威世科技 (VSH) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Vishay Q3 FY O5 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. If you do need assistance during today's call, please press the star followed by the zero. As a reminder, today's call is being recorded. At this time, we'd like to turn the conference over to the Chief Financial Officer of the Company, Mr. Richard Grubb. Please go ahead, sir.

Thank you for dialing in today for our conference call. With me is Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Dr. Felix Zandman, Vishay's Chairman, Chief Technical and Business Development Officer. Before we start, Bill Clancy, Vishay's Corporate Controller, will read our customary opening statement.

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. We expect to file our 10-Q by next Wednesday -- week. As usual, I will go over some summary facts and results and Dr. Paul will elaborate. And finally, Dr. Zandman will update our research and development and acquisition activities.

Today, the Vishay reported third quarter 2005 operational earnings per share of $0.14, and this compares to $0.14 for the third quarter of last year. It also represents a 15% increase over this year's second quarter. The net after-tax effect on earnings per share of severance charges of $3.9 million, and asset writedown of $4.6 million, and a gain of $1.1 million on a long-term purchase commitment, amounted to a negative $0.03 per share against operating earnings, resulting in U.S. GAAP earnings per share of $0.11.

Revenues for the third quarter of $566 million were approximately 3% lower than last year's third quarter, and also this year's second quarter. However, they were in line with our previous guidance. Revenues by major segments were: Semiconductors, 51%; passives, 49%, about the same as they were last quarter.

Consolidated gross margins for the quarter were 23.8% as compared to 22.9% for the immediately preceding quarter, a 90 basis-point improvement. Gross margins by major segments for the quarter were as follows: Semiconductors, 26% this quarter as compared to 23.5% last quarter, while passives were 21.5% this quarter as compared to 22.3% in the last quarter. As I said, Dr. Paul will elaborate on these particular numbers. Selling, general and administrative expenses of $94 million equals 16.6% of revenues, and are in line with previous quarters. Other income consists mainly of interest income.

The effective operational tax rate for the year is now at 28% as compared to our previous estimates of 32%. This difference is due to changes in the geographical mix of income and represents successful moving of jobs from high-cost countries into low-cost countries and low-tax areas. During this current quarter, the Company had paid a cash dividend from foreign operations to the U.S. Company, and also successfully completed statutory tax examinations, the net effect of which had no material impact on the current tax provision.

Capital expenditures for the quarter were $31 million. Depreciation and amortization for the quarter was $46 million. Total head count at quarter end was 25,723 employees, of which 72% are now in low-cost areas. Some other key amounts, cash at the end of this quarter, $607 million, up $30 million from last quarter. Long-term debt, substantially all of which is convertibles, equals 744, and has not changed over the last year.

Total inventory at quarter end was $503 million, the same as the previous quarter. Working capital at quarter end was $1.1 billion. Bookings for the quarter were $604 million, while the backlog now stands at $490 million. Cash generated from operations for the quarter was $65 million.

And furthermore, as announced in our press release, we expect the fourth quarter revenues to increase over this quarter and be in the $570 million to $590 million range with continued increases in profitability. Dr. Paul will now elaborate on some of these details.

Well, thank you, Dick. I think we had a good quarter, no question about it. Based on lower sales as compared to the prior quarter, operational earnings came out higher. We received $0.14 as compared to $0.12 in the prior quarter. It ended, they ended on the [INAUDIBLE] of the prior year when the sales were even higher. All this was achieved due to a lot of work on the the costs, and I will talk about it later more.

Let me start out as usual with summarizing the economic environment we have seen in the quarter. Overall, the business climate remained friendly during the whole quarter, despite slowdown of orders which we have experienced in the second quarter was just an episode, and this is as it was foreseen. The order situation improved steadily in the course of the quarter, despite, of course, some seasonal effects, the main drivers were distribution in general, and Asia, specifically.

Inventory levels in the supply chain stayed on reasonable levels. The worldwide distribution runs at now greater than four turns while inventories even decreased during the quarter. There was no accumulation of inventories that we know at OEMs or EMSO, the picture is completely different to the picture of one year ago when we, all of us, the whole industry, was suffering from too-high inventories in the pipeline. The lead times at the moment are stretching out across virtually all products.

The price pressure continues to exist for commodity products, but it seems to slow down in general with the demand increasing. Concerning the market segments, we can say that the industrial market segment continued strong worldwide. Automotive was solid in Europe and Japan, quite disappointing in the United States. Consumer in the U.S. continued strong, Europe stayed weak, Asia we saw improving, which partially is, of course, out of seasonal reasons.

There is a nice upturn of mobile phones, and we see in that more than just a seasonal effect. The third generation of phones seem to progress worldwide. There's a substantial upturn of laptops, and we see a very good year for avionics, military and space, so all together, I think, we can say, we are living in a friendly environment at the moment in the quarter.

The business development of Vishay, the somewhat weaker orders of the previous quarter was leading to a slightly decrease in sales. We achieved sales of 566 million, which was in the range we were leading to. This compares to 580 million in the prior quarter and 584 million prior year. Has to be noted that the exchange rate, have an impact, obviously, on our sales, they decreased sales by six million versus prior quarter, but had no impact versus the prior year.

Orders were strong. They were up by 5% versus prior quarter, 10% from distribution, and 2% higher from OEMs and EMS. Quite strong book-to-bill rate of 1.07 we can report and I'm happy to say this continues in October. We have seen 1.05 book-to-bill from distribution, 1.08 from OEMs and EMS. Now, if you split differently in Active and Passive, we have seen book-to-bill of 1.09 for Actives, and 1.04 for Passives. Regional split, 1.02 from the Americas, 1.03 from Europe, and really the star was Asia, 1.14 book-to-bill we have seen from Asia.

The backlog in the quarter increased to a quite comfortable level of 2.6 months. At the rate of price decline slowed down further on a quarter-over-quarter basis. Vis-a-vis the second quarter, we have seen a weighted price decline of 0.6% and vis-a-vis prior year we are running at 5.5%. Also for Actives, we are at the overall price decline is stronger, we have seen a slowdown sequentially. We have 0.7% price decline for Actives vis-a-vis prior quarter, but still 8% versus prior year.

Vishay is close to achieve price stability on the Passive side, we only had a price decline of 0.4% versus prior quarter, and 2.7% versus prior year. It is obvious that Vishay continues to concentrate on less price-sensitive products and markets. Well, summarizing that solid order level and strong backlog which we have at the moment, they indicate a good next quarter.

Some highlights from operations. Inventory turns remained practically stable at 3.1. The inventories went up slightly by six million, when you exclude exchange rate impacts, three million in raw materials, three million in rip and finished goods, but all this is not material. The overall fixed costs on the other side continue to go down, sequentially, and versus prior year. I'm happy to report that we reduced them another time by four million, vis-a-vis prior quarter, and by $13 million vis-a-vis prior year. So we do exactly what we announced to do, we are following our cost-reduction program religiously.

We have reduced the fixed-cost personnel in the quarter by 880 heads, most of them by nature in high-labor countries. Year-to-date, disregarding acquisitions, we have reduced 250 people of fixed-cost personnel. The high-labor employment continues to go down. It's now 27.5%, as compared to 28.2% at the end of last year. This is equivalent to a reduction of 350 heads, again, disregarding acquisitions, of course.

The delivery performance continues to be good, 93% of all what we ship is on time. Capital spending in the quarter was 31 million versus a depreciation of 43 million. We continue to expect 140 million capital spending this year versus a depreciation of 180 million. And, as you will remember, most of the capital spending goes for the expansion of the, production expansion on semiconductors. We are also well underway concerning the move to lead-free components.

We have technical solutions for practically all the cases. The transition in Vishay is quite an organized process, no surprises are to be expected. We are also, and I think this is important, we are also capable to produce lead-free and lead-bearing products in parallel for an indefinite future, which I guess takes out any risk in supplying our customers. Concerning restructuring, as I said before, our defined 50 million cost-savings program continues to be on track; 13 million showed in quarter three, and year-to-date we have seen 36 million cost reduction fixed costs.

Again, you will remember that there's an additional program to improve underperforming divisions. This is underway also. This consists of overhead cuts, accelerated moves, production moves, selective price increases. Out of this 40 million, which we expect overall annualized, we will see this year only a small amount of approximately two million, and the remaining will show in the years 2006 and 2007.

Let me talk a little about reconciliation of results versus the prior quarter, first of all. Based on 16 million lower sales, which actually without impact of exchange rates were 10 million lower sales, the adjusted operating margin improved by three million from 38 million to 41 million. What happened? The volume decrease burdened the results by two million, the price decrease by three million.

On the other side, we had better costs, better variable costs of two million, better fixed costs of three million, head inventory impacts favorable inventory impacts of two million, and had higher income on royalties by one million. So all together, this is what I said in the beginning, based on lower sales, our profitability improved. The reconciliation versus prior year, based on 18 million lower sales, you will remember, there was no impact from the exchange rate vis-a-vis prior year.

The adjusted operating margin decreased by four million from 45 million to 41 million. The main elements of this development was the impact of volume increase vis-a-vis prior year, of seven million, price decline strong of 32 million, a higher royalty income of two million, and then 20 million better costs vis-a-vis prior year, 10 million in the variable arena, and 10 million from the fixed costs you have to remember that three additional million are included just based on the acquisitions since prior year. This brings us back to the 13 million better fixed costs vis-a-vis prior year. So all together, as I said before, we are quite proud of our efforts to cut costs.

Now, let me talk about our product lines and let me start out with resistors and inductors. There's some slowdown of sales in the quarter, partially due to seasonal effects in Europe. You know, a major part of -- sizable part of our sister operation is in Europe, no questions are we seeing summer slowdown normally. Sales in the quarter were 130 million, which was down 6% versus prior quarter, and 2% versus prior year. All these comparisons to prior quarter and prior year, they exclude the impact of exchange rate and this will also be the case for all the product lines I will -- after this, comment on.

Book-to-bill was 1.03. Backlog increase for resistors and inductors, 2.6 months. The gross margin continued to run at a very acceptable level of 28% of sales, slightly below prior quarter as the reductions of fixed costs did not quite compensate the lower volume, but resistors, as I say, time and time again, is one of the strong parts of Vishay, 28% of gross margin -- of sales. Virtually, there was no price decline in the quarter, vis-a-vis prior quarter and just 2% versus prior year. Resistors were the [INAUDIBLE] of specialty products really show virtually no price decline.

The inventory turns are at a satisfactory level of 3.9. Capacity load was practically unchanged vis-a-vis prior quarter, 80% to 90% for SMD products, and 50% to 70% for leaded products. I'd like to highlight that we are shipping now thin-film resistor chips out of Israel at a quite substantial run rate of 400 million pieces per year, and we are expanding this capacity fast. We are working on cost reduction also on restructuring and resistors and we have announced to move PTC finishing from Avery in Belgium to Dongshu in China, and variable resistors from Swindon in the U.K. to the Czech Republic. The factory in Swindon will be closed.

This will give us four million, both projects together will give a savings of four million annualized, which will start to show mid of 2006 and this is part of this 40 million plan, cost reduction plan for underperforming divisions I was talking before about. I think we can say that resistors and inductors remain a very solid and profitable business for Vishay, and there's further potential for growth and cost reduction.

Talking about capacitors, there was the expected slowdown of sales in the quarter, as a consequence of the low order level in the prior quarter. Sales in the quarter were 109 million, which was 8% below prior quarter, and 15% below prior year, again, excluding exchange rates impacts.

We had strong orders, on the other hand, in the quarter, and this led to a book-to-bill ratio of 1.08 for capacitors. Especially, there was a strong recovery of tantalum capacitors with a book-to-bill of 1.14, the backlog in capacitor has grown to 2.8 months. Gross margin in capacitors has remained at the level of 10% of sales despite the lower volume. Obviously, the cost reduction efforts in capacitors have helped.

The price decline continued at the very low rate, it was less than 1% price decline versus prior quarter, and 3% versus prior year. So [INAUDIBLE] capacitors, the price decline, for Vishay at least, is slowing down. The inventory turns, on the other hand, has suffered from the lower cost of goods sold, we only had 1.7 in the quarter, the raw materials is up by six million, mainly [indiscernible], but as we expect the tantalum business to increase, this will improve as we go.

The capacity note for volume production, at least, was between 60% and 80% and for power applications, it was better than that. The divisional costs continued to go down, it's one of our major focuses. They went down 5% sequentially, and 9% versus prior year. Selective price increases have been announced and this also will be part of our $40 million improvement plan for underperforming divisions.

We will start the second phase of moving tantalum capacitors to finishing operations of that to China, in January 2006, again part of our 40 million plan. And there's more restructuring for capacitors to come. They are continued and I would say increasing efforts in capacitors to restructure in terms of cost but also of market approach, and I insist to say that the 15% gross margin level stays achievable.

Next product group is our Measurements Group. It's quite a stable business, you will remember. It, at the moment, performs practically on the sales level of prior year when you disregard acquisitions. On the other hand, we have increased revenues by an acquisition recently, we acquired SI Technologies, this has been reported before. Sales in the quarter were 40 million, whereby nine million came from this new acquisition, SI. Book-to-bill was at 1.0. The backlog remained at a level of two months. There's quite an excellent gross margin in this product group on a level of 36% of sales.

The inventory turns, 2.5 and for sure, there's some room for further improvements. We have in the meantime successfully merged the new acquisition, SI Technologies, with the existing organization. More synergies, for sure, are achievable, which will also be part of our 40 million improvement plan. No question Measurements Group is a growing contributor to Vishay's revenues, but also to Vishay's profits.

Coming to semiconductors, without Siliconix, I'm going to talk about Siliconix separately, there was no significant change of the business climate last quarter. There is intense competition, mainly in small signal products and in power diodes. We achieved 170 million sales in the quarter, which was 2% above prior quarter, and 4% below prior year. Backlog was at -- ended at 2.0 months, relatively low. Book-to-bill was 1.02. Gross margin, on the other hand, has improved further to a level of 23% of sales, and the reason, I trust, better costs, you know.

We were moving that, to move production and we are working also on the fixed costs. There was a continued price decline which, on the other hand, also for this product group, slowed down sequentially to 1%, but still it's 9% price down vis-a-vis prior year. The inventory turns remained at a very satisfactory level of 4.4. The inventories also continued to go down in this product group by two million in the quarter.

The capacity load was virtually unchanged vis-a-vis prior quarter. In power products it ranges between 75% and 90%, low power, 65% to 80%, and in opto and infrared 65% to 85%.

The move of packaging from Taiwan to China has been completed. A few qualifications are still pending, but I would say 90% of the envisioned savings incurred from now on. The fab expansions in Heilbronn and Taipei, again, I talked about it before, they continue on plan and we are in process to launch rectifiers using Trench technology, Vishay's first, and we are also quite proud of this development. It's a promising breakthrough, it really doubles the power you can apply to such a product.

So we are talking in this product group about a solid business and for sure, there's more potential through cost reduction and also product innovation.

Leaves us with Siliconix, the business continues to grow in Siliconix, temporary capacity constraints at Siliconix even limited to sales in the quarter which will improve this quarter. Sales were 180 million, 4% above prior quarter, and at the same level as prior year. Exceptionally strong orders led to a book-to-bill ratio of 1.2, inventories at distributors are very well under control. You know, we monitor that quite intensively now. Backlog has grown dramatically to 3.5 months, because margin improved further to a level of 30% of sales, the inventory turns are at very satisfactory 4.2. No price decline we saw vis-a-vis prior quarter and vis-a-vis prior year, the price decline was at a level of 6%.

Capacity load at Siliconix was at 80% for power MOSFETs, in general, but for certain technologies and packages, there are true shortages, we are booked out on these and we are increasing capacity. These programs for capacity increases are underway. The new subcontractor, Tower, has started to ship on a regular basis. They have been qualified now for the 178 million sale technology and we ramp up this capacity at Tower in the fourth quarter.

We also brought forward capital spending, which principally was meant for 2006 in order to cope with the high demands. All together, I'm also proud to say in Siliconix, there's a good discipline now for controlling fixed costs. So Siliconix is a very good division of Vishay, it's in midst of strong upswing and we continue to invest in this quite promising business.

Now, let me summarize the situation as I see it. I believe that Vishay starts to enjoy tailwind from the markets now. We are well represented in all parts of world, in all relevant markets, and I am in the position to offer the broadest range of electronic components of all competitors. Quality and service at Vishay have, I think we can say, have an excellent reputation and we continue to invest in critical capacities, and in new technologies and products.

Moreover, there's a lot of ambition and discipline in the Company, which I'm proud of. And I believe that we can be confident for the long-term future but also confident, in particular, for the quarters to come. The order level in the book-to-bill level I was talking about for October just underlines that. Thank you, I would like to pass onto Dr. Zandman.

Thank you, Gerald. Thank you, Dick. As you know, I am now the Chairman of the Board and the Technical and Business Development Officer. Dr. Paul, as you heard now, our past Chief Operating Officer is now our new CEO. The transition was seamless, simple, just perfect. As previously presented by Dick and Gerald, we have a better quarter than last quarter and we expect next quarter yet to be better. Our strategy stays on course, same as before, namely, acquisitions, cost reductions, market penetration and strong focus on R&D. We continue to investigate small and large acquisitions but nothing to announce so far for this quarter.

Now, a few examples of R&D successes. We introduced a few years ago what you call MICRO FOOT technology, which reduces substantially the size of certain MOSFET and ICs. This was done at Siliconix. Two years ago, we introduced two products based on that technology, namely MICRO FOOT MOSFET and MICRO FOOT Analogic Switch. The size reduction was phenomenal, 70% smaller product, a real breakthrough. In other words, 70% smaller footprint on the printed circuit. A very important thing, especially for handheld devices such as telephones.

The result is that our sales in these products are already $25 million for 2005, and growing very fast. Applications, most high-end cell phones, the first to introduce it was Motorola, then most everyone followed Motorola. We are increasing capacity to meet demand, a success.

Another example is our recent introduction of our Schottky diode, or rectifier using Siliconix Trench technology, which doubles the power handling capability of the rectifier, or for the same power, reduces the size of the diode to one half. This is a nice example of two Vishay divisions, Siliconix, and the semiconductor division of Vishay, working together.

As a matter of fact, this is one of my goals, I would like to synergize more and more engineering in the Company, whereby technology of one division would be applicable into another division resulting in new products. Very nice example. We are pushing more and more into that direction. The Company is well-organized. I believe we have a good and enthusiastic management. We have a very good product portfolio and excellent execution under the leadership of Dr. Paul, our new CEO. I remain optimistic for our short and long-term future. Thank you.

Thank you, Felix. Now we will take questions of anyone who has them.

Great, thank you very much. [OPERATOR INSTRUCTIONS] And our first question this morning comes from the line of Kevin Kessel with Bear Stearns. Please go ahead.

Yes, good morning.

Morning.

I wanted to ask you, Dr. Paul, you sound very optimistic about the overall outlook for the end markets, and the effect it might have on Vishay. But then I want to kind of go back to this quarter when you guys gave guidance of 560 to 580, it was almost implied that there might be some upside depending how the quarter turned out, I want to understand, what ended up happening toward the end of the quarter, why did you end up towards the lower end of your range? And then. as you look forward here, sounds like there's a lot of optimism, but yet the overall growth rate still seems rather low.

Let me say the following, first of all, I think, we just met our guidance. Because if you really met the midpoint because we have to take into account the impact of the exchange rates. If you really took it at the exchange rates of last quarter, you ended exactly in the midpoint of this interval which we were indicating. It's true, we had relatively low orders, relatively low orders in the quarter, the second quarter, but this remained to be an episode.

As we also said a quarter ago, we expected a strong fourth quarter, this is exactly what's going to happen. Let me insist on the fact that we met the guidance and it's exactly like that. But the orders continue to be strong. If you really ask why the slowdown in the third quarter took place, there's little slowdown.

I guess, if you dig deeper, it was Europe, in fact. It was Europe, partially seasonal. I think, but also Europe, in fact -- we are relatively strong in Europe, as a matter of fact. And Europe did not do too well, does not do too well, this year. But again, we are looking forward based on good orders to a good fourth quarter. Our projection came through for the third quarter, as for the fourth.

You guys did an excellent job on the cost side. As you look forward to next quarter, in terms of this restructuring, you already received 36 million of the 50 million in benefit, it sounds like you're expecting that additional benefit in the fourth quarter, in terms of a cost reduction. What would you say the sequential cost reduction might be? I understand it's probably expected to be at 40 million year-to-year, but what --

I don't want to be quoted on plus, minus one million, but I think I'm very confident to achieve our goal of 50 million.

Okay. And the restructuring program for next year, still at 40 million?

This is -- well, not -- this is all the things we are doing now in next year which will, on an annualized base, reduce our costs, we said before, 30 million to 40 million, now I say we can achieve 40 million, this will kick in partially next year, and partially in the year 2007.

And then last question is, one of your competitors in Europe has recently announced that they are divesting one of their underperforming capacitor businesses. Is that something you guys have thought about internally, whether or not, it makes sense to divest parts of your underperforming business lines?

It did not do -- I think we were really trying to restructure as good as we can and I believe we are quite successful in restructuring divisions.

Okay. Thank you very much.

[INAUDIBLE] capacitors, if you want to indicate that one.

Okay, thank you.

Thanks. And we have a question now from the line of Steve Fox with Merrill Lynch. Please go ahead.

Hi, good morning. Could you talk a little bit about the capacity constraints at Siliconix? How much did that impact the backlog building during the quarter, and did it result in hurting earnings or how -- would you describe that and what would the impact be in this quarter?

It's obvious that Siliconix with its good contributive margin, every sales dollar counts, no question about it. Hard to quantify it, but I definitely could imagine that Siliconix, if they had enough capacity, could have sold five to 10 million more this quarter.

And that's what's in the backlog right now?

Yes, the backlog is at 3.5 months, this is what I said, so it's high.

Thank you.

Thanks and we have a question now from the line of Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Good morning, this is Michael Ellis calling in for Matt. Could you, just a couple of housekeeping items, first. Could you comment on your expectations for the interest and other income line in the tax rate going forward, is 28% the rate we should be using going forward?

Yes.

In terms of where do you see the non-operating line going?

I would say it would probably be about the same for the fourth quarter as it was last quarter.

Okay.

We [INAUDIBLE] anything -- rates are picking up a little bit, you may see a little bit of bump in the income. But that's not significant.

Okay. And then for Dr. Paul, you didn't comment too much on, perhaps, infrastructure markets. I know your exposure there isn't too high, but we've heard mixed things from a lot of the larger EMS companies in terms of how those looked. Any insights into those markets?

You're talking EMS?

The EMS companies have mentioned that their telecom and IT infrastructure customers have given them pretty, fairly dismal order forecasts for the fourth quarter, just wonder if you're seeing that at all? Even though I know your exposure to that is not that high.

Not that high, as you say. In the case of phones and of computers, we are quite optimistic. We hear good things from the market, if I understood you correctly. But otherwise, overall, the only market segment that I think is relatively slow -- two aspects are really slow, maybe I misunderstood your question. You talk infrastructure, sorry, now I'm -- I do understand. Infrastructure, well, it's indirectly, it's industrial -- industry electronics, and in this case, this is one of our strongest, one of our strongest segments, it's not everything in industrial electronics, but this is doing well worldwide, as a matter of fact at the moment. But especially in infrastructure I cannot answer.

Okay. Just lastly, do you expect the sluggish conditions in Europe to continue?

Well, at the moment, people are talking about improvements in Europe. You know, if you follow the news, there shall be economic restructuring in Europe, mainly in Germany happening, which, of course, would help the industry. People in Germany are a little bit more optimistic, and this is the biggest economy in Europe, so I would suspect that we are facing a decent year in Europe.

Thank you.

Thanks and we have a question now from the line of Michael Walker with First Boston. Please go ahead.

Good morning.

Morning.

The capacitor business, just wondering if you could go a little bit more into what happened there? I know the book-to-bill last quarter was on the lower side.

Yes.

You know, is that a geographic issue or is it a product issue or what's happening?

Well, I think most of our competitors like us have seen tantalum capacitors coming up substantially this year -- this quarter, excuse me, and so, as I said, did Vishay, a book-to-bill of 1.14, I think it's a catch-up situation. We were -- last quarter, I think the European automotive by nature was relatively -- was weak to order on the capacitor side. Principally speaking, I believe capacitors, may I say it like that, are over the hurdle. I believe capacitors, especially tantalum capacitors, will become better as we go.

Secondly, Dick on the margin front, you're seeing some pretty good upticks here in margins, especially on the operating line. Do you expect that to -- I know you said you expect it to be continuing into December, do you have any rough ideas where you think margins will go in fiscal '06?

We haven't quantified that for '06 externally yet, we still see improvements going into '06 after the fourth quarter.

It all depends on the volume. It all depends on the volume for sure. The cost reduction problems will be implemented, and this continues, and I tried to describe it. We are investing in capacity expansion, especially in Siliconix, and General Semi, and these lines have good contributive margins. So --

Speaking of volume improvements, the increase in the distribution, do you have any -- is there any risk there that distributors are starting to build inventories, or do you consider it normal seasonal?

I tried to emphasize that because you remember very well a year ago this was a true problem, true problem throughout the industry and for us. Now we really on a monthly basis, check our worldwide distribution inventory. It even went down in the quarter. And there are -- they are at more than four turns, 4.3 turns. So it really, in this case, harmless.

Okay. And my last question on acquisitions, Dr. Zandman. I think you said you continued to look at acquisitions, but it sounds they might be a little smaller than a few of the names you contemplated a quarter or two quarters ago. What should we expect, a major deal at some point, potentially, or have you downsized are your expectations from an acquisition standpoint?

No, we did not downsize any expectations. It's not like a shopping center, you can't go and buy what you want immediately. We are looking at small and large. The small acquisitions we like very much to round off our product lines, especially for Measurements Group, and precision resistors and things like that. And the large acquisitions we look for it definitely, but it doesn't come so easy. Some of them were on the line, and then they went away. And now we continue to look for large ones, no question about that.

Do you have any requirements when you look at acquisitions, in terms of, they must be accretive immediately, or they must be accretive to return on capital or to margins?

There is no fixed requirement but so far, and we like that, we always like to be accretive immediately after acquisition. Maybe not at first quarter, but the second quarter for sure. And that's what we have achieved so far. If it happens that one acquisition, next one, we'll be such that we have to be accretive only after six months or a year, maybe I can't answer that, but so far the policy was make accretive as fast as you can and we have been successful to do that.

Okay, thanks a lot.

Thanks. And we have a question now from the line of Chris Lippincott with KeyBanc. Please go ahead.

I just wanted to go back to the Passive and Active gross margin. What were the two numbers, if I recall you correctly, you were mentioning the -- one was 26 and one was 22.5, was that correct?

I can give you exactly, semiconductors were 26 as compared to 23.5 in last quarter, and Passive was 21.5 compared to 22.3 in last quarter.

Okay, and, I think, in your prepared remarks you're talking about that you're expecting to see gross margins moving up, clearly some of that's going to be restructuring, some of that's going to be through volume. I was wondering if you could give perhaps a little bit of magnitude, perhaps, where that's going to come from, more from some of this restructuring, more from volume or, perhaps, what kind of balance? And then just as a follow-up, perhaps what type of magnitude should we think about as we go into the final quarter of the year?

I think both will contribute, not exactly equally, if I had to guess now, I would say the volume will play a bigger role than the cost reduction because volume leverage is in Vishay, we have close to 50% contributive margin, so by nature, this is a big number. Volume goes up. Orders indicate that, orders go up, you see also our guidance which is above our performance in the third quarter.

Okay. Thank you.

Thanks. And we do have a question now from the line of Jason Gerske with JPMorgan. Please go ahead.

Hi guys. Just a couple of quick questions. First, on your exchange rate expectations. How much is that going to contribute to, on a year-over-year levels in the fourth quarter for you? Have you done any kind of the back of the envelope calculations on that?

To say that, clearly, our sales line, the top line, is, of course, subject to exchange rate impact, it's obvious, but our bottom line is practically independent of that. Our structure of the Company, by chance really, well, not only by chance -- is in a way said to be not sensitive to changes, to swings between the dollar and the euro, at least, on the bottom line.

I understand on the bottom line, I'm trying to figure out the top line?

Oh, the top line, the problem is easy. We have approximately 30% of all what we sell is in euro, as a matter of fact, and make your own calculations.

Okay, perfect. Two other questions. On the royalties, that benefited gross margins, obviously, this quarter, is most of that coming in the General Semiconductor -- ?

No, most of it comes from Siliconix, clearly.

It comes from Siliconix.

As you could expect it.

So gross margins at Siliconix then went from -- that accounts for the improvement this quarter, then. Then, Dick, a question for you on stock option expense as we move into '06. Have you done any work on that? Can you give us a little bit of, kind of general thoughts on where we might come out on that on a quarterly basis, either before or after tax?

On a quarterly basis, it's de minimis. I would say for the whole year, it would be less than a million dollars before tax. It's not a big number here at Vishay.

Okay. Perfect, thanks guys.

Thank you.

Thanks and we have a question now then from the line of Shawn Severson with Raymond James.

Thank you, good morning.

Good morning, Shawn.

Dr. Paul, could you, maybe, give a little color on how the lead times are stretching out a bit, particularly at Siliconix, what's been happening with the expected order patterns through December, and how that might interact with March? I mean, we've been hearing about pushouts and phones and things like that, kind of expectations that we may even have a lot of programs coming to market in the September quarter, and would you agree with that? And did that affect, at all, anything at Siliconix this quarter?

Not really. So basically, Siliconix, you know it's an innovative Company. They are technically market leader in power MOSFETs, and they have developed new generations with high scale density, and we see that, especially, these new generations where, by definition, the capacities at the moment are limited, we have high request exactly for those.

In this case, we are really booked out, but these are also the ones we are continuously trying to expand capacity. This is what I tried to say, in the fourth quarter, the situation, capacity wise, also for these critical types will be better than the situation in quarter three. We continue to expand, we bring online a subcontractor, Tower, this is really coming along, already in the fourth quarter, and then in Germany, we bring up in Itzehoe, the wafer fab and this will kick in in the first half of next year, step by step. So we are preparing to grow the capacity of Siliconix especially, especially in these critical, let's say, and promising new designs and technologies.

So, but if you look at when the OEMs are maybe bringing their product to market, would you expect to see more in the March quarter than you would normally expect to see? I mean, obviously, most of the time it's the December quarter that most of the new hand sets are coming to market. Do you think March is going to be strong from a new handset launch standpoint?

I do not believe that the cycle will be different. But one thing is for sure, the inventory levels at distribution are very low this time. Really in contrast to last year. Very low. It could be that this will help us in the first quarter, that the inventory levels are that low. You remember last year it was exactly the opposite.

Okay. Thank you.

Thanks. And we have a question now from the line of Shawn Harrison with Longbow Research. Please go ahead.

Good morning. I just want to parse the pricing a little bit, with respect to both Siliconix, as well as the capacitors. Is there also maybe a mix play going on? You mentioned the next -- or the new generation products at Siliconix, and then also the, you know, higher sale of [INAUDIBLE] larger case size panel products and capacitors, or is it the market just kind of easing off on the pricing pressure?

I believe the market, it's easing. Because look, when I talk price decline, I really compare apples with apples. It means we really do a price analysis, product code by product code, mix is not part of that, as a matter of fact. So we go product line by product line. New products normally have the highest price decline, they start high and come down relatively fast. So, really, this is not the case.

I believe that in the case of Siliconix, it's obvious, if your backlog stretches out so much, and this is not only true for Vishay, I guess, this is true industry wide for a power MOSFET, then, of course, the price decrease starts to go down. This is normal.

In the case of capacitors, this may be a little different in our case. We are really concentrating more on products that, by nature, have lower price decline, power applications, for instance, specialty products, et cetera. So this is maybe a different mechanic.

Okay. And I guess as the backlog would come down in the fourth quarter into the first quarter, you would expect maybe some pricing decline to come back at Siliconix then?

I -- well, I think we are just shipping at the moment in Siliconix. You never know. But we are shipping, we are quite confident. We are shipping, really -- we can hardly ship what the customers demand. I do not believe that the backlog comes down dramatically.

All right. Thank you.

Thanks. [OPERATOR INSTRUCTIONS] We are showing a follow-up question from the line of Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Hi, just a couple quick follow-up questions. First, Dr. Paul, could you comment on your view on the pricing trend that you will see for the General Semi and the other semis? That price decline seems more severe.

Year-over-year the price decline is severe, I agree with you. But, on the other hand, sequentially now, for the second quarter, it's slowing down. It's just a reflection, I believe in the case of Siliconix, as I tried to say before, of the high demand in the market.

On the other semiconductors [INAUDIBLE], what we have in opto, I believe the price decline, if you look at the numbers, it also slows down, but I don't want to deny on power diodes, but also in small sequence diodes, there's still a lot of price decline and I do not see this going down midterm. And preparing for that, we are reducing costs.

Secondly, when you mentioned the lengthening lead times, is that pretty much across all your product areas or is that most pronounced in Siliconix?

Siliconix is by far the most important one, but we see stretching out lead times also for other semiconductors. Also resistors, we can hardly ship as much as customers want in certain areas.

Then just --

The conductors the same. Pardon.

Oh, pardon. Lastly, just on distribution orders, do you see your distribution customers building any inventory at this point, a little buffer inventory, anticipate maybe a little bit better demand or are they still just ordering what they need?

I think they don't get what they want. Because despite these high orders we got from distribution, we follow on a monthly basis, the inventory and in the course of the third quarter, the inventory came down by 4% to 5%, so they don't get what they need.

Okay, thank you.

Thanks. And we are nearing the bottom of the hour, so I'd like to turn the conference back over to Mr. Grubb for any closing comments.

Thank you very much for attending, we had a very profitable quarter, we expect to have a continuing profitable quarter for the fourth quarter of this year, which will be better than the third quarter, as we said, and we look forward to reporting again in January for the full year. Thank you for attending.

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