SFAS No. 157 (ASC Topic 820) establishes a valuation hierarchy of the inputs used to measure fair value. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the Company’s own assumptions.
An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company maintains non-qualified trusts, referred to as “rabbi” trusts, to fund payments under deferred compensation and non-qualified pension plans. Rabbi trust assets consist primarily of marketable securities, classified as available-for-sale, valued based upon level 1 inputs; and Company-owned life insurance assets valued based upon level 2 inputs.
The marketable securities held in the rabbi trusts are valued using quoted market prices multiplied by the number of shares held in the trust. The Company-owned life insurance assets are valued in consultation with the Company’s insurance brokers using the value of underlying assets of the insurance contracts.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, long-term notes receivable, short-term notes payable, accounts payable, and long-term debt. Except for long-term debt, the carrying amounts for these financial instruments reported in the consolidated condensed balance sheets approximate their fair values.
The fair value of long-term debt at September 26, 2009 is approximately $274 million, compared to its carrying value of $349 million. The Company estimates the fair value of its long-term debt using a combination of quoted market prices for similar financing arrangements and expected future payments discounted at risk-adjusted rates, which are considered level 2 inputs.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vishay Intertechnology, Inc. is an international manufacturer and supplier of discrete semiconductors and passive electronic components, including power MOSFETs, power integrated circuits, transistors, diodes, optoelectronic components, resistors, capacitors, inductors, strain gages, load cells, force measurement sensors, displacement sensors, and photoelastic sensors. Discrete semiconductors and passive electronic components manufactured by Vishay are used in virtually all types of electronic products, including those in the industrial, computer, automotive, consumer electronic products, telecommunications, military/aerospace, and medical industries.
Vishay operates in two product segments, Semiconductors and Passive Components. Semiconductors segment products include transistors, diodes, rectifiers, certain types of integrated circuits, and optoelectronic products. Passive Components segment products include resistors, capacitors, and inductors. We include in the Passive Components segment our Measurements Group, which manufactures and markets strain gages, load cells, transducers, instruments, and weighing systems whose core components are resistors that are sensitive to various types of mechanical stress. On October 27, 2009, Vishay announced that it intends to spin-off its measurements and foil resistors businesses into an independent, publicly-traded company to be named Vishay Precision Group, Inc.
As described in Note 1 to our consolidated condensed financial statements, effective January 1, 2009, Vishay adopted two accounting standards that require retrospective adjustment to previously issued financial statements. All prior period amounts have been adjusted to reflect the retrospective adoption of these new accounting standards. We have published unaudited selected financial data reflecting the retrospective adoption of these accounting standards, which was filed with the U.S. Securities and Exchange Commission as Exhibit 99 to our current report on Form 8-K dated April 13, 2009.
Revenues for the fiscal quarter ended September 26, 2009 were $525.3 million, compared to $739.1 million for the fiscal quarter ended September 27, 2008. The net earnings attributable to Vishay stockholders for the fiscal quarter ended September 26, 2009 were $2.3 million, or $0.01 per share, compared to a net loss attributable to Vishay stockholders of $301.3 million, or $1.62 per share for the fiscal quarter ended September 27, 2008.
The net earnings attributable to Vishay stockholders for the fiscal quarter ended September 26, 2009 was impacted by pretax charges for restructuring and severance costs of $3.5 million which, including its related tax effect, had a negative $0.02 per share effect on the net earnings attributable to Vishay stockholders.
The net loss attributable to Vishay stockholders for the fiscal quarter ended September 27, 2008 was substantially attributable to a noncash goodwill and indefinite-lived intangible assets impairment charge of $357.9 million ($328.8 million, net of tax). The third quarter 2008 results also include a pretax charge for restructuring and severance costs of $6.8 million, and $4.0 million of costs associated with Vishay’s terminated tender offer for all outstanding shares of International Rectifier. On an after tax basis, these items and the goodwill impairment charge had a negative $1.79 per share effect on the net earnings (loss) attributable to Vishay stockholders.
Revenues for the nine fiscal months ended September 26, 2009 were $1,435.1 million, compared to $2,246.8 million for the nine fiscal months ended September 27, 2008. The net loss attributable to Vishay stockholders for the nine fiscal months ended September 26, 2009 was $85.7 million, or $0.46 per share, compared to a net loss attributable to Vishay stockholders of $1,079.9 million, or $5.79 per share for the nine fiscal months ended September 27, 2008.
The net loss attributable to Vishay stockholders for the nine fiscal months ended September 26, 2009 was impacted by pretax charges for restructuring and severance costs of $34.5 million and for an amended executive employment agreement of $57.8 million, partially offset by a gain of $28.2 million on settlement of matters related to the acquisition of International Rectifier’s Power Control Systems business. These items and their related tax effects had a negative $0.31 per share effect on the net loss attributable to Vishay stockholders.
34
The net loss attributable to Vishay stockholders for the nine fiscal months ended September 27, 2008 was impacted by pretax charges for goodwill and indefinite-lived intangible assets impairment of $1,157.9 million, restructuring and severance costs of $34.0 million, related asset write-downs of $4.2 million, $4.0 million of costs associated with Vishay’s terminated tender offer for all outstanding shares of International Rectifier, and $9.9 million of tax expense associated with the repatriation of cash from certain non-U.S. subsidiaries. Including the tax effects of the pretax charges, these items had a negative $6.09 per share effect on the net earnings (loss) from continuing operations attributable to Vishay stockholders. The net loss for the nine fiscal months ended September 27, 2008 also included a loss on discontinued operations of $42.1 million, or $0.23 per share.
As previously disclosed, the results of operations for the fiscal quarter and nine fiscal months ended September 27, 2008 have been recast to include the retrospective effects of FSP APB 14-1 (ASC Topic 470-20). The retrospective application of this guidance decreased the reported loss from continuing operations for the quarter by $11.5 million ($0.06 per share) and increased the reported loss from continuing operations for the nine fiscal months ended September 27, 2008 by $0.8 million, or ($0.01) per share, respectively.
Vishay’s results for the third fiscal quarter and nine fiscal months ended September 26, 2009 have been substantially impacted by the on-going global economic recession. Due to our quick reaction to the recession, we have mitigated the loss of volume that we experienced through significant reductions of fixed costs and inventories, we have continued to generate positive cash flows from operations, and we are once again profitable following several quarters of realizing losses. During the third quarter, our business has begun to recover from the global economic recession.
Financial Metrics
We utilize several financial metrics to evaluate the performance and assess the future direction of our business. These key financial metrics include net revenues, gross profit margin, 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.
End-of-period backlog is one indicator of future revenues. We include in our backlog only open orders that have been released by the customer for shipment 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 quarter-end balance) for this same period. The inventory balance used for computation of this ratio includes tantalum inventories in excess of one year supply, which are classified as other assets in the consolidated balance sheet. See Note 14 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. A higher level of inventory turnover reflects more efficient use of our capital.
35
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 of the industry, especially for our Semiconductors segment products. However, we attempt to offset this deterioration with ongoing cost reduction activities and new product introductions. 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, end-of-period backlog, book-to-bill ratio, inventory turnover, and changes in ASP for our business as a whole during the five quarters beginning with the third quarter of 2008 through the third quarter of 2009(dollars in thousands):
| | 3rd Quarter | | 4th Quarter | | 1st Quarter | | 2nd Quarter | | 3rd Quarter |
| | 2008 | | 2008 | | 2009 | | 2009 | | 2009 |
| Net revenues | $ | 739,092 | | $ | 575,442 | | $ | 449,511 | | $ | 460,258 | | $ | 525,304 |
| Gross profit margin* | | 21.6% | | | 14.8% | | | 15.1% | | | 17.1% | | | 19.9% |
| End-of-period backlog | $ | 619,000 | | $ | 459,700 | | $ | 400,400 | | $ | 432,800 | | $ | 502,200 |
| Book-to-bill ratio | | 0.92 | | | 0.74 | | | 0.89 | | | 1.06 | | | 1.11 |
| Inventory turnover | | 3.85 | | | 3.40 | | | 2.84 | | | 3.02 | | | 3.53 |
| Change in ASP vs. prior quarter | | -1.4% | | | 0.0% | | | -1.0% | | | -1.1% | | | -0.8% |
____________________
* Gross profit margin for the fourth quarter of 2008 includes losses on adverse purchase commitments of $6.0 million.
See “Financial Metrics by Segment” below for net revenues, book-to-bill ratio, and gross profit margin broken out by segment.
As expected, net revenues for the third quarter of 2009 increased on a sequential basis, indicating signs of stabilization and macro economic recovery. Gross margins also increased sequentially, due to our restructuring and other cost cutting initiatives.
We have experienced a broad recovery in the book-to-bill ratio in the third quarter. The book-to-bill ratio improved to 1.11 from 1.06 in the second quarter of 2009. For the third quarter of 2009, the book-to-bill ratios for distributors and original equipment manufacturers (“OEM”) were 1.17 and 1.06, respectively, versus ratios of 1.20 and 0.93, respectively, during the second quarter of 2009.
Growing shortages of supplies have helped to moderate price declines, although, as expected, we experienced some increasing pricing pressure for Semiconductors segment products. We expect continued pricing pressure for our Semiconductors segment products.
For the fourth quarter of 2009 we anticipate sales of between $530 million and $570 million, at improved margins supported by permanently reduced fixed costs.
36
Financial Metrics by Segment
The following table shows net revenues, book-to-bill ratio, and gross profit margin broken out by segment for the five quarters beginning with the third quarter of 2008 through the third quarter of 2009(dollars in thousands):
| | 3rd Quarter | | 4th Quarter | | 1st Quarter | | 2nd Quarter | | 3rd Quarter |
| | 2008 | | 2008 | | 2009 | | 2009 | | 2009 |
| Semiconductors | | | | | | | | | | | | | | | |
| Net revenues | | $ | 392,934 | | $ | 272,669 | | $ | 198,995 | | $ | 227,347 | | $ | 276,745 |
| | | | | | | | | | | | | | | | |
| Book-to-bill ratio | | | 0.85 | | | 0.59 | | | 0.96 | | | 1.14 | | | 1.13 |
| | | | | | | | | | | | | | | | |
| Gross profit margin(1) | | | 21.8% | | | 11.5% | | | 6.6% | | | 14.4% | | | 16.5% |
| | | | | | | | | | | | | | | | |
| Passive Components | | | | | | | | | | | | | | | |
| Net revenues | | $ | 346,158 | | $ | 302,773 | | $ | 250,516 | | $ | 232,911 | | $ | 248,559 |
| | | | | | | | | | | | | | | | |
| Book-to-bill ratio | | | 0.98 | | | 0.88 | | | 0.84 | | | 0.97 | | | 1.09 |
| | | | | | | | | | | | | | | | |
| Gross profit margin(2) | | | 21.4% | | | 17.8% | | | 21.9% | | | 19.7% | | | 23.6% |
____________________
(1) Gross profit margin for the Semiconductors segment for the fourth quarter of 2008 includes losses on adverse purchase commitments of $3.7 million.
(2) Gross profit margin for the Passive Components segment for the fourth quarter of 2008 includes losses on adverse purchase commitments of $2.3 million.
37
Acquisition and Divestiture Activity
As part of our growth strategy, we seek to expand through targeted and synergistic 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 smaller targets to gain market share, effectively penetrating different geographic markets, enhancing new product development, rounding out our product lines, or growing 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 exploit synergies.
Due to improving economic conditions, our strong cash position, and our ability to generate free cash, we are returning to our strategy of exploring synergistic acquisition opportunities.
Proposed Spin-off of Vishay Precision Group, Inc.
On October 27, 2009, Vishay announced that it intends to spin-off its measurements and foil resistors businesses into an independent, publicly-traded company to be named Vishay Precision Group, Inc. The spin-off is expected to take the form of a tax-free stock dividend to Vishay’s stockholders and it is anticipated that holders of Vishay common stock will receive common stock of Vishay Precision Group and holders of Vishay Class B common stock will receive Class B common stock of Vishay Precision Group. Vishay has not yet finalized details of the spin-off.
The spin-off would enable the management teams of both companies to better focus on the unique issues facing their respective businesses and permit each company to pursue its own business plan, resource allocation and growth strategies, as well as attract the best personnel through compensation that is more closely tied to the performance of each company. If the spin-off is completed, Vishay is expected to be a more competitive, pure-play discrete electronic components company.
Vishay’s Board and management team, in consultation with independent financial and legal advisors, are working on the requirements to finalize and execute the spin-off and expect the spin-off to occur in the second quarter of 2010. The spin-off will be subject to a number of conditions, including, among other things: final approval of Vishay’s Board of Directors, favorable market conditions, receipt of U.S. and Israeli tax rulings or opinions, compliance with applicable rules and regulations of the U.S. Securities and Exchange Commission (SEC) and other customary conditions.
38
Cost Management
We place a strong emphasis on reducing our costs. Since 2001, we have been implementing aggressive cost reduction programs to enhance our competitiveness, particularly in light of the erosion of average selling prices of established products that is typical of the industry.
Historically, our primary cost reduction technique was through the transfer of production to the extent possible from high-labor-cost markets, such as the United States and Western Europe, to lower-labor-cost markets, 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 are successful in implementing this program. This percentage was 73.9% at the end of the third quarter of 2009 as compared to 73.1% at the end of the second quarter of 2009, 74.6% at the end of 2008, and 57% when this program began in 2001. Our target is to have between 75% and 80% of our headcount in lower-labor-cost countries. As we approach, and then maintain, this target headcount allocation, our cost reduction efforts are more directed towards consolidating facilities and other cost cutting measures to control fixed costs, rather than transfers of production to lower-labor-cost markets.
These production transfers, facility consolidations, and other long-term cost cutting measures require us to initially incur significant severance and other exit costs and to record losses on excess buildings and equipment. We anticipate that we will realize the benefits of our restructuring through lower labor costs and other operating expenses in future periods. Between 2001 and 2008, we recorded, in the consolidated statements of operations, restructuring and severance costs totaling $285 million and related asset write-downs totaling $86 million in order to reduce our cost structure going forward. We have realized, and expect to continue to realize, significant annual net cost savings associated with these restructuring activities.
A primary tenet of our business strategy is the expansion within the electronic components industry through acquisitions. In addition to the objectives of broadening our product portfolio and increasing our market reach, our acquisition strategy includes a focus on reducing selling, general, and administrative expenses through the integration or elimination of redundant sales offices and administrative functions at acquired companies, and achieving significant production cost savings through the transfer and expansion of manufacturing operations to countries where we can benefit from lower labor costs and available tax and other government-sponsored incentives. These plant closure and employee termination costs subsequent to acquisitions are also integral to our cost reduction programs, although these amounts were not significant in the years ended December 31, 2008, 2007, and 2006.
Under previous accounting standards, plant closure and employee termination costs that we incur in connection with our acquisition activities are included in the costs of our acquisitions and do not affect earnings or losses on our consolidated statement of operations. Statement of Financial Accounting Standards (“SFAS”) No. 141-R,Business Combinations(ASC Topic 805),which Vishay adopted effective January 1, 2009, requires such costs to be recorded as expenses in our consolidated statement of operations, as such expenses are incurred.
We evaluate potential restructuring projects based on an expected payback period. The payback period represents the number of years of annual cost savings necessary to recover the initial cash outlay for severance and other exit costs plus the noncash expenses recognized for asset write-downs. In general, a restructuring project must have a payback of less than 3 years to be considered beneficial. On average, our restructuring projects have a payback of between 1 and 1.5 years.
The perpetual erosion of average selling prices of established products that is typical of our industry makes it imperative that we continually seek ways to reduce our costs. Furthermore, our long-term strategy is to grow through the integration of acquired businesses, and the accounting standards for these integration costs has changed effective January 1, 2009. For these reasons, we expect to have some level of restructuring expenses each period for the foreseeable future.
We expect these restructuring programs to result in higher profitability through better gross margins and lower selling, general, and administrative expenses. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K.
39
We expanded our restructuring programs in 2008 to further reduce costs. Most of the costs related to our planned 2008 restructuring projects were recorded in the first quarter of 2008. These projects include the transfer of production of resistor products from Brazil to India and the Czech Republic and the transfer of certain processes in Belgium and the United States to third party subcontractors. We also transferred certain production from the Netherlands and the United States to Israel in 2008. We expect the planned restructuring projects initiated in 2008 to generate approximately $25 million of annual cost savings, of which approximately 60% of the savings would reduce costs of products sold, and approximately 40% of the savings would result in reduced selling, general, and administrative costs. We began to realize some of these savings in the second half of 2008.
In response to the economic downturn during the latter half of 2008, we undertook significant measures to cut costs. This included a strict adaptation of manufacturing capacity to sellable volume, limiting the building of product for inventory. It also included permanent employee terminations, temporary layoffs and shutdowns, and minimizing the use of foundries and subcontractors in order to maximize the load of our owned facilities.
We incurred restructuring and severance costs of $28.6 million during the fourth quarter of 2008, and incurred additional restructuring and severance costs of $34.5 million during the first nine months of 2009. These costs were incurred as part of our program to reduce manufacturing and SG&A fixed costs in 2009 by $200 million compared to the year ended December 31, 2008. Our cost reduction programs are ahead of schedule. Our fixed costs in the third quarter of 2009 decreased by $49 million compared to the third quarter of 2008, and our fixed costs for the nine fiscal months ended September 26, 2009 decreased by $173 million versus the comparable prior year period. Of these amounts, approximately 47% reduced costs of products sold and approximately 53% reduced SG&A expenses.
Certain components of our costs, while fixed in that they do not vary with changes in volume, are subject to volatility. This would include, for example, the effect of certain assets that are marked-to-market through the statement of operations, and certain transactions in foreign currencies. Furthermore, as described above, some of our cost reductions realized in the first nine months of 2009 are the result of temporary measures, which we intend to replace with more permanent actions. Accordingly, there is no assurance that all of the fixed cost reductions achieved in the first nine months of 2009 will be maintained in the last three months of the year or in 2010.
We expect total restructuring and severance costs for the full year of 2009 to be less than $50 million. Including unpaid balances from 2008 programs, we expect the 2009 cash outlay for restructuring and severance programs to be approximately $50 million, with additional amounts to be paid in future periods.
Our 2009 restructuring programs include headcount reductions in virtually every facility and every country in which we operate, as well as selected plant closures. In 2009, we plan to close two facilities in the United States and consolidate manufacturing for these product lines into other facilities. We also are consolidating our optoelectronics packaging facilities in Asia. We have successfully closed a film capacitor plant in Shanghai during the third quarter. Production on existing equipment in Loni, India will be increased to replace the production volume of the closed plant.
While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively impact our customer service or our ability to further develop products and processes. Our cost management plans also include expansion of certain critical capacities, which we hope will reduce average materials and processing costs.
40
Metals Purchase Commitments
Certain metals used in the manufacture of our products are traded on active markets, and can be subject to significant price volatility. 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 much of 2008, these metals were trading near all-time record-high prices. During the fourth quarter of 2008, as metals prices declined significantly from these record-high prices, we entered into commitments to purchase a portion of our estimated 2009 metals needs, principally for copper and palladium. After entering into these commitments, the market prices for these metals continued to decline. As a result, we recorded losses on these adverse purchase commitments during the fourth quarter of 2008 totaling $6.0 million.
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.
Statement of Financial Accounting Standards (“SFAS”) No. 52 (ASC Topic 830) requires that entities identify the “functional currency” of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary’s functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign subsidiary that is a direct and integral component or extension of the parent company’s operations generally would have the parent company’s currency as its functional currency. Vishay has both situations among its subsidiaries.
Foreign Subsidiaries which use the Local Currency as the Functional Currency
We finance our operations in Europe and certain locations in Asia in local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is the functional currency, assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not impact the results of operations and are reported as a separate component of stockholders’ equity. With the weakening of the U.S. dollar during the third quarter of 2009, we saw an increase in the translation adjustment recorded in accumulated other comprehensive income on our balance sheet. See Note 7 to our consolidated condensed financial statements.
For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the year. While the translation of revenues and expenses into U.S. dollars does not directly impact the statement of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in those foreign currencies. The dollar generally has been stronger during the first nine months of 2009 compared to the prior year, with the translation of foreign currency revenues and expenses into U.S. dollars decreasing reported revenues and expenses versus the comparable prior year periods.
Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency
Our operations in Israel and most significant locations in Asia are largely financed in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly payroll-related, which are incurred in the local currency. The cost of products sold and selling, general, and administrative expense for first nine months of 2009 have been favorably impacted (compared to the prior year period) by local currency transactions of subsidiaries which use the U.S. dollar as their functional currency, particularly our subsidiaries in Israel. However, most of the favorable impact was realized during the first quarter of 2009.
41
Results of Operations
Statement of operations’ captions as a percentage of net revenues and the effective tax rates were as follows:
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Cost of products sold | | 80.1% | | 78.4% | | 82.5% | | 77.2% |
| Gross profit | | 19.9% | | 21.6% | | 17.5% | | 22.8% |
| Selling, general & administrative expenses | | 17.1% | | 15.3% | | 18.2% | | 15.7% |
| Operating income (loss) | | 2.1% | | -43.6% | | -5.1% | | -46.3% |
| Income (loss) from continuing operations | | | | | | | | |
| before taxes | | 1.7% | | -43.6% | | -5.2% | | -47.3% |
| Income (loss) from continuing operations | | 0.5% | | -40.8% | | -5.9% | | -46.2% |
| Net earnings (loss) attributable to | | | | | | | | |
| Vishay stockholders | | 0.4% | | -40.8% | | -6.0% | | -48.1% |
| Effective tax rate | | 71.9% | | 6.5% | | -14.6% | | 2.4% |
Net Revenues
Net revenues were as follows (dollars in thousands):
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Net revenues | | $ | 525,304 | | | $ | 739,092 | | $ | 1,435,073 | | | $ | 2,246,769 |
| Change versus comparable prior year period | | $ | (213,788 | ) | | | | | $ | (811,696 | ) | | | |
| Percentage change versus | | | | | | | | | | | | | | |
| comparable prior year period | | | -28.9% | | | | | | | -36.1% | | | | |
Changes in net revenues were attributable to the following:
| | vs. Prior Year | | vs. Prior |
| | Quarter | | Year-to-Date |
| Change attributable to: | | | | |
| Decrease in volume | | -26.6% | | -33.6% |
| Decrease in average selling prices | | -2.8% | | -2.6% |
| Foreign currency effects | | -1.2% | | -2.3% |
| Acquisitions | | 0.1% | | 0.2% |
| Other | | 1.6% | | 2.2% |
| Net change | | -28.9% | | -36.1% |
42
All regions and virtually all of our end-use markets are heavily impacted by the global economic slowdown, which was most strongly seen in the decline in sales of our Semiconductors segment products in 2009 compared to the prior year periods. The relatively stronger U.S. dollar further decreased the amount reported for revenues in the quarter and nine fiscal months ended September 26, 2009 versus the comparable prior year periods. During the third quarter of 2009, we experienced the continuation of the world economic and electronics market recovery across all geographies, all markets, and all sales channels. We experienced a substantial upturn in Asia driven by orders and sales for end-uses in consumer products such as netbooks and power supplies. Orders and sales for end-uses in industrial applications in the U.S. and Europe appear to have bottomed out in the second quarter and we experienced the first phase of recovery in the third quarter, which was supported by low inventory levels. We experienced a substantial turnaround in orders and sales of our products utilized in automotive applications in Europe and the U.S., which was driven by demand for small cars. Sales of products for use in military and medical applications, while generally a smaller component of Vishay’s overall business, have also been strong.
We deduct, from the sales that we record to distributors, allowances for future credits that we expect to provide for returns, scrapped product, and price adjustments under various programs made available to the distributors. We make deductions corresponding to particular sales in the period in which the sales are made, although the corresponding credits may not be issued until future periods. We estimate the deductions based on sales levels to distributors, inventory levels at the distributors, current and projected market trends and conditions, recent and historical activity under the relevant programs, changes in program policies, and open requests for credits. We recorded deductions from gross sales under our distributor incentive programs of $44 million and $60 million for the nine fiscal months ended September 26, 2009 and September 27, 2008, respectively, or 3.0% and 2.6% of gross sales, respectively. Actual credits issued under the programs during the nine fiscal months ended September 26, 2009 and September 27, 2008, were $51 million and $57 million, respectively. Increases and decreases in these incentives are largely attributable to the then-current business climate.
Royalty revenues, included in net revenues on the consolidated condensed statements of operations, were approximately $3.4 million and $3.1 million for the nine fiscal months ended September 26, 2009 and September 27, 2008, respectively.
Gross Profit and Margins
Gross profit margins for the fiscal quarter and nine fiscal months ended September 26, 2009 were 19.9% and 17.5%, respectively, versus 21.6% and 22.8%, respectively, for the comparable prior year periods. These decreases in gross profit margin reflects significantly lower volume and modestly lower average selling prices, partially offset by our fixed cost reduction programs and favorable currency impacts.
Segments
Analysis of revenues and gross profit margins for our Semiconductors and Passive Components segments is provided below.
Semiconductors
Net revenues of the Semiconductors segment were as follows (dollars in thousands):
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Net revenues | | $ | 276,745 | | | $ | 392,934 | | $ | 703,087 | | | $ | 1,188,157 |
| Change versus comparable prior year period | | $ | (116,189 | ) | | | | | $ | (485,070 | ) | | | |
| Percentage change versus | | | | | | | | | | | | | | |
| comparable prior year period | | | -29.6% | | | | | | | -40.8% | | | | |
43
Changes in Semiconductors segment net revenues were attributable to the following:
| | vs. Prior Year | | vs. Prior |
| | Quarter | | Year-to-Date |
| Change attributable to: | | | | |
| Decrease in volume | | -26.1% | | -37.9% |
| Decrease in average selling prices | | -5.6% | | -5.7% |
| Foreign currency effects | | -0.5% | | -1.1% |
| Acquisitions | | 0.0% | | 0.0% |
| Other | | 2.6% | | 3.9% |
| Net change | | -29.6% | | -40.8% |
Gross profit as a percentage of net revenues for the Semiconductors segment was as follows:
| | Fiscal quarter ended | | Nine fiscal months ended |
| | | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Gross margin percentage | | 16.5% | | 21.8% | | 13.0% | | 22.4% |
The decrease in gross profit margin percentage reflects significantly lower volume and lower average selling prices, partially offset by our fixed cost reduction programs and favorable currency impacts.
Our Semiconductors segment has suffered significantly from the global economic slowdown. Profitability has suffered in an unprecedented manner due to the low sales volume during the third quarter and nine fiscal months ended September 26, 2009 compared to the same periods in the prior year. Despite the low volume, gross margin increased from the first and second quarters of 2009 to 16.5% of revenues mainly due to substantially reduced fixed costs. We experienced a sudden recovery in July in Asia consumer products that reached European automotive products by the end of the third quarter.
Passive Components
Net revenues of the Passive Components segment were as follows (dollars in thousands):
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Net revenues | | $ | 248,559 | | | $ | 346,158 | | $ | 731,986 | | | $ | 1,058,612 |
| Change versus comparable prior year period | | $ | (97,599 | ) | | | | | $ | (326,626 | ) | | | |
| Percentage change versus | | | | | | | | | | | | | | |
| comparable prior year period | | | -28.2% | | | | | | | -30.9% | | | | |
Changes in Passive Components segment net revenues were attributable to the following:
| | vs. Prior Year | | vs. Prior |
| | Quarter | | Year-to-Date |
| Change attributable to: | | | | |
| Decrease in volume | | -27.3% | | -29.0% |
| Increase in average selling prices | | 0.6% | | 0.6% |
| Foreign currency effects | | -2.0% | | -3.7% |
| Acquisitions | | 0.3% | | 0.5% |
| Other | | 0.2% | | 0.7% |
| Net change | | -28.2% | | -30.9% |
44
Gross profit as a percentage of net revenues for the Passive Components segment was as follows:
| | Fiscal quarter ended | | Nine fiscal months ended |
| | | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Gross margin percentage | | 23.6% | | 21.4% | | 21.8% | | 23.2% |
The quarterly increase in gross profit margin despite significantly lower volume is due to improved product mix and the results of our fixed cost reduction programs. The year to date decrease in gross profit margin percentage reflects significantly lower volume, partially offset by our fixed cost reduction programs and favorable currency impacts.
In light of the economic challenges, our Passive Components segment has maintained a respectable gross margin percentage. Average selling prices have been generally stable. We experienced a recovery in our resistors and inductors products as well as our capacitors products, which was driven by strong demand from European automotive products. While foreign currency effects reduced reported revenues, the general strengthening of the U.S. dollar improved margins versus the comparable prior year periods.
Selling, General, and Administrative Expenses
Selling, general, and administrative (“SG&A”) expenses are summarized as follows(dollars in thousands):
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Total SG&A expenses | | $ | 89,667 | | $ | 112,844 | | $ | 260,873 | | $ | 352,928 |
| as a percentage of revenues | | | 17.1% | | | 15.3% | | | 18.2% | | | 15.7% |
The overall decrease in SG&A expenses are primarily attributable to lower sales and our cost containment initiatives. The increase in SG&A as a percentage of revenues is primarily due to the decrease in revenues. Additionally, several items included in SG&A expenses impact the comparability of these amounts, as summarized below(in thousands):
| | Fiscal quarter ended | | Nine fiscal months ended |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Sept. 26, 2009 | | Sept. 27, 2008 |
| Amortization of intangible assets | | $ | 5,843 | | | $ | 5,183 | | | $ | 17,102 | | $ | 14,915 | |
| Patent infringement case | | | - | | | | - | | | | - | | | 5,600 | |
| Transition services agreements | | | - | | | | 300 | | | | - | | | 1,300 | |
| Net (gain) loss on sales of assets | | | (188 | ) | | | (2,538 | ) | | | 51 | | | (3,217 | ) |
The increase in amortization expense for the fiscal quarter and nine fiscal months ended September 26, 2009 is principally due to the acquisitions of our partner’s 51% interest in the Indian transducers joint venture, of Powertron GmbH, and of the wet tantalum capacitor business of KEMET Corporation, all in the third quarter of 2008. Amortization expense also increased for the fiscal quarter and nine fiscal months ended September 26, 2009 compared to the prior year periods due to the initiation of amortization of certain tradenames after determining that these indefinite-lived intangible assets were impaired during the third quarter of 2008.
The transition services agreements were associated with our acquisition of the PCS business in 2007.
45
Restructuring and Severance Costs and Related Asset Write-Downs
Our restructuring programs have been on-going since 2001. Our restructuring activities have been designed to reduce both fixed and variable costs. These activities include the closing of facilities and the termination of employees. Because costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, we could be required either to record additional expenses in future periods or to reverse previously recorded expenses. We anticipate that we will realize the benefits of our restructuring through lower labor costs and other operating expenses in future periods. We continued our restructuring activities during the nine fiscal months ended September 26, 2009, recording restructuring and severance costs of $34.5 million. We expect to continue to incur restructuring expenses to reduce our fixed costs, particularly in light of the current economic environment, as further explained in “Cost Management” above, in Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and in Note 4 to our consolidated condensed financial statements included in Part I of this document.
Other Income (Expense)
Interest expense for the fiscal quarter and nine fiscal months ended September 26, 2009 decreased by $4.3 million and $23.7 million, respectively, versus the comparable prior year periods. These decreases are primarily due to the repayment of the convertible subordinated notes on August 1, 2008 and lower interest rates on our variable rate debt. Interest expense for the fiscal quarter and nine fiscal months ended September 27, 2008 has been recast for the retrospective adoption of FSP APB 14-1 (ASC Topic 470-20), which decreased the reported loss from continuing operations for the quarter by $11.5 million ($0.06 per share) and increased the reported loss from continuing operations for the nine fiscal months ended September 27, 2008 by $0.8 million ($0.01 per share).
The following tables analyze the components of the line “Other” on the consolidated condensed statements of operations(in thousands):
| | Fiscal quarter ended | | | | |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Change |
| Foreign exchange gain (loss) | | $ | (389 | ) | | $ | 4,131 | | | $ | (4,520 | ) |
| Interest income | | | 874 | | | | 2,426 | | | | (1,552 | ) |
| Other | | | (158 | ) | | | 296 | | | | (454 | ) |
| | $ | 327 | | | $ | 6,853 | | | $ | (6,526 | ) |
| | | | | | | |
| | Nine fiscal months ended | | | | |
| | Sept. 26, 2009 | | Sept. 27, 2008 | | Change |
| Foreign exchange gain (loss) | | $ | 5,235 | | | $ | (2,456 | ) | | $ | 7,691 | |
| Interest income | | | 2,730 | | | | 10,642 | | | | (7,912 | ) |
| Dividend income | | | - | | | | 92 | | | | (92 | ) |
| Incentive from Chinese government | | | - | | | | 800 | | | | (800 | ) |
| Other | | | (265 | ) | | | 2,250 | | | | (2,515 | ) |
| | $ | 7,700 | | | $ | 11,328 | | | $ | (3,628 | ) |
46
Income Taxes
For the nine fiscal months ended September 26, 2009, the Company recorded a negative tax rate, tax expense on a pre-tax loss, primarily because we recorded tax expense on earnings in certain jurisdictions while realizing losses in other jurisdictions without recording tax benefits. For the same reason, the effective tax rate for the quarter ended September 26, 2009 was 71.9%. The effective tax rate for the fiscal quarter and nine fiscal months ended September 27, 2008 was 6.5% and 2.4%, respectively.
We recognized no tax benefit associated with the executive employment agreement charge of $57.8 million discussed in Note 10 to our consolidated condensed financial statements. We recorded no tax expense associated with the gain of $28.2 million recognized upon reimbursement of purchase price described in Note 2 to our consolidated condensed financial statements.
The relatively low effective tax rates for the quarter and nine fiscal months ended September 27, 2008 are principally attributable to the goodwill and indefinite-lived intangible asset impairment charges recorded in the second and third quarters. The vast majority of our goodwill was not deductible for income tax purposes. We recognized tax benefits of $29.1 million and $59.1 million during the third quarter and nine fiscal months ended September 27, 2008, respectively, associated with the goodwill and indefinite-lived intangible asset impairment charges.
In connection with the repurchase of the convertible subordinated notes on August 1, 2008, we repatriated approximately $250 million of cash from non-U.S. subsidiaries. During the second quarter of 2008, we recorded net tax expense of approximately $9.9 million after the utilization of net operating losses and tax credits as a result of this repatriation.
We operate in an international environment with significant operations in various locations outside the United States. Accordingly, the consolidated income tax rate is a composite rate reflecting our earnings and the applicable tax rates in the various locations where we operate. Part of our strategy is to achieve cost savings through the transfer and expansion of manufacturing operations to countries where we can take advantage of lower labor costs and available tax and other government-sponsored incentives. Accordingly, our effective tax rate is generally less than the U.S. statutory tax rate. Changes in the effective tax rate are largely attributable to changes in the mix of pretax income among our various taxing jurisdictions.
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 may be 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 taxable temporary differences, that would result in the utilization of loss carryforwards for tax purposes.
During the nine fiscal months ended September 26, 2009, the liabilities for unrecognized tax benefits increased by a net $4.0 million, principally due to increases for positions taken during prior periods, interest, and foreign exchange effects, partially offset by decreases for settlements.
47
Financial Condition, Liquidity, and Capital Resources
A worldwide financial crisis intensified significantly in the latter half of 2008 and continued into 2009. Although Vishay experienced some indicators of a recovery during the third quarter, the financial crisis 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.
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. A portion of the cash flows from operations was generated by the measurements and foil resistors businesses which we intend to spin-off.
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 this volatile economic environment, we 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 third quarter and nine fiscal months ended September 26, 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.
The following table summarizes the components of net debt at September 26, 2009 and December 31, 2008(in thousands):
| | September 26, | | December 31, |
| | 2009 | | 2008 |
| Credit facility - revolving debt | | $ | 125,000 | | | $ | 125,000 |
| Credit facility - term loan | | | 100,000 | | | | 112,500 |
| Exchangeable unsecured notes, due 2102 | | | 105,000 | | | | 105,000 |
| Convertible subordinated notes, due 2023 | | | 1,870 | | | | 1,870 |
| Other debt | | | 16,938 | | | | 2,305 |
| Total debt | | | 348,808 | | | | 346,675 |
| | | | | | | | |
| Cash and cash equivalents | | | 507,882 | | | | 324,164 |
| | | | | | | | |
| Net debt | | $ | (159,074 | ) | | $ | 22,511 |
48
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.
Substantially all of the September 26, 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 is 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 September 26, 2009 continued to be strong, with a current ratio (current assets to current liabilities) of 3.3 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 0.23 to 1 at September 26, 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 attributable to losses.
Cash flows provided by continuing operating activities were $178.6 million for the nine fiscal months ended September 26, 2009, as compared to cash flows provided by continuing operating activities of $192.1 million for the comparable prior year period. This decrease is principally due to less favorable operating results (adjusted for noncash expenses and charges) in the nine fiscal months ended September 26, 2009 compared to the prior year period, partially offset by favorable changes in net working capital during the 2009 period.
Cash used by discontinued operating activities of $3.2 million reflect payments to settle certain outstanding disputes with the buyer of the ASBU business during the nine fiscal months ended September 26, 2009. The expenses associated with these cash payments were accrued in the fourth quarter of 2008. Cash used by discontinued operating activities of $10.4 million for the nine fiscal months ended September 27, 2008 primarily reflects receivables collected by Vishay and remitted to the purchaser of the ASBU business pursuant to the transaction agreement. Cash provided by discontinued operating activities for the nine fiscal months ended September 27, 2008 reflects the proceeds of sale of the ASBU business, net of capital spending for information technology systems.
Cash paid for property and equipment for the nine fiscal months ended September 26, 2009 was $26.3 million, as compared to $99.1 million for the nine fiscal months ended September 27, 2008. Our total capital expenditures are projected to be significantly lower in 2009 as a result of the economic uncertainty. We estimate that 2009 capital expenditures will be approximately $55 million. This reduced level of annual capital spending is temporary and not sustainable.
Cash provided by investing activities for the nine fiscal months ended September 26, 2009 includes a net cash inflow of $28.2 million, representing a partial refund of purchase price, net of related expenses, subsequent to entering a settlement agreement with International Rectifier Corporation. This settlement agreement is more fully described in Note 2 to our consolidated condensed financial statements.
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 September 26, 2009, the term loan balance was $100 million, and $125 million was outstanding under the revolving credit facility. We will be required to amend the credit facility to complete the proposed spin-off of our measurements and foil resistors businesses.
Interest on the credit facility is payable at prime or other variable interest rate options. We are required to pay facility commitment fees. As a result of the amendment to the credit facility entered effective July 31, 2009, the interest rates applicable to amounts outstanding under the revolving credit commitment have increased by 40 basis points (to LIBOR plus 1.40% at the current leverage ratio). The interest rates applicable to amounts outstanding under the term loan arrangement have not changed (LIBOR plus 2.50% at the current leverage ratio).
49
The credit facility 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 charges coverage ratio (“FCCR”) 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 to1. The computation of these ratios is prescribed 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.
The July 31, 2009 amendment to the credit facility, which modified the FCCR covenant to require a minimum FCCR of 1.75 to 1 for the current fiscal quarter and the continuation of the minimum FCCR of 2.50 to 1 for successive fiscal quarters, would have required us to pay additional fees if we were not in compliance with the FCCR covenant.
We were in compliance with all covenants at September 26, 2009. Our tangible net worth, calculated pursuant to the terms of the credit facility, was $1,227 million, which is $160 million more than the minimum required under the related credit facility covenant. Our leverage ratio, fixed charge coverage ratio, and senior debt ratio were 1.69 to 1, 3.38 to 1, and 1.19 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.
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 unsecured notes due 2102 have cross-default provisions that could accelerate repayment in the event the indebtedness under the credit facility is accelerated.
Borrowings under the credit facility are secured by accounts receivable, inventory, machinery and equipment, and general intangibles (but excluding real estate and bank accounts) of Vishay and subsidiaries located in the United States, accounts receivable of a German subsidiary, certain intercompany loans owed to a significant German subsidiary and 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 up to a limit of $125 million 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.
50
Economic Outlook and Impact on Operations and Future Financial Results
The on-going worldwide recession has had and could continue to 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.
Debt Covenants
Our credit facility requires us to comply with covenants, including the maintenance of specific financial measures and ratios. We were in compliance with all covenants at September 26, 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.
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 unsecured notes due 2102 have cross-default provisions that could accelerate repayment in the event the indebtedness under the credit facility is accelerated.
Access to Capital Markets
In the United States, we presently have a revolving credit facility with approximately $125 million of unused borrowing capacity at September 26, 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 unsecured 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, there 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.
51
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, it is possible that our leverage ratio will 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.
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 did not actively pursue acquisitions during the first nine months of the year. The failure to pursue acquisitions could impede our future growth.
Due to improving economic conditions, our strong cash position, and our ability to generate free cash, we are returning to our strategy of exploring synergistic acquisition opportunities.
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 of these long-term projects. The deferral of some of these long-term projects could impede our development of new products.
52
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.
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.
53
Contractual Commitments
Our Annual Report on Form 10-K includes a table of contractual commitments as of December 31, 2008. Material changes to these commitments which occurred in 2009 are described below.
As more fully described in Note 10 to our consolidated condensed financial statements, on May 13, 2009, we entered into an amended and restated employment agreement with Dr. Felix Zandman, our Executive Chairman, Chief Technical and Business Development Officer, and founder. Pursuant to the amended and restated employment agreement, Dr. Zandman will receive five additional annual payments of $10 million each.
Except as described above, there were no material changes to these commitments during the nine fiscal months ended September 26, 2009.
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 and the pace of economic recovery; 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.
54
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.
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
Not applicable.
Item 1A.Risk Factors
See “Economic Outlook and Impact on Operations and Future Financial Results” included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion and analysis of market risks, which is hereby incorporated by reference.
Except as incorporated by reference above, 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.
55
Item 4.Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5.Other Information
Not applicable.
Item 6.Exhibits
| 10.1 | | Second Amendment to Vishay Intertechnology, Inc. Fourth Amended and Restated Credit Agreement. Incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed July 31, 2009. |
| |
| 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. |
| |
| 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. |
| |
| 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. |
| |
| 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. |
56
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: November 3, 2009
57
