Vishay Intertechnology, Inc. — Q1 2019 Form 10-Q
Reporting period: Fiscal quarter ended March 30, 2019 (13 weeks). Vishay manufactures discrete semiconductors and passive electronic components across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Unless stated otherwise, dollar amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2019 | Comparable period |
|---|---|---|
| Net revenue | $745.2 | $716.8 Q1 2018; $775.9 Q4 2018 |
| Gross profit / margin | $211.2 / 28.3% | $205.3 / 28.6% Q1 2018; 28.3% Q4 2018 |
| Operating income / margin | $107.7 / 14.5% | $104.1 / 14.5% Q1 2018; 15.4% Q4 2018 |
| Net earnings attributable to Vishay stockholders | $75.5 | $62.4 Q1 2018; $102.4 Q4 2018 |
| Diluted EPS | $0.52 | $0.39 Q1 2018; $0.69 Q4 2018 |
| Operating cash flow / capital expenditures | $79.5 / $36.4 | $46.9 / $28.3 Q1 2018 |
- Management-defined free cash was $43.5 million, versus $18.8 million in Q1 2018. Free cash is a non-GAAP measure.
- Cash and cash equivalents were $749.4 million at March 30, 2019; short-term investments were $8.4 million. Net cash and short-term investments, as defined by the company, were $265.0 million, versus $269.8 million at year-end 2018.
- Debt carrying value was $492.8 million, principally the 2.25% convertible senior notes due 2025. No revolving credit facility borrowings were outstanding. Total assets were $3.18 billion and total equity was $1.45 billion.
- Current assets were $1.77 billion and current liabilities $574.2 million; the reported current ratio was 3.1. Approximately 90% of cash and short-term investments were held outside the United States.
- Inventory was $480.2 million, little changed from $479.7 million at December 31, 2018. Inventory turnover declined to 4.3 from 4.5 in Q4 2018.
Changes and operating trends
- Revenue rose 4.0% year over year, mainly on higher volume, but fell 4.0% sequentially as demand normalized and supply caught up with demand. Gross margin was flat sequentially and down 0.3 percentage points year over year; management attributed the annual decline primarily to volume.
- Orders weakened: consolidated book-to-bill fell to 0.79 from 0.94 in Q4 2018, and backlog declined to $1.332 billion from $1.497 billion. Management reported elevated supply-chain inventory, particularly affecting distributor orders.
- Year-over-year revenue increased in MOSFETs (+7.7%), Resistors & Inductors (+6.7%), and Capacitors (+11.9%); was nearly flat in Diodes (+0.5%); and declined in Optoelectronic Components (-15.8%). Optoelectronic Components’ gross margin fell to 26.4% from 37.8% a year earlier.
- Net income improved year over year despite modest revenue growth, while sequential net income and diluted EPS declined. The 2018 comparative diluted EPS was affected by a substantially higher dilutive share count.
Outlook, commentary, and notable items
- For Q2 2019, management expected revenue of $700–$740 million and gross margin of 26%–27%, using Q1 exchange rates. It anticipated short-term revenue pressure from distributor inventory reductions.
- Management expected approximately $165 million of capital spending in 2019 and approximately $53.4 million of dividend payments. On May 8, 2019, the quarterly dividend was raised 12% to $0.095 per share, subject to board authorization for future payments. The filing stated that material restructuring was not anticipated in 2019.
- U.S. tariffs on goods imported from China pressured gross margins. Other cited risks include global economic and end-market demand, foreign exchange, pricing pressure, manufacturing capacity and cost adjustments, acquisitions, and changes in trade or tax rules.
- During Q1, Vishay spent $22.7 million to repurchase convertible debentures, reducing their principal amount to $21.1 million and fully retiring the 2042 debentures. The repurchases generated a $1.3 million debt-extinguishment loss. The 2040 debentures remained convertible through June 29, 2019, subject to reevaluation; the company intended to pay principal in cash upon conversion.
- Other income included $3.6 million of investment income, compared with investment expense in Q1 2018. The effective tax rate was 24.3%, compared with 32.0% in Q1 2018; discrete tax effects included a $1.3 million benefit related to debt extinguishment and a $0.6 million benefit from remeasurement of repatriation-related deferred taxes.
- Adoption of lease accounting on January 1, 2019 added right-of-use assets and lease liabilities. It also led Vishay to recognize a $23.0 million retained-earnings adjustment for the Santa Clara site sale-leaseback; management said adoption did not materially affect results or cash flows.
- A South Korean court imposed an approximately $44,000 penalty on a subsidiary for pre-acquisition conduct. The subsidiary waived trial, and the former owner had agreed to indemnify the subsidiary for the penalty and related expenses.
- The company reported compliance with credit-facility covenants, with a 19.33-to-1 interest coverage ratio and 0.96-to-1 leverage ratio. Management expected cash on hand and operating cash flow to cover normal operating needs, dividends, R&D, and capital plans.
Important facts for investors to verify
- Whether the falling book-to-bill, backlog, and distributor orders indicate continued demand weakness, and whether Q2 revenue and margin land within management’s stated ranges.
- Inventory levels and turnover across Vishay’s business and the broader distribution channel, especially given the stated supply-chain buildup.
- Segment-level performance, particularly the continued margin and revenue deterioration in Optoelectronic Components, and the effects of tariffs, pricing, and foreign exchange.
- Cash generation relative to planned capital spending, dividends, debt obligations, and the geographic availability of cash; review the company’s non-GAAP definitions when comparing free cash or net cash with peers.
- Convertible-debt conversion and repurchase developments, and the company’s ability to remain within credit-facility covenants if additional borrowing is needed.