our segments would be sequentially down on sale.

But the Decrementals are really total company, but I would say is if you look at Q2 versus Q4, a couple of big factors that we've been talking about one is with sales down our production volumes were also down versus the second quarter. So we've talked about a number of times, we get good leverage on production so when.

Caption levels are down not just necessarily electronics, but also our automotive segment as well as our industrial segment, we're seeing the unfavorable leverage impact on that and if you look at the trend on both metals pricing, our metals, which is.

A big headwind for us that have been talking about for some time.

Costs are up also over that period of time as well as the logistics cost.

Both had gone up over the past couple of quarters as well.

I would say lastly, I talked about the fact that our reporting calendar concludes that 14th week, which we expect to be pretty weekend sales, frankly pretty weak and profitability as well because you've taken an entire week of expenses, but that kind of a stub week on sales. So the combination of all of that is really what's driving that.

Decrementals to look at there.

Okay makes sense.

And also can you talk about.

Cost increases so I think you mentioned that you've perhaps half of the inflation cost you've seen is that across the company or is that in certain segments.

Material costs have you pass through in automotive and how much do you expect to surpass through at the beginning of 'twenty two.

We have negotiated new contracts.

Yes.

Numbers I quoted were really total company bite into the recap and talked about for the year from where things are at right. Now we're looking about 300 basis point headwind largely due to the metal metal pricing year over year as well as just the increased costs from a logistics standpoint again from a company perspective.

Offsetting about half of that from price.

Scale consistent with what I've mentioned in the past couple of quarters.

We really see much.

Much more of the pricing benefit coming through our electronics segment again, because if I go to market strategy.

Heavier in distribution, where were the price increases came through to.

The other end of the spectrum is across the automotive segment, whether that's in our passenger vehicle and commercial vehicle businesses lot of long term contracts in place with a number of different Oems.

Pricing moves a lot slower and yes, as we go through contract negotiations as they're coming to we're absolutely looking at we're looking at all of the pricing and causes all of that but we're going to those contract by contract. So it definitely moves a lot slower.

Okay, and maybe a last question how should we think about the carbon technology accretion and impact on profitability at once it comes on board and also can you talk about what products that are coming from carbon or incremental to your portfolio and what is complementary okay. Great. Yes.

Let me talk a little bit about the products and with complementary.

For our business.

Speak to the financial aspects of it but currently we are quite excited about the acquisition. We think it's a very strong fit into our business into our strategy. It will roll up into our commercial vehicle portion of our business, which is within the automotive segment.

The product technologies, they bring their one of the leading.

Brands and companies and switching for the commercial vehicle space, particularly strong here in North America, but also pretty strong in Europe and Asia. So we have a switching offering within our commercial vehicle today. It enhances that specifically it really takes out a leadership position now in commercial.

Political space.

They also do some power distribution systems within commercial vehicles also an area, where we have been growing nicely. So it's very complementary there. They also have an offering of <unk>.

Circuit Breakers that are really largely targeted to the telecom infrastructure space again another.

Market, where our business is very focused so it's very well enhances add scale allows us to bring more capabilities to our customers.

Yes.

And the question on financials.

Point in a transaction that we just signed the deal we're in the midst of regulatory approval right now and so as can't answer but right now two companies, we are operating independently and so.

Really our plan is to provide a lot of the financial details I know you and others are looking for in our fourth quarter earnings.

Thanks Mark.

Thanks, Nick appreciate your questions, we will take our next caller. Please.

Our next question comes from the line of Matt Sheerin from Stifel. You may begin.

Matt.

Yes.

I just have one question just regarding your comment about capacity adds.

It's certainly been beneficial could you could you be more specific about what you are in terms of where you have been adding capacity and how that is impacting your lead times, because I know lead times in electronics across your portfolio have been stretched.

And that has led to obviously very strong bookings and book to Bill and perhaps some double ordering so im wondering what look like and how you expect bookings to adjust accordingly.

Yes, Matt.

Clearly, having the capacity in place to serve our customers.

This.

As a critical partner.

Our business so.

I've talked about this maybe in the past where.

Our business is not particularly capital intensive.

Therefore part of our strategy is always to try to have some flex capacity in place. So when we do see in cyclical markets and uptick.

Demand that we can flex up better than most.

Because what we find is we will pick up some.

Sure during the up cycle, and while we won't necessarily maintain all of that because of our better ability to serve.

We do some of that share we retain when the cycle normalizes. So it's a key part of the strategy, we've been adding capacity really kind of across the board.

And in all segments of the business, we've been adding capacity quite frankly, if we can.

Could get delivery of some of the <unk>.

Components and equipment that we need we would add it faster.

But just like.

Just like other parts of the pit is limited and the ability to add the capacity and speed you, we'd like to with that said we begin we're beginning to get some of that capacity online and although our lead times have stretched.

Sure.

They're kind of.

And so they're no longer today stretching further so theyre kind of leveled off.

And we think Thats kind of the first time right.

I think we generally are pretty healthy healthy and our ability to serve that.

Okay, great. Thank you have a one other question just regarding that.

Your Opex, which was down sequentially and you talked about the reasons behind that as.

As we look through the December quarter, you have got an extra week of.

<unk> expenses as you said, so should we expect actually.

Absolute inventory Im sorry, opex dollars to be up sequentially.

Yes, that's also in general partner.

Margin decremental question that I answered earlier, it's going to be a little bit higher expenses than we would normally see just because of the weak sales quarter. When you look on a percent of sale basis correct.

Okay. Thank you.

Thanks, Matt for your questions.

Thank you.

The questions. Our next question comes from the line of David Kelley from Jefferies.

Good morning, David.

Hey, good morning team.

Thanks for taking my questions.

I believe you noted some tier one and partial vehicle builds in autos, just curious as to how meaningful.

Do you think that build and maybe put another way do you see any change to your targeted outgrowth algorithm in autos in the coming quarters.

Sure Yes.

Certainly, it's well known that there are a lot of vehicles that have been produced.

Just maybe some modules and things like that that are sitting out there kind of half finished or or 90% finished.

So clearly in those types of vehicles most of our products are in those vehicles ready to go up but they are not reported as cargo. So it effects kind of that growth over car build number.

And while we don't think it was a significant part of our third quarter.

In fact, there was some inventory impact there.

If you look back over the last 12 months.

So, let's say the last four quarter as a whole. So that's why we kind of started to see some of this and I think you'll look back.

We began to talk a little bit about this in the fourth quarter last year.

It's an imperfect.

Number because you're kind of off the back your way into it we don't have perfect visibility, but we would probably estimate that from inventory builds within the automotive market.

Over the last 12 months, it's probably in that $20 million, maybe as high as $25 million worth of inventory built during that period of time.

We're usually level loaded across that time.

Certainly all done in one quarter.

So clearly there is a higher level of inventory there some of that will kind of get cleared out and the math when they finished vehicles and put them on our lots.

And then the others really sitting mainly at tier ones, where they have been instructed by the Oems.

To carry a heavier inventory position in order to support the ability to ramp up as quickly as possible.

Some of that will work itself back out over time, we don't really know when that might be.

Our conjecture right now is it probably doesn't all work itself back up some level of that becomes a bit of the new normal of how to operate.

In a in a pretty.

Disruptive environment.

In supply chain. So we will see some of that kind of work its worked its way back out over time.

But as far as impacting our outgrowth sort of algorithm. If you will we've had very strong outgrowth, certainly some of that coming from distribution or not distribution, but inventory.

But also vehicle mix the focus on higher end vehicles to focus on Evs. Those are all higher content for us that's been quite favorable for us.

Got some.

Yes, some wins that have allowed us to actually gain some market share in some pockets as well. So I think we're in a positive trend is certainly on our outgrowth algorithm.

Okay got it. Thank you that's really really helpful color and then just switching gears to sizeable acquisitions now year to date, how should we think about ongoing M&A appetite just given your earnings power and what feels like really strong free cash flow visibility here.

Yeah.

We've been talking about for a while that.

Back in 2020, we will make sure we were gearing up and we had the balance sheet. So that as the M&A activity pick back up over the past 12 to 15 months that we were going to be ready for that itself.

Two acquisitions that's what.

Hoping for it to find some nice nice acquisitions to date, which we have and really there is no change to our ongoing strategy on acquisitions, we continue to look to the balance sheet remains strong.

Leverage perspective still quite low so it gives us the opportunity to really take a look at a lot of different assets out there and so obviously, we talked about a number of different end markets that we would look at.

Ranging from commercial vehicles, we talked about industrial end markets of course, we look at electronics type businesses that tuck into what we have today and so we continue with our with our activity on.

At that time, so our priority and that's our goal our first use of cash is acquisitions.

Okay, great. Thanks, so much I appreciate it.

Thanks for your question, David we'll take our next caller please.

Our next question comes from the line of Christopher Glynn from Oppenheimer, you may begin.

Was just looking for an update on the capacity shift and expansion for electronics into the Philippines, how thats going and how we might consider that.

Either cost savings or.

Productivity throughput.

Impact.

As the timeline progresses.

Yes, so its clearly thats a lot of footprint work, we've been doing the power semiconductor business and we've talked about that quite a bit.

The new factory location has been completed.

We've been qualifying lines as we've been importing them.

I would say, it's a challenging environment.

Do that ramp up first of all to get the equipment as quickly as you'd like.

Secondly, customer approvals can take a long time and in today's world that is all done virtually.

Customers in for visits because of the Covid situation.

So that kind of puts some challenges, but with that said we're kind of.

Pretty pretty well on track, we see that kind of concluding into the Philippines and getting the bulk of that kind of mid to late next year and so the bulk of the impact from the pick up from that will happen going into 2023.

And there is ongoing work beyond that as well as we continue to work on our footprint.

And our cost position to be as competitive as possible in the power semiconductor side.

Great. Thank you.

Thanks, Chris for your follow up question that.

That concludes today's call. Thank you for joining us and your interest in little views. We look forward to speaking with you during the Baird and Stifel conferences.

Have a great day.

Yes.