Vishay Intertechnology, Inc. — Q3 2018 Form 10-Q
Reporting period: Fiscal quarter and nine fiscal months ended September 29, 2018. Vishay manufactures discrete semiconductors and passive electronic components across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Unless noted, dollar amounts below are in millions. Prior-year comparisons were recast for adopted accounting standards.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $781.0 | $677.9 | $2,258.8 | $1,925.9 |
| Gross profit | $236.3 | $190.1 | $668.8 | $525.7 |
| Gross margin | 30.3% | 28.0% | 29.6% | 27.3% |
| Operating income | $138.1 | $95.4 | $365.5 | $248.0 |
| Operating margin | 17.7% | 14.1% | 16.2% | 12.9% |
| Net earnings attributable to Vishay stockholders | $77.9 | $64.4 | $243.3 | $157.3 |
| Diluted EPS | $0.51 | $0.41 | $1.55 | $1.01 |
Revenue increased 15.2% year over year in Q3 and 17.3% year to date. Management attributed growth and stronger gross margins primarily to higher sales volume, cost reductions, and operating efficiencies. All five segments grew year over year in Q3 except Optoelectronic Components, whose revenue declined slightly.
Cash flow, debt, and liquidity
- Operating cash flow for the first nine months was $108.9 million, versus $245.8 million a year earlier. Capital expenditures were $126.4 million, up from $84.8 million. The company-defined free cash measure was negative $9.0 million, compared with positive $162.5 million.
- Cash flow was substantially affected by approximately $156.8 million of taxes on cash repatriations and a $14.4 million first installment of the U.S. transition tax. Management said these payments materially reduced operating cash flow and free cash.
- At September 29, cash and cash equivalents were $928.1 million and short-term investments were $135.0 million. Reported net cash and short-term investments after debt was $474.5 million, down from $924.7 million at year-end 2017.
- Debt carrying value was $588.6 million; principal debt was approximately $885.9 million. Vishay issued $600 million of 2.25% convertible notes due 2025 and used proceeds to repurchase portions of its 2040 and 2042 debentures. The transactions generated a $17.3 million extinguishment loss.
- The revolving credit facility had no balance at quarter-end. The current ratio was 3.7 to 1. The company reported compliance with credit-facility covenants, with leverage and interest-coverage ratios of 1.48 to 1 and 16.68 to 1, respectively.
Changes, outlook, and risks
- Quarter-end backlog was $1.560 billion, down from $1.595 billion in Q2; the overall book-to-bill ratio fell to 0.95 from 1.17. Management linked the decline to distributor backlog normalization, particularly for semiconductor products in Asia. OEM book-to-bill remained 1.15, while distributor book-to-bill was 0.80.
- For Q4 2018, management forecast revenue of $745 million to $785 million and gross margin of 28.0% to 29.5%, using Q3 exchange rates. It noted that many product lines were at or near capacity, with longer lead times and some shortages; capacity investments were underway.
- Management cited minimal pricing pressure overall, but risks include inflation, U.S. tariffs on certain China-origin goods, foreign-exchange movements, changing global demand, capacity constraints, and the possibility of weaker economic conditions. The filing cautions that backlog may be cancelled or rescheduled and is not necessarily indicative of future revenue.
- Tax accounting under the 2017 Tax Cuts and Jobs Act remained provisional and subject to refinement. The company reported a 38.4% Q3 effective tax rate and a 22.9% year-to-date rate; tax estimates reflect repatriation, GILTI, interest-deduction limits, and other provisions. Approximately $300 million of previously identified foreign earnings remained to be repatriated over several years, potentially subject to further decisions and taxes.
- Capital spending was expected to be approximately $220 million for 2018. The quarterly dividend had increased 26% to $0.085 per share; future dividends remain subject to board approval. In October, the board authorized certain convertible-debt repurchases, and the company received a credit-agreement waiver to permit cash payments for such repurchases.
- Vishay disclosed a roughly $32,000 Korean antitrust fine concerning conduct before it acquired the subsidiary; the former owner agreed to indemnify the subsidiary. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether the Q4 revenue and gross-margin outlook was achieved, especially given the book-to-bill decline and capacity constraints.
- Subsequent free cash generation, capital spending, and cash-tax payments, including the remaining transition-tax and repatriation obligations.
- Debt repurchase or conversion activity, liquidity needs, and the effect of the convertible instruments on interest expense and diluted share count.
- Final adjustments to provisional tax estimates and the ongoing impact of U.S. tax-law provisions.
- Whether demand, distributor inventories, tariffs, currency changes, and product pricing alter segment growth and margins.