Vishay Intertechnology, Inc.
Q2 2008 Earnings Call Transcript

Published: 29 Jul 2008

[Operator:]

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay's second quarter 2008 earnings release. (Operator Instructions). Thank you. Mr. Grubb, you may begin your conference.

[Richard Grubb:]

Thank you. Thank you for calling in for today's conference call. Here with me today are Dr. Gerald Paul, Vishay's CEO and Dr. Felix Zandman, Vishay's Executive Chairman, Chief Technical and Business Development Officer. Before I start, Bill Clancy, Vishay's Senior Vice President and Corporate Controller will read our customary opening statement.

[Bill Clancy:]

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 statements. 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. Thank you.

[Richard Grubb:]

As usual, I will make some summary comments and Dr. Paul will add a more detail evaluation of the quarter and finally Dr. Zandman will update our research and development and acquisition activities, after which we will have a Q&A. As announced in our press release today, Vishay reported a goodwill impairment of $800 million. In light of a sustained decline in market capitalization for Vishay and its peer group companies and other factors, Vishay determines that an interim impairment test was necessary as at the end of the second quarter. The charge is non-cash in nature and will not affect Vishay's liquidity, cash flows from operation activities or debt covenants, or have any impact on future operations, except for some positive tax benefits for tax deductible goodwill. As announced in our press release, Vishay reported $0.23 operational earnings per share, as compared to $0.26 for last year's second quarter and $0.19 for the first quarter of 2008 and were in line with estimates. The reported GAAP earnings per share include the goodwill impairments of $800 million and restructuring and severance costs of almost $9 million. These items and the related tax consequences had a negative effect of $4.21 per share against our operating earnings. In addition, the continuing weakening of the US dollar amounted to $6 million negative pre-tax effect for this quarter. Revenues for the second quarter of $774 million were approximately 8% higher than last year's second quarter and 6% higher than the first quarter of 2008. The increase in revenues compared to last year's second quarter was primarily due to foreign currency effects. Revenues by segment were Semiconductor, 53%; Passives, 47%; consolidated gross margins for the quarter were 23.2% as compared to 23.5% for the immediately preceding quarter. Gross margins by segment for the quarter were

[Gerald Paul:]

Thank you, Dick. Well in essence, Vishay showed strong sales performance in the second quarter with improved operation results. On the other hand, the historical weakness of the US dollar again (inaudible) earnings in quite a major way. In the case of Israel, this is true in particular for the Israeli shekel. As Dick said before we continue to show a strong free cash flow and despite major macroeconomic concerns, we continue to be confident for the development of the business near term. Talking about economic environment, there's a lot of skepticism around. Nevertheless, the electronic market remains basically healthy in the second quarter. Most of the business trends which we saw in the market were seasonal trends. We have seen a continued strength of industrial automotive in Europe and aerospace military. We have seen also that obviously the upturn of the Asian market for notebooks and mobile phones seems to start. Again, we are seeing a strong POS performance of our worldwide distributors with quite satisfactory inventory turns. They had on a worldwide basis 4.1 turns after 4.0 in the first quarter. The Americas remain at a turn rate of 3.2. In Europe, last quarter the first quarter was really a spike and this went down to 4.4, this went down to a very normal number of 3.9 turns, nothing to be skeptical about. And Asia came up from 4.5 turns to 4.6 turns. Also, the book-to-bill of our distributors was almost one, so we have to assume that things are in good order there. The inventories at EMS appear normal and all together quarter three '08 looks solid, despite some ongoing macroeconomic concerns. Talking about the business development of Vishay in the second quarter, we had a strong sales performance and exceeded sales guidance substantially, naturally also because of exchange rate impact, but not only. We achieved sales of $774 million in the quarter as compared to $733 million in the prior quarter and $716 million in the prior year. When excluding exchange rate effects, sales versus prior quarter were up by $28 million or 4%, vis-à-vis prior year sales were up by $21 million or 3%. Book-to-bill in the quarter was at one. If you segment the book-to-bill, into segment into areas you see that for distribution book-to-bill was 1.01 in the quarter for OEMs, 1.0, very similar. For Actives 1.01, for Passives, 0.99, again, very similar. And regionally, you see for the Americas 0.94, for Europe 0.97, and for Asia 1.07. The only soft spot we see therefore, is the Americas, but all the other parts of the world are quite promising. The backlog is at a comfortable level of 2.7 months and the modest price decline which we have seen since a few quarters already continue. All together, Vishay lost prices of 0.9% vis-à-vis prior quarter, 3.1% versus prior year. Actives had a price decline of 1.4% versus prior quarter and 4.7% versus prior year. The passives as nearly always practically had no price decline, 0.3% versus prior quarter and 1.1% versus prior year. Let me talk about the results of the second quarter and let me reconcile them vis-à-vis the prior quarter. Based on 41 million higher sales, which is 28 million higher when excluding the exchange rate effect. The adjusted operating margin increased by 5 million, mainly from 54 million to 59 million. The main elements of this development were an ASP decline, which had an impact of $7 million negative. On the other hand, volume came up by $14 million. Variable cost of course were burdened by higher metal costs, but became better vis-à-vis first quarter by $7 million. We have seen a negative inventory impact of $4 million mostly due to additional obsolescence in the context of restructuring and the exchange rate burdened our results by $4 million vis-à-vis the first quarter. When looking and comparing the second quarter results to the second quarter last year, you'll see the following

[Felix Zandman:]

Good morning. Just a small summary. Again, Vishay reported $0.23 per share for the second quarter, as compared to $0.19 for the previous quarter, in line with consensus. The operations are performing quite well. The impairment of goodwill by $800 million due to accounting regulations because of the depressed value of our shares and the depressed value of the shares of our competitors, these are non-cash events and will be somewhat tax beneficial. It will also improve our ROI. Despite of the industrial slowdown or recession depending on the definition or outlook, Vishay shows good sales with relatively stable or slight price decline. In other words, at this time we don't see the recession. Our cash generation continues to be good. To avoid dilution, we decided to buy back our convertible of 23.5 million shares for $500 million. This will take place to date. Our strategy of broadening our product pipeline through acquisitions and new product development, positions Vishay as a stable, quality oriented, strong and innovative company. Our balance sheet is strong and we continuously look for suitable acquisitions, small and large. The R&D programs are in line. All our 18 divisions have programs for new products and in many instances new platforms, which focus on size reduction and increasing performance. In general, the company is performing as planned. Thank you.

[Gerald Paul:]

We will have questions now.

[Operator:]

(Operator Instructions) Your first question comes from Steve Smigie.

[Steve Smigie:]

Great. Thank you. Congratulations on getting a nice bump in revenue, in analytics some of it was based on currency. In any event, I was just curious if you could talk a little bit about what operating expenses might look like at September quarter, given the big jump in revenue here.

[Gerald Paul:]

Well, we are going to have about the same SG&A expenses in the third quarter as we had in the second quarter, but looking ahead, we do expect a reduction in the fourth quarter.

[Steve Smigie:]

All right and just with regard to the impairment, I was wondering if you could talk a little bit about what particular areas received the impairment?

[Gerald Paul:]

Well, the impairment is the $800 million, an estimate that we made which will be refined over the next 90 days. It's basically broken into two parts. Approximately $250 million is associated with our passive business and about $550 million is associated with our semiconductor business.

[Steve Smigie:]

Okay, within the semis, is the stuff related to international rectifier stuff or can you just give me some sense generally of what areas you guys were, and things are not quite as you had hoped?

[Gerald Paul:]

Well, I think it's a combination of many things in that area, General Semiconductor in the past, which was a 2002 acquisition and, but I don't know if anything specifically is associated with the IR acquisition.

[Steve Smigie:]

Lastly, could you just talk a little bit about what interest expense might look like in Q3 and going forward given the buyback here and issuance of debt, what rate you're getting there?

[Gerald Paul:]

Yeah, the net effect on interest at the company with this new deal is about breakeven. So the interest expense before and after the utilization of cash and increasing our debt will be equivalent to the rates that we were paying in prior to the bond outstanding. So we won't see any significant movement in that.

[Steve Smigie:]

Okay.

[Gerald Paul:]

And that includes the loss of the interest income that would have been associated with the deposits that we have.

[Steve Smigie:]

All right. Okay, great, thank you very much.

[Operator:]

(Operator Instructions) Your next question comes from Kevin Kessel.

[Kevin Kessel:]

Hi, there.

[Gerald Paul:]

Hi.

[Kevin Kessel:]

I just wanted to go back to IRF and just understand essentially where we are right now with that acquisition in terms of what's left to do as well as what's already been realized. Based on, I think just prior comments to that you guys have made, it sounds like the target remains $11 million in quarterly profit on roughly $60 million I think in quarterly sales from that.

[Gerald Paul:]

Okay.

[Kevin Kessel:]

And I believe that you were at, from a packaging standpoint in front end moving to foundries, the goal was to get about 50% of that moved by the first half of this year. And I just wanted to understand where you were and then also if you could update us on where the operating profit was in the quarter, I think last quarter it was 7% margin?

[Richard Grubb:]

First of all, sales and profits were approximately like in the previous quarter. It means we have always continued on the run rate of $240 million in the year, at a 7% incremental operating margin level which is of course still below our expectations. We do believe, again as I just repeat myself what I've said before, that we expect from this manufacturing moves, noticeable improvement of our profitability which basically was to be expected mainly in the second half of the year. Our move of packaging out of the Mexican IR plant is going on plan and also the move of the fabs, which basically will also happen in the second half of this year and in the first half of next year, is according to plan. At the present sales level, we will not quite meet our expectations, but you will see a noticeable improvement from the present incremental operating profit.

[Kevin Kessel:]

Dr. Paul, you expect that improvement to happen when? You say it's on plan, does that mean that you guys roughly did get to 50% of packaging in the front of renewals?

[Gerald Paul:]

Yes, indeed. Yes, absolutely.

[Kevin Kessel:]

And so the remaining 50% is expected to be complete by the end of 2008?

[Gerald Paul:]

By the end of 2008 as we said.

[Kevin Kessel:]

Okay, but it doesn't appear like any improvement that is necessarily showing up in the third quarter. That's what I'm trying to reconcile, in terms of margins or costs.

[Gerald Paul:]

We didn't forecast it separately. We forecasted in the context of the much bigger Siliconix business.

[Kevin Kessel:]

Meaning as an offset?

[Gerald Paul:]

What is that? Sorry.

[Kevin Kessel:]

I am sorry. Meaning that the Siliconix's business might be offsetting some of the improvements that you're getting.

[Gerald Paul:]

Only a small share of the total Siliconix business, obviously. So even in the rounding, you understand. So we do expect better results for IR to stay precisely in the third quarter.

[Kevin Kessel:]

Okay, great. And then in terms of the foreign currency, just so I understand, you said it was overall it was a $6 million pre-tax negative impact on your net income?

[Gerald Paul:]

Yes.

[Kevin Kessel:]

Or $0.02 and this is primarily being driven by the Israeli shekel.

[Gerald Paul:]

Yes.

[Kevin Kessel:]

Which is an unhedged of your foreign currency exposure?

[Gerald Paul:]

We don't hedge, but especially dollars are not the shekel. Shekel became very strong vis-à-vis dollar since the beginning of the year.

[Kevin Kessel:]

Now, is this $6 million, is this an incremental negative impact or is this what the FX impact was in the quarter, because I can't recall what it was in Q1?

[Gerald Paul:]

This is over Q2. This is additional to Q2. Especially the shekel continues to strengthen in the course of the second quarter over the first quarter. And you remember we are not really exposed to the euro because in Europe, we have equivalent sales as we have costs. In the case of the shekel, we only have cost and this is why we are exposed.

[Kevin Kessel:]

Okay. And then in the third quarter, is there any assumption for FX in the third quarter in terms of whether or not it gets worse or stays the same or gets better?

[Gerald Paul:]

All assumption, same thing, but it also appears to be like that. But you never know with currency exchange rates, right.

[Kevin Kessel:]

Okay, great.

[Gerald Paul:]

It's really unusual that the shekel has --

[Richard Grubb:]

First time.

[Gerald Paul:]

First time ever in its history. It's always been associated and connected to the dollar. This is an unusual event that I don't think is going to be long-term.

[Richard Grubb:]

Shekel was usually a press that's always divided.

[Gerald Paul:]

Historically, we always were able to offset the inflation in Israel by a devaluation of the Israeli shekel. So this is history. But now indeed I think also temporarily it became stronger, but we assume for the third quarter the same average rate as for the second quarter.

[Kevin Kessel:]

And then the impact on sales was how much again?

[Gerald Paul:]

On the Israel shekel, nothing, of course.

[Kevin Kessel:]

No, what I'm saying is the overall foreign currency impact on sales.

[Richard Grubb:]

Just the second quarter, it was 20.

[Gerald Paul:]

Something like $15 million over second quarter.

[Kevin Kessel:]

And the $13 million?

[Gerald Paul:]

Over first quarter, sorry.

[Kevin Kessel:]

Okay. And then just housekeeping, Dick, I just didn't catch what you said for depreciation and amortization and then I believe also legal fees you had mentioned. I don't know if that was an incremental impact on SG&A or if you were quite…

[Richard Grubb:]

The legal fees is a one-time increase to SG&A a $3.33 million.

[Kevin Kessel:]

No, I was just wondering, that's quarter-on-quarter, because last quarter I think was burdened by legal fees as well.

[Richard Grubb:]

Yes, same thing, quarter-over-quarter.

[Kevin Kessel:]

There was $3 million more, so it wasn't actually one-time, it's first quarter and second quarter.

[Richard Grubb:]

Right. That's the same suit, I am sorry maybe I'll see.

[Kevin Kessel:]

Same suit but it's impacted your first two quarters.

[Richard Grubb:]

Yes. Then as far as depreciation it would be the same, 56 million depreciation and amortization this quarter.

[Kevin Kessel:]

I got it. But we should not expect legal to impact you negatively in the third quarter?

[Richard Grubb:]

No, we don't anticipate it.

[Kevin Kessel:]

You don't anticipate it. Okay. Thanks so much.

[Richard Grubb:]

This is over with this.

[Gerald Paul:]

Concerning the Israeli shekel, the government is buying back $200 million of A dollars from America, quietly down, but it doesn't look like it's helping too much. Kevin?

[Richard Grubb:]

I think it's a unique situation with the Israeli shekel, really. We are watching it in 20 years. I think it will not last but hard to predict of course.

[Operator:]

Your next question is from Jim Suva.

[Jim Suva:]

Great. Thank you very much. This is Jim Suva from Citigroup. Quickly, on the debt that you put into short-term of about 250, just curious, how come you didn't move the entire $500 million that you expect to be put to the company?

[Richard Grubb:]

Well, because the $250 million of the debt is going to be paid off with new debt, long-term.

[Jim Suva:]

Okay. That makes sense. And then can you remind us about, tantalum how much of it you still have warehoused or stock piled and when you would be going back to the market to have a need to replenish or buy more tantalum materials?

[Gerald Paul:]

In fact we out of mixed reasons, big powder mix reasons, we already buy to a degree. Net, net we at the moment have something between one and one and a half years built at a decreased. You understand, just net-net.

[Jim Suva:]

Great. And then as a quick follow-up to that legal fees, so $3 million this quarter but we also now have to remove the Q1 legal, so net-net how much should we expect basically SG&A dollars to go down or just SG&A dollars to be flat?

[Gerald Paul:]

If you were to look at the quarter, $3 million in this quarter was a one-time thing. So that shouldn't repeat itself.

[Jim Suva:]

Okay. So we're not backing out three plus something else for Q3, just three. Great. Thank you very much, everyone.

[Gerald Paul:]

Thank you.

[Operator:]

(Operator Instructions) Your next question comes from Shawn Harrison.

[Shawn Harrison:]

Hi, good morning. First question, just getting back to Siliconix, the recovery and profitability at the IRF piece that was bought leads to some of the gross margin expansion expected in the second half. Where should we expect the remaining to come from? It doesn’t sound like a lot of it is going to be volume, is it just principally cost reduction initiatives?

[Gerald Paul:]

Well, we expected, when we projected Siliconix up for the second half, we of course expected also the seasonal volume increase quite substantially, as to be stated. The remainder is cost reduction. Cost reduction in particular from the die size shrinkage, right from the end of the year starting lower cost from a new foundry, but of course also, cost reduction from the manufacturing project at the IR portion of the Siliconix business.

[Shawn Harrison:]

Okay and it sounds like we're still somewhat on track to reach that 28% gross margin target?

[Gerald Paul:]

The biggest impact is clearly volume, of course, as you can imagine.

[Shawn Harrison:]

Okay and based upon the book-to-bill, it sounds like we're getting some of that volume?

[Gerald Paul:]

Yes, it started absolutely seasonally into the third quarter and also the end of the second quarter showed good orders.

[Shawn Harrison:]

Okay. Secondly, I was hoping if you could just comment on what you're seeing as we head into the third quarter on incremental raw material costs, be it metal, be it fuel surcharges to you, anything else that could pressure gross margin sequentially?

[Gerald Paul:]

Well, we have not seen in July additional burden at this point in time, so we assume really, but this is now really fresh in the quarter. We assume that the prices will be approximately the same.

[Shawn Harrison:]

For raw materials?

[Gerald Paul:]

Yeah.

[Shawn Harrison:]

Okay, then what about the pricing decline that was witnessed here in the second quarter at Siliconix? You said that was a little bit abnormal.

[Gerald Paul:]

A little, but I believe that this is a temporary thing because you have to see this in comparison to the first quarter price decline, which was absolutely low. I don't exactly recall the number, but it was absolutely low for Siliconix, practically flat. So you see this in context.

[Shawn Harrison:]

So it was essentially just maybe a catch up after abnormally low pricing in the first quarter?

[Gerald Paul:]

Yes. Exactly.

[Shawn Harrison:]

Okay and then my final question just has to do with what you're seeing in terms of, you mentioned last quarter some recourse with the automotive business. Is there any update in terms of how that's progressing, the automotive business that was sold?

[Gerald Paul:]

Which one?

[Shawn Harrison:]

That was purchased from IRF and sold, excuse me.

[Gerald Paul:]

Well we sold it. So maybe I don't understand the question.

[Shawn Harrison:]

I think it was implied last quarter that you were looking for just potentially legal recourse following the purchase.

[Gerald Paul:]

This was not stated like that.

[Richard Grubb:]

Well, yeah.

[Shawn Harrison:]

Okay, so it's an ongoing situation, maybe the best way to describe it?

[Gerald Paul:]

Yes.

[Shawn Harrison:]

Okay. Thank you.

[Gerald Paul:]

Thank you.

[Operator:]

Your next question is from Matt Sheerin.

[Matt Sheerin:]

Yes, thanks. Some of your competitors have talked about seeing actually weaker bookings and sales trends at the end of June and then a pickup in July. It sounds like you've seen pretty much seasonal trends, both in June and then so far in July where you seeing some strength at Siliconix and in Asia, but general seasonal weakness in Europe and North America in some of your business. So, could you just elaborate on what you're seeing?

[Gerald Paul:]

Matt, you've practically summarized the impression. We do not see any abnormal development on our markets. All the seasonal trends which you reasonably would expect are there. If you really want to be in a little bit more critical, then of course America does somewhat worse than we are used to and Europe does somewhat better than we are used to, Asia is really seasonal, it is absolutely seasonal. But in a nutshell, there is a very normal business development in our business, which is quite in contrast to the overall skepticism.

[Matt Sheerin:]

Exactly and given the cost initiatives and if you continue to see seasonal trends through the rest of the year, would you expect gross margin then to improve again in December after being flattish this quarter?

[Gerald Paul:]

This is our prediction, but I'm not guiding to the fourth quarter at this point.

[Matt Sheerin:]

Got you, understand. Okay. And then, just lastly, it's been a few quarters since you did a sizeable acquisition. I know the balance sheet has changed a little bit, but I know you've got still significant liquidity. Given valuations that some peers have come down a lot and it's relatively depressed market. This is historically when Vishay tends to do deals, so could you tell us, just update us on your strategy for acquisitions and what you're seeing in terms of opportunities?

[Gerald Paul:]

There are many opportunities presently, but we are looking at one after another very carefully, but we don't jump on it immediately. We are studying many situations presently. Sure the market is depressed and it's worth to look into it. We are in a very strong position to be able to do that, no question about it. Balance sheet is extremely strong and God willing maybe we'll earn something.

[Matt Sheerin:]

And is there a preference, active versus passives or does it not matter?

[Gerald Paul:]

It doesn't matter really, but we would prefer actives.

[Matt Sheerin:]

Okay. Thank you.

[Operator:]

Your next question is from Andrew Huang.

[Andrew Huang:]

Hello, can you hear me okay?

[Gerald Paul:]

Yes, absolutely. Hi, Andrew.

[Andrew Huang:]

Hi. Can you just comment on your expectations for (inaudible) for Q3 compared to Q2?

[Richard Grubb:]

Yes, we don't see a big difference. We don't see a big change. We are looking to Asia in particular of course, because this is the time of the year you have to be critical with Asia. You must see the pick up, which we see and if you look at the terms of the Asian distributors that I reported in my speech. They are quite normal. They became better vis-à-vis the second quarter. Inventories are high but vis-à-vis the POS obviously, right.

[Andrew Huang:]

So Dick, you have seen a pick-up in bookings out Asia so far through July.

[Richard Grubb:]

Absolutely, yes.

[Andrew Huang:]

Excellent. And then I guess the next question is with respect to the gross margin, did you comment that based on your guidance of $750 million to $770 million, you expect gross margins to be flat sequentially?

[Richard Grubb:]

Yes.

[Andrew Huang:]

If there is a pick-up in Asia, does that have a negative impact on your mix, or not really?

[Richard Grubb:]

No, because I think Vishay in the first approximation does not show cycle because we are strong in Europe, as strong in Europe as in Asia and typically in the beginning of the year, Europe is relatively strong. In the latter part of the year, Asia is typically strong. And the contributed margins of Siliconix which is strong in the second half of the year vis-à-vis the passives, which are mostly strong in the first half and not so dissimilar.

[Andrew Huang:]

Okay. Thank you very much.

[Richard Grubb:]

Thank you.

[Operator:]

Your next question is from Ingrid Aja.

[Ingrid Aja:]

Good morning. If we go back to the margin question, so your sales outlook is for lower sales in Q2 but you're looking for similar gross margins, so if you could comment on how you get there, give me a little more color there, maybe?

[Gerald Paul:]

It's really minor. Just to put things into perspective. We guide based on 760 something million per quarter, 10 million lower. It's really absolutely minor the sales decrease. And the impact on margin you can calculate yourself with a 50% variable margin approximately, that this does not really change the picture. It's a rounding thing. So approximately flat, at a little bit less sales, which may be also mostly seasonal. So we do not see, this is really the message. Just to guide down by 10 million on a level of 760 or something doesn't mean that we forecast a downturn.

[Ingrid Aja:]

Okay, great. And then I was wondering if you could talk a little bit about your automotive customers and how they're doing in Europe. It sounds like they're strong but are you making any progress in gaining content in new models?

[Gerald Paul:]

We always do. We do have a very strong position, especially in Europe and all the relevant suppliers there, Bosch to name just one [that's capable]. There are many prominent suppliers in the larger that's just fit. We are in so many technical programs that are there ongoing, I would bore you if I were to talk too much about it. We are constantly since 30, 40 years bring always new products into these accounts and we grow together with them.

[Ingrid Aja:]

Okay, great. Thanks. And then you said the Siliconix, one of your competitors made comments that pricing was a little tougher on MOSFETs, but it doesn't sound like that's what you're seeing, if you could just comment?

[Gerald Paul:]

As I said before, we have seen in the second quarter a higher price decline vis-à-vis the first quarter than a quarter before. But what I also said, the quarter before was for us at least very low price decline.

[Ingrid Aja:]

I see.

[Gerald Paul:]

And you have to see both things in context.

[Ingrid Aja:]

Okay, great. Thanks for the clarification.

[Operator:]

You have a follow-up question from Kevin Kessel.

[Kevin Kessel:]

Yes. Thank you very much. I'm just curious, are you expecting at all to be impacted one way or the other by the Beijing Olympics in the third quarter?

[Gerald Paul:]

No, we don't. It would only be for the output of the factories, right. There are some restrictions but it doesn't make a…

[Kevin Kessel:]

And the same is true for the suppliers to you of raw materials and…

[Gerald Paul:]

We do not expect a hiccup because of that.

[Kevin Kessel:]

Okay. And then in terms of your free cash flow or your cash flow from operations, when you look at the second half of this year, what's the expectation in terms of…

[Gerald Paul:]

We are going to get to a very attractive cash flow, again free cash flow. Kevin, that if you look at our history, that the second half typically concerning free cash is much higher than the first half.

[Kevin Kessel:]

CapEx, so is it still expected to be about a $150million, $155 million or is that too high or too low?

[Gerald Paul:]

I always say its $170 million, Kevin.

[Kevin Kessel:]

170, okay.

[Gerald Paul:]

It continues to be 170.

[Kevin Kessel:]

And any thinking about next year in terms of CapEx or is there any…?

[Gerald Paul:]

Not yet. It's a little early. We're in the midst of the budgeting process.

[Kevin Kessel:]

Got it.

[Gerald Paul:]

That will not be surprisingly high, nor surprisingly low.

[Kevin Kessel:]

Okay, got it. And then the last question I had was in terms of the discussion again on margins, just based on the comments that you guys have given and as well as the release with flat gross margins and it sounds like SG&A dollars should be down as a result of just at least the legal fees dropping off, if not other cost reductions, operating margin therefore would be expected to be up. Is that right?

[Gerald Paul:]

Well, what I said really is that we expect the operating expenses, the SG&A is down in the fourth quarter, which I said before.

[Kevin Kessel:]

Down in the fourth, but I thought in the third quarter we were looking at the $3 million in legal fees coming off.

[Gerald Paul:]

This is fairly true but I foresee a singularity for the third quarter. This is why I say we are down in the fourth quarter.

[Kevin Kessel:]

Okay. So what you're saying is the third quarter legal expense could be offset by other --?

[Gerald Paul:]

I'm not saying it's legal.

[Kevin Kessel:]

All right, thank you.

[Gerald Paul:]

Mathematically the three comes off here.

[Operator:]

(Operator Instructions) At this time, there are no questions.

[Richard Grubb:]

Okay. For the company I want to thank you for calling in and dialing in to, to listen to and ask your questions. We appreciate the interest in Vishay and look forward to a continued interest in the future. Thank you.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect.