Business context and reporting period
Vishay Intertechnology, Inc. (NYSE: VSH) manufactures discrete semiconductors and passive electronic components for industrial, automotive, computing, consumer, telecommunications, power-supply, military/aerospace, and medical markets. This Form 10-K reports the fiscal year ended December 31, 2019; quarterly figures below identify the fourth quarter separately. The company reported six product segments, separating Resistors and Inductors in its reporting structure and recasting prior periods.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2.668 billion | $3.035 billion |
| Gross profit / margin | $671.2 million / 25.2% | $888.5 million / 29.3% |
| Operating income / margin | $262.4 million / 9.8% | $485.1 million / 16.0% |
| Net earnings attributable to Vishay stockholders | $163.9 million; diluted EPS $1.13 | $345.8 million; diluted EPS $2.24 |
| Operating cash flow | $296.4 million | $258.5 million |
| Capital expenditures | $156.6 million | $229.9 million |
| Free cash (non-GAAP) | $140.4 million | $84.2 million |
Management’s adjusted net earnings were $183.1 million ($1.26 per diluted share) in 2019 versus $327.1 million ($2.12) in 2018. These non-GAAP measures exclude specified items and are not directly comparable to GAAP results.
Fourth-quarter 2019 revenue was $609.6 million, gross margin 22.2%, operating margin 4.0%, and Vishay-attributable net earnings $14.0 million (diluted EPS $0.10). Revenue declined from $775.9 million in fourth-quarter 2018; fourth-quarter 2019 book-to-bill was 0.94.
At December 31, 2019, cash and cash equivalents were $694.1 million and short-term investments $108.8 million. Debt carrying value was $499.1 million, leaving net cash and short-term investments of $303.8 million (company-defined, non-GAAP). Working capital was $1.184 billion and the current ratio was 3.3:1. The $750 million revolving credit facility, expiring June 2024, was undrawn; $747.9 million was available after letters of credit. The company reported covenant compliance, with a leverage ratio of 1.36:1 and interest coverage of 18.52:1.
Material changes versus the prior comparable period
- Annual revenue fell 12.1%, principally from a 9.8% volume decline; lower average selling prices and foreign currency effects also contributed. The company attributed the downturn to supply catching up with demand and customers, especially distributors, reducing inventories and orders.
- Gross margin declined 4.1 percentage points. Management cited lower volume, temporary manufacturing inefficiencies during capacity adjustments, inflation, and tariffs on products imported from China.
- All segments had lower annual revenue except Inductors, which declined 1.1%. The largest revenue declines were Diodes (21.9%) and Optoelectronic Components (23.0%); their gross margins also fell materially. Diodes’ gross margin declined to 20.4% from 27.6%, and Optoelectronics’ to 24.0% from 34.6%.
- Operating cash flow rose despite lower earnings, partly because 2019 repatriation-related cash taxes were lower than in 2018. Free cash benefited from lower capital spending; both years’ cash generation was affected by repatriation taxes and transition-tax installments.
- The company repurchased $19.4 million principal amount of convertible debentures in 2019 for $27.9 million, recognizing a $2.0 million extinguishment loss. Outstanding convertible principal was $617.2 million, primarily the $600 million 2.25% notes due 2025. The company had reduced legacy convertible debentures substantially; additional repurchases after year-end are described below.
Outlook, management commentary, risks and unusual items
No specific revenue or earnings guidance is provided. Management said supply-chain inventories remained relatively high and continued to weigh on orders; pricing pressure was increasing, particularly for commodity semiconductors. Fourth-quarter book-to-bill improved from 0.72 in the third quarter to 0.94, but remained below 1.0. Management expected Optoelectronics to return to historical levels after distributor inventory normalization, without specifying a timetable.
- Cost actions: A global cost-reduction and management-rejuvenation program incurred $24.1 million of 2019 restructuring expense. Management estimated approximately $25 million total program costs and about $15 million in annual savings when fully implemented, expected by December 2020. No facility closures were then expected; planned R&D was not expected to be affected.
- Investment and shareholder returns: Management expected approximately $140 million of 2020 capital spending and approximately $55 million of 2020 dividends, subject to Board authorization. In November 2019, the Board authorized up to $150 million of common-stock repurchases and repurchases of remaining legacy convertible debentures; the authorization does not require purchases. Through February 12, 2020, the company had repurchased an additional $14.25 million principal of 2041 debentures for $19.8 million.
- Tax and cash location: The company repatriated $188.7 million in 2019 and paid $38.8 million in withholding and foreign taxes. Substantially all cash and short-term investments were held outside the U.S., creating reliance on repatriation and the revolving facility for certain U.S. obligations. About $100 million of foreign earnings remained designated as not permanently reinvested, with repatriation timing under evaluation. The contractual-obligations table lists $155.0 million of remaining TCJA transition-tax payments.
- Key risks: Cyclical demand, distributor inventory and cancellable orders, customer concentration and pricing leverage, capacity adjustment, tariffs and trade-policy changes, foreign exchange, raw-material availability and volatility, and political or operating risks in foreign locations. The filing also identifies the emerging coronavirus outbreak in China as a potential source of manufacturing, customer, and shipping disruption.
- Concentrations and contingencies: TTI, Inc. represented approximately 10% of 2019 revenue; one customer accounted for 19.4% of receivables at year-end. Environmental remediation liabilities accrued were $12.1 million. U.S. and Canadian capacitor/resistor antitrust claims seek unspecified damages; Holy Stone has agreed to indemnify Vishay and its subsidiary for related losses. The company also faces intellectual-property disputes and routine claims; management did not expect these matters to materially affect consolidated results or financial condition.
- Unusual items and controls: The 2019 effective tax rate was 27.2%, affected by repatriation-related adjustments, a taxable foreign-exchange gain on an intercompany loan settlement, debt repurchases, and uncertain tax positions. Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether demand, distributor inventories, backlog, and book-to-bill recover, and whether margins stabilize after the 2019 volume decline.
- Progress, timing, cash costs, and realized annual savings from the restructuring program.
- Cash availability for U.S. obligations, remaining transition-tax payments, and the terms and status of convertible debt repurchases or potential conversion.
- Actual implementation of planned 2020 capital spending and dividends, and whether the Board exercises the authorized buyback programs.
- Exposure and outcomes relating to tariffs, the China outbreak, key customer concentration, environmental remediation, antitrust litigation, and tax examinations.