Vishay Intertechnology, Inc. Q2 2010 Earnings Call Transcript

Aug. 3.10 | About: Vishay Intertechnology (VSH)

Vishay Intertechnology, Inc. (NYSE:VSH)

Q2 2010 Earnings Call

August 3, 2010 9:00 am ET

Executives

Lior Yahalomi – CFO

Dr. Felix Zandman - Executive Chairman and Chief Technical and Business Development Officer

Dr. Gerald Paul - President and CEO

Lori Lipcaman - EVP and Chief Accounting Officer

Dave Tomlinson - SVP and Corporate Controller

Analysts

Jim Suva [Ostia Merchant] – Citigroup

Matt Sheerin – Thomas Weisel Partners

Shawn Harrison [Joe] – Longbow Research

Steve Smigle [Andrew] – Raymond James

Operator

Good morning. My name is Kayla, and I will be your conference operator today.

At this time, I would like to welcome everyone to Vishay’s Second Quarter Earnings Results 2010 Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Vishay’s CFO Loir Yahalomi. You may begin your conference.

Loir Yahalomi

Thank you, Kayla. This is Loir Yahalomi, Vishay’s Chief Financial Officer.

Ladies and Gentlemen, good morning, and welcome to Vishay’s Second Quarter 2010 Earnings Call.

On the line with me today are Dr. Zandman, Chairman and Chief Technical and Business Development Officer; Dr. Paul, Vishay’s President and Chief Executive Officer; Lori Lipcaman, Vishay’s Executive Vice President and Chief Accounting Officer; and David Tomlinson, Vishay’s Senior Vice President and Corporate Controller.

Before I start, our Corporate Controller, Dave Tomlinson, will read our customary opening statement. Dave?

David Tomlinson

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

Lior Yahalomi

Thank you, Dave. After my remarks, Dr. Paul will provide an analysis of our second quarter of 2010 and Dr. Zandman will update our R&D and acquisition activities and will provide summary remarks.

As you’re aware, on July 6, 2010, we completed the spinoff of Vishay Precision Group into an independent publically-traded company. Vishay’s financial results for the second quarter of 2010, still includes VPG.

VPG is an independent company; however, we will not restate prior financial statements to present VPG as a discontinued operation for U.S. GAAP purposes.

The reason is our continuing involvement primarily due to common board members, trademark licenses and certain transitional services.

To assist in the analysis of Vishay, including and excluding VPG, we have realigned our U.S. GAAP reportable segment, segregating VPG into its own segment as detailed in our current report on the form 8K filed with the SEC this morning.

This form, 8K is available in the SEC-Edgar website, as well as on the Vishay Investor Relations website at ir.vishay.com.

I will first discuss quarterly result as reported. In other words, including VPG, and then provide information on Vishay excluding VPG.

Quarterly results for Vishay, as reported, including VPG.

For the second quarter of 2010, the share reported revenues of 701.7 million, 9.6% higher than the first quarter of 2010, and 52.4% higher than the second quarter of 2009.

Our consolidated gross margins for the second quarter was 30%, as compared to 26.1% for the first quarter of 2010, and 17.1% for the second quarter of 2009.

The increase from the first quarter of 2010 reflects the continued recovery from the global economic crisis with increased sales and the cost reduction initiatives implemented by the company.

Selling, general and administrative expenses for this quarter were 109.3 million or 15.6% of revenue compared to 101.9 million or 15.9% of revenue for the first quarter of 2010, and 83.8 million or 18.2% for the last year’s second quarter.

The second quarter of 2010 included $6 million of cost, related to the VPG transaction.

Other income and expense for the second quarter of 2010 consist mainly of $2.4 million of interest expense, and 5.5 million in foreign currency gains.

The tax rate for the second quarter of 2010 was approximately 27%.

Capital expenditures for the quarter were $31.1 million compared to 18.1 million in our first quarter of 2010 and 7 million in the second quarter of 2009.

Depreciation and amortization for the quarter was 48.9 million as compared to 50.4 million in the first quarter of 2010 and 55.8 million in the second quarter of 2009.

As announced in our press release, Vishay reported earnings attributable to Vishay stockholders of $0.40 per diluted share for the second quarter of 2010. There were no unusual items for the second quarter of 2010 hence the $0.40 is both GAAP and adjusted.

Diluted earnings per share were $0.40 for the quarter as compared to net earnings per share of $0.24 for the first quarter of 2010, and a net loss per share of $0.32 for the second quarter of 2009.

Now quarterly results for Vishay, excluding VPG.

For the second quarter of 2010, excluding VPG, Vishay had revenues of 648.8 million, 9.5% higher than the first quarter of 2010 and 54.8% higher than the second quarter of 2009.

The gross margin for the quarter was 29.4% as compared to 25.3% for the first quarter of 2010 and 16.2% for the second quarter of 2009.

SG&A expenses for this quarter were 89.5 million. This amount excludes both the SG&A expenses incurred by the VPG business as well as the $6 million VPG transaction cost formed by Vishay Intertechnology.

This represents 13.8% of revenues as compared to 86.6 million or 14.6% of revenues for the first quarter and 273.6 million or 17.6% for last year’s second quarter.

VPG did not have a material impact on reported other income expense nor on the consolidated effective tax rate.

Capital expenditures for the quarter were 29.1 million as compared to 16.2 million in the first quarter of 2010 and 6.7 million in the second quarter of 2009.

Vishay, excluding VPG, generated earnings of $0.38 per diluted share for the second quarter of 2010 as compared to $0.23 for the first quarter of 2010.

Vishay’s reported debt and cash position, including VPG.

Vishay had a total debt of 322 million as of July 3, 2010. The debt consists predominately of the following segments; 105 million of long-term notes with 92 years maturity due on December 12, 2102 with interest rate of 90 day LIBOR plus zero; 75 million of long-term loans maturing on July 1, 2011, with payments spread over the next year with interest rate of 30-day LIBOR plus 2 1/2%; 250 million revolving credit facility maturing on April 20, 1012 with an interest rate of 30-day LIBOR plus 1.875%, 125 million of which was unused on July 3, 2010.

As of July 3, 2010, cash and capital equivalence were $675 million. Total available liquidity measured by cash, plus all available credit lines was 817 million, while the total debt payable over the next five years is only 212 million.

Now Vishay’s equity, excluding VPG.

VPG assumed approximately $12 million of debt in the spin-off.

Vishay, excluding VPG, had a total debt of 310 million as of July 3, 2010. The debt consists predominately of the following segments; 95 million of long-term note with 92-years maturity; 75 million of long-term maturing in 2011; and 250 million revolving credit facility maturing in 2012, 125 million which was unused on July 3, 2010.

As of July 3, 2010, cash and cash equivalence was $604 million. Total available liquidity measured as cash plus all available credit lines was $744 million.

Some other financial summaries as reported, including VPG.

Total inventory at quarter end was $450 million. Working capital at quarter end was approximately 1.1 billion. And free cash flow was $79 million for the second quarter of 2010 as compared to 50 million for the first quarter of 2010 and 9 million for the second quarter of 2009.

Other summary financials, excluding VPG.

Total inventory at quarter end was 406 million. Working capital at quarter end was approximately 1 billion. And free cash flow was $76 million for the second quarter of 2010 as compared to 47 million for the first quarter of 2010 and 3 million for the second quarter of 2009.

Now I’d like to share with you a decision by Vishay’s Board of Director, regarding the maximum debt for acquisition.

Vishay, based on a strong generation of free cash and the resulting continued strengthening of its balance sheet, will continue to pursue other successful strategy of acquiring and integrating businesses. In order to limit our financial exposure, the company has refined its acquisition strategy and policy.

Our strategy targets acquisitions to strengthen and broaden Vishay’s position as a specialty supplier of passive components and to increase our market share and exploit synergies in our discrete semiconductor product lines.

As announced today, the board of Vishay decided not to pursue acquisitions if our post acquisition debt will exceed 2.5 times of proforma EBITDA.

Again, apologies. Not to pursue acquisitions if our false acquisition debt would exceed 2.5 times our proforma EBITDA.

For this purpose, we will calculate proforma EBITDA to be Vishay’s EBITDA for the fourth quarter preceding the acquisition plus the adjusted EBITDA of the target for the same quarters. The adjusted ease for the expected savings predominately estimated through expected synergies.

At this point, we have no concrete target for large acquisition.

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

Dr. Gerald Paul

Thank you, Lior. And good morning, everybody. As you heard from Lior, we are leaving in excellent time. After a phase of steep recovery, Vishay in the second quarter experienced really good business conditions worldwide. Orders were stabilizing above pre-crisis levels. With shipments close to pre-crisis levels and permanently reduced fixed costs, a new level of profitability was reached. As you’ve heard, gross margin of 30% and operating margin of 14%.

Without VPG, the numbers are very similar. Gross margin were 29% and operating margins 15%.

We reported $0.40 per share adjusted as well as GAAP. The cash generation remains strong. We generated 129 million free cash year to date.

A very strong order book gives us confidence for the second half of the year.

Let me talk about the economic environment. We believe that global economy is in the phase of a robust recovery. No slowdown is visible in Europe. And although there has been some concerns about it, we cannot see any slowdown.

The overall market demand for electronic components has reached historically high levels. There are substantial shortages of supply, capacity, and locations, and long lead times.

There is still very low inventory in the supply chain. In particular, for semiconductors, mainly for MOSFETs.

There’s a strong POS and very high inventory turns at our distributors. POS is up by 9% and inventory turns worldwide of our distributors at 5.5 after 5.0 in the first quarter.

The American distributors show 3.9 turns after 3.4 turns in the first quarter. The European distributors, 5.6 turns after 5.2, and the Asian distributors are at 7.1 turns as compared to 6.7 turns in the first quarter.

Distribution inventories went up slightly in the quarter by 6% but there are still at an extremely low level.

All market segments and all regions remain strong to overheated in particular, netbooks, consumer, and fixed telecom. There’s a strong comeback of automotive. There’s a steady recovery of industrial and a continued strong picture at AMS.

Pricing is stable in general and there have been some opportunities exists for selective price increases.

Let me talk about Vishay. The picture is quite positive. Sales in the quarter came out at the upper end of the expected increase and there we’re still partially limited by manufacturing capacities. We achieved sales of 702 million in the quarter as compared to 641 million in prior quarter and 460 million in the prior year.

Excluding exchange rate affects, sales versus prior quarter were up by 79 million or 13%, and up by versus prior year by 253 million or 56%. Without VPG, sales in the quarter were 649 million as compared to 592 million in prior quarter and 219 million in prior year.

We see a continued strong book-to-bill ratio of 1.15 as compared to 1.46 in the first quarter and 1.22 in the fourth quarter of ''09.

Without VPG, the book-to-bill ratio is 1.16. Some more details about the book-to-bill; 1.17, 117 for distribution, 1.14 for OEMs; 1.08 for the actives and 1.23 for the passives; 1.27 when you exclude VPG; 1.17 for the Americas; 1.24 for Europe; and 1.07 for Asia.

You see there is [inaudible] optimism in general. For the actives we have seen some stabilization of orders on a high level. There are strong orders from the European and the American distributors that supports the passives.

The backlog continues to be at an extremely high level of 4.21, 4.5 for the actives, 4.3 for passives, excluding VPG, and 2.2 for VPG itself.

All this, I believe, can support, and does support our expectation for a strong third quarter.

Price decline has stopped in general. As I said before, there are selective opportunities for price increases. Prices via-a-vis for prior quarter for Vishay went up by 1.9% and by 1.1% up versus prior year. For passive, the prices were stable, for actives there were price increases of 3.8% versus prior quarter and 2.3% versus prior year.

Some highlights from operations. Inventory turns in the quarter improved further to 4.4. We increased inventories in the quarter slightly by 13 million, excluding exchange rate effects; by 2 million in raw materials; and by 11 million in finished goods.

We increased inventory this year to date by 22 million, which is immaterial in view of the revenue increase of 500 million annualized, which we have seen since the beginning of the year.

Capital spending in the second quarter was 31 million versus 18 million in prior quarter and 7 million in the prior year.

For 2010, we currently expect to spend 150 million, 1-5-0; 65 million for expansion; 35 million for cost reduction; and 50 million for the maintenance of the business. This is 50 million up from previous projections, mostly due to the fact that we made some additional capacity expansions and highly profitable specialty products. We are talking here about payback times of less than one year.

During the quarter, employment increased further by 930 heads, to a total of 24,350. Mostly due to the increase of manufacturing capacities, of course. Fixed personnel is part of the total, and remains stable. There’s no significant increase from the lowest level in 2009.

The total employment without VPG was 22,180. We do not expect to incur material restructuring cost in 2010, as I said before, but also not in 2011.

We generated 109 million cash from operations in the quarter as compared to 68 million in prior quarter, and 216 million in prior year.

We generated 79 million free cash in the quarter as compared to 50 million in prior quarter, and 29 million prior year.

As I said in the beginning, our year-to-date generation of free cash is 129 million, vis-à-vis 51 million prior year. So you can see, 2010 will be another excellent year of cash generation of Vishay.

Let me talk about reconciliation of the start of the quarter, vis-à-vis prior quarter. Based on 61 million higher sales, actually 79 million higher when excluding exchange-rate impacts, the adjusted operating margin increased by 36 million from 65 million to 101 million.

The main elements were a positive impact from selling prices of 13 million (1-3), and positive impact from increased volume of 34 million, and a negative impact from increased fix costs of 10 million. Predominately from the spin-off project which Lior, mentioned, severance cost, and bonuses.

When comparing the results of the quarter via-a-vis prior year, you find the following based on 241 million higher sales, 253 million high excluding exchange rate impacts. The adjusted operating margin increased by 106 million, from minus 5 million to 101 million.

The main elements were a positive impact of the selling prices of 8 million, a large impact positive impact from the volume of 120 million, positive impact of variable cost of 9 million, and higher fixed cost of 32 million, coming mainly from the bonuses from the discontinuation of short work and plant shutdowns, from the spinoff project and from some layoff costs.

Let me come to the product lines, and I will start as usual with resistors and inductors. This is Vishay’s traditional and most successful business. We are the world market leader, offering all existing product technology.

The business has regained the meantime pre-crisis sales levels. There’s a strong demand from industrial and automotive. Sales in the quarter were 153 million, which excluding exchange rate affects, is 7% above prior quarter and 66.0% above prior year.

There’s a very strong book-to-bill ratio for resistors and inductors of 1.22. The backlog has grown to 3.8 months. There are shortages of supply at inductors and some power resistors.

The gross margin has increased to 36% of sales, one of the best results ever we’ve ever had in resistors and inductors, and 1% above prior quarter.

We have seen a favorable product mix, excellent efficiencies and reduced fixed cost.

The selling prices were stable versus prior quarter and prior year. The inventory returns are at 5.0. We are expanding manufacturing capacities electively by optimizing further the cost structure.

We are adding production capacity in power resistors and inductors. We had implemented some price increases for the remaining commodity part of this business.

Coming to capacitors. This business in Vishay’s is based on a broad range of technologies. We have a strong position in European and American market niches, founded on product performance and reliability.

We do have a strong position in the rapid growth of high power applications. As expected in the second quarter, also capacitors, came back to pre-crisis sales levels. There’s a strong demand for Tantalum capacitors with [inaudible] ceramic capacitors and then capacitors mainly from automotive and industrial. Also, the power caps started to recover with, may I say, the normal time delay which we always see.

Sales in the quarter were 134 million which again, excluding exchange rate effects, we are up by 19% versus prior quarter, and by 51% versus prior year.

There’s a continued strong book-to-bill ratio of 1.31. The backlog has grown to very substantial 4.8 month and there are some shortages of supply.

Due to higher volume, gross margin has grown to a level of 24% of sales. The selling prices, like in resistors were stable versus prior quarter and versus prior year. Inventory turns have grown to 3.6. We can state that our field capacitor restructuring efforts have been finalized successfully. You may remember, it took us some time to get there. We are also restarting our expansion project for power capacitors in India.

Coming to the semiconductors, and starting with Diodes. Diodes represent a broad commodity business where Vishay is the largest supplier worldwide.

We offer virtually all technologies as well as the broadest product portfolio and technically leading in particular in power applications.

After very few [inaudible] Diodes in the fourth quarter of ''09, entered a phase of steep recovery. The business presently even is somewhat stronger than before the crisis.

Book to bill is at 1.35. There are very long lead times and also some shortages of supply.

Sales in the quarter were 151 million, 10% above prior quarter and 69% above prior year. Backlog has grown to 5.11.

The gross margin of Diodes has improved from 20% in the first quarter to 24%, and mostly due to higher volume.

Inventory turns are quite excellent, they are 5.5.

The price decline for Diodes has come to an halt. There are selective price increases possible. Altogether, prices went up by 2.1% versus prior quarter and by 0.7% versus prior year. We are working on some capacity debottlenecking for high power Diodes.

Let me come to our Opto line. Vishay’s Opto business consist of infrared sensors, couplers, and special LEDs. It contains relative high sales, custom design products, especially in the segment of sensors.

Vishay is the largest supplier of infrared components worldwide. We have a high innovation rate and the business is very application driven. We are seeing also here, a substantial recovery since the fourth quarter of '09. Business is back to pre-crisis levels.

Sales in the quarter were 58 million, 2% above prior quarter and 48% above prior year.

There’s a strong book-to-bill ratio also for Opto product of 1.26. The backlog has grown to 3.8 months. The gross margin increased to 35% of sales, one of the best results ever.

Inventory turns of the line at 5.8, quite excellent. The price decline has come down, in fact, vis-a-vis prior quarter had an increase of 1% of the selling prices vis-à-vis prior year, a decrease of 1.4%.

Talking about last, but really not least, the MOSFETs. We are the market leader through Siliconix in the low voltage MOSFETs. For the most part of the second quarter we continued to experience the continuation of a completely overheated upturn with extremely long lead-times, capacity allocations and substantial shortages of supply.

There is some stimulations of order from the high level recently. Sales in the quarter were at 153 million, up by 21% versus prior quarter and up by 61% versus prior year. The Siliconix business is not yet on pre-crisis levels. The backlog has grown to 4.2 months, extremely strong for this product line.

Gross margin has improved quite drastically to 31% of sales, due to higher volume and better pricing. For MOSFETs, there is really no price pressure at this point, on the market. There are some quite important opportunities even for price increases. We raised the prices via-a-vis prior quarter by 6.8% and vis-a-vis prior year by 5.5%.

The inventory turns are at 4.0. Our 8-inch expansion in our fab in Germany and it’s always quite on target. And quite important I believe, they are going to reach pre-crisis manufacturing capacities already in the third quarter, we basically counted up to now in the fourth quarter. It will be faster.

Let me summarize. For the second quarter, I believe has demonstrated Vishay’s ability to fundamentally improve its earnings power. At pre-crisis sales levels, operating margins, and earnings per share have at lest doubled.

A strong generation of free cash continues to be one of the main strength of this company. We successfully have implemented the spinoff of the Vishay Precision Group, which will be beneficial for both companies going forward.

It will not materially impact the performance of Vishay. Vishay continues to be one of the largest and technically leading enterprises in the electronic components, close to its customers in times like these, with long lead times, etcetera.

No doubt, we currently enjoy excellent market conditions. We nevertheless believe in the steady and permanent measures for expansion and cost reductions.

We think long term, and we be careful not to invest in manufacturing capacities just in order to follow speculative spikes of demand.

For the third quarter of 2010, the guide to a sales range between 650 and 690 million at slightly improved results. And Ladies and Gentlemen, this is now without VPG.

Thank you very much, I’d like to turn the discussion to Dr. Zandman.

Dr. Felix Zandman

Good morning. This is Felix Zandman, Executive Chairman of the Board, Chief Technical Officer and Chief Business Development Officer.

Vishay had a good second quarter, as you heard, retuning earnings per share of $0.40 a share. It is the fourth consecutive increase of GAAP earnings per share since the crisis.

Let’s look at the last four quarters. [Inaudible] EPS for third quarter of 2009 from a loss of $0.16 from the prior quarter; $0.15 per share for the fourth quarter of 2009; $0.24 for Q1 of 2010; and finally $0.40 for the second quarter of 2010.

The present quarter, the third quarter of 2010 looks also quite promising.

All operational results have improved substantially as you heard when compared to pre-crisis level.

Free cash year to date was 129 million, an exceptionally good result, and we are focusing on that continuing.

We continue to focus on free cash and this is one of our basis of operations.

The separation for Vishay, of Vishay’s Precision Group, called VPG, under the leadership of Ziv Shoshani it’s president and CEO, was seamless and very well educated. The sales of Vishay have almost reached the pre-crisis levels, although the sales of VPG are still somewhat lagging in the product areas of [inaudible] assistance. But sales in core products are at record levels.

I expect that the combined market capital of Vishay and VPG together is higher by 10% to 20% range when compared to the market prior to separation of VPG from Vishay.

Both companies are now focusing on their separate prices.

Vishay continues to look for acquisitions, small and large. However, with the intent not to exceed the ratio of 2 ½ times debt to EBITDA ratio for Vishay and the potential acquired company, as you heard from our CFO, more details about this issue.

Our new and recently introduced products contribute significantly to our results and drive great success. Some of them were recently licensed under royalty agreements. Just a few examples:

Highest-rated Surface Mount Square Inductor in great measure replaced the old-fashioned cylindrical inductor.

Our WO SMD, slap-type resistor in great measure also replaced the old-fashion cylindrical power resistor. MAP miniature [inaudible] capacitor if very successful in areas of [inaudible] capacitors for the same size. The trench value enjoyed great success and penetrated rapidly in new markets.

Many new products in power MOSFET and ICs have been introduced by Siliconix, which enjoys presently a rapid expansion. Our Optoelectronics sensors are introduced into many new applications, especially in the MOSFET areas.

New electronic products such as Apple iPad and other products contain many Vishay components. Because of our broad product line and [inaudible], Vishay products are found worldwide in most electronic applications.

Vishay management under the leadership of our CEO, Dr. Gerald Paul, has weathered and excelled very well past very difficult prices by generating substantial cash, substantial free cash and properly positioning Vishay for the future and for the recovery of the presently enjoyed.

As a summary, the company’s doing well and we look at optimism for the future.

We are now open for questions. Please, any questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Suva.

Jim Suva [Ostia Merchant] – Citigroup

Hi. Congratulations, gentlemen. This is Ostia Merchant on behalf of Jim Suva.

Dr. Gerald Paul

Thank you.

Jim Suva [Ostia Merchant] – Citigroup

Just now with the VPG spinoff, I guess we – if you can provide further clarity on how we should look at your outlook for growth margin, operating expenses and sort of the effective tax rate now that you’ve spun off VPG? Can you please provide some guidance on that? Thank you.

Lori Lipcaman

I can say something. First of all, the gross margin we have guided to slightly further – further slight improvements, as you remember. And we are at 29% in the second quarter without VPG.

On the SG&A, I think we can say 19 million per quarter is the appropriate number for Vishay without VPG.

Jim Suva [Ostia Merchant] – Citigroup

And then your effective tax rate?

Lori Lipcaman

It would be no big change from what we have now, around 27%.

Jim Suva [Ostia Merchant] – Citigroup

Okay. And the gross margin improvements that you were citing, is that a function of both ASB increases –

Lori Lipcaman

It is mostly volume. The further improvement we expect to come from volume for the most part.

Jim Suva [Ostia Merchant] – Citigroup

Okay. That’s all I have right now. Thank you.

Lori Lipcaman

Thank you.

Operator

Your next questions if from Matt Sheerin.

Matt Sheerin – Thomas Weisel Partners

Yes. Thanks. Good morning. So Dr. Paul, I didn’t get the book-to-bill for Siliconix. You may have given it, but I missed that. Could you give us that?

Dr. Gerald Paul

No, I haven’t. Siliconix was at 0.8 in the 79 in the quarter. But this is somehow also distorted by the fact that we do not recognize orders that are beyond one year. You understand? This is our policy, we do not recognize them.

If you counted all the orders, also the ones beyond one year confirmation time, it would have been about 4.2.

Matt Sheerin – Thomas Weisel Partners

Okay. So it was 0.8?

Dr. Gerald Paul

Approximately, 79.

Matt Sheerin – Thomas Weisel Partners

Okay. And that was – okay, so that’s up what, six-month bookings? Why was it down so much?

Dr. Gerald Paul

As I said, if you had counted all the orders, also the ones with confirmation dates beyond a year, we have very full capacities, then the order book-to-bill ratio would have been above 1.2, around 1.2.

Matt Sheerin – Thomas Weisel Partners

Okay. And your guidance for September implies up at the midpoint around 4% or so sequentially. Is that – do you expect all of your segments to be up sequentially, or would Siliconix be down based on that –

Dr. Gerald Paul

Siliconix really would be up in particular.

Matt Sheerin – Thomas Weisel Partners

So it would be up.

Dr. Gerald Paul

I think I didn’t get across – so our order book in Siliconix is extremely full.

Matt Sheerin – Thomas Weisel Partners

Okay. And on the gross margin, it looks like you’re at, you know, basically record gross margins if you take out the bubble years of 2000, 2001, same thing on operating margin. Do you think that’s sustainable, or are you getting help from ASPs in the fact that as you said, you used the term overheated. Do you think, you know, Vishay can sort of sustain that? You’re at $1.40-plus EPS run rate right now, do you think that’s sustainable for the new Vishay if you will? Or is that a little bit too optimistic?

Dr. Gerald Paul

Well, as a matter of fact, as I said since quite a few quarters, based on all the fixed cost reductions we had during the crisis, our break-even point has come down by 400 to 500 million. And this is sustainable. It means, at the same sales level, we are going to generate substantially more profits than before the crisis. The remainder is function of volume. And as it looks for the third quarter, we are very optimistic the volume remains.

But principally speaking, at each sales we are going to be at, our results will be substantially better than before the crisis.

Matt Sheerin – Thomas Weisel Partners

Okay. And your book-to-bill did come down pretty significantly in the quarter. Do you think part of it is, as you said, you acknowledged last quarter that there was some so-called double ordering. Do you think that’s starting to go away and the true book-to-bill is more reflective of what the real demand looks like going forward?

Dr. Gerald Paul

I try to make the same argument. If it counted all the orders, regardless when the confirmation date was, even beyond a year, if you had done the book-to-bill would have been very similar to the first quarter, very similar.

Matt Sheerin – Thomas Weisel Partners

Okay.

Dr. Gerald Paul

But understand, if you’re at full capacities, then you confirmed the orders sometimes after one year, then we don’t count it anymore. This is our policy.

Matt Sheerin – Thomas Weisel Partners

Okay. And just for my last question, Dr. Paul. What is your company’s total capacity revenue right now at in terms of if you were full, what could you produce?

Dr. Gerald Paul

It depends very much, of course, on the mix of products. You know, we have very many lines and – but I think, I expected the questions, so I think a fair number without VPG could be around 750.

Matt Sheerin – Thomas Weisel Partners

Seven-fifty, okay.

Dr. Gerald Paul

But Matt, this is a – it depends really on the mix. It’s a good guess, I think.

Matt Sheerin – Thomas Weisel Partners

Got you. And just lastly on pricing, I mean, obviously you’re in a business, are you expecting, or are you expecting to sort of run your business in an environment where there’s more normal price erosion?

Dr. Gerald Paul

Well, we expect fees, just level of prices for our foreseeable future.

Matt Sheerin – Thomas Weisel Partners

Okay.

Dr. Gerald Paul

Okay. So we do not expect price decline for the time being.

Matt Sheerin – Thomas Weisel Partners

Okay. Thanks very much.

Operator

Thank you. Your next question is from Joe.

Shawn Harrison [Joe] – Longbow Research

Hi. Good morning. This is Joe calling in for Shawn Harrison. First off, congratulations on the quarter.

I wanted to jump on the gross margin question from the first caller as well. The incremental margins, I guess, have been robust for three straight quarters now with 70 to 90%. So it doesn’t seem like from your comments there’s any reasons to expect a slowing. And you said it will increase further.

Is it safest just to model your typical –

Dr. Gerald Paul

Very much so. Very much so.

Shawn Harrison [Joe] – Longbow Research

Is there an benefit that you expect to change to the downside or anything to that extent?

Dr. Gerald Paul

No. I think if you go with this variable margin of 50% of consecutive margin, you’re right.

Shawn Harrison [Joe] – Longbow Research

Okay. Secondly, lead times. Have lead times come in at all as you look out at any aspect of your business?

Dr. Gerald Paul

No. They are very, very long. In fact, quite often longer than a year, as I tried to say.

Shawn Harrison [Joe] – Longbow Research

Okay. What about an update on the new capacity? You mentioned that the internal efforts have been going pretty well. I didn’t hear you speak about the external wafer sourcing.

Dr Gerald Paul

All together, as I said, all together Siliconix, already in the third quarter, will be from a manufacturing standpoint and of course, also from a sales standpoint, at peak prices levels. This is one quarter earlier than we anticipated.

And this includes, of course, also our external sources.

Shawn Harrison [Joe] – Longbow Research

And just one more thing. Inventory distribution, you said it picked up a little bit. We also saw that at Aero. I mean, the question – how do you see that trending in the second half of the year inventory?

Dr. Gerald Paul

I don’t have anything new since then, to be honest. But you must see, we are not the only ones who had some price increases in the quarter. It could also be the matter of an inventory evaluation. So we still see that inventories in distribution at extremely low levels given the activity, extremely low levels. I can hardly remember inventories down for distribution worldwide at 5.5.

Shawn Harrison [Joe] – Longbow Research

Got you. Hey, one last clarification thing, you had mentioned to Matt, I think, what the Siliconix book-to-bill would have been excluding the –

Dr. Gerald Paul

Above 1.2, around 1.2.

Shawn Harrison [Joe] – Longbow Research

Do you by chance have a comparable number what the March quarter would have been along those same lines? Or where there orders more than a year at that point?

Dr. Gerald Paul

Not by half, but it would have been high, I would say. More than 1.2. But book-to-bill above 1 is not sustainable by definition.

Shawn Harrison [Joe] – Longbow Research

Terrific. Thanks and congratulations again.

Dr. Gerald Paul

Thank you.

Operator

Thank you. (Operator Instructions) Your next question is from Steve Smigie.

Steve Smigle [Andrew] – Raymond James

Hi guys. This is Andrew calling in for Steve. Congratulations on the nice numbers here.

Just to start out, I think you mentioned, you know, adjusted EPS for standalone Vishay at $0.38 there. You also mentioned about 6 million transaction costs, you know, related to VPG. Is that still in included in your –

Dr. Gerald Paul

Yes. In the $0.38, it’s included.

Steve Smigle [Andrew] – Raymond James

It is included. Okay, great. Great. And then, I think you mentioned, you know, you gave a little color on the increase in gross profit there for the quarter of 30 million – 34 million related to you know, higher volumes, approximately 10 million on negative impact of fixed costs. Was there a third or fourth component there?

Lori Lipcaman

Quarter over quarter, these were really the three important items. ASP is 13 million positive volume, 34 million positive and some mostly similarities increased fixed cost of 10. These were really the three elements.

Steve Smigle [Andrew] – Raymond James

Okay. And I think you said for the next quarter you’re expecting pretty broad-based growth across each segment there. Could you talk a little bit about if gross margin expectations have changed for any of the lines based on some of the additional capacity you’re bringing online, but also the debottlenecking as well? Have those changed at all?

Lori Lipcaman

As soon as growth goes up you can count on everything being the same. Not everything aligned, but on something like 50% contributed margins.

So this is really the answer for constant prices, right?

From a pricing standpoint, I’d say it’s firm, as I said before. And there are no surprises on the fixed-cost side. So I think it’s easy to model.

Steve Smigle [Andrew] – Raymond James

Okay. And then finally, you know, you mentioned the automotive recovery’s pretty nice here. Any regions in specific that may have outperformed?

Lori Lipcaman

I think in Germany in particular, so Europe, but for the most part in Germany, at last cut, that I exported very much to Asia. There is an enormous boom there at the moment.

Steve Smigle [Andrew] – Raymond James

Okay, great. Well, thank you very much.

Lori Lipcaman

Thank you.

Operator

Thank you. Your next question is a follow up from Joe Whitney.

Shawn Harrison [Joe] – Longbow Research

Hi. Thanks. Just two quick follow ups. Tantalum powder, can you comment on the current environment for availability and pricing, and how it’s impacting you?

Dr. Gerald Paul

You can work from the assumption that you have secured for this year.

Shawn Harrison [Joe] – Longbow Research

Okay. And then last thing, in the press release that the working mentioned that orders have stabilized, I guess at this point, granted they’re well above pre-crisis levels. In any of your businesses, I guess, is that more so than others I guess? You know, orders –

Dr. Gerald Paul

At the moment, we have book-to-bill, if you count all the orders as I said, regardless of confirmation date, you have all the lines of above one.

Shawn Harrison [Joe] – Longbow Research

It’s helpful to say when the book-to-bills peaked within the June quarter. I guess, was it early or late?

Dr. Gerald Paul

They cannot be book-to-bill for ever substantially above one. The lead times get too long. That means even if there’s absolutely wonderful times for the next years, sooner or later book-to-bill will approach one by nature of things, I would say.

So it’s not an indication for a slow down. If book to bill is not 1.5 anymore, but just 1.2, I think.

Shawn Harrison [Joe] – Longbow Research

Absolutely. I think some may welcome a little bit of a decline in the ratio. Okay. Thanks again.

Operator

Thank you. Your next question is follow up from Matt Sheerin.

Matt Sheerin – Thomas Weisel Partners

Yes, just a couple of questions. One on the acquisition strategy and the debt to EBITDA ratio, is that a next debt ratio?

Dave Tomlinson

No. That’s not a net debt, however considering our, you know, 600-plus million of cash, which we continued to generate and will continue to focus on, you could expect that we’ll maintain a very strong cash position in any acquisition forward.

Matt Sheerin – Thomas Weisel Partners

So in other words, you would use cash, or some of that cash for an acquisition?

Dave Tomlinson

You know, possible, possible. However, we would maintain some of it for restructuring and will maintain some of it to manage any potential downturn in the market as we always do.

Matt Sheerin – Thomas Weisel Partners

Okay because if you look at the numbers and even if you normalize the EBITDA run rates of ’07 and ’08, you’re still talking about the capacity to spend a billion dollars or more on acquisitions. Correct?

Dave Tomlinson

Agree.

Matt Sheerin – Thomas Weisel Partners

Okay. And then just back to the, Dr. Paul –

Dave Tomlinson

This is really the, you know, we have no large targets, and I would say that the 2.5 really represents the maximum the Board directed us to reach. So it’s not like this is what we’re looking for. We’re looking for smaller medium-sized acquisitions as Dr. Paul indicated over the last couple of quarters, and we will be obviously – we will only reach to that 2.5 if we know for sure that immediately thereafter we will be able to generate free cash to start paying down the debt so that we could go back to a more normalized 1 or below 1 as we are today in terms of our debt to EBITDA.

Matt Sheerin – Thomas Weisel Partners

Understood. Okay. Thanks on that. And then, Dr. Paul, just back to the question of lead times you mentioned for Siliconix out a year, which seems like we haven’t heard that number maybe ever.

So what are you realistically quoting customers? When do you sort of stop at the six months and after that then the orders you get are sort of, you know, don’t make any sense and they’re phantom orders?

Dr. Gerald Paul

It’s our policy, and I think it’s very broad, this policy to only recognize orders when lead times are below a year. This is normal.

At the moment, there is, of course, a location and by nature of things, people order very much long term, which doesn’t mean too much. But on the other hand, it’s also not a sign of any downturn if this show go down at a point.

It’s just the concern people have not to get the product.

Matt Sheerin – Thomas Weisel Partners

Okay. And how are you allocating product, whether it be on the passive side, or the active side to customers? How do you make those decisions?

Dr. Gerald Paul

Well, as a matter of fact, it’s basically in Siliconix, by the way, basically in Siliconix. On the other side, it’s not really from a location. Well, we look at the history with the customer and basically – well, how good we are together, as a matter of fact. And really, we have to take into account contextual conditions also.

Matt Sheerin – Thomas Weisel Partners

Okay. Thanks a lot.

Dr. Gerald Paul

Thank you.

Operator

Thank you. At this time there are no further questions. Dr. Yahalomi, do you have any closing remarks?

Dr. Lior Yahalomi

Thank you for your participation in our call. We do appreciate your interest and we look forward for your continued participation. Thank you.

Operator

Thank you. This concludes today’s call. You may disconnect.

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