Prepared remarks
Good day, everyone, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, David Kelly. Please proceed.
Good morning, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. With me today are Greg Henderson, President and CEO; and Abhi Khandelwal, Executive Vice President and CFO. This morning, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available on 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 discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today'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 on our earnings release available on the Investor Relations section of our website. I will now turn the call over to Greg.
Thank you, David, and thank you to everyone joining us today. I wanted to start this morning with highlights on our third quarter and then provide an update on the progress we're making on our strategic priorities. As part of that progress, we're excited to announce the acquisition of Basler Electric. I will speak more about the acquisition and how it fits into our long-term strategy in a few moments, but we look forward to welcoming the Basler team to Littelfuse. Turning to our third quarter. We delivered revenue growth of 10% relative to the prior year, driven by strong Electronics segment growth. We delivered Industrial segment growth despite mixed underlying market demand. Finally, our Transportation segment navigated well through a softer commercial vehicle market in the third quarter. Overall, our third quarter earnings results exceeded the high end of our guidance range, reflecting our team's commitment to operational execution. Looking forward, we expect solid fourth quarter revenue and earnings growth versus the prior year, supported by our third quarter bookings, which were up more than 20% versus the third quarter of 2024. Abhi will discuss specific results and our outlook in more detail shortly, but I want to thank our global teams for their persistent hard work and efforts. Now I want to share the progress we're making on our first strategic priority, which is to enhance our focus on future growth opportunities around the safe and efficient transfer of electrical energy. I wanted to start with the acquisition of Basler Electric. Basler provides essential and innovative electrical control and protection solutions for high-growth power generation and distribution markets. They are market leaders in grid and utility infrastructure and add significant new capabilities to Littelfuse in the areas of high-voltage expectations and very high energy protection. In addition, as data centers have such significant power generation demand, Basler has key exposure to local data center power solutions. Basler has a long history of selling complete solutions to a deeply embedded industrial customer base. They complement our industrial segment portfolio, and their addition will broaden our OEM exposure, particularly in grid and utility infrastructure, where Basler is a key partner to industry-leading innovators. We are confident the addition of Basler will deliver long-term value for Littelfuse. Looking forward, strategic acquisitions will continue to be a key priority for us, supported by our strong balance sheet and cash generation. In addition to the acquisition and across Littelfuse, we continue to see meaningful traction in our new business pipeline. Our teams are executing well, converting our growing funnel to future revenue opportunities. Supporting this, our design wins are tracking up double digits year-to-date. As an example of our momentum, in the quarter, we delivered a multi-technology design win for a market leader in a 400-volt battery charging application. This charging solution brings best-in-class safety and protection while delivering an optimized form factor and efficiency. Our solution utilizes our market-leading capabilities in passive and semiconductor overvoltage protection, electromechanical overcurrent protection, and our power semiconductor technologies. Combined, our solution enables a more precise and efficient current flow while protecting against potential surges from the power grid. Importantly, this multiyear partnership will start production with revenue contribution in 2026. Our second strategic priority is to provide more complete solutions for a broader set of our customers and to increase our engagement with our key customers and market leaders. To accomplish this, in the third quarter, we formally realigned our sales structure to better serve our broad customer base with our market-leading technologies. As part of this realignment, we established three market-facing sales organizations with leaders who bring extensive experience and leadership across our evolving end markets. Our sales leaders will be supported by a realigned sales force that is now market-facing, customer-centric, and reinvigorated to engage our customers more frequently and with our complete technology portfolio. We see two key advantages to this realignment, which consists of a shift from our historical approach where Littelfuse sales teams were siloed in product-centric roles. One, we can now work more closely with our customers to help better understand and solve their technology challenges with our full product portfolio. Two, we can collaborate more meaningfully with our customers on their future technology road maps, which will better inform and ultimately shape our R&D efforts. We believe our sales evolution will enhance our visibility to our end market technology advancements and strengthen our long-term market leadership. While we're in the early innings of our go-to-market evolution, we are beginning to see signs of increased traction with customers. This is best exemplified by our data center go-to-market strategy, where we're early to apply our new sales model. Our data center revenue continues to grow significantly, while year-to-date, our data center design wins are up more than 50% versus the prior year. We are capturing multi-technology wins with leading hyperscaler, cloud, and infrastructure customers. We are also deeply engaged with market leaders that are building gigawatt-scale AI factories, and we are leveraging strong global collaboration and customer relationships through the data center ecosystem. Further, as we are more strategically focused on the leading customers in the data center market, we are sharpening our R&D efforts and building a strong pipeline around new products. Turning to our third strategic priority. We are focused on driving operational excellence as we grow. Today, I wanted to highlight our power semiconductor opportunity. Enhancing our long-term growth and profitability positioning in this area is a leading priority for our team. Our power semiconductor capabilities are critical to the safe and efficient transfer of electrical energy. Importantly, when combined with our market-leading protection offering, our semiconductor technologies can provide us a unique value proposition. Our long-term goal is to deepen our engagement with power semiconductor customers, better utilize our footprint, and ultimately drive improved long-term execution. As part of this initiative in the third quarter, we announced the hiring of Dr. Karim Hamed as the new leader of our semiconductor business. Karim most recently served at Analog Devices and brings a wealth of semiconductor industry, technology, and operational experience, and we're excited to have him as part of our leadership team. Taking a step back, we delivered a strong third quarter and are well positioned to drive further momentum through year-end. We will continue to execute on our three strategic priorities as we aim to scale our company with the goal of delivering long-term best-in-class performance and returns. With that, I will hand the call over to Abhi.
Thank you, Greg, and to everyone joining. I want to start by echoing Greg's sentiment as we're excited to announce the Basler acquisition. Today, I will provide some details on the acquisition including financial metrics and the transaction timeline. Then I will walk you through our third quarter results, followed by our fourth quarter outlook, and we will end the call with Q&A. If you turn to Slide 7, Basler has demonstrated leadership in controlling, regulating, and protecting mission-critical equipment for evolving power applications over the last 83 years. Their technologies and market position provide a distinct competitive advantage, while their footprint is highly complementary to Littelfuse. The all-cash transaction is valued at approximately $350 million. When adjusted for the present value of expected tax benefits of approximately $30 million, the net transaction value is roughly $320 million. This represents a 13.5x multiple for forecasted full year 2025 EBITDA. At closing, we anticipate our net leverage will be 1.4x versus our current level of 0.9x. We expect Basler will be accretive to adjusted earnings per share in 2026, while we target double-digit returns in year five post close. We expect to close the transaction by the end of the fourth quarter 2025 and look forward to welcoming the Basler team to Littelfuse. With that, please turn to Slide 8 for details on our third quarter. As Greg mentioned, we delivered strong results with revenue at the high end of the guidance range, while adjusted EPS exceeded the guidance range. Going forward, comparisons I will discuss will be relative to the prior year, unless stated otherwise. Revenue in the quarter was $625 million, up 10% in total and up 7% organically. The Dortmund acquisition contributed 2% to sales growth, while FX was a 1% tailwind. Adjusted EBITDA margin finished at 21.5%, down 20 basis points as solid volume expansion and operational leverage were offset by the impact of higher stock and variable compensation. Third quarter adjusted diluted earnings was $2.95, up 9%. We also delivered strong cash generation in the third quarter. Operating cash flow was $147 million, and we generated $131 million in free cash flow. Year-to-date, we have generated $246 million of free cash flow, and our conversion rate is tracking at 145%, well above our long-term target of 100%. We ended the quarter with $815 million of cash on hand and net debt-to-EBITDA leverage of 0.9x. In the quarter, we returned $19 million to shareholders via our cash dividend. Please turn to Slide 10 for our segment highlights. Starting with the Electronics Products segment. Sales for the segment were up 18% versus last year and up 12% organically. The Dortmund acquisition contributed 4%, while FX contributed 2 points to growth. Sales across passive products were up 19% organically, while semiconductor products increased 5% in the quarter. Within our semiconductor products exposure, protection product sales were strong, while we observed soft power semiconductor demand. Sequentially, we delivered modest power semiconductor growth. Adjusted EBITDA margin of 24% was up 140 basis points, reflecting favorable year-over-year passive and protection volume leverage, partially offset by lower power semiconductor volumes and higher stock and variable compensation. Moving to our Transportation Products segment on Slide 11. Segment sales were flat year-over-year as organic sales decreased 2% for the quarter, but were offset by favorable FX contribution of 2% to growth. In the passenger car business, sales were flat organically, reflecting stable passenger car product demand, offset by sensor declines. Commercial vehicle sales for the quarter decreased 3% organically, as we observed softer end market demand across on-highway, off-road, and agriculture markets. For the segment, adjusted EBITDA margin of 16.8% was down 220 basis points. Our Transportation segment margins were negatively impacted by lower volume, higher stock and variable compensation, and unfavorable tariff timing. We remain pleased with our Transportation segment margin trajectory through a dynamic end market backdrop. Year-to-date, our adjusted EBITDA margin of 18.2% is up 220 basis points. On Slide 12, Industrial Products segment sales grew 4% organically for the quarter. Third quarter sales benefited from solid energy storage, renewables, and data center growth. However, we observed softer HVAC demand and continued soft construction volume in the quarter. Third quarter adjusted EBITDA margin was 20.7%, down 310 basis points, driven by unfavorable mix and higher stock and variable compensation. While margins tracked lower in the quarter, we're pleased with the solid year-to-date margin performance, which is up 290 basis points. We will continue to balance profitability with long-term growth investments and remain confident in our long-term Industrial segment growth trajectory. Please move to Slide 13 for the forecast. We entered the fourth quarter with a strong backlog and expect solid growth versus the prior year. We expect typical seasonality given mixed conditions across transportation and industrial end markets. With that in mind, our fourth quarter guidance incorporates current market conditions, trade policies, and FX rates as of today. We expect fourth quarter sales in the range of $570 million to $590 million, which assumes 5% organic growth at the midpoint and 2 points of growth stemming from our Dortmund acquisition. We are projecting fourth quarter EPS to be in the range of $2.40 to $2.60, which assumes a 60% flow-through at the midpoint. Fourth quarter guidance also assumes an unfavorable impact from stock and variable compensation of $0.40 and a $0.15 headwind from a higher adjusted effective tax rate. Moving to Slide 15. For the full year 2025, we're assuming $59 million in amortization expense and $34 million in interest expense, two-thirds of which we expect to offset through interest income from our cash investment strategies. We're estimating a full year tax rate of 23% to 25% and expect to spend $80 million to $85 million in capital expenditures. With that, operator, please open the call for Q&A.
Questions and answers
And your first question comes from Luke Junk with Baird.
Maybe an apology, I missed part of the prepared remarks. Maybe if we could start with power semi. I think, Abhi, you mentioned that it did see some growth sequentially despite still being soft year-over-year. Can maybe you just speak to book-to-bill there, kind of the outlook into the fourth quarter in power semi and some of the puts and takes from a demand standpoint, and then how you'd expect any improvement to flow to margins as well?
Yes. Thank you, Luke. This is Greg. Maybe I'll start and then hand it to Abhi to give a little bit more color. But just kind of zooming out on power semi, and we talked about this before, I think our view on the power semi business is that it is strategically important from a strategic perspective as part of our overall portfolio and part of our safe and efficient transfer of energy, actually, in the example I gave on the battery charging solution in the script, that is a protection solution, and it uses our semiconductor protection, our passive protection, but actually also uses power semiconductors as part of the overall customer solution. And actually, Basler also is a customer of Littelfuse today and actually has a lot of semiconductor content in their solutions for protection relays and in their expectation system. So semiconductors is an important part of our business. But I think as we've said before, we have had some issues internally from kind of an execution perspective. So we talk about our strategic priorities as a company sharpening our focus and improving our go-to-market and improving our operational performance, and actually, all three of those apply to our semiconductor business as well. So we're working on sharpening the strategy and improving our execution. And so this is going to take some time, but we are on the journey. And maybe I'll hand it to Abhi to give a little bit more specific color.
Yes. No, I think Greg covered it, but I think if you kind of think about my prepared remarks, Luke, and what I mentioned, if I think about our Q3 performance in our power semi business, Q2 to Q3, we saw sequential improvement, right? Year-over-year, we're still down. But as you kind of think about our performance in Q3 versus Q2, we did see improvement in the quarter.
Very helpful. Just a quick one on the $0.40 stock comp. Is that an outsized impact in the fourth quarter? I know typically, stock comp from a seasonal standpoint tends to be weighted. I think you said 2Q and 3Q this year? Just want to make sure I understand the impact.
Yes, absolutely. I can walk you through it, Luke. So there's two things here. It's not just stock comp. It's also the impact of variable comp. So if you kind of think about our last year performance and where we ended the year, our teams didn't get paid. So this is a reset back to paying a target. That's the majority of the $0.40 headwind. And then a small portion of that is just the year-over-year impact of stock comp.
Got it. So if we think ahead to 2026, especially regarding the variable compensation component, it should start to normalize. Is that how we should interpret it?
That is absolutely correct. When you look at 2026 compared to 2025, it will be normalized on a year-over-year basis. However, due to our performance in 2024, we didn't pay the variable compensation, which impacted the P&L positively. This year, we are resetting back to the target. To elaborate on our Q4 guidance, at the midpoint, we are projecting an EBITDA conversion of 60% based on our top-line growth compared to last year.
Very helpful. And then lastly, and apologies if I missed any comments on this. But Greg, just be curious to get your kind of incremental update on your efforts in data center, both near-term opportunities hitting maybe things that can move quicker over the next quarter or two and then your progress getting designed into sockets on future architectures as well.
Yes, thanks, Luke. We are really excited about our progress in the data center area. We've implemented a sales realignment across the business, starting with data center a bit earlier. We're seeing significant advancements, with design wins more than doubling year-to-date. Data center growth played a crucial role in our overall performance this quarter. We now have substantial revenue coming from data center due to past efforts. Our go-to-market strategy has improved, and with our increased focus, we're strengthening our relationships with customers, particularly hyperscalers and cloud computing firms. We're also advancing our long-term R&D plans in this space. Overall, we are seeing growth now, and we believe that this enhanced focus will sustain it moving forward.
Your next question comes from the line of Christopher Glynn with Oppenheimer.
Just want to build on the last question on the data center comment. I think I heard up over 50% and up maybe double just on the last question about the design wins. So I just want to clarify that. And is that like an account of the design win instances or a dollar value? Just trying to think of what that might imply for growth, what the design in to revenue kind of lead time is like? And maybe if we could clarify what the current scope of the data center business is for Littelfuse?
Thank you, Chris. I'll start with some clarification and then pass it over to Abhi for more details. To begin with, data center contributed significantly to our growth this quarter. That's a key point to highlight. Our design wins have increased more than double compared to last year. We track these design wins, although the timing can vary, making it difficult to predict solely based on that number. Data center is one of our faster markets, especially when compared to sectors like automotive or industrial, where it takes longer to translate design wins into revenue. That's my main point, and I’ll let Abhi provide further insights on the impact of the data center segment.
Yes. So Chris, thanks for your question. I think the best way to think about the data center growth is if you kind of look at Electronics segment performance. It's a good reflection of our data center exposure, and that's where you see the real growth in terms of the segment being up 18%, 12% organic, passive products being up 19% organically, right? Now we haven't quantified the exact impact of data centers for us as a total company, but I would say it's high single digits.
Okay. Great. Appreciate that. I'm sure we'll get a further deep dive in February. And then it sounds like the overall company is seeing some good momentum in new business opportunities. How is that funnel looking besides data center? I'm curious, at least especially for industrial, where first half, you had really outsized outgrowth and that moderated a bit. I don't know if there's some noise in any channels or just a real noisy quarter for residential HVAC, which is well known. But curious about the kind of scalability for industrial and NBO funnel there as it pertains to maybe extending the outgrowth that you saw year-to-date.
Yes. Thank you, Chris. Yes, I think let me just start by, if we zoom out to the industrial segment, I mean, we had solid growth in the quarter and actually have had many quarters of solid industrial growth. In the quarter, growth was driven by markets that continue to see strong demand and do well, energy storage, renewables, data center infrastructure, and actually some of our industrial business plays into data center infrastructure that continues to see strong demand. That said, as you note, we do have softer residential HVAC demand and the construction MRO continues to be soft. So that's kind of where there's mixed performance, and we do have exposure there, which has made maybe a little bit more muted performance on the industrial in the quarter. But if you zoom out from eight quarters of growth, and this continues to be a significant investment area and growth driver. You mentioned the Basler Electric is an acquisition as well that brings significant kind of industrial exposure and will be part of our industrial business.
And then just to add to Greg's commentary, just one last point I'd point out is if you kind of look at the year-to-date performance for the segment, we're up 12% year-to-date. So that's another positive sign of growth in that segment.
And your next question comes from the line of David Williams with Benchmark.
Congratulations on the continued progress here. You talked about realigning your sales force and breaking down some of the silos. And just kind of curious if you could provide a little more color there. I mean you talked about being able to engage more deeply with your customers and what that means. But is there a way to kind of quantify what your expectations are and how we can kind of gauge that success?
It’s challenging to quantify at this moment, but let me clarify. Historically, our sales organization was closely aligned with our products, which led to individual product teams having separate sales representatives. Even though our products focus on the safe and efficient transfer of electrical energy, we often sold to the same customer. For example, in the battery charging application, we had multiple solutions like passive overvoltage protection and power semiconductor solutions coming from different business units. In the past, this meant three different sales teams might contact the same customer, which often resulted in missed opportunities as we could only sell parts of our overall solution. Additionally, having multiple representatives reaching out to the same customer could create confusion. To address these issues, we have fundamentally changed our approach. Our sales team now focuses on our customers rather than our products. We launched this strategy initially in our e-mobility and data center businesses, and we are already seeing positive results from those early implementations. This change has now been expanded across the entire sales force. While it takes time, we believe it will yield significant benefits, allowing us to sell our full portfolio more effectively. It will also inform our R&D strategy to ensure we are developing the right products aligned with market trends and the needs of our leading customers. The aim is to align more closely with market leaders and position ourselves correctly for the future.
Fantastic color. And then maybe secondly, just on the tariff side, I know you mentioned it in the script. It seemed like it was a modest headwind, but are you seeing anything developing there in terms of do you think that the growth is being tempered by tariffs or any delays? Just any color maybe around the impact of that tariff.
Yes, I can take that, David. When I discuss the impact of tariffs, I'm referring to the timing we experienced in the second quarter. We benefited from pricing while the costs hadn't fully impacted the profit and loss statement yet. This resulted in approximately a $6 million advantage in Q2, which is expected to turn into a challenge in Q3. That's the timing I mentioned. About $3 million of this affected our Transportation segment. Now, regarding our current position and guidance for Q4, we have accounted for a neutral price impact from tariffs for the quarter.
Yes. And I'd also say, I think, look, there's still noise that can happen, but I think the market dynamics of this have largely stabilized. We've talked before that we have a diversified manufacturing footprint. We are trying more and more manufacturing close to our customers. So there is some impact, as Abhi mentioned. But broadly speaking, we feel like this is somewhat stabilized in our customer base, and we don't see a major impact from it.
Your next question comes from the line of, again, Christopher Glynn with Oppenheimer.
Just on Transportation, I wanted to just ask about the difference between the passenger vehicle fuses up 4% and the sensors down 18% organic. Is the sensors side still engaged in attrition exits product pruning there?
Yes. Maybe I'll start, and then Abhi can give a little bit more color on the transportation business. But actually, if you zoom out actually in our core passenger products, we have actually had a reasonable quarter given the kind of passenger car builds and so forth. We had a reasonable quarter. But we do continue to have, I would say, lower revenue and profitability of the sensor products. So we talked before in the past about the fact that, that was a business that we were kind of realigning. We continue on that journey. So I would say that if you put aside that sensor which is not really a strategic focus of ours, the core passenger business actually did do pretty well, considering the kind of stable car build and some of the kind of EV slowness that we all see in the market.
It seems you believe there's significant potential in the power semiconductor strategy compared to other business areas. Could you provide some insights on this, including your target market focus? Is this strategy aimed at the middle market, and how do you plan to elevate it to meet your standards?
In the third quarter, our Electronics segment showed varied performance, with passive products at 19% and semiconductor products at 5%. The underperformance in semiconductor products mainly stems from the power semiconductors, although our protection semiconductors have been performing well. This situation reflects broader strategic goals at Littelfuse, particularly in three areas: increasing our focus, prioritizing customer engagement, and enhancing execution. We aim to concentrate on high-growth markets with high energy density, such as data centers, grids, and utilities. Our power semiconductor business, particularly in the medical market, is an example of where we have strong performance. Additionally, with our recent sales realignment, we can leverage our existing customer relationships better and drive semiconductor sales, as some sales teams were not promoting these products effectively before. We also plan to optimize our operational efficiency in power semiconductors, which we believe will contribute to growth and profitability. Our focus will remain on areas where we can provide unique value and align with our broader strategy for the safe and efficient transfer of optical energy.
There's no further question at this time. I will now turn the call back over to Greg Henderson for closing remarks. Greg?
Thank you all for joining the call. In closing, I want to express my gratitude to our global teams for their strong performance. I am also very excited about Basler and the significant growth opportunities it brings to us in the data center and grid utilities sectors. We look forward to speaking with you further and seeing many of you at the Baird Industrial Conference in Chicago in a couple of weeks.
This concludes today's conference call. You may now disconnect.