Vishay Intertechnology Inc

NYSE:VSH

Earnings Call Transcript 2017-Q4

[Peter Henrici]

Good morning and welcome to Vishay Intertechnology's Fourth Quarter and Year 2017 Conference Call. With me today are Dr. Gerald Paul, Vishay's President and Chief Executive Officer; and Lori Lipcaman, our Executive Vice President & Chief Financial Officer.

As usual, we will start today's call with the CFO, who will review our fourth quarter and year 2017 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 web cast from the Investor Relations section of our web site at ir.vishay.com. The replay for this call will be publicly available for approximately 30 days.

You should be aware, that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the SEC.

In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use non-GAAP measures, because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide.

This morning, we filed a Form 8-K that outlines the various variables that impact the diluted earnings per share computation. On the Investor Relations section of our web site, you can find a presentation of the fourth 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.

[Lori Lipcaman, EVP and CFO]

Thank you, Peter. Good morning everyone. I am sure that most of you have had the chance to review our earnings press release. I will focus on some highlights and key metrics.

Vishay reported revenues for Q4 of $674 million. Our GAAP results reflect the significant effect of the U.S. Tax Cuts and Job act and we report a GAAP net loss for the quarter of $1.23 per share, due to a $235 million charge related to the U.S. tax reform.

Adjusted EPS was $0.37 for the quarter. The fourth quarter includes restructuring charges totaling $6.1 million and a gain related to the favorable resolution of contingencies associated with our sale of an equity affiliate in Q1.

During the fourth quarter, we repurchased approximately 120,000 shares of our common stock for approximately $3 million, pursuant to the $150 million share repurchase program announced in August 2017. Since year end, we have not purchased any additional shares pursuant to this program. The stock repurchase program does not obligate the company to acquire any particular amount of common stock.

Revenues in the quarter were $674 million down by 0.5% from previous quarter and up by 18.2% compared to prior year. Gross margin was 26.2%, operating margin was 10.8%, adjusted operating margin was 11.7%. EPS was a loss of $1.23, adjusted EPS was $0.37, EBITDA was $114 million or 16.9%. Adjusted EBITDA was $119 million or 17.7%.

For the full year 2017, revenues were $2.604 billion, up by 12% compared to prior year. Gross margin was 26.9%, operating margin wireless 12.0%, adjusted operating margin was 12.4%. EPS was a loss of $0.14, adjusted EPS was $1.43. EBITDA was $464 million or 17.8%, adjusted EBITDA was $481 million or 18.5%.

Reconciling versus prior quarter, adjusted operating income quarter for 2017 compared to adjusted operating income for prior quarter, based on $3 million lower sales were $4 million lower excluding exchange rate impacts, adjusted operating income decreased by $17 million to $79 million in Q4 2017 from $96 million in Q3 2017.

The main elements were, average selling prices had a negative impact of $2 million, representing a 0.2% ASP decline. Volume decrease for the negative impact of $3 million equivalent to a 0.4% decline of volume in total and a negative impact due to a mix shift in our businesses. Variable costs increased for the negative impact of $2 million, due to higher wages over time and some manufacturing inefficiencies.

Fixed costs increased for the negative impact of $6 million, primarily due to environmental remediation expenses and higher depreciation. Inventory impacts had a negative effect of $4 million.

Versus prior year, adjusted operating income quarter four 2017 compared to prior year, based on $104 million higher sales or $86 million higher, excluding the exchange rate impacts, adjusted operating income increased by $38 million to $79 million in quarter four 2017 from $41 million in Q4 2016. The main elements were, average selling prices had a negative impact of $16 million, representing a 2.3% ASP decline. Volume increased for the positive impact of $47 million, representing a 17.7% increase. Variable costs decreased for the positive impact of $10 million, primarily due to cost reduction efforts, which more than offset the increase of our labor costs and metal prices.

2017 versus 2016 full year adjusted operating income for the year 2017 compared to prior year, based on $280 million higher sales or $284 million higher excluding exchange rate impacts, adjusted operating income increased by $121 million to $323 million for 2017 from $202 million for 2016. The main elements were, average selling prices had a negative impact of $71 million, representing a 2.6% ASP decline. Volume increased with a positive impact of $162 million, equivalent to a 14.8% increase. Variable costs decreased with a positive impact of $30 million, primarily due to cost reduction efforts, efficiencies, lower metal and material prices, which more than offset the increase of labor costs. Fixed costs with a negative impact of $11 million, mainly due to higher incentive compensation. Inventory increases had a positive impact of $17 million, and exchange rate effects had a negative impact of $7 million.

Selling, general and administrative expenses for the quarter were $98 million, higher than expected due to environmental remediation expenses. For the year, selling, general and administrative expenses were $377 million. For Q1 2018, our expectations are approximately $100 million of SG&A expenses and approximately $400 million for the full year. These expectations for our 2018 SG&A expenses are on a comparable basis to 2017. We will adopt new accounting standards effective January 2018, which will result in the reclassification of a small portion of this amount to other lines on the P&L. Once the new accounting standards are adopted, we will retrospectively recast prior periods.

During quarter four, we have recorded approximately $6.1 million of restructuring expenses related to our previously announced restructuring programs. These programs are now substantially implemented. Total cash restructuring payments in Q4 2017 were approximately $3 million and approximately $15 million for the full year.

The Tax Cuts and Jobs act will have a significant impact on Vishay. As permitted by the SEC, we have recorded the impact of this change in tax law, based on reasonable estimates, and these provisional amounts maybe refined during the defined measurement period, and as additional analysis is completed. Generally speaking, U.S. tax reform will likely have limited impact on our manufacturing operations, but could have a significant impact on how we finance those operations.

Like most companies with significant non-U.S. operations, we will be required to pay a large transition tax on undistributed foreign earnings, but will benefit from the ability to repatriate cash in the future, without further U.S. taxes. The future repatriation of foreign earnings will still be subject to incremental foreign taxes. We have changed our permanent reinvestment assertion regarding unremitted earnings in certain key countries, which total approximately $1.1 billion at current exchange rates, and have accrued appropriate incremental foreign taxes to repatriate those amounts.

This new repatriation plan replaces our previously discussed $300 million 2015 repatriation plan. Even though the tax is accrued, the actual repatriation of those amounts will be at a measured pace.

We recorded a total charge of $235 million related to U.S. tax reform. This is primarily comprised of, a benefit of $75 million to reduce our net deferred tax liabilities, based on the lower 21% statutory U.S. tax rate. A charge of $216 million on the transition tax related to undistributed foreign earnings. A benefit of $119 million due to the cancellation of our 2015 cash repatriation plan, and a charge of $213 million of foreign taxes related to the new repatriation plan.

To reiterate, these amounts are considered provisional, as committed by SEC's Staff Accounting Bulletin 118 and maybe adjusted in future periods, as additional analysis is completed.

The year-to-date normalized tax rate, excluding the unusual items was approximately 24.1%. For the quarter, this mathematically gives a normalized tax rate of approximately 16.7% for quarter four.

We are not yet able to provide specific quantitative guidance regarding our future tax rate. We are still evaluating several aspects of the new tax law. Our current expectation is that our consolidated tax rate for 2018 will be in the high 20s. Our Form 10-K, when it is filed, will include some additional qualitative discussion about our expectations for the effect in the tax reforms on a consolidated tax rate.

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.

Overall [ph] shares outstanding at quarter end were 144 million. The expected share count for EPS purposes for the first quarter 2018, based on the average stock price as for the fourth quarter is approximately 161 million shares. This does not reflect the impact of any share repurchases during Q1. 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 $123 million. Capital expenditures for the quarter were $86 million. Free cash generated for the quarter was $37 million. For the year, cash from operations was $369 million, capital expenditures were $170 million, split approximately for expansion $85 million, for cost reduction $18 million for maintenance of business, $67 million. Proceeds from the sales, property and equipment were $2 million in 2017. Free cash generation was $200 million in 2017.

Vishay has consistently generated an excess of $100 million free cash in each of the past 12 years. Cash flows from operations were greater than $100 million for the last 23 years and greater than $200 million for the last 16 years.

Backlog at the end of quarter four was at $1.320 billion or 5.9 months of sales. Inventories decreased quarter-over-quarter by $4 million, excluding exchange rate impacts. Days of inventory outstanding were 80 days, days of sales outstanding for the quarter were 45 days, days of payables outstanding for the quarter were 37 days, resulting in the cash conversion cycle of 88 days.

We had a total liquidity of $1.8 billion at quarter end. Cash and short term investments comprised $1.3 billion and unused capacity on the credit facility was $486 million. The carrying value of our debt of $370 million is the net of the unamortized issuance costs of $9 million and includes $150 million outstanding on the credit facility and $229 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 2017 the convertible debentures due in 2040 and 2042 are redeemable for the next quarter.

Accordingly, for those tranches we have reclassified the differences between the carrying value and the principal amount from stockholders' equity to a separate line between liabilities and equity on our consolidated balance sheet. If the debentures are converted, we would fund a 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.

[Dr. Gerald Paul, President and CEO]

Thank you, Lori, and good morning everybody. 2017 for Vishay has been a very successful year, showing an accelerated improvement of our financial performance.

Throughout the year, we were carried by a very high level of demand in virtually all market segments. Historically high order rates, high backlogs and long leadtimes characterized the year as well as for a [indiscernible] beginning of 2018.

We keep increasing manufacturing capacities and output of our key product lines. Vishay in 2017 achieved a gross margin of 27% of sales as compared to 25% in 2016, and adjusted operating margin of 12% of sales versus 9%, and GAAP EPS loss of $0.14 due to U.S. tax reform related changes versus a gain of $0.32 last year, and adjusted earnings per share of $1.43 versus $0.85 in the year 2016. We generated in 2017, free cash of $200 million which is the best performance in six years.

The fourth quarter was practically in line with our performance of the entire year. We achieved a gross margin of 26% of sales, adjusted operating margin of 12% of sales, a GAAP EPS loss of $1.23 and an adjusted earnings per share of $0.37.

Let me talk about the economic environment; the economic environment during 2017 has been fairly excellent and exceeded our expectations substantially. This is, in particular true, for our key markets, automotive and industrial.

Market demand exceeded and continues to exceed available capacity in several product areas, mainly in semiconductors, forcing continued allocation and creating some supply concerns with our customers. During the entire year and in particular in the fourth quarter, high order levels are driven by distribution in all regions. The economic environment offers the opportunity for more stable pricing.

Let me talk about regions; all regions in 2017 did well. We have seen steady improvement of business conditions in the American market through the year, driven by healthy macroeconomics. We have seen ongoing strength of the European business, since the European manufacturers in automotive and industrial segments capitalized on their traditional strength, and we have seen strong growth in Eastern Europe in particular. Very strong Asian markets, mainly for industrial equipment, energy infrastructure and automotive electronic equipment.

Let me come to distribution; worldwide distribution in 2017 enjoyed quite excellent business conditions, worldwide POS grew by 14% over prior year. Also in the fourth quarter, orders to distribution from end customers continue to be extremely strong. 24% above prior year after 28% above in the third quarter.

Despite an inventory increase of 10% in the year, inventory turns of distributors remained at a very healthy level of 3.6 in the fourth quarter, as compared to 3.7 in prior quarter and to 3.3 in prior year. In the Americas, 2.1 turns; after 2.2 in the third quarter and 1.9 in prior year. In Asia, 4.9 turns after 5.1 in quarter three and 4.9 in prior year. And in Europe 3.9 turns after 4.2 in Q3 and 3.3 in prior year. There is unproven [ph] confidence of distributors concerning the year 2018.

Let me comment on the various industry segments we serve; automotive continues to be the main driver of growth in our industry. Customers expect further growth in the 10% range, due to increasing electronic content, driver assist systems, 48-volt projects, new LED technology and e-mobility in general are the main drivers.

Also industrial markets remain strong across all regions. Drivers are factory automation, infrastructure programs, alternative energy and Internet-of-Things centering. Computing has stabilized, offering for us, nice business opportunities. As a mixed picture concerning telecom, we see fierce competition amongst global telecom manufacturers.

There are various opportunities in consumer markets, mainly in gaming systems, premium TVs and whitegoods.

Avionics, military and space continue to be stable with program-specific business opportunities. Medical markets remain strong, and are expecting to grow steadily.

Coming to the development of our business; in the fourth quarter, sales, excluding exchange rate impact, came in slightly above the midpoint of our guidance. We achieved sales of $674 million versus $678 million in prior quarter and $571 million in prior year. Excluding exchange rate effects, sales in the fourth quarter were down versus prior quarter, slightly, by $4 million or 0.6%, but up versus prior year by $86 million or 14.5%.

Sales in the year 2017 were $2.60 billion versus $2.32 billion in 2016, an increase of 11% excluding exchange rate effects.

Book-to-bill ratio of 1.28 in the fourth quarter was strong across the board. We have seen 1.40 for distribution after 1.15 in quarter three, 1.13 for OEMs after 1.06 in quarter three. 1.40 for actives, after 1.13; 1.15 for passives after 1.09. 1.14 for the Americas, after 1.04. 1.40 for Asia after 1.15; and 1.23 for Europe, after 1.12.

Backlog in the fourth quarter again increased quite dramatically to 5.1 from 5.0 months in the third quarter. 6.8 months in actives and 4.9 months in passives.

We have seen decreasing price decline in general. 0.2% decline versus prior quarter and 2.3% price decline versus prior year. For actives, semiconductors, there was no price decline versus prior quarter, and 2.7% down versus prior year. For passives, 0.4% price decline versus prior quarter and 1.9% decline versus prior year.

Let me talk about our operations, give you some highlights; also in 2017, we were able to offset the negative impact of inflation and price decline on the contributive margin by cost reduction and innovation.

SG&A costs in Q4 came in at $98 million, slightly above expectations. SG&A costs for the year 2017 were at $377 million, $5 million or 1.4% above prior year at constant exchange rates. Manufacturing fixed costs in the fourth quarter, came in at $124 million, slightly above expectations. Manufacturing fixed costs for the year 2017 were $485 million; $7 million or 1.5% above prior year, again at constant exchange rates.

All in all, Vishay, in 2017 again managed to compensate, to a large extent, inflation on its total fixed costs by cost reduction programs. Excluding exchange rate effects, total fixed costs year-over-year just increased by $12 million or 1.4%, virtually all coming from incentive compensation.

Total employment at the end of 2017 was 23,015 people, approximately 4% up from prior year.

Excluding exchange rate impacts, inventories in the quarter were reduced by $4 million. Raw materials increased by $3 million, work in process and finished goods decreased by $7 million.

Inventory turns in the fourth quarter remained at a very satisfactory level of 4.5. In the year 2017, inventories increased by $38 million, raw materials by $18 million and WIP and finished goods by $20 million. Inventory turns for the year 2017 were at a good level of 4.6.

Capital spending in 2017 was $170 million versus $135 million in prior year. We spent $85 million for expansion, $18 million for cost reduction and $67 million for maintenance of business.

Extended leadtimes for equipment last year, were leading to an increased carryover into this year. For 2018, we expect CapEx of about $210 million, in accordance with requirements of the markets, putting in projects from our existing expansion plans.

Generated in 2017, cash from operations of $369 million versus $296 million in prior year. Generated in 2017, free cash of $200 million, a substantial improvement versus a good prior year, when we had generated $168 million. Vishay, another time, has lived up to its reputation as an excellent and reliable producer of free cash.

Coming to our main product lines; I'd like to start 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, automobile and medical market segments.

Since a few years, we successfully concentrate on growing in the Asian, predominantly, the Chinese industrial market. Sales in the fourth quarter were $260 million, virtually on the level of prior quarter, but up versus prior year by 12%, excluding exchange rate impacts. Year-over-year, resistors and inductors grew from $750 million in 2016 to $839 million in 2017 by 11%, excluding exchange rate impacts.

The book to bill ratio in the fourth quarter was 1.19 after 1.15 in prior quarter. All this indicates continued growth.

Backlog increased to a historical level of 5.2 months, reflecting quite extreme demand for SMD and fixed wire wound resistors as well as for power inductors.

Gross margin in the quarter came in at 29% of sales after 30% in prior quarter, impacted by inventory reduction. Gross margin for the year 2017 was 30% of sales, which is on the level of 2016. There was some negative impact of training requirements and over time for additional production staff, also somewhat higher repair and maintenance costs for total utilized capacities.

Inventory turns in the fourth quarter remained at a very satisfactory level of 4.5 as compared to 4.7 for the entire year. Low price decline for resistors and inductors, 0.1% down versus prior quarter, 1.7% down versus prior year. We continue to invest in manufacturing capacities of power inductors, metal strip resistors and thin film 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 power transmission, and of e-cars, namely in Asia. We entered in 2017, the Chinese power transmission market in a major way. Sales in the fourth quarter were at $106 million, 10% above prior quarter and 26% above prior year, which excludes exchange rate effects.

Year-over-year capacitor sales increased significantly from $337 million in 2016 to $384 million in 2017, by 13%, excluding exchange rate impacts. The book-to-bill ratio in quarter four was 1.08 after 0.97 in previous quarter. Backlog remained at a high level of 4.3 months.

Gross margin of capacitors in the quarter remained at 20% of sales. Gross margin for the year 2017 was 20% of sales on the level of 2016, negatively impacted by a less favorable product and customer mix, and by additional costs for over time and training of new personnel. Also the exchange rates for this line did not help.

Inventory turns in the quarter were 4.0 as compared to 3.9 for the whole year. Price decline was normal, 1.1% down versus prior quarter and 2.4% down versus prior year, and we continue to see numerous opportunities for growing the capacitor business, especially in Asia.

Coming to opto products; Vishay's business with opto products consists of infrared emitters, receiver sensors and couplers, as well as LEDs for automotive applications. The business represents one of Vishay's opportunities for mid and longer term growth, especially in the segment of sensors.

Sales in the quarter were $70 million, 9% below prior quarter and 1% below prior year, which excludes exchange rate impacts. Year-over-year sales with opto products increased from $272 million to $286 million by 5%, excluding exchange rate impacts.

The book-to-bill ratio in the fourth quarter for opto products was $1.21, after $0.94 in prior quarter, and the backlog increased substantially to 4.6 months from 3.6 months in the third quarter.

Gross margin in the quarter came in at a somewhat disappointing 33% of sales after 38% in the third quarter, [technical difficulty] representing a record. The gross margin was impacted negatively by an inventory decrease, as compared to an increase in prior quarter, by a non-repetition of Q3 positive singularities in manufacturing fixed costs.

Gross margin for the year 2017 came in at quite excellent, 34% of sales, as compared to 32% in prior year.

Quite excellent inventory turns of 5.6 in the fourth quarter as compared to 5.5 in the year 2017. Low price decline, 0.9% down versus prior quarter and 1.9% down versus prior year. We remain very confident for this line growing steadily and profitably also, in future.

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, and we are, 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 $160 million, 1% below prior quarter, but 15% above prior year, which exclude the exchange rate effects. Year-over-year sales with diodes increased from $554 million to $621 million, that means by 12%, excluding exchange rate impacts.

We have seen a very strong book-to-bill ratio of 1.34 in Q4 after 1.18 in Q3, mainly driven by distribution. The backlog for diodes increased to a record level of 7.3 months from 6.2 months in prior quarter. There are unusually long leadtimes in this product segment currently.

Gross margin in the quarter was 26% of sales, slightly below Q3 at 27%, which has been a record. Gross margin in the year 2017 grew to a fairly excellent level of 26% of sales, coming from 24% in 2016. Inventory turns remained at a very satisfactory level of 4.9, as compared to 5.0 for the full year.

Substantially reduced price decline, we see an increase of 0.3% versus prior quarter and a decrease of 2.0% versus prior year, and we are expanding manufacturing capacities for all critical lines as fast as we can.

Finally, MOSFETs; Vishay continues to be one of the market leaders in MOSFET transistors. MOSFETs over the last years developed a strong and growing position in automotive, which really the business now benefits from. Sales in the quarter were $122 million, 3% below prior quarter but 19% above prior year, excluding exchange rate impacts. Year-over-year sales with MOSFETs increased from $406 million to $468 million, that means by 15% excluding exchange rate impacts.

In Q4, there was a quite historic book-to-bill ratio of 1.59, after 1.19 in the third quarter. We have seen extremely strong orders, namely from automotive and from distribution. The backlog increased to a record level of 7.3 months coming from 5.3 months, also in MOSFETs, we currently see unusually long leadtimes.

Gross margin in the quarter was stable at 26% of sales. Obviously, our fundamental restructuring program for the MOSFETs yielded quite sustainable improvements as we expected.

Gross margin in the year 2017 grew to a very satisfactory level of 23% of sales, coming from just 14% in 2016. Inventory turns of 4.3 in the quarter, as compared to 4.2 in the year.

Like for the diodes, we see price decline being substantially reduced, no price decline versus prior quarter, 3.9% price decline versus prior year. We are in process to increase manufacturing volume at foundry, since [ph] to maximize the output of our fab in Itzehoe as fast as we can. We are very confident concerning future growth of this line in particular, in automotive.

Let me summarize; supported by an excellent economic environment and based on own efforts, Vishay enjoyed a very successful year, 2017. Financial results improved noticeably vis-à-vis the year 2016, which already has been fairly satisfactory. The generation of free cash was the highest since six years, we are proud of this performance.

Vishay also in 2017, demonstrated its operational strength, in pursuing and completing major operational targets, like keeping discipline and controlling tightly fixed costs also during a strong upturn, or like pushing ahead in Asian automotive and industrial markets.

The strong free cash flow enabled us again to raise the cash dividend to continuously rejuvenate and upgrade our organization, also to invest in promising product lines in a major form.

We currently evaluate the impact of the U.S. tax reform on our capital structure. We have decided and are already on the way to prepare ourselves for new and very positive challenges we likely will have to face in the context of an accelerating market growth, especially in automotive and especially in industrial applications. We are excited about our opportunities going forward.

For the first quarter, we guide to a sales range between $665 million to $705 million, at gross margins of between 26% and 27% of sales.

Thank you very much. I will turn the call back to Peter?

[Peter Henrici]

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

[Operator]

[Operator Instructions]. Your first question is from the line of Jim Suva.

[Jim Suva, Citigroup]

Great. Thank you so much. It's Jim Suva from Citi. The details are greatly appreciated. When you gave the CapEx guidance for 2018, it looks like it's up pretty materially. Can you help us understand the timeline of what's being installed in the revenue contribution of that and will there be a gross margin headwind, as that CapEx has turned a ramping, or is it not going to be your gross margin challenge? Just kind of curious, about how the CapEx and revenues and margins fold in? Thank you.

[Dr. Gerald Paul, President and CEO]

First of all, a part of this investment, we would have liked to make already in 2017. But the leadtimes of the equipments were long and stretched out, like the leadtimes of our product. Secondly, they come piece-by-piece, as a matter of fact, it goes over the whole year, and concerning gross margin, there is no concern on that. And also, what we invest is really covered by long term plans. We just accelerate the plans we had before. We do have products that grow fast, and we accelerate that, driven by the market, but concerning gross margins, we don't have to be concerned.

Altogether, this really enables us once more to increase our capacity substantially, vis-à-vis 2017.

[Jim Suva, Citigroup]

Great. And my follow-up is then, that capacity, since the leadtime of equipment has extended, and you would have liked it to come in, in 2017 or 2018, when do the revenues really start to come on materially? Is it like mid-year, is there a step function or is it folded into --?

[Dr. Gerald Paul, President and CEO]

No, no, it's a continuous increase vis-à-vis prior year. It goes not exactly at the same rate, but you will see quarter-after-quarter, obviously an increase versus prior year, which of course was an increase in itself. So the first quarter 2017 was below the fourth quarter 2017, and we grow then continuously as the equipments are installed, and people are hired.

[Jim Suva, Citigroup]

Okay. And then my last question is, you mentioned this quarter had a gross margin challenge with the singularity. Was that like a work shift change or like a product transition change or how can we have confidence the singularity doesn't come back again?

[Lori Lipcaman, EVP and CFO]

Jim, it was actually the non-repetition of positive singularities in Q3 that Dr. Paul explained, particularly for the --

[Jim Suva, Citigroup]

Okay, I understand. So Q3 had a positive one that didn't repeat in Q4, as opposed to a negative item in Q4? Okay. Thank you.

[Operator]

Your next question is from the line of Shawn Harrison.

[Gausia Chowdhury, Longbow Research]

Hey good morning. This is Gausia Chowdhury on behalf of Shawn Harrison. The first question is just about the guidance; at the midpoint, it still looks to be lower than seasonal, but the book-to-bills keep pushing up. I understand there is capacity constraints, but can you explain the disconnect, if there is anything else we should be thinking about?

[Dr. Gerald Paul, President and CEO]

I don't think there is a disconnect. If you compare to the first quarter last year, it's a substantial increase, and it's really the reflection also of the equipment available at the working days in the first quarter. So that's approximately what we can do.

[Gausia Chowdhury, Longbow Research]

Okay, great. And then, the higher SG&A for the year, can you talk about the cadence of the year, and any particular factors behind the step-up please?

[Dr. Gerald Paul, President and CEO]

Of the year 2017?

[Gausia Chowdhury, Longbow Research]

Yes -- no, sorry, for 2018, the guidance?

[Dr. Gerald Paul, President and CEO]

Approximately flat cycle. We said $400 million, it's $100 million per quarter, roughly.

[Gausia Chowdhury, Longbow Research]

Okay. And that's a step up from 2017, correct? So can you --

[Dr. Gerald Paul, President and CEO]

Inflation. You have wage increases really. The wage increase is [indiscernible] as a matter of fact. You have 3% around the world, I would say as an average, and this is what drives the cost up.

[Gausia Chowdhury, Longbow Research]

Okay, all right. And then lastly, just about the gross margin question again, how much impacted -- I know there were singularities, positive ones in the third quarter. But looking forward, how much of an impact does it have on the guide, just based on your guidance for the first quarter, will you see that negative impact permanently throughout 2018, or how should we think about --?

[Dr. Gerald Paul, President and CEO]

No. A part of the gross margin that -- indicative impact on the gross margin had some training issues of new people, increase of capacity, to a degree, as we continue to increase our capacity, you will continue to see it. But at the lower rate, I would say. We have taken quite a few people in.

[Gausia Chowdhury, Longbow Research]

Thank you.

[Operator]

And your next question is from the line of Ruplu Bhattacharya.

[Ruplu Bhattacharya, ‎Bank of America Merrill Lynch]

Hi. Thanks for taking my questions. Dr. Paul, I mean, Vishay is capacity constrained, you are adding capacity. The book-to-bill is still unusually high, I mean, at distribution, I think you said 1.4; and OEM book-to-bill is also high. So obviously, the two questions are, what's the danger of double ordering, and once you have added your capacity and your competitors are adding capacity, what's the danger that the industry goes into an oversupply situation in the second half of 2018? So just your thoughts on these two things?

[Dr. Gerald Paul, President and CEO]

Ruplu, I expected the question somehow, I must admit that. So as a matter of fact, it's very true what you say. We do have enormous orders. On the other hand, it's clear that there is some double ordering, absolutely clear, has to be, which does not mean, that when things normalize, we would see any impact really on our sales, as a matter of fact. And concerning the danger that we invest too much, and that we expand too much and then afterwards suffer, it's very unlikely, because you know, there is a price decline if the market grows anyway. And we do invest in lines, which historically grow, and we expect them to grow according to our plans also.

We just accelerate programs, we don't invent new programs, we just accelerate programs, which we would have had anyway. And I believe, the danger that we do too much, depends of course, if really a crisis comes, it can happen for the short time. But principally speaking, there is no capacity, that according to my recollection, that we invested in the last say 20 years or so, I even say it like that, that we could use later on. So the danger is very low.

[Ruplu Bhattacharya, ‎Bank of America Merrill Lynch]

And I think on the call you mentioned that there is a shortage in semiconductors. How about resistors, inductors and capacitors? Are you adding capacity there, is there a shortage of capacity?

[Dr. Gerald Paul, President and CEO]

Okay, it was -- I didn't say it's not in passives, it's also in passives, only in semiconductors it's stronger. In diodes and the MOSFETs, it's really strong, I cannot remember such a demand that we see now. And in passive, since you ask it, it's the same one, well it's not quite the same, but the same direction. In resistor chips, very conventional products. In resistor chips, in power, inductors, for instance, to a degree also in tantalum, as a matter of fact, also in passives, you see the effect, but not as strong as in semiconductors.

[Ruplu Bhattacharya, ‎Bank of America Merrill Lynch]

Okay. And then maybe just for my last question, switching to buybacks and repatriation, I think on the call, you talked about a measured pace of repatriation. Could you just remind us on what authorization -- what amount of authorization is left? And if you can give us any guidance on what that means in terms of measured pace? Like how should we think about -- how much or how soon you can bring back the cash and your plans for dividends increases or buybacks?

[Dr. Gerald Paul, President and CEO]

Well Ruplu, it's early to answer. These changes are quite recent, and at a measured pace, really means mainly, that we don't jump with both feet into something, which we haven't analyzed before. And we are in process to analyze our new freedom which we have, and it exists, you are right it exists. But of course, this requires some discussion internally. So at this point in time, forgive me, I don't think I can give details, we have to discuss that internally, we have to talk to our board, as is [indiscernible], and then we will come to conclusions. But you are right, we have a new degree of freedom, which we are going to use.

[Ruplu Bhattacharya, ‎Bank of America Merrill Lynch]

Okay. Thank you for taking my questions. Appreciate it.

[Operator]

Your next question comes from the line of Matt Sheerin.

[Matt Sheerin, Stifel Nicolaus]

Yeah thanks. This is Matt Sheerin with Stifel. So Dr. Paul, you have been pretty helpful here. But as you said, it looks like 60% to 70% of your product portfolio is in short supply, and we have seen leadtimes at 20 weeks, 30 weeks plus. So I guess the issue without you being specific about capacity, how much revenue capacity is coming online? Looks like you are pretty much capped here in terms of revenue, for at least the next two to three quarters, and then margins obviously, there seems to be some incremental costs relative to ramping that revenue. So trying to figure out, what could move the numbers here from where they are? Looks like your contribution margin year-over-year is going to be in the 30% range, which is below your 40% plus target. So just trying to figure out, is there much more -- aside from the capacity you are bringing online, it looks like you are capped out here. Is that one way to look at it?

[Dr. Gerald Paul, President and CEO]

Two remarks I would like to make; number one, we take into equipment -- that comes in as I said before, quarter-by-quarter. So altogether, if you really try to quantify, which is not completely easy, how much sales we can generate based on this new investment year-over-year comparing 2017 and 2018, you come to 8% --

[Matt Sheerin, Stifel Nicolaus]

8% for this year. Okay, okay.

[Dr. Gerald Paul, President and CEO]

So if you really calculate that, of course it's not an exact calculation, but it's a direction. I think it's a good estimate. And secondly, from a variable margin standpoint, this is what you refer to, we have unbroken our variable margin, our contributive margin all along. Only, there were some effects between quarter three and four, partially because quarter three contained singularities, which did not repeat themselves in quarter four, and we knew that, we said it. And secondly, you also have of course, increased training needs. Last year, we had to train a lot of people, as you can imagine, and there is of course some losses, I mean you take into people until they learn, and they are quite nicely ahead of our schedule. So we can expect some improvements there.

[Matt Sheerin, Stifel Nicolaus]

Okay. And then why are we not hearing about price increases, some of your competitors, both on the semi and the passive side, resistors, capacitors, haven't put price increases through, and it doesn't sound like you folks have, although you are seeing a less pronounced decline in ASPs. I know during the last cycle, you did have some price increases, particularly in the form of expedited shipment, so why are you not increasing prices or are you?

[Dr. Gerald Paul, President and CEO]

Matt, we actually do increase prices. The point is only, 50% of our business roughly is with OEMs and most of them is based on contracts, longer term contracts. We keep our contracts. It means, in this case, in these contracts, you have price decrease anyway. And you cannot change that, you honor your contracts. And overall, we hardly have any -- we have the whole price decline, or in some cases you may have heard, it was even constant. That means we do have some price increases, yes we do, otherwise the price decline overall wouldn't be explainable.

[Matt Sheerin, Stifel Nicolaus]

So that's primarily through distribution then, right?

[Dr. Gerald Paul, President and CEO]

Right.

[Matt Sheerin, Stifel Nicolaus]

Okay. That's helpful. Just then, as this capacity comes online, right, and leadtimes come in, in theory that six-seven month backlog, which we have really never seen here from Vishay, a lot of that will just disappear, right, as leadtimes come in?

[Dr. Gerald Paul, President and CEO]

I could imagine that it has to be like that. They will normalize. But it does not mean that we necessarily see an impact of the sales line. It's just -- [indiscernible] ordering in the markets, no question about it. And if this, the way I call it, [indiscernible] go away, this does not mean that our development as a company would suffer to any degree.

[Matt Sheerin, Stifel Nicolaus]

Okay. And just, regarding -- I mean, you seem to have a good read on distribution sell-through or the POS. Are there signs that your OEM customers, which can get all the product they want from you, they are ordering from distribution, and a concern there that actually bring in more inventory that you would see, cuts there, maybe later in the year?

[Dr. Gerald Paul, President and CEO]

I wouldn't reconfirm that. We -- of course we are watching the situation at distribution, especially as the leadtimes are long, especially as they order so much. So the inventory is very reasonable [indiscernible], that OEMs order more from distribution now. I cannot exclude it, but I don't have -- no tangible observations now.

[Matt Sheerin, Stifel Nicolaus]

Okay. Just last question for me, maybe for Lori on the -- you said that the margin was impacted somewhat by incremental environmental costs or cleanup costs. Could you tell us what that was related to and how long that's going to be going on for?

[Lori Lipcaman, EVP and CFO]

So as you know, we have been downsizing our activity in Santa Clara. And that's part of the cleanup, as we are moving out of the facility, we had an additional environmental charge that we needed to take in quarter four.

[Matt Sheerin, Stifel Nicolaus]

Okay. And that won't repeat this quarter?

[Lori Lipcaman, EVP and CFO]

At the moment, we think we are fully accrued. But of course, we view it several times during the year. All of our sites [indiscernible]. Normally at this point of time, we feel that we are fully accrued.

[Matt Sheerin, Stifel Nicolaus]

Okay. All right. Thank you.

[Lori Lipcaman, EVP and CFO]

Welcome.

[Operator]

And your next question is from the line of Harlan Sur.

[Harlan Sur, JPMorgan]

Good morning and thank you for taking my question and congratulations on a strong 2017. Capacitor revenues were up sequentially in Q4, which seem sort of against -- sort of the normal seasonal trend for the business. Can you just help us understand some of the drivers there? Did you guys bring on some additional capacity, or are able to ship to the strong backlog, or were there some end market strengths that drove the quarterly trends?

[Dr. Gerald Paul, President and CEO]

It was a good quarter in general. But there was one real event. We shipped the major portion of power caps. I mean, I tried to say it indirectly, that we got a much stronger foothold into the energy transmission applications in China, and there were large shipments in the fourth quarter.

[Harlan Sur, JPMorgan]

Great. Thanks for that. And then, on the gross margin front, it seems like opto, was the big driver of the slightly lower than expected gross margins. But they dropped pretty significantly. I think it was like about 800 basis points drop to 30%, and that's a level that we haven't seen in like over four quarters. And so I want to make --

[Dr. Gerald Paul, President and CEO]

Opto is our -- from a relative profitability standpoint of baseline [ph], as you know, very consistent. But 38% which we showed in quarter three, was really driven by singularities, which we said at the time. And now, it would have normalized anyway, and then on top of everything, they had some inventory movements, I can assure you that opto year-over-year was a nice improvement, and it will continue to improve next year. So as a matter of fact, we are not worried whatsoever. In that sense quarter four, came in especially in comparison to an excellent quarter three as a -- it's kind of disappointing too. But this doesn't mean anything for the future.

[Harlan Sur, JPMorgan]

So do you expect gross margins in opto to start to grow starting here in the March quarter?

[Dr. Gerald Paul, President and CEO]

Yeah, yeah. As a matter of fact, the 30% was relatively low for opto conditions. This is more like, 32%, 34%. There is no [indiscernible].

[Harlan Sur, JPMorgan]

Great. And then my last question, as you think about the CapEx profile for this year, and you layer on top of that, equipment leadtimes, which I would agree, are getting extended. Can you help us think about how you are going to prioritize adding capacity for the different product lines?

[Dr. Gerald Paul, President and CEO]

You mean, the time cycle or however it comes?

[Harlan Sur, JPMorgan]

Well, how are you going to prioritize the CapEx versus the different product categories and you know -- timeline on bringing that on?

[Dr. Gerald Paul, President and CEO]

I cannot [indiscernible], but approximately, the center of our investments is clearly in diodes and in resistors clearly. This is where the need is especially strong. Also MOSFETs, we will get a portion of the investment -- a strong portion of the investment. But in this case, we work through foundries. So not directly -- so this is why it's not as big. But really, the most part goes into diodes, which is the biggest line anyway, and into resistors, where we see an enormous demand in the market for resistor chips, and in also inductors. So this is where we spend most of the capital. Of course, we could break it down further, but that is really -- and hasn't changed. So the focus of our investments over the last years hasn't changed. We just accelerate what we wanted to do in future anyway.

[Harlan Sur, JPMorgan]

Great. Thank you, Dr. Paul.

[Operator]

And there are no other questions at this time.

[Dr. Gerald Paul, President and CEO]

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

[Operator]

This concludes today's conference call. You may now disconnect at this time.