威世科技 (VSH) 2008 Q3 法說會逐字稿

Good morning, my name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Intertechnology conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

I would now like it to turn the conference over to Dr. Lior Yahalomi, CFO. Please go ahead, sir.

Thank you, April. Thank you for calling in for today's conference call. On the line with me today are Dr. Gerald Paul, Vishay's President and CEO; Dr. Felix Zandman, Vishay's Executive Chairman and Chief Technical and Business Development Officer; and Lori Lipcaman, Vishay's Chief Accounting Officer.

Before I start, Bill Clancy, Vishay' Senior Vice President and Corporate Controller, will read our customary opening statement. Bill?

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, Bill. I will make summary comments. Dr. Paul will add a more detailed evaluation, and finally Dr. Zandman will update our R&D and acquisition activities.

As announced in our press release, Vishay has reported additional impairment of goodwill and indefinite-lived intangibles of $358 million in the third quarter of 2008. The total impairment of goodwill and indefinite-lived intangibles for the nine months ended September 27, 2008 is $1.158 billion. In light of the sustained decline in market capitalization for Vishay and its peer group companies and other factors, Vishay determined that an interim impairment test was necessary as of the end of the third fiscal quarter.

The charge is non-cash in nature and will not affect Vishay's liquidity, cash flows from operating activities or debt covenants nor have any impact on future operations except for proposed tax benefits for tax deductible goodwill. As announced in our press release, Vishay reported $0.18 adjusted net earnings per share as compared to $0.23 for the second quarter of 2008 and $0.25 for last year's third quarter.

The reported GAAP earnings per share for the third quarter 2008 include impairment of goodwill and indefinite-lived intangibles of $358 million, restructuring and severance cost of $6.9 million, expenses related to the International Rectifier's terminated tender offer of $4 million, and non-cash loss of $13.6 million related to the early extinguishment of debt. These items and their related tax consequences have a negative $1.86 per share affect against GAAP earnings.

On October 13, 2008, Vishay announced it had terminated its tender offer to acquire all of the outstanding shares of International Rectifier common stock for $23 per share in cash. We consistently stated that we could not pursue our proposal in the face of opposition from a Board of Directors that has refused to engage in any discussion with us regarding our offer. We thank the significant number of shareholders who supported our three nominees at the 2007 annual meeting.

Revenues for the third quarter of $739 million were approximately 5% lower than the second quarter of 2008 and 1% higher than last year's third quarter. Consolidated gross margins for the quarter were 21.6% as compared to 23.2% for the second quarter of 2008 and 24% for last year's third quarter.

Selling, general administration expenses for this quarter were 15.3% of revenues compared to 15.6% of revenues for the second quarter 2008 and 15.2% of revenues for last year's third quarter. This quarter includes gains on sales of fixed assets of approximately $2.5 million. The second quarter of 2008 included approximately $3 million of legal fees related to settlement of patent infringement which did not reoccur in the third quarter of 2008.

Other income consists mainly of interest income and foreign exchange gains. The effective adjusted tax rate for the year is approximately 26%, an increase from the 24% we stated at the end of our second quarter 2008. The increase in the annual tax rate is mainly due to the change in the mix of income in low versus high tax rate jurisdictions.

Capital expenditures for the quarter were $41 million. Depreciation and amortization for the quarter was $56 million. Some other key summary financials are cash and cash equivalents at the quarter end was $312 million. Total debt at quarter end was $359 million. The $500 million, 3.58% bonds were put to us on August 1, 2008, and we paid off $498 million of them of the bonds.

We utilized $250 million of our cash balance in addition to drawing on our credit lines to retire these bonds. Total inventory at quarter end was $562 million. Working capital at quarter end was $1 billion. Finally, cash generated from operations was $89 million for the third quarter of 2008 compared to $117 million for the third quarter 2007.

Free cash flow was $55 million for the third quarter of 2008, as compared to $83 million for the third quarter of 2007. I will now turn the call over to Dr. Paul. Dr. Paul?

Thank you, Lior. Well, we are reporting a difficult quarter for Vishay, which, of course, has also been a difficult quarter for most of the industry. Despite that, I think we achieved reasonable results with $0.18 adjusted earnings per share and $55 million free cash flow.

Electronics has quite abruptly experienced the impact of the present macroeconomic turbulence. We missed expectations due to rapidly deteriorating economic conditions during the quarter. Let me talk more about the economic environment. As I said, we have experienced a substantial economic slowdown which accelerated, really, in September and this slowdown continues in October.

Automotive now also in Europe is impacted heavily by the downturn. Mobile phones, computers, and consumer goods are below seasonal expectations, whereas industrial, the industrial market segment is relatively stable and military aerospace is holding up nicely. There is a sharp decline of orders from our worldwide distributors, which, obviously, is not driven by the inventory turns. They are quite reasonable at 4.0. But driven by their weak book-to-bill ratio which is below one area of .9.

There is only little confidence these days at many OEMs. There is a broad fear of a recession as all of you know. And looking around the world, there are hardly any geographic differences.

Talking about the business development of Vishay, the quarter has been disappointing in sales and orders and as I said, this progressed during the quarter. We achieved sales of $739 million in the quarter, as Lior pointed out, vis-a-vis $774 million in prior quarter and $730 million in prior year. Excluding the exchange rate effects, sales versus prior quarter we were down by $27 million or 4%, and down by $13 million or 2% versus prior year.

Book-to-bill in the quarter was quite weak at .92 as compared to .98 last year. Some book-to-bill details, there was a book-to-bill ratio of .88 for distribution, and .95 for OEMs, .85 for actives, .98 for passives, .93 for the Americas, .94 for Europe, and .89 for Asia. So really if you want to pinpoint the problem, the area of special weakness it was at actives in Asia and in distributional.

Our backlog declined to 2.5 months which is really at the lower end of what we call comfort zone. The price decline continued at a quiet modest rate. Vishay in total lost price of 1.4%, vis-a-vis prior quarter and 3.4% vis-a-vis prior year. There was continued price stability at passives, .3% down only versus prior quarter and 1.2% down versus prior year.

We have seen slowly accelerating price decline at the actives at 2.4% price decline vis-a-vis prior quarter and 5.3% price decline versus prior year. Now let's look at the results and compare them vis-a-vis to second quarter of '08. Based on $35 million lower sales, $27 million lower sales excluding the exchange rate impacts, the adjusted operating margin decreased by $12 million from $59 million to $47 million.

The main elements were the price decline which impacted the results negatively by $11 million, volume and mix negative by $3 million. The mix actually was improved vis-a-vis the second quarter. And the variable costs reverse by $5 million. On the other hand, we had better fixed costs of $8 million.

Looking at the comparison vis-a-vis prior year, we see that based on $10 million higher sales without exchange rate impacts $13 million lower sales. The adjusted operating margin decreased by $18 million from $65 million to $47 million. The main drivers were the selling prices, again, which impacted the results negatively by $26 million.

Volume and mix was positive by $16 million. Fixed cost better by $5 million. And we had the very negative impact of currency exchange rates of $16 million since vis-a-vis prior year and this is not the euro, I wanted to emphasize. It happens to be mostly the Israeli shekel.

Some highlights of operations, inventory turns remained at 3.9. Excluding exchange rate effects, inventories in the quarter decreased by $7 million. All came from raw materials. Capital spending in the quarter was $41 million compared to $32 million in prior quarter and to $34 million in prior year. Depreciation was $51 million.

We expect capital spending in the range $150 million to $160 million in 2008. This is down from $170 million as previously projected. During the quarter, the share of employment in high labor countries decreased slightly to 24.4%. Total employment was at 27,400 people, 200 heads down from last quarter. There is a weakening capacity load in numerous lines. The lead times are short in general.

We generated $89 million cash from operations in the quarter as compared to $65 million in prior quarter and to $117 million in prior year. We generated $55 million free cash in the quarter as compared to $36 million in prior quarter and to $83 million in prior year. As you see, we continue to produce cash in a respectable way, I feel. Metal prices in the quarter in general started to normalize in a major way.

Let me come to resistors and inductors as the first family of products I want to comment on. Also this business, which is a traditional and successful business for Vishay, starts to get impacted by the economic slowdown. Sales in the quarter were $163 million which is 6% below prior quarter, but on the level of prior year if you eliminate the impact of exchange rates. There was a relatively low book-to-bill ratio at .94. Backlog was stable at 2.5 months.

Gross margin dropped to a level of only 25% of sales versus prior year. The results have been impacted negatively by the exchange rates, as I pointed out. Vis-a-vis prior quarter impacted negatively by the volume drop in some restructuring related inefficiencies. The selling prices in resistors/conductors continue to be stable versus prior quarter and versus prior year.

The inventory turns are at an excellent level of 4.5 and all announced restructuring projects will be finalized by the end of '08. Coming to capacitors, this business does not experience yet the impact of the general economic downturn as power capacitors continue to grow, and as we seem to gain share in tantalum capacitors. Sales in the quarter were $132 million, down by 2% versus prior quarter and up by 3% versus prior year. Book-to-bill at 1.02.

The backlog remained at a comfortable level of three months. Gross margin dropped to 12% of sales practically due to one-time effects related to the valuation of metals, especially palladium. This drop we will get back through lower costs going forward. Modest price decline continues also this line points -- .7% price decline versus prior quarter and 3% price decline versus prior year.

Inventory turns improved further to 3.0. Inventory went down, compacitors by $9 million in the quarter all from raw materials. We decided to close the multilayer ceramic capacitor factory in Monroe, Connecticut, and to integrate this volume into our (inaudible) plant in Migdal in Israel. This project will be finalized in steps by the third quarter '09 and we expect annualized benefits of $3 million from this move, both from variable costs and from fixed costs.

All other amounts restructuring projects will be finalized by year end of this year. We are in progress at the moment to integrate the recent acquisition of (inaudible) tantalum capacitors which will further enhance our offering in specialty caps, a general direction which we pursue to increase the share of specialty products also in capacitors.

Coming to the [measurements] group, you know this is a principally stable business with strain gages, load cells and weighing systems, which is very different from the mainstream components business of Vishay. This business is not impacted by the economic downturn. It is in principal less sensitive. Sales in the quarter were $51 million as compared to $53 million in the prior quarter and to $48 million in prior year.

Book-to-bill for this business was 1.03 in the quarter and we see a backlog of 2.4 months. Gross margins, quite strong, at 33% of sales. Inventory turns of 2.7 in the quarter. We closed the Breda, Netherlands plant -- we are in the process to close it and this will be finalized by the year end of '08 also.

Coming to semiconductors, first of all to diodes and [opto] products. The consumer and automotive part of the business suffers substantially from the downturn. We have seen in the quarter a very abrupt, deep drop. Sales in the quarter $211 million, 9% below prior quarter and 7% below prior year. There is a weak book-to-bill ratio for this product family of .88, in particular due to Asian distributors pushing out the orders. The backlog has been reduced to 2.2 months, which starts now to impact our production load substantially.

Gross margins have dropped to 20% of sales. Price volume driven mainly volume driven. This all was substantially below our expectations for the quarter. Inventory turns were excellent at the level of 4.5. We are seeing increasing price pressure, 1.4% versus prior quarter and 3.9% versus prior year.

Additional restructuring measures for this group are under evaluation. Our increased efforts in product development, though, are showing positive results. Coming to Siliconix, as you know this is the market leader in low voltage MOSFETs, which after the IR acquisition is now also present in high voltage MOSFETs.

We are starting there to experience the economic slowdown. Sales in the quarter were $182 million, up by 5% versus prior quarter, down by 1% versus prior year so the quarter was quite okay. But we have seen a weak book-to-bill ratio of only .82, again, the same main reason the Asian distributors are pushing out orders. Backlog has dropped to 2.4 months. Now they are really at the very low level at this 2.4 months.

Gross margins came in at the expected level of 24% of sales. The price decline for silicon is accelerating. We have seen 3.6% versus prior quarter and 6.9% versus prior year. The inventory turns are at an acceptable level of 4.0.

Our move of the IR -- International Rectifier a packaging operations out of Mexico is virtually finalized. The fab transfer from the IR facility is according to plan. We expect to finalize the plan by the second quarter of next year and we, too, have some streamlining of divisional overhead on the way in Siliconix.

Let me summarize. Vishay has experienced a difficult quarter with sales and profits below expectations. The low order rate of October indicates a further acceleration of the economic decline. We achieved $0.18 of adjusted earnings per share and continue to generate cash on a respectable level, $89 million from cash from operations and $55 million of free cash.

Taking into account, taking into consideration the possibility of a deep and long recession Vishay will implement all measures required to protect its positive free cash flow. And the statement holds true also for worst case scenarios. We remain confident for electronics in the long run. Short-term projections are difficult, though.

For the current quarter, we guide to a sales range between $640 million and $670 million and slightly lower gross margins. It should be noted that the weaker euro, of course, only also contributes to our lower sales. This should not be forgotten. Thank you very much. I'm turning over to Dr. Zandman.

Good morning. I will repeat just what Gerald said. We achieved $0.18 per share for Q3 and $55 million free cash in spite of the turmoil of world markets. The short-term outlook is not clear.

However, Vishay will do whatever is necessary to continue to stay profitable and generate free cash. Presently our debt approximately equals our cash. Our tender offer for IR did not materialize as you know and in view of today's world economic situation what concerns me is a positive event. Otherwise, Vishay would have a major debt in a time when sales are decreasing especially in the semiconductor sector. So a negative event inadvertently turned into a positive.

This acquisition and others may be revisited when the economy gets stabilized and cash from banks and bonds become again available. On the other hand, we landed three small acquisitions which will be highly profitable even in the present economic situation. One, we acquired the remaining 51% of our JV in India which was not yet 100% owned by us.

This will result in major savings and will give us a platform to transfer some of our high labor costs and will improve our presence in the Indian and export markets. Two, we acquired a small company in Germany with expertise in high power precision resistors, a niche market, and technology which we did not have. Once more labor savings and product which sells in the highly specialized applications.

And, three, we acquired from KEMET a special tantalum product line used mainly in oil exploration, military and aerospace industries which we believe will not be suffering from the general market downturn. Our R&D programs are on target. The share of new products released to the market continues to increase.

Bad economic times will not, I repeat, will not reduce our efforts for new products as the mid-term and long-term success depends very much on innovation. We will continue to look for niche acquisitions which should be available at presently decent prices. Our management, under the leadership of Dr. Paul, our CEO, knows exactly how to implement rapidly and necessary and in necessary cost reductions so that we maintain our profitability and we will generate free cash.

In spite of the present uncertain market situation, we remain optimistic for the mid-term and long-term outlook for Vishay. Thank you. We should pass now to the questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first comes from Matt Sheerin.

Yes, thank you. My question regarding your guidance. I understand the revenue guidance makes sense given the book-to-bill. But you also in the press release talked about flat, expectation for flat gross margin in December. How is that possible if revenue is going to be down so much? Is it a mix issue?

It's mix, but also cost reduction. It's a combination of a couple of things. I tried to explain that in capacitors in particular we were exposed to a writedown of palladium which impacted the quarter, but will help us in the next quarter. For instance. But they are ongoing improvements. So we talk to flat to slightly down in between more flat gross margins.

Would you expect in your active business given that revenue is going to be off so sharply that gross margin would actually be down for Siliconix and for the discrete business?

I would say in Siliconix we expect slightly down. On the other hand, we expect some recovery on the passive side. And we are talking relative gross margins percent, of course, right?

I understand. And you talked about the euro's impact on your revenue. Could you also talk about, Dr. Paul, the impact on your costs? O know you have a lot of manufacturing operations in Europe, although it's not all in euros. So could you talk about currency impact overall on your business both from a revenue standpoint and a cost standpoint?

The dollar/euro ratio impacts only the top line in Vishay. Our distribution of costs is approximately the same distribution as the distribution of sales in these two currencies. It means in the first approximation it's neutral. There is no effect.

On the other hand, it's different, for instance, for currencies like the Israeli shekel. In this case, we have [just] costs and are exposed to a strengthening of the shekel. But in terms of dollar/euro our bottom line, our operating margin, [just] approximation is independent.

Okay, approximately what percentage of your costs come from Israel?

Well, I don't know by heart. We have about 4,000 people in Israel, you see. So it's a very substantial number. And year-over-year we are going to experience a negative impact of the Israeli shekel to the tune of $35 million to $40 million year-over-year. That 2007 to 2008.

That would be positive, then?

This is Dr. Zandman here. I would like to add something there. The shekel went down from 4.2 all the way down to 3.2. Tremendous drop. But in the meantime, for the last month and a half it recovered and it's about 3.9.

And the way it goes, it may come back to 4.2 in the next few months depending -- it's like oil, but the other way. It depends on the world situation. It went down from 4.2 to 3.2. It is now at 3.9. So it's a fluctuate -- the situation fluctuates and we hopes if it comes to 4.2 the drain will stop.

Thank you.

Your next question comes from Jim Suva.

Great. Thank you very much. First, a quick clarification question. I believe Dr. Paul, in his prepared remarks, said gross margins to be slightly down. When I look at your press release it says --

It is flat. It is flat indeed. I was reading a misprint, but practically it's flat, practically flat.

Great. Thank you for that clarification. Can you let us know how much, you had three tuck-in acquisitions. How much they contributed for the quarter and what their run rate is of those acquisitions?

No. Those three acquisitions did not contribute yet. They all have been accomplished during the mid-quarter. And the suggestion in the midst of restructuring the management would be gone. It didn't do anything yet. If should happen next quarter and thereafter,of course.

The biggest acquisition was the acquisition from KEMET. This happened just recently.

That's the most significant.

And maybe a run rate per quarter of those acquisitions then?

I don't think we have that prepared. I would rather not commit to that.

The two small relative to the Company and we don't necessarily disclose these numbers.

Okay. And then two quick housekeeping items. What should we expect for a tax rate going forward? Is the 26% a good rate or should we expect something else?

26% is expected for the year.

And then last question, you wrote down some precious metals, I think it was palladium. Can you tell us how much you wrote down and was that included in your charges this quarter?

Yes. It was included in the operation results. It was to the tune of $4 million to $5 million.

$4 million to $5 million. Great. And last question. On tantalum, what are you seeing for tantalum prices for 2009 outlook as far as price increases since there is a lot of discussion about increases in tantalum powder.

We have not seen that. At the moment, we still have a portion of what we use from inventory, as you can imagine. Still it's going down, of course, the inventory, but it's still foreseeably partially from inventory. On the other hand, we do not see price increases there.

Okay. Thank you.

Your next question comes from Steve Smigie.

Thank you. You commented that the euro impacted your guidance. How much of that that guidance is euro and how much is macro weakness?

This drop we are forecasting is approximately, I would say, 40% from the currency and 60% real.

Okay. And you've seen, I guess, some continued weakening here in the gross margin of Siliconix. I know you guys have been taking action to try to fix that. Just talk a little bit about where those actions stand?

As a matter of fact, Siliconix came up quarter-over-quarter from 23%, if I remember right, to 24%. So it's really a little bit the opposite, so it recovered. We are away from historic levels of 30%, that's true. But this was also not forecasted.

But we were continuing our cost reduction efforts. But everything is a function of volume,of course, as you can imagine in gross margin. And if the gross margin held, no question we would further improve our performance. It's the variable costs that are because positively impacted our measures which are in line with our plans. Everything is a question of volume. And we are not living in times which command record volumes.

Right, I understand. And then I was curious about the operating expenses. As you go into Q4 and into 2009, what kind of efforts do you have there? Do you have a target percentage of revenue for roughly 15.5% or so you seem to have been running?

First of all there is no target in terms of percent. For us, the SG&A costs are fixed costs. So basically you see that we came in this quarter at 113, which is already a reduction contained once really vis-a-vis the third quarter. We will it continue to work it down. We are working on a plan now.

Do you think you will be able to get it down as quickly as revenue for Q4?

I would say, yes. And revenue, pardon. As quickly as revenue? It's also exchange rate driven, of course. Not that this is also exchange. I didn't make this calculation in terms of percent. Don't think so. Not completely, no. Not as short-term. Takes a little longer.

Then as we look out to 2009 at this point, any plans on dropping CapEx spending there versus --

Yes. Sure, sure. Looking out to 2009, we feel for sure not spend $150 million to $160 million which we forecast now. If economy doesn't command it. You never know. The outlook, the mid-term outlook is not an easy one these days. If capacity is required, we will react. From two day's perspective, which is a little pessimistic, I must admit that, we will spend less.

Right. Okay. And again, with limited visibility, what other actions would you be taking to preserve the cash flow, as you mentioned?

As a matter of fact, we would watch inventories closely, as we always do. Work more even on collecting the money better, as a matter of fact, drop capital spending more and, of course, we will reduce our fixed costs.

Okay. Great. Thank you.

Your next question comes from Shawn Harrison.

Hi. Just a follow-up on the operating expense question. I think it was mentioned there was a gain included in the $113 million this quarter. So the true run rate is closer to --

$115 million.

$115 million?

Something like that, yes.

Okay. And then maybe given the true revenue decline looks to be about 7% sequentially at the midpoint of your guidance. You would expect something a little bit lower than that in terms of operating expense.

Short-term actions is mostly belt tightening as you can imagine. Real structural effects we will see next year.

Okay, and I guess that will be announced as part of the January earnings call?

Yes.

Okay. Just clarification point, the backlog for the quarter, what was the dollar amount?

Dr. Paul?

You must have it.

The backlog is 619.

619, okay.

Okay. And the greatest decline there occurred on the active component side?

Yes, of course.

Okay. Thirdly, I just wanted to run through the cash flow math again. Maybe my math is incorrect, but it looks like you generated something like within the numbers provided $49 million of free cash flow yet you were citing a $55 million number as part of the prepared text. I was wondering where my disconnect was.

Maybe we do this in a separate discussion later, the 55. But I think Lior and Lori, you should address that.

And then finally I know you talked about distributors pushing back in Asia. Is it more of an inventory issue with them or is it more of a demand issue on --

How to distinguish. How to distinguish. The inventory turns of worldwide distribution in quarter three was quite normal. 4.0. Really not worse than the quarter before. What is different from the quarter before is the book-to-bill, which is around .9 this time.

And I could suspect, and I think that is also proven through discussions with these people, that really they are cautious. They had to take into account a downturn and the reaction is obvious. They step on the brakes and inventory turns off the quarter will not be a reason.

Okay. And then finally, I guess maybe, the visibility is very limited. But what is the typical seasonality you would see heading into the March quarter in each aspect of the business if things leveled out from here? I know on the passive side you'd typically see an uptick. With demand so weak on the actives, will you see a sequential downtick?

The real seasonality in Vishay is practically no seasonality. So in the first quarter you said yourself, the first quarter are strong in the passives normally, whereas the third and fourth quarter are stronger in the actives normally.

Well, we will not see an excellent quarter in quarter one. I cannot forecast the first quarter at this point, but it's obvious if the orders continue on a low level which they are at the moment then we are going to see a relatively weak first quarter. No question.

Okay, but maybe not as weak as normal on the active side given the sequential downtick here, or would you expect it to pull back even further? I'm just trying to get an idea.

Vishay has a total -- our first quarter is normally a good quarter. And still this time it's impacted by lower orders, vis-a-vis overlook October orders are low. In the auto industry are low and it's really difficult to forecast these days. Every week is new somehow.

Okay. And then one final point on the cash flow. What additional fees for the IRF deal may flow through the P&L in the fourth quarter and what should we expect maybe other cash restructuring charges?

We don't expect any additional expenses. Shawn, I wanted, Dr. Paul, I wanted to respond to Shawn's question vis-a-vis the cash issue, so there is a $7 million difference which is due to cash on the real estate and buildings that we had this quarter.

So a sale of assets?

Fixed assets.

Okay. Thank you very much.

Your next question comes from Kevin Kessel.

Great. Thank you very much. Dr. Paul, I wanted to clarify when you were saying earlier the palladium charge of $4 million to $5 million was in operations. Do you mean that was part of the 21.6% gross margin that you referenced?

Yes, yes.

So that's something that, obviously, right now appears to be one time in nature, but it's, obviously, difficult to predict.

The opposite. Because as the costs are now lower, it will come back really through lower costs.

To benefit? Right, but it ran through your pro forma and through your $0.18 pro forma number? And then in terms of the SG&A, the 112.8, so there was a gain in that number?

Yes.

What was that amount?

2 1/2.

And that -- what was that gain for?

This was also from the sale of real estate.

I was under the impression there was going to be some one-time costs as well that might be in SG&A and in the September quarter that were not of a legal nature, is that true?

It's true. It's in both directions. This is the outstanding singularity. We had both otherwise.

You had both?

Both directions. Singularities in both directions in the quarter.

I see. But at the end of day there was still a net $2.5 million gain?

That's true.

Okay, so that's where the $7 million, a lot of it was booked. And then in terms of the overall comments you guys made about October, can you just help give a little bit more context around precisely what you are seeing now? Obviously, from the prepare remarks and the press release it sounds like things maybe accelerated even further to the downside in a rather dramatic way.

Were you seeing this come out of any particular industry? Any particular business line? Even if it was broad were there certain areas where they were more affected than others from what you can tell so far?

First of all, October indeed, if you compare the two months, September when things started really or became obvious to us that things turned down and it turned down quickly, vis-a-vis October we have stated October is worse than September. No question.

That means book-to-bill is substantially below one in October. So we do not have a good October. If you look around geographically it's more or less Asia is the worst, but it goes together. The pattern stays the same. If you look -- everything is relatively weak except a few exceptions. The center of the problem for us lies in Asia, in actives, and in distribution.

Does that imply Siliconix, then?

Yes. You have seen -- I mentioned it a bit, the weak book-to-bill of Siliconix of .82 in the quarter, you remember. Sales were fine, but book-to-bill was not encouraging. And the same is true for the other same results. Passives, in principle, do better these days than the actives. Which is kind of typical in a way.

Right. Would we then trace that to more to computing and consumer? I mean if it's Asia distribution and Siliconix?

Really, what is very different for us Europeans in particular at the beginning of this downturn is the weakness of the European automotive industry. Otherwise, it's always the same things. The computer and telephones are seasonally weak.

This is really the normal starting point and distributions orders are below their sales and they really tune down their orders. This is normal. What is really not so normal is the weakness of the European car industry at the moment.

Could you say also that past recessions active components are first and passive come after. And the recovery reverse, active come first and then passive after. We have said it several times.

Yes, indeed. It is so and this is what I try to say. It's normal part of the downturn. Yes.

Okay. And then in terms of the way you guys look at inventory and distribution, I mean, the large North American base distributors that are also large in Europe seem to have very well managed lean inventories at the moment. Is that -- do you get the same sense there or are you guys concerned about inventory distribution even outside of Asia?

I think the swings in Asia are much more drastic, but this is typical. It's the nature of the beast and also of the business, I mean. It's really the nature. And Europe and in America are not optimistic either. But it's true what you say, that the amplitudes are smaller.

Okay. I got it. And just last question then on the, I guess, the overall cost question.

It sounds like you are confident about the gross margin begin able to hold relatively flat despite the big decline. Sounds like part of that is cost cost cutting. Is the other aspect of that just the effect like you just mentioned there was a palladium writedown in September and that should --

Of course.

Come back to offset?

It was a hit in quarter three of about $4 million to $5 million, as I said, $4.5 million. And a portion of it, a nice portion of that will come back even in the opposite direction in quarter four.

And then the rest of it is just normal course restructuring?

We have some restructuring on the way which bears fruit now. It's a cake relation, bottoms up. You must remember, half of the drop in sales is exchange rate related. And we told vis-a-vis euro doesn't give negative on the bottom line.

Is there an assumption then that you have for euro exchange rate in your guidance like where the dollar versus euro will essentially be for the quarter?

We compare two days exchange rates, basically.

I'm sorry. Say that again?

We compare -- this is the basis of the -- the current exchange of euro to the dollar.

Assuming it stays flat?

What else can you do? It changes a lot these days also.

Okay, I got it. Thanks so much.

Your next question comes from Ingrid Aja.

Good morning. I think most of the questions have been asked. I was going back to business trends. Are you seeing planned shutdowns from customers as you are getting into December that are maybe longer than normal and are you taking that into your outlook?

I know for sure a few European car makers have extended vacation over Christmas. This is true for Mercedes, BMW and three or four of our customers. Porsche and [Conti] will follow, no question. So we will have extended periods of vacation over Christmas. They have to fight the low orders also. And we are going to follow partially.

Okay. And then I was wondering if you could expand on what your assumptions you are making about pricing for your different product lines?

Well, in terms of passives, I think we have proven time and time again even in recessions in downturns in the last years that this product line, which in our case is to a large degree specialty products, is not harmed by additional price pressure. It's harmed by lower volume based on lower economy, but not for prices to a large degree. Which is totally different for the actives. On the actives we are fully exposed and we have to count on accelerated price decline going forward. This is in our thinking that's included.

Okay. Great. Thank you.

At this time there are no further questions. I'm sorry. We do have one more question. From [Jonathan Kaplan].

Hi, gentlemen. I'm on the buy side of the business. I've owned the stock for quite sometime. This is kind of a big picture question. The stock price, I think, is down to a level that it hasn't seen in about 18 years or so.

And based on the success or lack thereof of the acquisition strategy -- I find it curious that you are still in the acquisition mode rather than in the mode of harvesting your earnings, cutting costs and doing the right thing for shareholders. I haven't seen many things done over the last number of years that are really beneficial for shareholders in a tangible way.

If you compare your company to let's say an AVX who is much less acquisitive, pays a dividend, repurchases shares and very careful with their capital spending, their stock has outperformed yours by a wide margin, so I'm asking, at what point do you say to yourselves that our acquisition strategy is not working and we have to really rethink the way we handle shareholders money?

Well, I guess that's a question for me in a way and for Gerald. It's easy to continue with acquisitions because we believe strongly that acquisitions after restructuring do bring us to our growth and will materialize by earnings per share, higher earnings per share. The three small acquisitions which we made now are really, will be generating cash and better profits. It is true that for the future we have to be careful and we always have been careful. With 10 acquisitions we've made we never made slip up on that. They have all been positive.

Sometimes people make acquisitions and they lose money and we have been always accretive as of the first quarter and we will continue to guide that. On the other hand, I agree with you that we must tighten the belt and reduce cost as much as possible and Gerald, our CEO, is doing that. He will be accelerating doing that in the future.

I am -- it's very difficult to be responsible for a market behavior. In terms of AVX, which you mentioned as giving a dividend and so on, we have determined many times that paying a dividend is much less for the shareholder. Much less beneficial than acquiring a company. I am personally probably the largest -- I am the largest shareholder in Vishay and every time we look at that, paying -- paying dividends doesn't make sense.

I think AVX is doing. That I don't know, you'll have to ask them. But it's typical for a Japanese company. AVX is owned by Japanese. Concerning buying back shares, yes, it is not a best strategy. When you have free cash to do that.

To borrow money today for acquiring shares, even at those prices, and in view of the interest you have to pay today, if you get any money is negative. To spend our -- we have presently some $350 million in cash but we have $350 million in debt. At this point, we don't want to touch it. Cash is so important. We don't know for how long we will be going into the recession and it's very important for the Company to be stable and good.

The product lines are okay. And our job is to produce earnings per share, free cash for future growth and that's what we are trying to do. If you have any suggestions and so on, please, call us.

Fine. I wanted to -- you just said that repurchasing, borrowing money to purchase share doesn't make sense given interest rates and all that. That's not a fair comparison to what you have been doing in terms of acquisitions because if you repurchase -- let's say you can earn $0.18 per share over the long term per quarter which is $0.72 per share per year per annum.

You buy the stock here and you are guaranteed over 20% return. On day one. How can't you beat that? I don't understand the logic behind the fact what you are saying that you need to do acquisitions, but you can't repurchase the shares because interest rates are too high or it's too costly?

At this point, that's the case. If the interest rate would be very low or if you had free cash much more than we have now that would make definite sense. If you had more than $350 million cash which is equal our debt. So we don't have any net debt situation. If we had another $300 million or so I would be very willing to do that, definitely, but I don't have it.

Then I think it behooves you to stop making acquisitions. It doesn't -- I just don't see --

Well, we didn't acquire anything presently than three small companies which are cash positive and will bring very good profits.

Okay. Thank you.

You're welcome.

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

This concludes today's Vishay Intertechnology conference call. You may now disconnect.