Vishay Intertechnology, Inc. (VSH) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to, Mr. Peter Henrici, Head of Investor Relations. Please go ahead, sir.

Thank you, Paula. Good morning and welcome to Vishay Intertechnology’s third quarter 2017 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 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 third quarter 2017 financial information containing some of the operational metrics Dr. Paul will be discussing. Now I turn the call over to Chief Financial Officer, Lori Lipcaman.

Thank you, Peter. Good morning, everyone. I’m 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 three of $678 million at the upper-end of our guidance when adjusted for exchange impacts. The euro appreciated 6.4% versus the U.S. dollar during quarter three, increasing Vishay’s revenues by approximately $14 million. GAAP net income for the quarter was $0.41 per share. Adjusted EPS was $0.42 for the quarter. The second quarter includes restructuring charges totaling $3.2 million. During the third quarter, we repurchased approximately 2.1 million shares of our common stock for approximately $37.6 million, pursuant to the 150 million share repurchase program announced in August. Since quarter-end, we have purchased another approximately 120,000 shares of common stock pursuant to this program. This stock repurchase program does not obligate the company to acquire any particular amount of common stock. Revenues in the quarter were $678 million, up by 5.1% from previous quarter and up by 14.5% compared to prior year. Gross margin was 27.9%. Operating margin was 13.6%, Adjusted operating margin was 14.1%. EPS was $0.41. Adjusted EPS was $0.42. EBITDA was $132 million, or 19.5%. Adjusted EBITDA was $136 million, or 20.0%. Reconciling versus prior quarter, adjusted operating income, quarter three 2017 compared to adjusted operating income for prior quarter, based on $33 million higher sales, or $19 million higher, excluding exchange rate impacts. Adjusted operating income increased by $13 million to $96 million in quarter three 2017 from $86 million in Q2 2017. The main elements were, volume increased with a positive impact of $7 million equipment to a 3.1% increase, lower variable and fixed costs had a positive impact of $3 million. Reconciling versus prior year, adjusted operating income, quarter three 2017 compared to prior year, based on $86 million higher sales, or $76 million higher, excluding exchange rate impacts. Adjusted operating income increased by $36 million to $96 million in quarter three 2017 from $60 million in quarter 2016. The main elements were, average selling prices had a negative impact of $17 million, representing a 2.4% ASP decline, volume increase had a positive impact of $44 million, representing a 15.9% increase, variable cost decreased with a positive impact of $5 million, primarily due to cost reduction efforts and efficiencies which more than offset the increase of labor costs and material prices. Selling, general and administrative expenses for the quarter were $94 million, in line with expectations when adjusting for exchange rates. The quarter four 2014 – excuse me, 2017, our expectations are approximately $96 million of SG&A expenses and approximately $375 million for the full-year. I’d like to give you an update of our cost reduction programs. During quarter three, we recorded approximately $2.4 million restructuring expense related to our previously announced extended MOSFETs Enhanced Competitiveness restructuring program announced in November last year. This program is expected to result in additional cost savings of approximately $8 million to $9 million when fully implemented. Payments were practically realized already in Q3. Our other previously announced ongoing global cost reduction programs are progressing as planned and are nearing completion. The amount of restructuring expenses recorded for the global program during Q3 was at $0.8 million, or $26.0 million for the programs to-date. Total cash restructuring payments in Q3 2017 were approximately $4 million and approximately $12 million year-to-date. The year-to-date effective tax rate on a GAAP basis was approximately 26%. The year-to-date normalized tax rate was approximately 27%. For the quarter, this mathematically yields a GAAP tax rate of approximately 25.1% for quarter three and a normalized rate of approximately 26.8%. The normalized tax rate includes the quarterly re-measurement of the cash repatriation deferred taxes, a benefit of $0.9 million for Q3 and $3.1 million year-to-date and considers the tax effects of the restructuring charges. The year-to-date normalized rate also reflects the non-deductibility of the loss on disposal of the equity affiliate. We expect our normalized tax rate for Q4 2017 and full-year 2017 to be approximately 27%. This rate is based on an assumed level and mix of income among our various taxing jurisdictions. A shift in income could result in significantly different results. Total shares outstanding at quarter-end were 144 million. The expected share count for EPS purposes for the fourth quarter of 2017, based on the average stock price fourth quarter to-date is approximately 160 million shares. This does not reflect the impact of any share repurchases during quarter four. 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 $118 million. Capital expenditures for the quarter was $36 million. Free cash generation for the quarter was $82 million. For the trailing 12 months, cash from operations was $329 million. Capital expenditures were $138 million, split approximately for expansion $68 million, for cost reduction $14 million, for maintenance of business $56 million. Proceeds from the sales of property and equipment were $6 million for the trailing 12 months. Free cash generation was $197 million for the trailing 12 months. Proceeds from the sale of property and equipment includes insurance proceeds for assets destroyed in the Tianjin explosion. Vishay has consistently generated an excess of $100 million free cash in each of the past 11 years. Cash flows from operations were greater than $100 million for the last 22 years and greater than $200 million for the last 15 years. Backlog at the end of quarter three was at $1,122 billion, or a 5.0 months of sales. Inventories increased quarter-over-quarter by $14 million, excluding exchange rate impacts. Days of inventory outstanding were 80 days. Days of sales outstanding for the quarter were 44 days. Payables outstanding for the quarter were 34 days, resulting in a cash conversion cycle of 90 days. We had a total liquidity of $1.7 billion at quarter-end. Cash and short-term investments comprised $1.2 billion and unused capacity on the credit facility was at $495 million. The carrying value of our debt of $357 million is net of the unamortized issuance cost of $9 million and includes $138 million outstanding on our credit facility and $228 million of convertible debentures, net of unamortized discount, issued in three tranches and due in 23, 24 and 25 years, respectively. The principal amount or face value of the converts is $575 million. No principal payments are due until 2020. However, the convertible debentures may be redeemed if certain stock price thresholds are met. At the end of quarter four 2016 and continuing through the end of Q3 2017, the convertible debentures due 2042 are redeemable for the next quarter. Additionally, the convertible debentures due 2040 are also now redeemable for the next quarter. Accordingly, we have reclassified the difference between the carrying value and the principal amount for those debentures from stockholders’ equity to a separate line between liabilities and equity on a consolidated balance sheet. If the debentures are converted, we would fund the principal amount with borrowings on our revolving credit facility and net share settle amounts in addition to the principal amount. This criteria is measured quarterly and measured separately for each tranche and the amounts presented as temporary equity will revert to regular equity if the criteria are not met for that particular tranche debentures. Now I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

Thank you, Lori, and good morning, everybody. Well, after a very successful first-half and very successful second quarter, Vishay in the third quarter showed further improvements of sales and profits. Also in the third quarter, we were carried by an unprompted [ph] high level of demand in virtually all market segments. We keep increasing manufacturing capacities and output for our key product lines, while maintaining good efficiencies across the Board. Vishay in Q3 achieved a gross margin of 28% of sales, adjusted operating margin of 14% of sales, GAAP earnings per share of $0.41, and adjusted earnings per share of $0.42, and we continue to generate free cash on a very high level. Let me talk about the economic environment. In general, the economic environment principally did not change much since the second quarter. Historically, high order rates and still growing backlogs characterize also in the third quarter. Virtually all markets continue to do well, in particular automotive and industrial, and customers remain very confident across the Board. Again, the high order level was driven by distribution mainly in Asia and Europe. The components industry in general is in process to increase its manufacturing output, but still they’re longer lead times and even shortages of supply. Like for the entire year 2017, semiconductors continue to be more affected than capacitors. Let me come to the details. Continuous improvement of business conditions in the American markets can be observed, driven by healthy macroeconomics. We see moderate growth in the Industrial segment. Strong military sector and automotive is picking up recently. Ongoing robustness of the European business can be reported. Central European manufacturers capitalized on their traditional strength in Automotive and Industrial segments. Their strong growth in Eastern Europe in particular and also the western part of Europe starts to recover. In Asia, strong domestic and overseas demand resulted in a click expansion of production mainly for industrial equipments, energy infrastructure and automotive electronic equipment. Coming to distribution. Distribution, in particular, in Asia and Europe continues to enjoy really excellent business conditions. The growth of POS remains on a remarkably high level, there’s no change versus Q2. Despite a slight inventory increase of 5% in the quarter, inventory turns of distributors, those distributors remained at an excellent level of 3.7 after a record level of 3.9 in prior quarter. In the Americas, 2.2 turns after 2.3 turns in Q2 and 2.0 turns in prior year. In Asia, 5.1 turns after 5.3 turns in the second quarter and 4.5 turns in prior year. And in Europe, 4.2 turns after 4.3 turns in the second quarter and 3.4 turns in prior year. Also, orders on distributors in Q3 continue to be extremely strong. They were 28% above prior year. And after all, distribution remains confident for the quarters to come. Let me comment on the most important industry segments. Automotive remained strong and continues to expect further growth in the 10% range, due to increasing electronic content. Driver systems 48-volt projects new LED technologies and e-mobility in general will drive this growth. Also, industrial markets remained strong in most areas. Drivers are factory automation, infrastructure programs, alternative energy and Internet of Things sensoring. Computing was stable to up in the third quarter. Mobile phones did well with low-cost Chinese suppliers further gaining share. Various opportunities continue to exist in consumer markets. AMS markets remain healthy, both in military product areas and commercial avionics. Medical grow steadily providing opportunities for high-end products. Coming to Vishay’s business development. Due to higher than expected manufacturing output, sales in the quarter came in at the upper-end of the range from our guidance, when excluding exchange effects of $14 million. We achieved sales of $678 million in the quarter versus $645 million in prior quarter and $592 million in prior year. Excluding the exchange effect, sales in the quarter were up versus prior quarter by $19 million, or 3%, and up versus prior year by $76 million, or 13%. The book-to-bill ratio of 1.11, again was very strong across the Board. It was 1.15 for distribution after 1.43 in Q2. 1.06 for OEMs after the same 1.06 in Q2. 1.13 for actives after 1.35, 1.09 for passives after 1.20, 1.04 for the Americas after 1.19 in Q2, 1.15 for Asia after 1.38 in last year, 1.12 for Europe after 1.20. After a quite dramatic increase of backlogs in the second quarter, there was further growth from 4.8 to 5.0 months in Q3, 5.3 months for actives and 4.5 passives. This is a very unusual situation. The – we saw a continuation of decreasing price decline, it’s virtually stable prices quarter-over-quarter, minus 0.1% versus prior quarter and minus 2.4% versus prior year. For the actives, it was minus 0.3% versus prior quarter and minus 2.7% versus prior year. And for the passives, we saw a slight increase of 0.1% versus prior quarter and minus 2.1% versus prior year. Some highlights of operations. We in the third quarter, again, we’re able to offset the negative impact of inflation and price decline on the contributed margin by cost reduction and innovation. SG&A costs in the quarter came in at $94 million according to our expectations when adjusted for exchange rate effects. Manufacturing fixed costs in the quarter were $122 million, according to expectations when adjusted for exchange rate effects. Total employment at the end of quarter three was 22,970 heads like in prior quarter. Due to increasing production levels, inventories in the third quarter increased slightly by $14 million, again excluding exchange rate effects. Raw materials went up by $10 million, and we’re in process and finished goods by $4 million. Inventory turns in the quarter remained on a very satisfactory level of 4.5. Capital spending in the third quarter was $36 million versus $30 million in prior year, $138 million on a trailing 12-month basis. For 2017, we expect CapEx of approximately $165 billion. We generated in the third quarter cash from operations of $118 million versus $108 million in prior year, $329 million on a trailing 12-month basis. We generated in the third quarter free cash of $82 million, as compared to $88 million in prior year and $197 million on a trailing 12 months basis. I think, we can continue to say that cash generation at Vishay remains to be excellent. Coming to our most important product lines and the start out is always with resistors and inductors. Vishay’s traditional and since years, most profitable business continues to grow steadily. With resistors and inductors, we enjoy a very strong position in the industrial, auto, mill and medical market segments. Since a few years, and we started to concentrate on the Asian, predominantly on the Chinese, industrial market and we achieved an increase of this business by 55.0% in four years. Sales in the quarter were $216 million, up by 1% versus prior quarter and up by 11% versus prior year, excluding exchange rate effects. The book-to-bill ratio in Q3 was 1.15 after 1.23 in prior quarter. Backlog increased to 4.6 months. We see a stretched lead times for many product lines, in particular, for power inductors and resistor chips. Gross margin remained at a good level of 30% of sales. Inventory turns in the quarter were at very satisfactory 4.6 after 4.8 in prior quarter. Price decline was low just 0.3% decline versus prior quarter and 2.1% versus prior year. We are accelerating investing for increasing manufacturing capacities at power inductors, metal strip resistors and resistor chips. Coming to capacitors. Our business with capacitors is based on a broad range of technologies with a strong position in American and European market niches. We enjoy increasing opportunities in the fields of electro-cars and of power transmission, namely in Asia, China and entered the polymer tantalum capacitor market. Sales in the third quarter were $96 million, 2% above prior quarter and 12% after – above prior year, again without exchange rate effects. The book-to-bill ratio for capacitors in the quarter was 0.97 after 1.14 in the second quarter. Coming from a very high level of 4.6 months, backlog in the quarter decreased slightly to 4.3 months. Gross margin in the quarter three was 20% of sales. Inventory turns in the quarter were at 3.7 after 3.8 in the second quarter. We see a further stabilization of prices, we saw an increase of prices of 1.1% versus prior quarter and a decrease of 2.0% versus prior year. We continue to see numerous opportunities, especially in Asia for growing this business further. Coming to opto products. Vishay’s business with opto products consists of infrared emitters, receivers, sensors and couplers as well as LEDs for automotive applications. The business represents one of Vishay’s best opportunities for long-term growth, especially the segment of sensors. Sales in the quarter were $77 million, 2% above prior quarter and 4% above prior year, again without exchange rate impacts. Book-to-bill in the quarter was 0.94 after 1.11 in the second quarter. Backlog is at 3.6 months after 3.8 in prior quarter. Gross margin reached a record level of 38% of sales after 35% in prior quarter, all this supported by also by some favorable cost singularities. Inventory turns remain at an excellent level of 5.3 after 5.5. Also in this case, we see a stabilization of selling prices no price decline versus prior quarter and 2.1% price decline versus prior year. We remain confident for this profitable line to grow steadily also in future, especially sensors will benefit from an increasing demand in the Automotive and Industrial segment. Diodes. Diodes for Vishay represents 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’re, in particular, leading in power applications. The business has a strong position in the Automotive and Industrial market segments and keeps growing steadily and profitably since years. Sales in the quarter were $161 million, 2% above prior quarter and 13% above prior year without exchange rate effects. We continue to see a strong book-to-bill ratio of 1.18 after rather extreme 1.41 in prior quarter. Perceived shortages of supply continue to drive orders, especially from distribution. And the backlog keeps increasing further, we reached a very unusual high of 6.2 months coming from 5.8 months in prior quarter lead times alone. Due to higher volume, gross margin increased to quite excellent 27% of sales after 26% in the second quarter. Inventory turns for this line remained at a very satisfactory level of 5.1 virtually at the same type of this [ph] in the second quarter. There is a continuation of reduced rate of price decline 0.2.6% decline versus prior quarter, 3.3% decline versus prior year. We are expanding manufacturing capacities in all critical lines as fast as possible also, of course in order to prepare the mid and longer-term future of this very competitive line. Coming to MOSFETs. Vishay continues to be one of the market leaders in MOSFET transistors. And MOSFETs, as we say, over the last three years, developed a strong and growing position in automotive, which to business now benefits from. We currently see a strong upturn of the entire business also supported by Vishay’s improved cost structure. Sales in the quarter were $127 million, 10% above prior quarter and 24% above prior year. The backlog was – the book-to-bill ratio in the quarter was 1.19, compared to 1.37 in the second quarter, it’s a very similar picture to the diodes. Backlog has reached an unusually high level of 5.3 months coming from 5.2 in Q2. Again, very similar to the diode line. Gross margin in the third quarter continued to improve further in a substantial way to 26% of sales after 22% of sales in prior quarter. With efficiencies high volume and the favorable last time by support is profitability performance. And this is the best for MOSFETs since more than five years. Inventory turns increased to a good level of 4.3, coming from 4.1. We have seen substantially reduced price pressure, minus 0.1% versus prior quarter, minus 2.3% versus prior year. And we are in process to increase manufacturing volume at foundries and to maximize the output of our fab in Itzehoe. Let me summarize. Supported by ongoing excellent business conditions in most of our markets and for most of our product lines and based on good efficiencies, Vishay enjoyed a very successful first-half and then even better third quarter. We in particular, are proud of having successfully turned around our business with MOSFETs, which for years has burdened Vishay profitability. We now see a good future for this line. We currently work on maximizing the output of plants, foundries and subcontractors. We accelerate investing in critical manufacturing capacities having in mind the large future market potential for our products in general, but especially in Asia. We expect another excellent year for the generation of free cash. We will further increase our efforts to even better penetrate automotive and industrial markets in Asia. We expect strong growth in automotive markets for years to come, driven by e-mobility and sensoring, and we’re well-positioned in terms of products and regional sales representation. We continue to focus on shareholder value by returning cash to the shareholders. The decision was taken, as you know, to establish another stock buyback program for $150 million to be executed by June 2018 and the program actually further spill underway, restricted to a degree by fewer working days in the Christmas quarter before Q4 guide to a sales range between $645 million and $685 million with gross margins between 26% and 28% of sales at the second quarter exchange rates. Thank you very much.

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

Your first question comes from the line of Ruplu Bhattacharya of Bank of America Merrill Lynch.

Hi. Thank you for taking my questions. Dr. Paul, the first question for you more on supply and demand, really both on in the industry level, as well as at Vishay. When talking about diode, you said perceived shortage of supply. So really, I guess, my question is, when you look at your supply and what’s coming online, A, do you think, you have enough capacity to meet the demand? And then more importantly, using the demand that you’re seeing and your book-to-bill at distributors is very high and your months of backlog are also high in diodes and market MOSFETs. How much of that do you think is real, and how much of that do you think is backward – double ordering?

First of all, we do not have enough capacity now, as I indicated. We are going to continue to invest. But as I said, we continue to invest. We invested in this capacity since years. The demand has taken another step of acceleration. And at the moment, we do not have enough machines. Whatever we intend to buy now will be sufficient to satisfy present needs, but we will continue even after that to invest in this line. We are very competitive there, and the markets automotive and industrial are our key markets where we always have been strong. Concerning the backlog, this of course, question is always to be asked in such situations. I see in – if the right answers – I think the right answer should be looking through all the numbers I have available for Vishay. And believe me, if you look carefully, we currently do not see any sign of weakening of the business. I guess, this is the underlying question you have, right?

Right, right. No, that’s very helpful. Thanks. And then in terms of adding capacity, I mean, which product lines are you adding capacity? And how should we think about CapEx in the next fiscal year?

I would say, CapEx will be above the $165 million, which we announced or expect for 2017, and there are basically quite a few products. We have to expand capacity besides diodes, will be in the MOSFETs, will be in Surface Mount Resistors, especially also in inductors, where we have to put definitive more equipment in. I would – don’t want to make it. At this point, we’re in the budget process, but it will be above the $165 million of this year.

Okay. And then maybe the last one for me, when we look at your MOSFETs margins, the gross margin is now at 2011 levels and opto gross margin is probably the highest that has been since 2004. So just your thoughts on that how should we think about the progression in margins going forward? What can drive it up? What can drive it down?

Well, I mean, you know, gross margin is a game between the variable – the prices, variable costs and volume in reality. Concerning the – let me start out with the MOSFETs. I indicated that this MOSFETs margin has been supported to a degree by a one-time effect, still we’re running very good. And I believe also something like 24% gross margin at present volumes can’t be supported also mid-term, which is more than we originally anticipated when we had – and started to implement our plan to few of this line, you may remember we talked about 22% or so, 21%, 22%. Now I think we’re more successful than we ourselves thought at a point than we are running, I think, sustainably at this volume of cost on a level of, say, 24%. On opto was was one-time effect, a few one-time effects. So – but opto is very profitable, and you know, we had quarters in the past of 35%, 36%. Now it was 38%. I mean, 35%, for sure, is sustainable to think, again at this volume.

Okay.

What can happen to us, the both – the biggest danger for our profitability like for every companies if volume drops by nature.

Right. Okay, thank you so much for taking my questions.

Your next question comes from the line of Shawn Harrison of Longbow Research.

Hey, good morning. This is Gausia Chowdhury on behalf of Shawn. Just wanted to clarify then about the MOSFETs gross margin comments. So now that we are above that target that you had initially laid out, and understandably again because of the volumes. Is there a new target that we should consider going into 2018, or is it that 24% we should be thinking about?

I think, the 24% is the sustainable number, as I try to say. We had a positive singularity last time buy which was profitable so to speak and this helped the quarter. But 24% is pocket at present volumes, which is sustainable, I think.

Okay. Thank you. And then SG&A of $375 million for the year, I think, that’s a little bit higher than you are initially guiding to last quarter. Can you maybe discuss why the step up and how we should think about next year?

Well, I’m not aware that this is some – this is much more than – it must be minor deviation. In SG&A, you cannot forget the imprint of exchange rates, of course. And the euro is strong at the moment, indeed the part of our SG&A are third of the total in Europe being paid in euros. And as soon as the euro comes up, then of course, you see that there’s an increase in reality, it’s not an increase, it’s a consequence of the exchange rate. For next year, we must – we will see the inflation, I would say, approximately the rate of inflation, but this – again, we’re in process to define our budget.

Okay, great. And one last one for me, just circling back to a prior question, so the book-to-bills are still very strong and you said that you’re not seeing any kind of slowdown. Yesterday, one of your peers did mention a gradual traction in backlog. Are there maybe any segments that we should consider? I mean, the book-to-bill has did sound below one in some areas. So are you seeing a normalizing of funds within those market?

I suspect that I have to correct something. What is really strong still at the orders, the backlog growth you still see in our case, but of course, the backlog growth has slowed down, no question. But orders and sales are both on a very high level. Backlogs don’t grow forever by nature of things really. So – but we have a continuous strong backlog, which even grows even at this extremely high level, continues to grow slightly. But orders continue to be very strong. This is the same statement. Backlogs are up, therefore, orders must exceed sales, at least, a bit.

All right. Thank you.

Your next question comes from the line of Matt Sheerin of Stifel.

Thank you. Good morning, everyone. Few questions for me and sort of follow-ups, if I may. Just looking at your various markets segments – your product segments, where you talked about lead time issues and adding capacity. At what point do you expect to see capacity meet demand with these additions that you have going on and maybe by category, diodes, resistors, MOSFETs?

We have to say, it depends on the overall development of the market, of course. But my personal opinion is that in diodes, we will just continue – we take at the moment and acceleration in adding capacity. But even then, we expect this market, our sales there to grow. So it’s just an acceleration of an ongoing increase in capacity at the investment. So I don’t see a point where we really we’ll catch up to the demand. I think we follow closely the demand. In the case of MOSFETs I would suspect what we have now we have to increase to a degree and this will make it for next year, I believe personally. On the passives, it depends really on the line. We are very diversified in the line. Like with diodes, a little even more steep, we continue to invest since years into power inductors, it’s the same thing. We continue to invest. We just continue to work what we’ve done since many years. So we’ll see an ongoing demand and we’re gaining share in the automotive. I see a bright future and of course capital requirements. I don’t see this to catch up so easily. We just grow with our business. In this case, we just go ahead as we have done. Then of course, we have the traditional product. In the traditional products, we have clearly enough capacity. We are focused on seeing resistor chips. Resistor chips is also an area where we are surprised by our, I mean, I’d say, own success. In this case, I think, major step, which we have to do next year should make it then, I believe for sometime.

Okay. So – okay, and you’ve obviously been through several cycles where you have seen shortages and then capacity adds and then an inventory build and a correction. Do you see that same cycle playing out, or you think we see more of a soft landing versus different this time?

Mat, we have a long history together. There was only one time in my long time, when we invested too much. And this was in the year 2000 for emergency, you may or may not remember, otherwise our business grows. That means, even if I did too fast, if – which I don’t believe in this case by the way. Even if I did too much at a time, half a year later, a year later you needed anyway.

Okay, fair enough. And then just a question on the converts. Lori, you talked about a certain percentage being redeemable this quarter, given the share price. What are the plans there for the converts? Do you have concrete plans and what does that mean to interest expense and other things?

So at the moment, the redeemable theoretically or the redeemable, I should say, only for the coming quarter for the current quarter and the way we measure at the end of every period. So they may or may not be redeemable in the following quarter. And we don’t actually expect that they will be redeemed. It’s not very probable, because they trade in the separate market and it’s market activity. So holder conceivably would make more profits quicker by selling it into this market as opposed to coming to us to redeem them. Second of all, in terms of the instruments themselves, at this point in time, we don’t plan to change anything and effectively are holding these debentures. It would be premature, we need to evaluate potentially future tax and applications from President Trump, which are not clear yet. And so, at the moment, we don’t have any plans to do anything with those instruments other then to committed to hold them.

Okay, great. Thanks so much.

Your next question comes from the line of Harlan Sur of JPMorgan.

Good morning, Dr. Paul and Lori, and congratulations on the solid quarterly execution and strong free cash flow generation. You guys have done a great job on expanding the margins in semiconductors. And looking at the trends on the passives, resistors and inductors have been sort of flattish through the first nine months of this year, kind of in a little bit of a slight downward trajectory in capacitors, despite what is a pretty healthy volume shipment environment and constructive ASP environment. And I would also think that you guys are seeing some of the early benefits of the global cost reduction initiatives. So maybe, you can just help us understand kind of the gross margin dynamics in passives here?

Somehow we expected the question somehow – anyway. So a concerning resistors, I believe what has to be stated is, what has not grown is the percent. What has grown obviously is the dollars in terms of gross margin. And I believe, we commented on that before, we want to expand this good business we have, resistors. And in order to expand that we go to Asia and have some success there. But here you add customers that are still – provide you with a profitable business, but maybe not as profitable, but this is incremental and not as profitable as your base business. But we want to continue, because in the end of – at the end of the day, you need the dollars and not the percent, right, as matter of fact at all, yes. Secondly, in inductors, I think, they are variable, so their percentage did grow as a matter of fact. Of course, the depreciation grows together with the sales, because we have to invest, we can grow happily. So as a matter of fact, I don’t think there will be miracles in percent, but even more than in resistors, the dollars grow substantially, because we are taking share in automotive space, right. And this is a nice area of continuous growth. Capacitors is a different story. In capacitors, the volume increase did not take place, right? But if you look at our business with capacitors, this is a different beast, because only a relatively modest share of this capacitor business is of commodity nature. And what in such times like these, the commodity products go through the roof and not necessarily to specialty products. This is my experience since a long time. And our capacitor business is in principal for the main part a specialty business. I believe on the other hand, specialty businesses in the exciting times of decline also are not so vulnerable as commodity businesses. So we have to be more patient with our capacitors. It is 20%, it’s okay. But of course, we expect more on mid-term, we want to grow there. And I believe, in the case of capacitors, we simply need more volume and this we’re very much we’re in Asia active in order to find niches, because these are niche – technical niche product for this product line.

Great. Thank you for the insights there. And then there’s a similar question to perhaps last quarter. But I think still kind of relevant given the environment that we’re in. As you mentioned, the backlog continues to rise, but it’s – it grows a little bit right relative to the prior quarters. You’ve got some initiatives to increase capacity. You combine that with typically what is a little bit more seasonally weaker kind of second-half of the year. I would think that that would give the Vishay team a bit more horsepower to kind of catch up, as it relate to the supply demand imbalances. Do you feel like the team is making progress on stabilizing order lead times, as we get kind of closer to the end of this year?

Well, unfortunately, for our customers and ourselves, we want to safe our customers obviously well, as the backlog is not reducing, even growing slightly, even in October, it grew slightly.

Yes.

Not at the same degree as it did before, of course. The lead time situation has not become much better, obviously, because the backlog is about the same. So – but we work on it. I mean, we work on it, there’s no question. We’re adding capacities further.

Thank you.

And done already so.

Yes. Thank you, Dr. Paul.

Pleasure.

Your final question comes from the line of Jim Suva of Citi.

Thank you very much. I have a couple of questions. First, you’ve mentioned on your prepared comments a couple of times about some one-time purchases. Were those like end of product manufacturing purchases, or expedited purchases, or why won’t they occur again or what was unique about them?

No, as a matter of fact, this last time buy, I mentioned once, and this is in the MOSFET arena. In the MOSFETs, indeed, we discontinued and we announced that sometime ago a certain product line and there was a last time buy in the third quarter, which had a favorable impact on the results on the gross margins of this line. And you remember, we were at a very high – we came to a very high level and becomes gross margin, just wanted to be clear about it, this is not a sustainable level. But the 24%, which exhibits, which would have been there without this effect, I think, is sustainable at this volume. But this was the only time I mentioned last time buy.

Okay, I understood. And then it looks like your average selling prices across some of your different products are better than your guidance range, let’s say, 3% to 5%. So is that, you just want to stick with the historical of down 3% to 5%, I think it was down 2.7% in semis this quarter, like why not change your guidance range from that? Are you seeing that ASPs or expect them to revert to a more normal range next year?

Sooner or later, they will, there is no question about it. Soon – as demand may or may get not as high as it is today then you in commodity products, I mean, the experience tells us then the price pressure will get higher, but this is nothing, but natural.

Okay, I understood. My last question is – go ahead.

I said, we’re used to it, I wanted to say, and then we can cope at the time it comes, because we have ongoing cost reduction.

Okay. And my last question is, on your capacity expansions whether it be additional capital expenditures or ramping of your equipment of getting yield up higher. Can you walk us through the timing of that? Is that gradual? Is it all of a sudden in a couple of quarters you’re going to have a lot more capacity come on, or how should we think about the timing of your throughput?

It’s gradual, there’s no question. And the lines, I think I have mentioned. We want to do something on the diodes. We want to do something on the MOSFETs. We’re going to continue to do something like we have done and for many years in the power inductor arena, in the resistor arena, in resistor chips and in low WSL resistor types. This is basically where we focus on and this is a broad type of our offering. From a timing standpoint, disclose increments and this is – it depends very much on lead time. So I think we are going to continuously get these machines in, and of course, already as we talk, we have a couple of pieces of equipment underway. So it’s a continuous process.

Thank you so much for your details.

Thank you.

This concludes today question-and-answer session. I will now turn the floor back over for any additional or closing remarks.

Thank you. This concludes our third quarter conference call. Paula?