Vishay Intertechnology, Inc. — Q1 2016 Form 10-Q
Business context and period: Vishay manufactures discrete semiconductors and passive electronic components across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. The quarter ended April 2, 2016; comparisons are with the fiscal quarter ended April 4, 2015, unless noted. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $570.6 million | $593.4 million | Down 3.8% year over year |
| Gross profit / margin | $137.3 million / 24.1% | $145.0 million / 24.4% | Margin down 0.3 percentage points |
| Operating income / margin | $40.5 million / 7.1% | $47.6 million / 8.0% | Lower revenue and higher restructuring costs |
| Net earnings attributable to Vishay stockholders | $28.0 million | $30.7 million | Down 8.7% |
| Diluted EPS | $0.19 | $0.20 | Adjusted diluted EPS was $0.19 versus $0.21 |
| Operating cash flow | $20.3 million | $13.5 million | Included $17.0 million of Taiwanese pension contributions |
| Capital expenditures | $19.8 million | $19.8 million | 2016 spending expected to be approximately $130 million |
| Cash and short-term investments | $1,075.6 million | $1,094.5 million at Dec. 31, 2015 | Cash increased; short-term investments declined |
| Total debt, carrying amount | $400.1 million | $436.7 million at Dec. 31, 2015 | Includes convertible and exchangeable notes |
| Net cash and short-term investments, as defined by company | $675.5 million | $657.8 million at Dec. 31, 2015 | Non-GAAP liquidity measure |
Q1 2016 income before taxes was $38.5 million and income tax expense was $10.3 million; the effective tax rate was 26.8%, versus 30.7% a year earlier. The company reported a $3.6 million gain on early extinguishment of debt, which supported reported earnings; adjusted net earnings excluding identified comparability items were $29.2 million, versus $31.6 million.
Material changes and operating trends
- Management said business conditions showed signs of recovery in Q1: revenue rose from $555.9 million in Q4 2015 to $570.6 million, backlog increased to $571.6 million, and the company-wide book-to-bill ratio improved to 1.08 from 0.97.
- Year-over-year revenue pressure was attributed mainly to lower average selling prices (3.1% impact) and foreign currency (0.7% impact); volume was down 0.1%. Average selling prices declined 1.2% sequentially.
- Segment revenue declined year over year in MOSFETs (5.5%), Diodes (0.8%), Optoelectronic Components (8.5%), Resistors & Inductors (2.1%), and Capacitors (6.4%). Diodes’ gross margin improved to 24.1% from 21.9%; the other four segments’ gross margins declined year over year.
- SG&A fell to $90.3 million from $96.1 million, partly reflecting lower amortization and restructuring savings. Restructuring and severance expense rose to $6.5 million from $1.4 million.
- Foreign currency translation generated $32.5 million of other comprehensive income, compared with a $76.3 million loss in Q1 2015. Management said currency effects reduced reported revenue and expenses, with euro-based sales and expenses substantially offsetting one another.
Liquidity, debt, and capital allocation
- At April 2, 2016, current assets were $1.89 billion and current liabilities were $438.0 million; the current ratio was 4.3 to 1. The company reported total equity of $1.68 billion.
- Debt included $178.0 million drawn on the revolving credit facility, down from $190.0 million at year-end. The facility has a $640 million commitment and matures in December 2020. The company reported compliance with its financial covenants; its leverage ratio was 2.14 to 1 and interest coverage was 10.57 to 1.
- Operating cash flow less capital expenditures was approximately $0.5 million before proceeds from asset sales. The company described free cash generation as positive, but cautioned that a weaker economic environment could reduce future cash generation.
- The quarterly dividend was increased to $0.0625 per share; management expected 2016 dividend payments of approximately $37 million, subject to board approval. On May 2, 2016, after quarter-end, the board authorized a stock repurchase plan of up to $100 million through May 2, 2017; no shares had been repurchased under the plan as of the filing.
Outlook, risks, and unusual items
- For Q2 2016, management expected revenue of $565 million to $605 million and gross margin of 23% to 25%. It expected approximately $130 million of capital expenditures and approximately $37 million of dividend payments for 2016.
- The 2013 MOSFETs cost-reduction program was substantially implemented by quarter-end. The company expected approximately $23 million of annual cost savings at current volumes beginning in Q3 2016. The 2015 programs were expected to yield approximately $35 million of annual savings at current volumes, with implementation targeted by the end of 2017.
- Key operating risks cited include global economic and end-market weakness, semiconductor price erosion, currency movements, competition and technology changes, execution of cost reductions and acquisitions, and potential difficulty adjusting manufacturing capacity to demand.
- The proposed termination of the U.S. qualified pension plan remained subject to IRS and PBGC requirements. The additional funding required was uncertain and estimated at zero to $35 million. The company also contributed $17.0 million to Taiwanese pension plans during the quarter.
- For the 2015 Tianjin explosion damage, the company estimated $10.1 million of damage and repair costs through Q1 2016 and recorded a $4.8 million insurance receivable. Potential business-interruption insurance recoveries were not quantified or recorded.
- A Japan Fair Trade Commission order concerning pre-acquisition conduct by a subsidiary involved in tantalum capacitor pricing resulted in no fine for the subsidiary, which received full immunity. The former owner agreed to indemnify Vishay and the subsidiary for related losses and investigation expenses.
- Management stated there were no material changes to previously disclosed risk factors or market risks. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the sequential recovery in orders, backlog, and book-to-bill continues, and whether it converts into revenue growth.
- Whether pricing pressure and weaker demand in Optoelectronic Components and Capacitors persist, and how segment margins respond.
- Whether planned MOSFETs and 2015 restructuring savings are realized on schedule and at the stated levels, alongside remaining cash costs.
- The eventual funding requirement and timing for the U.S. pension plan termination, as well as ongoing pension contributions.
- Insurance recovery outcomes for the Tianjin incident, including any business-interruption claims, and compliance with credit-facility covenants.
- Execution of the Q2 revenue and gross-margin outlook, 2016 capital spending and dividends, and any use of the authorized share-repurchase plan.