Vishay Intertechnology, Inc.
Q3 2007 Earnings Call Transcript

Published: 30 Oct 2007

[Operator:]

Good morning. My name is Philis and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay's Third Quarter 2007 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-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Rick Grubb; Vishay's Chief Financial Officer. You may begin your conference.

[Richard N. Grubb:]

Thank you. Thank you for calling in for today's conference call. On line with me today are Dr. Gerald Paul, Vishay's Chief Executive Officer; Dr. Felix Zandman, Vishay's Executive Chairman and 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.

[William M. Clancy:]

You should be aware that on 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.

[Richard N. Grubb:]

Thank you. As usual, I will make some summary comments and Dr. Paul will add a more detailed evaluation on the results for the quarter and finally Dr. Zandman will update our research and development and acquisition activities. As announced in today's press release, Vishay reported $0.25 operating earnings per share as compared to $0.27 for last year's third quarter and $0.26 for the second quarter of 2007. The operational results of the third quarter 2007 and for the last six months of 2007 exclude the automotive business unit acquired as part of International Rectifiers PCS Business. Company announced its intention to sell this business unit in June and is in the process of meeting interested parties. The reported GAAP earnings per share include restructuring and severance cost of $9.9 million. This item and its related tax consequences plus an additional tax benefits pertains in foreign tax rates at a negative $0.05 per share effect against operating earnings. In addition, this quarter earnings were negatively affected by foreign exchange charge of $2.5 million. Revenues for the third quarter of $730 million were approximately 11% higher than last year's third quarter, 2% higher then the second quarter of 2007. Increase in revenues compared to last year's third quarter is primarily due to International Rectifiers PCS acquisition in April of this year. Revenues by segment were

[Dr. Gerald Paul:]

Thank you, Dick. Good morning everybody. I think quarter three was another solid quarter for Vishay. Earnings per share were at $0.25 per share and we were close to street expectations. Our free cash flow remain strong, we achieved a $84 million and our acquisition, our IR acquisition continued to contribute to the rest of the results. Let me talk first about the business environment. I think that general skepticism for the quarter was not justified. Q3 showed the continuation of the friendly business climate that exists since the end of 2005. Asia in quarter three was strong beyond pure seasonality. Europe on the other hand was seasonally weak. There was strong business at distribution. The POS was above the prior quarter and above the prior year. Inventory turns of our distributors improved to 4.1, Americas at 3.0, Europe at 3.8 and especially Asia improving these days turns 5.9. Relatively moderate price pressure continues to exist despite the lead times being normal in general. We've seen a strong upturn in notebooks and in mobile phones beyond seasonality. Industrial and automotive segments are stable on a high level. Let me talk about Vishay's business development in quarter three. We were in line with our guidance. We achieved sales of $730 million in the quarter as compared to $716 million in prior quarter and $654 million last year. The IR acquisition excluding the automotive systems part of it contributed $59 million, which was also in line with our expectations. Without acquisitions and without the exchange effects, sales are constant versus prior year. But the orders are up by 6%, which makes us optimistic for the time to come. Book-to-bill was at 0.98, which includes some backlog corrections for the IR product line. Some details of the book-to-bill ratio; 0.93 for distribution, 1.03 for OEMs, 0.95 for the actives, 1.02 for the passives, 0.94 for the Americas, 0.98 for Europe and 1.03 for Asia. Our backlogs remain at the comfortable level of about 2.8 months and as I said before, the price decline was low in general. Vishay has lost prices of 1.3% versus prior quarter and 2.7% versus prior year. The active part of Vishay lost 2.0% versus prior quarter and 4.5% versus prior year. The passives had picked no price decline which we see since many quarters; 0.4 price decline versus prior quarter 0.7% versus prior year. Let me talk a little about the reconciliation of the results of this quarter versus quarter two '07 based on $14 million higher sales, which is $10 million higher excluding exchange rate impact. The adjusted operating margin remained at the same level of $65 million. The main element was the impact of volume, a positive impact of $4 million, price decline of minus $9 million, costs were better by $8 million and all inventory related impact namely the reduction of the inventories caused a negative of $4 million versus prior quarter. Let me compare now the results of the quarter versus the third quarter last year. And I'll talk first about the Company's core businesses without the acquisitions IR and PM. Based on $10 million higher sales, actually $4 million lower sales because excluding exchange rate effect, the adjusted operating margin decreased by $14 million from $74 million to $60 million. Main elements, the volume was slightly positive by $4 million, selling price is of course the negative of $18 million, costs were better by $4 million, which includes a negative of $5 million higher costs for metals and silicon, and inventory-related impacts gave a burden of $3 million. Our acquisitions in the quarter contributed $65 million sales and $5 million operating margin. Some highlights from the operations. We improved the manufacturing inventory turns further to $3.6 million. Excluding exchange rate effects, the inventories went down by $29 million, by $16 million in raw materials and by $13 million in finished goods. My comments on inventory includes $44 million tantalum classified as other assets. Capital spending in the quarter was $35 million, as compared to $42 million in the prior quarter and $245 million prior year. Depreciation was $49 million. We expect capital expenditures of approximately $190 million in 2007, again without the automotive systems division of IR. Overall, employment remained virtually constant at 27,760 people for continuing operations. The share of high labor reduced from 26.2% to 25.3%. We have seen a good capacity load in virtually all commodity products, the lead times quite normal between four and eight weeks. We continue to expand production capacities mainly in discrete, but also for selective specialties in passives. We have accelerated our last major manufacturing restructuring effort. We have announced the complete closing of all Belgium production of non-linear resistors by the end of 2008, and recorded a charge in the third quarter. We expect a pay back of 1.3 years from this project. With a very good cash production this quarter, we generated cash from operations of $121 million, as compared to $107 million prior quarter and to $98 million the prior year for the core business. And free cash flow for the core business we generated $87 million as compared to $68 million prior quarter and to $56 million prior year, again for the core business. The acquisitions IR and PM, both generated minus $4 million cash from operations, and also minus $4 million free cash in this quarter. Let me talk about our IR acquisition. Our quarterly sales were $59 million which was quite in line with the expectations of $240 million annualized. Book-to-bill year-to-date on the Vishay was close to parity, actually at 0.97. There are still some relatively high inventory levels for high voltage MOSFETs at distributions. The levels are coming down but it will take some months still for normalization. The daily business of the acquisition run smoothly, the service levels are approaching our Vishay standards. Operating margin in the third quarter were at 8% of sales, or $5 million. The results are still burdened as you know by transition service agreements with IR and also by substantial purchases in shipments from and to IR at fixed prices. The transition service agreements are planned to end in the first quarter next year. We are in process to move out of the IR facilities in steps by the end of 2008. Let me talk about the product line of resistors and inductors. There was a seasonal decrease of the revenues, but the business remains healthy. Sales in the quarter were $156 million, which is 4% below prior quarter, and 1% below prior year. Book-to-bill was at 1.01. The backlog has grown to 2.8 months. Due to lower sales volume, inventory reduction and some temporary inefficiencies, gross margin in the quarter was only at 28%, but we expect the recovery in the fourth quarter. The selling prices were stable versus prior quarter and prior year. Inventory turns for resistors and inductors improved to 4.2%. We announced as I said before, the closure of non-linear resistors in Belgium effective at the end of next year, and we pulled in this project by nine months. Can I talk about capacitors next? Business has stabilized after a successful implementation of our new pricing strategies. Sales in the quarter were $124 million, which is down by 2% versus prior quarter, but on the same level as prior year. Book-to-bill was at 1.02, mainly driven by film power capacitors, where we see a very good development especially in India. Our strong backlog at the capacitors of 3.2 months, gross margin was at 18% of sales, and recovered as we expected due to a more normal product mix than in quarter two. Price decline was modest for capacitors, minus 1% versus prior quarter, minus 1.3% versus prior year. Manufacturing inventory turns of 2.2 continue to improve as in particular tantalum powder and wire inventory levels decreased. Altogether, inventories for capacitors were down by $17 million in the quarter. We are in process to expand the capacity for our tantalum map chips. Coming to our Measurements Group, it's a stable business, which we recently expanded by the acquisition of PM Onboard in the U.K. Sales in the quarter were $48 million. This compares to $49 million in the prior quarter and $42 million in the prior year. Book-to-bill was strong at 1.06 and driven by load cells and weighing systems. Backlog has grown to 2.6 months. The gross margin of our Measurements Group remained at an excellent level of 33% of sales. Inventory turns of 2.5 they require... this requires further improvements. Our restructuring measures for PM Onboard on the way to be implemented, but we do not expect significant charges in that context. Semiconductors without Siliconix, but including now a portion of the IR business that diverts portion of the IR acquisition, we see a solid and quite dependable development of the business. Sales in the quarter were $220 million, which is 2% above the prior quarter and 15% above the prior year, mostly due to the IR acquisition. Book-to-bill in the quarter was at 0.94, which was driven by distribution. Backlog was at 2.4 months. The gross margin improved to 24% of sales and we see... we continue to see a steady and reliable performance of this product family. The selling price decline remained moderate, minus 1.1% versus the prior quarter, and minus 2.2% versus prior year. The inventory turns improve to quite an excellent level of 4.6. The new product family, Trench Schottky Rectifiers continues to grow in revenue. We continue to expand our manufacturing capacity in Taiwan. Siliconix, again including a portion of the IR acquisition, high-voltage MOSFETs, the core business continues to grow year-over-year up to 4% versus year-to-date September 2006, which was a record year for us. Sales in the quarter were $181 million, up by 10% versus prior quarter, and up by 19% versus prior year, again mostly due to the IR acquisition. Book-to-bill was at 0.97, but contains some backlog corrections for IR high-voltage MOSFETs. Backlog is strong at Siliconix at 3.1 months. Gross margin declined to 23% of sales, mostly due to a temporary shift of product mix and due to inventory reduction. We have seen quite a normal level of price decline at Siliconix, minus 3.1% versus prior quarter and minus 7.3% versus prior year. Inventory turns of Siliconix improved dramatically to 4.5. Let me summarize, Vishay continues to operate in a friendly economic environment and there are no signs for a change of this environment. We have stabilized on a solid performance level of $0.25 earnings per share. Our generation of free cash remains very strong, we expect to exceed the excellent year 2006 for the core business. We are progressing to integrate our two recent acquisitions and expect from them a growing contribution going forward. 2007 will be another successful year for Vishay. For the current quarter, we guide to a sales range between $710 million and $730 million and similar to slightly improved gross margins. Thank you very much. I hands you to Dr. Zandman.

[Dr. Felix Zandman:]

Good morning. I am Felix Zandman Executive Chairman and Chief Technical and Business Development Officer. The quarter produced $84 million free cash. Free cash is for what for Vishay said one of the key focus points. We always emphasize that. Our earnings per share was $0.01 or so below market expectation. If it were not for substantial quite substantial inventory reduction, our earnings per share would have somewhat exceeded market expectations. Integration, processes for our businesses which we have recently acquired continues or continue on plan, IR and PM Onboard are proceeding properly. Our R&D programs are on target and I would like to mention now about one program. Just wanted to mention that about the introduction of our new product line, PM Onboard, our new acquisition. PM has developed sensors for our new way of weighing the cargo transported by vans and trucks. The sensors and its software optimize loading of a truck. And a truck which is overloaded pays heavy fines and when under loaded is expensive to operate. The market potential to outfit new trucks and retrofit old ones is into hundreds of millions of dollars per year. During the Birmingham show in U.K., it was a show for commercial vehicles, General Motors, Volkswagen, Renault and others, truck manufacturers and producers and major truck fleet operators showed a high interest. Small orders and quotes are underway. Fifty better sites to prove product reliability show excellent results. The official product release will be next month, this is but one of their R&D projects which are under way. We continue to investigate small and large acquisitions as in the past to broaden our product portfolio and introduce advanced technologies in our line of business namely called passive components, discrete semiconductors, infrared components and weighing sensors. They look with bit confidence on the immediate and long range future objective. Thank you and we are open for questions. Well you are open for questions. What is it?

[William M. Clancy:]

Well Philis. Question And Answer

[Operator:]

Yes. [Operator Instructions]. Your first question comes from the line of Jim Suva.

[Jim Suva:]

Great, thank you very much. Can we come back to the gross margin issue? I believe last quarter you had mentioned that you expected gross margins to improve or re-bounce somewhat. And I know you had mentioned that there were some inventory adjustments on your end this quarter. But I believe inventory corrections for the most part within Vishay is kind of under your control. So kind of help us triangulate around really what happened this quarter to profitability as sales are going up and margins are going down?

[Dr. Gerald Paul:]

Okay. Well we did not guide for gross margin actually. And it was clear that we would continue to reduce inventory. In fact it's a target of the year to generate a strong cash flow, which we are doing. As it relates to the inventory reduction, you understand a reduction like that doesn't impact on the P&L which we show and Dr. Zandman pointed out without this impact we would have exceeded the street expectation. In the fourth quarter, we will stop to reduce the inventory of... to reduce the inventory in different finished goods and we will continue to reduce on the other hand the inventory and raw materials. We also had in Siliconix a negative shift of the product mix, which contributed to the negative gross margin development vis-à-vis the prior quarter. But mostly it came from the inventory reduction.

[Jim Suva:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Matt Sheerin.

[Matthew Sheerin:]

Yes, thank you. It's Thomas Weisel Partners. Just a follow up on Jim's question on the margins, Siliconix gross margin was I guess the lowest number in three years. I know you talked about mix, you talked about inventory. Could you be more specific about the mix issue there and how you see that playing out in the next couple of quarters?

[Dr. Gerald Paul:]

Well, we had... there was a replacement of sales volume to the handsets by volume for the desktops which was at lower variable margins. We are working on cost reduction quite heavily and we see a normalization of the mix going forward, but it will not come overnight. But we work heavily on the cost reductions.

[Matthew Sheerin:]

Okay. Because you not too long ago, gross margins were in the 30% range. I mean is that?

[Dr. Gerald Paul:]

It was 28% to 30%.

[Matthew Sheerin:]

Okay. And I mean do you see... do you think you can get there sometime in '08 back there with Siliconix?

[Dr. Gerald Paul:]

I think we will have a very strong cost reduction next year.

[Matthew Sheerin:]

Okay. And then on the distribution book-to-bill seemed pretty low. What are you seeing from your distribution customers in terms of their strategy concerning inventories and are you expecting I mean normally you see strong distribution sales in the first quarter of the year. Are you talking to distributors about re-stocking inventories at any point in the next couple of quarters?

[Dr. Gerald Paul:]

In our numbers for the distribution, we have included an inventory correction as a permanent drop of inventories for IR. As I reported last time, when we took on the IR acquisition the inventories at for IR products at distribution were very high from the beginning and now we see a constant decrease in normalization of this inventories. Of course this is reflected in our book-to-bill for distribution. Overall, the business and this is I think what counts. With the business of our distributors is very strong. Their POS continues on a high level and we expect no decline there.

[Matthew Sheerin:]

Okay. And if... so where was the distribution book-to-bill within passive then? Was that higher than the overall number?

[Dr. Gerald Paul:]

Passives was higher I've said it before and let me just see, was 1.02... in distribution you mean?

[Matthew Sheerin:]

Yes.

[Dr. Gerald Paul:]

I do not have this break down here. Yes, it was for sure. Yes it was.

[Matthew Sheerin:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Thomas Dinges.

[Tom Dinges:]

Hi, good morning guys. Dr. Paul I wanted to follow up just on two quick comments that you had made. You did say that notebooks and phones were better than what you would have expected in normal seasonal.

[Dr. Gerald Paul:]

Yes.

[Tom Dinges:]

And then you said that industrial and auto was stable at a higher level? And you had previously also said that Europe was down just sort of seasonally, nothing other than seasonal and may be just some distribution realignments in the numbers geographically there?

[Dr. Gerald Paul:]

I see only in Europe, we only have seen the seasonal impact. The environment continues strong.

[Tom Dinges:]

Okay. And then just one last quick one is, if you look at the Siliconix overall the book-to-bill there being a little bit less than one. If you adjusted for those backlog corrections at the business --

[Dr. Gerald Paul:]

It would have been slightly above one.

[Tom Dinges:]

It would be slightly above one?

[Dr. Gerald Paul:]

Yes.

[Tom Dinges:]

Okay, thank you. That was my question.

[Dr. Gerald Paul:]

Thank you.

[Operator:]

Your next question comes from the line of Kevin Kessel.

[Kevin Kessel:]

Great, thank you.

[Dr. Gerald Paul:]

Hi Kevin.

[Kevin Kessel:]

My question is in terms of the PCS acquisition, I think that you guys are still looking to bring that to about $11 million operating profit quarterly?

[Dr. Gerald Paul:]

That is true.

[Kevin Kessel:]

And that is that still on target for I think its March quarter, March '08?

[Dr. Gerald Paul:]

Well we still have the same target, but it may take somewhat longer because we found to separate manufacturing from IR. It will take more time than we thought and this is a major portion of the improvements going forward.

[Kevin Kessel:]

And can you help us understand what you mean by take longer than you thought?

[Dr. Gerald Paul:]

Something like six to 12 months.

[Kevin Kessel:]

Okay. So you thought it would be done by in --?

[Dr. Gerald Paul:]

We said it would have been in the second quarter next year if I remind and now we would say 6 to 12 depending how it goes a month later.

[Kevin Kessel:]

Later than the second quarter.

[Dr. Gerald Paul:]

Yes.

[Kevin Kessel:]

So, some either.

[Dr. Gerald Paul:]

It goes successively also step-by-step. But this separation from IR manufacturing is represents quite an effort, which is underway.

[Kevin Kessel:]

Of course. All right okay. So, how much I mean what... if that was going to happen as still pass the March quarter, I mean how much of that was... how much of additional improvement did that represent getting fully separated from manufacturing?

[Dr. Gerald Paul:]

Now, I think manufacturing going forward represents still at least half of the remaining improvement.

[Kevin Kessel:]

Half of it, okay. And then in terms of the just the overall top line, you do essentially $730 million in September and when you look at the outlook at the mid point 720, what is exactly driving the sequential decline even though slight, what is driving it?

[Dr. Gerald Paul:]

Now, it's the end of the year and we have a new business, IR we may be somewhat conservative can be, but this is our best opinion.

[Kevin Kessel:]

Okay. Thank you very much.

[Dr. Gerald Paul:]

Thank you.

[Operator:]

Your next question comes from the line of Steven Fox.

[Steven Fox:]

Hi, good morning. Can you talk a little bit more of the pricing pressures? I am a little confused here, it sounds like you saw a little bit more pricing pressure than you are expecting. But at the same time, the other metrics I would look at seem fairly stable. So, could we dig into why you saw the pricing again?

[Dr. Gerald Paul:]

I mean on the passives, I don't have to argue, it's 0.4% versus prior quarter and 0.7% versus prior year, sometimes its little positive, sometimes a little negative. I think it doesn't contradict the statement that passives more or less as we say see no price decline. On the actives indeed, it's slightly increased but only slightly vis-à-vis prior year it's 4.5%. It's still on the lower side definitely. Historically, it's on the lower side. It was 2% versus prior quarter. I would not over interpret it. It's sometimes a little more, sometimes a little less, so I would not see at this point an increase of the pricing pressure.

[Steven Fox:]

Okay. And then when you look at Siliconix, can you just update us on any kind of expansion plans year-to-date?

[Dr. Gerald Paul:]

We will continue to expand. We will continue to expand volume by 15% going for the next year... in the course of next year. So we expect to grow accordingly.

[Steven Fox:]

How much is volume increase this year at Siliconix?

[Dr. Gerald Paul:]

Its 20% roughly 20%.

[Steven Fox:]

And just to be queried, expansion underway into next year's mix still basically back end December?

[Dr. Gerald Paul:]

Its both back end and then front end both.

[Steven Fox:]

Great. Thank you.

[Dr. Gerald Paul:]

Thank You.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Andrew Huang.

[Andrew Huang:]

Hi good morning. Can you hear me okay?

[Dr. Gerald Paul:]

Yes sure.

[Andrew Huang:]

I was just wondering if you could talk a little bit about your revenue guidance in relation to some of the other discrete companies we've heard from so far and some of the passive side. Generally, they have been thinking about revenues up in the range of 2% sequential and year to guidance a bit of down 1% sequential.

[Dr. Gerald Paul:]

It's our best estimate it's the year end. We have new acquisition on board and we want I think we may have been a little conservative, but that is the projection.

[Andrew Huang:]

Great.And I know you wouldn't like to give guidance on the quarter. But I was just wondering if you could just give us just kind of a general outlook for '08. For the full year would you expect the year to be up or down?

[Dr. Gerald Paul:]

We see no signs. And I can only talk of what I see, which doesn't mean that I know the future. I see no signs on the market that the economy should slowdown, and Vishay is going to participate properly at this economy. I think we can expect another good year 2008, given the situation as we see it today.

[Andrew Huang:]

Thanks very much.

[Dr. Gerald Paul:]

Thank you.

[Operator:]

Your next question comes from the line of Shawn Harrison.

[Shawn Harrison:]

Hi. Just firstly, a point of clarification, you mentioned operating expenses would hold at the current level going forward. Is that the percentage of sales, or in dollar amount?

[Dr. Gerald Paul:]

Well, we expect more of less the same sales. So it is the same thing. For the next quarter, we are guiding to practically... to practically the same sales level. We are managing it not to the percent of sales; we are managing it to the absolute number.

[Shawn Harrison:]

Okay. That helps. So, secondly, just going back to Siliconix, you mentioned you had backfilled some demand with desktop related products, negatively impacting the mix. With the handset demand coming back, shouldn't that positively impact gross margins going forward for you?

[Dr. Gerald Paul:]

Yes, it will for sure. It will, but it doesn't go overnight. So it will be a... we forecast for next quarter an improvement in Siliconix gross margin. But it goes step by step, and it's a combination of recovering product mix and cost reduction going forward.

[Shawn Harrison:]

Okay. My third question just has to deal with incremental restructuring actions. You mentioned you had a good or solid plan for cost removal heading into '08. I was wondering if there was any update to the $50 million program that you've spoken of, that you are currently implementing.

[Dr. Gerald Paul:]

The manufacturing... all our restructuring efforts are on plan, absolutely on plan. We just advanced, I wonder whether I got across properly, we just advanced the last major manufacturing restructuring program by nine months. We wanted to announce in the closing of non-linear resistors in Belgium in the course of 90, of 2... sorry, of 2008. But, we came to the conclusion that we could be faster. It's an effective project with a payback of 1.2, 1.3 years. And we just decided it to announce it now. This is the... for given the present structure of Vishay. But talking about future acquisitions, this is the last major manufacturing project we see.

[Shawn Harrison:]

Okay. So, no further major manufacturing relocations?

[Dr. Gerald Paul:]

No.

[Shawn Harrison:]

Okay. My final question, just inventory reductions, it sounds like they may slow to an extent in the fourth quarter, but as we look into '08 what should we expect in terms of inventory reductions on the raw material side. Should it be at a reducing pace or at similar pace?

[Dr. Gerald Paul:]

On the raw material side, we want to go down approximately at the same pace, approximately for... I would say three quarters of the year. You know what happens. We correct our high inventory of tantalum powder and wire. And we can foresee this reduction to continue at approximately the same rate for the main part of next year. But this doesn't impact the P&L.

[Shawn Harrison:]

Okay. It's mainly... it's on... going forward it's on tantalum powder versus --

[Dr. Gerald Paul:]

Tantalum and a few other programs, but I must admit tantalum is the biggest part of it.

[Shawn Harrison:]

Okay. Thank you very much.

[Dr. Gerald Paul:]

Thank you.

[Operator:]

Your next question comes from the line of Steve Smigie.

[Steve Smigie:]

Great, thank you. My first question of firstly, I just want to... I appreciate the gross margin guidance. That's really helpful. Second, I was wondering if you could talk a little bit about any plans you have for any potential capital structure changes, given the convertible debt in cash any changes coming up.

[Richard N. Grubb:]

Yes. As you all know, we have this $500 million bond, convertible bond that 2023 is maturity date. But they do have a put day available in August of '08 and we are addressing that situation right now. Someway tweaking that bond to make it last little bit longer and do away with put.

[Steve Smigie:]

Okay, thank you. And could you... if you just state again what the gross margin was on the capacitors, or excuse me the resistors?

[Dr. Gerald Paul:]

18% and the resistors were 28.

[Steve Smigie:]

It seems like there has been some drop here recently across a number of your categories in terms of gross margin. And I was just hoping if you could talk a little bit about, and it just seems that there is a pretty decent potential for recovery there. I am just trying to hope you help me understand, was there sort of step function jump, a couple of quarters out may be. When could we expect to see that recover? It seems like just a lot of potential there. I was trying to ask you about --?

[Dr. Gerald Paul:]

On resistors, 28% is on the low side for our margin potential. If you go back during to the recent quarter say, four or five quarters, you will see resistors would be more on the 30% gross margin. But it's a certain swing which is primarily due to product mix. It's of course always it's not constant. Secondly, the quarter was definitely burdened also there by inventory reduction which was our plan, which was our plan, which was our plan. So you... we expect and I said it in the presentation, we expect already in quarter four an improvement of the gross margin in the resistors back to more normal levels, because for instance, the inventory reduction will discontinue. On capacitors, it's the same thing. There is a spread. You may know we come from very low gross margins in capacitors. And we have recovered to a range between 17% and 21%. This time it came out at 18%. We see potential there to improve especially as we see a good development. I also tried to say it at some power applications, given power applications, which grow fast.

[Steve Smigie:]

How much the impact on the Siliconix gross margin was from including IR revenue in there?

[Dr. Gerald Paul:]

IR was close to the average.

[Steve Smigie:]

IR was close to the average, okay. And just in general, you mentioned that the environment you viewed as friendly. I was hoping you could talk a little bit about what makes you consider the environment friendly and what you would... what signs you might see in the economy that might make you say, hey, things are slowing down or becoming unfriendly?

[Dr. Gerald Paul:]

They are qualitative and quantitative things. Quantitative for sure is the inventory turns of our distributors. 45% or 40% to 45% of our business is with distribution. And of course seeing their POS strong and seeing their inventory turns high gives confidence. And then of course we talk to customers. So overall, the response from the market does not indicate a downturn.

[Steve Smigie:]

Okay. And are you seeing anything different say in the U.S. where may be you have some weakness in housing that might affect the consumer versus other international markets, is there any sort of dramatic difference?

[Dr. Gerald Paul:]

At least nothing I can see from our responses and our numbers as a matter of fact. I don't see. If they achieve, if they turn... the gross national product goes down everywhere dramatically, this of course will also reflect... be reflected in our industry. But this is from me nothing tangible at this point. It's not in our responses, nor in our orders, nor... I cannot see it at this point.

[Steve Smigie:]

Okay, great. Thank you very much.

[Dr. Gerald Paul:]

Thank you.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Shawn Harrison.

[Shawn Harrison:]

Hi. Just two quick follow ups. The decline in other income sequentially, how should we look at that going forward? I know this quarter was FX related.

[Richard N. Grubb:]

We expect the interest income to be about the same as running about at $4 million positive this quarter.

[Shawn Harrison:]

Okay.

[Richard N. Grubb:]

The FX for this quarter as I indicated is, for the first six months we've had zero effect on FX, and for this quarter we had a $2.5 million negative charge, mainly due to the shekel-dollar relationship, and this is something that's unusual. But we don't expect that to continue into the fourth quarter.

[Shawn Harrison:]

Okay. And then just a point of clarification, I want to make sure that I had this correct. You are trying to eliminate the put on that $500 million convert and potentially change that into a longer term, just strictly debt instrument.

[Richard N. Grubb:]

No. It would continue to be a convertible. However, we have announced back in I believe June of this year that when... if the put takes place or when the particular maturity comes, we would be selling that in cash anyway. We would not be using share. So, it becomes almost like a debt instruments anyway. But besides pushing the put back there, we will have to do some tweaking of the call features from some other devices.

[Shawn Harrison:]

Okay. I just wanted to make sure that you want to replacing that with another debt instrument.

[Richard N. Grubb:]

No.

[Shawn Harrison:]

Okay. Thank you.

[Operator:]

At this time, there are no further questions. Are there any closing remarks?

[William M. Clancy:]

Yes. Thank you very much. And I would like to thank everybody for calling in today. That officially ends our call for this quarter. We expect in late January to be reporting on the year, and I look forward to talking to everybody there again. Thank you.

[Operator:]

This concludes today's Vishay's third quarter 2007 earnings results conference call. You may now disconnect.