Vishay Intertechnology, Inc. (VSH) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vishay Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Peter Henrici. Please go ahead, sir.

Thank you, Jennifer. Good morning, and welcome to Vishay Intertechnology's Third Quarter 2013 Conference Call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President and Chief Financial Officer. As usual, we'll start today's call with the CFO, who will review our third quarter financial results. Dr. Gerald Paul will then give an overview of our business and discuss operational performance, as well as segment results in more detail. Finally, we'll reserve time for questions and answers. This call is being webcast from the Investor Relations section of our website at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days. 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. In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to generally accepted accounting principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide. This morning, we filed a Form 8-K that outlines the various variables that impact the diluted earnings per share computation. We expect to file our Form 10-Q for the third quarter this evening. On the Investor Relations section of our website, you can find the presentation of the Q3 2013 financial information, containing some of the operational metrics Dr. Paul will be discussing. Now, I turn the discussion over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. Good morning, everyone. I am sure that most of you have had a chance to review our earnings press release. I will focus on some highlights and key metrics. Vishay reported revenues for quarter 3 of $603 million, just below the low end of the guidance, and 0.9% above quarter 2. Gross margin remained at a similar level compared to Q2 due to the lack of anticipated volume increase. GAAP EPS for the quarter was $0.22. The third quarter includes an adjustment of $2.9 million related to a tax law change in Israel, impacting our deferred tax assets. Excluding the effect of this item, adjusted EPS was $0.20 for the quarter. During the third quarter, we were able to capitalize on favorable credit market conditions to increase the amount available to us under our credit facility to $640 million. We received commitments in excess of our targeted amount. The amended credit facility extends the terms of our available credit to August 2018, secures lower interest rates than we were currently paying for the next 5 years, and provides us with additional financial flexibility to pursue our growth plan. During the third quarter, a holder of our exchangeable unsecured notes exercised the option to exchange $56.4 million principal amount of the notes for 3.7 million shares of our common stock. The exchange increases the number of our common shares outstanding, but has no effect on the calculation of the weighted average shares outstanding used for computing diluted earnings per share, because our earnings per share computation assumes that the exchangeable unsecured notes would be converted. The transaction reduces our outstanding debt and results in an improvement of our debt-to-equity ratio to 0.20 from previously 0.24. Yesterday, we announced various cost reduction initiatives. The programs are expected to lower costs by approximately $36 million per year at an expected cash cost of $26 million. The full implementation is expected by end of quarter 1, 2016. For a full explanation, please refer to the 8-K we filed yesterday. Revenues in the quarter were $603 million, up by 0.9% from previous quarter, and up by 5.3% compared to prior year. Gross margin was 23.8%. Operating margin was 8.8%. EPS was $0.22. Adjusted EPS was $0.20. In July 2013, a new tax law was enacted in Israel, which effectively increased the corporate income tax rate on certain types of income earned after January 1, 2014. While this tax law change will increase our future tax expense, as a result of this change, our deferred tax assets in Israel were increased to reflect the higher rate, and we recorded a one-time tax benefit of $2.9 million. Reconciling versus prior quarter, our operating income quarter 3 2013 compared to adjusted operating income for prior quarter, based on $5 million higher sales or $3 million higher excluding exchange rate impacts, adjusted operating income increased by $3 million from $50 million in quarter 2 2013 to $53 million in quarter 3 2013. The main elements were: average selling prices, which had a negative impact of $4 million, representing a 0.6% ASP decline; and fixed and variable cost, which had a positive impact of $7 million, primarily due to lower material prices and cost containment measures. Reconciling versus prior year, operating income quarter 3 2013 compared to prior year, based on the $30 million higher sales or $22 million higher excluding exchange rate impacts, operating income increased by $9 million from $44 million in Q3 2012 to $53 million in Q3 2013. The main elements were: average selling prices, which had a negative impact of $22 million, representing a 3.6% ASP decline; volume increased with a positive impact of $20 million, representing a 7.9% increase, $8 million coming from acquisitions; variable cost decreased with a positive impact of $13 million, primarily related to material prices; fixed cost increased with a negative impact of $3 million, $2 million coming from acquisitions. Selling, general and administrative expenses for the quarter were $90 million, lower than guided due to cost containment measures instituted during the quarter, and also included the realignment of the incentive compensation accruals. For quarter 4, our expectations are approximately $92 million of SG&A expenses at constant exchange rates, which is on the normalized level of Q3. The expected normalized tax rate for the year, excluding unusual items, is approximately 34%, up from the approximately 32% recorded in the first half of 2013. This increase of the expected annual tax rate to 34%, resulted mathematically in an effective tax rate of 37% for quarter 3. The increased rate is based on an assumed mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. Please note that the year-to-date GAAP tax rate continues to include the one-time $1.3 million benefit recorded in Q1, as well as the impact of the change in Israeli tax law enacted in Q3 of $2.9 million. These benefits are discrete items not included in our normalized tax rate. Our year-to-date effective tax rate for GAAP is approximately 31%. Total shares outstanding at quarter end were 147 million. The expected share count for EPS purposes for the fourth quarter 2013, based on the same average stock price as in quarter 3, is approximately 152 million shares. For full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K we filed this morning. Cash from operations for the quarter was $85 million. Capital expenditures for the quarter were $44 million. Proceeds from the sale of assets were $1 million. Free cash generation for the quarter was $42 million. For the trailing 12 months, cash from operations was $282 million. Capital expenditures were $155 million, split approximately: for expansion, $77 million; for cost reduction, $18 million; for maintenance of business, $60 million. Proceeds for the trailing 12 months from the sales of property and equipment were $6 million. Free cash generation was $133 million. Vishay has consistently generated in excess of $100 million free cash in each of the past 7 years. Cash flows from operations were greater than $100 million for the last 18 years, and greater than $200 million for the last 11 years. Backlog at the end of the quarter was $614 million or 3.1 months of sales. Inventories increased quarter-over-quarter by $4 million, or decreased by $1 million, excluding exchange rate impacts. Days of inventory outstanding were 88 days. Days of sales outstanding for the quarter were 43 days. Days of payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle of 100 days. We had a total liquidity of $1.6 billion at quarter end. Cash and short-term investments comprised $1.091 billion, and unused capacity on the credit facility was $522 million. The breakdown of our debt of $360 million was: $110 million outstanding on our credit facility; $39 million of exchangeable unsecured notes, due in 90 years; $211 million of convertible debentures, net of unamortized discount issued in 3 tranches, and due in 27, 28 and 29 years, respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2018. Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori. And good morning, everybody. Our business in the third quarter was impacted by a sudden and unexpected reduction of orders, predominately from distribution. Vishay's sales volume, to a degree, suffered from this development. We achieved in the quarter a gross margin of 24% of sales, operating margin of 9% of sales and adjusted earnings per share of $0.20. We continue to be on track in terms of free cash generation, we generated $42 million in the quarter and $92 million year-to-date. And, as Lori said, we are in process to establish a comprehensive cost reduction effort, consisting of several programs in order to support profitability. But let me emphasize, this is without jeopardizing Vishay's plans for internal growth. Let me talk about the economic environment. After a strong recovery in the first half of 2013 from a very weak end of 2012, orders from distribution worldwide rather rapidly fell off after July. The Asian distributors seem to be increasingly skeptical concerning a traditionally better second half of the year and decided to adapt their inventory levels. In particular, there is concern about the outlook for notebooks. Also, western distributors slowed down orders but to a lesser extent. Europe in the third quarter has shown its normal seasonality, with Southern Europe still very weak in general, however, automotive keeping up strongly. The industrial segment in the Americas remained stable. The automotive demand healthy, but military starts to suffer. Distributor turns due to increased inventories were 3.6 worldwide, after 3.9 in the second quarter, 2.3 in the Americas versus 2.6, 5.2 in Asia versus 5.3, 3.6 in Europe versus 4.1 in the second quarter. POS remained flat versus prior quarter. The book-to-bill ratio of distributors to their customers was close to 1, after 1.06 in prior quarter. For the fourth quarter, no major market changes are expected in general. For Vishay, sales came in slightly below the range for our guidance. We reached $603 million in the quarter versus $598 million in prior quarter and $573 million in prior year. Excluding the effects from exchange rates and from acquisitions, sales were on the level of prior quarter and up versus prior year by $14 million, or by 2.5%. The book-to-bill ratio in the quarter declined to 0.93 after a strong book-to-bill ratio of 1.14 in quarter 1 and 1.08 in the second quarter. In the third quarter, we have seen 0.91 for distribution, 0.96 for OEMs, 0.90 for actives, 0.96 for passives, 0.94 for the Americas, 0.92 for Asia and 0.93 for Europe. Our backlog has reduced to 3.1 month, which still represents a comfortable level. We have a backlog of 3.1 month in actives and of 3.0 months in passives. The rate of order cancellations remains very slow. The price decline has somewhat accelerated year-over-year. We have seen a reduction in prices of 0.6% versus prior quarter, and of 3.6% versus prior year. The actives prices declined by 0.8% versus prior quarter, and by 4.6% versus prior year. The passives has always been more stable in terms of pricing. The reduction was 0.4% versus prior quarter and 2.5% versus prior year. The latter was driven by capacitors mainly. Some highlights of operations. After the correction of most of the incidents that burdened the second quarter, the contributive margin in the third quarter improved and came close to our traditional range of between 46% and 48%. The SG&A costs, due to some containment measures, came in better than expected at $90 million. Manufacturing fixed costs, after the integration of the acquisition of MCB in France, were $125 million, according to expectations. Total employment at Vishay at the end of the third quarter was 22,520, which is approximately flat versus Q2. Inventory turns in the third quarter remained on a good level of 4.1. Excluding exchange rate impacts, inventories in the third quarter decreased slightly at $1 million in raw materials. We expect more inventory reduction to take place in the fourth quarter. Capital spending in the third quarter was $44 million. We expect the capital expenditures of about $160 million in 2013, following the midterm requirements of our growth plan, but adapted to current economic conditions. We will see the traditional split of about $100 million for expansion and cost reduction, and remainder for maintenance of business. We generated, in Q3, cash from operations of $85 million versus $91 million in prior year. We generated, in the third quarter, free cash of $42 million versus $53 million in the prior year. On a trailing 12-month basis, Vishay generated cash from operations of $282 million and free cash of $133 million. And I think, it's fair to say that Vishay remains a very reliable generator of free cash. I think you know -- as you know, Vishay is a company that tries to keep its costs tightly. And Lori said already that we have announced a comprehensive cost reduction program, which I would like to outline as follows: In fact, the program consists of 4 separate projects, all fully implemented by the first quarter of 2016. The total restructuring costs of these projects are estimated a $26 million cash. Total annualized savings, after full implementation, will be $36 million, therefore, quite meaningful, approximately half of the savings on the variable cost side and half of the savings in fixed costs. One project will be a voluntary retirement program for fixed personnel. We expect the participation of about 100 people, leading to annualized savings of approximately $10 million per year. The other projects relates to manufacturing moves for semiconductors, targeting for the MOSFETs at the utilization of more efficient fabs, put diodes and move to a lower-labor country, respectively a consolidation of manufacturing locations. The voluntary retirement program is about to be established. We expect to finalize it by mid of 2014. Manufacturing projects will be announced step-by-step, starting in the first quarter of 2014. Let me now comment on the various lines we have, and I start, as always, with resistors and inductors. Vishay's traditional and most profitable business, after recovery in the first quarter, continues on a good level. We enjoy a very strong position in the industrial and mill markets, and are penetrating the medical segment. Sales in the quarter were $178 million, which contains $8 million from our recent acquisition, MCB, in France. Excluding MCB and x-rate effects, sales were on the level of the prior quarter and 2% above prior year. Book-to-bill is encouraging at 1.04, indicating an unbroken positive trend. The backlog for resistors and inductors has increased to 3.1 month. The gross margin was at a satisfactory level of 30% of sales, which now includes MCB. There is relative price stability. We have seen a decline of 0.5% versus prior quarter and of 1.6% versus prior year. The inventory turns were at very satisfactory 4.5. The acquisition of MCB expands our European market position in the industrial segment and will synergize well with our Sfernice division. The process of integration has been started, and MCB, already in the transition phase to Vishay, has achieved a gross margin of above 20%. We expect further substantial improvements in the context of the exploitation of synergies with Sfernice division. Coming to capacitors. This business at Vishay is based on a broad range of technologies. It has strong position in European and American market niches. After a good second quarter, the business disappointed in commodity tantalum capacitors offset by higher sales in high-power film caps. Sales in the quarter were $112 million, at the level of prior quarter, and 2% below prior year. Book-to-bill was 0.84, after 1.05 in the prior quarter. The backlog reduced to a level of 2.8 months. Gross margin of capacitors remained at 19% of sales, which is below our expectations, mostly due to lower sales. Improvements in variable margin were offset by the impact of inventory reduction. We are seeing at capacitors a somewhat accelerated price decline versus prior year, versus prior quarter was minus 0.3% vis-à-vis prior year minus 3.6%. Inventory turns were at 3.4, and we do remain confident for capacitors for the midterm in view of increasing power and clean energy application. Coming to Opto, our Opto product line, Vishay's Opto business consists of infrared emitters, receivers, sensors, couplers, as well as LEDs for automotive applications. It contains a substantial share of customer-designed products, mainly sold to automotive and industrial markets. We enjoy a leading position with innovative infrared emitter and receiver solutions for remote controls and phones. The business has shown a high degree of stability during the recent downturns and had recovered to the full extent already in the first quarter of this year. Sales in the quarter were $57 million, 3% below prior quarter, but 11% above prior year. The book-to-bill in the quarter was 0.87 after 1.0 in the prior quarter. The backlog is at a normal level of 2.6 months. Gross margin was at a very satisfactory level of 36% of sales. Inventory turns were quite excellent, I think, 4.9. And we have seen quite normal price decline of minus 0.3% versus prior quarter and minus 2.2% versus prior year. We are in process, especially in Opto, to add technical resources for accelerated growth, mainly in the area of infrared sensors, which is a project-based business. Coming to diodes, which represents a broad commodity business where we are a largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio and we are leading in particular in power applications. Sales in the quarter were $141 million, at the level of prior quarter and 13% above prior year. Book-to-bill has suffered from a slowdown of orders from distribution. We have seen 0.88 in the third quarter, after a very -- after very strong orders in the first and second quarter with book-to-bill rates of 1.28 respectively, 1.17, I think, we can talk about a correction in this case. The backlog has been reduced to a still high level of 3.3 months. Gross margin has improved to 23% of sales. Inventory turns were at very satisfactory 4.5. And the price decline was relatively modest. We have seen minus 0.5% versus prior quarter and minus 3.2% versus prior year. Last but not least, the MOSFETs. Vishay continues to be one of the market leaders in the segment of low-voltage MOSFETs. We are in process to complete our product offering also in high-voltage products. The predominantly Asian business with customers in computers and phones, the first half is benefited from the recovery of Asian distribution and now like also the diodes, faces some correction. We also see the continuation of weakness in notebooks. Sales in the quarter were $115 million at the level of the prior quarter and 7% below prior year. Book-to-bill of -- the book-to-bill rate of 0.94, suffered from weaker orders from distribution, after a strong performance in the first and second quarter, with book-to-bill rates of 1.22 respectively of 1.11. The backlog was at a comfortable level of 3.3 months. Gross margin remained at 14% of sales, which is somewhat disappointing and mainly caused by lower-than-expected volume. Inventory turns were at satisfactory 3.8. We have seen an accelerated price decline for MOSFETs minus 1.4% versus prior quarter and minus 7.2% versus prior year. MOSFETs will be one of the focus points for our announced cost reduction efforts but remains in the focus of the interest of Vishay. Let me summarize. There is clearly some disappointment about the third quarter especially, for the most part due to lower-than-expected sales, we are not able to live up to our expectations. On the other hand, I would dare to say that the third quarter by far hasn't been a bad quarter. Vishay has since improved its operational results and demonstrated another time its strength in generating free cash. We worked on contributive margin, kept fixed costs low and reached an improved operating margin, which was close to our business model. We also continued to follow our Growth Plan, increasing selectively technical resources, critical manufacturing capacities and our market presence in Asia, mainly in China. With MCB, we are integrating our next promising specialty business and more acquisitions are to come. I now feel that we, without jeopardizing internal growth, can further optimize our costs in fixed overheads as well as in production. Benefits will be very noticeable, about $36 million per year, all fully implemented early in 2016. I think that we have all reasons to continue believing in a good future of Vishay. For the fourth quarter, we guide to sales between $570 million to $610 million at margins in line with this volume. Thank you very much.

Thank you, Dr. Paul. We will now open the call to questions. Jennifer, please take the first question.

[Operator Instructions] The first question is from Shawn Harrison.

Just getting to the volume dynamic. If I do my math correctly, distribution was down $15 million or $16 million sequentially, which is essentially I guess, the miss relative to midpoint of guidance.

Exactly.

And just your view that distribution got a little too far ahead of itself probably with the second quarter ordering pattern and this quarter represented a normalization.

No, in retrospective, obviously, yes. But after the first month of the third quarter looked differently, we really believed that it would continue like that and had all reasons to do so. But obviously, it is what I said, there was suddenly more skepticism around for the remainder of the year, not untypical has been the same, but stronger last year. And distribution decided to adapt the inventories as it looks.

Is where essentially through the month of October, have you seen any changes in booking patterns that would lead you to believe, you're going to be toward the lower-end of guidance, as we get towards the December quarter, is that pretty much status quo with the seasonality?

I think status quo is the right description.

Okay, and then one final question on just how the cost savings roll on, if we could look at year-by-year, particularly the early retirement, those $10 million of savings, when will you see that full annualized benefit and then maybe if we could talk about the manufacturing side, when will you see that other $26 million begin to roll on?

The first part will be expect -- it's a voluntary program, but it's would be -- it's very likely that this will be fully implemented, for the most part, by the mid of next year. Within this first half, I don't want to comment. It also depends how long the stocks with our people will take place. But I think it's a fair guess that the full implementation, except a few exceptions, will be behind us by mid of next year. Concerning manufacturing, as we all know, manufacturing moves take a little longer. And I think it's fair to say, we have seen, I think indicated 3 projects really. The first smaller projects you will see the impact already next year in the course of next year. And the big project, as we talked about the major manufacturing project, I do not believe that anything can be seen before the year of 2016, but then it will be fully implemented beginning of 2016.

The next question is from Jim Suva.

Dr. Paul, for the Q3 results, is it fair to say the gross margin softness or disappointing it was pretty much of 100% attributed to lower sales? Or were there other factors within that?

No, it's exactly as you say. It was really the volume. That's it.

Great. And then going forward, it sounds like you're entering this new restructuring. Can you help us know when we should start to see gross margin improvement again? I know we've got some seasonality factors here in Q4 and Q1, to just be conscious of it, how we should think about when we layer on timing of restructuring to start to help gross margins once again, would that kind of be more mid-year next year?

First of all, it will also be in SG&A. So our voluntary retirement program will also, which is the first phase of the restructuring, will impact the SG&A costs. I think more than 50% will be SG&A, approximately 50%. And the remainder will be fixed personnel in manufacturing phase, 50-50 approximately, and we will see a full implementation of this first segment of the first $10 million savings, 50-50 as I said in by mid of next year, this is my best estimate. There can be some exceptions, which take a little longer, but across our model, it should be done by mid of next year. The other programs are really focused on manufacturing and therefore on gross margin. And as I said before, these 3 projects, 2 of them will be implemented in the course of next year, successively supporting, I would say, after mid-year, our results, whereas the larger projects relating to MOSFETs will take somewhat longer, we will see the impact towards the beginning of 2016, but then to the full extent.

Great, and then a follow-up question for Lori. Long-term tax rate for long-term planning, is 34% kind of a good rate or are there some things in that we should kind of build our expectations for a long-term tax rate for Vishay?

Okay. So typically, we do not guide for a longer-term tax rate. So from 2013 though, I can say that our tax rate suffered somewhat the mix of the profitability in our different taxing jurisdictions. And particularly, remember in the past, we discussed that the MOSFETs have a relatively low tax rate. And so of course, if they would improve that our tax rate would also reduce to somewhat more normalized levels. We also had some impact from the commodity capacitors that Dr. Paul spoke of earlier, that also had in comparison to Vishay tax rate is somewhat lower tax rate.

I guess, if I take your comment and add them all together, 34% would be too high, as of the mixed shift that would possibly impacting down the road, is that correct?

Yes, that's correct.

Your next question is from Ruplu Bhattacharya.

I just wanted to start by asking you on the MOSFETs segment. Dr. Paul, last quarter, you had a transition out to an external foundry, I just wanted to ask, is that transition complete? Or is that still hurting your margins?

It's really complete, it's complete. And we were really, we were really suffering, for the most part, particularly of just lower volume, lower than anticipated volumes, which I try to explain this quarter.

Okay. And when I look at the $23 million in savings, which is specifically targeted for the MOSFETs segment, is that all going to go into the gross margin for MOSFETs and will some of that roll into the next couple of quarters?

No, as I've said, first of all, it's a yes. Most of the savings will be related to variable costs and manufacturing fixed costs. Therefore, they will enter into the gross margin line. But this is a manufacturing related program, which takes some time. It did requires, kind of investment, the qualification, et cetera. And we will not see this part of the improvement earlier than in the first quarter 2016. I cannot exclude that we will see some before, but only smaller.

Okay. That's helpful. And then the last one for me, do you know what the current book-to-bill is as of today?

Book-to-bill, approximately at the moment, is around 1.

The next question is from Matt Sheerin. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: So Dr. Paul, your guidance for the December quarter at midpoint is down roughly 2%, which is seasonal. You just told us the book-to-bill was 1, but it sounded like at the end of the quarter it was weaker particular in Asia and the Semiconductor business, so is that a conservative guide or how did you come up with that guidance, because it sounds like it could be a little bit weaker than that?

You refer to our guidance of 3 months ago, I suspect Matt, right? Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: No, your guidance for the September, for the December quarter at the midpoint of that guidance seems down 2%, right?

Matt, it's not a conservative guidance. It's a reasonable guidance, which we can see based on the present business as we see especially also, including Asia. I think it's realistic. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And it sounds like if you look at the passive businesses, it typically sort of flattish in the September quarter and that's how it played out, but the Semiconductor business, which are typically up, were flat, so that's where you missed on the revenue. And I know there's a lot of concentration on consumer computing and notebook. Could you give us some more specifics in terms of percentage growth or decline that you saw on those businesses? And what are you actually seeing in terms of demand from customers in those markets?

I think what we have seen really is that the POS, especially the POS, was not really affected. So as a matter of fact, I do believe what we have seen in the third quarter and also were taken by surprise, to the degree as I admitted before, was the decision of distribution, not to follow the traditional trend, expecting especially for consumer computer a better second half than the first half. This has not happened. And this is really the center of our negative surprise, which we had concerning to orders and consequently, the sales. I think things have settled, so we are not seeing really, we have not seen the downturn in end customer demand. What we have seen is the decision by distribution, a more negative view of distribution on their sales going forward, I think. And in the meantime, having book-to-bill ratios of 1 approximately, it indicates that this erosion of inventories does not continue. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And your lead times across your product segments are what? Are they sort of normal, below normal?

I would call them normal. But, Matt, of course, we're adapting manufacturing capacities to the need. So that's of course we could produce more than we produce at the moment by nature, but we have adapted, of course, manufacturing. That means our lead times are not super short. I would call them normal, and it's very different for different lines. But I would not say that any of these lines at the moment stick out that they're super long. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then your operating margin, flattish sequentially. But obviously, you saw good improvement year-over-year. I know you've talked about getting to sort of a mid-teen operating margin target for the company. Obviously, a lot lower than that right now on the volumes, what has to happen for you to get to those numbers, either on the top line or mix of business?

The answer is clear. There's only one word. It's volume, very simple, volume. Nothing else is to happen, volume. You know, we have seen quarters with sales beyond the $700 million. And it's an easy exercise. If you took our results and put sales up to a level which we actually had in the year 2010 and partially '11 of 700x, then you automatically come to such profits. And we would not add any fixed costs for that. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just lastly, I mean, your balance sheet obviously, is in very good shape. Could you talk about, you did 1 acquisition this year. Could you talk about the M&A pipeline, what you're seeing, what areas you're focusing on?

As I said, we are interested to acquire companies, and there are some possibilities. According to our strategy, to look for midsize and smaller companies to things in certain divisions, which we just did with our French division. Two, that we are looking after a few opportunities, but it's too early to say final things about them.

Your next question from Chris Danely. Shaon Baqui - JP Morgan Chase & Co, Research Division: This is Shaon Baqui calling for Chris. I just want to ask real quick on the other end markets, which were the strongest and which ones were the weakest, I know you singled out competing consumer, I just wanted to understand, which was your kind of seasonal and below seasonal, and how you expect that to trend in Q4?

What is really astonishing is the ongoing strength of automotive around the world. And normally in Europe, you see some seasonality between the first and the second half is typical for Europe. But in automotive, the seasonality has gone away. So it's completely full automotive in Europe, but also in the rest of the world is strong, so I would like to highlight this in a positive way. Shaon Baqui - JP Morgan Chase & Co, Research Division: Okay, very helpful. And I guess just a more broader question for you, Dr. Paul, can you walk us through kind of your thoughts on the general state of the industry? Do you see the second half conditions right now as kind of a temporary pull back or a speed bump or are we in a prolonged downturn, you think and maybe contrast this year's business condition versus last year and the year before, where things started kind of falling apart in the second half?

Well, as I tried to say, I do not see a real downturn worldwide. In fact, the economy is not doing badly. I think we, Vishay and others in our industry, we are really exposed our ups and downs partially, triggered by inventory decisions in the pipeline, I tried to say that. Whereas the sales to end customers, do not really change that much. So it's very much triggered by inventory creation or depletion. For instance, at distribution, this is the biggest part of it. And if you compare the situation with prior year, I don't know, perhaps my comments then, but I more or less said the same thing. It was also distribution and the decisions of distribution, which gave us some kind of headache in the fourth quarter. All in all, you see this year appears better than prior year, I think we can say that.

[Operator Instructions] Your next question is from Steve Smigie.

This is actually Elizabeth Howell calling on behalf of Steve. Regarding your recent acquisition, I think your revenues from MCB came in a little bit better than expected. Can you just talk a little bit about how that acquisition is playing out?

Well, it's a little early actually. So we are completely in line with our plan. That it's true what you say the acquisition is somewhat more sales, but I would have to cake relate to which extent a stronger Euro plays a role in it. So the stronger Euro helps of course, because we are invoicing predominately in Europe for this -- it's very much European sales. On the other hand, I think we have brought on board a quite interesting enterprise. It complements, on the one hand what we have in Sfernice means it strengthens the position in existing products. And on the other hand, brings in certain products, which Sfernice didn't have before. So altogether, we are more than pleased to have it. It took us also some time to get it, I must admit that. And on the other hand, we are of course, now very early in the process of integration. We took the decision as not to be too quick in integrating it. We want to defend the business first, so I think this is target #1. But then of course, as we said, we are going to exploit some synergies, which are obvious.

Great. And then if you could give us a bit of color on your product segment expectations for 4Q? Or maybe which area you think will be your biggest growth driver maybe in the longer-term 2014, '15?

Okay. Well, as matter of fact, Vishay is active in most of the market segments and most of the geographies. What is an ongoing positive impression, I said it before, is Automotive, Vishay is strong in Automotive and we expect also continued growth there. Our big project is, on the other hand, to get more into the industrial market in the Far East, namely in China. But this one is easier to say, but to do as a matter of fact, it takes some time, you have to put more people, of course, we had people on the ground already before, but we are intensifying our efforts there. And we have more people on board, substantially more people, but now as always, it takes some time to get them running so to speak and get successes. We see something, but of course it's early in the game in this case also, but if you ask me about, where I see our largest chances going forward, that's exactly it. It's industrial in the Far East. Vishay is historically strong in industrial in Europe and the U.S., but not strong never it was strong, never very strong in China. So I think we can apply the virtues that we have in this industry also for this market in China, which obviously, grows faster than America and Europe especially.

Just last one, in terms of margins for 4Q, would it be fair to assume, your guidance means we should be looking at something around 23.5% for gross margin, or similar levels you've achieved on $590 million in revenue in the past?

As a matter of fact, it's relatively easy cake relation as a matter of fact, our fixed costs are approximately fixed, and our variable margin, contributive margin is around 45%. So I think it's easy to calculate as a matter of fact.

[Operator Instructions] We have a follow-up question from Shawn Harrison.

And my follow-up is little bit related that last one, I'll just ask you directly on the math. What's like your EBIT margin should be down 100 basis points sequentially using via numbers you just provided. Is that a correct assumption?

So in principle, as I can only repeat what I said. Take the delta in sales multiply it by 0.45, make an assumption on the fixed costs, which I think is not hugely varying and then you have it. Very simple, there are no other changes.

At this time, there are no further questions. I will turn the conference back to Mr. Henrici for closing remarks.

Thank you very much for your interest in Vishay Intertechnology. This terminates our third quarter conference call.

Thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect your line.