Vishay Intertechnology Inc

NYSE:VSH

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Vishay Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Peter Henrici, Head of Investor Relations. Please go ahead, sir.

[Peter Henrici, Senior Vice President, Corporate Communications]

Thank you, Regina. Good morning and welcome to Vishay Intertechnology's third quarter 2020 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 Vishay's third quarter 2020 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 Form 8-K that outlines 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 2020 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.

[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 Q3 of $640 million, significantly higher than our original expectation as pre-announced on October 14. EPS was $0.23 for the quarter. Adjusted EPS was $0.25 for the quarter.

During the quarter, we repurchased another $59 million principal amount of our convertible notes due 2025 and recognized a U.S. GAAP loss on extinguishment. I will elaborate on these transactions in a few moments.

On October 1, 2020, we completed the acquisition of the worldwide business of Applied Thin-Film Products. This niche acquisition will compliment our existing thin-film business and strengthen our competitiveness in this market. Due to the timing of the acquisition at the end of the fiscal quarter, ATP had no impact on Q3 results.

The macroeconomic effects of COVID-19 continue to impact our business and our financial results. Similar to Q1 and Q2, we have identified certain COVID-19 related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak. These items were insignificant to Q2 and Q3 results, but are added back when calculating our non-GAAP adjusted EPS for comparability. Such measures exclude indirect impacts such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity.

Revenues in the quarter were $640 million, up by 10% versus previous quarter and up by 1.9% compared to prior year. Gross margin was 23.7%. Adjusted gross margin, excluding COVID costs, was also 23.7%. Operating margin was 9.6%. Adjusted operating margin, excluding COVID costs, was also 9.6%. EPS was $0.23. Adjusted EPS was $0.25. EBITDA was $94 million or 14.7%. Adjusted EBITDA was $97 million or 15.2%.

Reconciling versus prior quarter, adjusted operating income quarter three, 2020 compared to adjusted operating income for prior quarter based on $58 million higher sales or $47 million excluding exchange rate impacts. Adjusted operating income increased by $20 million to $61 million in Q3, 2020 from $42 million in Q2, 2020.

The main elements were, average selling prices had a negative impact of $7 million, representing a 1.1% ASP decline; volume increase with a positive impact of $24 million, representing a 9.4% increase; variable costs decreased with a positive impact of $6 million, primarily due to volume related efficiencies. Inventory impacts had a negative effect for $3 million.

Reconciling versus prior year, adjusted operating income Q3, 2020 compared to operating income in Q3, 2019, based on $12 million higher sales or $3 million excluding exchange rate impacts; adjusted operating income increased by $3 million to $61 million in Q3, 2020 from $58 million in Q3, 2019.

The main elements were, average selling price had a negative impact of $18 million, representing a 2.7% ASP decline; volume increased with the positive impact of $7 million, representing a 3.4% increase; variable costs decreased with a positive impact of $13 million; manufacturing efficiencies, cost reductions, and lower material prices more than offset increases in metal prices and labor costs; fixed costs decrease to the positive impact of $3 million, primarily due to lower travel.

Selling, general and administrative expenses for the quarter were $90 million, which includes a net benefit of $0.4 million of subsidies in excess of identified COVID costs. For Q4, 2020, our expectations are approximately $94 million of SG&A expenses at constant exchange rates.

During the quarter, we were able to repurchase $59 million principal amount of our outstanding convertible notes due 2025. Year-to-date, we have repurchased $165 million principal amount of the convertible notes due 2025. The year-to-date average repurchase price for the notes was 95.3% of face value.

The U.S. GAAP loss on extinguishment is primarily due to reduced market interest rates since the initial issuances, which is a key assumption in bifurcating between the debt and equity attributes. By reducing our fixed term debt, the repurchase of the convertible notes provides us with future flexibility to better utilize our revolver and to adjust our debt levels as necessary.

We continued to be authorized by our Board of Directors to repurchase up to an additional 65 million of convertible notes due 2025, as well as the remaining 3 million of convertible debentures subject to market and business conditions, legal requirements and other factors.

We had total liquidity of $1.4 billion at quarter-end. Cash and short-term investments comprised $712 million and the usable capacity on the credit facility is approximately $672 million. Our debt at quarter-end is comprised of the convertible notes due 2025 and the remaining convertible debentures due in 2040 and 2041.

The principal amount for face value of the converts total of $468 million, $465 million related to the notes do 2025 and $3 million related to the remaining debentures. The current value of $392 million is net of unamortized discount and debt issuance costs.

There were no amounts outstanding on a revolving credit facility at the end of Q3. However, we did utilize revolve from time to time during Q3 to meet short-term financing needs and expect to continue to do so in the future.

No principal payments are due until 2025 and revolving credit facility expires in June, 2024. We expect interest expense for Q4 to be approximately $7 million excluding the impact of any additional convertible note repurchases in Q4.

As announced last year, we are implementing global cost reduction programs, which are expected to be fully implemented by the end of 2020. The programs are intended to provide management rejuvenation and to lower costs by approximately $15 million annually when fully implemented.

The year-to-date effective tax rate on a GAAP basis was approximately 23%. The year-to-date normalized tax rate was approximately 24%. For the quarter, this mathematically yields the tax rate of approximately 26% for both GAAP and normalized.

Our year-to-date GAAP tax rate includes the unusual tax benefits related to the settlement of some of the convertible debentures in Q1. Our year-to-date normalized rate excludes the unusual tax items, as well as the tax effects of the pretax loss on extinguishment of debt, the identified COVID costs and the Q2 restructuring charge.

Our consolidated effective tax 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. We expect our normalized effective tax rate for 2020 to be between 23% and 25%.

Total shares outstanding at quarter-end were 145 million. The expected share count for EPS purposes for the fourth quarter of 2020 is approximately 145 million. For full explanation of our EPS share count and variables that impact the calculation, please refer to the 8-K filed this morning.

Cash from operations for the quarter was $64 million. Capital expenditures for the quarter were $22 million. Free cash for the quarter was $42 million. For the trailing 12 months, cash from operations was $274 million. Capital expenditures were $127 million, split approximately for expansion $87 million, for cost reduction $7 million, for maintenance of business $33 million.

Free cash generation for the trailing 12-month period was $147 million. The trailing 12-month period includes $16 million cash taxes paid related to the cash repatriation. Plus $15 million cash taxes paid for the current year installment of the U.S. tax reform transition tax. Vishay has consistently generated an excess of $100 million cash flows from operations in each of the past 25 years and greater than $200 million for the last 18 years.

Backlog at the end of the quarter three was at $928 million for 4.3 months of sales. Inventory has decreased quarter-over-quarter by $15 million excluding exchange rate impacts. Days of inventory outstanding were 83 days. Days sales outstanding for the quarter were 45 days. Days of payable outstanding for the quarter were 29 days, resulting in a cash conversion cycle of 99 days.

Now, I will turn the call over to our Chief Executive Officer, Dr. Gerald Paul.

[Gerald Paul, President and Chief Executive Officer]

Thank you, Lori and good morning, everybody. Despite ongoing negative impact of the pandemic Vishay's worldwide business in the third quarter has developed better than expected. After an historical drop in particular of the automotive segment in the second quarter, we experienced a strong recovery in the third quarter.

Having adapted costs and manufacturing capacities during the second quarter, we in the third quarter enjoyed to the full impact of the economic upturn. We achieved the gross margin of 23.7% of sales and operating margin of 9.6% of sales, earnings per share of $0.23 and adjusted earnings per share of $0.25. The generation of free cash remained on a good level of $42 million in the quarter.

Let me describe the economic environment as we see it. Indeed, as I said, the economic environment in the third quarter improved substantially, mainly driven by this unexpectedly abrupt recovery of the automotive sector, but also by continued strong Asian markets.

With sales and orders picking up simultaneously, total backlogs remained virtually flat on a high level. 13-week backlogs on the other hand were increasing steadily in the cause of the quarter, which is a principally encouraging sign. Lead times start to stretch out in general, but no real shortages of supply or visibility yet. Cancellations have dropped to a normal level and we see quite normal price pressure in general.

Let me come to the regions. The Americas have experienced a significant recovery of the automotive market, but at the same time, COVID related disruption of the commercial aircraft production. POS and POA sales in the Americas were robust.

Asia continued its strong recovery, in particular China. There has been improvement of virtually all market segments, especially for computers and consumer related products and the high demand in Asia helped to burn distribution inventories.

In Europe after historical disruption in the second quarter, European automotive markets recovered steeply during the third quarter. Industrial market stabilized, driven by growth in smart home automation and new alternative energy projects. Like in the United States, the commercial aircraft industry also in Europe suffers extremely.

Some comments on distribution. Global distribution improved sales in the third quarter by 8% versus prior quarter, remaining slightly below prior year by 2%. POS increased versus prior quarter in the Americas by 12%, in Asia by 10% and in Europe by 4%.

Inventories at distributors in the third quarter decreased by $18 million after an increase of $29 million in the second quarter. Inventory turns in distribution improved to 2.8 from 2.7 in Q2, and from 2.4 in prior year. In the Americas, we have seen 1.5 turns after 1.4 in Q2 and 1.5 in prior year. In Asia 4.3 turns after 4.1, and 3.3 in prior year. In Europe 3.0 turns the same as in quarter two, and in comparison to 2.9 in prior year. I think we can say that Asian distribution year-over-year is in a substantially better inventory position now. And all-in-all, distribution remains quite confident.

Let me comment on the most important industry segments. After a massive decline in the second quarter, automotive markets recovered strongly in the third quarter beyond our expectations. The supply chain of vehicles appears to be depleted. Electric vehicles continue to show high growth.

A mixed picture we perceive for the broad industrial markets. Home related technologies benefit, whereas power transmission and other large government projects suffer at this point, there are delays. Factory automation remains strong, whereas as the oil and gas sector does not show yet signs of recovery. Remote learning and work-from-home drives demand in notebooks and servers.

5G programs there to support the demand for fixed telecom equipment whereas smartphone sales continue to be depressed. Overall, medical continue strong. Military markets remain positive, but commercial avionics is in a substantial crisis, which may last for some time. And we observe a substantial ramp up of air conditioning production and gaming.

Let me comment on Vishay's business development in the third quarter. As indicated, the third quarter sales excluding exchange rate impact exceeded our original guidance significantly, mostly due to a faster than expected recovery of the automotive sector, but also due to relatively stable sales to distribution.

We achieved sales of $640 million versus $582 million in prior quarter and $628 million in prior year. Excluding exchange rate impact, sales in the third quarter were up by $47 million or 8% versus prior quarter and up versus prior year by $3 million or 0.5%. The book-to-bill ratio in Q3 was 0.99 as compared to 0.82 in the second quarter. 0.99 for distribution after 0.75 in the second quarter, 1.01 for OEMs after 0.93. 0.98 for semiconductors after 0.81 in the second quarter, 1.0 for passives after 0.83. 0.92 for the Americas after 0.81 in Q2, 1.04 for Asia after 0.86, 1.01 for Europe after 0.78.

The backlog in the third quarter decreased to a still historically high level of 4.3 months from 4.7 months. 4.3 months in semis and 4.4 months in passives. There was normal price pressure in general, minus 1.1% versus prior quarter and minus 2.7% versus prior year. Some acceleration for the semiconductors minus 1.2% versus prior quarter, minus 4.1% versus prior year and quite normal price decline for the passives minus 0.9% for prior quarter versus prior quarter and minus 1.3% versus prior year.

Some highlights of operations. In the third quarter, we, again, were able to offset the normal negative impacts on the contributive margin as well as temporarily increased logistics costs. Despite Corona, virtually all plants of Vishay in the third quarter were able to operate in a normal fashion.

Adjusted SG&A costs in the third quarter came in at $91 million, very close to our expectations. Manufacturing fixed costs in the third quarter were at $127 million, also according to our expectations. Total employment Vishay at the end of the third quarter was 21,605, 6.5% down from prior year.

Excluding exchange rate impacts, inventories in the quarter decreased by $15 million, raw materials by $5 million and WIP and finished goods by $10 million. And this includes the additional inventories of our acquisition ATP of $3 million. Inventory turns in the third quarter returns to a good level of 4.4 after 3.9 in quarter two.

Capital spending in the third quarter was $22 million versus $30 million in prior year, $15 million for expansion, $2 million for cost reduction and $5 million for the maintenance of the business. For 2020, we continue to expect CapEx of approximately $110 million quite in accordance with the requirements of our markets.

We generated cash from operations of $274 million on a trailing 12 months basis, including $16 million cash taxes paid for cash repatriation. And we generated free cash of $147 million on a trailing 12 months basis, again including $16 million cash taxes for cash repatriation.

Let me comment on our major product lines and I star out as always with resistors. With resistors, we enjoy a very strong position in the auto industrial mill and medical market segments and we offer virtually all resistor technologies. Vishay’s traditional and traditionally growing business in the second quarter had suffered quite substantially from the weakness of the automotive market sector, but is now in process to recover.

Sales in the third quarter were $145 million, which is up by $6 million or 5% versus prior quarter, down by $11 million was 7% still versus prior year, all this excluding exchange rate impacts. Book-to-bill in the quarter was 1.06 after 0.73 in Q2. Backlog in the quarter remained at a high level of 4.4-month.

Gross margin of resistors in the quarter improved to 24% of sales, up from 23% in prior quarter and all this, despite some inventory reduction in Q3. Inventory turns in Q3 were at the satisfactory level of 4.1 after 3.7 in prior quarter. We saw normal price decline, but some temporary impact of customer mix, minus 0.7% versus prior quarter, minus 2.5% versus prior year.

In Q3, we completed the acquisition of ATP avail established and financially successful producer of specialty thin-film substrates with annual sales of about $20 million. The acquisition further strengthens Vishay's position in specialty resistors. We continued to see significant opportunities to further expand the resistor the business in the midterm.

Coming to inductors. The business consists of power inductors and magnetics, exploiting the growing need for inductors in general, Vishay developed the platform of robust and efficient power inductors and leads the market technically. With magnetics, we are very well-positioned in specialty businesses showing steady growth since years. After a short slowdown in the second quarter inductors already in Q3 were back to their impressive long-term growth path.

Sales of inductors in Q3 were $79 million, up by $14 million or 21% versus prior quarter and up by prior year by $5 million or 7%, excluding exchange rate impact. Book-to-bill in the third quarter for inductors was 0.96 on the level of prior quarter. Backlog in the third quarter has come down to a still high 4.3 months from an artificial spike even of 5.3 months in prior quarter.

As a result of higher volume, gross margin in the third quarter improved further to 33% of sales from 31% in prior quarter. Inventory turns in the quarter improved sharply to 4.9 after 3.8 in prior quarter. There is now normal price decline year-over-year of price decline of 2.5%, vis-à-vis prior quarter we saw some impact of customer mix. We had a price decline vis-à-vis prior quarter of 2.5%. Inductors continued to carry our highest confidence for growth within the passives portfolio.

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 power transmission and of electro cars, namely in Asia, respectively in China. Also capacity -- and also capacitors, it faced the weak second quarter, but started to recover in Q3.

Sales in Q3 of capacitors were at $93 million, $7 million or 8% above prior quarter, but $7 million or 7% below prior year, which excludes exchange rate effects. Book-to-bill in the third quarter was 0.95 after 0.9 in prior quarter. Backlog decreased slightly into a still high level of 4.4 month, down from 5.0 months in the second quarter. Mostly due to higher volume, gross margin in the third quarter improved to 20% of sales from 18% in prior quarter. Inventory turns in the quarter improved to 3.7 from low 3.3 in the second quarter.

We have seen stable increasing selling prices 0.1% plus versus prior quarter and 2% plus versus prior year. We will continue to benefit from strong mill markets and the ongoing need for grid expenses, namely in China.

Coming to the Opto line, Vishay's business with Opto products consists of sensors, infrared emitters, receivers, couplers and LEDs for automotive applications. Sales in the quarter were $65 million, 29% above prior quarter and 25% above prior year, which excludes exchange rate impacts, a really steep recovery. Book-to-bill in the third quarter was 0.97 after 0.96 in prior quarter. Backlog has reduced to a still high level of 4.6 months after 6.1 month in the second quarter.

Driven by better volume, better efficiencies and a better product mix, gross margin in the quarter spike to 33% of sales coming up from 24% gross margin in prior quarter. There were good inventory turns of 5.4 in Q3 as compared to 4.9 in Q2. Price decline was low, minus 0.2% versus prior quarter, minus 0.6% versus prior year. We are confident that Opto products going forward will contribute noticeably to our costs. Behind the process, as you know, to modernize and expand our Heilbronn Fab in Germany.

Diodes. Diodes for Vishay represents a broad commodity business, where we are the largest supplier worldwide. Vishay offers virtually all technologies, as well as the most complete product portfolio. The business has a very strong position in the automotive and industrial market segments and is kept growing steadily and profitably over years. Diodes since a few quarters had suffered from too much inventory in the supply chain and from the weakness of its main markets. Apparently the business now approaches a phase of recovery.

Sales in the quarter were $124 million, down by 2% versus prior quarter and down by 1% versus prior year, excluding exchange rate effects. Book-to-bill in the quarter was 1.05 as compared to 0.61 in the second quarter. Backlog increased to 4.7 months, up from 4.5 months in prior quarter, we are on a historical high.

Gross margin in the quarter reduced to 17% of sales from 20% in the second quarter. Temporarily increased price pressure in combination with some inefficiencies related to the start up the new Taiwanese plant burdened the results in the quarter.

Inventory turns improved to 4.4 after 4.2 in the second quarter. Some acceleration in price decline, minus 1.9% versus prior quarter minus 4.5% versus prior year. We expect the profitability of the diode line to return to more historical levels with volume normalizing.

Last but not least, the MOSFET line. Vishay is one of the market leaders in MOSFET transistors. With MOSFETs, we enjoy a strong and growing market position in automotive, which in view of an increasing use of MOSFET in automotive will provide a successful future.

Sales in the quarter were $134 million, 11% above prior quarter and 5% above prior year, excluding exchange rate effects. The book-to-bill ratio was 0.93 in the quarter after 0.97 in Q2. Backlog was healthy 3.7 months as compared to 4.4 months in Q2. Gross margin in the quarter was at 22% of sales, slightly below Q2 at 23%. Results versus prior quarter they're burdened by a temporarily less beneficial product in customer mix, the impact of inventory reduction and higher metal prices.

Inventory turns in the quarter were 4.4 as compared to 3.7 in the second quarter. Price decline for the MOSFETs was normal, minus 1.2% versus prior quarter and minus 5.7% versus prior year. Obvious that MOSFETs remain key for Vishay's growth going forward.

Let me summarize. The unprecedented pandemic continues to impact very many segments of the world economy. Nevertheless, electronics apparently is on the way to recover in a broader way from a very difficult second quarter. Recovery principally has been expected for the third quarter, but it happened faster and it was steeply than anticipated. Obviously, the very positive fundamentals of electronic growth prevail for another time.

Vishay like during former economic downturns has reacted quickly and professionally, by controlling fixed costs and inventories and by adapting manufacturing capacities, and we are ready to explore it now the next upturn to the full extent. Our business model has not changed and continues to be successful.

We will continue to focus on profitability and cash generation while neither neglecting our essential long-term strategic strategies nor, of course, safeguarding the health and wellbeing of our employees. Corona remains under good control in our plants and offices. For the fourth quarter, we guide to a sales range of $622 million to $660 million and the gross margin of 23.9% plus/minus 70 basis points.

Thank you. Peter?

[Peter Henrici, Senior Vice President, Corporate Communications]

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

[Operator]

Our first question will come from the line of Ruplu Bhattacharya with Bank of America. Please go ahead.

[Ruplu Bhattacharya, Bank of America]

Hi. Thank you for taking my questions. Dr. Paul, in the past, you've talked about some excess inventory in the distribution channel. This quarter, you saw reduction. I think you said of $18 million worth of inventory. So, with that, would you characterize the inventory at distribution as normal? And overall, when you look at supply demand in the industry, how would you characterize that?

[Gerald Paul, President and Chief Executive Officer]

I think really the inventory levels at distribution have come down in the western world to a normal level. And I would even say in the Asian world, we would expect some restocking as a matter of fact. You know how long it took to get there, since long time. And I would dare to say that you never know it completely, but I would dare to say that the inventory -- the supply chain is very normal at this point.

[Ruplu Bhattacharya, Bank of America]

Okay. And then maybe on the margin side, Opto saw really good margins this quarter. Should we think that that level of margins can persist going forward? And the same question for diodes. I think you had some -- gross margins came in at 17%. So, how would you see those margins progressing?

[Gerald Paul, President and Chief Executive Officer]

I use my words carefully and Opto assets spiked to 33%. And we had the same discussion before. I believe we just reconfirmed our optimism for the line. What is sustainable at these levels of sales is the high-end -- up to 20s. The 33% was also some luck included concerning product mix as a matter of fact, but high 20s, which is a nice development vis-à-vis the last two years I would say sustainable, at present sales levels.

Concerning the diodes, little disappointing, but it's a pure game of volume. You can calculate. If you went back, and we expect to do so -- the volumes, which we had before really realistically, only one year ago, one and a half years ago, you would return to gross margins, like say 23% of sales. And this was always our expectation for this commodity line, which grows.

[Ruplu Bhattacharya, Bank of America]

Got it. And maybe just for my last question, can you maybe talk about your capital allocation priorities as we sit here? How do you think about reinvesting in the business versus further M&A and buybacks, and any thoughts on the dividend?

[Gerald Paul, President and Chief Executive Officer]

We have always all these possibilities in mind. We invest in the business. We -- already we increased the capital spending, which make our plans for next year. We do not miss sales because of a lack of equipment. At this point in time, you never know all the details on that, but principally we invest enough. We pay the dividends, and all this is, of course, a decision of the Board, but we continue to pay the dividends. And we also evaluate all kinds of other uses of the produce cash. So, no change.

[Ruplu Bhattacharya, Bank of America]

Okay. Thanks for taking my questions and congrats on the strong results in the quarter.

[Gerald Paul, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question will come from the line of Karl Ackerman with Cowen. Please go ahead.

[Karl Ackerman, Cowen]

Yes. Hi. Thank you. Two questions, if I may. I guess, Dr. Paul, it's encouraging to see the implementation of your M&A strategy, especially in the current environment. Could you explain the deal rationale for the thin-film products business? And then perhaps any synergies with your portfolio or customer base? And is there potential for more deal activity in the near-term, given what appears to be a stabilizing backlog?

[Gerald Paul, President and Chief Executive Officer]

Can I start with the end? So, anyway, it's absolutely true. And we said it before we continuously look for specialty businesses, not necessarily only resistors, but also the resistors. And I think this is an intelligent way into the future. So, we will try to continue. Of course, it depends on the opportunities, but we are looking continuously for that.

And in the case of ATP, I think I'm very happy that we acquire that company. We are a leader in resistors. And we offer by place it every quarter, all the technologies in resistor. So, this one just added very nicely to our technology basis. It compliments other parts of Vishay, which we already have on board, and we can synergize the efforts. I think we will be a very strong -- we will become very strong in offerings in film substrates on the market. I'm very happy about the whole move. And it's profitable, quite profitable. It's north of 35% gross.

[Karl Ackerman, Cowen]

Understood. Thank you. For my follow-up, the supply chain has flexed considerably on demand degradation in the June quarter, and now on a very strong sequential improvement in the third quarter. First, why shouldn't pricing improve for your products, if the supply chain remains stretched and backlog has come down considerably from the earlier part of the year?

Second, how has escalating trade friction and a rebound and end demand changed if at all, your view on supply chain consolidation? Thank you.

[Gerald Paul, President and Chief Executive Officer]

Well, true. If lead time stretch out, it's absolutely to be expected that the price pressure, especially on commodity product will go down. In all our specialty products, we do not see -- we are not exposed to same kind of price pressures as we have it for the commodity products. It's clear.

But, of course, it's true. This increasing demand and stretching out lead times, I would suspect also for commodity products, some less price decline as we go forward. And we had examples that in the past. Such a decline, which we are seeing partially this year, if you go back to history, would not be the first time that such a decline will be followed by a nice upturn, bit of cost and some positive impacts on the pricing amongst others. Basically, yes.

What was the second part of the question? Sorry.

[Karl Ackerman, Cowen]

Yes. Just and how you see the escalating trade friction and perhaps a rebound and end demand changed your view if at all on supply chain consolidation.

[Gerald Paul, President and Chief Executive Officer]

I think, it doesn't change it fundamentally. We do have some negatives, but they are very limited, but no principal change for us.

[Karl Ackerman, Cowen]

Thank you.

[Operator]

Your next question comes from the line of Alvin Park with Stifel. Please go ahead.

[Alvin Park, Stifel]

Yes. Hi. Thank you for taking the question, and congratulations on a solid result and guide. Just want to follow-up on the automotive end segment for the December quarter and beyond. I'm just wondering if you see Q4 as kind of peaking levels or if there's still generally positive momentum going into the March quarter, if there's any insight into fiscal year -- the early part of fiscal year 2021?

[Gerald Paul, President and Chief Executive Officer]

First of all, you basically said it yourself. It wasn't such a spike as you may have expected it in quarter three, quarter four runs at least at the same level as quarter four in automotive for us. And as a matter of fact, I'm also quite optimistic for automotive for the year to come, because electrification -- electronification helps a lot. As a matter of fact, I -- it was always our picture that if the car sales -- units of cars sold would go down by 10% would more or less mean constant sales for us. So, you see there's a major impact of the electronification. I think, of course, everything depends on the development of the world economy clear, but I'm confident that this -- what we see now was a recovery and not a spike.

[Alvin Park, Stifel]

Okay. Thank you. A follow-up question, if I may. Capacitors, the ASP was actually very strong, positive turn increase of 1% quarter-over-quarter, I believe and 2% year-over-year, and about one to two years ago, there was a huge uptick in pricing as well as extension of lead times due to high case size and LCC [ph]. Do you have any updates on how you're seeing that industry currently? And if we might see similar spikes and similar constraints and stretch lead times into fiscal 2021, if the industrial and automotives were to heat up for the...

[Gerald Paul, President and Chief Executive Officer]

You refer especially to capacitors.

[Alvin Park, Stifel]

Yeah.

[Gerald Paul, President and Chief Executive Officer]

Well, Vishay is not typically in capacitors. We are in niche businesses as a matter of thing, and we have a relatively high share of specialty products. We are not so much in the main battlefield of commodities there. We read through from there with good reasons, I believe, historically. So, we are not typical. So, you -- we are not a reflection of what happens in the mass market of capacitors, I would say.

Principally speaking, we were correcting some prices as a matter of fact. There was some customer mix exchange also on capacitors and altogether, it helped capacitors to improve their profitability as a matter fact. But I wouldn't go further. Okay?

[Alvin Park, Stifel]

Thank you very much.

[Operator]

Your next question comes from the line of Shawn Harrison with Loop Capital. Please go ahead.

[Shawn Harrison, Loop Capital]

Hi, everybody. Dr. Paul, my first question is more on, I think, the raw material and competitive environment we've seen kind of commentary that. Supplies are tightening up a little bit as maybe competitors in Asia are pre-buying -- the market pre-buying some capacity. But what are you seeing in terms of just raw material availability, any issues there for you? And kind of are you seeing lead times of competitors stretch out that could potentially -- maybe shift some share to Vishay if those products are more difficult to get?

[Gerald Paul, President and Chief Executive Officer]

Well, I can't give a simple answer via at this point in time. I know that we have shortages in raw materials supply. What has come up, and this is why I complained a little about it in the MOSFETs in particular, there's some raw material, some metals, noble metals came up substantially. But this is price and availability. Concerning availability, I don't see shortages at this point, really not.

[Shawn Harrison, Loop Capital]

Okay. And then Lori, I have a question for you kind of a two-parter. The first being on the puts and takes as we head into 2021, in terms of both cost inflation, you might see on the OpEx line because it's temporary measures that were implemented this year versus cost savings from some of the efforts that $15 million that you roll in. How do you think that should net out, let's say in the first half of 2021?

And then second, just on the tax rate. If you could remind me what happened when the tax reform came in, in 2018, that if there is a change in the administration, how that might impact Vishay if corporate taxes go up in the U.S.?

[Lori Lipcaman]

Okay. So, starting with the operating expenses, at this point in time, it's a little bit early in our budgeting process. So, we'd have to give you an estimate. But at the moment, of course, the cost reduction program should approximately offset inflation in terms of wages both in operating expenses and in the manufacturing side.

On the other hand, travel expenses were severely curtailed in 2019 due to the COVID and the incentive compensation and whatever were diminished. So, we would expect an increase as the economy would return back to normal. We split it between the first half and the second half. At this point in time, there seems to be a big flare up in the COVID cases around the world, which means the first half is likely to be somewhat lower than the second half, but we'd expect probably about a 6% increase in operating expenses next year.

[Shawn Harrison, Loop Capital]

That's helpful. And then just the second part being the tax dynamic, trying to remember. There was a lot of moving pieces, I guess, in 2018.

[Lori Lipcaman]

There were a lot of moving pieces. And the interpretation has come through. And it had been the past few years about some of those rules and regulations. So Vishay, our taxes didn't -- actually come down in an extreme manner when the tax regulations were announced at the end of 2017. And the recent decline in the Vishay tax rate was more related to the mix of income and our different taxing jurisdictions. So, our tax rate has come down since a year ago, based on the mix of the earnings.

Again, I don't know all the details of the projections of what would be implemented depending on if the Whitehouse turns over to the Democrats or not. But we would certainly have to take into consideration that there could be an impact on Vishay, but I don't know what that would be yet.

[Shawn Harrison, Loop Capital]

Very helpful. Thank you.

[Operator]

Your next question comes from the line of Harlan Sur with JPMorgan. Please go ahead.

[Harlan Sur, JPMorgan]

Good morning. Good to see the strong recovery in the third quarter and into the fourth. Typically, the March quarter is the seasoning stronger quarter for the team, up low, mid, single digit sequentially. But to plow, given the expanding global economic outlook, your backlog coverage, I know you get some forecast in your consignment customers. Are you anticipating positive seasonality in Q1?

[Gerald Paul, President and Chief Executive Officer]

Principally speaking as you have said yourself, quarter four came out a better than, will come out as you guide Q4 better than seasonal. So, quarter one may not be the same difference to quarter four, but listen, I believe if the economy -- if this pandemic really easiest its pain somehow on us, I think we can have a good year next year, really, as a matter of fact. If this helps statement.

[Harlan Sur, JPMorgan]

Yeah. Thank you for that. And then on the ATP acquisition, on the rationale, and I can see the application to your thin-film resistors and capacitors product companies. But it looks like this company's main focus was complex in film circuit substrate fabrication for applications like communications, aerospace, obstacle. So is this an expansion of your strategy to now include full thin-film circuit substrate versus just in electronics [ph]?

[Gerald Paul, President and Chief Executive Officer]

We had it before and we were just acquiring another smaller company sometime ago UltraSource, and this maybe bring together thin-film, I think a quite nice division out of that. There are some synergies between the three elements, one we had before. One, we were acquiring last year and this one we acquired now. So, altogether, this reform a nice profitable specialty resistor division.

And as I was asked before this idea to acquire specialty businesses, maybe a little larger also, is definitely maintains to be our strategy, as a matter of fact.

[Harlan Sur, JPMorgan]

Yeah. Thank you for that. Just one last question. So, we're looking sort of longer term, so we're obviously, hearing more and more about silicon carbide based power transistors and components for things like EV, industrial, clean energy applications. I know Vishay has some sort of concurred based power transistors and diodes. Are you guys starting to put more focus on silicon carbide and maybe other wide band gap technologies such as gallium nitride?

[Gerald Paul, President and Chief Executive Officer]

Not in our -- it's not in our focus. We deal with it. We have some programs, but it's not in our focus.

[Harlan Sur, JPMorgan]

Okay. Thank you, Dr. Paul.

[Operator]

Our next question comes from the line of David O'Connor with Exane BNP Paribas. Please go ahead.

[David O'Connor, Exane BNP Paribas]

Great. Thanks for taking my questions. One or two from my side. Maybe firstly, Dr. Paul, just going back to your comment previously on the 10 points outperformance you mentioned in auto versus your sales for 2020 versus I guess the units. How much of that is volume in EV versus content growth for you guys? Any characterization around the outperformance would be helpful.

And then, is that -- is that's 10 points, is that sustainable into 2021 in terms of the auto outperformance? And I have a follow-up for Lori. Thanks.

[Gerald Paul, President and Chief Executive Officer]

Well, first of all, electrical cars are very promising for us. They contain many more components than the normal cars, including their electrification. But from a share standpoint, it's still a small impact. So, when I talk about this, it's not science by the way, the 10% difference. But approximately this was our opinion which we also said a few quarters ago. This is really driven by the electrification in normal classes, a matter of fact, the non-electrical classes.

I -- but on the other hand, if we need to move -- there was a move towards electrical class, this would be beneficial for us. And, of course, our competitors as well. They -- definitely there are more electrical components in electric cars than in the traditional cars, as a matter of fact. So, we -- but I was not talking about electrical cars. I really said this ongoing trend, which we observed since quite some time, the cars contained more and more electrical aspects, as a matter of fact, which I think is promising.

[David O'Connor, Exane BNP Paribas]

Understood. Thanks for that. And then maybe as a follow-up for Lori. The cost savings on the manufacturing side, is there any real impact on that on the fall through on the kind of the next up-cycle, any impact on the contribution margin we should bear in mind as we go into 2021? Thanks.

[Lori Lipcaman]

The cost reduction program was based on fixed costs, so there would be a testament, in fact on the gross margin. But it approximately offsets inflation. So, it's an avoidance then a further increase in terms of wages.

[David O'Connor, Exane BNP Paribas]

Got it. Understood. And maybe last question for Dr. Paul. On the -- you spoke about in your prepared remarks, some acceleration, price decline in semis, I think. Could you just elaborate a bit on that and [indiscernible] best? Thank you.

[Gerald Paul, President and Chief Executive Officer]

Well, we have seen basically -- this is temporary shift in customers. We shipped so much to automotive and relative to that -- relative less to distribution. And this, of course, had some impact, which is temporary on the customer mix and on the price therefore. We believe all this is very temporary. In fact, if lead times stretch out and I would expect some kind of a mitigation of the price then going forward even.

[David O'Connor, Exane BNP Paribas]

Got it. Thanks so much.

[Operator]

I'll now turn the conference back over to management for any concluding remarks.

[Peter Henrici, Senior Vice President, Corporate Communications]

Thank you. This concludes our third quarter conference call. Thank you for your interest in Vishay.

[Operator]

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.