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Bryan Hsu

Vishay Intertechnology, Inc. (NYSE: VSH) makes semiconductors and passive electronic components. The company's products are used in end-user electronics ranging from hybrid cars and government satellites to mp3 players and microwaves. VSH's products are considered commodities; they are widespread and readily available from numerous competitors. The company's customers are mostly large OEM or ODM manufacturers of end-user electronics. These companies have significant purchasing power and are continually forcing suppliers to continuously find means to cut costs to remain competitive. In order to grow revenue and profitability Vishay acquires other companies. The company however, has only been able to achieve returns on capital that exceeded the initial cost of capital twice in the last fifteen years.^[1] In other words, Vishay's acquisitions have cost the company more money than the acquired companies generate. As a result of its acquisitions the company had goodwill impairment charges which totaled $357.9 million for the third quarter of 2008 and $800 million combined for the first and second quarter of 2008.^[2][3]

Company Overview

Vishay Intertechnology, Inc. is an international manufacturer and supplier of discrete semiconductors and passive electronic component. Through it's extensive acquisition strategy, Vishay has come to produce components for nearly every kind of end-user electronics including those used in the industrial, computer, automotive, consumer electronic products, telecommunications, military/aerospace, and medical industries. ^[4]

To gain footholds in emerging markets, and to maintain and expand presence in current markets, Vishay has relied heavily on acquisitions. Since Vishay's first acquisitions of Dale Electronics ^[5] to Vishay's most recent acquisition of the Power Control Systems (PCS) business of International Rectifier (IRF), in April 2007^[6], Vishay has acquired twenty nine businesses. Among these acquisitions, the most notable are:

• General Semiconductor (2001) - Then, a leading producer of rectifiers and diodes. This acquisition propelled Vishay to top as a manufacturer of discrete semiconductors. ^[7]
• BCcomponents (2002) - Acquired from Koninklijke Philips Electronics (PHG), pushing Vishay to the top as a passive electronics component manufacturer and supplier. ^[7]
• CyOptics Israel Ltd. (2005) - Acquired from CyOptics, Ltd. to strengthen Vishay's presence in the market for optoelectronics. This acquisition has landed Vishay numerous Israeli government grants and tax reliefs, helping to expand its research and developement (R&D) in the market of optoelectronics.^[8][9][10]

Business and Financial Metrics

Revenues and Earnings

Revenue by Product Group 2007 ^[17]

Revenue By Region 2007^[18]

Revenue for Vishay is split 53% discrete semiconductors and 47% passive components. As the chart suggests, both of these larger sections can be further broken down into smaller segments. Vishay has seen its gross profits and gross revenues rise in the past three years. Revenue, total income taken in from sales, has increased 12.4% from 2005 to 2006 and 9.75% from 2006 to 2007.^[16] Gross profit, which is total revenue less total material/labor costs has also increased 25% from 2005 to 2006 and 5.4% from 2006 to 2007. ^[16] Earnings, the money left over after asset write-downs, depreciation costs, currency changes, restructuring costs and interest rate changes, is the amount of money that Vishay is able to in turn use in future investments. Because the market for electronic components is highly competitive, marginal revenue is very low on products resulting in low earnings even though sales reach billions of dollars.

Business Segments

Semiconductors(52.6% of Revenue^[19], 58.6% of Net Income^[19])

Semiconductors include discrete devices, integrated chips (IC), and modules. Discrete devices are often single component or an arrangement of several components that perform a single function, such as switching, amplifying,or transmitting electrical signals. Integrated circuits or IC's have anywhere between a few to a million active and passive components on a single chip. Vishay's IC's focus on analog signal switching and routing, power conversion, and power management. ^[19] A module is a self contained component of a system, comprising of several different components packaged together. ^[20] Discrete semiconductors and ICs are manufactured and marketed primarily through Vishay's Siliconix subsidiary, the Vishay Semiconductor GmbH subsidiary, and General Semiconductor business.^[19]

Passive Components(47.4% of Revenue^[19], 41.4% of Net Income^[19])

Passive components are used to store electrical charges, to limit or resist electrical current, and to help in filtering, surge suppression, measurement, timing, and tuning applications. Vishay includes its Measurements Group within this segment because the instruments use passive components in their electro-mechanical measurements. ^[27] Within this segment of Vishay's products the most notable are:

• Bulk Metal® Resistors: These are high precision resistors used in high accuracy electronics such as precision amplifiers; high-precision instrumentation; medical and automatic test equipment; high-end stereo equipment; electron beam scanning and recording equipment; and military, aerospace, and down-hole equipment and instrumentation.^[27]
• Power Metal Strip® Resistors: These are resistors with low resistance values. They are used to detect subtle changes in current flow and to divert current flow. ^[27]
• Vishay PhotoStress® coatings and instruments: As part of the Measurements Group, these unique optical instruments detect stress and other physical forces.^[27]

Key Trends and Forces

Cyclical Nature of Electronics Component Market May Result in Increasingly Large Downturns

The electronics components industry is very cyclical and has periods of decline in sales and production from time to time.The most recent downturn from 2000-2002 was touted to be the worst in the history of the semiconductor industry with sales falling from $200B to $160B. ^[34] A slow-down in demand affects Vishay's ability to project future sales and earnings which threaten Vishay's financial condition.

For the year 2009, due to the worsening economic situation, iSuppli, a company that specializes in analyzing the electronics and technology markets, projects that demand for microprocessors and DRAM, essential components of PC's, will drop 4% in the coming year.^[35] iSuppli also projects that 1G and 2G mobile phone demand will also fall by about 14% this year as opposed to the previously estimated 1% drop.^[35]Since demand for electronic components is directly tied to end-user products, a decline in demand for end-user products due to the economic downturn will adversely affect Vishay's revenues. This decline will lead to order cancellations and deferrals, lower average selling prices and inventory excess (which lowers inventory turns), which again will adversely affect Vishay's operations. ^[36]

Recurring Restructuring Costs and Asset Write-Downs Affect Earnings

Vishay has only twice been able to achieve returns on acquired capital that have exceeded the firm's capital cost in the past 15 years. ^[1] Since Vishay first began acquiring other companies, it has continued to face costs related to restructuring acquired companies in an attempt to streamline operations and as well as costs related to restructuring itself due redundant factories, offices, and employees. For 2007, net restructuring and severance costs totaled to $14,681,000.^[37] Because employees are terminated and facilities are shut down, vacated buildings are written down and incur a depreciation expense. Total asset write-downs and depreciation expenses totaled $200,433,000.^[38] Each year, total costs related to acquisitions have grown larger and larger: $385.9M in 2005, $415.0M in 2006, and $443.8M in 2007. ^[38] With cost of products already comprising 75.5% of net revenue^[39], further increases in acquisition costs only stand to lower net earnings of the company.

Operations in Israel Are Profitable, However Future Benefits May Not Last

Vishay has significant manufacturing operations in Israel (17% of 2007's net revenues were from products manufactured in Israel^[40]) in order to benefit from that country’s lower wage rates, highly skilled labor force, government-sponsored grants, and various tax abatement programs.^[41]The low tax rates in Israel applicable to earnings of operations in that country, compared to the rates in the United States, have had the general effect of increasing net earnings, although this was not the case during 2002, 2003, and 2004 due to losses on purchase commitments. ^[42] Vishay also benefits from numerous employment grant incentives from the Israeli government.^[42] These grants are awarded to specific projects and are intended to promote employment in Israel's industrial sector; consequently, are conditioned on the recipient maintaining certain prescribed employment levels. ^[43] These grants were recorded as reduction in costs of products sold, amounting to $4.8M, $6.0M, and $6.9M in 2007, 2006, and 2005 respectively.^[43] However, over the past few years, the Israeli government has scaled back or discontinued some of its incentive programs.^[43] Vishay believes that since it has received approval for most of its planned projects, they do not anticipate that the cutbacks will have an adverse effect on earnings or operations for several years.^[43] Also, given the on-going turmoil in the Middle East, Vishay's operations in Israel stand to be hurt significantly should the turmoil reach certain levels.

Competition

In the market for electronics components, Vishay faces fierce competition. The market sees numerous companies startup each year only to die after a few years due to the fierce competition. Those that do stay afloat do so by either specializing in niche markets, or acquiring other companies to continue expanding. Vishay is unique in this market in that it is one of a few electronic component manufacturers that produces both semiconductors and passive components. Since Vishay produces both, it faces competition on both fronts and must maintain the same if not greater level of advancement in product lines through research and development. In the semiconductor sector it faces strong competition from Fairchild Semiconductor International (FCS), and ON Semiconductor (ONNN). Within the passive component sector, Vishay faces competition from AVX (AVX).

• Fairchild Semiconductor International (FCS) is one of the founders of the semiconductor industry and has continued to be a producer of power analog, power discrete and certain non-power semiconductors with 2007 sales reaching $1.67 billion.^[44] In 2007, 74% of its gross revenue were from power discrete and power analog semiconductors alone.^[45] They have offices worldwide in the Americas, Asia and Europe. Most of their fabrication and manufacturing of their products is done in low-cost labor regions such as China, Malaysia, and the Philippines.^[45]
• ON Semiconductor (ONNN) is another major manufacturer of semiconductors. They have a product portfolio of 29,300 products used in an extensive list of end-user electronics such as hybrid cars, computers, GPS devices, and automated testing equipment.^[46] ON Semiconductor specializes in power management and data control semiconductors.^[46] Power management semiconductors control, convert, protect and monitor the power supply to electronic components in an end-user device.^[46] Data control semiconductors regulate data flow for communication systems. ^[46]
• AVX (AVX) is a worldwide manufacturer of passive components in electronic end-user products. Most of the passive components that AVX sells are made by a Japanese company, Kyocera Corporation of Japan, which owns a 71% stake in AVX.^[47] AVX has three main product segments, passive components and Kyocera Electronic Devices "KED" Resale and Connectors.^[47]. As of March 31, 2008 total revenue was $1.61 Billion USD, up 8% from March 31, 2007. ^[48]

References

1. ↑ ^{1.0 1.1} VSH 2008 Report by Morningstar
2. ↑ Vishay sees 3Q loss due to impairment charge Yahoo! Business
3. ↑ Vishay Investor Relations Vishay Intertechnology Inc.
4. ↑ VSH 10-K, 2007 Item 7: MD&A Pg. 32
5. ↑ VSH 10-K 2007, Item 1: Business, Pg. 6
6. ↑ "UPDATE 1-Vishay to acquire International Rectifier's PCS unit" Reuters
7. ↑ ^{7.0 7.1} VSH 10-K 2007, Item 1: Business, Pg. 6
8. ↑ CyOptics Inc.
9. ↑ "Vishay Invests in Compound Growth" Science Direct
10. ↑ VSH 10-K 2007, Item 1: Business, Pg. 12
11. ↑ VSH 10-Q 3Q2007, Pg. 33
12. ↑ VSH 10-Q 4Q2007, Pg. 32
13. ↑ VSH 10-Q 1Q2008, Pg. 26
14. ↑ VSH 10-Q 2Q2008, Pg. 35
15. ↑ VSH 10-Q 3Q2008, Pg. 40
16. ↑ ^{16.0 16.1 16.2 16.3 16.4} VSH 10-K 2007, Selected Financial Data, F-6
17. ↑ Vishay 2007 Annual Report, Pg. 7
18. ↑ Vishay 2007 Annual Report, Pg. 7
19. ↑ ^{19.0 19.1 19.2 19.3 19.4 19.5} VSH 10-K 2007, Selected Financial Data Pg. F-61
20. ↑ "Modules" Wikipedia.org
21. ↑ VSH 10-Q 3Q2007, Pg. 34
22. ↑ VSH 10-Q 4Q2007, Pg. 33
23. ↑ VSH 10-Q 1Q2008, Pg. 27
24. ↑ VSH 10-Q 2Q2008, Pg. 36
25. ↑ VSH 10-Q 3Q2008, Pg. 41
26. ↑ ^{26.0 26.1 26.2} VSH 10-K 2007, Item 7 MD&A, Pg. 48
27. ↑ ^{27.0 27.1 27.2 27.3} VSH 10-K 2007, Item 1: Business, Pg. 9
28. ↑ VSH 10-Q 3Q2007, Pg. 34
29. ↑ VSH 10-Q 4Q2007, Pg. 33
30. ↑ VSH 10-Q 1Q2008, Pg. 27
31. ↑ VSH 10-Q 2Q2008, Pg. 36
32. ↑ VSH 10-Q 3Q2008, Pg. 41
33. ↑ ^{33.0 33.1 33.2} VSH 10-K 2007, Item 7: MD&A, Pg. 49
34. ↑ Semiconductor Cyclicality Wikinvest
35. ↑ ^{35.0 35.1} How Bad Will 2009 Be for Semiconductors Trade Radar.com
36. ↑ VSH 10-K 2007, Item 1a: Risk Factors Pg. 17
37. ↑ VSH 10-K, 2007 Note 4, Pg. F-28
38. ↑ ^{38.0 38.1} VSH 10-K 2007, Note 15, Pg. F-61
39. ↑ VSH 10-K 2007 Item 7:MD&A, Pg. 46
40. ↑ VSH 10-K 2007, Item 1: Business, Pg. 12
41. ↑ VSH 10-K 2007 Note 14, Pg. F-59
42. ↑ ^{42.0 42.1} VSH 10-K 2007, Item 1a: Risk Factors, Pg. 21
43. ↑ ^{43.0 43.1 43.2 43.3} VSH 10-K 2007, Item 7: MD&A, Pg. 39
44. ↑ FCS 10-K 2007, Selected Financial Data Pg. 32
45. ↑ ^{45.0 45.1} FCS 10-K 2007, Item 1: Business, Pg. 8
46. ↑ ^{46.0 46.1 46.2 46.3} ONNN 10-K 2007, Item 1: Business Overview, Pg. 3
47. ↑ ^{47.0 47.1} AVX 10-K 2007, Item 1: Business, Pg. 3
48. ↑ AVX 10-K 2007, Item 1: Business, Pg. 4
49. ↑ VSH 10-K, 2007 Selected Financial Data, F-4
50. ↑ FCS 10-K 2007 Selected Financial Data, Pg. 54
51. ↑ ONNN 10-K 2007 Selected Financial data Pg. 87,104
52. ↑ AVX 10-K 2008 Selected Financial Data Pg. 47,48,59