Vishay Intertechnology, Inc. — Q2 2016 Form 10-Q
Reporting period: Fiscal quarter and six fiscal months ended July 2, 2016. Vishay makes discrete semiconductors and passive electronic components across five segments: MOSFETs, Diodes, Optoelectronic Components, Resistors & Inductors, and Capacitors. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $590.1 | $590.5 | $1,160.7 | $1,183.9 |
| Gross profit / margin | $146.1 / 24.8% | $141.5 / 24.0% | $283.4 / 24.4% | $286.5 / 24.2% |
| Operating income / margin | $49.4 / 8.4% | $44.2 / 7.5% | $90.0 / 7.8% | $91.7 / 7.7% |
| Net earnings attributable to Vishay stockholders | $33.1 | $26.3 | $61.1 | $57.0 |
| Diluted EPS | $0.22 | $0.17 | $0.41 | $0.37 |
- Q2 revenue was essentially flat year over year; higher volume was offset by lower average selling prices. For the first half, revenue declined 2.0%.
- Q2 gross margin improved, which management attributed mainly to higher volume, restructuring savings, and lower metals and materials prices. Six-month gross margin also improved slightly.
- Q2 operating income and attributable net earnings increased year over year. Six-month operating income declined modestly while net earnings increased.
- Q2 results included a $1.0 million gain on early extinguishment of debt. First-half results included a $4.6 million gain from repurchasing exchangeable notes below par.
- Operating cash flow was $95.0 million for the first half, versus $92.4 million a year earlier. Capital expenditures were $51.1 million, compared with $49.6 million. The filing reports positive free cash generation but does not provide a specific first-half free-cash figure in the supplied text.
Liquidity, debt, and capital returns
- At July 2, 2016, cash and cash equivalents were $475.2 million and short-term investments were $546.1 million. Reported net cash and short-term investments, after debt, were $686.1 million.
- Long-term debt carrying value was $335.1 million, down from $436.7 million at year-end 2015. Credit-facility borrowings fell to $124 million from $190 million. No exchangeable notes due 2102 remained outstanding after the company repurchased the full balance for $34.0 million in two transactions.
- The current ratio was 4.2 to 1; the debt-to-Vishay-stockholders’-equity ratio was 0.20 to 1. The company reported compliance with its credit-facility covenants, with leverage of 2.0 to 1 and interest coverage of 10.72 to 1.
- Operating cash flow included a $17.0 million contribution to Taiwanese pension plans. The company paid $18.4 million in dividends during the first half and repurchased 495,569 shares for $6.1 million under a new $100 million authorization.
- Most cash and short-term investments were held outside the United States. The company repatriated $46 million in Q2 under a previously announced program covering $300 million of foreign earnings.
Business trends and material changes
- Management described a continuing recovery in orders, though at a slower pace than in Q1. Q2 backlog rose to $579.8 million, and the overall book-to-bill ratio was 1.02, down from 1.08 in Q1. Average selling prices continued to decline, but more slowly.
- Q2 revenue increased year over year in Diodes (2.4%) and Resistors & Inductors (7.4%); it declined in MOSFETs (3.9%), Optoelectronic Components (6.7%), and Capacitors (8.6%). Diodes and Resistors & Inductors had the strongest segment operating margins; MOSFETs remained under pricing and margin pressure.
- Management cited volume, cost reductions, and lower material costs as support for consolidated margins. Capacitors remained affected by weakness in oil and gas and computers; Optoelectronic Components faced a difficult Asian market.
Outlook, risks, and unusual items
- For Q3 2016, management forecast revenue of $570 million to $610 million and gross margin of 24% to 26%. It also expected approximately $135 million of capital expenditures and approximately $36.8 million of dividends for 2016; dividends remain subject to board approval.
- Cost-reduction programs announced in 2015 are expected to generate approximately $35 million of annual savings at current volumes, with about $30 million of expected cash costs; implementation is expected before the end of 2017. The MOSFETs program is expected to reduce annual manufacturing costs by approximately $23 million at current volumes beginning in Q3 2016.
- Completion of the proposed U.S. qualified pension-plan termination was not expected before Q4 2016 and could require additional funding estimated at zero to $35 million. The company had already contributed $17.0 million to Taiwanese pension plans in 2016.
- Following the 2015 Tianjin explosion, the company estimated $10.1 million of inventory, property, equipment, repair, and cleanup costs. It recorded a $4.1 million insurance receivable; business-interruption claims were not quantified and no receivable was recorded for them.
- A Vishay subsidiary received full immunity and no fine from Japan’s Fair Trade Commission in a tantalum-capacitor matter concerning conduct before Vishay acquired the business. Vishay remained a defendant in similar Canadian resistor antitrust cases; U.S. amended complaints no longer named Vishay or its subsidiaries.
- Key stated risks include weaker global demand, ongoing price erosion, foreign-exchange movements, execution of cost programs, and acquisition identification and integration. Backlog orders may be canceled or rescheduled, often without penalty. Management said there had been no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the recovery in orders and book-to-bill above 1.0 continues, and whether the Q3 revenue and gross-margin guidance is achieved.
- Whether price declines, particularly in MOSFETs, are offset by volume growth, cost savings, and improved manufacturing efficiency.
- Progress, cash costs, and realized savings from restructuring, including the projected MOSFETs savings and 2015 global cost programs.
- Cash availability and repatriation costs, pension funding needs, capital spending, and the pace of share repurchases and dividends.
- Resolution of Tianjin insurance and business-interruption claims, the U.S. pension termination process, and the remaining Canadian litigation.