Vishay Intertechnology, Inc. — Q3 2019 Form 10-Q
Reporting period: Fiscal quarter ended September 28, 2019; year-to-date figures cover nine fiscal months. Vishay manufactures discrete semiconductors and passive electronic components across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $628.3 million | $781.0 million | $2,058.7 million | $2,258.8 million |
| Gross profit | $150.1 million | $236.3 million | $535.8 million | $668.8 million |
| Gross margin | 23.9% | 30.3% | 26.0% | 29.6% |
| Operating income | $51.0 million | $138.1 million | $238.3 million | $365.5 million |
| Net earnings attributable to Vishay stockholders | $30.0 million | $77.9 million | $150.0 million | $243.3 million |
| Diluted EPS | $0.21 | $0.51 | $1.03 | $1.55 |
| Operating cash flow | Quarterly value not separately stated here | — | $212.0 million | $108.9 million |
| Free cash, company-defined non-GAAP | $46.1 million | $21.1 million | $112.2 million | $(9.0) million |
Q3 revenue fell 19.5% year over year and 8.3% from Q2 2019. Management attributed most of the decline to lower volume, with additional pressure from falling average selling prices and foreign currency. Gross margin and operating margin declined as lower volume, manufacturing capacity adjustments, and U.S. tariffs on imports from China weighed on results. Q3 SG&A was $91.8 million, or 14.6% of revenue, versus 12.6% a year earlier. Q3 net earnings were $30.3 million including noncontrolling interests; adjusted net earnings were $38.3 million and adjusted diluted EPS was $0.26, both non-GAAP measures.
Liquidity, debt, and capital allocation
- At September 28, 2019, cash and cash equivalents were $731.5 million and short-term investments were $56.0 million. Debt’s balance-sheet carrying value was $496.3 million, producing company-defined net cash and short-term investments of $291.3 million.
- Current assets were $1,691.1 million and current liabilities were $481.1 million; the reported current ratio was 3.5 to 1. Long-term lease liabilities were $81.0 million, with $16.9 million current.
- The $750 million revolving credit facility matures June 5, 2024; there were no borrowings outstanding at quarter-end. The company reported covenant compliance, an interest coverage ratio of 19.29 to 1, and leverage ratio of 1.16 to 1.
- Nine-month capital expenditures were $100.3 million. Management expected 2019 capital spending of approximately $140–$150 million and dividends totaling approximately $53.4 million for the year. The quarterly dividend was increased to $0.095 per share in 2019.
- Operating cash flow was higher year over year, while cash flow remained affected by cash taxes related to repatriations and U.S. transition-tax installments. The company reported $188.7 million repatriated to the U.S. during the first nine months and approximately $100 million of unremitted foreign earnings still under evaluation for possible repatriation.
Material changes and operating trends
- Demand weakened after the 2017–2018 upcycle. Distributor inventory reduction was a key factor; companywide book-to-bill was 0.72 in Q3, and backlog declined to $935.4 million from $1,559.7 million in Q3 2018.
- Distributor revenue declined to $317.4 million in Q3 from $452.1 million a year earlier. Asian distributor demand was a particular source of weakness.
- All five segments had lower Q3 revenue year over year. Diodes and Optoelectronic Components had the steepest declines, down 33.6% and 33.7%, respectively. Resistors & Inductors remained the largest segment by Q3 revenue at $228.6 million.
- Inventory was $444.7 million at quarter-end, down from $479.7 million at December 31, 2018. Inventory turnover was 4.1, versus 4.4 in Q3 2018.
- Cash and short-term investments exceeded debt, although substantially all cash and short-term investments were held outside the U.S.; the undrawn facility supports U.S. liquidity needs.
Outlook, commentary, and unusual items
- For Q4 2019, management expected revenue of $580–$620 million and gross margin of 23%–24%, at Q3 exchange rates. Management anticipated continued near-term revenue pressure from distributor inventory reductions.
- The company announced global cost-reduction and management-rejuvenation programs. It expected approximately $25 million of implementation costs, primarily cash severance, and approximately $15 million of annual savings when fully implemented by December 2020. It had recorded $7.3 million of restructuring expense through Q3; planned R&D was not expected to be affected.
- Other notable items included a $7.6 million tax expense related to a tax-basis foreign-exchange gain on settlement of an intercompany loan, and a $1.3 million loss on early extinguishment of debt during the first quarter. The company repurchased $22.7 million of convertible debentures during the first quarter.
- Vishay cited global economic conditions, weak end-market demand, pricing pressure, foreign exchange, trade tariffs, manufacturing adjustments, and uncertainty around taxes as risks to results. It stated that there had been no material changes to previously disclosed risk factors or market risks and no material developments in previously disclosed legal proceedings.
Important facts for investors to verify
- Whether distributor and broader supply-chain inventory reductions are easing, and how book-to-bill and backlog trend after Q3.
- Whether Q4 revenue and gross-margin guidance was achieved, and whether demand and margins stabilized across the segments.
- Progress, timing, realized savings, and total costs of the restructuring program, including whether additional actions become necessary.
- Availability and location of cash, cash-tax and repatriation requirements, and continued compliance with credit-facility covenants.
- Reconciliation and definitions of management’s non-GAAP adjusted earnings and free-cash measures against GAAP results.