Vishay Intertechnology, Inc. — Q2 2018 Form 10-Q
Reporting period: Fiscal quarter and six fiscal months ended June 30, 2018. Comparative 2017 figures were recast for adopted accounting standards where noted. Dollar amounts below are in millions except per-share data.
Business context and results
Vishay manufactures discrete semiconductors and passive electronic components through five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Management reported broad-based strong demand, with volume growth driving improved revenue and margins.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $761.0 | $643.2 | $1,477.8 | $1,248.0 |
| Gross profit | $227.2 | $173.8 | $432.5 | $335.6 |
| Gross margin | 29.9% | 27.0% | 29.3% | 26.9% |
| Operating income | $123.3 | $85.0 | $227.4 | $152.6 |
| Net earnings attributable to Vishay stockholders | $103.1 | $56.2 | $165.5 | $92.9 |
| Diluted EPS | $0.65 | $0.36 | $1.04 | $0.60 |
Q2 revenue increased 18.3% year over year and 6.2% sequentially; six-month revenue rose 18.4%. Q2 operating margin was 16.2%, compared with 13.2% a year earlier. Management attributed margin gains primarily to higher volume, efficiency and cost management. All five segments had higher Q2 revenue year over year; Resistors & Inductors was the largest segment by revenue.
Cash flow, liquidity and debt
- Six-month operating cash flow was $38.2, down from $128.3 a year earlier. Capital expenditures were $76.6, versus $49.1; reported six-month free cash was negative $30.1, compared with positive $80.5.
- Q2 operating cash flow was negative $8.7 and free cash was negative $48.9. The company attributed the cash-flow decline largely to $92.1 of taxes paid on repatriated cash and a $14.4 first installment of U.S. transition tax.
- At June 30, cash and cash equivalents were $1,007.1 and short-term investments were $142.7. Reported net cash and short-term investments, after debt, were $470.1, down from $924.7 at year-end 2017. Current ratio was 3.9 to 1.
- Debt carrying value was $679.6; principal debt was approximately $981.9. In June, Vishay issued $600.0 principal amount of 2.25% convertible notes due 2025 and used the proceeds to repurchase $289.1 principal amount of older convertible debentures for $585.0, recording a $17.3 extinguishment loss. Total debt carrying value rose from $370.5 at year-end.
- The $640 million revolving credit facility had $96.0 outstanding. Vishay reported compliance with its covenants; interest coverage was 16.02 to 1 and leverage was 1.76 to 1.
Changes, outlook and notable items
- Backlog increased to $1,595.2 from $1,498.7 in Q1; company-wide book-to-bill was 1.17. Management said some product lines were at or near capacity, extending lead times and causing supply shortages, and described plans to expand capacity while limiting fixed-cost growth.
- For Q3 2018, management forecast revenue of $755–$795 and gross margin of 29%–30%, at Q2 exchange rates. It expected quarterly interest expense of approximately $11.0, including $6.1 payable in cash.
- Q2 included a negative 5.8% effective tax rate, including a $34.0 tax benefit related to the debt extinguishment, a $9.0 benefit from repatriation-related deferred-tax remeasurement, and $12.0 of additional provisional TCJA tax expense. The tax rate and net earnings therefore include significant unusual items.
- Vishay repatriated approximately $274 of foreign cash in Q2 and paid about $92.1 in related withholding and foreign taxes. It expected to repatriate a further $450 in Q3, net of about $72 in taxes; these estimates and TCJA tax accounting remained provisional.
- The quarterly dividend increased 26% to $0.085 per share. The prior stock repurchase plan expired June 1, 2018; no shares were repurchased in 2018. Management expected 2018 capital spending of approximately $225 and dividends of approximately $46.5, subject to board approval.
- Risks highlighted include economic and end-market weakness, tariffs and trade-policy changes, foreign exchange, pricing and cost inflation, capacity constraints, acquisition execution, provisional tax estimates, and debt and convertible-note obligations. Remaining 2040 and 2042 debentures were convertible at quarter-end; potential conversion could require cash principal repayment. No material changes to previously disclosed legal proceedings were reported.
Key facts for investors to verify
- Whether Q3 revenue, gross-margin and interest-expense guidance is achieved, and whether constrained capacity and longer lead times ease.
- Whether operating cash flow and free cash improve after the significant tax-related cash payments; compare reported cash generation with management’s non-GAAP free-cash measure.
- Final TCJA tax and repatriation amounts, including the expected timing and net proceeds of further repatriations.
- Debt principal versus carrying value, refinancing costs, covenant headroom, and potential cash requirements from conversion of outstanding debentures.
- Whether strong backlog and book-to-bill translate into shipments, given management’s warning that orders may be cancelled or rescheduled.