Vishay Intertechnology, Inc. — Q3 2014 Form 10-Q
Reporting period: Fiscal quarter ended September 27, 2014; comparative quarter ended September 28, 2013. Nine-month figures are for the nine fiscal months ended on those dates. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and financial performance
Vishay manufactures discrete semiconductors and passive electronic components, reported across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Growth reflects higher demand and volume, cost initiatives, and acquisitions; management said orders weakened late in the quarter, particularly from distributors in Asia.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $638.2m | $602.9m | $1,882.5m | $1,754.8m |
| Gross profit / margin | $158.4m / 24.8% | $143.2m / 23.8% | $467.8m / 24.8% | $422.8m / 24.1% |
| Operating income / margin | $45.5m / 7.1% | $53.2m / 8.8% | $146.0m / 7.8% | $150.6m / 8.6% |
| Net earnings attributable to Vishay stockholders | $27.0m | $32.7m | $88.4m | $93.0m |
| Diluted EPS | $0.17 | $0.22 | $0.57 | $0.61 |
Quarter revenue increased 5.9% year over year, but declined from $641.9m in Q2 2014. Nine-month revenue rose 7.3%. Volume gains were partly offset by lower average selling prices. GAAP operating income and earnings fell year over year, despite higher revenue, with restructuring and pension-settlement charges contributing to the comparison.
Management’s non-GAAP adjusted net earnings were $40.1m, or $0.26 per diluted share, in Q3 2014, versus $29.9m, or $0.20, in Q3 2013. For the nine months, adjusted net earnings were $112.1m, or $0.73 per diluted share, versus $87.6m, or $0.58. These company-defined measures exclude specified items and are not GAAP measures.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $197.0m, compared with $179.6m in 2013. Capital expenditures were $90.5m, versus $91.6m.
- Cash and cash equivalents were $575.3m and short-term investments $538.1m at September 27, 2014. Total debt carrying value was $440.9m; management-reported net cash and short-term investments, after debt, were $672.5m, down from $786.7m at year-end 2013.
- Current assets were $1,996.1m and current liabilities $470.0m; the current ratio was 4.2, versus 4.4 at year-end. Total assets were $3,376.5m.
- Revolver borrowings increased to $187m from $114m at year-end, including $53m borrowed in connection with Capella. The $640m revolving facility runs through August 2018. The company reported compliance with its financial covenants; leverage ratio was 1.85 to 1 and interest coverage 13.72 to 1.
- Cash declined by $65.0m over the nine months. Investing cash use included $198.2m for acquisitions and $90.5m for capital expenditures; financing cash inflow was $44.6m. Most cash and short-term investments were held by non-U.S. subsidiaries and are expected to remain invested abroad; U.S. repatriation could incur additional taxes.
Material changes and notable items
- Q3 book-to-bill fell to 0.91 from 1.00 in Q2; backlog was $598.0m, down from $663.8m. Distributor book-to-bill was 0.86 and OEM book-to-bill 0.97. Average selling prices declined 0.9% sequentially; management attributed $6m of sequential revenue reduction to currency effects.
- Segment revenue trends versus Q3 2013: Optoelectronic Components +18.8%, Diodes +7.6%, Resistors & Inductors +6.9%, MOSFETs +5.6%, and Capacitors -4.3%. Capacitors’ decline primarily reflected lower volume and distribution sales.
- Vishay acquired 88.95% of Capella Microsystems, a Taiwanese fabless optoelectronic IC designer, for approximately $180.2m; the remaining-share merger was expected by the end of January 2015, subject to approvals and other closing conditions. Capella added $97.7m of preliminary goodwill and $74.5m of identifiable intangible assets; related annual amortization was expected to be about $10m. The acquisition’s Q3 consolidated earnings impact was not material.
- Holy Stone Polytech, a Japanese tantalum-capacitor manufacturer, was acquired in June for $20.8m net of cash acquired. Its reported impact was not material.
- Q3 included $15.6m of non-cash U.S. pension settlement charges after transactions that reduced the U.S. projected benefit obligation by about $59.4m. Restructuring and severance costs were $3.5m for Q3 and $18.9m for the nine months. The company expected the announced cost programs to yield about $36m of annual savings when fully implemented, at approximately $32m in cash costs.
- The 2042 convertible debentures became convertible through December 31, 2014, subject to reevaluation. Vishay intended to repay principal in cash and settle any excess in shares, financing principal conversions with its revolver. A $91.1m amount was classified as redeemable convertible debentures/temporary equity.
- The company began quarterly cash dividends in 2014 and paid $0.06 per share each quarter through Q3. Nine-month dividends paid were $26.5m; future dividends remain subject to board approval.
Outlook, risks, and contingencies
Management expected Q4 2014 revenue of $600m–$640m, with margins corresponding to that volume. It said business conditions faced political and macroeconomic uncertainty and orders softened late in Q3. No full-year revenue or earnings guidance was provided in the filing. Management expected 2014 capital spending of approximately $170m and dividends of approximately $35.6m, subject to board approval.
- Key operating risks include global demand weakness, distributor order changes and cancellations, continued selling-price erosion, cost-program execution, foreign-exchange exposure, and acquisition integration and performance.
- Capella is dependent on third-party foundries and subcontractors, has a concentrated customer base with consumer-market exposure, and depends on retaining technical personnel. Its primarily intangible asset base could be subject to impairment if performance disappoints.
- New purported antitrust class actions filed since July 2014 allege restraints of trade involving aluminum and tantalum electrolytic capacitors and, in some cases, film capacitors. Plaintiffs seek injunctive relief and unspecified joint-and-several treble damages; Vishay said it intended to defend the cases. The filing provides no clear estimate of potential loss.
- A hypothetical 10% adverse foreign-currency movement was estimated to affect net earnings by approximately $5.2m. The company also warned that covenant noncompliance could trigger facility termination and accelerated debt, with cross-default provisions in other debt instruments.
Important facts for investors to verify
- Whether Q4 revenue guidance and margins were achieved, given Q3’s 0.91 book-to-bill and lower backlog.
- Whether cost reductions deliver the targeted annual savings, and how much additional restructuring expense and depreciation affect margins.
- Capella’s integration, customer and foundry dependencies, completion of the remaining-share merger, and realization of expected growth and synergies.
- Cash generation and uses, revolver borrowings, covenant headroom, and the effects of overseas cash availability and potential debt conversions.
- Developments in the capacitor antitrust litigation and any subsequent estimate or disclosure of potential exposure.