Vishay Intertechnology, Inc. (VSH) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there would be a question-and-answer session. [Operator Instructions] I would now hand today's call over to Mr. Peter Henrici. Please go ahead, sir.

Thank you, Tamika. Good morning, and welcome to Vishay Intertechnology's fourth quarter and year 2015 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 will start today's call with the CFO, who will review our third quarter and yearly 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 will 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 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 a presentation of the fourth quarter 2015 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 Q4 of $556 million. GAAP EPS for the quarter was a loss of $0.93. Adjusted EPS was $0.14 for the quarter. The fourth quarter includes unusual tax charges netting to 152 million and restructuring charges of $10 million. In December, we amended our credit facility extending our existing commitment of $640 million through 2020. The new agreement has less restrictive covenants, specifically related to share repurchases and dividends. As long as the pro forma leverage ratio is less than 2.25, the new agreement provides unlimited capacity to pay dividends and make stock repurchases. As we discussed many times over the years, despite our $1 billion-plus of cash in short-term investments, it is quite difficult to efficiently access that cash, because it is held by our non-U.S. subsidiaries and will be subject to tax upon repatriation. As part of the evaluation, which led to the amended and extended credit facility, we evaluated our anticipated domestic cash needs over the next several years and our most efficient use of liquidity. We have determined that the most efficient use of liquidity is a combination of our revolver and cash repatriation. Consequently, we have recorded a tax expense of $164 million in order to repatriate $300 million to the U.S. This is the book tax amount. The actual cash taxes paid will be significantly less when considering available net operating losses and other tax attributes. We anticipate the effective tax cost of the repatriation will be approximately 15%, which could vary significantly depending on the timing of the repatriations over the next several years. Revenues in the quarter were $556 million, down by 0.8% from previous quarter and down by 9.0% compared to prior year. Gross margin was 22.6%. Operating margin was 5.4%. Adjusted operating margin was 7.2%. EPS was a loss of $0.93, adjusted EPS was $0.14. EBITDA was $71 million or 12.8%. Adjusted EBITDA was $81 million or 14.6%. Reconciling versus prior quarter, adjusted operating income quarter four 2015 compared to adjusted operating income for prior quarter, based on $5 million lower sales or $3 million lower excluding exchange rate impacts. Adjusted operating income decreased by $1 million to $40 million in Q4, 2015 from $41 million in Q3 2015. The main elements were average selling prices had a negative impact of $4 million, representing a 0.7% ASP decline; volume decreased with a negative impact of $2 million, fixed costs decreased with a positive impact of $3 million, primarily due to reduction of amortization intangibles and general belt-tightening measures. Inventory reduction had a negative impact $3 million and exchange rates had a positive impact of $3 million. Reconciling versus prior year, adjusted operating income quarter four 2015 compared to prior year, based on $55 million lower sales or $32 million lower excluding exchange rate impacts, adjusted operating income decreased by $5 million to $40 million in Q4 2015 from $45 million in Q4 2014. The main elements were; average selling prices had a negative impact of $21 million, representing a 3.6% ASP decline; volume decreased with a negative impact of $6 million, representing a 2% decrease. Variable costs decreased with a positive impact of $6 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices, which more than offset the increase of labor costs. Fixed costs decreased with a positive impact of $10 million. This decrease includes impacts from personnel, intangibles and depreciation and general cost reduction programs and belt-tightening more than offset salary and wage increases. Inventory impacts were positive $3 million and exchange rate effects had a positive impact of $3 million. Reconciling the full year 2015 versus 2014, adjusted operating income for the year 2015, based on $193 million lower sales or $58 million lower excluding exchange rate impacts, adjusted operating income decreased by $46 million or $39 million, excluding exchange rate impacts to $180 million for 2015 from $226 million for 2014. The main elements were average selling prices had a negative impact of $70 million, representing a 3.0% ASP decline. Variable costs decreased with a positive impact of $21 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices, which more than offset the increase of labor costs. Inflationary effects related fixed costs were offset by cost reduction and belt-tightening. The 2014 acquisitions had a net negative impact $5 million. Inventory impacts were a positive $6 million and exchange rate effects had a positive impact of $6 million. Selling, general and administrative expenses for the quarter were $86 million, lower than expected, primarily due to a positive impact of exchange rates as well as more severe belt-tightening efforts. For quarter one 2016, our expectations are approximately $88 million of SG&A expenses, assuming a $1.09 USD to Euro exchange rates and for the full-year not more than $350 million. I would like to give you an overview of our restructuring programs. As announced, we are implementing global cost reduction programs intended to lower costs by approximately $35 million annually when fully implemented, had cash cost approximately $30 million. These programs include a plan to reduce SG&A by $17 million to be implemented by the end of 2016. We also plan to streamline and consolidate production of certain product lines, which we expect to reduce costs of product sold by approximately $18 million annually, split 50-50 between variable and fixed costs. These production transfers will be completed in steps by the end of 2017. Our strategy in the first phase is to seek volunteers to accept a voluntary separation early retirement offer. The amount of restriction expense recorded for these programs during quarter four was $8.1 million or $13.7 million for the year 2015. More will follow in 2016. Our other previously announced program in the MOSFET segment continues as planned. An additional $1.7 million of restructuring expense was recorded in Q4, bringing the total for the year to $5.4 million. As discussed previously, this program is being implemented in steps through quarter one 2016. Meaningful cost savings are not expected until the program is nearly completed. Savings will start to kick-in, in Q2 2016. They are expected to be approximately $23 million per year when fully implemented. Restructuring charges are recognized ratably during the implementation period. The GAAP income tax rate for the year includes unusual items totaling $152.4 million, primarily to record the effect, planned repatriation of foreign earnings to the United States, following an evaluation of the Company's anticipated domestic cash needs over the next several years and the Company's most efficient use of liquidity. Excluding these items and the tax effect of restructuring impairment and Tianjin explosion charges, the year-to-date normalized tax rate approximately 32.4%. This mathematically yields a normalized tax rate of 37.3% for quarter four. We expect our normalized tax rate for 2016 to be approximately 30%. This rate is based on an assumed level and then the mix of income among our various tax and jurisdictions. A shift in income could result in significantly different results. Totals shares outstanding at quarter end were 148 million. The expected share count for EPS purposes, for the first quarter 2016, based on the same average stock price as the fourth quarter is approximately 151 million shares. For a full explanation of our EPS share count and variables that impact calculation, please refer to the 8-K we filed this morning. Cash from operations for the quarter was $92 million. Capital expenditures for the quarter were $60 million. Free cash generation for the quarter was $31 million. For the year 2015, cash from operations was $245 million. Capital expenditures were $147 million, split approximately for expansion $72 million, for cost reduction $14 million, for maintenance of business $61 million. Proceeds from the sales of property and equipment were $2 million for the year 2015. Free cash generation was $100 million. Vishay has consistently generated in excess of $100 million free cash in each of the past 10 years. Cash flows from operations were greater than $100 million for the last 21 years and greater than $200 million for the last 14 years. Backlog at the end of quarter four was at $515 million or 2.8 months of sales. Inventories decreased quarter-over-quarter by $23 million, excluding exchange-rate impacts. Days of inventory outstanding were 92 days. Days of sales outstanding for the quarter were 45 days. Days payable outstanding for the quarter were 32 days, resulting in a cash conversion cycle of 105 days. We had a total liquidity of $1.5 billion at quarter end. Cash and short-term investments comprised $1.95 billion and unused capacity on the credit facility was $443 million. During quarter four, we adopted a new accounting standard. Debt issuance costs, which were classified as a non-current assets are now presented as an offset to long-term debt. The standard was retrospectively adopted and the 2014 balance sheet has also been recast to present these items in a similar manner. The carrying value of our debt of $437 million is net of the unamortized issuance cost of $13 million and includes 190 million outstanding on our credit facility, $39 million of exchangeable unsecured notes, due in 88 years, $221 million of convertible debentures net of unamortized discount issued in three tranches and due in 25, 26 and 27, respectively. The principle amount or face value of the converts is $575 million. No principle payments are due until 2020. Now, I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning everybody. The year 2015 for Vishay, like for the entire electronic components industry has been disappointing. An ongoing weakness in several key markets and the growing skepticism concerning China, burdened the economy environment substantially. As a consequence, Vishay in 2015 remains behind its plans towards profitability and also behind the prior year. We achieved the gross margin in the year of 24% of sales and adjusted operating margin of 8% of sales, adjusted earnings per share of $0.72 and GAAP earnings per share of a loss minus $0.73. We generated free cash of $100 million in the year, lower than in prior year's but still quite respectable as we think. The fourth quarter did not represent surprises, gross margin came in at 23% of sales, adjusted operating margin were at 7% of sales, adjusted earnings per share at $0.14 and GAAP earnings per share at a loss of $0.93. Let me talk about the economic environment as we see it. There was an unexpected deterioration of the economic environment after the first quarter of 2015. Since then, there was no real recovery as we see it. Inventories at distributors in the fourth quarter continued to climb slightly by 2%, distributors in the fourth quarter had a relatively weak POS, which was down by 6% versus prior quarter, a bigger drop than in prior year. We have seen low inventory turns at distribution in the quarter, 3.1 turns worldwide versus 3.3 turns in the third quarter, 2.0 turns in the Americas versus 2.2 turns in the third quarter, 4.4 turns in Asia on the same level as in Q3, 3.2 turns in Europe versus 3.5 turns in Q3. The book-to-bill ratio of distributors in the fourth quarter was principally encouraging. Though it was at 1.02. There are microeconomic concerns for China, and during the quarter they became more severe with stock markets taking a harsh decline. The American market continues to show a mixed picture. Automotive continues healthy. We see a very weak energy sector, which continues to burden the Industrial segment, which in general shows a relatively normal economic. Europe in the fourth quarter like during the entire year 2015 remained stable. Of course, supported by a weaker euro. Automotive remained strong worldwide, maybe in future somewhat lower growth rates to be expected than we have seen in the last year's. The Industrial segment is stable in Europe, okay in the U.S., except for the energy sector. Infrastructure projects mainly in China and India start to support the Asian industrial segment. Computers, in general continue to fall short of all expectations, the smartphones' market is flat with Chinese produces gaining share. Fixed telecom is expected to pick up, due to investments in 4G, mainly in developing countries like India. In the consumer segment, wearables and gaming support the business. Military remains flat, whereas the Medical segment continues to be friendly, in particular also in China. Coming to our business development, excluding exchange rate impact, sales came in close the mid-point of our guidance. In the fourth quarter, we achieved sales of $556 million versus $561 million in prior quarter and $611 million in prior year. Excluding exchange rate effect, sales in the quarter virtually were on the level of the third quarter, but down by $32 million or 5% versus prior year. Sales in the year 2015 were $2.3 billion versus $2.49 billion in 2014, a decrease of 4% excluding exchange rate effects and acquisitions. Book-to-bill in the quarter was 0.97, 1.02 for distribution after $0.96 in the third quarter, 0.91 for OEM after 0.96, 0.94 for active after 0.98, 1.02 for passives after 0.94, 0.92 for the Americas after 0.92, same level. 0.98 for Asia after 0.99, 1.0 for Europe after 0.96. Our backlog decreased slightly to 2.8 months, 2.7 in actives and 2.9 in passives. The order cancellations remain at the normal level. We have seen some increase of the price pressure versus prior year, vis-à-vis prior quarter minus 0.7%, but minus 3.6% versus prior year. For the actives vis-à-vis prior quarter, we have seen a decrease of 1.3% versus prior-year, a decrease of 4.3%. For passives, prices were stable vis-à-vis prior quarter, but there was a decrease of 2.7% versus prior year. Some highlights on operations, we in the year 2015, again, were able to offset the impact of inflation and of price decline on the contributive margin. SG&A costs in the quarter came in at $86 million better than expectation also due to quite effective belt-tightening. SG&A costs for the year were at the $362 million, $5 million or 1.4% below prior year at constant exchange rates and excluding the impact of acquisitions. Manufacturing fixed costs for the year were $491 million, $7 million or 1% above prior year, excluding the impact of exchange rates and acquisitions. Vishay in 2015 was able to compensate the effects of inflation on its total fixed costs by cost reduction. Total employment at the end of 2015 was 22,435 people, slightly below prior year. The fixed headcount went down by 45 heads in the year and more reductions obviously are to come. Excluding exchange rate impacts, inventories in the quarter were reduced by $23 million and inventory turns in the fourth quarter were 3.9. In 2015, inventories increased by $9 million, whereby the required build up safety stocks for MOSFETs costs at increase of 20. Inventory turns for the year were at $4.0 according to our expectations. Capital spending in 2015 was $147 million versus $157 million in prior year. We spent $72 million for expansion, $14 million for cost reduction and $61 million for maintenance of business. The major expansion projects were for power inductors, diodes and tantalum polymer capacitors. For 2016, we expect CapEx of approximately $140 million, in line with mid-term requirements of our growth plan. We generated in 2015 cash from operations of $245 million versus $297 million in prior year and we generated in 2015 free cash of $100 million versus $143 million in prior year. Naturally, the required buildup of our MOSFET safety stock burdened our performance last year, but this will be reduced going forward. Coming to our product lines and starting with resistors and inductors, Vishay's traditional and most profitable business basically continues on a good level, but in 2015 also experienced the general weakening of the economy. With resistors and inductors, we enjoy a very strong position in industrial, auto and mill markets and HiRel is very well positioned in the medical segment. We continue to see opportunities for growth in the Asian, predominantly in the Chinese market, especially in the industrial segment regardless some present cooling of the economy there. Sales in the quarter were $166 million, down by 3% versus prior quarter and down by 6% versus prior year, excluding exchange rate impacts. Year-over-year, resistors and inductors cruised light by about 0.4%. The book-to-bill ratio in the quarter was 1.03, after 0.95 in prior quarter and we increased our backlog in this product line to a solid level of 2.9 months. Gross margin was at 28% of sales in the quarter after 29% in prior quarter, due to lower volume and gross margin for the year came in at 30% of sales. Inventory turns in the quarter were at 4.2 as compared to 4.3 for the year. The price decline was small vis-à-vis prior quarter, 0.3%, but increased slightly year-over-year. It came to 3.1%. We continue in resistors, inductors in the area we continue to invest for expanding manufacturing capacities in power inductors and in thin film resistors and the acquisitions in specialty products some years ago, Huntington, HiRel and MCB, maintained to be quite successful. We in the year 2016, despite a weaker euro achieved sales of $95 million at an improved gross margin of 27%. Now I come to capacitors, our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. The capacitor business presently suffers severely from a decline of the oil and gas sector, the weakness in computers in the general economic softening in Asia. Sales in the fourth quarter were at $82 million, slightly below prior quarter, but 14% below prior year which excludes exchange rate effects. The book-to-bill ratio in the quarter was 0.99 after 0.93 in previous quarter. The backlog remained stable at 2.9 months. The gross margin for capacitor was at 19% of sales in the quarter, up from 16% in the third quarter, due to better efficiencies. The gross margin for the year 2015 was at 19% of sales. Inventory turns in the quarter were at 3.4 as compared to 3.4 for the whole year. The price decline was normal. We had slight price increases vis-à-vis prior quarter of 0.5% and prices were down by 1.9% versus prior year. For the mid-term, we remain confident for capacitor in view of our opportunities in Asia in power capacitors and for polymer tantalum capacitors in MAP technology, which we started to sell in the fourth quarter. Coming to the opto line, Vishay's business with opto products consists of infrared emitters, receivers, sensors and couplers, as well as LEDs for automotive applications. The business with infrared opto products represents one of Vishay's opportunities for growth especially the segment of sensors. The acquisition of Capella, a design house for chips used in optoelectronic sensors will strengthen our position and our potential for expanding this promising business further by having own competence in the field of chip design. Sales in the quarter were $68 million, 3% below prior quarter, but 1% above prior year, which excludes exchange rate impacts and acquisitions. Book-to-bill in the quarter was 0.91 after 0.95 in prior quarter. Backlog decreased slightly to 2.7 months, gross margin in the quarter reduced to 28% of sales after 33% in prior quarter, due to lower volume, a less favorable product mix and some temporary inefficiency in manufacturing. All this leads still to a quite satisfactory level of 32% gross margin for the year. This product line has quite excellent inventory turns of 6.0 in the quarter as compared to 5.6 in the year. Price decline was modest 0.9% decline versus prior quarter, 1.2% decline versus prior year. The newly created subdivisions sensors had a growth nicely with sales in the year of $134 million, which is a growth of 13% on a pro forma basis, excluding exchange rate effects. Coming to diodes, diodes represent a broad and growing commodity business, where we are largest supplier worldwide. Vishay offers virtually all technologies as well as the most complete product portfolio and we in particular are leading power applications. The business in the quarter in general was impacted negatively by the Asian slowdown. We reached sales of $135 million, 9% above prior quarter, but 2% below prior year, excluding exchange rate effects. Please be reminded that the third quarter has been handicapped by the explosion in port of Tianjin, the book-to-bill ratio of 0.97 in the quarter; after 1.05 in the third quarter. The backlog reduced to 2.7 months, the gross margin in the quarter improved to 23% of sales after 22% in prior quarter, which leads to a solid gross margin of 22% in the year. The inventory turns were very satisfactory 4.3 in the quarter as compared to 4.3 in the year. Some acceleration we have seen of the price decline versus prior year, minus 1% versus prior quarter declined minus 4.8 versus prior year. Coming to the MOSFETs, Vishay continues to be one of the market leaders in MOSFET transistors. Business continues to suffer from the weakness of the computer segment and of the Asian economy in general. Over the last year's we developed a quite good position in automotive, which helps to stabilize the performance. Sales in the quarter were $104 million, 5% below prior quarter and 6% below prior year, excluding exchange rate effects. Book-to-bill remained low, 0.9 in the fourth quarter versus 0.91 in prior quarter. The backlog is reduced to 2.6 months. The gross margin in the quarter was 13% of sales after 15% in prior quarter, because of lower volume in combination with less inventory build. The gross margin in the year was 14%. The inventory turns of 3.1 in the quarter, SG&A as compared to 3.4 in the year. There is an accelerated price decline, which continues to burdens the results minus 1.8% versus prior quarter, minus 5.7% versus prior year. We are approaching the full implementation of our major cost reduction project according to plan by the end of the first quarter, which will positively impact the results in the second quarter. Let me summarize. 2015 for Vishay clearly contained disappointments concerning the development of the business, leading to financial results not in line with our expectations. On the other hand, Vishay continue to show respectable results and remain the reliable supplier of free cash. We in 2015 achieved substantial progress in vital projects. We continue to control tightly our fixed costs initiating another companywide restructuring program. We implemented various programs for improving efficiencies and manufacturing, in particular at MOSFETs. With the help of our Capella acquisition, we started to grow sensors even faster and process to penetrate the tantalum polymer market. We also increased further our selling efforts in China, which undoubtedly will pay off in the future. Based on our operational strength and good financial position, we enter 2016 with confidence, in particular we believe in an eventual turnaround of the Chinese economy, especially of the interesting industrial segment. We continue to focus on shareholder value and by the repatriating foreign earnings, we improve our ability and flexibility for paying dividends, for buying back stock and for acquisitions in the United States. For the first quarter we guide to a sale ranges between 540 million and 580 million at the gross margin between 22% and 24% of sales. Thank you very much.

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

Your first question comes from the line of Ruplu Battacharya of Bank of America.

Just, Dr. Paul to start off with maybe if you can comment a little bit more…

Hi, Ruplu.

…on inventory in the channel, I think you said inventories and distribution went up 2%. Overall, how do you see inventory in the channel? Do you think that we are at the point where distribution can start re-stoking inventory or are the end markets still weak and just if you can give your viewpoint on inventory?

Well, this increase of inventory in the fourth quarter was a surprise to us to a degree. It is not the end of the world, but we had predicted and expected the decline of the inventories in the fourth quarter, came differently, but we are not talking about the dangerous situation of the pipeline, which the whole thing may delay a real upswing a little, but all together, I think this reduction which we expect will take place in the first quarter now.

Okay. That is helpful. Then you talked about price declines. They seem to be a little bit on the higher side this quarter, and especially in the opto segment, you also talked about some manufacturing inefficiencies. Can you just talk about what you are seeing in terms of price declines for 1Q and just elaborate a little bit on what you saw in the opto segment?

Most of the product lines we have seen in the fourth quarter, accelerated priced decline vis-à-vis prior year, have different reasons. I mean, in the past since it is just very often customer mix, so as soon as you sell more to Asia, you will take incremental business at lower variable margins, but at somewhat lower variable margins as it is incremental, it is good to do, but as a matter of fact, shows then effectively as the price decline. I would not take this seriously. It is different in the case of our actives. In our actives, we see indeed on the market more competitive situation than say a year ago. This is clear because the economy at the moment is absolutely not mute. It is in fact the economy is not strong at the moment. Of course by nature of things, this accelerated price decline will go to the other side and we have less price decline in times of our economic recovery, but this is not really targeted at or restricted to one product line. We have seen it in diodes, we have seen it in the MOSFETs arena. On MOSFETs, we have now Capella, and they have more price decline, per se, than the traditional opto division head. In opto, where basically they had to tune down the volume, and if you tune down volumes in manufacturing, it can happen that for a relatively short time, there are some inefficiencies, because you want to tune down the volume somewhat faster than you can adapt to people and there was some ambition here, maybe too much ambition to bring down the inventory quickly and this caused some really temporary inefficiencies.

Okay. That is helpful. Thanks for the color and that makes sense. Maybe the last one from me, I mean, you have announced the repatriation of the cash. Maybe if you can just talk about your sense for the cadence of that, how fast you think you are going to do that and just overall - I mean, I was unclear on this, was it more efficient for you to repatriate the cash versus taking on more debt or did you have to do that at this point based on accounting reasons and maybe just talk about your priorities for cash.

It was indeed the best possibility, but I think I would hand over to my CFO.

Good morning, Ruplu.

Hey, Lori.

In fact, as Dr. Paul said, it was our most efficient option in time and we plan to repatriate over several years, because that is sort of method to drive the cash tax for the repatriation down, it is just spread it over several years.

Right. Okay. I mean, are we looking at like two or three years for all of it to come in and for you to be able to maintain that 15% cash tax rate?

We plan a little bit more than two to three years. I would say, three to five approximately.

Three to five, okay. That is helpful. The last thing was your priorities for cash? I think, on the press release you have talked about dividends and share buybacks and acquisitions, but do you have any preference for one or the other?

Ruplu, this is an opportunistic to choice that we have to make. We have done basically all of it. We have paid dividends, we are paying dividends, continue to do so. We have bought back stock and we have acquired in the U.S., so indeed we have basically done everything of it and it is hard to predict what we want to do. It is an opportunistic thing and this decision is the decision of the Board, which will be taken.

Okay. Thank you so much. I appreciate you taking my questions.

Thank you.

Your next question is from the line of Harlan Sur with JPMorgan.

Good morning. Thank you for taking my question. In answer to the previous question, it seems like you are still anticipating continued inventory drawdown in the channel, maybe just being offset by some return to consumption in certain segments, so the net impact is flattish growth here in the March quarter. Dr. Paul, could you just help us understand what end markets or geographies are still burning inventories and what segments are driving some of the growth kind of offset that decline here in March?

As a matter of fact, I would have said - the easy answer is always, it is Asia. To a degree it is also Asia. On the other hand, looking into January, orders are not bad at all and they come also from distribution Asia, so I should be careful with my statement. I think, we will see some reduction of inventories in the U.S. This is our observation that distributors in the U.S. may come to the conclusion that it is also opportunistically better for them to reduce the inventory levels to a degree. This is what I would say.

Okay. Then nice job on controlling the SG&A spend in the December quarter. It looks like you guys are going to keep SG&A a relatively flattish off of the Q4 run rate for all of 2016. How is the team going to be offsetting the normal inflationary increases this year?

Well, we too have some restructuring programs on the way, and the impact of these restructuring programs as we said before, really able to offset the impact of the wage increases. This is why we project this to [ph]

The diode in the MOSFET space, there are some ongoing M&A activity, primarily on the part of China to acquire competencies and diodes and low and high voltage of MOSFETs. How do you think longer-term about the economics in your discrete business if China becomes a bigger player in the segment of the market?

Well, everybody has to run, so to speak, so cannot fall behind and we are also manufacturing in China, so there is no god-given [ph] cost advantage of Chinese companies, so I think we had to compete in the past. We will have to compete in the future.

All right, thank you.

I am confident in that.

Thank you, Dr. Paul.

I am confident as well.

Your next question is from the line of Jim Suva with Citi.

Thank you. Congratulations to you and your team. The additional rounds of restructuring that you announced are discussed today, have those been in the works for a while or is something like the macro economy or end markets or local production costs cause those additional rounds to be announced?

The two major programs that are still ongoing is the MOSFET restructuring program, which was announced some time ago, more than a year ago far more than a year ago and really had to defend our profitability in this most endangered line, the most competitive line MOSFETs. This is on the way and will come to fruit in the second quarter. The other one that means the general fixed cost reduction program was influenced, of course, by less than satisfactory development of the economy, but we implemented and I believe we will not suffer from that. We are very shy to let technical people go, so to speak, so we concentrate on non-technical people, and also this one, I am absolutely certain that this would become a success as we announced. It will take some time. It is a combination of SG&A really, and of manufacturing. SG&A will be finalized this year and for the manufacturing moves, which are announced for the major part. It will take a longer, because moving manufacturing is somewhat time-consuming effort, but you right. the second step has been determined by the economy to a major degree. No question.

Okay. Then on a follow-up regarding inventory, you gave comments about inventory. Could you clarify was the inventory situation more in the channel or more the companywide and pushback from the channel or what inventory have to be adjusted and when should we have those adjusted?

Sorry. I did not get through. We are talking to completely different things. Number one, internally speaking within Vishay, we had to build inventory in the context of the move of manufacturing from a plant A to plant B. Our main customer requires safety stocks and this was due for an internal increase of $20 million in the year 2015. The other part was relating to the channel. In this case, we saw in the fourth quarter that distribution inventories worldwide went up by 2% immediately in the opposite direction of what we expected. We expected a certain decline and it happened to be a certain increase, so two different things.

Right, but my question is, when will they be resolved. What should we think about that in working through that?

The internal part of it is just as it is a safety stock. It is not the ambition to sell it overnight. We could not, but I would say half of the $20 million will be sold in 2016, and then it will take another one year, one-and-a-half years to sell it completely. The customer is committed to take this inventory. That is number one. Number two concerning the inventory reduction at distribution is not in our hands. It can only be an expectation. I believe a part of it will obviously now really happen in the first quarter and as I see it maybe it is even enough, maybe the first quarter reduction is enough, but I cannot really know that.

Okay. Then finally, can you help us on gross margins? How we should think about gross margins for kind of Q1 and all the quarters of the year? Is it pretty steady, are there some flows up and down with production and rightsizing and moving things around and with your restructuring? Thank you.

Jim, basically, we have guided for the first quarter to a range between 22% to 24%, depending on sales and it is always very much depending on sales, our contributive margin is relatively high and the impact of volume is very high on the gross margin percent. Of course, we too have improvement programs on the way. On the other hand, there is of course also price decline, so I would expect no dramatic changes from gross margin levels through the year.

Thank you, and congratulations to your team.

Also, let me add to that. On the MOSFETs, I think, there will be some improvement. We planned for that, but overall the picture should be stable. Thank you.

Thank you and congratulations to your team.

Thank you.

Your next question is from the line of Steve Smigie with Raymond James.

Great. Thanks a lot, guys. Is it possible to talk a little bit more about auto? It seems like most of semi guys have been putting up pretty good numbers, but there has been some worry about there that might slow. Your tone seemed to indicate that maybe you were seeing some weakness finally start to come into auto a little bit. I was hoping if I could get some more color there and what is concerning you.

It sounds like a broken record, but I am always every year I am somehow skeptical about the continuation of growth in automotive and for the last five years I was wrong. We obviously expected some decline of growth and it always was the same one record after the other. I believe, maybe that now it is more realistic, there is no indication that things would fall off and there would be shrinkages on, but there are some indications from leading customers in this field that they themselves do not expect the same growth rate anymore, still growth of course, but not the same as they have seen in the last say, five years. This has what drove me to my statement as a matter of fact. Am I certain about it? Of course not, it can definitely be good again, but we are not talking about the decline for sure now. At least nobody expects it.

Okay. On the book-to-bill on the MOSFETs, is the weakness there related mostly to PC or is it sort of broad-based? It is a wild combination. It really comes from Asia for the most part, not from the automotive sector. The automotive sector continues strong, but it is really the combination of computers and telephones, which hits us at the moment and not only us, obviously.

Okay. I am not quite sure I understood your answer to the gross margin question before, so the gross margin is assumed for the rest of the year is roughly the same as the March quarter. Is that what you were saying?

Well, as a matter of fact, in principle you have to take in of course our cost reduction programs. On the other hand, there is price decline. There is more cost reduction in pricing again. There may be somewhat, but it is very much depending on volume, at the same volume we talk. At the same volume, dependency should be to somewhat higher gross margins, but the basic project is taken place in one area and this is MOSFET. In this case, we are going to see better gross margins. Yes.

Okay. Then just on the cash repatriation. I mean, there has been some talk about the U.S. allowing some repatriation maybe it does not have to do [ph] with elections or something, but in the event that were implemented, would you guys be able to go back and sort of reset some of the future repatriation, so you get maybe a better, more favorable tax ruling or implementation. If that what happens six to nine months out or something like that?

At the moment, we have recorded a book tax expense to enable us to make this repatriation. We have not executed it yet, so if anything were to happen in terms of changes in requirements by the federal government would be [ph] the issue and take the most favorable approach.

Okay. Great. My question was just on the Capella. Any color on any potential, I mean, you guys talked about some possible design wins I think coming and I was just curious any more color on how that is going?

Sorry. I did not catch the question quite. I am sorry. Could you say it again?

For the optical sensors, I think there have been some indications I think the power side about potentially some opportunities coming down the road that you saw…

I just did not understand it. Yes, of course. First of all, we combined I think with good reasons. We combined at the moment in my comments that two businesses - the tradition sensor business and Capella's business is one subdivision, because Capella works of course for - this was the intention from day one, for our existing business, which is one industrial and in automotive. You see, and I look carefully before I wrote it down and said it. Really on an apples-to-apples basis, we have year-over-year increase of 13%. We would not have had this 13% if there had not been Capella and this is really a pro forma. It is apples-with-apples comparison, so it takes out the effect of the acquisition. As a matter of fact, we believe that going forward, I mean, it is that Capella was a very expensive acquisition, but going forward it is really an enrichment for Vishay and it will help us to produce sensors. I mean, if you are in discrete components, you are not really spoiled by two great growth rates on the market. The sensors are totally different. They really grow and I think we can participate in that through Capella, many projects on the way.

Okay. Great. Thanks very much.

Your next question is from the line of Shawn Harrison with Longbow.

This is Gausia Chowdhury calling on behalf of Shawn. If I could revisit the cash return question, so understanding that you will be opportunistic, would you of course be doing it in large chunks in terms of a buyback, would that be done in large chunks or constant amount over a year? Then also for the dividend, you have a dividend growth goal in mind?

Okay. For the cash repatriation we announced that we would spread it over several years, because that is the way we are optimizing the cash tax expense, so we do not plan to do it in large chunks or in one-time go. Does that answer your question?

Yes. Okay. Same with dividend growth, do you have a goal in mind or just…

You know, we pay a dividend and potentially and changes will have to be decided by the Board, and for sure in our next Board meeting, we will talk the same subject again, but there is no firm plan in that sense obviously, which I can share with you.

Okay. Then regarding the book-to-bill, just wondering here through January has it stayed at the same level or has improved and by region if there has been improvement. That is all.

January has started encouragingly, but it is just January so to speak. It is a month, so it was substantially above one we were satisfied, but again I do not over interpret it. It is just a good start into a year. That is it.

Sounds good. Thank you.

Your next question is from the line of Matt Sheerin with Stifel, Nicolaus.

Matt?

You gave a lot of color on demand and your margins, but I just wanted to revisit that a little bit. On your revenue, you have been basically bouncing around the bottom here for, the March will be three quarters in a row about the same level, so fairly depressed. Are you expecting growth at all this year, because you are going to be starting off down 5% or so year-over-year with some FX obviously impacting that, but are you getting a sense if distribution comes back that you should start to see growth resume and that you can grow the business this year?

Matt, as you know I am in this business for a long time, it is not a revolutionary business in the sense that you can expect two-digit growth so easily, but as a matter of fact we did, we went into the year and I have no reason to change my mind that this year will be better than prior year, but it is a prediction based on my experience of my feeling on talks I have. Miracles will not happen, but I do believe that sales this year on the same exchange rate basis of course will be better than the year before, but again who am I?

Sure. On the on the margin, I mean, I think even that MOSFET program, you are going to be looking at about $5 million savings run rate a quarter right, kicking in, in the June quarter, so that is like 500 or 50 basis points or so of gross margin right there, so you would think that that gross margin could expand even with ASP erosion?

That is true. This was our target. You know, we have always said our target is a 20% gross margin and I am absolutely fine with this number still, so this is our…

Okay. Then operating margins, so you should improve with SG&A cuts?

Of course, yes.

Okay. Just further on your M&A strategy and the cash, just update us. I know you have been looking at more niche acquisitions, what were the areas that you are looking at. Then just also from a strategic standpoint, I am sure that the Vishay Board has not overlooked at the massive consolidation going on within the semiconductor sector, a lot of your peers in the semiconductor space, particularly in power semiconductors have been consolidating. What is Vishay's Board's thought about looking at maybe doing a bigger acquisition, or maybe partnering with a larger company in terms of a sale?

Matt, indeed, we have not overlooked that. It was really - quite enormous movements. On the other hand, looking at the financial scope of that, this would have not been for Vishay as a matter of fact too big, plus I think our focus has been and will be more in acquiring specialty businesses and I do not want to highlight too much, but passives normally closer to our thinking than actives as a matter of fact. Again, it is an opportunistic business to announce it even is wrong like that. There can also be actives business, which is interesting for us. Look at Capella. I mean, Capella, for us is a nice addition, but it is for us in reality was a technologically driven acquisition, which would enable the specialty business to grow faster, so this is something which is closer to us than a broad commodity business as a matter of fact.

Okay. Then from the other standpoint in terms of potential bigger buyer coming in and interested in either parts of your business and/or all of your business.

Well, it is always a matter of price of course and a matter of a decision of the Board. I cannot say differently, but we are more towards acquiring than towards selling. I must admit that also.

Okay. Fair enough. Okay. Thanks and best of luck this year.

Thank you, Matt. Bye.

At this time, there are no further questions.

Thank you very much for being on the call and thank you for your interest in Vishay Intertechnology. I wish you all a good day.