Littelfuse Inc (LFUS) Q2 2019 Earnings Call Transcript

LFUS earnings call for the period ending June 29, 2019.

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Littelfuse Inc (NASDAQ:LFUS)
Q2 2019 Earnings Call
Jul 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Littelfuse, Inc. Second Quarter Fiscal 2019 Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] .

I would now like to turn the call over to your host, Ms. Trisha Tuntland. Please go ahead.

Trisha Tuntland -- Head of Investor Relations

Good morning, and welcome to the Littelfuse Second Quarter 2019 Earnings Conference Call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. This morning we reported results for our second quarter and a copy of our earnings release is available in the Investor Relations section of our website. A webcast for today's conference call will also be available on our website. Our discussion 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.

Before proceeding, I'd like to mention that we will participating in CL King's Best Ideas Conference in New York on September 19. We hope to see you at this event.

I will now turn the call over to Dave.

David W. Heinzmann -- President and Chief Executive Officer

Thank you, Trisha. Good morning and thanks for joining us today. This was a difficult quarter as our results on both the top and bottom line were below our expectation. Consistent with our preliminary release on July 16, we ended the second quarter with sales of $398 million and adjusted EPS of $1.91. In 2019, we have been working through challenging business cycles in the electronics and automotive end markets. Our distributor partners continue to reduce excess electronics channel inventories and we saw further declines in global auto production as ongoing global trade uncertainties continued to drive lower demand.

Lower sales from our electronics product segment were driven by continued channel inventory corrections. Our electronics book-to-bill exiting the second quarter was between 0.8 and 0.9. Point of sales data for our products through broadline distribution partners varied significantly by region, but has declined since the first quarter. While we have seen reduced absolute inventory levels of our product, slower end market demand resulted in a static level of weeks of inventory in the channel. As we exited the second quarter, channel inventories across most of our electronics products remained at the upper end of our normal range, which is typically 11 to 14 weeks. As a result, we expect continued softness through this year, with ongoing distributor inventory destocking.

Our long-term relationships with our channel partners are a significant factor contributing to our success across our electronics products segment, as approximately 75% of sales in this segment are fulfilled through our distribution partners. These partnerships jointly drive demand and profitable growth. However, when market growth patterns change we are exposed to greater sales volatility.

In our automotive products segment, global car build declined high single digits. This decline was greater than expected, which negatively impacted sales, particularly in China and Europe. While our products are represented across a wide and diverse cross section of automotive manufacturers, the current competitive landscape is unfavorably impacting our sales. Japanese and Korean OEM car builds where we have the lowest levels of content were down only 1%. North American, European, and Chinese OEM car builds where we have our highest levels of the content, were down more than 10%. Automotive Tier 1 suppliers continue to rebalance inventory as some OEMs have signaled extended plant shutdowns in 2019. As a result, we now expect to see global auto production down mid-single digits for the full year.

With the slowing auto demand in China, we've seen a shift in the competitive landscape in our sensor business. While the China market has been a strong driver of top line growth for our sensor business in the past few years, the increased local competition in some applications has driven unattractive margin profiles for us and we've begun to step back from portions of this business.

While these factors have challenged our organic growth trajectory in the near term, our experienced global teams are actively managing costs to mitigate the impact to our bottom line. Our disciplined, proactive cost management strategy, which includes a combination of ongoing structural cost improvement and near-term cost reductions, enabled us to achieve a second quarter adjusted operating margin of 15%.

During these demand challenges, we are targeting a mid-teens operating margin balancing prudent cost savings in management, while continuing to invest for the long term. We remain focused on the growth drivers of our business and continue to generate solid design wins. During the second quarter, we won business across a number of high-growth applications, including electric vehicles and EV infrastructure, automotive electronic systems, renewable energy and storage, as well as telecom infrastructure and smart connected consumer electronics.

Our business model has a track record of sustained growth, profitability, and cash generation. This enables us to navigate through the cycles as we deliver ongoing value for our shareholders. We remain confident in the strength of our strategy aligned to the long-term secular growth themes that will drive content increases across the transportation, industrial, and electronics end markets we serve. We have balanced exposure across these markets and see meaningful opportunities to grow the business across a broad range of applications.

Our technical capabilities, customer relationships, and focus on high-growth end markets position us to deliver ongoing best in class returns.

With that introduction, I will now turn the call over to Meenal to provide additional color on our financial results.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thanks, Dave and good morning everyone. I'll start with highlights from our second quarter of 2019. Sales of $398 million were down 13% with organic sales down 11% versus last year. Our sales decline included foreign exchange headwind of 2%, mainly due to the weaker euro and Chinese RMB. Sales were weaker than expected across our electronics and automotive segments versus our view from 90 days ago slower-than-expected end market demand impeded channel inventory reduction.

In addition, global car build excluding Japan was down high single-digits, also a greater decline than projected. GAAP operating margins were 13.2%, while adjusted operating margins finished at 15%. During the quarter we continue to take near-term cost actions aligning manufacturing and supply chain operations to volume expectations, reducing our SG&A levels and initiatives, and managing ongoing reductions in discretionary spend in variable compensation.

Our operating expenses in the quarter were down over $15 million on both a GAAP and an adjusted basis, a 17% decline over last year. We're also continuing our ongoing structural cost reduction projects which include IXYS synergy initiatives. Last quarter we announced two factory consolidation project . The closure of our Italian automotive sensor facility and the consolidation of most of our European semiconductor assembly and test operations into a new Philippines plant. As part of our IXYS initiatives, we've also started consolidating our two US epitaxial [Phonetic] manufacturing sites into a single location, which we expect to complete mid next year.

Structural projects like these reflect our focus on continuous cost reduction efforts independent independent of market conditions. During this period of volatile demand, we're targeting to maintain operating margins in the mid teens. We'll continue to manage costs to align to the near-term demand environment while remaining focused on strategic actions to maximize our growth over the long term.

Second quarter GAAP diluted EPS was $1.75. GAAP EPS included $4 million in after-tax charges mainly due to restructuring and integration charges, partially offset by foreign exchange and non-operating items. Adjusted diluted EPS was $1.91 for the second quarter. Lower volumes and operating leverage impacts were the biggest drivers of the year-over-year decline. We also saw higher levels of price erosion versus last year as pricing has returned to more normalized levels across our electronics segment.

Cost reductions and IXYS synergy savings I mentioned earlier were a significant benefit versus last year, while foreign exchange reduced EPS about $0.07. Our GAAP effective tax rate was 18.2% for the quarter, our adjusted effective tax rate was 17.3% about 180 basis points lower than last year.

Moving on to our capital management. I'll start with cash flow. We generated $49 million in operating cash flow for the quarter and $38 million in free cash flow. Through the first half of the year, free cash flow was $55 million, a 68% conversion from net income. Our decline in cash earnings has had the biggest impact of this year's cash flow generation. We also have higher restructuring activity versus last year and due to holidays in the quarter and timing, some of our receivable collections were pushed into July.

Offsetting our lower operating cash flow, we've deferred some capacity expansion projects given current demand levels. We now expect to spend between $70 million to $75 million in capital expenditures this year compared to our prior projections of $90 million to $95 million. Looking across the full year, our cash flow is traditionally heavier weighted to the second half due to seasonality of our business. Expecting that pattern to continue, we're still targeting to achieve 100% free cash flow conversion of net income for the year.

We were active in the second quarter across various areas of our capital structure, we repatriated close to $100 million, bringing us to $200 million in cash repatriated to the United States this year. We also opportunistically repurchased $32 million of our shares during the quarter followed by another $8 million in July, totaling nearly 240,000 shares. In addition, our Board of Directors approved a 12% increase in our quarterly cash dividend from $0.43 to $0.48. Since the 2010 inception of our dividend, our dividend has grown 14% on a compounded annual basis.

So far this year we've returned over $70 million in capital to our shareholders through share buybacks and dividends, demonstrating our confidence in our ongoing cash generation. Aligned with our strategy, we continue to balance investment for growth while returning capital to our shareholders. Our debt levels were unchanged during the quarter with our adjusted growth leverage ending at 1.9 times on a total debt to adjusted EBITDA basis and well under one time on a net basis.

Now let me provide some performance highlights by product segment for the second quarter. Sales volume versus last year and associated leverage had the largest impact to our company operating margin affecting our electronics and automotive product segments. Currency headwinds, we're at 50 basis point margin headwind. Starting with our electronics product segment sales declined 13% and declined 11% organically. Operating margins were 16.8% declining 570 basis points versus last year. Beyond the unfavorable impact from lower volumes and associated leverage I noted earlier, we're also seeing price erosion levels return to more historical ranges. These factors were partially offset by benefits from IXYS synergies and other cost reduction actions.

Automotive segment sales declined 15% and declined 12% organically. Operating margins were 9.5% declining 280 basis points versus last year. Profitability was hurt by foreign exchange a 200 basis point margin headwind versus last year. In addition, we had higher than expected sales declines largely stemming from lower passenger car builds. Our industrial product segment sales were down 9% due to the custom business exit in the second quarter last year, while organic sales grew 1%.

Margins were 19.6% improving 350 basis points versus last year. Margins benefited from the savings from the closure of our Canadian manufacturing plant in the 4th quarter last year. Overall, this was a challenging quarter for us as the macro environment was softer than we expected entering into the quarter. Our teams continue to take actions based on the visibility we have today, managing the bottom line impacts in the short term while continuing to pursue long-term growth opportunities.

And with that, I'll turn it back to Dave for more color on end market trends.

David W. Heinzmann -- President and Chief Executive Officer

Thanks Meenal. Now, I will provide commentary on the key end markets we serve, beginning with transportation. With the ever greater sophistication of electrical architecture of today's vehicles design win activity in our transportation end market continues to be strong. A lot of nearly 20 new electric vehicle models this year where we are designed in remains a positive for our content opportunities. We continue to win new designs for hybrid and EV platforms, which will launch over the next several years. Increased electrification and the push toward driver assist systems are key factors for growth in automotive electronics.

In the quarter, we secured dozens of design wins with significant wins in Korea, China and Europe, including battery management systems on vehicle chargers for EVs, vehicle telematics and infotainment systems. Also during the quarter, we secured new business for solar sensors, tailgate position sensors and next generation seatbelt buckle sensors. For all of these wins are close collaboration with our customers and differentiated products are key drivers as we continue to secure new business. Beyond the near near-term dynamics, we continue to expect content growth above global car build.

Turning to commercial vehicles, we started seeing softening orders rates during the second quarter and coupled with foreign exchange impacts saw a decline in sales versus last year. Looking ahead, we anticipate lower demand as North America heavy-duty truck and global construction equipment markets come off peak revenues, the past few quarters. Along with the declines in the agriculture sector.

Our commercial vehicle business remains focused on growth beyond North America and won business in Europe, in China. During the quarter, we had 2 key wins in Europe for our high current switches a strategic product line we added through our Italian acquisition. One was with the construction equipment manufacturer and the other a heavy-duty truck application. We made notable progress carrying new business this quarter, and our pipeline remains healthy. Global opportunities will drive long-term growth for us in commercial vehicle markets.

As I wrap up my comments on transportation end markets. I'm confident beyond the current volatility within the automotive supply chain. We are well positioned to capitalize on increased content opportunities as global car production normalizes. As the complexity of transportation applications increases. We will continue to be successful and win new business based on our strong customer relationships, technical expertise and the Littelfuse brand reputation for product quality, safety and reliability.

Moving on to industrial end markets. We continue to see evolving global trends in the energy sector toward a higher percentage of renewables used in new power generation and the implementation of energy storage. Government subsidies and incentives, environmental regulations and more efficient technologies are helping drive cost parity versus traditional fossil fuel enabling growth in renewables. In particular solar, wind and energy storage applications are expanding led by the US, China and India.

Heavy industries such as oil and gas and mining markets are stable. The oil and gas markets are using more automation to improve efficiencies and mining is moving toward more cost effective techniques before require more electrical content. While US non-residential construction was slightly down during the second quarter, driven primarily by weather conditions is projected to recover in the second half. Across these applications is a requirement for greater electrical protection and power conversion. During the second quarter with our technical engineering capabilities service and support . We secured new solar business in North America and wind turbine business in Europe in Europe. Further, we won business from motor drive applications in industrial elevators and fans. With the ongoing global focus on energy conservation, we see the expanded need for the Littelfuse full range of protect and control technologies increasing across industrial end markets. We continue to expand our investments in capacity in these high growth areas to support growth in renewable and power conversion application.

Lastly across electronics end-markets, customers continue to invest in R&D as they remain focused on developing innovative products. We continue to see good design activity across a range of applications and secured new design wins for chargers and battery management systems for consumer electronics. We secured circuit protection and electronic sensor wins across multiple appliance applications and continue to see good design win activity in telecom infrastructure, as well as building and home automation.

This activity reinforces for us that despite the near-term macro pressures, our long-term strategy remains on track and is supported by the continued proliferation of smarter and more connected devices driving demand for Littelfuse products. We will continue to win new business opportunities by leveraging our broad product offering and our strategic relationships with far-reaching access into diverse end markets. Our objective continues to be delivering the innovative technologies and outstanding customer support that are more than 100,000 end customers have come to expect.

With that, I'll turn the call over to Meenal to talk about guidance.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thanks, Dave. Based on the weaker market backdrop and order trends we currently see, we expect sales for the third quarter of 2019 of $362 million to $374 million. The midpoint of the guidance reflects a 16% decline in reported sales and a 15% organic sales decline versus last year. We estimate currency to be about a 1% headwind. We expect third quarter adjusted diluted EPS to be in the range of $1.50 to $1.64. Our adjusted EPS guidance assumes an adjusted effective tax rate in the range of 20% to 21% for the quarter.

Our third quarter forecast includes channel inventory reductions, continuing to impact our sales across electronics, and we are assuming low single-digit declines in car build versus last year. The main driver of year-over-year EPS decline is from the lower volumes and operating leverage. We expect FX to be an estimated $0.08 year-over-year headwind for the quarter based on current rate. On the cost side, we are continuing to drive our IXYS synergy initiatives -- and given demand projections, we expect to take further cost reduction actions in the third quarter. While savings will be limited in this year, we'll see this benefit us for 2020.

We are estimating 24.9 million diluted shares for the third quarter, which incorporates the shares bought back-to-date. Overall, we expect the fourth quarter to also be a challenge due to market conditions with our typical seasonality of a sequential sales decline. We're focused on managing costs with this trend in mind.

For the year, we expect our adjusted operating expenses, excluding amortization to be about $300 million, which is about $40 million lower than 2018. The bulk of that decline is within SG&A. Foreign exchange remains a headwind for this year but more muted in the second half. Based on the current exchange rates and volumes, we're now estimating FX to be a $0.35 EPS headwind for 2019. Interest expense for the year remains in the range of $22 million to $23 million and we expect amortization expense of approximately $40 million for the year.

We are narrowing our full year 2019 tax rate range to 19% to 20% but continue to expect the rate to vary across quarters due to the timing of certain discrete tax items. And as I noted earlier, we now expect to spend between $70 million to $75 million in capital expenditures compared to our prior projection of $90 million to $95 million. This reduction reflects a deferral and various planned capacity projects given current demand levels.

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

David W. Heinzmann -- President and Chief Executive Officer

Thanks Meenal. In conclusion with the backdrop of this difficult near term macro environment and the cycles we are working through, the long-term fundamentals and growth drivers of our business remain strong. We remain focused on operational excellence and managing our costs to align to current business conditions. We also continue to leverage our distinct global competitive advantages, including the breadth and depth of our portfolio, our manufacturing, technical and application expertise, as well as our strong customer and distributor relationships.

With our persistent focus on execution and determination to win new business, we will continue to benefit from the secular growth themes of a safer, greener, and more connected world. We remain well positioned to successfully execute our five-year growth strategy.

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


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Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Shawn Harrison from Longbow Research.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Shawn.

Shawn Harrison -- Longbow Research -- Analyst

Good morning. Good morning, everybody. Dave, you mentioned the POA varied widely through distribution during the quarter. Is there anyway you could give us a sense of what the disconnect is you're seeing right now between the point of sale out of distribution and then the selling of your product? What it was in the second quarter and then kind of what you've been experiencing here so far in July?

David W. Heinzmann -- President and Chief Executive Officer

Sure. We kind of look at the difference between POS and POA. We are seeing in different product lines kind of varying between about 0.8 to 0.9 from a book-to-bill, from our distributors to us. What we're seeing from the distributors, the broad line distributors particularly is that their POS, which was a quarter ago running just below one and kind of approaching one, is now running at about 0.9. So really the challenge we saw as their demand patterns came down some related to ultimate end market demand, some related to EMS guys continuing to reduce their inventories, that reduced POS and sell-through kept us from driving inventory levels from a weeks of inventory down. So we continue to be at the upper range of that. And so because of that, we believe the inventory correction is kind of extending further than we previously thought and will take the bulk of the year to work our way through.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you, Shawn.

Operator

Our next question comes from the line of Christopher Glynn from Oppenheimer.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you. Hey, good morning. So you talked about a few structural cost actions in some plant transfers and closing. I'm wondering if you could kind of quantify the structural cost out amount you're anticipating and the timing payback?

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Yeah, Chris it's Meenal. So in general with the structural cost which are -- we talk a lot about the plant transfers that we're doing, all the ones that I mentioned a couple that were related to IXYS, those are really going to go out into 2020 and 2021 by the time we're completed. So those were part of the IXYS synergy benefits that we've talked about. So those are going to be further out. The near-term, one that we talked about, which was the closure of our Italian automotive sensor facility, that's going to finish by the end of this quarter or so, so limited benefits in '19 and it's part of our profitability improvement within the automotive segment.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you, Chris .

Operator

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

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Matt.

Matt Sheerin -- Stifel Nicolaus -- Analyst

Yes, thank you. A question regarding your commentary, Dave, regarding the automotive business, and it sounds like some share shifts within the sensor business in China. Could you talk about the impact relative to the sequential in year-over-year declines that you're seeing in auto? And other parts of your business that may have, it may be more on the commodity side where you could see some additional pressure from a competitive standpoint in Asia?

David W. Heinzmann -- President and Chief Executive Officer

Yeah. So kind of talking about the automotive sensor business in China specifically, which if you kind of look back over the last couple of years has been a top line growth driver for our sensor business and it's been a pretty healthy growth driver there. What we've seen is typical in the sensor in the sensor applications they will qualify ourselves plus one other. And what we've seen as demands have softened over the last few year or so in China pretty strong push to try to move in certain categories like for instance in the transmission sensors that we're selling into China, where local competitors have gotten very aggressive on pricing. And we've had the opportunity to maintain the business. But we have chosen not to, because the margin profile of it is just not attractive for us.

So it's not an issue where they kind of blindly make a change and shift share without our engagement We're engaged in it, but might choose to walk away from it. In most cases there is a limitation and the ability to make those moves very quickly. So I'm not sure that we have a lot of risk in other categories or other applications for kind of shift from one supplier to the other. So overall, I think it's kind of really retain kind of contained around particular sensor applications in China.

And it's really more our choice where we're choosing not to participate in the lower margin side of it.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you, Matt.

Operator

Our next question comes from the line of Steven Fox from Cross Research.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Steven.

Steven Fox -- Cross Research -- Analyst

Hi, good morning. Two questions please. First, Dave on the pricing comments you've made overall more broadly speaking, you said that you're seeing more normalized pricing. Can you give us a sense for what that means from where it was. And secondly on a similar vein, meanwhille[Phonetic], can we talk about the sequential change in operating margins. I imagine most of it is volume related, but is there other negative impacts we should think about in the quarter-over-quarter decline in margins beyond just volumes? Thank you.

David W. Heinzmann -- President and Chief Executive Officer

Yeah. Steven, I'll talk about kind of the pricing conditions and we talked a little bit about this actually last quarter. The reality is, and this is mainly impacting the electronics portion of our business. We're not really seeing much of a change in industrial or automotive, automotive it's fairly consistent year-to-year. But the last couple of years with very strong demand patterns and shortages in the markets, not particularly on our technologies. But overall shortages pricing pressure on electronics drop meaningfully.

So where we would see normal pricing pressure in the electronics area being 4% to 6% per year, which varies by technology and things, but it kind of in that range for electronics that's kind of normal what we saw the last couple of years, it was about half of that pricing pressure. So we had the advantage in a tailwind of favorable pricing conditions. What we're seeing is not that pricing is getting ugly or anything, it's kind of returning back to that normal level of that 4% to 6% in electronics.

So it creates a bit of a headwind, which we deal with every year, year-in and year out on driving costs to kind of match up to those things and keep our margins healthy. So, pricing that's kind of story on pricing. -- I'll talk a little bit about the sequential changes on margins.

Trisha Tuntland -- Head of Investor Relations

Sure Steven, I knew you were just asking in general on sequential margins Q3 this year versus Q2. Your comment on, but most of its volume is correct. It is -- a lot of that is volume and leverage specifically a little bit on pricing as Dave mentioned as we continue to see a little bit of the increased levels of price erosion to normalized levels, you get a little bit more and more quarter-over-quarter in terms of price erosion. I would say the other large factor is our tax rate that we've guided to is slightly higher on a sequential basis and that has about a $0.06 EPS impact if you assume the flat tax rate quarter-on-quarter.

Steven Fox -- Cross Research -- Analyst

Great, that's helpful. Thank you.

Trisha Tuntland -- Head of Investor Relations

Thank you, Steven .

Operator

Our next question comes from the line of David Liker from Baird.

Trisha Tuntland -- Head of Investor Relations

Good morning David.

David Liker -- Baird

Hi, good morning everyone.

David W. Heinzmann -- President and Chief Executive Officer

Hi.

David Liker -- Baird

Hey guys, two kind of related things on the automotive side, I mean your revenue performance relative to the, what the end markets did. There was a meaningful divergence there relative to what it normally is and guessing some of that is probably mix, but if there is anything in particular you can call out to help on that. And then on the sensor business, you're talking about, you gave some color on that, but can you give us some frame of reference in terms of the magnitude of that size? Thank you.

David W. Heinzmann -- President and Chief Executive Officer

Sure, Yes, so the difference on our growth versus end markets I think global car build we would say was probably down 7%, 8%, somewhere in that range that will kind of get more clear as time goes by. But what we really saw impacting us negatively in this quarter with the shift in OEM and we haven't really talked so much about this in the past in some ways. But so I talked about in the prepared comments. We have extremely strong content position with North America and European and Chinese OEMs.

And we have a much weaker position with Japanese and Korean. And if you really look at the split of how from an OEM global perspective growth rate took place during the quarter really Japanese and Koreans we're the one who's faired the best particularly in China, where their growth rates were slightly down. But they were kind of between 0% and 1% down and overall car build to those OEMs. And if you look at the European, North American and Chinese OEMs. The growth rates there, they were down more than 10%. So that shift in OEM mix was unfavorable to us with a particular impact coming out of China.

They kind of being the biggest driver there. So we still saw good content opportunity within those customers, but that mix of customer certainly hurt us. And we also saw a bit of probably softening in order rates and shipments because of some of the Tier-1s and preparing for OEM shutdowns [Phonetic] and things like that impacted it. On the sensor side of things, what's the magnitude of that. So we have already begun stepping away from those pieces of business and we will step away from more likely in the coming quarters. So it's been a few million dollars so far that we've stepped away from in China , and there is a few million more that we will, we haven't given guidance and won't give an exact number. But it's a few million dollars that's already been done and we've got a few million to go. Hopefully, that helps. Thank you.

Operator

Yes, thank you. Our next question comes from the line of Karl Ackerman from Cowen.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Karl.

Karl Ackerman -- Cowen

Hey, good morning. Meenal or Dave, how should we think about what is the optimal inventory level for you on your own balance sheet. And in terms of the OpEx and gross margins, I know you're not necessarily guiding for Q4 at this stage. But given the distribution overhang and likelihood of reducing inventory days on hand. Could you just give us a sense of how we should think about margins and OpEx learning for the full year. And if I may squeeze in one more. As a follow up, when you think about the operating margin uplift going forward how much of it should we think about should come from a richer mix of value-added products that you've alluded to on this call in your prepared comments versus end demand growth. Thank you.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

So, what a nice I start. I think there were with a couple of questions. I'll start with inventory and then maybe just comment on full year, on margin and OpEx, but inventory right now, we're trending somewhere in the neighborhood of 90 days or so in terms of days of inventory on hand. Higher than the levels that we would expect we'd be targeting some lower levels more in the, -- but I've got to go back and do the math. Now, but in the 75 to 80 days when we start to think about IXYS or so and we had targeted reductions that we put in place for this year. I would say on the one hand, we are making progress, because that was also part of our IXYS synergies that we were, we were looking to drive with from a cash flow working capital improvement perspective. It's been hampered with some of the sales softness that we're seeing and especially in the case of the second quarter the fact that demand declines all the pieces that David talked about were higher than we expected. We ended up with extra inventory at the end of the quarter which exacerbated the differential and really where we want to be.

Also impacting cash flow a bit. So, we have plans in place. We have more to go. And we're working on that. And then secondly in terms of Q4. So in the end of my prepared remarks, I commented on a couple of things. David mentioned earlier that we expect this weakness to continue through the year. Historically, we see Q4 is a sequential sales down versus Q3 and we're not really seeing anything different today that would tell us the pattern is going to be any different. The other comment that I had made is overall on a year-over-year basis. We are reducing our operating expenses $40 million and so right now we are projecting our full-year 2019 OpEx to be in the $300 million range. The bulk

the bulk of that reduction is coming out of SG&A.

David W. Heinzmann -- President and Chief Executive Officer

Then your last comment was really, as we kind of return to growth, is it going to be a healthier mix, a more value-added driving growth and I would say there is a couple of story lines there. If we look at the electronics part of our business, the bulk of the decline that's going on right now, yes, end markets are down a bit and depressed, but primarily it's driven out of the inventory correction through both EMS and end customers and then through distribution on back then to ourselves. So the mix of business there and the products and technology isn't going to shift dramatically as we kind of return to growth. It really just we play it through the inventory and get back to healthy growth levels.

On the automotive side, certainly the content increase and the growth drivers there are certainly in the areas where there are higher dollar content and higher value products as voltage levels go up and electrification of vehicles and things like that. So, yes, there will be a shift in mix over time, a little challenging to project just how quickly, particularly the electrification takes place. And as you guys know that market and follow it as much as we do, we'll continue to kind of monitor that and participate in that and see how that rolls out. Thanks, Carl.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you, Carl.

Karl Ackerman -- Cowen

Thank you for the color. Thank you.

Operator

Our next question comes from the line of George Godfrey from C.L. King.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, George.

George Godfrey -- C.L. King & Associates -- Analyst

Thank you. Good morning, Meenal, good morning, Dave and Trish. I want to ask about capital allocation. Given the leverage ratio is low as it is, any thought -- and I heard about the raising of the dividend, but maybe stepping up share buyback more aggressively or perhaps an acquisition that you've coveted in three years, the price was out of reach and now in different conditions maybe the price negotiation is more reasonable? Thanks.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

So I'll comment on just a couple of the factors you mentioned, I am sure Dave will add some color as well. In terms of acquisitions, we've been getting that question a lot about, Hey, with the market down in some of the market softness, there should be some good acquisition opportunities out there. Our funnel remains strong and we continue to review all the targets that we've been looking at. Yes there are several that we would be interested in. I would just say that memories in the market tend to be longer than share price movement or valuation views if you're a private company. And so even if the market is down short term, people don't necessarily think about the value of the company being down and they think about comparables from 12 months ago, or 18 months ago, things like that. So I wouldn't say that we're seeing any significant price changes right now in terms of acquisition targets. That's one.

And then two, in terms of share buyback, I did mentioned that we bought back in this past few months and we bought back about $40 million in shares, equates to about 240,000 shares when you add that into the share buyback that we've done since October -- it's been a pretty meaningful amount around 700,000 shares or so. We've always said our philosophy is opportunistic and we find that that's lets the best balance for us with capital and we're making sure we're getting a good return on shares and we tend to buy them what we think is the low point of our valuation and that will be our philosophy so going forward.

David W. Heinzmann -- President and Chief Executive Officer

So, yeah, I think we always balance between returning cash to shareholders through buybacks and things like that. And then also what the acquisition opportunities are. We're active. We continue to look for opportunities. First and foremost, we've got to meet the strategic needs we want. And secondly, of course, we've got to drive superior return in the acquisition. So we continue to be active and working on those things and as opportunities come along and we can shake them loose, we will certainly take actions. But it's a balanced approach.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you, George.

George Godfrey -- C.L. King & Associates -- Analyst

Understood. Thank you.

Operator

Another question on the line of Seth Sherwood from Morningstar.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Good morning, Seth.

Seth Sherwood -- Morningstar -- Analyst

Good morning. One of your competitors recently mentioned an increasing number of suitors for M&A targets in the sensor space. Are you seeing any substantive changes on this front? Does this along with the overall sensor situation in China, I trust your M&A strategies are priorities in the medium to long term?

David W. Heinzmann -- President and Chief Executive Officer

What I would say is in the sensor space. It's been an active M&A space for some time and we continue to look at opportunities and properties and there are niche opportunities that are smaller, maybe regional one technology sort of players where they have fairly high expectations on margin profiles. But there is still in a reasonable range. We certainly see the bigger properties, multiples continue to be pretty high, and some of the bigger players certainly been pretty active and some of the bigger opportunities, whether it's the first sensor the CE [Phonetic] is working to close or things like that.

So I'm not sure that we've seen a change in dynamics in the sensor space from an M&A standpoint, but it's been a pretty competitive space for a while.

Seth Sherwood -- Morningstar -- Analyst

Okay.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thank you Seth.

Operator

Next question comes from the line of Shawn Harrison from Longbow Research.

Shawn Harrison -- Longbow Research -- Analyst

Hi, two follow-ups just on the cost structure, if I may. Meenal, the $40 million approximate decline in OpEx this year, how much of that is temporary versus structural so that we model it correctly as demand comes back? And then, all in, I'm trying to kind of with that question determine as you get into, let's say 2021, what is the total cost out of the Littelfuse business that we would see relative to either 2018 or 2019 pick your point in time, but just the cost reductions in aggregate that we'll see with IXYS new actions and kind of in-process actions?

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Sure. So overall I had talked about $40 million in operating expenses coming out. I'd say, I'd divide them into two buckets, about half and half, first part being more structural cost reductions that we've taken, which include the IXYS synergies that are part of that as well, in just overall whether it's headcount and other easier non-manufacturing facility type activities that we've done.

The other part is more variable. It's a combination of variable compensation. But other areas like supply chain costs that we have running through operating expenses as well. So as long as demand stays down, especially when it comes to a lot of the supply chain costs, those are down as well. While I didn't touch on this in detail, we've also taken out costs on our topline that impact gross profit from a manufacturing and gross profit perspective. In many cases, a lot of the short-term stuff is variable in that we're aligning our manufacturing and supply chain structures to align to the demand volumes we have, but it can stay in place for some time and even when demand starts to pick up we're careful on how we put some of those cost back. So there is a bit of a trailing edge on that.

And then lastly, I mentioned some of the structural work we were doing starting with in the fourth quarter last year, we closed down a plant in Canada, we announced last quarter about our Italian sensor plant, a couple of different big moves going on relating to IXYS. Overall, as I look in 2021, we had committed to $30 million, at least $30 million of cost coming up for IXYS, it's going to be more than that. And we said that. And then, I'd say in terms of overall, the cost that we're taking out now, we'll come back to you with a little bit more structure of what is that, how much of that rolls in from '19 to '20 and net-net, how does that shape up for 2021. We're still evaluating some different things. Also, there could be longer-term structural actions.

Shawn Harrison -- Longbow Research -- Analyst

Thanks.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our last question comes from the line of Christopher Glynn from Oppenheimer.

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Hi, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Hey, Dave. In your early prepared remarks, you did your usual summary of some business wins. Your new business wins in those product life cycles stands independent of channel or activity or end demand fluctuations, right now. So I'm wondering if there is a way for you to quantify the value of net new business wins relative net of expiring product cycles if that's the way that you look at your business?

David W. Heinzmann -- President and Chief Executive Officer

Yeah, it's a great question, Chris and it's challenging, particularly with very large customer base that we're selling through particularly in electronics as you're kind of talking to what's new business wins, how is that backfilling churn and things like that. Some of the things we monitor and watch closely are customer counts, new customers through our distribution channels, new customers who are signing into, and selling into and things like that. Overall, what I would say is on the electronics side, we still are finding that there are content opportunities and we're gaining content in our applications, whether it's 5G infrastructure in the back-haul there or connected devices and also

Unidentified Speaker

and also in kind of the industrial electronics side, as our power semiconductors are getting traction in these areas. So we still feel good about the content story in electronics, it's just a lot of noise with the inventory corrections and the inefficiency of the kind of a long supply chain. So we remain pretty confident and in the fact that once we get through this, and clean up the excess inventories and got to take another couple of weeks out of inventory and the supply chain out to get to there that the content story and the design activity remains pretty healthy.

So we feel very positive about that and in the business.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you.

Trisha Tuntland -- Head of Investor Relations

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

Duration: 50 minutes

Call participants:

Trisha Tuntland -- Head of Investor Relations

David W. Heinzmann -- President and Chief Executive Officer

Meenal A. Sethna -- Executive Vice President and Chief Financial Officer

Unidentified Speaker

Shawn Harrison -- Longbow Research -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Matt Sheerin -- Stifel Nicolaus -- Analyst

Steven Fox -- Cross Research -- Analyst

David Liker -- Baird

Karl Ackerman -- Cowen

George Godfrey -- C.L. King & Associates -- Analyst

Seth Sherwood -- Morningstar -- Analyst

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