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VSH > SEC Filings for VSH > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for VISHAY INTERTECHNOLOGY INC

Form 10-Q for VISHAY INTERTECHNOLOGY INC


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Vishay Intertechnology, Inc. ("Vishay," "we," "us," or "our") is a global manufacturer and supplier of discrete semiconductors and passive components, including power MOSFETs, power integrated circuits, transistors, diodes, optoelectronic components, resistors, capacitors, and inductors. Discrete semiconductors and passive components manufactured by Vishay are used in virtually all types of electronic products, including those in the industrial, computing, automotive, consumer electronic products, telecommunications, power supplies, military/aerospace, and medical industries.

We operate in five product segments: MOSFETs; Diodes; Optoelectronic Components; Resistors & Inductors; and Capacitors.

Since 1985, we have pursued a business strategy of growth through focused research and development and acquisitions. Through this strategy, we have grown to become one of the world's largest manufacturers of discrete semiconductors and passive components. We expect to continue our strategy of acquisitions while also maintaining a prudent capital structure.

We are focused on enhancing stockholder value and improving earnings per share. In addition to our growth plan, we also have opportunistically repurchased our stock. In the second fiscal quarter of 2012, we completed the repurchase of 13.9 million shares of our common stock for $150 million. Including this most recent repurchase, we have repurchased 44.3 million shares of our common stock since the fourth fiscal quarter of 2010, representing 24% of our shares outstanding before we began this initiative. Beginning in 2012, the permitted capacity to repurchase shares of stock under our credit facility began to increase each quarter by an amount equal to 20% of net income. At September 29, 2012, our total capacity to repurchase shares of stock under our credit facility is $170.4 million. Although we have no current plans, we will continue to evaluate attractive stock repurchase opportunities.

Our business and operating results have been and will continue to be impacted by worldwide economic conditions. Our revenues are dependent on end markets that are impacted by consumer and industrial demand, and our operating results can be adversely affected by reduced demand in those global markets. For several years, we implemented aggressive cost reduction programs. We continue to monitor the current economic environment and its potential effects on our customers and the end markets that we serve. Additionally, we continue to closely monitor our costs, inventory, and capital resources to respond to changing conditions and to ensure we have the management, business processes, and resources to meet our future needs. See additional information regarding our competitive strengths and key challenges as disclosed in Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the "SEC") on February 23, 2012.

We utilize several financial metrics, including net revenues, gross profit margin, segment operating income, end-of-period backlog, book-to-bill ratio, inventory turnover, change in average selling prices, net cash and short-term investments (debt), and free cash generation to evaluate the performance and assess the future direction of our business. (See further discussion in "Financial Metrics" and "Financial Condition, Liquidity, and Capital Resources.") The year 2011 was characterized by a strong first half and a weak second half. Through the first six fiscal months of 2012, our business was recovering from the reduction in demand and high inventory levels experienced in the last six fiscal months of 2011, but experienced another substantial downturn in demand in the third fiscal quarter of 2012, which resulted in a reduction of nearly all key financial metrics.

Net revenues for the fiscal quarter ended September 29, 2012 were $572.8 million, compared to $637.6 million for the fiscal quarter ended October 1, 2011. The net earnings attributable to Vishay stockholders for the fiscal quarter ended September 29, 2012 were $22.3 million, or $0.15 per diluted share, compared to $50.5 million, or $0.31 per diluted share for the fiscal quarter ended October 1, 2011.


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Net revenues for the nine fiscal months ended September 29, 2012 were $1,699.5 million, compared to $2,042.6 million for the nine fiscal months ended October 1, 2011. The net earnings attributable to Vishay stockholders for the nine fiscal months ended September 29, 2012 were $101.8 million, or $0.65 per diluted share, compared to $207.9 million, or $1.22 per diluted share, for the nine fiscal months ended October 1, 2011.

The net earnings attributable to Vishay stockholders for the fiscal quarters and nine fiscal months ended September 29, 2012 and October 1, 2011 include items affecting comparability as listed in the reconciliation below. The reconciliation below includes certain financial measures which are not recognized in accordance with GAAP, including adjusted net earnings and adjusted net earnings per share. These non-GAAP measures should not be viewed as an alternative to GAAP measures of performance. Non-GAAP measures such as adjusted net earnings and adjusted net earnings per share do not have uniform definitions. These measures, as calculated by Vishay, may not be comparable to similarly titled measures used by other companies. Management believes that these measures are meaningful because they provide insight with respect to our intrinsic operating results. Reconciling items to arrive at adjusted net earnings represent significant charges or credits that are important to understanding our intrinsic operations.

The items affecting comparability are (in thousands, except per share amounts):

                                              Fiscal quarters ended          Nine fiscal months ended
                                            September       October 1,      September        October 1,
                                             29, 2012          2011         29, 2012            2011

GAAP net earnings attributable to Vishay
stockholders                               $     22,280     $   50,487     $   101,763       $  207,869

Reconciling items affecting operating
margin:
Gain on sale of property                   $          -     $        -     $   (12,153 )     $        -
Executive compensation charges                        -          1,873               -            5,762

Reconciling items affecting tax expense:
Tax effects of items above and other
one-time tax expense (benefit)             $          -     $     (684 )   $     4,131       $    7,921

Adjusted net earnings                      $     22,280     $   51,676     $    93,741       $  221,552

Adjusted weighted average diluted shares
outstanding                                     150,118        163,808         157,770          170,039

Adjusted earnings per diluted share *      $       0.15     $     0.32     $      0.60       $     1.30

* Includes add-back of interest on exchangeable notes in periods where the notes are dilutive.

Our results for the fiscal quarter and nine fiscal months ended September 29, 2012 represent the effects of a deteriorating business environment in most of our markets in the third fiscal quarter of 2012. This period of business environment deterioration followed a period of improvement in the business environment experienced in the first six fiscal months of 2012 compared to the last six fiscal months of 2011. We believe that the business environment in most of our markets is being negatively impacted by macroeconomic anxiety that has started to influence the end consumers and the supply chain. Our results for the first nine fiscal months of 2012 demonstrate our ability to react quickly to changing economic environments and successfully implement temporary cost reduction measures when necessary to sustain earnings. Despite the relatively low revenues, our pre-tax results were as we would expect based on our business model. Changes in the mix of income among our various taxing jurisdictions negatively impacted our effective tax rate for the fiscal quarter and nine fiscal months ended September 29, 2012.


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Financial Metrics

We utilize several financial metrics to evaluate the performance and assess the future direction of our business. These key financial measures and metrics include net revenues, gross profit margin, operating margin, segment operating income, end-of-period backlog, and the book-to-bill ratio. We also monitor changes in inventory turnover and average selling prices ("ASP").

Gross profit margin is computed as gross profit as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but also deducts certain other period costs, particularly losses on purchase commitments and inventory write-downs. Losses on purchase commitments and inventory write-downs have the impact of reducing gross profit margin in the period of the charge, but result in improved gross profit margins in subsequent periods by reducing costs of products sold as inventory is used. Gross profit margin is clearly a function of net revenues, but also reflects our cost management programs and our ability to contain fixed costs.

Operating margin is computed as gross profit less operating expenses as a percentage of net revenues. We evaluate business segment performance on segment operating margin. Only dedicated, direct selling, general, and administrative expenses of the segments are included in the calculation of segment operating income. Segment operating margin is computed as operating income less items such as restructuring and severance costs, asset write-downs, goodwill and indefinite-lived intangible asset impairments, inventory write-downs, gains or losses on purchase commitments, global operations, sales and marketing, information systems, finance and administrative groups, and other items, expressed as a percentage of net revenues. We believe that evaluating segment performance excluding such items is meaningful because it provides insight with respect to intrinsic operating results of the segment. Operating margin is clearly a function of net revenues, but also reflects our cost management programs and our ability to contain fixed costs.

End-of-period backlog is one indicator of future revenues. We include in our backlog only open orders that we expect to ship in the next twelve months. If demand falls below customers' forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, the backlog is not necessarily indicative of the results to be expected for future periods.

An important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period as compared with the product that we ship during that period. A book-to-bill ratio that is greater than one indicates that our backlog is building and that we are likely to see increasing revenues in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of declining demand and may foretell declining revenues.

We focus on our inventory turnover as a measure of how well we are managing our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each fiscal quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital.

Pricing in our industry can be volatile. We analyze trends and changes in average selling prices to evaluate likely future pricing. The erosion of average selling prices of established products is typical for semiconductor products. We attempt to offset this deterioration with ongoing cost reduction activities and new product introductions. Our specialty passive components are more resistant to average selling price erosion.


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The quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business. The following table shows net revenues, gross profit margin, operating margin, end-of-period backlog, book-to-bill ratio, inventory turnover, and changes in ASP for our business as a whole during the five fiscal quarters beginning with the third fiscal quarter of 2011 through the third fiscal quarter of 2012 (dollars in thousands):

                                     3rd            4th            1st            2nd            3rd
                                   Quarter        Quarter        Quarter        Quarter        Quarter
                                     2011           2011           2012           2012           2012

Net revenues                      $  637,649     $  551,391     $  538,547     $  588,199     $  572,781

Gross profit margin                     26.3 %         22.8 %         25.4 %         25.1 %         23.3 %

Operating margin (1)                    11.8 %          6.1 %          9.3 %         12.4 %          7.8 %

End-of-period backlog (2)         $  655,200     $  530,200     $  607,100     $  593,300     $  525,900

Book-to-bill ratio                      0.67           0.80           1.11           1.01           0.87

Inventory turnover                      3.99           3.86           3.66           4.01           4.00

Change in ASP vs. prior quarter         -1.1 %         -0.5 %         -1.0 %         -1.4 %         -0.7 %


________________________________


(1) Operating margin for the third fiscal quarter of 2011 includes a $1.9 million executive compensation charge recognized upon the resignation of our former Chief Financial Officer (see Note 9 to our consolidated condensed financial statements included in Item 1). Operating margin for the second fiscal quarter of 2012 includes a $12.2 million gain recognized on the sale of a vacated property in Belgium (see Note 4 to our consolidated condensed financial statements included in Item 1).
(2) End-of-period backlog for the first fiscal quarter of 2012 reflects a total of $12.2 million related to the backlog of the HiRel Sytems LLC as of the date of acquisition.

See "Financial Metrics by Segment" below for net revenues, book-to-bill ratio, and gross profit margin broken out by segment.

The low demand and reduction in distribution inventory levels that we began to experience in the second half of 2011 reduced our backlog and resulted in a decrease in net revenues in the first half of 2012 compared to the prior year periods. Due to unexpectedly low orders throughout the third fiscal quarter, revenue decreased versus the second fiscal quarter of 2012 and only met the low end of our revenue guidance. Orders and the backlog decreased versus the second fiscal quarter due to the deteriorating business environment in most of our markets, macroeconomic anxieties that affected end consumers and the supply chain. Competitive pricing pressure for commodity semiconductor products has resulted in the continued decline of average selling prices versus the prior quarter and prior year periods.

The decrease in sales volume in the third fiscal quarter of 2012 versus the second fiscal quarter of 2012 and prior year periods resulted in a decrease in gross margins compared to the second fiscal quarter of 2012 and prior year periods.

Due to the unexpectedly low orders, particularly for the Asia market and for distributors, the book-to-bill ratio decreased to 0.87 in the third fiscal quarter of 2012 from 1.01 in the second fiscal quarter of 2012. The book-to-bill ratios for distributors and original equipment manufacturers ("OEM") were 0.79 and 0.94, respectively, versus ratios of 1.06 and 0.94, respectively, during the second fiscal quarter of 2012. The low book-to-bill ratio does not indicate a short-term recovery of revenues.

Visibility is limited in the current economic environment. However, we expect the results of all of our business segments will be negatively affected by the current economic environment in the fourth fiscal quarter, and the MOSFETs, Diodes, and Capacitors segments will be the most significantly affected.

For the fourth fiscal quarter of 2012, we anticipate revenues between $500 million and $540 million at accordingly lower margins compared to the third fiscal quarter of 2012.


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Financial Metrics by Segment

The following table shows net revenues, book-to-bill ratio, gross profit margin,
and segment operating margin broken out by segment for the five fiscal quarters
beginning with the third fiscal quarter of 2011 through the third fiscal quarter
of 2012 (dollars in thousands):

                                     3rd            4th            1st            2nd            3rd
                                   Quarter        Quarter        Quarter        Quarter        Quarter
                                     2011           2011           2012           2012           2012
MOSFETs
Net revenues                      $  131,866     $  109,871     $   94,838     $  111,363     $  123,325

Book-to-bill ratio                      0.50           0.77           1.18           1.20           0.70

Gross profit margin                     20.7 %         14.5 %         11.2 %         16.8 %         14.1 %

Segment operating margin                13.1 %          5.5 %          1.4 %          7.8 %          5.8 %

Diodes
Net revenues                      $  150,993     $  127,470     $  120,134     $  136,008     $  124,108

Book-to-bill ratio                      0.62           0.70           1.01           0.95           0.88

Gross profit margin                     23.7 %         19.8 %         20.9 %         21.1 %         20.3 %

Segment operating margin                19.4 %         14.8 %         16.1 %         16.7 %         15.7 %

Optoelectronic Components
Net revenues                      $   56,119     $   52,258     $   50,639     $   58,083     $   50,205

Book-to-bill ratio                      0.77           0.91           1.12           0.91           0.95

Gross profit margin                     30.9 %         29.7 %         34.2 %         32.0 %         31.0 %

Segment operating margin                24.7 %         22.8 %         27.7 %         26.2 %         24.7 %

Resistors & Inductors
Net revenues                      $  157,037     $  141,757     $  159,010     $  166,398     $  163,712

Book-to-bill ratio                      0.85           0.90           1.13           0.99           0.94

Gross profit margin                     32.9 %         29.9 %         34.1 %         33.1 %         31.3 %

Segment operating margin                28.6 %         24.6 %         29.3 %         28.1 %         26.6 %

Capacitors
Net revenues                      $  141,634     $  120,035     $  113,926     $  116,347     $  111,431

Book-to-bill ratio                      0.65           0.75           1.12           0.97           0.87

Gross profit margin                     25.0 %         22.2 %         25.9 %         22.8 %         21.7 %

Segment operating margin                20.8 %         17.1 %         21.0 %         18.0 %         17.1 %


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Acquisition Activity

As part of our growth strategy, we seek to expand through targeted acquisitions of other manufacturers of electronic components that have established positions in major markets, reputations for product quality and reliability, and product lines with which we have substantial marketing and technical expertise. This includes exploring opportunities to acquire targets to gain market share, penetrate different geographic markets, enhance new product development, round out our existing product lines, or grow our high margin niche market businesses. Acquisitions of passive components businesses would likely be made to strengthen and broaden our position as a specialty product supplier; acquisitions of discrete semiconductor businesses would be made to increase market share and to generate synergies. To limit our financial exposure, we have implemented a policy not to pursue acquisitions if our post-acquisition debt would exceed 2.5x our pro forma earnings before interest, taxes, depreciation, and amortization ("EBITDA"). For these purposes, we calculate pro forma EBITDA as the adjusted EBITDA of Vishay and the target for Vishay's four preceding fiscal quarters, with a pro forma adjustment for savings which management estimates would have been achieved had the target been acquired by Vishay at the beginning of the four fiscal quarter period.

Our growth plan targets adding, through acquisitions, approximately $100 million of revenues per year over the next five years. Depending on the opportunities available, we might make several smaller acquisitions or a few larger acquisitions. We intend to make such acquisitions using mainly cash, rather than debt or equity, although we do have capacity on our revolving credit facility if necessary. We are not currently targeting acquisitions larger than $500 million.

On January 13, 2012, we acquired HiRel Systems LLC, a leading supplier of high reliability transformers, inductors, coils, and power conversion products, for approximately $85.5 million. The products and technology portfolio acquired will further enhance our inductors portfolio, particularly in the field of custom magnetics for medical, military, aerospace and aviation, and applications in the industrial and commercial field such as renewable energy and test and measurement equipment. For financial reporting purposes, the results of operations for this business have been included in the Resistors & Inductors segment from January 13, 2012.

On September 28, 2011, we acquired the resistor businesses of Huntington Electric, Inc., for approximately $19.3 million. The businesses acquired will further enhance our broad resistor portfolio, particularly in the high power and high current ranges, as well as with resistor assemblies for industrial applications. For financial reporting purposes, the results of operations for these businesses have been included in the Resistors & Inductors segment from September 28, 2011.

There is no assurance that we will be able to identify and acquire additional suitable acquisition candidates at price levels and on terms and conditions we consider acceptable.


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Cost Management

We place a strong emphasis on controlling our costs.

The erosion of average selling prices of our established products, particularly our semiconductor products, that is typical of our industry and inflation drive us to continually seek ways to reduce our variable costs. Our variable cost reduction efforts include expending capital to increase automation and maximize the efficiency in our production facilities, consolidating materials purchasing across regions and divisions to achieve economies of scale, materials substitution, maintaining an appropriate mix of in-house production and subcontractor production, increasing wafer size and shrinking dies to maximize efficiency in our semiconductor production processes, and other yield improvement activities.

Our cost management strategy also includes a focus on controlling fixed costs. We seek to maintain selling, general, and administrative expenses at current quarterly levels, excluding foreign currency exchange effects and substantially independent of sales volume changes. Our fixed cost control efforts include automating administrative processes through the expansion of IT systems, gradually migrating to common IT systems across our organization, streamlining our legal entity structure, and reducing our external resource needs by utilizing more cost-effective in-house personnel, while utilizing external resources when day-to-day expertise is not required in-house.

Historically, our primary cost reduction technique was through the transfer of production to the extent possible from high-labor-cost countries, such as the United States and Western Europe, to lower-labor-cost countries, such as the Czech Republic, Israel, India, Malaysia, Mexico, the People's Republic of China, and the Philippines. The percentage of our total headcount in lower-labor-cost countries is a measure of the extent to which we were successful in implementing this program. This percentage was 74.4% at the end of the third fiscal quarter of 2012 as compared to 57% when this program began in 2001. We believe that our workforce is now appropriately located to serve our customers, while maintaining lower manufacturing costs.

As a result of restructuring activities in 2008-2009, we drastically reduced our break-even point by approximately $450 million. While streamlining and reducing fixed overhead, we exercised caution so that we will not negatively impact our customer service or our ability to further develop products and processes. The risks associated with our cost reduction programs are further detailed in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 23, 2012.

We did not initiate any new restructuring projects in 2011 or the first nine fiscal months of 2012 and thus did not record any material restructuring and severance expenses during such periods.

Because we believe that our manufacturing footprint is suitable to serve our customers and end markets, we do not anticipate any material restructuring expenses in 2012. We currently plan to keep our trained workforce even through periods of lower manufacturing activity levels by reducing hours and limiting the use of subcontractors and foundries. However, the recurrence of a significant economic downturn may require us to implement additional restructuring initiatives.

Our long-term strategy includes growth through the integration of acquired businesses, and GAAP requires plant closure and employee termination costs that we incur in connection with our acquisition activities to be recorded as expenses in our consolidated statements of operations, as such expenses are incurred. We have not incurred any material plant closure or employee termination costs related to our acquisitions of Huntington Electric and HiRel Systems LLC, but we expect to have some level of future restructuring expenses due to future acquisitions.

Even as we seek to manage our costs, we continue to pursue our growth plans through investing in capacities for strategic product lines, and through increasing our resources for R&D, technical marketing, and field application engineering; supplemented by opportunistic acquisitions of specialty businesses.


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Foreign Currency Translation

We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. While we have in the past used forward exchange contracts to hedge a portion of our projected cash flows from these exposures, we generally have not done so in recent periods.

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