Vishay Intertechnology Inc. Q4 2009 Earnings Call Transcript

Feb. 9.10 | About: Vishay Intertechnology (VSH)

Vishay Intertechnology Inc. (NYSE:VSH)

Q4 2009 Earnings Call

February 09, 2010 10:00 am ET


Lior Yahalomi - EVP & CFO

Gerald Paul - President & CEO

Felix Zandman - Founder & Executive Chairman, CTO & CBDO

Lori Lipcaman - EVP & CAO


Shawn Harrison - Longbow Research

Matt Sheerin - Thomas Weisel Partners

Steve Smigie - Raymond James


Good morning. At this time, I would like to welcome everyone to the Vishay's fourth quarter 2009 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-session. (Operator Instructions).

Thank you. I would now like to turn the call over to Dr. Lior Yahalomi. Sir, you may begin your conference.

Lior Yahalomi

Thank you. This is Loir Yahalomi, Vishay's Chief Financial Officer. Good morning, ladies and gentlemen and welcome to Vishay's fourth quarter 2009 earning call.

On the line with me today are Dr. Felix Zandman, Vishay's Executive Chairman and Chief Technical and Business Development Officer; Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, Vishay's Executive Vice President of Finance and Chief Accounting Officer.

Before I start, [David Tomlinson], our Senior Vice President, Corporate Controller, will read our customary opening statement. [Dave]?

Unidentified Company Representative

You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statement. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the SEC.

Lior Yahalomi

Thank you, [Dave]. I will make summary remarks. Dr. Paul, our CEO will add a more detailed analysis of our year and fourth quarter 2009. And finally, Dr. Zandman, our Chairman will update our R&D and acquisition activities and will make summary remarks.

Before I start, please note that the press release that we issued this morning includes a schedule which reconciles GAAP EPS and adjusted EPS. Quarterly results. For the fourth quarter of 2009 Vishay reported revenues of $607.0 million, 15.5% higher than the third quarter of 2009 and 5.5% higher than the fourth quarter of 2008.

On a GAAP basis, our consolidated gross margin for the quarter was 22.6% as compared to 19.9% for the third quarter of 2009 and 14.8% for the fourth quarter of 2008. The increase from the third quarter of 2009 reflects mainly the recovery from the historical global economic crisis with increased sales and the cost reduction initiative implemented by the company.

Selling general and administrative expense for this quarter were $98.3 million or 16.2% of revenues compared to $89.7 million or 17.1% of revenues for the third quarter of 2009 and $97.9 million or 17.0% for last year's fourth quarter. Restructuring and severance costs and related asset write downs in our fourth quarter were $4.1 million. Total cash paid out for restructuring during the fourth quarter of 2009 was $7.2 million.

Other income and expense for the fourth quarter of 2009 consist mainly of $1.2 million of interest income. The effective tax rate for the fourth quarter of 2009 was 17.2%. Capital expenditures for the quarter were $24 million as compared to $8 million for the third quarter of 2009 and $52.9 million in the fourth quarter of 2008.

Depreciation and amortization for the quarter was $60 million as compared to $59 million in the third quarter of 2009 and $55 million in the fourth quarter of 2008. As announced in our press release, Vishay reported earnings attributable to Vishay's stockholders of $0.15 per diluted share for the fourth quarter of 2009.

The net earnings attributable to Vishay's stockholders for the fiscal quarter ended December 31, 2009 was impacted by a pretax charges for restructuring and severance cost and related asset write-down of $4.1 million, these items and the related tax effects had a $0.01 per share effect on the net earnings attributable to Vishay's stockholders.

The adjusted net earnings therefore $0.16 for the fourth quarter of 2009 as compared to adjusted net earnings per share of $0.03 for the third quarter of 2009 and adjusted net loss per share of $0.07 for the fourth quarter of 2008.

Annual results. For the year of 2009 Vishay reported revenues of $2.042 billion or 27.6% lower than 2008. On a GAAP basis our consolidated gross margins for the year 2009 were19.0% as compared to 21.2% for 2008.

SG&A expense for the year 2009 were $359.2 million or17.6% of revenues compared to $450.9 million or 16.0% of revenues for the year 2008.

Restructuring and severance cost and related asset write downs for the year 2009 were $38.6 million. Total cash paid out for restructuring during the 12 months of 2009 was $48.4 million.

Other income and expense for the year 2009 consist mainly of $3.9 million interest income and $5.0 million of foreign exchange gains. The company incurred significant pretax losses in low tax rate jurisdictions during the year of 2009, which meant we could not benefit from the losses and this led to a negative effective tax rate.

As announced in our press release, Vishay reported a loss attributable to Vishay's stockholders of $0.31 per diluted share for the year of 2009. The net loss attributable to Vishay's stockholders for the fiscal year ended December 31, 2009 was impacted by pretax charges for restructuring and severance cost and related asset write downs of $38.6 million for an amended executive employment agreement of $57.8 million partially offset by a gain of $28.2 million on settlement of matters related to the acquisition of the International Rectifier's power control system business.

These items and the related tax effects had a $0.33 per share effect on the net loss attributable to Vishay's stockholders. Therefore, the adjusted net earnings per share is $0.02 for the year of 2009 as compared to adjusted net earnings per share of $0.45 for the year 2008.

Capital expenditures for the year 2009 were $50.3 million compared to $152.0 million in 2008. Depreciation and amortization for the year 2009 was $229.6 million compared to $222.9 for the year of 2008. We expect depreciation and amortization for 2010 to be slightly above $200 million.

As previously disclosed, Vishay was required to adopt two new accounting standards on January 1, 2009, which required retrospective adjustment of previously issued financial statement. The retrospective application of FSP APB 14-1 had no effect on the reported loss from continuing operations are diluted share for the fourth quarter of 2008 and increased the previously reported loss from continuing operations by $0.8 million, with no effect on earnings per diluted share for the year-to-date period.

Vishay's liquidity. Vishay had a total debt of $301 million as of December 31, 2009. The debt consist predominately of the following four segments. $105 million of long term notes with 93 years maturity due on December 12, 2102 with interest rates of 90-day LIBOR plus 0%; $87.5 million of long-term maturing on July 1, 2011 with payment spread over to next 1.5 years with interest rate of 30-day LIBOR plus (inaudible).

We also have $250 million revolving credit facility maturing on April 20th, 2012 with an interest rate of 30-day LIBOR plus 1.52%, $125 million of which was unused on December 31, 2009. And finally, a $15 million of long-term loan maturing January 27, 2014 with payment spread over five years with interest rate of 30-day LIBOR plus 3.45%.

As of December 31, 2009, Vishay had cash and cash equivalents of $579.2 million. Total available credit lines; including the $125 million unused revolver in the U.S. was $172 million at December 31, 2009. Vishay's total available liquidity measured by cash plus all available credit lines as of December 31, 2009 was $751 million while, our total debt payable over the next five years is only $230 million.

Some other key summary financials are: Total inventory at year end was $434.9 million as compared to $538.0 million at the end of 2008. Working capital at the year-end was $1.0 billion as compared to $867 million at the year-end 2008.

Free cash flow, which Vishay defines as cash flows from operations less capital expenditures plus proceeds on sale of property and equipment, was $91.9 million for the fourth quarter of 2009 as compared to $103.4 million for the third quarter of 2009 and $30.3 million for the fourth quarter of 2008.

For the total 2009 year, our free cash flow was $246.5 million as compared to $133.4 million during the year of 2008. Vishay's total liquidity as of December 31, 2009, again, is $751 million and our continuous focus in generating free cash would further improve our liquidity throughout 2010.

I will now turn the call over to Dr. Paul, our President and Chief Executive Officer. Dr. Paul?

Gerald Paul

Thank you, good morning, everybody. As you could hear from Lior, our CFO, the recovery of Vishay's business in the fourth quarter continued at a robust pace with orders approaching pre-crisis levels. Due to better sales good efficiencies and reduced fixed costs profits improved further Vishay came back to pre-crisis profitability levels at still much lower sales. Gross margin increased to 22.6% of sales.

We reported $0.15 per share GAAP or $0.16 per share adjusted. 2009 also became one of our best years in terms of cash. We generated $246 million of free cash $92 million alone in the fourth quarter. Fixed costs were reduced quite dramatically versus 2008 which puts us in a favorable position for reaching new performance levels going forward.

Let me talk about the economic environment as we see it. The demand for electronic components in the fourth quarter increased dramatically across all geographies all markets and all sales channels. Low inventory levels in combination with stretching out lead times contributed to exceptional order levels. After a strong turn around in Asia in the third quarter, in Q4 also the U.S. and Europe followed.

The main Asian market segments, laptops and mobile phones defined normal seasonality in the fourth quarter. We have seen a major order increase in automotive, which is still driven by small cars, but also supported by very low inventory levels in the pipeline. Industrial segment continues to show a steady recovery worldwide, which I believe is a promising sign for a profound and solid upturn.

Military and medical continued strong and stable. [POS] was strong; inventories at distributors were still going down somewhat in the fourth quarter by 2%. I remind you of the reduction of 10%, 12%, and 10% in the prior quarters.

Inventory turns at distribution came back to normal. We have seen worldwide 4.2 turns after 3.7 last quarter. The Americas 3.0 turns after 2.8. Europe 3.9 turns after 3.3, Asia 5.8 turns after 5.3. Book-to-bill ratio of our distributors were substantially above one in all regions. What we also see is a decrease in price pressure in general due to a components shortages and lengthening lead times.

Let me talk about Vishay's business development, due to stronger than expected orders we exceeded our original sales projection for the fourth quarter substantially. We achieved sales of $607 million in the quarter as compared to $525 million in the prior quarter and compared to $575 million prior year. Excluding exchange rate effects sales versus prior quarter were up by $74 million or 14% and up versus prior year by $11 million or 2%.

We have seen very strong book-to-bill ratios across the board, 1.22 in the quarter after 1.11 in the third quarter. Some book-to-bill details, we have seen book-to-bill of 1.37 for distribution, 1.06 for OEMs, 1.32 for actives, 1.12 for passives, 1.16 for the Americas, 1.22 for Europe and 1.29 for Asia. So what you can see, we have had exceptionally strong orders from distribution in particular for actives of course supported, as I said before, by a strong [POS] of our distributors.

Backlog has grown to 3.1 months and this underlines our anticipations concerning further sales increases. Price decline quarter-over-quarter has practically stopped and continues to go down year-over-year. For the entire company we had a price decline of only 0.1% quarter-over-quarter practically stable and 2.2% price decline versus prior year.

Looking at actives, stability also vis-à-vis prior quarter, and a price increase of 1.1% versus prior year, for the actives also stability versus prior quarter and a reduced decline of 5.4% versus prior year.

Some highlights of our operations. Despite the sales increase we continued to reduce inventories in the quarter by $11 million even you exclude exchange rate effects. $5 million reduction in raw materials and $6 million reduction in finished goods and WIP.

We have reduced $113 million or 20% of our inventory in the year 2009. Our inventory turns increased to 4.1, but further improvements can be expected referring sales and substantially constant inventories. Capital spending in the fourth quarter remains on a low level of $24 million versus $8 million in prior quarter and $53 million in 2008.

Capital expenditures in 2009 were at $50 million versus $152 million in 2008. For 2010, we expect to spend approximately $135 million, $50 million in maintenance of business, $35 million in cost reduction, and $50 million for expansion.

The focus of expansion projects will be on new technologies, new products like Trench diodes, wet tantalum caps, and new infrared application. So, I'm talking about various special expansion projects.

During the quarter, employment in Vishay increased by 498 due to the rebuild of manufacturing capacities. However, fixed cost personnel as part of the total continue to decrease by 68 quarter-over-quarter. Since September '08, the beginning of the crisis if you want so, 19% of all employees and 16% of all fixed asset has reduced and we expect only very limited additions of fixed heads during the upturn.

The restructuring of our operations has continued in 2009, we have completed consolidation of opto packaging in Asia. We have closed the film capacitor plant in Shanghai moving the volume to Loni in India. We have closed the MLCC plant in Monroe, Connecticut moving the volume to Israel; all this will reduce and reduces already our fixed cost without a loss of volume. We generated $112 million cash from operations in the quarter as compared to $110 million in prior quarter and $76 billion in prior year.

We generated, as Lior pointed out, $92 million free cash in the quarter as compared to $103 million in prior quarter into $30 million in prior year. In the crisis here 2009 we generated free cash of $246 million, which is one of the best results in Vishay's history and you will understand that we are somewhat proud of it.

Also foreseeably Vishay will continue to be an excellent generator of free cash. Let me talk about the results a little and reconcile this quarter and full'09 vis-à-vis quarter three; based on $82 million higher sales, $74 million higher excluding exchange rates impacts, the adjusted operating margin increased by $24 million, mainly from $15 million to $39 million.

The main elements were price decline, very low price decline with a negative of minus $1 million volume impact positive by $36 million, variable costs went up by $5 million and fix cost went up by $17 million, whereby $8 million out of the $17 million came from the needs to increase capacities and $6 million came from generally not requiring costs like the spin-off project which we currently pursue and of some warranty costs.

Now let me go to the reconciliation of the fourth quarter vis-à-vis prior year. You can see that based on $32 million higher sales and $11 million higher excluding exchange rate impacts, the adjusting operating margin increased by $50 million from minus $11 million to $39 million.

The main elements were again ASP decline of 2.2% or $14 million negative impact, volume impact of plus $15 million variable cost went up by $28 million in the quarter, fixed cost went up by $13 million and we also had a positive inventory impact of $7 million.

Now comparing the two years, 2009 versus 2008, you can see that based on $780 million lower sales, $748 million lower excluding exchange rate impacts, the adjusted operating margin decreased by $119 million from $148 million to $29 million. The ASP decline of 2.5% gave a negative of $52 million, volumes was impacted heavily as you can imagine by $295 million, on the other hand we had better costs of $206 million and the exchange rate helped by $27 million.

Let me report about our 2009 measures, concerning, restructuring and right-sizing and let me just communicate what we have achieved vis-à-vis our targets. First of all we want to reduce inventories by $50 million to $100 million originally, as we've said before; we have reduced by $113 million. We wanted to limit our capital spending to $70 million as you have heard we came out with $50 million capital spending. We wanted to limit our cash cost for restructuring to $50 million, we nearly got there, we spend $48 million.

Finally, we wanted to reduce all fixed cost by $150 million year-over-year. We have reduced $176 million whereby $80 million came from manufacturing and fixed in terms of reductions of $96 million from SG&A. We actually expected $200 million reductions, only achieve 176, but short work and plant shutdowns had to be discontinued earlier than we expected due to some economic up turn in the last quarter. Also the spin off project and some accelerated depreciations increased the costs, but overall, we have dramatically reduced the fixed costs.

Let me talk about resistors and inductors. This traditional and successful business is in the steep up turn. It's supported also by quite an accelerated rebound of the industrial segment. Sales in the quarter were $146 million, which is 25% above the prior quarter and on the same levels with prior year. We've seen in the quarter very strong book-to-bill ratio of 1.20. The backlog is at the healthy level of 2.9 months.

Gross margin was exceptionally good due to higher volume good efficiencies, good mix and lower fixed cost it is at an excellent level of 32% of sales. We believe that approximately 30% gross margin can be sustained at historical sales levels.

The ASPs in resistors continue to be stable. Inventory turns in resistors improved to a record level of 4.8. There are some shortages for inductors and specialty resistive products and we quite selectively expanding our capacities there. We are also in process to correct pricing into few still existing commodity segments of the business, namely for a thick film chip resistors.

We have successfully completed the move of non-linear resistors out of (inaudible) to China, Israel and Germany all this for consolidation; we are going to say fixed cost like that. The (inaudible) site which is in Belgium is about to be sold.

Coming to capacitors, also capacitors see a solid up turn only some industrial power applications are lagging, which according to our experience is the normal sequence of events has a strong demand for capacitors in particular for automotive and consumer.

Sales in the quarter were $122 million, which is up by 19% versus prior quarter, but still down by 3% versus prior year. We've seen a solid book-to-bill ratio of 1.07 for capacitors and the backlog is at a quite healthy level of 3.1 months.

The gross margin due to fixed cost reduction and good efficiencies improved further to 21% of sales. We expect gross margins in the range of 23% to 25% at historical sales levels.

The prices for our capacitors are virtually stable quarter-over-quarter, but continue to increase year-over-year. We have seen year-over-year a 2% increase, which is really the impact and consequence of selective price increase programs, which we have in place since quite sometime.

The inventory returns improved to 3.4, it is a record level for capacitors. We expect further improvement with growing volume. Film capacitors in only India and now completely up and running, we also completed the concentration of all emergency manufacturing in Israel.

Again all this without loss of volume and for savings fixed costs. We currently see a very strong demand for Tantalum caps in general, but in particular for the Tantalum net capacitor and also here for Tantalum net capacitor we increased capacity.

Let me come to the Measurements Group. Some segments of the Measurements Group's business are still impacted by the economic crisis. Nevertheless, the sales of this group in the quarter grew to $37 million; the book-to-bill ratio is close to 1, it is at 0.95.

Gross margin, historically good but at a level of 28% of sales and the inventory returns were at 2.5. Let me come to semiconductors and I would like to start with diodes and opto products, the recovery has started for this product group in July '09 mainly at consumer customers in Asia.

The recovery has reached European automotive in the third quarter. And in the fourth quarter, it became parent in every way, practically all geographies in the own markets and we currently see quite dramatic order levels there.

There are quite dramatic shortages of supply in SMTs rectifiers, but also in several opto lines, mainly in (inaudible). Partially, up to 20 weeks lead time we have to help the customers.

The sales in the quarter were $178 million, which is 14% above prior quarter, 30% above the second quarter and 13% above prior year. We have seen an extremely strong book-to-bill ratio of 1:26, which may contain some over reaction mainly by distribution, but it's really enabled us for further sales increases.

The backlog of this product group has grown to 2.9 months, which is high for this business. The gross margins remain at the level of 18% of sales, but was negatively impacted in the quarter by an accelerated write-down of equipment of $3 million.

Our profitability target for this group is 22% to 24% gross margin at the direct sales levels. The group has shown quite excellent inventory returns of 5.2. Price declined quarter-over-quarter has stopped, there was slight increased of 0.2% and there is still a normal may I say, price decline year-over-year 4.7%, undoubtedly this will go down.

We do have quite substantial success with our Trench Power Diodes; they will continue to be in a sole source position. We launched a product line in 2008 and 2010 we estimate already sales of about $50 million. And we're expanding capacity quickly here.

Last but not least Siliconix; the market leader in low voltage most of it after suffering the most of all Vishay business has now reached a phase of a rapid passionately even overheated market upturn.

Very low inventories in the supply chain are leading to extremely long lead times in the market and to overreactions of the buyers. Foundry related capacity limitations are impacting Siliconix's ability to capture with demand currently.

The main shortages are there especially for older products due to the discontinuation of supply by the foundry of ours. Sales in the quarter were $124 million, which is up by 1% versus prior quarter and up by 2% versus prior year.

We see an extremely strong book-to-bill ratio of about 1:4; the backlog is at 4.1 months. The gross margin has improved in the quarter to 18% of sales, but we expect gross margins to come back to the range of 25% to 27% for Siliconix at historical levels of business.

The price decline also for Siliconix reduces, we have seen a price decline of only 0.4% versus prior quarter-end of 6.3% versus prior year and foreseeably also fore most threads the price decline will reduce further.

The inventory returns for Siliconix are at 3.8, which will improve with growing volume. We see [unproved] innovation at Siliconix, I remind you of the [key] sale, which is highest sale density on the market.

Our current main focus as you can understand is on the increase of manufacturing capacities. We are in the process of re-establishing the fourth shift in the Santa Clara. We are expanding each (inaudible) and we are developing further existing foundries. We expect the output to increase steadily through the year mainly in the second half.

Let me summarize, for the first time since more than a year, we say it is a satisfactory quarter. We are solidly back to profitability, we improved gross margin to pre-crisis levels. We again generated free cash in a remarkable way.

During the crisis, fixed cost have been restrictedly reduced. We have lowered our break-even point permanently by 500 million break-even is really break-even is the sales you need to cover all your fixed costs. Vishay therefore will be able to reach new levels of profitability. Our defined restructuring programs has been implemented therefore; restructuring cost going forward will be low. Vishay also in future will remain to be an excellent producer of free cash based on improving profitability in combination with lower working capital requirements.

The preparation of the spin-off of EPG is proceeding smoothly and eventually we will have both companies to concentrate even more on their respective business. We are now actively looking again for small-to-medium size acquisitions that will enhance further our profitability.

Vishay's business since the fourth quarter is in the phase of the steep upturn and we are confident that 2010 will become a good year for us. However; in the case of a new economic slow down, we are prepared to re-establish all saving measures of 2009. For the first quarter, we guided to a sales range of between $630 million and $670 million that further improved results. Thank you very much and I would like to pass on to Dr. Felix.

Felix Zandman

Good morning, as presented by Dr. Paul, Q4 is a strong improvement of our Q3. Sales increased by 14% from $575 million to $607 million from Q4 over Q3 and earnings per share increased over 5 fold from $0.03 to $0.60 per share for the same period. Free cash generation was $247 million for the 2009 year, well above our budget.

Free cash generation was in number one priority for 2009 and I'm really gratified with our management was able to accomplish that. Free cash will continue to be strong for 2010. Down the reduction of overheads by approximately $180 million will result in a better bottom line for the future. The recession showed us that Vishay is able to respond fast and efficiently even in a case of sudden and very deep recession as we have seen in 2009.

Now, a few words about the spin off. We have announced that spin off of our Measurements Group and Foil Resistor Businesses, which will be called Vishay Precision Group or VPR.

Now, VPR or Vishay Precision Group is not part of Vishay, the reason for the spin off is a fundamental difference between Vishay Intertechnology and VPG across products, technology and the factoring markets and customers.

Vishay Intertechnology has a broad line of discrete electronic components, while VPG is vertically integrated from sensors to weighing modules, to instruments to control systems. The spin off of Vishay makes Vishay a pure play discrete electronic component company.

The spin off of VPG will show that VPG performance on a standalone basis not being diluted into Vishay. Also, it will sharpen management focus for both companies. Furthermore, it will enable each company to more effectively execute strategies and allocate resources.

And finally, it will enhance the effectiveness of employee compensation structure. It also will provide VPG with its own acquisition currency, I mean if you have shares which could be them put to the market to increase its liquidity if need for acquisitions.

Our R&D activities progress as planned and we'll accelerate as the economy improves based on our very strong balance sheet, strong liquidity. And the improved economic environment we're now again actively perusing acquisitions. We are targeting small to mid size companies for the passive components we aim to strengthen and broaden our position as a specialty product supplier. For the discrete semiconductors the intent is to increase market share and exploit synergies, of course the goal of acquisition activities is to further improve our profitability. In the short term future, including next quarter looks very, very promising.

Thank you. And we're open to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Shawn Harrison, Longbow Research.

Shawn Harrison - Longbow Research

The first question just has to do with the step up, I guess in SG&A spending and it looks like some of the one-time cost in the fourth quarter. What should we look like or what should we look for in terms of SG&A spending in the March quarter and how much of that will roll off eventually tied to the spin out?

Lior Yahalomi

What you have seen in the December quarter is typical for the March quarter, because you have bonuses coming back, some salary increases will be there. So, what you see approximately $98 million per quarter is typical for the March quarter and for the remainder of the year 2010.

Shawn Harrison - Longbow Research

So, essentially the cost with the spin out will be replaced with bonus accruals?

Lior Yahalomi


Shawn Harrison - Longbow Research

The inventory right down that was in cogs will roll off?

Lior Yahalomi

Yes, manufacturing fixed, you can expect to go down between quarter four and quarter one.

Shawn Harrison - Longbow Research

I would like to just touch again on your commentary about the semiconductor market getting a little bit over heated, with a book-to-bill even above 1.2 in the businesses, but inventory is being very lean at distribution. What do you think I guess the carry through from these high book-to-bill ratios are not into the March quarter, but into the June quarter. Does that imply that we'll see a slowdown in ordering and must been normal seasonality as a result. Just maybe I guess your high level thoughts knowing that, it looks like a recently semi side the March quarters fully booked?

Lior Yahalomi

Exactly, just to reconfirm that March quarter looks very solid. I think there is some over heating, but I do not believe that it impact negative or positive judgment of the economic situation, could imagine that the orders may see some decline, but the shipments will continue to grow up when capacity catches up to demand. And then you see in the second quarter normally the better season for the semiconductors anyway, the seasonality always sees to best quarter-in-quarter free also quarter four is not bad for semi in terms of sales, so we are optimistic. Not delaying some over heating at the momentum in terms of orders books.

Shawn Harrison - Longbow Research

It's seems like. I guess your statement is more of the situation of capacity versus demand in one step against the normal. Okay, and then just finally, if you can clarify again for actives and passives what the price changes were on both the quarter-over-quarter and year-over- year basis?

Lior Yahalomi

Really quarter-over-quarter there was no price decline at all anymore, neither in passives no in actives. On the passives, year-over-year we see an increase of 1.1% basically driven by capacitors in our case, because we have longer term increase pricing projects in place, which now really shows some effect, resistors are practically constant year-over-year. Actives come down year-over-year by 5.4% as I said before, which is low, but I have no question that this price decline foreseeable will slowdown even further on the actives.


Your next question comes from Matt Sheerin - Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

Could you comment on distribution, obviously there was very strong orders you saw in December and also in March. Do you look at your guidance in March being up sequentially and I know it's normally flat to down, is that mostly distribution orders that you're seeing that is going to drive the higher number in March?

Gerald Paul

The distribution will be strong no question, but we see a good picture everywhere, but distribution will be strong.

Matt Sheerin - Thomas Weisel Partners

And do you get a sense that those low inventories are going to start to creep up again or do you expect the sell through to be just as strong in the March quarter for distribution?

Gerald Paul

Matt, I must admit that I was wrong again and again over the quarters; I always expected that the inventories would level off; still they went down slowly in quarter four. I think everybody hopes that we come to stabilization. Personally, I think we will reach it in the first quarter.

Matt Sheerin - Thomas Weisel Partners

You gave revenue guidance, but you didn't give gross margin or EPS guidance and then I appreciate that, but what kind of incremental margin contribution should we expect going forward given that you still have some costs coming out, should it be in the 40% or more range?

Gerald Paul

Yes. We always say between 40% or 45.

Matt Sheerin - Thomas Weisel Partners

As the year goes on, do you see that coming down at all as you invest back in capacity and people?

Gerald Paul

No, as a matter of fact, we are going to keep the fixed cost fixed and this is our typical variable margin, contributed margin what you're talking about. So, it's just a function of sales.

Matt Sheerin - Thomas Weisel Partners

Just lastly, Dr. Paul obviously things are very good, you used the term overheated a couple of times and we have seen that from some other suppliers back in '03 and '04 we saw very strong growth and then there was an inventory correction because there were order cancellations, customers got ahead of themselves in terms of ordering. What you're doing in terms of looking for signs that may happen this year and in terms of running your own business. What sort of plan B do you have in place to keep cost down, so that if you do have a down quarter the negative impact won't be that big?

Gerald Paul

First of all, as I've said fixed cost are fixed. We have achieved quite a reduction vis-à-vis in 2008, a portion will come back, but you have seen that already in the fourth quarter. So we will keep the fixed cost at this level regardless of what. Secondly, we're not going to jump back into high levels of capital spending, but we do really is we concentrate on specialty products or new products, which I believe would be absolutely detrimental if we didn't do it, but we are not investing based on this high order levels which we see, which absolutely contain some overheating.

As a matter of fact, which we don't believe to emphasize that, the economy slows down really again, our shipment slow down really then we go back to our saving modes, cost saving mode of the year 2009. We have trained so to speak, we had to train it and this is absolutely possible to reintroduce that in a short time.


Your next question comes from Steve Smigie - Raymond James.

Steve Smigie - Raymond James

Is there something you could talk a little bit about what the revenue looks like now for the business that will be spun out? I think we have a clear picture of the measurement stuff, but I think the part of the resistors, what will the dollar amount be at this point and it's Q2 that's likely to get spun out, correct?

Gerald Paul

Out of memory, Steve in 2009, the sales of VPG altogether was about $175 million.

Steve Smigie - Raymond James

I was just wondering because it's a big jump up here in the guidance that changed dramatically?

Lior Yahalomi

The jump up doesn't come from this portion of the business.

Steve Smigie - Raymond James

And just I was curious are you thinking that's spin off of Q2 and you answered a question earlier about what OpEx did look like in March to take into account some of the cost coming out, so I guess there is little confused just to how the cost to come out spin off until June or that the June Quarter?

Lior Yahalomi

We expect, maybe I misunderstood your question but we expect to spin off to take place mid of the year. And then when I say the fixed cost constant, I always talk still about the entire company of course.

Steve Smigie - Raymond James

So, I guess if I'm looking at overall operating expenses for the March quarter, you are saying that's going to be and going forward everything included, it is going to be roughly around that $98 million level?

Gerald Paul

Yes, and on the manufacturing fixed cost side, you could see it though.

Steve Smigie - Raymond James

And then on the book-to-bill on the distribution business as others have mentioned, obviously very strong. So, I have to assume that part of that is just their desire to really fill a channel that is comedown meaningfully.

So, how much of that increase in orders do you think you will actually service in the quarter. I mean is it, you think you will get through all of that or is that you just sort of working your way through and you're going to have to keep some of that you're not going to be able get so much capacity into them, sort of something to look into?

Felix Zandman

Let me answer, if we ship what we can ship obviously and there is a limitation for Vishay to bring back capacity super, super quickly and there is a limitation, obviously not only for Vishay. So, I think there is kind of fuse in the whole thing, I don't think that the inventories will shoot up so dramatically, it is just not there, the potentially is not there in my judgment. So, I do believe that the low inventory level at distribution will survive for sometime.

Steve Smigie - Raymond James

Last question, I will let somebody else jump in here, just on the capacity, it sounds you're adding some other people are, but even given that, it seems like people, most companies are generally remaining fairly constrained in terms of what their commitments are to future and capital spending and you are taking it back off, no doubt but a lot of guys seem to be still on a very conservative mood and I was just, at least for yourselves or whatever you are willing to comment what you see from your competitors, does that seem reasonable?

Felix Zandman

I think I can only a reconfirm what you said. And this is also through for Vishay. So, what we are spending at the moment in terms of expansion as I tried to say before is really not consequence of this high order level, which we see. In reality, this is something we would have done anyway for new products in particular and for specialty applications. So, I don't think we jump blindly as maybe the industry and Vishay has jumped into such situations in the past.


And there are no further questions. Dr. Yahalomi, do you have any closing remarks?

Lior Yahalomi

Thank you. I would like to thank you for participating in our call. We appreciate your interest in Vishay, and we look forward to your continued interest in the future. Thank you.


Thank you. This concludes today's conference call. You may now disconnect.

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