VSH

Vishay Intertechnology, Inc. - Q2 2007 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2007, and the six fiscal months ended on that date. Vishay Intertechnology, Inc. is an international manufacturer of discrete semiconductors and passive electronic components. The company operates through two primary segments: Semiconductors and Passive Components. The reporting period was significantly impacted by two major acquisitions completed in April 2007: the Power Control Systems (PCS) business of International Rectifier Corporation and PM Group PLC.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 8.4% year-over-year for the quarter and 6.4% for the six-month period. This growth was primarily driven by acquisitions (contributing 8.7% to quarterly growth) and favorable foreign currency effects (2.3%).
• Margin Compression: Gross profit margins declined to 24.9% in Q2 2007 from 27.2% in Q2 2006. This was due to higher raw material costs, lower volume in certain areas, and the inclusion of the newly acquired PCS business, which had a lower margin (19%) due to transition delays.
• Restructuring Costs: Restructuring and severance costs decreased significantly to $1.2 million in Q2 2007 compared to $8.2 million in Q2 2006. Asset write-downs were $2.7 million in Q2 2007 versus $3.8 million in the prior year.
• Discontinued Operations: The company reported a loss of $1.3 million from discontinued operations related to the automotive modules and subsystems business (ASBU) acquired from International Rectifier, which Vishay intends to sell.

Guidance, Outlook, and Risks

• Acquisition Integration: Vishay expects the PCS acquisition to be accretive to earnings. The company plans to sell the ASBU by April 1, 2008, though no assurance is given regarding the terms or timing.
• Cost Management: The company continues to shift production to lower-labor-cost countries, with 73.0% of headcount in such regions as of Q2 2007. Management expects 2007 to be the final phase of major restructuring efforts initiated in 2001.
• Guidance: Management expects revenues between $710 million and $730 million for the third quarter of 2007. Pricing is expected to be stable to moderately lower for the full year.
• Capital Resources: Cash decreased by approximately $285 million during the six-month period, primarily due to the $331 million spent on acquisitions. The company maintains a $250 million revolving credit facility (expandable to $500 million) and expects cash flows to meet operating and capital expenditure needs.
• Risks: Key risks include the successful integration of acquired businesses, potential inability to realize synergies, commodity price volatility (specifically tantalum and palladium), and foreign exchange fluctuations. Additionally, an internal investigation at International Rectifier regarding accounting irregularities at a foreign subsidiary (not acquired by Vishay) is being monitored for potential impact on the acquired PCS business controls.

Investor Verification Checklist

• Acquisition Synergies: Verify the timeline and financial impact of integrating the PCS business and the realization of projected cost savings.
• Divestiture of ASBU: Monitor progress on the sale of the automotive modules and subsystems business, including potential impairment charges if the sale is delayed.
• Raw Material Costs: Track the impact of precious metals and raw material price fluctuations on gross margins, particularly for tantalum capacitors.
• Restructuring Accruals: Review the remaining balance of restructuring liabilities ($11.5 million from 2006 programs and $2.7 million from 2007 programs) and actual cash outflows.
• Debt Covenants: Confirm continued compliance with the new revolving credit facility covenants, particularly regarding financial ratios and dividend restrictions.