A worldwide financial crisis became more pronounced and intensified significantly in the latter half of 2008 and continued into the first quarter of 2009. This has resulted in significant volatility in capital and commodities markets, decreased access to credit markets, and produced recessionary pressures through most of the world’s economies.
We believe that Vishay has adequate financial resources to weather the current recessionary environment, and we remain confident for the long-term prospects for the electronics industry. However, the factors driving the current economic crisis are different than in previous recessions, and as a result, there is somewhat limited historical experience available to guide our business strategy. Nevertheless, thus far, we are seeing a familiar sequence of events for the electronics industry during this recession.
We focus on our ability to generate cash flows from operations. The cash generated from operations is used to fund our capital expenditure plans, and cash in excess of our capital expenditure needs is available to fund our acquisition strategy and to reduce debt levels. Vishay has generated cash flows from operations in excess of $200 million in each of the past 7 years, and cash flows from operations in excess of $100 million in each of the past 14 years.
We refer to the amount of cash generated from operations in excess of our capital expenditure needs and net of proceeds from the sale of assets as “free cash,” a measure which management uses to evaluate our ability to fund acquisitions and repay debt. Vishay has generated positive “free cash” in each of the past 12 years, and “free cash” in excess of $80 million in each of the past 7 years. In light of the current economic slow down, we intend to continue to focus on the generation of free cash, including an emphasis on cost controls.
We continued to generate strong cash flows from operations and free cash during the first quarter of 2009 despite the challenging economic environment. There is no assurance, however, that we will be able to continue to generate cash flows from operations and free cash during the current downturn.
Measurements such as “free cash” and “net debt” do not have uniform definitions and are not recognized in accordance with generally accepted accounting principles (“GAAP”). Such measures should not be viewed as alternatives to GAAP measures of performance or liquidity. However, management believes that “free cash” is a meaningful measure of our ability to fund acquisitions and repay debt, and that an analysis of “net debt” assists investors in understanding aspects of our cash and debt management. These measures, as calculated by Vishay, may not be comparable to similarly titled measures used by other companies.
Over 95% of the March 28, 2009 cash and cash equivalents balance was held by our non-U.S. subsidiaries. We expect that we will need to repatriate additional cash to repay a portion of the term loan outstanding under our credit facility. At the present time, we expect the remaining cash and profits generated by foreign subsidiaries will continue to be reinvested outside of the United States indefinitely. If additional cash needed to be repatriated to the United States, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits), state income taxes, incremental foreign income taxes, and withholding taxes payable to various foreign countries.
Our financial condition as of March 28, 2009 continued to be strong, with a current ratio (current assets to current liabilities) of 3.1 to 1, as compared to a ratio of 2.9 to 1 at December 31, 2008. This increase is primarily due to changes in working capital. Our ratio of total debt to Vishay stockholders’ equity was 0.24 to 1 at March 28, 2009, as compared to 0.22 to 1 as of December 31, 2008. The increase in this ratio is primarily due to a decrease in net equity (accumulated other comprehensive income) resulting from the strengthening of the U.S. dollar and an increase in total debt subsequent to obtaining a new $15 million bank loan in Israel.
Cash flows provided by continuing operating activities were $53.3 million for the fiscal quarter ended March 28, 2009, as compared to cash flows provided by continuing operating activities of $38.2 million for the fiscal quarter ended March 29, 2008. This increase is principally due to favorable changes in net working capital during the first quarter of 2009 compared to the first quarter of 2008.
Cash used by discontinued operating activities of $3.0 million reflect payments to settle certain outstanding disputes with the buyer of the ASBU business during the first quarter of 2009. The expenses associated with these cash payments were accrued in the fourth quarter of 2008. Cash provided by discontinued operating activities of $3.5 million for the fiscal quarter ended March 29, 2008 primarily reflects a decrease in working capital of ASBU business.
Cash paid for property and equipment for the fiscal quarter ended March 28, 2009 was $11.3 million, as compared to $25.8 million for the fiscal quarter ended March 29, 2008. Our total capital expenditures are projected to be significantly lower in 2009 as a result of the economic uncertainty. We now estimate that 2009 capital expenditures will be less than $50 million, lower than our previously published estimates. This reduced level of annual capital spending is temporary and not sustainable in an expanding economy.
We maintain a credit facility, which provides a revolving commitment of up to $250 million through April 20, 2012, and a term loan which requires semi-annual principal payments through 2011. At March 28, 2009, the term loan balance was $112.5 million, and $125 million was outstanding under the revolving credit facility.
Interest on the credit facility is payable at prime or other variable interest rate options. We are required to pay facility commitment fees. The credit facility also restricts us from paying cash dividends and requires us to comply with other covenants, including the maintenance of specific financial measures and ratios.
The financial maintenance covenants include (a) tangible net worth (as defined in the credit facility) of $1 billion plus 50% of net income (without offset for losses) and 75% of net proceeds of equity offerings since December 31, 2006; (b) a leverage ratio of not more than 3.50 to 1; (c) a fixed charge coverage ratio of not less than 2.50 to 1; and a senior debt (as defined in the credit facility) to consolidated EBITDA ratio of not more than 2.00 to 1. The computation of these ratios is more fully described in Article 7 of the Vishay Intertechnology, Inc. Fourth Amended and Restated Credit Agreement, which has been filed with the SEC as Exhibit 10.1 to our current report on Form 8-K filed June 25, 2008, and is hereby incorporated by reference.
We were in compliance with all covenants at March 28, 2009. Our tangible net worth, calculated pursuant to the terms of the credit facility, was $1,274 million, which is $209 million more than the minimum required under the related credit facility covenant. Our leverage ratio, fixed charge coverage ratio, and senior debt ratio were 1.18 to 1, 4.53 to 1, and 0.85 to 1, respectively.
We expect to continue to be in compliance with these covenants based on current projections. We also have mechanisms, including deferral of capital expenditures and other discretionary spending, to facilitate on-going compliance. However, in the current economic environment, there is a reasonable possibility that we could fail certain financial covenants, particularly the fixed charge coverage ratio covenant, at future measurement dates.
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If we are not in compliance with all of the required financial covenants, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility (including the term loan) could become immediately payable. Additionally, our Exchangeable Notes due 2102 have cross-default provisions that could accelerate repayment in the event of continuing non-compliance with the credit facility covenants.
Based on expected financial results over the next several quarters, we expect our leverage ratio to increase, which would result in an increase to the variable rate of interest paid on outstanding borrowings under the credit facility.
Borrowings under the 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 credit facility. Certain of our subsidiaries are permitted to borrow under the credit facility. Any borrowings by these subsidiaries under the credit facility are guaranteed by Vishay.
While the timing and location of scheduled payments for certain liabilities will require us to draw additional amounts on our credit facility from time to time, for the next twelve months, management expects that cash on-hand and cash flows from operations will be sufficient to meet our normal operating requirements, to meet our obligations under restructuring and acquisition integration programs, to fund scheduled debt maturities, and to fund our research and development and capital expenditure plans. Acquisition activity may require additional borrowing under our credit facility or may otherwise require us to incur additional debt.
Economic Outlook and Impact on Operations and Future Financial Results
The worldwide financial crisis will have direct and indirect impacts on our business operations and the amounts reported in our consolidated financial statements. Many of these impacts are related to inherent risks of our business, as more fully described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K. Specifically, these impacts could include, but are not limited to, the following:
Orders, Revenues, and Margins
A decline in product demand on a global basis could result in order cancellations and deferrals, lower total revenues, and lower average selling prices. Our customers may cancel orders if business is weak and their inventories are excessive. We have experienced substantial cancellations and/or deferrals of orders to future periods in the current economic environment. A slowdown in demand or recessionary trends in the global economy make it more difficult for us to predict our future sales and manage our operations.
Declines in demand are driven by market conditions in the end-use markets for our products. Changes in the demand mix, needed technologies, and these end-use markets may adversely affect our ability to match our products, inventory, and capacity to meet customer demand. This may result in a material increase in excess or obsolete inventory and excess capacity, which will reduce gross margins.
Furthermore, a reduction in sales volume may, in turn, result in a reduction of production volume. A reduction in production volume would reduce the number of units available to absorb fixed costs, increasing the costs of individual units produced and resulting in lower gross margins when those units are sold.
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Debt Covenants
Our credit facility requires us to comply with other covenants, including the maintenance of specific financial measures and ratios. We were in compliance with all covenants at March 28, 2009, and we expect to continue to be in compliance with these covenants based on current projections. We also have mechanisms, including deferral of capital expenditures and other discretionary spending, to facilitate on-going compliance. However, in the current economic environment, there is a reasonable possibility that we could fail certain financial covenants, particularly the fixed charge coverage ratio covenant, at future measurement dates.
If we are not in compliance with all of the required financial covenants, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility (including the term loan) could become immediately payable. Additionally, our Exchangeable Notes due 2102 have cross-default provisions that could accelerate repayment in the event of continuing non-compliance with the credit facility covenants.
Access to Capital Markets
In the United States, we presently have a revolving credit facility with approximately $114 million of unused borrowing capacity at March 28, 2009. We also have other committed and uncommitted lines of credit available on a short-term basis in various countries around the world. In light of the current environment, credit markets are functioning differently than in the past, with key interest rate spreads increasing substantially, and banks tightening lending standards. If Vishay were to require additional capital, either to sustain normal operations, fund debt maturities, repay the credit facility in the event of default, or to pursue a strategic acquisition, we may be unable to obtain financing on terms which we consider acceptable, if at all.
Interest Rates
We are exposed to changes in interest rates as a result of our borrowing activities and our cash balances. Our credit facility and our exchangeable notes due 2102 bear interest at variable rates based on LIBOR. LIBOR has fluctuated significantly over the past nine months. A significant increase in LIBOR would significantly increase our interest expense. A general increase in interest rates would be largely offset by an increase in interest income earned on our cash balances. However, their can be no assurance that the interest rate earned on cash balances will move in tandem with the interest rate paid on our variable-rate debt.
Additionally, the interest rate paid on outstanding balances under our credit facility could vary based on our leverage ratio. Based on expected financial results over the next several quarters, we expect our leverage ratio to increase, resulting in an increase to the variable rate of interest paid on outstanding borrowings under the credit facility.
Prices of Raw Materials
The prices of certain raw materials used in our products, particularly precious metals, are highly volatile. From time to time, we enter into purchase commitments to acquire these materials at fixed prices. Our policy is to enter into short-term commitments to purchase defined portions of annual consumption of these metals if market prices decline below budget. For periods when the prices of these materials are declining, we may be required to record losses on adverse purchase commitments, as we did in the fourth quarter of 2008 as a result of rapid declines in the market prices for copper, palladium, and certain other metals. Such declines might also require us to write down our inventory carrying costs for these raw materials, because we record our inventory at the lower of cost or market. Depending on the extent of the difference between market price and our carrying cost or committed purchase price, this write-down could have a material adverse effect on our net earnings. For periods when the prices of these materials are increasing, we may be unable to pass on the increased cost to our customers, which would result in decreased margins for the products in which these materials are used.
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Collectibility of Accounts Receivable
Due to Vishay’s large number of customers and their dispersion across many countries and industries, we have limited exposure to concentrations of credit risk. However, further deterioration of economic conditions could result in customers defaulting on payment or delaying payment, which could have a material impact on our cash flows and results of operations.
Acquisitions
Our growth strategy historically has included expansion through acquisition 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. In response to the uncertain economic conditions, we do not plan to actively pursue acquisitions, but will consider special opportunities should they arise. The failure to pursue acquisitions could impede our future growth. Furthermore, if a special opportunity should arise, our ability to finance the acquisition may be limited, particularly in light of the current credit crisis.
Impairment of Assets
During 2008, we recorded material impairment charges to reduce the carrying value of our goodwill to zero, and to reduce the carrying value of certain intangible assets and certain property and equipment. These impairments are generally measured based on expected future cash flows. A continued decline in market conditions could require us to assess whether or not our assets are further impaired, and may require additional, material impairment charges.
Capital Expenditures
To preserve cash, we plan to defer certain capital expenditures. This could limit our new product introductions or our ability to meet customer demands. As a result, when the economy rebounds, we may not have adequate manufacturing capacity, or we may have difficulty expanding our manufacturing capacity, to satisfy demand.
Research and Development
Our regular R&D programs are continuing and we will continue to roll out the new products that the market demands. Some of our R&D activities, however, have very long-term goals. To reduce costs, we have deferred certain projects.
Pension and Other Postretirement Benefits
Accounting for defined benefit pension and other postretirement plans involves numerous assumptions and estimates, as further described in Item 7 to our Annual Report on Form 10-K under the heading “Critical Accounting Policies and Estimates – Pension and Other Postretirement Benefits.” Events in the financial markets have led to declines in the fair value of investment securities held by our pension plans. Negative investment returns are deferred as an actuarial item and amortized over future periods, which has the effect of significantly increasing pension costs for 2009 and possibly future periods. Furthermore, negative investment returns could ultimately affect the funded status of the plans, requiring additional cash contributions.
In December 2008, the President of the United States signed the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”). WRERA provides certain relief from defined benefit plan funding requirements. We are still evaluating the impact of WRERA on our U.S. defined benefit pension plans. We anticipate making contributions to U.S. defined benefit pension plans of between $15 million and $25 million in 2009, although this amount could materially change based on our evaluation of WRERA.
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Restructuring
Due to recessionary pressures, we expect to restructure our operations to reduce our cost structure and to remain competitive. In such restructuring programs, we seek to eliminate redundant facilities and staff positions and move operations, where possible, to jurisdictions with lower labor costs. During this process, we may experience under-utilization of certain plants in high-labor-cost regions and capacity constraints in plants located in low-labor-cost regions. This under-utilization may result initially in production inefficiencies and higher costs. These costs include those associated with compensation in connection with work force reductions and increased depreciation costs in connection with the initiation or expansion of production in lower-labor-cost regions. In addition, as we implement transfers of certain of our operations we may experience strikes or other types of labor unrest as a result of lay-offs or termination of our employees in high-labor-cost countries.
Income Taxes
We have recorded deferred tax assets representing future tax benefits, but may not be able to generate sufficient income to realize these future tax benefits in certain jurisdictions. A sustained decline in economic conditions could affect the ultimate realizability of these deferred tax assets and could require us to record a valuation allowance for these deferred tax assets.
Based on our anticipated U.S. cash requirements, we expect that we will need to repatriate additional cash to repay the term loan outstanding under our credit facility, and have recorded additional tax expense in 2008 on this expected transaction because such earnings are not deemed to be indefinitely reinvested outside of the United States. Depending on the length and severity of the recession, we may have additional U.S. cash needs which may require us to repatriate additional cash from our non-U.S. subsidiaries and incur additional tax expense.
Foreign Currency
Foreign currency exchange rates have fluctuated significantly over the past year. We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. Economic uncertainty in the current environment exacerbates the possibility of significant adverse movements in foreign currency exchange rates which could, in turn, have a significantly adverse effect on our operating results. See also “Foreign Currency Translation” above for additional discussion and analysis of the effects of foreign currency.
Contractual Commitments
Our Annual Report on Form 10-K includes a table of contractual commitments as of December 31, 2008. There were no material changes to these commitments during the three fiscal months ended March 28, 2009.
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Safe Harbor Statement
From time to time, information provided by us, including but not limited to statements in this report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated.
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: general business and economic conditions, particularly the current recessionary environment; difficulties in integrating acquired companies, the inability to realize anticipated synergies and expansion possibilities, and other unanticipated conditions adversely affecting the operation of these companies; difficulties in new product development;changes in competition and technology in the markets that we serve and the mix of our products required to address these changes; an inability to attract and retain highly qualified personnel, particularly in respect of our acquired businesses; changes in foreign currency exchange rates; difficulties in implementing our cost reduction strategies such as labor unrest or legal challenges to our lay-off or termination plans, underutilization of production facilities in lower-labor-cost countries, operation of redundant facilities due to difficulties in transferring production to lower-labor-cost countries;and other factors affecting our operations, markets, products, services, and prices that are set forth in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”). 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
There have been no material changes in the market risks previously disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 26, 2009.
Item 4.Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are: (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1.Legal Proceedings
Not applicable.
Item 1A.Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 26, 2009.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 5.Other Information
Not applicable.
Item 6.Exhibits
| 10.1 | | Vishay Intertechnology, Inc. 2007 Stock Incentive Program (as amended and restated effective February 2009). |
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| 31.1 | | Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Dr. Gerald Paul, Chief Executive Officer. |
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| 31.2 | | Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Dr. Lior E. Yahalomi, Chief Financial Officer. |
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| 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. Gerald Paul, Chief Executive Officer. |
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| 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Dr. Lior E. Yahalomi, Chief Financial Officer. |
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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/ Lior E. Yahalomi | |
| Dr. Lior E. Yahalomi |
| Executive Vice President and Chief Financial Officer |
| (as a duly authorized officer and principal financial officer) |
| |
| |
| /s/ Lori Lipcaman | |
| Lori Lipcaman |
| Executive Vice President and Chief Accounting Officer |
| (as a duly authorized officer and principal accounting officer) |
Date: May 5, 2009
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