UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________to ____________________
333-29727
(Commission File Number)
Viasystems, Inc.
(Exact name of Registrant as specified in charter)
Delaware
(State or other jurisdiction of incorporation or organization)
43-1777252
(I.R.S. Employer Identification No.)
101 South Hanley Road, Suite 400
St. Louis, MO 63105
(314) 727-2087
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] | Accelerated Filer [ ] | Non-Accelerated Filer [X] | Smaller Reporting Company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 5, 2008, there were 1,000 shares of Viasystems, Inc.’s Common Stock outstanding.
VIASYSTEMS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
| PAGE |
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PART I - FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Viasystems, Inc. and Subsidiaries |
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Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 | 2 |
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 | 3 |
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 | 4 |
Notes to Condensed Consolidated Financial Statements | 5 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 24 |
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Item 4. Controls and Procedures | 24 |
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PART II - OTHER INFORMATION |
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Item 5. Other Information | 25 |
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Item 6. Exhibits | 25 |
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SIGNATURES | 26 |
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EXHIBIT INDEX | 27 |
VIASYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| September 30, 2008 |
| December 31, 2007 |
ASSETS | (Unaudited) |
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Current assets: |
|
|
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Cash and cash equivalents | $ 61,818 |
| $ 64,002 |
Restricted cash | 303 |
| 303 |
Accounts receivable, net | 139,312 |
| 135,326 |
Inventories | 91,213 |
| 81,058 |
Prepaid expenses and other | 13,228 |
| 11,049 |
Total current assets | 305,874 |
| 291,738 |
Property, plant and equipment, net | 245,547 |
| 243,973 |
Goodwill | 79,485 |
| 79,485 |
Intangible assets, net | 6,037 |
| 6,904 |
Deferred financing costs, net | 4,433 |
| 5,980 |
Other assets | 1,425 |
| 1,153 |
Total assets | $ 642,801 |
| $ 629,233 |
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LIABILITIES AND STOCKHOLDER’S EQUITY |
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Current liabilities: |
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Current maturities of long-term debt | $ 8,929 |
| $ 1,796 |
Accounts payable | 112,302 |
| 112,765 |
Accrued and other liabilities | 58,673 |
| 66,717 |
Total current liabilities | 179,904 |
| 181,278 |
Long-term debt, less current maturities | 215,176 |
| 204,817 |
Other non-current liabilities | 32,278 |
| 35,884 |
Total liabilities | 427,358 |
| 421,979 |
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Stockholder’s equity: |
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Common stock, par value $0.01 per share, 1,000 shares authorized, issued and outstanding | - |
| - |
Paid-in capital | 2,437,828 |
| 2,437,177 |
Accumulated deficit | (2,225,399) |
| (2,236,742) |
Accumulated other comprehensive income | 3,014 |
| 6,819 |
Total stockholder’s equity | 215,443 |
| 207,254 |
Total liabilities and stockholder’s equity | $ 642,801 |
| $ 629,233 |
See accompanying notes to condensed consolidated financial statements.
2
VIASYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
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Net sales |
| $ 196,343 |
| $ 186,278 |
| $ 565,019 |
| $ 527,256 |
Operating expenses: |
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Cost of goods sold, exclusive of items shown separately |
| 158,580 |
| 148,325 |
| 446,462 |
| 423,257 |
Selling, general and administrative |
| 13,249 |
| 14,778 |
| 42,938 |
| 44,588 |
Depreciation |
| 13,550 |
| 12,275 |
| 39,839 |
| 36,886 |
Amortization |
| 311 |
| 315 |
| 936 |
| 959 |
Restructuring and impairment |
| - |
| 196 |
| - |
| 514 |
Operating income |
| 10,653 |
| 10,389 |
| 34,844 |
| 21,052 |
Other expense (income): |
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Interest expense, net |
| 5,411 |
| 5,465 |
| 16,330 |
| 16,370 |
Amortization of deferred financing costs |
| 515 |
| 516 |
| 1,547 |
| 1,549 |
Other, net |
| 509 |
| 597 |
| (2,028) |
| 752 |
Income before income taxes |
| 4,218 |
| 3,811 |
| 18,995 |
| 2,381 |
Income tax provision |
| 1,145 |
| (2,486) |
| 7,652 |
| 5,752 |
Net income (loss) |
| $ 3,073 |
| $ 6,297 |
| $ 11,343 |
| $ (3,371) |
See accompanying notes to condensed consolidated financial statements.
3
VIASYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Nine Months Ended September 30, | ||
| 2008 |
| 2007 |
Cash flows from operating activities: |
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Net income (loss) | $ 11,343 |
| $ (3,371) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization | 40,775 |
| 37,845 |
Amortization of deferred financing costs | 1,547 |
| 1,549 |
Loss on disposition of assets, net | 569 |
| 246 |
Non-cash impact of exchange rate changes | 111 |
| 750 |
Non-cash stock compensation expense | 651 |
| 1,713 |
Deferred income taxes | 16 |
| 4,032 |
Change in assets and liabilities: |
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Accounts receivable | (3,986) |
| (12,891) |
Inventories | (10,155) |
| 3,332 |
Prepaid expenses and other | (2,872) |
| 3,811 |
Accounts payable | (463) |
| (6,785) |
Accrued and other liabilities | (14,738) |
| (12,586) |
Net cash provided by operating activities | 22,798 |
| 17,645 |
Cash flows from investing activities: |
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Capital expenditures | (42,623) |
| (21,904) |
Proceeds from disposals of property | 641 |
| 78 |
Net cash used in investing activities | (41,982) |
| (21,826) |
Cash flows from financing activities: |
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Proceeds from borrowings under credit facility | 20,000 |
| - |
Repayment of borrowings under credit facility | (3,000) |
| - |
Repayment of amounts due under long-term contractual obligations | - |
| (7) |
Net cash provided by (used in) financing activities | 17,000 |
| (7) |
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Net change in cash and cash equivalents | (2,184) |
| (4,188) |
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Cash and cash equivalents, beginning of the period | 64,002 |
| 37,954 |
Cash and cash equivalents, end of the period | $ 61,818 |
| $ 33,766 |
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See accompanying notes to condensed consolidated financial statements.
4
VIASYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
1.
Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
The unaudited interim condensed consolidated financial statements of Viasystems, Inc. and subsidiaries (“Viasystems” or the “Company”) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations and cash flows. The results for the three and nine months ended September 30, 2008, are not necessarily indicative of the results that may be expected for a full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report for the year ended December 31, 2007, filed on Form 10-K with the Securities and Exchange Commission.
NatureofBusiness
Viasystemsisaleadingworldwideproviderofcomplexmulti-layerprintedcircuitboardsandelectro-mechanicalsolutions. The Company’s products are used in a wide range of applications, including automotive dash panels and control modules, data networking equipment, telecommunications switching equipment, and complex medical and technical instruments.
PrinciplesofConsolidation
The accompanying condensed consolidated financial statements include the accounts of Viasystems. All intercompany accounts and transactions have been eliminated in consolidation.
UseofEstimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect i) the reported amounts of assets and liabilities, ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and iii) the reported amounts of revenues and expenses during the reporting period.
Estimates and assumptions are used in accounting for the following significant matters, among others:
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allowances for doubtful accounts;
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inventory valuation;
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fair value of derivative instruments and related hedged items;
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useful lives of property, equipment and intangible assets;
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long-lived and intangible asset impairments;
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restructuring charges;
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warranty and product returns allowances;
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deferred compensation agreements;
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tax related items;
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contingencies; and
·
fair value of options granted under our stock-based compensation plan.
5
Actual results may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period in which the revision is made. The Company does not consider as material any revisions made to estimates or assumptions during the periods presented in the accompanying condensed consolidated financial statements.
Commitments and Contingencies
The Company is a party to contracts with third party consultants, independent contractors and other service providers in which the Company has agreed to indemnify such parties against certain liabilities in connection with their performance. Based on historical experience and the likelihood that such parties will ever make a claim against the Company, in the opinion of the Company’s management, the ultimate liabilities resulting from such indemnification obligations will not have a material adverse effect on its financial condition and results of operations and cash flows.
Viasystems provides that none of the Directors and officers of the Company bear the risk of personal liability for monetary damages for breach of fiduciary duty as a Director or officer except in cases where the action involves a breach of the duty of loyalty, acts in bad faith or intentional misconduct, the unlawful paying of dividends or repurchasing of capital stock, or transactions from which the Director or officer derived improper personal benefits.
The Company is subject to various lawsuits and claims with respect to such matters as product liability, product development and other actions arising in the normal course of business. In the opinion of the Company’s management, the ultimate liabilities resulting from such lawsuits and claims will not have a material adverse effect on its financial condition and results of operations and cash flows.
Earnings Per Share
Viasystems is exempt from the computation, presentation and disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128,Earnings per Share, as the Company has no publicly held common stock or potential common stock.
Fair Value Measurements
As of January 1, 2008, the Company adopted the provisions of SFAS No. 157,Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1 - observable inputs such as quoted prices in active markets; Level 2 - inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and Level 3 - valuations derived from valuation techniques in which one or more significant inputs are unobservable. In addition, SFAS No. 157 discusses valuation techniques which may be used, including the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; and the cost approach, using the replacement cost of assets.
The Company records deferred gains and losses related to cash flow hedges based on the fair value of active derivative contracts on the reporting date, as determined using a market approach (see Note 6). As quoted prices in active markets are not available for identical contracts, Level 2 inputs are used to determine fair value. These inputs include quotes for similar but not identical derivative contracts and market interest rates which are corroborated with publicly available market information. Upon adoption of SFAS No. 157, Level 3 inputs were used to determine the opening fair value of the Company’s active derivative contracts. Subsequently, the Company was able to corroborate the opening fair value using
6
Level 2 inputs. As a result, the Company has reclassified all of its derivative contracts which were active as of January 1, 2008 to Level 2.
Recently Issued Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (“SFAS No. 161”). This standard applies to derivative instruments, nonderivative instruments that are designed and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 does not change the accounting for derivative instruments and hedging activities, but requires enhanced disclosures concerning the effect on the financial statements from their use. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
2.
Inventories
The composition of inventories is as follows:
| September 30, 2008 |
| December 31, 2007 |
Raw materials | $ 31,998 |
| $ 28,359 |
Work in process | 21,386 |
| 22,588 |
Finished goods | 37,829 |
| 30,111 |
Total | $ 91,213 |
| $ 81,058 |
Inventories are stated at the lower of cost (valued using the first-in, first-out method) or market.
3.
Property, Plant and Equipment
The composition of property, plant and equipment is as follows:
| September 30, 2008 |
| December 31, 2007 |
Land and buildings | $ 54,767 |
| $ 54,016 |
Machinery, equipment and systems | 435,186 |
| 399,599 |
Leasehold improvements | 40,679 |
| 38,466 |
Construction in progress | 2,780 |
| 4,195 |
| 533,412 |
| 496,276 |
Less: Accumulated depreciation | (287,865) |
| (252,303) |
Total | $ 245,547 |
| $ 243,973 |
7
4.
Long-term Debt
The composition of long-term debt is as follows:
| September 30, 2008 |
| December 31, 2007 |
2006 Credit Agreement: |
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Term loans | $ 17,000 |
| $ - |
Revolving credit loans | - |
| - |
Senior Subordinated Notes, due 2011 | 200,000 |
| 200,000 |
Capital leases | 7,105 |
| 6,613 |
| 224,105 |
| 206,613 |
Less: Current maturities | (8,929) |
| (1,796) |
| $ 215,176 |
| $ 204,817 |
During the first quarter of 2008, the Company borrowed $20,000 under the 2006 Credit Agreement, which was subsequently converted to a term loan as required by the original terms of the 2006 Credit Agreement. Through September 30, 2008, the Company made scheduled payments of $3,000, and the balance is repayable in quarterly installments through July 2010. As of September 30, 2008, approximately $56,250 of the revolving credit facility under the 2006 Credit Agreement was unused and available, which is net of outstanding letters of credit totaling $3,750.
5.
Restructuring and Impairment
The Company’s reserve for restructuring activities declined by a net $804 to $4,363 during the nine months ended September 30, 2008, due to payments of $1,054 primarily related to lease and other contractual commitments, off-set by accretion of interest on discounted restructuring liabilities of $250. For the nine months ended September 30, 2007, the reserve for restructuring activities declined a net $509 to $5,558, primarily due to payments of $1,078 related to leases and other contractual commitments and $233 related to personnel and severance, offset by additional expense and accretion of interest on discounted restructuring liabilities totaling $802.
6.
Derivative Financial Instruments
The Company enters into foreign currency forward contracts to fix exchange rates for future expected cash flows. The Company’s currency forward contracts as of September 30, 2008, relate only to Chinese Renminbi (“RMB”) exchange rates, and because that currency is not freely traded outside of the People’s Republic of China, such contracts are settled in U.S. dollars by reference to changes in the value of notional quantities of RMB through the contract settlement date. Amounts received or paid at the contract settlement date are recorded in cost of goods sold at the time of settlement. For the three and nine month periods ended September 30, 2008, a $307 gain and a $1,343 gain, respectively, were reclassified from other comprehensive income to cost of goods sold upon the settlement of foreign currency forward contracts. For the three and nine month periods ended September 30, 2007, a $65 loss and a $25 loss, respectively, were reclassified from other comprehensive income to cost of goods sold upon the settlement of foreign currency forward contracts.
At September 30, 2008, the Company had foreign exchange contracts outstanding with a notional amount of 570,000 Chinese RMB, at a weighted average exchange rate of 6.6626, with a weighted average remaining maturity of 4.8 months. Related to these contracts, at September 30, 2008, deferred losses of $3,455 (net of tax of $0) measured using Level 2 inputs (see Note 1), were recorded in accrued and other liabilities and other comprehensive income on the condensed consolidated balance sheet. All cash flow hedges were highly effective, and therefore, no unrealized gains or losses were recognized in the results of operations for the three and nine months ended September 30, 2008 and 2007. Subsequently, in
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October 2008, the Company entered into additional foreign exchange contracts with a total notional amount of 420,000 Chinese RMB, at a weighted average exchange rate of 6.9768, which will mature from July to December 2009.
7.
Stock-based Compensation
In accordance with SFAS No. 123 (revised 2004),Share-Based Payment, (“SFAS No. 123(R)”), stock compensation expense is recorded in the condensed consolidated statements of operations as follows:
| Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 | ||||
Cost of goods sold |
| $ 22 |
| $ 38 |
| $ 80 |
| $ 187 | ||||
Selling, general and administrative |
| 172 |
| 263 |
| 571 |
| 1,526 | ||||
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| $ 194 |
| $ 301 |
| $ 651 |
| $ 1,713 |
The following table summarizes the stock option activity from January 1, 2008, through September 30, 2008:
| Shares |
| Weighted |
Outstanding at December 31, 2007 | 2,765,600 |
| $ 12.63 |
Granted | 12,000 |
| 12.63 |
Exercised | - |
| - |
Forfeited | (95,800) |
| 12.63 |
Outstanding at September 30, 2008 | 2,681,800 |
| 12.63 |
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Options exercisable at September 30, 2008 | 2,355,918 |
| 12.63 |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions for the nine months ended September 30:
| 2008 |
| 2007 |
Expected life of options | 5.8 years |
| 5.0 years |
Risk free interest rate | 2.71% |
| 4.63-4.76% |
Expected volatility of stock | 52% |
| 61-64% |
Expected dividend yield | None |
| None |
8. Income Taxes
The Company’s income tax provision relates primarily to our profitable operations in China and Hong Kong. Because of the substantial net operating loss carryforwards in the Company’s U.S. and other tax jurisdictions, the Company has not recognized certain income tax benefits in such jurisdictions for the Company’s substantial interest expense, among other expenses.
During the nine months ended September 30, 2008, as a result of both negotiated settlements and remeasurement of ongoing uncertain positions, the Company adjusted its reserves for uncertain tax positions in multiple jurisdictions related to transfer pricing and other matters. As a result, included in the tax provision for the three and nine months ended September 30, 2008, are reversals of tax reserves of $2,577 and $3,156, respectively. Included in these reversals are amounts representing interest of $989 and $1,217 for the three and nine months ended September 30, 2008, respectively.
9
During the three months ended March 31, 2007, the Company revalued certain foreign deferred tax assets and liabilities as a result of a tax law change in China, which increased the statutory tax rate for certain subsidiaries. The income tax provision for the nine months ended September 30, 2007, includes approximately $4,000 of deferred tax expense related to this revaluation.
9.
Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
Net income (loss) |
| $ 3,073 |
| $ 6,297 |
| $ 11,343 |
| $ (3,371) |
Change in fair value of derivative instruments designated and qualifying as foreign currency cash flow hedging instruments |
| (4,778) |
| 510 |
| (3,805) |
| 56 |
Foreign currency translation adjustments |
| - |
| - |
| - |
| (14) |
Comprehensive (loss) income |
| $ (1,705) |
| $ 6,807 |
| $ 7,538 |
| $ (3,329) |
10.
Business Segment Information
SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance.
The Company operates in two segments: (i) Printed Circuit Boards and (ii) Assembly. The Printed Circuit Boards segment consists of printed circuit board manufacturing facilities located in China. These facilities manufacture double-sided and multi-layer printed circuit boards and backpanels. The Assembly segment consists of assembly operations including backpanel assembly, printed circuit board assembly, cable assembly, custom enclosures, and full system assembly and testing. The assembly operations are conducted in manufacturing facilities in China, Mexico and the United States. Assets and liabilities of the Company’s corporate headquarters, along with those of its closed printed circuit board operations, have not been allocated and remain in Other for purpose of segment disclosures. Operating expenses of the Company’s corporate headquarters are allocated to each segment based on a number of factors, including sales.
Total assets by segment are as follows:
| September 30, 2008 |
| December 31, 2007 |
Total assets: |
|
|
|
Printed Circuit Boards | $ 489,962 |
| $ 478,690 |
Assembly | 131,410 |
| 113,092 |
Other | 21,429 |
| 37,451 |
| $ 642,801 |
| $ 629,233 |
10
Net sales and operating income by segment, together with a reconciliation to income before income taxes, are as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September, 30 | |||||||||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 | |||||||||||
Net sales to external customers: |
|
|
|
|
|
|
|
| |||||||||||
Printed Circuit Boards |
| $ 121,888 |
| $ 117,824 |
| $ 375,619 |
| $ 342,932 | |||||||||||
Assembly |
| 74,455 |
| 68,454 |
| 189,400 |
| 184,324 | |||||||||||
Total |
| $ 196,343 |
| $ 186,278 |
| $ 565,019 |
| $ 527,256 | |||||||||||
|
|
|
|
|
|
| |||||||||||||
Intersegment sales: |
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|
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|
|
|
| |||||||||||
Printed Circuit Boards |
| $ 5,045 |
| $ 5,995 |
| $ 15,401 |
| $ 15,047 | |||||||||||
Assembly |
| - |
| - |
| - |
| - | |||||||||||
Total |
| $ 5,045 |
| $ 5,995 |
| $ 15,401 |
| $ 15,047 | |||||||||||
|
|
|
|
|
|
|
|
| |||||||||||
Operating income (loss): |
|
|
|
|
|
|
|
| |||||||||||
Printed Circuit Boards (a) |
| $ 7,887 |
| $ 8,404 |
| $ 34,249 |
| $ 16,300 | |||||||||||
Assembly (a) |
| 2,766 |
| 2,181 |
| 595 |
| 5,266 | |||||||||||
Other |
| - |
| (196) |
| - |
| (514) | |||||||||||
Total |
| 10,653 |
| 10,389 |
| 34,844 |
| 21,052 | |||||||||||
|
|
|
|
|
|
|
|
| |||||||||||
Interest expense, net |
| 5,411 |
| 5,465 |
| 16,330 |
| 16,370 | |||||||||||
Amortization of deferred financing costs |
| 515 |
| 516 |
| 1,547 |
| 1,549 | |||||||||||
Other, net |
| 509 |
| 597 |
| (2,028) |
| 752 | |||||||||||
Income before income taxes |
| $ 4,218 |
| $ 3,811 |
| $ 18,995 |
| $ 2,381 |
(a)
During the first quarter of 2008, the Company refined its methodology for allocating common selling, general and administrative expenses to its segments to better reflect the efforts undertaken to support each segment. Previously these costs were allocated based solely on each segment’s percentage of total net sales. For the three and nine months ended September 30, 2007, operating income by segment has been restated to conform to the presentation in the current period.
11.
Guarantor Subsidiaries
The Senior Subordinated Notes (the “2011 Notes”) are fully and unconditionally (as well as jointly and severally) guaranteed on an unsecured, senior subordinated basis by each subsidiary of Viasystems other than its foreign subsidiaries. Each of the guarantor subsidiaries and non-guarantor subsidiaries is wholly-owned by the Company.
The following condensed consolidating financial information includes the accounts of Viasystems, Inc., the combined accounts of the guarantor subsidiaries and the combined accounts of the non-guarantor subsidiaries.
11
Balance Sheet as of September 30, 2008
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ 804 |
| $ 13,426 |
| $ 47,588 |
| $ - - |
| $ 61,818 |
Restricted cash | - |
| 303 |
| - |
| - |
| 303 |
Accounts receivable, net | - |
| 26,219 |
| 113,093 |
| - |
| 139,312 |
Inventories | - |
| 12,864 |
| 78,349 |
| - |
| 91,213 |
Other current assets | - |
| 1,864 |
| 11,364 |
| - |
| 13,228 |
Total current assets | 804 |
| 54,676 |
| 250,394 |
| - |
| 305,874 |
Property, plant and equipment, net | - |
| 12,025 |
| 233,522 |
| - |
| 245,547 |
Other assets, net | 4,308 |
| 114 |
| 86,958 |
| - |
| 91,380 |
Investment in subsidiaries | 679,274 |
| 360,784 |
| - |
| (1,040,058) |
| - |
Total assets | $ 684,386 |
| $ 427,599 |
| $ 570,874 |
| $ (1,040,058) |
| $ 642,801 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDER’S EQUITY |
|
|
|
|
|
|
|
| |
Current maturities of long-term debt | $ - |
| $ - |
| $ 8,929 |
| $ - |
| $ 8,929 |
Accounts payable | - |
| 9,856 |
| 102,446 |
| - |
| 112,302 |
Accrued and other liabilities | 4,928 |
| 16,348 |
| 37,397 |
| - |
| 58,673 |
Total current liabilities | 4,928 |
| 26,204 |
| 148,772 |
| - |
| 179,904 |
Long-term debt, less current maturities | 200,000 |
| - |
| 15,176 |
| - |
| 215,176 |
Other non-current liabilities | - |
| 9,725 |
| 22,553 |
| - |
| 32,278 |
Intercompany payable / (receivable) | 266,003 |
| (284,166) |
| 18,163 |
| - |
| - |
Total liabilities | 470,931 |
| (248,237) |
| 204,664 |
| - |
| 427,358 |
Total paid-in capital and accumulated deficit | 212,429 |
| 679,274 |
| 360,784 |
| (1,040,058) |
| 212,429 |
Accumulated other comprehensive income (loss) | 1,026 |
| (3,438) |
| 5,426 |
| - |
| 3,014 |
Total liabilities and stockholder’s equity | $ 684,386 |
| $ 427,599 |
| $ 570,874 |
| $ (1,040,058) |
| $ 642,801 |
Balance Sheet as of December 31, 2007
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ 653 |
| $ 28,464 |
| $ 34,885 |
| $ - |
| $ 64,002 |
Restricted cash | - |
| 303 |
| - |
| - |
| 303 |
Accounts receivable, net | - |
| 24,334 |
| 110,992 |
| - |
| 135,326 |
Inventories | - |
| 11,687 |
| 69,371 |
| - |
| 81,058 |
Other current assets | - |
| 2,668 |
| 8,381 |
| - |
| 11,049 |
Total current assets | 653 |
| 67,456 |
| 223,629 |
| - |
| 291,738 |
Property, plant and equipment, net | - |
| 10,823 |
| 233,150 |
| - |
| 243,973 |
Other assets, net | 5,405 |
| 114 |
| 88,003 |
| - |
| 93,522 |
Investment in subsidiaries | 657,945 |
| 349,785 |
| - |
| (1,007,730) |
| - |
Total assets | $ 664,003 |
| $ 428,178 |
| $ 544,782 |
| $ (1,007,730) |
| $ 629,233 |
LIABILITIES AND STOCKHOLDER’S EQUITY |
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt | $ - |
| $ - |
| $ 1,796 |
| $ - |
| $ 1,796 |
Accounts payable | - |
| 9,138 |
| 103,627 |
| - |
| 112,765 |
Accrued and other liabilities | 9,625 |
| 15,402 |
| 41,690 |
| - |
| 66,717 |
Total current liabilities | 9,625 |
| 24,540 |
| 147,113 |
| - |
| 181,278 |
Long-term debt, less current maturities | 200,000 |
| - |
| 4,817 |
| - |
| 204,817 |
Other non-current liabilities | - |
| 10,385 |
| 25,499 |
| - |
| 35,884 |
Intercompany payable / (receivable) | 252,832 |
| (265,060) |
| 12,228 |
| - |
| - |
Total liabilities | 462,457 |
| (230,135) |
| 189,657 |
| - |
| 421,979 |
Total paid-in capital and accumulated deficit | 200,435 |
| 657,945 |
| 349,785 |
| (1,007,730) |
| 200,435 |
Accumulated other comprehensive income | 1,111 |
| 368 |
| 5,340 |
| - |
| 6,819 |
Total liabilities and stockholder’s equity | $ 664,003 |
| $ 428,178 |
| $ 544,782 |
| $ (1,007,730) |
| $ 629,233 |
12
Statement of Operations for the three months ended September 30, 2008
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated | ||||||
Net sales | $ - - |
| $ 39,975 |
| $ 173,639 |
| $ (17,271) | $ 196,343 | |||||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||||
Cost of goods sold, exclusive of items shown separately | 23 |
| 37,698 |
| 138,130 |
| (17,271) |
| 158,580 | ||||||
Selling, general and administrative | 170 |
| 4,450 |
| 8,629 |
| - |
| 13,249 | ||||||
Depreciation | - |
| 918 |
| 12,632 |
| - |
| 13,550 | ||||||
Amortization | 79 |
| - |
| 232 |
| - |
| 311 | ||||||
Operating (loss) income | (272) |
| (3,091) |
| 14,016 |
| - |
| 10,653 | ||||||
Other expense (income): |
|
|
|
|
|
|
|
|
| ||||||
Interest expense (income), net | 2,641 |
| (5,834) |
| 8,604 |
| - |
| 5,411 | ||||||
Amortization of deferred financing costs | 308 |
| - |
| 207 |
| - |
| 515 | ||||||
Other, net | 24 |
| (857) |
| 1,342 |
| - |
| 509 | ||||||
Equity in (earnings) loss of subsidiaries | (6,318) |
| (2,923) |
| - |
| 9,241 |
| - | ||||||
Income (loss) before income taxes | 3,073 |
| 6,523 |
| 3,863 |
| (9,241) |
| 4,218 | ||||||
Income tax provision | - |
| 205 |
| 940 |
| - |
| 1,145 | ||||||
Net income (loss) | $ 3,073 |
| $ 6,318 |
| $ 2,923 |
| $ (9,241) |
| $ 3,073 | ||||||
|
|
|
|
|
|
|
|
|
Statement of Operations for the nine months ended September 30, 2008
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
Net sales | $ - |
| $ 127,413 |
| $ 492,106 |
| $ (54,500) |
| $ 565,019 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of items shown separately | 80 |
| 118,006 |
| 382,876 |
| (54,500) |
| 446,462 |
Selling, general and administrative | 570 |
| 13,159 |
| 29,209 |
| - |
| 42,938 |
Depreciation | - |
| 2,585 |
| 37,254 |
| - |
| 39,839 |
Amortization | 241 |
| - |
| 695 |
| - |
| 936 |
Operating (loss) income | (891) |
| (6,337) |
| 42,072 |
| - |
| 34,844 |
Other expense (income): |
|
|
|
|
|
|
|
|
|
Interest expense (income), net | 8,075 |
| (17,657) |
| 25,912 |
| - |
| 16,330 |
Amortization of deferred financing costs | 923 |
| - |
| 624 |
| - |
| 1,547 |
Other, net | 97 |
| 774 |
| (2,899) |
| - |
| (2,028) |
Equity in (earnings) loss of subsidiaries | (21,329) |
| (10,999) |
| - |
| 32,328 |
| - |
Income (loss) before income taxes | 11,343 |
| 21,545 |
| 18,435 |
| (32,328) |
| 18,995 |
Income tax provision | - |
| 216 |
| 7,436 |
| - |
| 7,652 |
Net income (loss) | $ 11,343 |
| $ 21,329 |
| $ 10,999 |
| $ (32,328) |
| $ 11,343 |
Statement of Operations for the three months ended September 30, 2007
|
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
Net sales |
| $ - |
| $ 48,208 |
| $ 159,185 |
| $ (21,115) |
| $ 186,278 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of items shown separately |
| 38 |
| 42,464 |
| 126,938 |
| (21,115) |
| 148,325 |
Selling, general and administrative |
| 263 |
| 7,249 |
| 7,266 |
| - |
| 14,778 |
Depreciation |
| 24 |
| 623 |
| 11,628 |
| - |
| 12,275 |
Amortization |
| 78 |
| - |
| 237 |
| - |
| 315 |
Restructuring and impairment |
| - |
| - |
| 196 |
| - |
| 196 |
Operating (loss) income |
| (403) |
| (2,128) |
| 12,920 |
| - |
| 10,389 |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
| 1,587 |
| (5,866) |
| 9,744 |
| - |
| 5,465 |
Amortization of deferred financing costs |
| 309 |
| - |
| 207 |
| - |
| 516 |
Other, net |
| - |
| (2,583) |
| 3,180 |
| - |
| 597 |
Equity in (earnings) loss of subsidiaries |
| (8,596) |
| (2,797) |
| - |
| 11,393 |
| - |
Income (loss) before income taxes |
| 6,297 |
| 9,118 |
| (211) |
| (11,393) |
| 3,811 |
Income tax provision |
| - |
| 522 |
| (3,008) |
| - |
| (2,486) |
Net income (loss) |
| $ 6,297 |
| $ 8,596 |
| $ 2,797 |
| $ (11,393) |
| $ 6,297 |
13
Statement of Operations for the nine months ended September 30, 2007
|
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
Net sales |
| $ - |
| $ 127,528 |
| $ 450,751 |
| $ (51,023) |
| $ 527,256 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of items shown separately |
| 187 |
| 112,478 |
| 361,615 |
| (51,023) |
| 423,257 |
Selling, general and administrative |
| 1,526 |
| 23,135 |
| 19,927 |
| - |
| 44,588 |
Depreciation |
| 70 |
| 1,809 |
| 35,007 |
| - |
| 36,886 |
Amortization |
| 223 |
| - |
| 736 |
| - |
| 959 |
Restructuring and impairment |
| - |
| - |
| 514 |
| - |
| 514 |
Operating (loss) income |
| (2,006) |
| (9,894) |
| 32,952 |
| - |
| 21,052 |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
| 4,854 |
| (17,585) |
| 29,101 |
| - |
| 16,370 |
Amortization of deferred financing costs |
| 927 |
| - |
| 622 |
| - |
| 1,549 |
Other, net |
| - |
| (7,399) |
| 8,151 |
| - |
| 752 |
Equity in (earnings) loss of subsidiaries |
| (4,416) |
| 9,701 |
| - |
| (5,285) |
| - |
Income (loss) before income taxes |
| (3,371) |
| 5,389 |
| (4,922) |
| 5,285 |
| 2,381 |
Income tax provision |
| - |
| 973 |
| 4,779 |
| - |
| 5,752 |
Net income (loss) |
| $ (3,371) |
| $ 4,416 |
| $ (9,701) |
| $ 5,285 |
| $ (3,371) |
Statement of Cash Flows for the nine months ended September 30, 2008
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
Net cash provided by (used in) operating activities | $ 151 |
| $ (11,240) |
| $ 33,887 |
| $ - |
| $ 22,798 |
Net cash provided by (used in) investing activities | �� - |
| (3,798) |
| (38,184) |
| - |
| (41,982) |
Net cash provided by (used in) financing activities | - |
| - |
| 17,000 |
| - |
| 17,000 |
Net change in cash and cash equivalents | 151 |
| (15,038) |
| 12,703 |
| - |
| (2,184) |
Cash and cash equivalents, beginning of the period | 653 |
| 28,464 |
| 34,885 |
| - |
| 64,002 |
Cash and cash equivalents, end of the period | $ 804 |
| $ 13,426 |
| $ 47,588 |
| $ - |
| $ 61,818 |
Statement of Cash Flows for the nine months ended September 30, 2007
|
| Viasystems, Inc. |
| Total Guarantor |
| Total Non- Guarantor |
| Eliminations |
| Viasystems, Inc. Consolidated |
Net cash provided by (used in) operating activities. |
| $ (570) |
| $ 7,581 |
| $ 10,634 |
| $ - |
| $ 17,645 |
Net cash provided by (used in) investing activities. |
| - |
| (3,679) |
| (18,147) |
| - |
| (21,826) |
Net cash provided by (used in) financing activities |
| - |
| (7) |
| - |
| - |
| (7) |
Net change in cash and cash equivalents |
| (570) |
| 3,895 |
| (7,513) |
| - |
| (4,188) |
Cash and cash equivalents, beginning of the period |
| 701 |
| 13,244 |
| 24,009 |
| - |
| 37,954 |
Cash and cash equivalents, end of the period |
| $ 131 |
| $ 17,139 |
| $ 16,496 |
| $ - |
| $ 33,766 |
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this information statement.
We have made forward-looking statements in this analysis that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or other similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions, including those referred to in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on March 28, 2008. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this information statement.
You should understand that many important factors could cause our results to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to, fluctuations in our operating results and customer orders, unexpected decreases in demand or increases in our inventory levels, our competitive environment, our reliance on our largest customers, risks associated with our international operations, our ability to protect our patents and trade secrets, environmental laws and regulations, risks associated with our acquisition strategy, our substantial indebtedness and our ability to comply with the terms thereof, control by our largest stockholders and other factors.
Overview
We are a leading worldwide provider of complex multi-layer printed circuit boards (“PCBs”) and electro-mechanical solutions (“EMS”). The products we manufacture include, or can be found in, a wide array of products including automotive dash panels and control modules, telecommunications switching equipment, data networking equipment, major household appliances, wind energy applications, and a variety of complex medical and technical instruments. We currently have seven manufacturing facilities. Five of our manufacturing sites are located in The People’s Republic of China (“China”) and one in Mexico to take advantage of low cost, high quality manufacturing environments. We also have one manufacturing facility in Milwaukee, Wisconsin which provides electronic manufacturing solutions to our customers. In addition, in order to support our customers’ local needs, we maintain engineering and customer service centers in Hong Kong, China, the Netherlands, England, Canada, Mexico and the United States.
We are a supplier to over 125 manufacturers of original equipment in numerous end markets, including industry leaders Alcatel-Lucent SA, Bosch Group, Caterpillar Inc., Continental AG, Delphi Corporation, EMC Corporation, Ericsson AB, General Electric Company, Hewlett-Packard Company, Huawei Technologies Co. Ltd., Otis Elevator Company, Rockwell Automation, Inc., Siemens AG, Sun Microsystems, Inc. and Tellabs, Inc. We have good working relationships with industry leading contract manufacturers such as Celestica, Inc. and Jabil Circuit, Inc., and we supply PCBs and EMS products to these customers as well.
15
Results of Operations
Three Months Ended September 30, 2008, Compared to the Three Months Ended September 30, 2007
Net Sales. Net sales for the three months ended September 30, 2008, were $196.3 million, representing a $10.0 million, or 5.4%, increase from net sales during the same period in 2007.
Net sales by end-user market for the three months ended September 30, 2008 and 2007, were as follows:
End-User Market(dollars in millions) |
| 2008 |
| 2007 |
Automotive |
| $ 68.9 |
| $ 63.6 |
Industrial & Instrumentation, Medical, Consumer |
| 60.3 |
| 42.9 |
Telecommunications |
| 48.9 |
| 60.4 |
Computer and Datacommunications |
| 18.2 |
| 19.4 |
Total Net Sales |
| $ 196.3 |
| $ 186.3 |
Our net sales of products for end use in the automotive market grew by approximately 8.3% during the three months ended September 30, 2008, compared to the same period in 2007 based on sustained strong demand by European and Asian automotive producers, partially offset by weak demand in North America. In the industrial & instrumentation, medical, consumer and other markets, new wind power related programs with an existing customer was the primary driver of our approximately 40.6% increase in net sales. Partially offsetting the increase to this end user market was reduced demand for certain fabricated metal products as a customer program goes end of life. Net sales of products ultimately used in the telecommunications market declined by approximately 19.0% from the quarter ended September 30, 2007, to the quarter ended September 30, 2008, primarily as a result of weak demand on select product offerings. An approximate 6.2% decline in third quarter net sales of our products for use in the computer and datacommunications markets is largely the result of reduced demand from select customers, partially offset by sales to a new customer.
Net sales by segment for the three months ended September 30, 2008 and 2007, were as follows:
Segment(dollars in millions) |
| 2008 |
| 2007 |
Printed Circuit Boards |
| $ 126.9 |
| $ 123.8 |
Assembly |
| 74.4 |
| 68.5 |
Eliminations |
| (5.0) |
| (6.0) |
Total Net Sales |
| $ 196.3 |
| $ 186.3 |
Printed Circuit Boards segment net sales, including intersegment sales, for the three months ended September 30, 2008, increased by $3.1 million, or 2.5%, to $126.9 million as compared to the third quarter of 2007. The increase is a result of improved product mix, an increase in volume of approximately 1.0% and selling price increases tied to higher material costs.
Assembly segment net sales increased by $5.9 million, or 8.6% to $74.4 million for the three months ended September 30, 2008, as compared to the third quarter of 2007, primarily due to new wind power related programs with an existing customer in the industrial & instrumentation, medical, consumer and other end market, partially offset by reduced demand from select customers in the telecommunications end market.
16
Cost of Goods Sold. Cost of good sold, exclusive of items shown separately for the three months ended September 30, 2008, was $158.6 million, or 80.8% of consolidated net sales. This represents a 1.2 percentage point increase from the 79.6% of consolidated net sales for the third quarter of 2007.
The materials and supplies used to support our production are the most significant costs in our Printed Circuit Boards segment. The costs of materials, labor and overhead in the segment have been impacted by adverse trends in global commodities, currency exchange rates and minimum wage increases. Other cost trends in China, including increases in electricity and diesel fuel costs have further impacted our costs adversely. Economies of scale help to offset a portion of the increased costs. Cost of goods sold for the third quarter of 2008, as compared to the same period in the prior year, was favorably impacted by the elimination of professional fees associated with our continuing initiatives to reduce costs of materials and production. In addition to the $2.6 million improvement related to the reduction in professional fees, the third quarter of 2008 reflects cost improvements associated with these initiatives.
Cost of goods sold in our Assembly segment relates primarily to component materials costs. As a result, trends in sales volume for the segment drive similar trends in cost of goods sold. However, our costs have been negatively impacted by startup costs for production of new products related to new customers and to new programs with existing customers. In addition, costs of materials, labor and overhead incurred in Chinese Renminbi (“RMB”) were negatively impacted due to the appreciation of that currency.
Selling, General and Administrative Costs. Selling, general and administrative costs were $13.2 million for the three months ended September 30, 2008, which represents a $1.5 million reduction as compared to the same period in the prior year. Approximately one-half of our costs are incurred to support our global operations and are not specific to any segment. These common costs are allocated to our Printed Circuit Boards segment and our Assembly segment. The decrease is primarily due to reduced professional fees and other cost savings initiatives, as well as lower stock compensation expense.
Depreciation. Depreciation expense for the three months ended September 30, 2008, was $13.6 million, including $11.8 million related to our Printed Circuit Boards segment and $1.8 million related to our Assembly segment. Depreciation expense in our Printed Circuit Boards and Assembly segments increased by approximately $1.1 million and $0.4 million, respectively, compared to the same period last year primarily as a result of investment in new equipment.
Operating Income. Operating income of $10.7 million for the three months ended September 30, 2008, represents an increase of $0.3 million compared to operating income of $10.4 million during the three months ended September 30, 2007. The primary sources of operating income for the three months ended September 30, 2008 and 2007, were as follows:
Source(dollars in millions) |
| 2008 |
| 2007 |
Printed Circuit Boards segment(a) |
| $ 7.9 |
| $ 8.4 |
Assembly segment(a) |
| 2.8 |
| 2.2 |
Restructuring activities |
| - |
| (0.2) |
Operating Income |
| $ 10.7 |
| $ 10.4 |
(a)
During the first quarter of 2008, we refined our methodology for allocating common selling, general and administrative expenses to our segments to better reflect the efforts undertaken to support each segment. Previously these costs were allocated based solely on each segment’s percentage of total net sales. For the three months ended September 30, 2007, operating income by segment has been restated to conform to the presentation in the current period.
17
The operating income from our Printed Circuit Boards segment decreased by $0.5 million to $7.9 million for the three months ended September 30, 2008, compared to $8.4 million of operating income for the same period in the prior year. The decrease is primarily the result of increased manufacturing cost and increased depreciation expense partially offset by a reduction in professional fees associated with our continuing initiatives to reduce production costs.
The operating income from our Assembly segment was $2.8 million for the three months ended September 30, 2008, compared to $2.2 million of operating income in the third quarter of 2007. The increase is primarily the result of increased sales volume, partially offset by increased depreciation expense.
Adjusted EBITDA. We measure our performance primarily through our operating income. In addition to our consolidated financial statements presented in accordance with U.S. GAAP, management uses certain non-GAAP financial measures, including “adjusted EBITDA.” Adjusted EBITDA is not a recognized financial measure under U.S. GAAP, and does not purport to be an alternative to operating income or an indicator of operating performance. Adjusted EBITDA is presented to enhance an understanding of our operating results and is not intended to represent cash flows or results of operations. Our owners, lenders and management use adjusted EBITDA as an additional measure of operating performance for matters including covenant compliance, executive compensation, and competitor comparisons. The use of this non-GAAP measure provides an indication of our ability to service debt, and we consider it an appropriate measure to use because of our highly leveraged position.
Adjusted EBITDA has certain material limitations, primarily due to the exclusion of certain amounts that are material to our consolidated results of operations, such as interest expense, income tax expense and depreciation and amortization. In addition, adjusted EBITDA may differ from the adjusted EBITDA calculations of other companies in our industry, limiting its usefulness as a comparative measure.
We use adjusted EBITDA to provide meaningful supplemental information regarding our operating performance and profitability by excluding from EBITDA certain items that we believe are not indicative of our ongoing operating results or will not impact future operating cash flows as follows:
·
Restructuring Charges – which consist primarily of facility closures and other headcount reductions. A significant amount of these restructuring charges are non-cash charges related to the write-down of property, plant and equipment to estimated net realizable value. We exclude these restructuring charges to more clearly reflect our ongoing operating performance.
·
Stock Compensation – non-cash charges associated with recognizing the fair value of stock options granted to employees. We exclude these charges to more clearly reflect a comparable year over year cash operating performance.
18
Reconciliations of operating income to Adjusted EBITDAfor the three months ended September 30, 2008 and 2007, were as follows:
|
| Three Months Ended September 30, | ||
Source(dollars in millions) |
| 2008 |
| 2007 |
Operating Income |
| $ 10.7 |
| $ 10.4 |
Add-back |
|
|
|
|
Depreciation and Amortization |
| 13.9 |
| 12.6 |
Restructuring and impairment |
| - |
| 0.2 |
Non-cash stock compensation expense. |
| 0.2 |
| 0.3 |
Adjusted EBITDA |
| $ 24.8 |
| $ 23.5 |
Adjusted EBITDA increased by $1.3 million, or 5.5%, primarily as a result of increased operating income exclusive of depreciation expense.
Interest Expense, net. Interest expense, net of interest income, was $5.4 million for the three month period ended September 30, 2008, which was relatively unchanged from the $5.5 million for the third quarter of 2007. Interest expense related to our 2011 Senior Subordinated 10.5% Notes is approximately $5.3 million in each quarter as the $200 million principal and the 10.5% interest rate remain unchanged since the notes were issued in 2003.
Interest expense under our 2006 Credit Agreement was $0.3 million for the three months ended September 30, 2008, as compared to $0.2 million in the same period last year. This expense varies from period to period based on the outstanding principal on the term loan and revolving loans and letters-of-credit outstanding, all of which bear interest at floating rates. Interest expense on capital leases was approximately $0.2 million during each of the quarters ended September 30, 2008 and 2007.
Interest income increased $0.2 million to $0.4 million for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, on higher cash deposits in interest bearing accounts.
Other Expense. Other expense, net was $0.5 million for the three months ended September 30, 2008, which was relatively unchanged from the $0.6 million for the same period in the prior year.
Income Taxes. Income tax expense of $1.1 million for the three months ended September 30, 2008, compares to income tax benefit of $2.5 million for the quarter ended September 30, 2007. During the three months ended September 30, 2008, as a result of both negotiated settlements and remeasurement of ongoing uncertain positions, the Company adjusted its reserves for uncertain tax positions in multiple jurisdictions related to transfer pricing and other matters. As a result, included in the tax provision for the three months ended September 30, 2008, are reversals of tax reserves of $2.6 million, including $1.0 million of interest.
Our income tax provision relates primarily to our profitable operations in China and Hong Kong. Because of the substantial net operating loss carryforwards previously existing in our U.S. and other tax jurisdictions, we have not recognized certain income tax benefits in such jurisdictions for the Company’s substantial interest expense, among other expenses.
19
Nine Months Ended September 30, 2008, Compared to the Nine Months Ended September 30, 2007
Net Sales. Net sales for the nine months ended September 30, 2008, were $565.0 million, representing a $37.7 million, or 7.1%, increase from net sales during the same period in 2007.
Net sales by end-user market for the nine months ended September 30, 2008 and 2007, were as follows:
End-User Market(dollars in millions) |
| 2008 |
| 2007 |
Automotive |
| $ 210.9 |
| $ 191.7 |
Industrial & Instrumentation, Medical, Consumer |
|
147.8 |
|
119.4 |
Telecommunications |
| 145.8 |
| 164.6 |
Computer and Datacommunications |
| 60.5 |
| 51.6 |
Total Net Sales |
| $ 565.0 |
| $ 527.3 |
Our net sales of products for end use in the automotive market grew by approximately 10.0% during the nine months ended September 30, 2008, compared to the same period in 2007 based on sustained strong demand, and new program wins with European and Asian automotive producers, partially offset by weak demand in North America. In the industrial & instrumentation, medical, consumer and other market, new wind power related programs with an existing customer was the primary driver of our 23.8% increase in net sales to this end use market, in which a broad base of other customers remained stable. Net sales of products ultimately used in the telecommunications market declined by approximately 11.4% from the nine months ended September 30, 2007, to the nine months ended September 30, 2008, primarily as a result of weak demand from our customers on select product offerings. An approximate 17.2% increase in net sales for the nine months ended September 30, 2008, of our products for use in the computer and datacommunications markets is largely the result of a new customer and increased demand from existing customers.
Net sales by segment for the nine months ended September 30, 2008 and 2007, were as follows:
Segment(dollars in millions) |
| 2008 |
| 2007 |
Printed Circuit Boards |
| $ 391.0 |
| $ 358.0 |
Assembly |
| 189.4 |
| 184.3 |
Eliminations |
| (15.4) |
| (15.0) |
Total Net Sales |
| $ 565.0 |
| $ 527.3 |
Printed Circuit Boards segment net sales, including intersegment sales, for the nine months ended September 30, 2008, increased by $33.0 million, or 9.2% to $391.0 million. The majority of the increase is a result of an increase in volume of more than 5.0% along with improved product mix and selling price increases introduced during the third quarter of 2008.
Assembly segment net sales increased by $5.1 million, or 2.8% for the nine months ended September 30, 2008, compared with the same period during 2007 as new wind power related programs with an existing customer in our industrial & instrumentation end market were offset by reduced demand from select customers in our telecommunications end market.
Cost of Goods Sold. Cost of goods sold, exclusive of items shown separately in the condensed consolidated statement of operations for the nine months ended September 30, 2008, was $446.5 million, or 79.0% of consolidated net sales. This represents a 1.3 percentage point
20
improvement from the 80.3% of consolidated net sales for the nine months ended September 30, 2007.
The materials and supplies used to support our production are the most significant costs in our Printed Circuit Boards segment. The costs of materials, labor and overhead in the segment have been impacted by adverse trends in global commodities, currency exchange rates and recent minimum wage increases. Copper is used in our circuit plating processes and by our suppliers in the form of high-quality foil to make laminate materials that are the basic building blocks in our products. Despite recent global copper trading price declines, the average cost of copper was more than 10% higher during the nine months ended September 30, 2008, when compared to the same period in 2007. Other cost trends in China, including increases in electricity and diesel fuel costs beginning in July 2008, have further impacted our costs adversely. Economies of scale help to offset a portion of the increased costs. Cost of goods sold for the nine months ended September 30, 2008, as compared to the same period in the prior year, was favorably impacted by the elimination of professional fees associated with our continuing initiatives to reduce production costs. In addition to the $5.9 million improvement related to the reduction in professional fees, the period reflects cost improvements associated with these initiatives.
Cost of goods sold in our Assembly segment relates primarily to component materials costs. As a result, trends in net sales for the segment drive similar trends in cost of goods sold. However, our costs have been negatively impacted by startup costs for production of new products, related to new customers and new programs with existing customers. In addition, costs of materials, labor and overhead incurred in Chinese RMB were negatively impacted due to the appreciation of that currency.
Selling, General and Administrative Costs. Selling, general and administrative costs were $42.9 million for the nine months ended September 30, 2008, which represents a $1.7 million reduction as compared to the same period in the prior year. Approximately one-half of our costs are incurred to support our global operations and are not specific to any segment. These common costs are allocated to our Printed Circuit Boards segment and our Assembly segment. The decrease is primarily due to reduced professional fees and other cost savings initiatives, as well as, lower stock compensation expense.
Depreciation. Depreciation expense for the nine months ended September 30, 2008, was $39.8 million, including $34.5 million related to our Printed Circuit Boards segment and $5.3 million related to our Assembly segment. Depreciation expense in our Printed Circuit Boards segment and Assembly segment increased by approximately $2.3 million and $1.0 million, respectively, compared to the same period last year primarily as a result of investment in new owned and leased equipment.
Operating Income. Operating income of $34.8 million for the nine months ended September 30, 2008, represents an increase of $13.7 million compared to operating income of $21.1 million during the nine months ended September 30, 2007. The primary sources of operating income or loss for the nine months ended September 30, 2008 and 2007, were as follows:
Source(dollars in millions) |
| 2008 |
| 2007 |
Printed Circuit Boards segment (a) |
| $ 34.2 |
| $ 16.3 |
Assembly segment (a) |
| 0.6 |
| 5.3 |
Restructuring activities |
| - |
| (0.5) |
Operating Income |
| $ 34.8 |
| $ 21.1 |
(a)
During the first quarter of 2008, we refined our methodology for allocating common selling, general and administrative expenses to our segments to better reflect the efforts undertaken to support each segment. Previously these
21
costs were allocated based solely on each segment’s percentage of total net sales. For the nine months ended September 30, 2007, operating income by segment has been restated to conform to the presentation in the current period.
Operating income of our Printed Circuit Boards segment increased by $17.9 million to $34.2 million for the nine months ended September 30, 2008, compared to $16.3 million of operating income for the same period in the prior year. The increase is primarily the result of increased sales volume, net cost improvements, and a reduction in professional fees associated with our continuing initiatives to reduce production costs, partially offset by increased depreciation expense.
Operating income of our Assembly segment declined by $4.7 million to $0.6 million for the nine months ended September 30, 2008, compared to $5.3 million of operating income for the same period in the prior year. The decline is primarily the result of additional startup costs associated with new product introductions along with currency exchange rates and increased depreciation expense.
Adjusted EBITDA. Reconciliations of operating income to Adjusted EBITDAfor the nine months ended September 30, 2008 and 2007, were as follows:
|
| Nine Months Ended September 30, | ||
Source(dollars in millions) |
| 2008 |
| 2007 |
Operating Income |
| $ 34.8 |
| $ 21.1 |
Add-back |
|
|
|
|
Depreciation and Amortization |
| 40.8 |
| 37.8 |
Restructuring and impairment |
| - |
| 0.5 |
Non-cash stock compensation expense. |
| 0.7 |
| 1.7 |
Adjusted EBITDA |
| $ 76.3 |
| $ 61.1 |
Adjusted EBITDA increased by $15.2 million, or 24.8% as a result of a more than 64% increase in operating income.
Interest Expense, net. Interest expense, net of interest income for both nine month periods ended September 30, 2008 and 2007, was approximately $16.3 million. Interest expense related to our 2011 Senior Subordinated 10.5% Notes is approximately $15.8 million in each nine month period as the $200.0 million principal and the 10.5% interest rate remain unchanged since the notes were issued in 2003.
Interest expense under our 2006 Credit Agreement was $1.0 million and $0.5 million for the nine months ended September 30, 2008 and 2007, respectively. This expense varies from period to period based on the outstanding principal on the term loan, revolving loans and letters-of-credit, all of which bear interest at floating rates. Interest expense on capital leases was approximately $0.5 million during both of the nine month periods ended September 30, 2008 and 2007.
Interest income increased $0.5 million to $1.2 million for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007, on higher cash deposits in interest bearing accounts.
Income Taxes. Income tax expense of $7.7 million for the nine months ended September 30, 2008, compares to income tax expense of $5.8 million for the same period of the prior year. During the nine months ended September 30, 2008, as a result of both negotiated settlements and remeasurement of ongoing uncertain positions, the Company adjusted its reserves for uncertain tax positions in multiple jurisdictions related to transfer pricing and other matters. As a result, included in the tax
22
provision for the nine months ended September 30, 2008, are reversals of tax reserves of $3.2 million, including $1.2 million of interest.
Our income tax provision relates primarily to our profitable operations in China and Hong Kong. Because of the substantial net operating loss carryforwards previously existing in our U.S. and other tax jurisdictions, we have not recognized income tax benefits related to our substantial interest expense, among other expenses.
Liquidity and Capital Resources
We believe that cash flow from operations, available cash on hand, and cash available from our credit facility will be sufficient to fund our capital expenditures and other currently anticipated cash needs. Our ability to meet our cash needs through cash generated by our operating activities will depend on the demand for our products, as well as general economic, financial, competitive and other factors, many of which are beyond our control. We cannot be assured however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, that future borrowings will be available to us under a credit facility or that we will be able to raise third party financing in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness.
Our principal liquidity requirements will be for i) $10.5 million semi-annual interest payments required in connection with our $200 million 2011 Notes, payable in January and July each year, ii) capital expenditure needs of our continuing operations, iii) working capital needs, iv) scheduled capital lease payments for equipment leased by our Printed Circuit Boards segment, v) debt service requirements in connection with our credit facility with UBS, and vi) maturity date principal payment of our $200.0 million 2011 Notes. In addition, the potential for acquisitions of other businesses by us in the future may require additional debt or equity financing.
Net cash provided by operating activities for the nine months ended September 30, 2008 and 2007, were $22.8 million and $17.6 million, respectively. The improvement in net cash from operating activities is primarily due to increased operating income, offset in part by spending to build inventories at our manufacturing sites in the People’s Republic of China, in anticipation of delivery restrictions during the 2008 Summer Olympic and Paralympic Games.
Net cash used in investing activities was $42.0 million for the nine months ended September 30, 2008, compared to $21.8 million for the nine months ended September 30, 2007, which was substantially related to capital expenditures. Our Printed Circuit Boards segment is a capital-intensive business that requires annual spending to keep pace with customer demands for new technologies, cost reductions, and product quality standards. The spending required to meet these developing customer requirements is incremental to recurring repair and replacement capital expenditures required to maintain our existing production capacities and capabilities. In addition, our potential for growth in this segment may be limited if we do not expand production capacities through incremental capital expenditures. Total capital expenditures by our Printed Circuit Boards segment for the nine months ended September 30, 2008 and 2007, were $37.0 million, and $17.1 million, respectively.
23
Net cash provided by financing activities was $17.0 million for the nine months ended September 30 2008. In January 2008, we borrowed $20.0 million under the 2006 Credit Agreement, which we subsequently converted to a term loan (the “Term Loan”) as required by the original terms of the 2006 Credit Agreement. Through the third quarter of 2008 we made scheduled payments of $3.0 million. The Term Loan is payable in quarterly installments through July 2010, with remaining maturities of $1.5 million, $7.5 million and $8.0 million in 2008, 2009 and 2010, respectively.
Given the recent volatility in the financial markets and uncertainty about global economic conditions, management has and continues to proactively align capacity, overhead costs and operating expenses with market demand, which also more closely aligns cash outflows with inflows. During the fourth quarter of 2008 we will continue to focus on managing inventory levels, capital expenditures and monitoring costs closely to respond to changing economic conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
We conduct our business in various regions of the world, and export and import products to and from several countries. Our operations may, therefore, be subject to volatility because of currency fluctuations. Sales are primarily denominated in U.S. dollars, while expenses are frequently denominated in local currencies, and results of operations may be affected adversely as currency fluctuations affect our product prices and operating costs or those of our competitors. From time to time, we enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations. We do not engage in hedging transactions for speculative investment reasons. Our hedging activities historically have not been material, and gains or losses from these activities have not been material to our cash flows, financial position or results of operations. There can be no assurance that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies. At September 30, 2008, there were foreign currency hedge instruments outstanding with a notional value of 570.0 million Chinese RMB related to our Asian operations.
Item 4. Controls and Procedures
As of September 30, 2008, under the supervision, and with the participation of our Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to our management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
PART II. OTHER INFORMATION
Item 5. Other Information
(a)
On November 4, 2008, pursuant to the terms of the Stockholders’ Agreement between the Company, Hicks, Muse, Tate and Furst Incorporated (“HMTF”), GSCP (NJ), Inc. (“GSC”) and certain other stockholders of Viasystems Group, Inc., GSC appointed Peter R. Frank to replace Robert A. Hamwee who, also on November 4, 2008, retired from his position as a member of the Board of the Company (the “Board”). Mr. Hamwee previously served on the Compensation Committee and the Executive Committee of the Board, and the vacancy left by his retirement on each such Committee will be filled by Robert F. Cummings. In turn, Mr. Frank will replace Mr. Cummings as a member of the Audit Committee.
Mr. Frank currently acts as the Senior Managing Director and Senior Operating Executive of Equity and Distressed Investing at GSC Group. Mr. Frank joined GSC Group in 2001 and since 2005 has served as the Senior Operating Executive for GSC’s Recovery Funds. He is a member of the GSC’s Board of Directors and is a member of the investment committees for GSC Recovery Funds, GSC European Corporate Debt and GSC European Mezzanine Funds. He is also the Chief Executive Officer of GSC Acquisition Company. Prior to that, Mr. Frank was the CEO of Ten Hoeve Bros., Inc. and was an investment banker at Goldman, Sachs & Co. He is Chairman of the Board of Atlantic Express Transportation Group, Scovill Fasteners, Inc., Worldtex, Inc., and a director of Color Spot Nurseries, Inc. and North Star Media LLC. Mr. Frank graduated from the University of Michigan with a B.S.E.E. degree and from the Harvard Graduate School of Business Administration, with a M.B.A. degree.
(b)
There are currently no material changes to the procedures by which security holders may recommend nominees to the Board.
Item 6. Exhibits
| (a) | Exhibits | |
|
|
|
|
|
| 31.1 | Chief Executive Officer’s Certification required by Rule 13(a)-14(a). |
|
| 31.2 | Chief Financial Officer’s Certification required by Rule 13(a)-14(a). |
|
| 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002. |
|
| 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
25
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Clayton, State of Missouri on the day of November 5, 2008.
| VIASYSTEMS, INC. | |
|
| |
|
| |
| By: | /s/ David M. Sindelar |
| Name: | David M. Sindelar |
| Title: | Chief Executive Officer |
|
| (Principal Executive Officer) |
|
|
|
|
|
|
| By: | /s/ Gerald G. Sax |
| Name: | Gerald G. Sax |
| Title: | Senior Vice President & |
|
| Chief Financial Officer |
|
| (Principal Financial and Principal Accounting Officer) |
|
|
|
26
EXHIBIT INDEX
Exhibit No. | Description |
31.1 | Chief Executive Officer’s Certification required by Rule 13(a)-14(a). |
31.2 | Chief Financial Officer’s Certification required by Rule 13(a)-14(a). |
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002. |
27
Endnotes
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 31.1
Exhibit 32.2
31