Littelfuse, Inc. (LFUS) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Littelfuse Second Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Vice President of Investor Relations, David Kelly. Please proceed.

Good morning, and welcome to the Littelfuse Second Quarter 2026 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 second 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 in our earnings release available in the Investor Relations section of our website. I will now turn the call over to Greg.

Thank you, David, and thank you to everyone for joining us today. This morning, I will provide details on our second quarter results, including an update on performance across our end markets. I'll then discuss progress against our strategic priorities before turning it over to Abhi to review our financial results by segment. But before discussing the quarter in greater detail, I think it's important to step back and view our performance through lens of the growth strategy we outlined at Investor Day in May. Our results reflect continued progress against the priorities we shared with investors. Across our markets, we are partnering with our customers to enable the adoption of higher power and more advanced electrical architectures. Our second quarter performance and the momentum we see into the second half of 2026 reinforce our confidence in our long-term growth and profitability framework. Now turning to the quarter. We delivered sales and adjusted earnings above our expectations, with net sales of $739 million, up 20% year-over-year and 14% organically. We also delivered meaningful earnings growth as our teams executed well while leveraging continued demand momentum across several of our key growth markets. Looking at our end market exposures across the Littelfuse portfolio, we delivered strong second quarter growth across computing, communications and diversified industrial markets or CCDI. Within the market, data center remained a leading contributor to growth as we continue to leverage our unparalleled grid to chip capabilities across our businesses. Diversified industrial channels were also a key contributor to CCDI growth. while we benefited from improving demand across medical and aerospace and defense applications. Finally, within CCDI, consumer electronic sales declined in the quarter, consumer electronics represents less than 10% of company sales and has a limited impact on our long-term growth trajectory as we prioritize strategic industrial and data center opportunities. Turning to energy and industrial infrastructure end markets, or EII, we benefited from both broad-based demand strength and the contribution from Basler in the second quarter. Across our industrial infrastructure verticals, growth was led by industrial automation and construction, while we benefited from faster-than-expected HVAC recovery. In Energy Infrastructure, we continue to benefit from demand tied to grid modernization, utility investment and renewable energy deployment. Notably, Basler continues to drive significant momentum in grid and utility infrastructure, a key strategic growth market for Littelfuse. Finally, revenue across transportation and logistics end markets increased moderately year-over-year. In passenger vehicles, we delivered growth despite lower global production volumes driven by content expansion and share gains. In commercial vehicles, revenue growth benefited from improving demand in truck, construction and agricultural equipment markets. We are seeing continued traction from our more focused and proactive go-to-market approach, particularly with leading OEM customers where we can bring system-level solutions and multi-technology capabilities to support more complex platform requirements. In the quarter, we partnered with a leading transportation customer for a light truck and commercial vehicle platform. Our integrated solution utilizes our current sensor and MEGA Fuse technologies, providing up to 700 AM protection rating, while monitoring and sensing high-impact loads. Importantly, our solution reduces risk of battery degradation typically associated with the stress of high current loads. This design win represents more than $20 million in annual revenue opportunity with potential to scale across additional vehicles in the future. Overall, our second quarter performance reinforces the strength of our end market diversity and technology portfolio as well as the benefits of our sharpened focus on high-growth opportunities and operational excellence. Heading into the third quarter, we are well positioned to build on our growth momentum. We entered the quarter with record bookings and our book-to-bill is well north of 1.0. We continue to partner more closely with customers on their next-generation architectures with a focus on providing multi-technology solutions. Supporting this through the first half of the year, design wins were up double digits across each of our markets, reflecting improved conversion of our expanding new business opportunity pipeline. Let me provide you with an example of our progress. In the quarter, we were awarded a significant program with a leader in battery energy storage and power supply applications. Our solution, which utilizes our fast-acting TLS uses optimizes performance of battery backup units for data center markets. This design win and our strategic partnership with this customer is positioning us well for the expansion of high-voltage battery storage solutions for both data center and grid scale markets. Finally, I want to update you on our portfolio optimization and rationalization in power semiconductor products. As mentioned at Investor Day, we are sharpening our power semiconductor focus on high power and high-value applications where we have a differentiated right to win. As an example of where we are applying this strategy, we have a design win this quarter with a leading player in fusion power. Our solution leverages our high-voltage IGBT and diodes to actively manage the stored energy that is used to drive the fusion reaction. This solution offers an unparalleled 4.5 kV operation in extremely compact footprint. We will begin shipping for this customer in the third quarter as they build their first prototype reactor. Notably, our power semiconductor demand strengthened in the quarter and our teams executed well, contributing to improved growth and profitability. We see continued power semiconductor demand momentum into the third quarter, and we are balancing these growth opportunities with ongoing portfolio rationalization and footprint optimization. Abhi will update you on the process shortly, but we believe the actions we are taking will better position our semiconductor products business for enhanced long-term profitable growth. Overall, we are encouraged by the progress we are making across our high-growth opportunities, customer partnerships and operational execution as we position the company for continued long-term value creation. I want to thank our global teams for their hard work and for positioning Littlefuse well for the second half of the year. With that, I'll turn the call over to Abhi.

Thank you, Greg, and good morning, everyone. Today, I will walk you through our second quarter results. Please turn to Slide 6 for details on our second quarter performance. All comparisons are versus the prior year unless noted otherwise. Net sales in the second quarter were $739 million, up 20% and 14% organically. The Basler acquisition contributed approximately 6% to sales growth while foreign exchange was a 1% tailwind. Adjusted EBITDA margin finished at 23.6%, up 220 basis points, reflecting strong volume leverage, favorable mix and operational execution. Adjusted diluted earnings per share were $4.19, up 47% versus the prior year. In the quarter, operating cash flow was $146 million, while free cash flow grew to $127 million up 75% year-over-year. We ended the quarter with $628 million of cash, a consolidated net leverage ratio of approximately 0.8 turns and returned $9 million to shareholders through our dividend. We increased our quarterly dividend by 7% to $0.80 per share, reflecting our continued commitment to returning capital to shareholders. Please turn to Slide 8 for our segment highlights, starting with the Electronics Products segment. Sales for the quarter increased 21% year-over-year with 20% organic growth. Asset products again delivered strong growth while semiconductor products benefited from continued protection strength and improved power semiconductor demand. Across the Electronics Products segment, we benefited from increased demand in data center diversified industrials and transportation end markets. Adjusted EBITDA margin for the Electronics segment was 26.3%, up 470 basis points versus the prior year, reflecting strong volume leverage mix and execution. Looking ahead, we are pivoting our power semiconductor focus to high-value applications and the goal of driving long-term profitability enhancements. Supporting this, earlier this year, we announced the closure of our Allen, Texas power semiconductor manufacturing facility. This location is slated to close in 2027 and marks an important early step in our ongoing portfolio optimization and footprint rationalization process. Looking forward, we expect the site closure will enhance our 2027 electronics segment profitability, and we will continue to share more as we make progress. Moving to our Transportation Products segment on Slide 9. Sales increased 2% year-over-year. Organic growth was 1%, driven by stronger commercial vehicle volumes across truck, construction and agricultural equipment markets. Passenger vehicle organic sales declined 2%, reflecting lower global production and continued sensor product sales declines. Adjusted EBITDA margin was 18.6%. The -- while lower in the quarter, our focused execution has driven improved profitability year-to-date amid mixed market conditions. Our teams remain focused on driving operational excellence and continued profitability improvements across the transportation portfolio. Turning to Slide 10. Industrial segment sales increased 52% year-over-year. Organic growth was 16%, supported by strong data center, industrial automation and construction demand. In the second quarter, we also benefited from faster-than-expected HVAC sales recovery. I would also like to highlight Basler, which contributed approximately 36% of growth in the quarter for the Industrial segment. Integration efforts are progressing well, and the business is performing ahead of our expectations, both operationally and commercially. Demand across key end markets remains healthy, and the password team has executed well since joining Littelfuse. As a result, we now expect Basler to contribute approximately $135 million to $140 million of revenue in 2026, above our prior outlook. We are also increasing our expected earnings contribution to $0.25 to $0.30 for the full year. More importantly, our early success reinforces the strategic rationale for the acquisition expands our exposure to attractive energy and industrial infrastructure applications and positions us to capture additional opportunities. through our broader customer relationships and technology portfolio. Adjusted EBITDA margin was 22.6%, up year-over-year, supported by volume leverage and favorable mix. We have been focused on executing against favorable industrial end market trends, while continuing to advance vascular integration initiatives. Turning to our outlook for the third quarter on Slide 11. We expect continued healthy demand across several of our key markets, supported by a strong backlog and increased customer traction. Based on current market conditions, we expect third quarter net sales in the range of $780 million to $800 million. This represents 26% growth versus the prior year at the midpoint. We expect 21% organic growth, a contribution of 6% to growth from the Basel acquisition and a 1% FX headwind. We also expect third quarter adjusted diluted EPS to be in the range of $4.85 to $5.05. At the midpoint, this represents 68% growth versus the prior year. Finally, our third quarter guidance assumes an adjusted effective tax rate of 23% to 24%. Thank you to the Littelfuse teams for their persistent efforts throughout the first half of 2026. We're excited about our continued momentum and the strategic progress we're making on the way to achieve our 2030 targets of $4.5 billion in revenue and $1.1 billion in adjusted EBITDA. With that, operator, please open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Luke Junk with Baird.

To start with Greg, hopefully, you could just comment on ways that the company can lean into this better breadth that you're seeing in electronics and industrial for that sake, be it taking share in a strategic way leaning into pricing and capitalizing on the potential for some channel normalization. Just how do you think about prioritizing some actions moving through the year in this environment?

Thanks, Luke. I think, look, what's important that we see this quarter as we really see broad-based momentum. So across all of our end markets where we see growth, we see broad-based momentum. And actually, we see a strengthening of momentum in markets that maybe last quarter were a little bit slow. For example, specifically in our Industrial business, we had good growth in energy infrastructure, industrial automation, grid utility but also -- this quarter, we had strength in AC, which is something that hadn't happened in the past. And actually, this is in our CCD market, but we also mentioned that we have very broad strength in our diversified industrial business that includes medical and aerospace and defense. So we see a broadening. We talked about that last quarter. We see that continuing. And so I would say we really see broad-based strength and growth. Also importantly, for us, kind of strategically is about our design win traction. We talked about our design wins being up double digits across all of our markets. So for us, I think it's broad growth across our reported segments and across our markets. And so our strategy and focus right now is being well positioned to capture the upside in the volume.

Great. And then for my follow-up. Obviously, there's been a lot of discussion of your data center business in total on the next-gen content lift as we move into higher voltages. But just curious if you could comment on just continuing to improve the positioning of the business in the near term, as we move through 2026 and just in terms of year-to-date progress, anything you can share to just kind of level set where the company is as of midyear and data center as well.

Yes. Thanks, Luke. I think data center was a strong growth driver in the quarter. We talked about strong growth in the CCDI market. and data center was a strong growth driver of that. And we -- with the outlook we're giving in 3Q and actually through the back half of '26, we expect data center to continue to grow. I think what's also important, though, is that to understand that the revenue growth that we have now in data center this year is all related to the low voltage architectures. And we've talked about the high-voltage architectures coming in the future, probably in 2017 and beyond. We have very low volume shipments now for kind of the proof of concept of those systems, but that comes in. And if you look at our revenue, it's largely around the lower voltage architectures -- going forward, our pipeline and design wins are heavily -- have a heavy strength around these high-voltage architectures. So we see that. And I think 1 thing we'll say about data center -- we continue to have strong design win traction in the first half of 2020 -- in the first half of 2026 as well as in the quarter, our design wins again more than doubled compared to the year before. And like I said, a lot of those design wins are heavily focused around the higher voltage architectures that we expect to come in the future. So we have good momentum. We had good results in the quarter. We expect that to continue through '26 and the design wins are positioning us well for beyond 26 into the future.

And then Luke, this is Abhi. Just to take you back to Investor Day. If you kind of think about the content opportunity, we talked about content opportunity being 2 to 4x higher and high voltage versus low voltage today that we're seeing in terms of revenue. And so just to bring it all back, I think we're pretty confident in our 25% to 30% CAGR that we laid out over the next 5 years back to our data center markets.

And just to read between the lines, I mean, it seems like data center mix has to be moving up in the first half of the year. Anything you can share relative to the exit rate coming out of last year, which was low double digits.

By mix, do you mean data center compared to other markets? Or do you mean mix of our products inside the data center?

Yes. Data center is a percentage of sales, Greg? .

Yes. I think this is also important, right. Like we are very positive on our data center, we see strong growth. But we did talk about this, right? Last year, our growth was really dominated by data center in grid utility. This year, we have the broadening momentum across other markets, diversified industrials or other industrial markets. And even like we said, now we see improvements in HVAC, which was kind of soft in the last couple of quarters. So that's a difference we see now is a much broader base demand across our business than we had last year.

But to Greg's point, our data center still remains -- continues to be the fastest growing market in the quarter and for the first half of the year.

Got it. And then Abhi, maybe just incremental margin dynamics, if you could unpack those a little bit, especially the 3Q guidance that floating up to 40%. Can you talk about some of the drivers, be it volume or maybe even taking some price to the market right now?

Yes, look, at the highest level, if you think about our business model, we've talked about this before, right? When you start to see organic growth in the mid- to high singles or double digits for that matter, our incrementals are pretty positive. So if you think about the margin drivers, so I'll bring it down to a couple of things. Number 1 is the volume leverage that you see unpack as we start to grow the company on a year-over-year basis; two, it's tied to operational execution. Three, it's take to mix. So if you think about the growth drivers and think about where the growth is coming from passive and protection, I have a very high flow-through on the uptick. And so it's a combination of operational execution, volume leverage and mix of revenue that were seen within the quarter that's contemplating the guide.

Your next question comes from the line of David Williams with Needham.

Congrats on the really strong results. Maybe, Gregor, if you kind of think about the savings from the semi fab closure, and you said you'll have more color on that later. But just curious if there's any additional information you can provide around that, when you think you see that come into the P&L and maybe the magnitude of what those savings could look like.

Yes. Maybe, David, thank you. I'll just start with kind of a little bit of context around power semis and kind of how we're thinking about that and then Abhi kind of give you kind of the detailed colors on Alan and some of the kind of the timing of this. But I think we talked about this in our Investor Day. And I would say the thing to understand is that this -- the power semiconductor kind of rationalization and footprint opposition, it's a, I will call a multiyear process that we're really making progress on, but it's going to take some time. And so it's really about optimizing the portfolio to focus on the areas where we really have differentiation where we can win. We're making progress. We also did mention in the call that we have good momentum in power semi from a market perspective, from a bookings and order. We had good growth in the power semi business in the quarter, and we actually have -- it will be a strong contributor to our incrementals in 3Q. So we're making progress. The Allan is like one of the first things we announced is other actions that we'll be taking over time, and maybe give -- Abhi can give some more color on that.