Vishay Intertechnology, Inc. (VSH) Q2 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Vishay Intertechnology Second Quarter Earnings Conference Call. My name is Crystal, and I will be your conference moderator today. [Operator Instructions] I will now be turning the call over to Mr. Peter Henrici, Senior Vice President, Corporate Communication. You may begin, sir.

Thank you, Crystal. Good morning, and welcome to Vishay Intertechnology's second quarter 2014 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 second quarter financial results; Doctor 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 Securities and Exchange Commission. In addition, during this call, we may refer to adjusted or other financial measures that are not prepared in -- 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. On the Investor Relations section of our website, you can find an updated company presentation and the Q2 2014 financial information containing some of the operational metrics Dr. Paul will be discussing. Now, I'll 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 Q2 of $642 million, in line with the guidance. GAAP EPS for the quarter was $0.23. The second quarter includes a charge of $9 million related to our previously announced cost-reduction programs. Excluding the effect of this item and the related tax impact, adjusted EPS was $0.27 for the quarter. During quarter 2, we announced a special, limited time, voluntary lump sum payment opportunity to former employees in our qualified U.S. pension plan. The primary purpose of this offer is to reduce investment and [indiscernible] risk associated with our pension plan. The accounting impact of the offer will depend on the number of plan participants that elect to accept the lump sum and will be reflected in Q3. There will be a noncash charge recorded in Q3 related to this offer, but otherwise, it is not expected to have a significant, immediate impact on adjusted earnings. Also during Q2, we acquired Holy Stone Polytech for $21 million. The acquisition closed in mid-June, so the impact on Q2 results was not significant. On July 11, we announced the pending transaction with Capella Microsystems. Capella is a fabless IC design company, specializing in optoelectronic sensors. It is listed on Taiwan's stock exchange. The first step, a tender offer, is expected to close in September and is conditioned upon receiving over 50% of outstanding shares. Then the remaining shares would be acquired by a merger vote of shareholders that is expected to be completed by January 2015. Assuming we control over 50% of the outstanding shares at the close of the tender offer, we will begin including Capella in Vishay's consolidated financial statements. The noncontrolling interests will be excluded from Vishay's net earnings. As I said, we expect this in September, so in other words, for a small portion of Q3. The bulk of the purchase price will be funded with cash on hand. Although we will borrow between $50 million and $60 million on a revolving credit facility to achieve a legal entity structure, which provides optimal future flexibility. We expect that there will be a significant value allocated to amortizable, intangible asset in the purchase accounting. We estimate the yearly amortization cost will be in excess of $10 million. The EPS impact on Q3 is not expected to be significant. Capella had roughly $60 million of cash and no long-term debt on its balance sheet at the end of 2013. At the end of quarter 3, we expect the cash balance to be $50 million to $60 million after Capella pays dividends, bonuses and deal costs. The payback of the acquisition is expected to be in the usual range of 7 to 8 years. Looking at the P&L, revenues in the quarter were $642 million, up by 6.6% from previous quarter and up by 7.4% compared to prior year. Gross margin was 25.6%, operating margin was 9%, adjusted operating margin was 10.4%, EPS was $0.23, adjusted EPS was $0.27, EBITDA was $100 million or 15.6%, adjusted EBITDA was $109 million or 17.1%. Reconciling versus prior quarter. Adjusted operating income quarter 2 2014 compared to operating income for prior quarter based on $40 million higher sales or $39 million higher excluding exchange rate impacts, adjusted operating income increased by $18 million to $67 million in Q2 of 2014 from $49 million in Q1 2014. The main elements were: average selling prices had a negative impact of $4 million, representing a 0.6% ASP decline; volume increased with a positive impact of $20 million; variable costs had a positive impact of $5 million, primarily due to efficiencies, lower metal prices and cost-reduction efforts; inventory effects had a negative impact of $3 million, due to a lower inventory build versus Q1 and is not expected to repeat in Q3. Versus prior year, adjusted operating income quarter 2 2014 compared to prior year based on $44 million higher sales or $35 million higher excluding exchange rate impacts, adjusted operating increased by $17 million to $67 million in Q2 2014 from $50 million in Q2 2013. The main elements were: average selling prices had a negative impact of $14 million, representing a 2.1% ASP decline; volume increased with a positive impact of $24 million, representing an 8.2% increase, $2 million coming from acquisitions based on $6 million in sales; variable costs decreased with a positive impact of $13 million, primarily due to cost-reduction efforts, efficiencies and lower metal and material prices, which more than offset the increase of labor costs. Fixed cost increased with a negative impact of $8 million, this increase includes, from acquisitions, $1 million; additional depreciation expense related to our MOSFET restructuring program, $2 million. This additional depreciation is expected to continue until the finalization of the restructuring program at the end of Q1 2016 and from compensation-related expenses, $3 million. Selling, general and administrative expenses for the quarter were $97 million, slightly higher than expected, partly due to costs incurred to close the Holy Stone Polytech acquisition and to investigate and negotiate the pending Capella transaction. For quarter 3 2014, our expectations are approximately $95 million of SG&A expenses at constant exchange rates. I'd like to give you an overview of our cost-reduction programs. As we announced in late October, we are implementing some targeted cost-reduction programs. The first is our MOSFETs enhanced competitiveness program, which will have a cost -- a cash cost of $16 million with annualized savings of $23 million at current volumes when fully implemented. The program will occur in steps through Q1 2016. The long implementation is primarily due to automotive qualification complexities. Meaningful savings are not expected until the program is nearly completed. Restructuring charges are recognized ratably during the implementation period. Q2 2014 includes a $1.5 million charge of severance related to this program. The second is our voluntary early retirement program. All of the participants have been identified and have left or will leave the company in the next few months. We recorded a charge of $7.5 million in the second quarter, bringing the total charges related to this program to $12.8 million, very close to our original expectation. We expect this program to have annualized savings of $10 million. We anticipate savings of approximately $2 million in Q3 and for the benefits of the program to be fully realized, meaning, $2.5 million per quarter by quarter 4. The same is expected to be split between cost of goods sold and SG&A, approximately 35% and 65%. The third program is minor activities within our Diodes segment, which are currently in development. Cash costs are expected to be approximately $3 million, with annualized savings of $3 million. These activities are expected to be implemented in the latter half of the year or early 2015. We expect our normalized tax rate for 2014 to be approximately 32%. This rate is based on an assumed mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. The GAAP tax rate for Q2, which includes the tax impact of the charge of $9 million related to our previously announced cost-reduction programs was approximately 32%. Total shares outstanding at quarter-end were 148 million. The expected share count for EPS purposes for the third quarter 2014 based on the same average stock price as in quarter 2 is approximately 154 million shares. For a 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 $69 million. Capital expenditures for the quarter were $34 million; proceeds from the sale of assets, $1 million. Free cash generation for the quarter was $36 million. Cash from operations for the trailing 12 months was $297 million. Capital expenditures for the trailing 12 months were $159 million. Split approximately for expansion, $71 million; for cost reduction $24 million; for maintenance of business, $64 million. Proceeds trailing 12 months from the sales of property and equipment were $3 million. Free cash generation was $141 million. Vishay has consistently generated in excess of $100 million free cash in each of the past 8 years. Cash flows from operations were greater than $100 million for the last 19 years and greater than $200 million for the last 12 years. Backlog at the end of quarter 2 was $664 million or 3.1 months of sales. Inventories increased quarter-over-quarter by $7 million or by $5 million, excluding exchange rate impacts and the acquisition of Holy Stone. Again, this is not expected to repeat in Q3. Days of inventory outstanding were 87 days. Days of sales outstanding for the quarter were 42 days. Days of payables outstanding for the quarter were 30 days, resulting in a cash conversion cycle of 99 days. We had a total liquidity of $1.7 billion at quarter-end. Cash and short-term investments comprised $1,174,000,000 and unused capacity on the credit facility was $498 million. The breakdown of our debt of $387 million was $134 million outstanding on our credit facility; $39 million of exchangeable unsecured notes, due in 90 years; $214 million of convertible debentures, net of unamortized discount issued in 3 tranches and due in 26, 27 and 28 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. The second quarter for Vishay has been simply good. Our results were substantially above the first quarter and is better than expected. Our continued solid order intake indicates also the third quarter to become successful. Vishay in the second quarter achieved a gross margin of 26% of sales, adjusted operating margin of 10% of sales, adjusted earnings per share of $0.27 and GAAP earnings per share of $0.23. We generated free cash of $36 million in the quarter and remained a very reliable generator of free cash. Let me talk about the economic environment. Throughout the second quarter, we enjoyed a friendly economic environment with healthy business conditions in almost all market segments and also in all geographies. Distribution continued to build backlog but at a substantially reduced speed of 1.5% quarter-over-quarter. POS also increased by 1.5% quarter-over-quarter. Inventory turns at distribution remained reasonable with overall turns of 3.6 like in prior quarter. Some additional detail. In the Americas, 2.4 turns, after 2.3 turns in the first quarter; in Asia, 4.8 turns, after 4.9 turns; in Europe, 3.8 turns, after 3.9 turns. The industrial demand continued to be very strong across the board, which can also be expected in Q3, which as you know is important for Vishay. Automotive remains quite robust in all regions. We expect growth also in the second half but possibly, at a more moderate rate of increase. Computers in general remain soft with some opportunities in service. The rates of decline in notebooks has slowed down but the segment continues to decrease. Fixed telecom leveled out in the second quarter and we expect it to be flat in the third quarter. The smartphone markets remained solid with upside potential going forward in conjunction with major new product launches. Military and AMS markets were still soft in the second quarter but medical continues to be strong. Let me talk about the business development of Vishay. Sales in the second quarter came in according to our guidance. We achieved sales of $642 million versus $602 million in prior quarter and $598 million in prior year. Excluding exchange rate effects, sales quarter-over-quarter were up by $39 million or by 6% and up versus prior year by $28 million or by 5%, excluding the impact of acquisitions and after-tax rate -- of the exchange rate. Book-to-bill ratio in the quarter was 1.0 versus 1.09 in the first quarter. We have seen 1.03 for distribution after 1.1 in the first quarter, 0.97 for OEMs after 1.08 in the first quarter, book-to-bill of 1.06 for actives after 1.12, book-to-bill of 0.94 for passives after 1.06, book-to-bill of 1.05 for the Americas after 0.99, 1.01 for Asia after 1.14, 0.97 for Europe after 1.1. We see no clear trends and there is stability, we believe. The backlog decreased slightly to 3.1 months, 3.4 in actives and 2.8 in passives, and there are no problems in general concerning lead times. The order cancellations remain at a low level. The price pressure remains normal to low, minus 0.6% versus prior quarter, minus 2.1% versus prior year. Price decline is relatively low for actives, minus 0.5% versus prior quarter, minus 3.2% versus prior year. And for passive, the price decline is moderate, minus 0.6% versus prior quarter and minus 0.9% versus prior year. Let me give you some highlights on our operations. The contributive margin in the second quarter improved quarter-over-quarter and came in within our traditional range of between 46% and 48%. The SG&A costs in the quarter were at $97 million, very close to our expectation. The manufacturing fixed costs for the second quarter were $131 million like in the first quarter and as expected. Total employment at Vishay increased to 23,080 heads or by 0.4%, all the increase was due to the acquisition of Holy Stone in Japan. The inventory turns in the quarter were at satisfactory 4.2. Due to increasing production outputs, inventories in the second quarter went up by 5 million when excluding the acquisition of Holy Stone. All happened in -- were in process and in finished goods. Capital spending in the second quarter was $34 million versus $27 million in prior year. $17 million for expansion, $4 million for cost reduction and $13 million for maintenance of business. For 2014, we continue to expect capital expenditures of about $170 million. We generated in the second quarter, cash from operations of $69 million versus $71 million in prior year, $297 million for trailing 12 months. We generated in the second quarter cash, free cash of $36 million versus $46 million in prior year, $141 million for trailing 12 months. And all in all, we expect another solid year for the free cash generation at Vishay. Let me go through our product lines, and I'll start as always with the resistors and inductors. Vishay's traditional and most profitable business continues on a good level. With resistors and inductors, we enjoy a very strong position in the industrial, auto and military markets. We are intensively penetrating the medical segment and focused on gaining share in Asian industrial markets, predominantly in China. We see good opportunities for thin film resistors, thick film power resistors and power inductors there. Sales in the quarter were $192 million, 2% above prior quarter and 10% above prior year, 7% above prior year when excluding the acquisition of MCB in France. Book-to-bill of 0.98 and a backlog of 2.8 months indicate stability. Gross margin in the quarter came in at 32% of sales, which is at the same level as in prior quarter. The price decline remains modest in our traditional markets, altogether, minus 1.1% price decline versus prior quarter and 2.5% price decline versus prior year. There is some acceleration due to the impact of adding customers in Asia. Inventory turns remained at excellent 4.5. Our acquisitions in the field of specialty products, Hunting (sic) [Huntington], HiRel and MCB, continued to be successful with a run rate of sales of over $100 million. Let me come to Capacitors. This business is based on a broad range of technologies with a strong position in European and American market niches. The business last year has suffered from slowdown, in particular, in renewable energies and from generally high inventory levels at distribution. After a strong order intake in previous quarters, sales increased to $112 million, 6% prior -- above prior quarter but 2% below prior year still. Relatively weak book-to-bill ratio of 0.19 -- 0.88 after 1.09 in previous quarter was visible mainly due to power capacitors but this is a temporary effect. The backlog decreased to 2.9 months. Gross margin at Capacitors increased to 24% of sales due to higher volume, better selling prices, higher efficiencies and lower cost for noble metals. The selling prices increased due to some measures in certain specialty products. We raised the prices by 0.3% altogether versus prior quarter and by 1.8% versus prior year. We remain confident for this product group, especially in view of opportunities in Asia, and also based on our latest acquisition, Holy Stone in Japan, which will allow us to penetrate the polymer tantalum market. Coming to opto products. Vishay's opto business consists of infrared emitters, receivers, sensors, couplers as well as LEDs for automotive applications. It contains a substantial and growing share of customer design products mainly sold to automotive and industrial markets. The business represents one of Vishay's growth opportunities, especially in the area of sensors and high performance couplers. Sales in the quarter increased further to $63 million, 10% above prior quarter and 6% above prior year. We see the continuation of an encouraging book-to-bill ratio at opto products, 1.04 in the second quarter after 1.16 in prior quarter. The backlog is at 3.1 months. Gross margin continues at an excellent level of 36% of sales, slightly down from 37% in prior quarter, which had benefited from some singularities. Inventory turns are quite excellent, they are 5.1. There's the low price decline, minus 0.7% versus prior quarter and minus 0.5% versus prior year. We continue to increase our technical staff in order to support growth, working on an increasing number of design-in projects. We also made a tender offer for Capella, a leading Taiwan-based IC design company. Capella, in a substantial way, would further -- could further strengthen our position in the promising field of optoelectronic sensors, where Vishay already is fairly successful. Diodes. Diodes represent a broad commodity business, where we are 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. The business continues on a growth path. The book-to-bill in the quarter was 1.07 after 1.09 in the first quarter. The backlog has grown to 3.5 months. Sales in the quarter were $150 million, 9% above the first quarter and 5% above prior year. Gross margin at diodes increased further to 23% of sales after 22% in the prior quarter. The inventory turns were at excellent 4.6. Price decline is relatively low, 0.2% versus prior quarter and 2.3% versus prior year. And we continue to expand manufacturing capacities in SMD packages. Coming to MOSFETs. Vishay continues to be one of the market leaders in MOSFETs, the MOSFETs transistors. The originally predominant Asian business, with customers in computers and phones, over years has been expanded successfully to automotive and recently also to industrial. And this now helps to balance the decline in laptops and PCs, which recently has slowed down. Sales in the quarter grew to $124 million, 10% above prior quarter and 7% above prior year. Book-to-bill ratio remains encouraging, 1.05 in the second quarter after 1.13 in the first quarter. The backlog at MOSFETs has grown to 3.4 months. The gross margin has improved to 15% of sales after 11% in prior quarter based on better volume, but continues, of course, to be impacted negatively by additional depreciation as a consequence of the announced restructuring until the first quarter of 2016. We have good inventory turns at MOSFETs of 4.1. Price decline was normal, 0.9% versus prior quarter and 5.4% versus prior year. And we are on the way to implement a major restructuring program, which targets at a move of substantial volume from a 6-inch to an 8-inch fab, including major reductions of fixed costs. We continue to expect full implementation by the first quarter of 2016, and all this should enable us to reach a gross margin in the area of 20% of sales. Let me summarize. The second quarter for sure has been a good quarter for Vishay. We achieved very reasonable financial results, better than expectation. We continue to generate cash and we continue to do our homework, following our growth plan. Additionally, we are excited about 2 major moves that will help to assure a good future for Vishay. The acquisition of Holy Stone, which will open the door for a new business segment in Capacitors. The tender offer for Capella, which is a successful enterprise already today, but has the potential to boost our effort to grow in optoelectronic sensors, a very promising growth market. For the third quarter, we guide to a sales range between $630 million and $670 million at gross margins in line with this volume. Thank you. Peter?

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

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

I wanted to get some more detail on both Holy Stone and Capella, both the annual revenue profile of each business as well as where you expect the margins to be for the businesses on both the gross and operating front.

Really, they are 2 different cases. Polymer we really bought mainly -- the Holy Stone we bought mainly to get in the polymer technology into Vishay. We are a substantial supplier in the tantalum market but, up to now, couldn't offer products in the polymer segment of this market, which is sizable. So we buy our first-class technology there. And based on our efforts, our market excess but also on investments, which we can provide, we expect to grow there. At the moment, this is relatively small company with sales of approximately $12 million to $15 million, but we are really positive to be able to increase that. And variable margins are quite normal in line with the average variable margins in our business, so volume increases will help us by nature. Capella is really exciting. It's a chip design house. And we already are in the area of optical sensors, but this acquisition, it really increases our potential to offer quickly solutions to the market. We are quite excited about it, and it should be accretive very early from -- so present sales is about $60 million sales roughly per year.

Okay. If the research I did is something about gross margins maybe in the high 40s, is that the correct way to think about Capella?

Yes. Depends very much on the volume, as you can imagine, but approximately, yes.

Okay. And then I guess, I don't mean to nitpick on the SG&A dynamics, but it went up in the June quarter, coming down to kind of the previously forecast level for the September quarter, but there's also supposed to be the structuring savings within that number as well.

Yes.

And so adding everything together, maybe I thought it would be a bit lower. Maybe there's some other dynamics going on within that.

I think you're right. As a matter fact, I think we see completely the result of our restructuring effort. But in parallel, we have additional activities in China. We decided to increase our sales efforts there another time, so what you see is a kind of a net affect.

Your next question comes from the line of Jim Suva.

When we look at the book-to-bill, I think it was around 1.1, and last year, it was 1.08. Can you help us understand, any thoughts about kind of what's going on in this number? It looks like in Slide 10, you said that Europe and Asia looks like book-to-bill is slowing the most. Is that the way to think of it? One would think in Europe that actually book-to-bill might be pretty strong given automotive or maybe just the seasonal impact of the automotive slowdown because it seems like PCs are slowing a little bit, yet industrial and other sectors doing well. Because if you can help us with that, that would be great.

Jim, if you compare to the first quarter, it's quite natural. We came from a low level so often in quarter 4 and, in the first quarter, especially distribution really placed substantial orders and Q-- saw a strong book -- very strong book-to-bill ratio. The second quarter started very strong. Then we had a relatively disappointing June but July, I can say that openly, is back to the good start of the second quarter. But we have to admit that June really hampered a little the performance of book-to-bill in the second quarter. Otherwise, from the standpoint of the markets, Europe in the summertime, really beginning summertime, is not the strongest field for orders. Automotive, you are right again, is defending us, is defending our position, but the broad industry, Europe in summer, especially industrial, where we strong, is of course not the strongest. Europe is like that. Otherwise, nothing -- or the markets continue to be friendly, very friendly.

Great. And then for gross margins, your commentary about the inline with the volumes, the way I look at it, maybe it's wrong, is if we look at quarter-over-quarter, we look at sales to grow at your midpoint, about 1.3%, but then I would assume you have ASPs that are impacting volume, so you probably have closer to 2% volume increases quarter-to-quarter. So should we expect gross margins to be closer to 26% or should we look at things more year-over-year where your number comes out kind of different math if we do the same calculations.

No. I mean principally speaking, you can do it many ways, you are right. But I think the easiest way to calculate the impact of sales is just to take the difference in sales and multiply it by our variable margin, which is around 46%. And on top of everything, of course, you have price decline, but on the other hand, we have cost reductions. So we, since many years, are able to compensate price decline by cost reductions so in the first approximation. And for sure, from 1 quarter to the other, you can just forget this effect. So really, take the incremental volumes times the 46%.

And it's best to do that quarter-over-quarter not year-over-year. That way, we can capture the most recent results of restructuring, is that the best way?

Yes. But on the other hand, the restructuring falls into 2 parts, we have the fixed cost restructuring, and then whatever you do for the variable cost. This is an ongoing program for the variable cost, but there are steps. What we want to do with the MOSFETs contains also a major share of variable cost reduction, which then as a step function, sure, will play a role.

Your next question comes from the line of Matt Sheerin. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: So Dr. Paul, in terms of your guidance, it looks like it's up slightly sequentially. And the last couple of years, you guys, similarly up modestly. And of course, you missed numbers and as did a lot of semiconductor component suppliers. And I think the big issue there was distribution and inventory. Do you see anything that sort of similar in hindsight, looking at the last couple of years, and how that played out in this year? What's different? What gives you a little bit more confidence and more seasonality this time?

Matt, I expected this question. To say it frankly, it was obvious. I believe this year, overall, economy is better than in prior years. Principally speaking, we are, of course, never safe. The distribution comes to different conclusions and, very appropriately, we are never safe. But on the other hand, the overall market condition this year is much better than in the years before. So we go with confidence in this segment. And it's very broad also. So altogether, we see industrial maintaining strong. Automotive was strong also last year, admittedly. And I do believe that the inventories at distribution are healthy. That means it's not on the high side. And you have seen the POS coming up in the same way as the inventory came up. So altogether, you are never completely safe, unfortunately, but it looks better than prior year. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, great. And by product category, typically, the MOSFET business, the Diodes business, geared towards Asia, toward consumer mobility, et cetera. That should be up sequentially. And then the passives business will be down seasonally because of the industrial and auto exposure, is that fair?

It's absolutely fair for industrial. Automotive normally doesn't show a seasonality, really. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And in terms of the MOSFETs business or the Siliconix business, you talked about a target of 20% gross margin by -- was that by Q1 of 2016?

After Q1. It takes us for the first quarter of 2016 to implement all this -- end up all these qualifications, which we need. It's really a matter of qualifications. And then we can, of course, have -- we will have all the cost reduction effective, the variable and the fixed cost reduction effective one shot. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Because if you look back 4 or 5 years ago, you were well in excess of that. And I know that there were MOSFET shortages that led to premium pricing. But historically, your margins in your semiconductor business had been well ahead of 20% and now you're targeting that as a goal. So what has changed? Is it just more commoditized, that business? What's changed about the business? And do you think you can ever get it back to the mid-20s in a normalized state?

Personally, I think -- you said it yourself, it became less of a specialty, the MOSFETs. It's really more a commodity product and there are more competitors around. The market doesn't grow that much in MOSFETs. I believe the target would be at the 20%, which is a typical number for a commodity business. I think our Diodes are a good example for that. Diodes is truly a commodity business, the business we have, and it's quite successful. It's at 22%, 23%. So to 20% MOSFET margin, of course, we will try to do better, but this is what we think we can achieve, realistically. Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And just to double check on that Capella acquisition, that's not expected to close basically until the beginning of next year, so that's not going to show up in any numbers until then, right?

Well, to a degree, in the third quarter, but there will be the fourth quarter -- Lori, you want to say something, excuse me.

Excuse me, sorry. As I said in my prepared remarks, assuming we got more than 50% of the shares at the end of quarter 3, we would start to consolidate the financial results and then we would take the minority interest out of the final net earnings numbers for Vishay. But we would consolidate the financial results with Vishay.

Okay. And what steps need to happen between now and -- do you need a regulatory approval as well?

There is some regulatory approval that's required in Taiwan, but we're not expecting any issue in receiving that.

Your next question comes from the line of Steve Smigie. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: When I look at the gross margins here, some of the best ones we've seen from you guys in a while. And it sounds like there's other -- there are other improvements coming. So let's say we get to your gross margin target, the 20% on the MOSFETs in 2016 plus continue to have sort of a decent economic environment, where do you think you can get to overall on gross margins if things go reasonably well here?

Steve, it's a matter of the volume. I could imagine that 1% -- well, it's a matter you can calculate, you know our fixed costs. I didn't do the calculation here right away. But I think to get another point in gross margin is not an impossibility given the right volume, as a matter of fact. Given the -- you know we come from higher volume -- at a high volume in 2010, we were higher than that. So it's really a volume game. And what we do to ensure, to assure the volume is we put in a more, in critical times, more manufacturing capacity. This is different to what we have done before, so we look ahead and try to make sure that as soon as the market really demands it, we have the capacity in order to exploit the volume potential. And indeed, this can lead into higher gross margins, it's true, must lead. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. Just a little bit on end market side. You mentioned medical a few times here, been hearing a lot of talk about medical and general out there. Can you give some color on what the potential growth in that business? Could that be a sizable growth business? I think of auto, for example, that 10 years ago, we all had sort of, as part of the overall industrial bucket, and it's grown so fast that everybody has to break it out now. Now, is there that potential for medical over the next few years where the growth opportunity is pretty substantial?

Medical for Vishay will never be a deciding force. It's a very nice business to be in. It's a professional business which suits Vishay for quality products. But of course, the share of what we sell in medical is very, very low. So it's a nice enhancement of the contributive margin but, of course, you must have the product. We do count on improving our share there. The acquisition of HiRel gave us a nice start into -- an additional nice start into medical. But to put a real number of intended growth now here officially, I wouldn't like to do that. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. And then just in terms of the opto business. Obviously, you're seeing that as a pretty decent size grower, you've got maybe 5 other competitors out there. What is it that you guys do that's differentiated in that market? And what do you see is the primary driver for you guys and market-wise?

We -- at least mainly in Europe, but partially also in Asia, we are a traditional supplier. The opto business was an important part of our TEMIC acquisition many years ago. And they were very nicely established already then in the industrial and partially on the automotive segments, we will build on that. We are an introduced supplier there. Had some disadvantages concerning designing chips, which we now think we can fix with this acquisition, which we are intending to have. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. In the previous question about Capella, you talked about this 40% gross margin. Would you consider other businesses with high gross margin like that or you think more will in more traditional margins for you guys?

I didn't catch the question, I'm sorry. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Just for future acquisitions, do you think they'll be more like a 40% gross margin like Capella or more of your traditional margin structure in there?

It really depends in which direction we want to go. There are different kinds of acquisition. And in the case of Capella, we really fixed a hole in our program, so to speak. It enables us technologically for something which we only, in a limited way, were able to do. And this is typical for a specialty business to have high variable or, in this case, gross margin. But if -- there could also be an acquisition in the future for synergistic reasons and, in this case, you do not count on such high -- relative margins, but on a major -- on a volume effect in the major absolute contribution to earnings per share, it really depends in which direction you want to acquire. So the relative variable of gross margin per se is not a packet in itself, it's the contribution to earnings per share, I think. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. And then I looked at the book-to-bill ratio, you mentioned that July is looking pretty good. Unfortunately, as you mentioned, we have August in there, which is obviously a slow month. But would you argue that you might have your book-to-bill improve in the third quarter relative to the second quarter, where potentially you should get that back above 1 again?

The third quarter is a peculiar one. Started good in July, August is not the best month in the year, it all depends on September. But the signs we get from the market, I continue to stress that are friendly, really friendly, I could imagine that it will be somewhat better than 1. But this is definitely my personal guess, not a forecast in that sense, it's not possible. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. Last question is just on distribution. Yourselves and a number of other folks seem to have, generally speaking, shift more inventory into the channel than was shipped out. I guess you did say POS is looking about similar. But it seems like there's some inventory build there. General sense is that, the point of this is that the distributors are more optimistic about the future, and so they're reloading a little bit. Is that accurate? I think Arrow had some decent numbers.

Yes. I think that -- but we have indeed increased the quality in our products, they have increased -- at least in our products, they have increased the inventory slightly by 1.5%. But at the same time, the POS also went up by 1.5%. I think it's very rational for that [indiscernible] at the moment.

Your next question comes from the line of Ruplu Bhattacharya.

Just wanted to ask, I think you mentioned some weakness in the power capacitors. Could you just kind of explain that a little bit? And why you think it's temporary?

No. As a matter of fact it was a delay of a shipment. It was -- typically, in this area of the business, there are big shipments which have to be consolidated, and then it goes out as a relatively big block. And unfortunately, for us, for Capacitors, shipment did not go out because it wasn't complete. But we know, and this is why I called it a temporary effect, it will go out in the third quarter. So nothing miraculous in the whole thing.

And inventory of your products has built in the channel over the last 2 quarters. But I mean, overall, would you say inventory of your products are still low or at a normal level?

I would not call it low, I would not call it low, but normal for sure. It also -- you see the inventory turns stated 3.6, which is a good indicator. We have seen higher numbers but, for sure, we have seen lower number also of the inventory turns. So I would not be concerned at this point in time but, of course, everybody has to watch and so do the distributors, I'm sure. But as their POS is still coming up, I'm not super concerned now.

Okay, got it. Then on the acquisitions of Holy Stone and Capella, do you anticipate any restructuring charges associated with that?

Not really. No, no, no.

So will you run those as independent businesses, basically within respect[indiscernible]...

At least Capella. In the case of Holy Stone, this will become part of our Tantalum division. On the other hand, we are very happy to be in Japan with our manufacturing site. It's high-quality, high-tech, and we are not going to restructure there anything foreseeably. And the other one -- and Capella is a separate -- will be run as a separate business.

I see, okay. And then the last one for me, what is the current book-to-bill number?

Current means quarter-to-date or what?

Yes, quarter-to-date?

I would have even look it up. I think it's above 1.

Right.

Yes, it's above 1 in July, yes. But I didn't -- so I hit -- somebody know? No, I was too optimistic, it's 1.0 still, yes.

Your next question comes from the line of Shawn Harrison.

Lori, a brief follow up on Capella in terms of the financing, the $50 million to $60 million that you had financed, the interest rate on that would be probably around 2.5%, is that the correct rate?

I don't know if I have the rate, but I know that we're estimating -- it would cost us about just over $1 million per year, approximately, $300,000 per quarter.

Okay. And then the amortization charges, you'll run those through the P&L, you won't back that out?

Correct.

And then the final question, the cash on hand that you expect with Capella, is that included in the enterprise value associated with the purchase price announcement, or your net purchase price will actually be $155 million if you back out their cash?

It's sits at $155 million.

[Operator Instructions] And at this time, there are no further questions. Peter, are there any closing remarks?

Thank you very much, Crystal. This concludes our second quarter conference call. Thank you for your interest in Vishay Technology.