significantly less than those recorded in 2003, 2002, and 2001. Restructuring and severance costs for the quarter and six fiscal months ended July 3, 2004 were $1.8 million and $2.1 million, respectively, substantially all of which was paid by July 3, 2004.
We recorded restructuring and severance costs for the year ended December 31, 2003 of $29.6 million, $28.6 million of which was workforce reduction expense and $1.0 million of which was fixed asset impairment. Included in restructuring and severance costs for year ended December 31, 2003 are restructuring and severance charges of $12.9 million recorded during the six months ended June 30, 2003. The workforce reduction expense for the year ended December 31, 2003, was comprised of termination costs for 708 employees in Europe, Asia and the United States. As of the end of the second quarter 2004, approximately $5.6 million of workforce reduction costs continue to be accrued. The balance of accrued workforce reduction costs remaining at the end of the second quarter 2004 is expected to be substantially all paid by the end of 2004. The fixed asset impairment related to facility closure. As a result of restructuring activities initiated in 2003, we expect an annual increase in gross profit of approximately $10.4 million.
We recorded restructuring and severance costs for the years ended December 31, 2002 and 2001 of $31.0 million and $61.9 million, respectively. We realized savings in 2003 and 2004 related to these restructuring charges, and we expect to continue to realize annual cost savings associated with these restructuring activities initiated in 2002 and 2001.
Restructuring and severance costs are separate from plant closure, employee termination and similar integration costs we incur in connection with our acquisition activities. These amounts are included in the costs of our acquisitions and do not affect earnings or losses on our statement of operations. For a discussion of these costs, see Note 2 to our consolidated financial statements.
Interest expense for the quarter and six fiscal months ended July 3, 2004 decreased $0.6 million and $2.0 million, respectively, as compared to the comparable prior year periods. These decreases are primarily attributable to repayment of debt with the proceeds of lower interest rate debt issued in the third quarter of 2003. These proceeds, from our issuance of our 3-5/8% convertible subordinated notes, were used to repay approximately $171 million principal amount of General Semiconductor’s 5.75% convertible notes, approximately $97 million accreted principal amount of Liquid Yield Option™ Notes (LYONs) and $130 million in borrowings under our revolving credit facility in the third quarter of 2003. Additionally, on June 4, 2004, we repurchased $102.1 million accreted principal amount of LYONs through the issuance of 5,534,905 shares of common stock. The repurchase of the LYONs is expected to reduce future interest expense by approximately $3 million per year, but had only a minimal impact in reducing interest expense for the quarter and six fiscal months ended July 3, 2004.
Other income for the quarter and six fiscal months ended July 3, 2004 was $3.0 million and $4.0 million, respectively, compared to $0.3 million and $0.9 million, respectively, for the comparable prior year periods. We experienced foreign exchange gains in the second quarter and six fiscal months ended July 3, 2004, of approximately $2.3 million and $2.1 million, respectively. This compares to exchange losses of $1.2 million and $2.5 million for the comparable prior year periods. Interest income for the second quarter of 2004 increased approximately $0.7 million as compared to the second quarter of 2003, primarily attributable to an increase in invested cash, partially offset by lower interest rates. Interest income for the six fiscal months ended July 3, 2004 was approximately the same as interest income for the comparable prior year period, primarily attributable to lower interest rates. Additionally, the quarter and six fiscal months ended July 3, 2004 include a loss on disposal of fixed assets of $1.4 million. The comparable prior year periods included gains on sale of fixed assets of $0.2 million and $0.3 million, respectively.
Minority interest in earnings increased $2.0 million for the six fiscal months ended July 3, 2004, as compared to the comparable prior year period, primarily due to the increase in net earnings of Siliconix, of which we own 80.4%.
Income Taxes
The effective tax rate, based on earnings before income taxes and minority interest, for the six fiscal months ended July 3, 2004 was 28.5% as compared to 23.4% for the comparable prior year period. Excluding the impact of the minority interest, the effective tax rate was approximately the same for both periods.
The effective tax rates reflect the fact that we could not recognize for accounting purposes the tax benefit of losses incurred in certain jurisdictions, although these losses are available to offset future taxable income. Under applicable accounting principles, we may not recognize deferred tax assets for loss carryforwards in jurisdictions where there is a recent history of cumulative losses, where there is no taxable income in the carryback period, where there is insufficient evidence of future earnings to overcome the loss history and where there is no other positive evidence, such as the likely reversal of temporary timing differences, that would result in the utilization of loss carryforwards for tax purposes.
We enjoy favorable tax rates on our operations in Israel. Such rates are applied to specific approved projects and are normally available for a period of ten or fifteen years. The low tax rates in Israel applicable to us ordinarily have resulted in increased earnings compared to what earnings would have been had statutory United States tax rates applied. Additionally, we have been able to offset taxable income with loss carryforwards from prior years. Accordingly, earnings of our subsidiaries subject to Israeli taxes during the first six fiscal months of 2004 resulted in an increase in earnings of approximately $4 million as compared to what earnings would have been had statutory United States tax rates applied. Due to losses reported in Israel for the comparable period in 2003, there was no material impact on net earnings for the comparable period.
Financial Condition and Liquidity
Cash and cash equivalents were $639 million at the end of the second quarter 2004, of which $324 million belonged to Siliconix. Of the remaining amount of $315 million, approximately $240 million is held by our non-U.S. subsidiaries. Our cash and most profits generated by foreign subsidiaries are expected to be reinvested indefinitely. Any repatriation of earnings and cash back to the United States would be deemed to be a dividend and would be subject to U.S. income taxes, state income taxes, and foreign withholding taxes.
Cash flows from operations were $132.5 million for the six fiscal months ended July 3, 2004 as compared to $94.5 million for the comparable prior year period, primarily attributable to increased earnings.
Our financial condition at the end of the second quarter 2004, continued to be strong, with a current ratio (current assets to current liabilities) of 3.1 to 1, the same ratio as of the end of the first quarter 2004. The current ratio was 2.8 to 1 at December 31, 2003. The increase in this ratio in 2004 is primarily due to cash generated by operations and increases in receivables as a result of higher sales. Our ratio of long-term debt, less current portion, to stockholders’ equity was 0.27 to 1 at the end of the second quarter 2004, as compared to 0.33 to 1 at the end of the first quarter 2004 and at December 31, 2003. The improvement in this ratio is due to the reduction of debt subsequent to the issuance of shares of common stock to holders of our Liquid Yield Option™ Notes (LYONs) who elected to exercise their option to require us to repurchase their LYONs on June 4, 2004.
Holders of our LYONs had the option to require us to purchase all or a portion of their LYONs on June 4, 2004 at their accreted value of $602.77 per $1,000 principal amount at maturity. Pursuant to the terms of the notes, we elected to pay the purchase price in Vishay common stock. Holders representing approximately 44% of outstanding LYONs exercised their option. We issued 5,534,905 shares of common stock as consideration in the purchase of approximately $102.1 million accreted principal amount of the LYONs. The remaining LYONs holders also have the right to require us to repurchase their notes on June 4, 2006, June 4, 2011, and June 4, 2016 at their accreted value on these dates, as set forth in the notes.
Even with the reduction of debt by $102.1 million subsequent to our repurchase of the LYONs, our debt levels have increased significantly since 2000. This is primarily attributable to acquisition activity. Additionally, in 2003, we issued $500 million of convertible subordinated notes, using a majority of the proceeds to repay other higher interest rate debt.
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We maintain a secured revolving credit facility of $400 million, which was extended in 2003 until May 2007. At July 3, 2004 and December 31, 2003, there were no borrowings outstanding under this credit facility.
Borrowings under the revolving credit facility are secured by pledges of stock in certain significant subsidiaries and certain guarantees by significant subsidiaries. The subsidiaries would be required to perform under the guarantees in the event that Vishay failed to make principal or interest payments under the revolving credit facility. If any subsidiary were to borrow under the credit facility, Vishay would provide a similar guarantee with respect to the subsidiary.
On May 24, 2004, we entered into a Consent and First Amendment to Vishay Intertechnology, Inc. Second Amended and Restated Long Term Revolving Credit Agreement, effective as of May 14, 2004. The amendment provides for lender consent to the corporate restructuring of certain subsidiaries of Vishay, permits subsidiary guarantees of certain equipment leases and revises and clarifies the conditions under which Vishay and its subsidiaries may extend loans to one another. In addition, in connection with the execution of the amendment, certain additional Vishay subsidiaries, which have become “significant subsidiaries” as that term is defined under the credit agreement, have become parties to various security and guaranty documents. We are presently in the process of entering into a second amendment, which will make certain additional technical changes to the collateral arrangements under the revolving credit agreement. Such amendment, when executed, will be effective as of August 6, 2004. Our Siliconix subsidiary is not a party to our revolving credit agreement.
The credit facility restricts us from paying cash dividends and requires us to comply with other covenants, including the maintenance of specific financial ratios. Pursuant to the amended and restated credit facility agreement, we must maintain a tangible net worth of $850 million plus 50% of net income (without offset for losses) and 75% of net proceeds of equity offerings since July 1, 2003. Our tangible net worth at July 3, 2004, as calculated pursuant to the terms of the credit facility, stood at $1,070 million, which is $172 million more than the minimum required under the related credit facility covenant.
Net purchases of property and equipment for the six fiscal months ended July 3, 2004 were $48.6 million, as compared to $41.1 million in the prior year period. Our capital expenditures are projected to grow from $127 million in 2003 to $175 million in 2004, in part to expand capacity in the active business, which will occur primarily in the second half of the year. Purchase of businesses of $6.3 million and $14.7 million, for the six fiscal months ended July 3, 2004 and June 30, 2003, respectively, represent payments made related to liabilities assumed from previous acquisitions.
For the next twelve months, management expects that cash flows from operations will be sufficient to meet our normal operating requirements, to meet our obligations under restructuring and acquisition integration programs, and to fund our research and development and capital expenditure plans.
Tower Semiconductor
On May 17, 2004, our 80.4% owned subsidiary Siliconix announced that it signed a definitive long-term foundry agreement for semiconductor manufacturing with Tower Semiconductor.
Siliconix will place with Tower orders valued at approximately $200 million for the purchase of semiconductor wafers to be manufactured in Tower’s Fab 1 over a seven to ten year period. The agreement specifies minimum quantities per month and a fixed quantity for the term of the agreement.
The first phase of technology transfer from Siliconix to Tower has started and is estimated to last approximately 12 months. After the completion of the technology transfer, the expected purchase commitments are approximately $8 million for year one; approximately $16 million for year two; and approximately $28 million per year through the end of the agreement.
Siliconix will advance to Tower $20 million to be used for the purchase of additional equipment required to satisfy Siliconix’s orders, which will be credited towards the purchase price of the wafers. No amounts have been advanced as of the end of the second quarter 2004.
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The closing of the agreement is subject to the approval of Tower’s lending banks. If these approvals are not obtained, neither Vishay nor Siliconix will have any obligations pursuant to this agreement.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB 51. The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46-R”) to address certain FIN 46 implementation issues. The adoption of FIN 46 and FIN 46-R did not have a material effect on our financial position, results of operations, or liquidity.
In December 2003, the FASB issued a revision to SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revised standard retains the disclosure requirement contained in the original standard and requires additional disclosures about the assets, obligations, cash flows and net period cost of defined pension plans and other defined benefit postretirement plans. We adopted the annual disclosure requirements required by SFAS No. 132 (revised 2003) for our U.S. pension and other postretirement plans in our annual report on Form 10-K for the year ended December 31, 2003. This quarterly report on Form 10-Q includes the required interim disclosures. As permitted by SFAS No. 132, certain disclosures regarding non-U.S. pension plans and estimated future benefit payments for both U.S. and non-U.S. pension and other postretirement benefit plans will be delayed until our annual report on Form 10-K for the year ending December 31, 2004.
On December 8, 2003, the President of the United States signed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). On May 19, 2004, the FASB issued Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, (“FSP No. 106-2”). The above Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP No. 106-2 is effective for the first interim period beginning after June 15, 2004 and provides that an employer shall measure the accumulated plan benefit obligation (“APBO”) and net periodic postretirement benefit cost taking into account any subsidy received under the Act. As of July 3, 2004, our measurements of both the APBO and the net postretirement benefit cost do not reflect any amounts associated with the subsidy. We are in the process of evaluating the impact of the accounting treatment required by FSP No. 106-2.
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Safe Harbor Statement
Statements contained herein that relate to our future performance and outlook, including, without limitation, statements with respect to our anticipated results of operations or level of business for 2004 or any other future period, including anticipated business improvements or continuing business trends, synergies and cost savings, and expected or perceived improvements in the economy and the electronic component industry generally are forward-looking statements within safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the factors that could cause actual results to materially differ include: changes in the demand for, or in the mix of, our products and services; market-wide business and economic trends, generally or in the specific areas where we sell the bulk of our products; competitive pricing and other competitive pressures; changes in the pricing for new materials used by the Company, particularly tantalum and palladium; cancellation of a material portion of the orders in our backlog; difficulties in expansion and/or new product development, including capacity constraints and skilled personnel shortages; changes in laws, including trade restrictions or prohibitions and the cancellation or reduction of government grants, tax benefits or other incentives; currency exchange rate fluctuations; labor unrest or strikes; underutilization of plants and factories in high labor cost regions and capacity constraints in low labor cost regions; the availability of acquisition opportunities on terms considered reasonable by us; and such other factors affecting our operations, markets, products, services and prices as are set forth in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates and interest rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. The Company’s policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed. No derivative financial instruments were utilized to hedge these exposures during the second quarter 2004.
We are exposed to changes in U.S. dollar LIBOR interest rates on borrowings under our floating rate revolving credit facility. No amounts were outstanding under this facility during the quarter or six fiscal months ended July 3, 2004. On a selective basis, from time to time, we enter into interest rate swap or cap agreements to reduce the potential negative impact that increases in interest rates could have on our outstanding variable rate debt. No such instruments were outstanding during the quarter or six fiscal months ended July 3, 2004.
Item 4. Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective as of the end of the second quarter of 2004, including for purposes of ensuring that all material information required to be filed in this report has been made known to our management, including the CEO and CFO, in a timely fashion.
There has not been any change in our internal controls over financial reporting during the second quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
| |
| Not applicable |
| |
Item 2. | Changes in Securities |
| |
| Not applicable |
| |
Item 3. | Defaults Upon Senior Securities |
| |
| Not applicable |
| |
Item 4. | Submission of Matters to a Vote of Security Holders |
(a) The Company held its Annual Meeting of Stockholders on May 12, 2004.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to management’s nominees for the directors as listed in the definitive proxy statement of the Company dated April 7, 2004, and all such nominees were elected.
(c) Briefly described below is each matter voted upon at the Annual Meeting of Stockholders.
(1) Election of the following individuals to hold office as Directors of the Company for terms of three years.
Total common stock voted was 133,128,291.
| | For | | Withheld | |
| |
| |
| |
Dr. Felix Zandman | | | 98,728,229 | | | 34,400,062 | |
Zvi Grinfas | | | 98,738,083 | | | 34,390,208 | |
Philippe Gazeau | | | 130,041,427 | | | 3,086,864 | |
Dr. Gerald Paul | | | 93,642,979 | | | 39,485,312 | |
Total Class B common stock voted was 14,895,847, all in favor.
(2) Ratification of the appointment of Ernst & Young LLP as independent auditors for the year ending December 31, 2004. Total common stock voted was 131,027,150 in favor, 2,001,474 against, 99,667 abstain, and 0 broker non-votes. Total Class B common stock voted was 14,895,847, all in favor.
(3) Approval of the amendment of Section 162(m) Cash Bonus Plan. Total common stock voted was 122,183,435 in favor, 9,259,794 against, 99,667 abstain, and 1,585,395 broker non-votes. Total Class B common stock voted was 14,895,847, all in favor.
(4) Approval of the Senior Executive Phantom Stock Plan. Total common stock voted was 95,752,926 in favor, 9,749,155 against, 1,704,453 abstain, and 25,921,757 broker non-votes. Total Class B common stock voted was 14,895,847, all in favor.
Each share of common stock is entitled to one vote and each share of Class B common stock is entitled to 10 votes on matters voted upon by stockholders.
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Item 5. | Other Information |
| | | |
| Not applicable |
| | | |
Item 6. | Exhibits and Reports on Form 8-K |
| |
| (a) | Exhibits: |
| | |
| | 31.1 | Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Dr. Felix Zandman, Chief Executive Officer. |
| | | |
| | 31.2 | Certification pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Richard N. Grubb, Chief Financial Officer. |
| | | |
| | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Dr. Felix Zandman, Chief Executive Officer. |
| | | |
| | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Richard N. Grubb, Chief Financial Officer. |
| | | |
| (b) | Reports on Form 8-K: |
| | |
| | On May 4, 2004, we filed a current report under Item 7 of Form 8-K, reporting our financial results for the first fiscal quarter of 2004. |
| | |
| | On May 24, 2004, we filed a current report under Items 5 and 7 of Form 8-K, announcing that we entered into a Consent and First Amendment to Vishay Intertechnology, Inc. Second Amended and Restated Long Term Revolving Credit Agreement, effective as of May 14, 2004. |
| | |
| | On June 2, 2004, we filed a current report under Items 5 and 7 of Form 8-K, announcing the number of shares per Liquid Yield Option ™ Note (LYON) to be issued to holders who exercise their option to require us to repurchase their LYONs on June 4, 2004. |
| | |
| | On June 4, 2004, we filed a current report under Items 5 and 7 of Form 8-K, announcing the amount of LYONs for which holders exercised their option to require us to repurchase their LYONs on June 4, 2004. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VISHAY INTERTECHNOLOGY, INC |
| |
| /s/ RICHARD N. GRUBB |
|
|
| Richard N. Grubb, Executive Vice President,
Treasurer, and Chief Financial Officer
(Principal Financial and Accounting Officer) |
| |
Date: August 10, 2004 | |
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