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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-7416
VISHAY INTERTECHNOLOGY, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-1686453
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation) Identification Number)
63 Lincoln Highway
Malvern, PA 19355-2120 610-644-1300
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(Address of Principal Executive Offices) (Registrant's Area Code and
Telephone Number)
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 x No__
----
As of August 13, 2003 registrant had 144,262,508 shares of its Common Stock and
15,382,296 shares of its Class B Common Stock outstanding.
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VISHAY INTERTECHNOLOGY, INC.
FORM 10-Q
JUNE 30, 2003
CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited) - June 30, 2003 and December 31, 2002 3
Consolidated Condensed Statements of Operations
(Unaudited) - Three Months Ended June 30, 2003
and 2002 5
Consolidated Condensed Statements of Operations
(Unaudited) - Six Months Ended June 30, 2003
and 2002 6
Consolidated Condensed Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 2003
and 2002 7
Notes to Consolidated Condensed Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VISHAY INTERTECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited - In thousands)
June 30, December 31,
ASSETS 2003 2002
----------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 361,886 $ 339,938
Accounts receivable, net 381,268 343,511
Inventories:
Finished goods 197,522 219,769
Work in process 155,082 142,846
Raw materials 180,785 191,451
Deferred income taxes 44,621 47,297
Prepaid expenses and other current assets 194,985 188,881
----------- -----------
TOTAL CURRENT ASSETS 1,516,149 1,473,693
PROPERTY AND EQUIPMENT - AT COST
Land 118,442 118,000
Buildings and improvements 341,791 339,869
Machinery and equipment 1,639,078 1,609,931
Construction in progress 76,674 61,830
Allowance for depreciation (930,208) (854,780)
----------- -----------
1,245,777 1,274,850
GOODWILL 1,390,114 1,356,293
OTHER INTANGIBLE ASSETS, NET 116,730 122,417
OTHER ASSETS 106,828 87,906
----------- -----------
$ 4,375,598 $ 4,315,159
=========== ===========
3
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------- ------------
CURRENT LIABILITIES
Notes payable to banks $ 18,265 $ 18,161
Trade accounts payable 137,247 123,999
Payroll and related expenses 107,700 103,184
Other accrued expenses 315,447 303,609
Income taxes 7,092 8,734
Current portion of long-term debt 1,633 18,550
----------- -----------
TOTAL CURRENT LIABILITIES 587,384 576,237
LONG-TERM DEBT 690,863 706,316
DEFERRED INCOME TAXES 49,454 52,935
DEFERRED INCOME 35,446 42,345
MINORITY INTEREST 79,523 75,985
OTHER LIABILITIES 273,766 279,462
ACCRUED PENSION COSTS 238,566 223,092
STOCKHOLDERS' EQUITY
Common Stock 14,425 14,429
Class B Common Stock 1,538 1,538
Capital in excess of par value 1,910,499 1,910,994
Retained earnings 533,082 523,354
Accumulated other comprehensive loss (38,629) (91,115)
Unearned compensation (319) (413)
----------- -----------
2,420,596 2,358,787
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$ 4,375,598 $ 4,315,159
=========== ===========
See Notes to Consolidated Condensed Financial Statements.
4
VISHAY INTERTECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited - In thousands except earnings per share)
Three Months Ended
June 30,
2003 2002
--------- ---------
Net sales $ 538,103 $ 457,877
Costs of products sold 414,804 350,312
--------- ---------
GROSS PROFIT 123,299 107,565
Selling, general, and administrative expenses 95,882 75,677
Restructuring expense 12,258 1,907
--------- ---------
OPERATING INCOME 15,159 29,981
Other income (expense):
Interest expense (9,464) (7,081)
Other 294 80
--------- ---------
(9,170) (7,001)
--------- ---------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 5,989 22,980
Income taxes 1,234 5,206
Minority interest 1,875 2,157
--------- ---------
NET EARNINGS $ 2,880 $ 15,617
========= =========
Basic earnings per share $ 0.02 $ 0.10
Diluted earnings per share $ 0.02 $ 0.10
Weighted average shares outstanding - basic 159,596 159,407
Weighted average shares outstanding - diluted 160,145 161,306
See Notes to Consolidated Condensed Financial Statements.
5
VISHAY INTERTECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited - In thousands except earnings per share)
Six Months Ended
June 30,
2003 2002
----------- -----------
Net sales $ 1,070,230 $ 892,017
Costs of products sold 828,421 697,515
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GROSS PROFIT 241,809 194,502
Selling, general, and administrative expenses 192,544 150,337
Restructuring expense 12,945 4,931
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OPERATING INCOME 36,320 39,234
Other income (expense):
Interest expense (19,465) (13,990)
Other 937 2,629
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(18,528) (11,361)
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 17,792 27,873
Income taxes 4,169 6,012
Minority interest 3,895 3,824
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NET EARNINGS $ 9,728 $ 18,037
=========== ===========
Basic earnings per share $ 0.06 $ 0.11
Diluted earnings per share $ 0.06 $ 0.11
Weighted average shares outstanding - basic 159,577 159,293
Weighted average shares outstanding - diluted 160,076 160,938
See Notes to Consolidated Condensed Financial Statements.
6
VISHAY INTERTECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited - In thousands)
Six Months Ended
June 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net earnings $ 9,728 $ 18,037
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 101,211 89,346
(Gain) loss on disposal of property and equipment (305) 162
Amortization of imputed interest 4,767 4,628
Writedown of inventory 1,585 --
Minority interest in net earnings of consolidated
subsidiaries 3,895 3,824
Other (24,865) 570
Changes in operating assets and liabilities (1,561) 120,081
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 94,455 236,648
INVESTING ACTIVITIES
Purchase of property and equipment (41,104) (30,241)
Proceeds from sale of property and equipment 13,918 8,730
Purchase of businesses, net of cash acquired (14,668) (81,347)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (41,854) (102,858)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 225 153
Principal payments on long-term debt (17,577) (1,721)
Net payments on revolving credit lines (20,000) (120,297)
Net changes in short-term borrowings 464 (11,093)
Proceeds from stock options exercised 95 3,100
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (36,793) (129,858)
Effect of exchange rate changes on cash 6,140 9,270
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INCREASE IN CASH AND
CASH EQUIVALENTS 21,948 13,202
Cash and cash equivalents at beginning of period 339,938 367,115
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 361,886 $ 380,317
========= =========
See Notes to Consolidated Condensed Financial Statements.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited) June 30, 2003
Note 1: Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for
presentation of financial position, results of operations, and cash flows
required by accounting principles generally accepted in the United States for
complete financial statements. The information furnished reflects all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair summary of the financial position, results
of operations, and cash flows for the interim period presented. The financial
statements should be read in conjunction with the financial statements and notes
thereto filed with the Company's Form 10-K/A for the year ended December 31,
2002. The results of operations for the three months and six months ended June
30, 2003 are not necessarily indicative of the results to be expected for the
full year.
Note 2: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except earnings per share):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- --------- ---------- ----------
Numerator:
Net earnings $ 2,880 $ 15,617 $ 9,728 $ 18,037
Denominator:
Denominator for basic earnings per share -
weighted average shares 159,596 159,407 159,577 159,293
Effect of dilutive securities:
Employee stock options 474 1,790 427 1,539
Other 75 109 72 106
-------- -------- -------- --------
Dilutive potential common shares 549 1,899 499 1,645
Denominator for diluted earnings per
share - adjusted weighted average shares 160,145 161,306 160,076 160,938
Basic earnings per share $ 0.02 $ 0.10 $ 0.06 $ 0.11
======== ======== ======== ========
Diluted earnings per share $ 0.02 $ 0.10 $ 0.06 $ 0.11
======== ======== ======== ========
8
Diluted earnings per share do not reflect the following, as the effect
would be antidilutive for the periods presented:
o assumed conversion of the Company's zero coupon subordinated
convertible notes for the three and six month periods ended June
30, 2003 and 2002, respectively;
o assumed conversion of the convertible notes of General
Semiconductor, acquired November 2, 2001, for the three and six
month periods ended June 30, 2003 and 2002, respectively;
o assumed conversion of the convertible notes of BCcomponents,
acquired December 13, 2002, for the three and six month periods
ended June 30, 2003;
o outstanding warrants of 8,824,000, issued in connection with the
acquisition of BCcomponents, for the three and six month periods
ended June 30, 2003; and
o outstanding stock options of 7,109,000 and 7,324,000 for the
three and six month periods ended June 30, 2003, and 1,164,000
for the three and six month periods ended June 30, 2002.
Note 3: Business Segment Information
The Company designs, manufactures, and markets electronic components that
cover a wide range of products and technologies. The Company has two reportable
segments: Passive Electronic Components (passives) and Active Electronic
Components (actives). The Company evaluates performance and allocates resources
based on several factors, of which the primary financial measure is business
segment operating income exclusive of restructuring charges and unusual and
non-recurring items. The corporate component of operating income represents
corporate selling, general, and administrative expenses.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ----------- -----------
Business Segment Information
(in thousands)
Net Sales:
Passives $ 280,056 $ 187,430 $ 554,930 $ 372,002
Actives 258,047 270,447 515,300 520,015
----------- ----------- ----------- -----------
$ 538,103 $ 457,877 $ 1,070,230 $ 92,017
----------- ----------- ----------- -----------
Operating Income:
Passives $ (7,790) $ (4,394) $ (6,972) $ (20,169)
Actives 28,288 39,221 53,900 68,490
Corporate (5,339) (4,846) (10,608) (9,087)
----------- ----------- ----------- -----------
$ 15,159 $ 29,981 $ 36,320 $ 39,234
----------- ----------- ----------- -----------
Restructuring Expense:
Passives $ 11,834 $ 1,697 $ 12,301 $ 4,625
Actives 424 210 644 306
----------- ----------- ----------- -----------
$ 12,258 $ 1,907 $ 12,945 $ 4,931
----------- ----------- ----------- -----------
9
BCcomponents, acquired December 13, 2002, contributed $63,600,000 of net
sales and $(300,000) of operating loss to the passives segment for the quarter
ended June 30, 2003, and $132,900,000 of net sales and $1,100,000 of operating
income to the passives segment for the six months ended June 30, 2003.
Note 4: Comprehensive Income
Comprehensive income includes the following components (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- -------- -------- --------
Net Earnings $ 2,880 $ 15,617 $ 9,728 $ 18,037
Other comprehensive income:
Foreign currency translation
adjustment 27,490 42,404 51,263 50,552
Unrealized gain (loss) on
interest rate swap 1,100 (1,627) 1,760 (3,207)
Pension liability adjustment,
net of tax (434) 6,352 (537) 86
-------- -------- -------- --------
Total other comprehensive income 28,156 47,129 52,486 47,431
-------- -------- -------- --------
Comprehensive income $ 31,036 $ 62,746 $ 62,214 $ 65,468
======== ======== ======== ========
Note 5: Restructuring Expense
Restructuring expense reflects the cost reduction programs currently being
implemented by the Company. These include the closing of facilities and the
termination of employees. Effective January 1, 2003, restructuring costs are
accounted for under Statement of Financial Accounting Standards (SFAS) No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Because these costs are
recorded based upon estimates, our actual expenditures for the restructuring
activities may differ from the initially recorded costs. If the initial
estimates were too low or too high, we could be required either to record
additional expenses in future periods or to reverse part of the previously
recorded charges.
Quarter Ended June 30, 2003
The Company recorded restructuring expense of $12,258,000 for the quarter
ended June 30, 2003. Restructuring of European operations included $11,343,000
of employee termination costs covering 301 technical, production, administrative
and support employees located in Germany, France, Hungary, Portugal, the United
Kingdom, Austria and the Far East. The remaining $915,000 of restructuring
expense relates to termination costs for 89 technical, production,
administrative and support employees located in the United States. The
restructuring expense was incurred as part of the cost reduction programs
currently being implemented by the Company.
10
Six Months Ended June 30, 2003
The Company recorded restructuring expense of $12,492,000 for the six
months ended June 30, 2003. Restructuring of European operations included
$11,900,000 of employee termination costs covering 346 technical, production,
administrative and support employees located in Germany, France, Hungary,
Portugal, the United Kingdom, Austria and the Far East. The remaining $592,000
of restructuring expense relates to termination costs for 104 technical,
production, administrative and support employees located in the United States.
The restructuring expense was incurred as part of the cost reduction programs
currently being implemented by the Company. Activity related to these costs for
the six months ended June 30, 2003 is as follows (in thousands, except number of
employees):
Number of
Workforce Employees
Reduction Terminated Total
-----------------------------------------
Restructuring expense $ 12,492 450 $ 12,492
Cash paid (3,257) (166) (3,257)
Foreign currency effect 423 -- 423
-------- -------- --------
Balance at June 30, 2003 $ 9,658 284 $ 9,658
======== ======== ========
The remaining $9,658,000 of restructuring liability, currently shown in
other accrued expenses, is expected to be paid by December 31, 2003.
Quarter Ended June 30, 2002
The Company recorded restructuring expense of $1,907,000 for the quarter
ended June 30, 2002. Restructuring of European and Israeli operations included
$1,243,000 of employee termination costs covering approximately 101 technical,
production, administrative and support employees located in the Czech Republic,
France, Hungary, Israel, Portugal and Austria. The remaining $664,000 of
restructuring expense related to termination costs for approximately 70
technical, production, administrative and support employees located in the
United States. The restructuring expense was incurred as part of the cost
reduction programs being implemented by the Company.
Six Months Ended June 30, 2002
Restructuring expense was $4,931,000 for the six months ended June 30,
2002. Restructuring of European and Israeli operations included $2,535,000 of
employee termination costs covering approximately 335 technical, production,
administrative and support employees located in the Czech Republic, France,
Hungary, Israel, Portugal and Austria. The remaining $2,396,000 of restructuring
expense related to termination costs for approximately 266 technical,
production, administrative and support employees located in the United States.
The restructuring expense was incurred as part of the cost reduction programs
being implemented by the Company.
11
Year Ended December 31, 2002
Restructuring expense was $30,970,000 for the year ended December 31,
2002. Restructuring of European and Israeli operations included $10,698,000 of
employee termination costs covering approximately 778 technical, production,
administrative and support employees located in the Czech Republic, France,
Hungary, Israel, Portugal and Austria. An additional $7,909,000 of restructuring
expense related to termination costs for approximately 660 technical,
production, administrative and support employees in the United States. The
remaining $12,363,000 of restructuring expense related to the noncash write-down
of buildings and equipment that were no longer in use. The restructuring expense
was incurred as part of the cost reduction programs being implemented by the
Company. The restructuring activities related to existing business were designed
to reduce both fixed and variable costs, particularly in response to the reduced
demand for the Company's products occasioned by the electronics industry
downturn which began in 2001. Activity related to these costs is as follows (in
thousands, except number of employees):
Number of
Workforce Asset Employees
Reduction Impairment Terminated Total
------------------------------------------------------------
Restructuring expense $ 18,607 $ 12,363 1,438 $ 30,970
Utilized (6,420) (12,363) (783) (18,783)
-------- -------- -------- --------
Balance at December 31, 2002 12,187 -- 655 12,187
Utilized (6,431) -- (430) (6,431)
Changes in estimates 453 -- -- 453
Foreign currency effect 661 -- -- 661
-------- -------- -------- --------
Balance at June 30, 2003 $ 6,870 $ -- 225 $ 6,870
======== ======== ======== ========
The remaining $6,870,000 of severance costs, currently shown in other
accrued expenses, is expected to be paid by December 31, 2003.
Year Ended December 31, 2001
Restructuring expense was $61,908,000 for the year ended December 31,
2001. Restructuring of European, Asia Pacific and Israeli operations included
$27,064,000 of employee termination costs covering approximately 3,778
technical, production, administrative and support employees located in France,
Hungary, Portugal, Austria, the Philippines, Germany and Israel. The European
operations also recorded $2,191,000 of non-cash costs associated with the
write-down of buildings and equipment that were no longer in use. An additional
$13,870,000 of restructuring expense related to termination costs for
approximately 1,885 technical, production, administrative and support employees
in the United States. The remaining $18,783,000 of restructuring expense related
to the non-cash write-down of buildings and equipment in the United States that
were no longer in use. Activity related to these costs is as follows (in
thousands, except number of employees):
12
Number of
Workforce Asset Employees
Reduction Impairment Terminated Total
-------------------------------------------------------------
Restructuring expense $ 40,934 $ 20,974 5,663 $ 61,908
Utilized (18,114) (20,974) (4,913) (39,088)
-------- -------- -------- --------
Balance at December 31, 2001 22,820 -- 750 22,820
Utilized (19,865) -- (612) (19,865)
Changes in estimates (1,391) -- -- (1,391)
-------- -------- -------- --------
Balance at December 31, 2002 1,564 -- 138 1,564
Utilized (1,586) -- (50) (1,586)
Changes in estimates 22 -- (88) 22
-------- -------- -------- --------
Balance at June 30, 2003 $ -- $ -- $ -- $ --
======== ======== ======== ========
Note 6: Acquisitions
As part of its growth strategy, the Company seeks to expand through the
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 the Company has substantial marketing
and technical expertise. In the past two years, the Company has taken advantage
of the downturn in the electronics industry and the strength of its own balance
sheet to acquire businesses for consideration that it believes was lower than
what it would have been required to pay in other economic environments. In
pricing an acquisition, the Company focuses primarily on the target's revenues
and customer base, the strategic fit of its product line with its existing
product offerings, opportunities for cost cutting and integration with its
existing operations and production and other post-acquisition synergies, rather
than on the target's assets, such as its property, equipment and inventory. As a
result, the fair value of the acquired assets may correspond to a relatively
smaller portion of the acquisition price, with the Company recording a
substantial amount of goodwill related to the acquisition.
These principles apply in particular to acquisitions in the passive
segment. The passive electronics business is a mature industry that, in general,
has a slow organic growth rate linked to macro-economic trends. The Company's
business strategy for growth in the passive segment relies primarily upon the
acquisition of other electronic components manufacturers whose operations
satisfy the Company's acquisition criteria. Rather than focusing on the assets
of the acquired company, the Company seeks to capture its sales and customers,
which it expects to service in substantial measure with its own long term assets
and personnel. In this regard, the Company anticipates that, following the
acquisition, it will be able to maintain sales levels on the strength of its
relationships with original equipment manufacturers (OEMs), distributors and
electronic manufacturers' supply (EMS) companies. The Company also anticipates
that it will be able to achieve fairly rapid cost reductions by eliminating or
combining redundant sales offices, sales personnel, commission representatives,
administrative staff; eliminating or consolidating manufacturing facilities; and
transferring manufacturing operations from high labor countries to low labor
jurisdiction. These savings and synergies are made possible in the current
environment of depressed activity in the electronics industry by low utilization
of manufacturing and distribution capacity in the passive segment. The plant,
property and equipment of the acquired company are
13
expected to be eliminated or substantially reduced and are valued accordingly.
The result for acquisitions in the passive segment is recognition of a
substantial amount of goodwill.
On November 2, 2001, the Company acquired General Semiconductor, Inc., a
leading manufacturer of rectifiers and power management devices, following
approval of the transaction and related matters by the stockholders of the two
companies, for $554.8 million, including acquisition expenses of $7.0 million.
In connection with the General Semiconductor acquisition, the Company recorded
restructuring liabilities of $94,643,000 in connection with an exit plan that
management began to formulate prior to the acquisition date. The goal of the
Company is to achieve significant production cost savings through the transfer
and expansion of manufacturing operations to regions such as Israel, the Czech
Republic and the People's Republic of China, where the Company can take
advantage of lower labor costs and available tax and other government-sponsored
incentives. The Company's exit plan also includes reducing selling, general and
administrative expenses through the integration or elimination of redundant
sales offices and administrative functions at General Semiconductor.
Approximately $88,242,000 of the restructuring liabilities recorded in
connection with the acquisition related to employee termination costs covering
approximately 1,460 technical, production, administrative and support employees
located in the United States, Europe and the Pacific Rim. The remaining
$6,401,000 of restructuring liabilities related to provisions for lease
cancellations and other costs. The restructuring liability is included in other
accrued expenses on the consolidated balance sheet. The workforce reduction
costs are expected to be paid out by March 31, 2004. The outbreak of the SARS
disease has caused the Company's workforce reduction plans to be pushed back by
one quarter. The other costs are expected to be paid out by 2005. A rollforward
of the activity related to these restructuring liabilities is as follows (in
thousands, except number of employees):
Number of
Workforce Employees
Reduction Other Terminated Total
----------------------------------------------------------
Balance at January 1, 2002 $ 88,242 $ 6,401 1,460 $ 94,643
Utilized (52,118) (1,249) (426) (53,367)
Changes in estimates (7,900) -- (147) (7,900)
-------- -------- -------- --------
Balance at December 31, 2002 28,224 5,152 887 33,376
Utilized (4,063) (2,641) (84) (6,704)
-------- -------- -------- --------
Balance at June 30, 2003 $ 24,161 $ 2,511 803 $ 26,672
======== ======== ======== ========
In January 2002, the Company acquired the transducer and strain gage
businesses of Sensortronics, Inc. Sensortronics is a leading manufacturer of
load cells and torque transducers for domestic and international customers in a
wide range of industries with manufacturing facilities in Covina, California,
Costa Rica, and, pursuant to a joint venture arrangement, India. The acquisition
included the wholly-owned subsidiary of Sensortronics, JP Technologies, a
manufacturer of strain gages, located in San Bernardino, California. The
purchase price was $10 million in cash. The purchase price has been allocated,
with resulting goodwill of $3,027,000. The results of operations of
Sensortronics are included in the results of the passives segment from January
31, 2002.
14
In June 2002, the Company acquired Tedea-Huntleigh BV, a subsidiary of
Tedea Technological Development and Automation Ltd. Tedea-Huntleigh is engaged
in the production and sale of load cells used in digital scales by the weighing
industry. The purchase price was approximately $21 million in cash.
Additionally, Vishay will be paying Tedea a $1 million consulting fee over a
three-year period and repaid a $9 million loan of Tedea to Tedea-Huntleigh.
Tedea-Huntleigh operates two plants in Israel, in Netanya and Carmiel, where it
employs approximately 350 people, as well as a number of facilities outside
Israel. Tedea-Huntleigh also has load cell operations in the People's Republic
of China. The purchase price has been allocated, with resulting goodwill of
$13,841,000. The results of operations of Tedea-Huntleigh are included in the
results of the passives segment beginning July 1, 2002.
In July 2002, the Company acquired the BLH and Nobel businesses of Thermo
Electron Corporation. BLH and Nobel are engaged in the production and sale of
load cell-based process weighing systems, weighing and batching instruments, web
tension instruments, weighing scales, servo control systems, and components
relating to load cells including strain gages, foil gages, and transducers. The
purchase price was $18.5 million in cash. The purchase price has been allocated,
with resulting goodwill of $11,262,000. The results of operations of BLH and
Nobel are included in the results of the passives segment beginning August 1,
2002.
In October 2002, the Company acquired Celtron Technologies. Celtron is
engaged in the production and sale of load cells used in digital scales for the
weighing industry, with manufacturing facilities and offices in Taiwan, the
People's Republic of China and California. The purchase price of $13.5 million
in cash has been allocated, with resulting goodwill of $4,711,000.
On December 13, 2002, the Company acquired BCcomponents Holdings B.V., a
leading manufacturer of passive components with operations in Europe, India and
the Far East. The product lines of BCcomponents include linear and non-linear
resistors; ceramic, film and aluminum electrolytic capacitors; and switches and
trimming potentiometers.
Vishay acquired the outstanding shares of BCcomponents in exchange for
ten-year warrants to acquire 7,000,000 shares of Vishay common stock at an
exercise price of $20.00 per share and ten-year warrants to acquire 1,823,529
shares of Vishay common stock at an exercise price of $30.30 per share. The fair
value of the warrants ($39,462,000) was determined using the Black-Scholes
method. Significant assumptions used included an expected dividend yield of 0%,
a risk free interest rate of 3%, an expected volatility of 66%, and an expected
life of five years.
In the transaction, outstanding obligations of BCcomponents, including
indebtedness and transaction fees and expenses, in the amount of approximately
$224 million were paid ($191,000,000) or assumed ($33,000,000). Also, $105
million in principal amount of BCcomponents' mezzanine indebtedness and certain
other securities of BCcomponents were exchanged for $105 million principal
amount of floating rate unsecured loan notes of Vishay due 2102. The Vishay
notes bear interest at LIBOR plus 1.5% through December 31, 2006 and at LIBOR
thereafter. The interest rate may be further reduced to 50% of LIBOR after
December 31, 2010 if the price of Vishay common stock trades above a specified
target price, as provided in the notes. The notes are subject to a put and call
agreement under which the holders may at any time put the notes to Vishay in
exchange for 6,176,471 shares of Vishay common stock in the aggregate, and
Vishay
15
may call the notes in exchange for cash or for shares of its common stock after
15 years from the date of issuance. The purchase price was as follows:
Cash consideration (including transaction
fees and expenses) $191,000,000
Warrants issued 39,462,000
Acquisition costs 3,000,000
------------
Total purchase price $233,462,000
============
Under purchase accounting, the total purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
allocation of the purchase price is based on a preliminary evaluation of the
fair value of BCcomponents' tangible and identifiable intangible assets acquired
and liabilities assumed at the date of the merger based upon currently available
information. There can be no assurance that the estimated amounts will represent
the final purchase allocation. The purchase price has been preliminarily
allocated, pending finalization of appraisals for property, plant, and
equipment, debt, intangible assets and warrants, to the acquired assets and
liabilities based on fair values as follows:
Current assets $ 91,859,000
Property, plant, and equipment 127,626,000
Other assets 3,054,000
Trademarks 21,000,000
Completed technology 22,000,000
Current liabilities (118,425,000)
Long-term debt (126,328,000)
Other noncurrent liabilities (29,860,000)
Goodwill 242,536,000
------------
Total purchase price $233,462,000
============
In connection with the BCcomponents acquisition, the Company recorded
restructuring liabilities of $48,000,000 related to an exit plan that management
began to formulate prior to the acquisition date. Approximately $46,000,000 of
these liabilities relate to employee termination costs covering approximately
780 technical, production, administrative and support employees located in the
United States, Europe and the Pacific Rim. The restructuring liability is
recorded in other accrued expenses and is expected to be paid out by the second
quarter of 2004. The exit plan is not yet finalized. Future adjustments that
increase or decrease the restructuring liabilities would increase or decrease
goodwill. A rollforward of the activity related to these restructuring
liabilities is as follows (in thousands, except number of employees):
Number of
Workforce Employees
Reduction Other Terminated Total
---------------------------------------------
Balance at January 1, 2003 $ 45,855 $ 1,939 780 $ 47,794
Utilized (7,789) (175) (73) (7,964)
Foreign currency effect 2,218 -- -- 2,218
-------- -------- -------- --------
Balance at June 30, 2003 $ 40,284 $ 1,764 707 $ 42,048
======== ======== ======== ========
16
Had the above acquisitions (other than General Semiconductor) been made as
of January 1, 2002, the Company's pro forma results would have been (in
thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
-------------------- -------------------
Net sales $541,074 $1,058,746
Net earnings $ 11,146 $ 8,768
Basic earnings per share $ 0.07 $ 0.06
Diluted earnings per share $ 0.07 $ 0.05
Note 7: Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages entities
to record compensation expense for stock-based employee compensation plans at
fair value but provides the option of measuring compensation expense using the
intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock
Issued to Employees. The Company accounts for stock-based compensation in
accordance with APB 25 and related interpretations. The following is provided to
comply with the disclosure requirements of SFAS 123, as amended. If compensation
expense for the Company's stock option programs had been determined using the
fair-value method prescribed by SFAS 123, the Company's results would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- --------- ----------- ----------
Net income, as reported $ 2,880 $ 15,617 $ 9,728 $ 18,037
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects 414 674 866 1,285
----------- -------- ----------- ----------
Pro forma net income $ 2,466 $ 14,943 $ 8,862 $ 16,752
=========== ======== =========== ==========
Earnings per share:
Basic--as reported $ 0.02 $ 0.10 $ 0.06 $ 0.11
=========== ======== =========== ==========
Basic--pro forma $ 0.02 $ 0.09 $ 0.06 $ 0.11
=========== ======== =========== ==========
Diluted--as reported $ 0.02 $ 0.10 $ 0.06 $ 0.11
=========== ======== =========== ==========
Diluted--pro forma $ 0.02 $ 0.09 $ 0.06 $ 0.10
=========== ======== =========== ==========
17
Note 8 - Accounting Pronouncements Pending Adoption
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. The Company is
currently evaluating what impact, if any, adoption of FIN 46 will have on its
consolidated financial position, consolidated results of operations, or
liquidity.
Note 9 - Guarantees
The Company's borrowings under its credit facility are secured by pledges
of stock and guarantees by certain significant subsidiaries. The subsidiaries
would be required to perform under the guarantees in the event that the Company
failed to make principal or interest payments under the $500,000,000 revolving
credit facility. The Company's borrowings under the credit facility were
$91,000,000 and $111,000,000 at June 30, 2003 and December 31, 2002,
respectively. If any subsidiary were to borrow under the credit facility, the
Company would provide a similar guarantee with respect to the subsidiary's
borrowings.
Note 10 - Subsequent Events
On August 6, 2003, Vishay sold $450 million aggregate principal amount of
3-5/8% convertible subordinated notes due 2023 and granted the initial
purchasers an option to purchase, within 30 days of the date of the offering
memorandum relating to the notes, an additional $50 million of the notes. The
notes will pay interest semi-annually. Holders may convert their notes into
shares of Vishay common stock, subject to certain conditions, at a conversion
price of $21.28 per share, which is the equivalent to a conversion rate of
46.9925 shares per $1,000 principal amount of notes. The notes are subordinated
in right of payment to all of the Company's existing and future senior
indebtedness and will be effectively subordinated to all existing and future
liabilities of its subsidiaries. The notes will be redeemable at the Company's
option beginning August 1, 2010 at a redemption price equal to 100% of the
principal amount plus accrued and unpaid interest, if any. Holders of the notes
will have the right to require Vishay to repurchase all or some of their notes
at a purchase price equal to 100% of their principal amount of the notes, plus
accrued and unpaid interest, if any, on August 1, 2008, August 1, 2010, August
1, 2013 and August 1, 2018. In addition, holders of the notes will have the
right to require Vishay to repurchase all or some of their notes upon the
occurrence of certain events constituting a fundamental change. On any required
repurchase, the Company may choose to pay the purchase price in cash or shares
of Vishay common stock or any combination of cash and Vishay common stock.
18
The Company used approximately $130 million of the proceeds of the
offering of the convertible subordinated notes to pay down its revolving credit
facility and approximately $97.4 million to fund the purchase of approximately
$97.0 million accreted principal amount ($165.0 million face amount) of its
Liquid Yield Option(TM) Notes (LYONs). The Company expects to use approximately
$176.6 million of the offering proceeds (exclusive of accrued interest of
approximately $2.3 million) to fund the redemption of the convertible notes of
its General Semiconductor subsidiary referred to below. The Company estimates
that the purchase of the LYONs and the General Semiconductor debentures will
result in a pretax loss of approximately $11 million in the third quarter of
2003. The Company intends to use the remaining proceeds for general corporate
purposes.
Vishay has agreed with the lenders under its secured revolving credit
facility to an amendment and restatement of the agreement governing the
facility. The maximum availability under the facility, in light of the Company's
anticipated liquidity needs, has been changed from $500 million to $400 million,
and the final maturity of the facility has been extended from June 2005 to May
2007. The restatement decreases the Company's minimum tangible net worth
requirement to $850 million, eliminates the minimum earnings before interest and
tax requirement, permits securitization of up to $200 million of non-U.S.
accounts receivable, allows for the release of all collateral (other than
subsidiary stock and pledges by Vishay and its subsidiaries of intercompany
notes) under certain circumstances and creates an event of default upon the
occurrence of a fundamental change as defined under the Company's convertible
subordinated notes.
The Company expects to call for redemption on September 10, 2003 all of
the outstanding 5.75% convertible subordinated notes due 2006 of its General
Semiconductor subsidiary. There are presently $171,000,000 principal amount of
the General Semiconductor notes outstanding. These notes are redeemable at a
price of 103.286% of their principal amount, plus accrued but unpaid interest to
the date of redemption.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Overview
Vishay operates in two segments, passive components and active components.
The Company is the leading manufacturer of passive components in the United
States and Europe. These components include resistors, capacitors, inductors,
strain gages and load cells. Vishay is also one of the world's leading
manufacturers of active electronic components, also referred to as discrete
semiconductors. These include transistors, diodes, rectifiers, certain types of
integrated circuits and optoelectronic products. The passive components business
had historically predominated at Vishay until the purchase of General
Semiconductor in November 2001, after which the active business took
predominance. The acquisition of BCcomponents in December 2002 has shifted the
predominance back to the passive business. Revenues for the three and six months
ended June 30, 2003 were derived 52% from the Company's passive business and 48%
from its active business.
Following a difficult 2002 and 2001, in which the electronic components
business generally was depressed both in the United States and much of the
world, market conditions in the electronics industry remain difficult. The
results for the second quarter continue to reflect the impact of the current
weak economy. The unexpected recovery which began in February 2003 has slowed
down since the end of April, especially in the active components business. The
active components business has suffered primarily in Asia, due to the SARS
disease. There is a continued weakness in the telecommunications and consumer
markets, although networks appear to be slowly improving. Short-term orders
increased predominately in the passive business from contract equipment
manufacturers and from the automotive market. It is not currently known whether
this recovery will be sustained. The current economic environment has affected
both the passive and active component businesses. The Company's book-to-bill
ratio for the second quarter was 0.96, reflecting a book-to-bill ratio for the
active business of 0.96 and a book-to-bill ratio for the passive business of
0.96. The Company's backlog was $419.8 million at the end of the second quarter,
a $18.4 million decrease from the previous quarter but a $12.2 million increase
from December 31, 2002.
The following table shows the end of period backlog and the book-to-bill
ratio for Vishay's business as a whole during the five quarters beginning with
the 2nd quarter of 2002 through the second quarter of 2003.
2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter
------------ ----------- ------------ ------------ ------------
2002 2002 2002 2003 2003
---- ---- ---- ---- ----
End of Period Backlog $ 421,500,000 $ 378,500,000 $ 407,600,000(1) $ 438,200,000(1) $ 419,800,000(1)
Book-to-Bill Ratio 1.02 0.90 0.93 1.05 0.96
20
(1) Includes $49,800,000, $49,500,000 and $49,500,000 of backlog attributable
to the business of BCcomponents for the fourth quarter of 2002, the first
quarter of 2003, and the second quarter of 2003, respectively.
BCcomponents was acquired in December 2002.
The following table shows sales and book-to-bill ratios broken out by
segment for the five quarters beginning with the second quarter of 2002 through
the second quarter of 2003:
2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter
------------ ----------- ----------- ------------ ------------
2002 2002 2002 2003 2003
---- ---- ---- ---- ----
Passive
Components
----------
Sales $ 187,430,000 $ 196,702,000 $ 198,542,000 $ 274,874,000(1) $ 280,056,000(1)
Book-to-Bill
Ratio 0.98 0.96 1.00 1.07 0.96
Active
Components
----------
Sales $ 270,447,000 $ 274,717,000 $ 260,835,000 $ 257,253,000 $ 258,047,000
Book-to-Bill
Ratio 1.04 0.85 0.88 1.03 0.96
(1) Includes $69,300,000 and $63,600,000, respectively, attributable to
BCcomponents for the first and second quarters of 2003.
The Company continued to implement its cost control programs during the
second quarter with an emphasis on the reduction and reallocation of headcount.
A major element of the Company's cost control strategy has been to position its
manufacturing facilities, to the extent practicable, in jurisdictions with low
labor costs. The percentage of headcount in low labor cost countries was 66% as
of June 30, 2003, as compared to 65% as of June 30, 2002 and December 31, 2002,
respectively. The Company continues to target improvement in this area with the
continued integration of the business of BCcomponents.
Income statement captions as a percentage of sales, and the effective tax
rates, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- ------- -------
Costs of products sold 77.1 % 76.5 % 77.4 % 78.2 %
Gross profit 22.9 23.5 22.6 21.8
Selling, general and
administrative expenses 17.8 16.5 18.0 16.9
Operating income 2.8 6.5 3.4 4.4
Earnings before income taxes
and minority interest 1.1 5.0 1.7 3.1
Net earnings 0.5 3.4 0.9 2.0
Effective tax rate 20.6 % 22.7 % 23.4 % 21.6 %
21
Net Sales, Gross Profits and Margins
Net sales for the quarter ended June 30, 2003 increased $80,226,000, or
17.5%, as compared to the comparable prior year period. The increase primarily
reflects the acquisitions of BCcomponents in December 2002, Celtron Technologies
in October 2002, BLH and Nobel in July 2002 and Tedea-Huntleigh BV in June 2002.
Excluding these acquisitions, net sales increased $704,000, or 0.2%. Foreign
exchange rates during the quarter positively impacted revenues by $26,100,000 as
compared to $4,000,000 for the three months ended June 30, 2002. Net sales for
the six months ended June 30, 2003 increased $178,213,000, or 20.0%, as compared
to the comparable prior year period. The increase primarily reflects the
acquisitions of BCcomponents in December 2002, Celtron Technologies in October
2002, BLH and Nobel in July 2002 and Tedea-Huntleigh BV in June 2002. Excluding
these acquisitions, net sales increased $11,255,000, or 1.3%. Foreign exchange
rates during the six months ended June 30, 2003 positively impacted revenues by
$48,400,000 as compared to a negative impact of $1,700,000 for the six months
ended June 30, 2002. In the passive components business, pricing continues to
stabilize in the resistor and inductor product lines, and a slow recovery has
begun in the capacitor product line. Active component revenues decreased
$12,400,000 for the quarter ended June 30, 2003 as compared to the comparable
prior year period, reflecting the outbreak of SARS in Asia. The outbreak of SARS
had a significant negative impact on Siliconix, a majority-owned subsidiary of
the Company, as more than 70% of the Siliconix business is generated in Asia.
Costs of products sold as a percentage of net sales for the quarter and
six months ended June 30, 2003 were 77.1% and 77.4%, respectively, as compared
to 76.5% and 78.2% for the comparable prior year periods. Gross profit as a
percentage of net sales for the quarter and six months ended June 30, 2003, were
22.9% and 22.6%, respectively, as compared to 23.5% and 21.8% for the comparable
prior year periods. Price declines were offset by volume increases and cost
savings programs.
The following tables show sales and gross profit margins separately for
our passive and active segments.
Passive Components
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Net Sales $ 280,056,000 $ 187,430,000 $ 554,930,000 $ 372,002,000
Gross Profit Margin 19.3 % 13.9 % 19.3 % 12.4 %
Net sales of passive components for the quarter and six months ended June
30, 2003 increased $92,626,000 (49.4%) and $182,928,000 (49.2%), respectively,
as compared to the
22
comparable prior year periods. Without the acquisition of BCcomponents, Celtron
Technologies, BLH and Nobel, and Tedea-Huntleigh, the passive components
business sales would have increased by $13,104,000, or 7.0%, for the quarter
ended June 30, 2003 and by $15,970,000, or 4.3%, for the six months ended June
30, 2003 as compared to the comparable prior year periods. The increase in net
sales can be attributed to the volume increases in the resistor and inductor
product lines, partially offset by price declines and the positive impact of
foreign currency exchange rates. The average selling price decline has slowed in
the resistor and inductor product lines and further stabilization is expected
due to the BCcomponents acquisition. The capacitor product line continues to
struggle, with the average selling price down 8% from the prior year. However,
there are indications of the start of a slow recovery. Gross margins were 19.3%
and 19.3%, respectively, for the quarter and six months ended June 30, 2003, as
compared to 13.9% and 12.4%, respectively, for the comparable prior year period.
This increase is mainly due to the acquisitions noted above. The gross profit
margins at BCcomponents for the quarter and six months ended June 30, 2003 were
16.9% and 19.0%, respectively, and the gross profit margins for the other
acquisitions mentioned above ranged from 15.4% to 47.0%. Several significant
cost reduction programs have been initiated in all of the products lines,
including facility combinations and shifting production to lower cost regions.
The impact of these cost savings plans has been partially offset by the
underutilization of capacity in the commodity products. Additionally, a
write-down of $1,500,000 of palladium inventory was taken in the six months
ended June 30, 2003.
Gross margins are impacted by tantalum and palladium writedowns in the
period in which the writedowns occur and in subsequent periods. Due to the large
number of products containing tantalum and palladium and the lack of systems to
track individual products containing written down inventory, which may be in
inventory at a number of different locations, the Company cannot determine the
impact of inventory writedowns on our gross margins in any individual reporting
period.
The Company anticipates, based on current and foreseeable demand for
tantalum capacitors, that its minimum purchase commitments under the contracts
with Cabot will substantially exceed its requirements over the terms of the
contracts. Also, the Company does not anticipate utilizing its stockpile of
tantalum ore at any time in the foreseeable future. Tantalum ore, powder and
wire have an indefinite shelf life; therefore, the Company believes that it will
eventually utilize all of the material in its inventory or purchased under the
contracts. Based on usage currently expected in 2003, the Company's purchase
commitments represent approximately 7.5 years of usage. The Company has little
visibility of the demand for its tantalum capacitor products beyond twelve
months. It is almost certain that actual requirements of tantalum will differ
from those projected, and likely that the difference will be material.
Tantalum inventory as of June 30, 2003 was 302,000 pounds. The estimated
usage over the next twelve months is 196,000 pounds. The Company has
reclassified 106,000 pounds, or $24.3 million, into long-term assets.
23
Active Components
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Sales $258,047,000 $270,447,000 $515,300,000 $520,015,000
Gross Profit Margin 26.9% 30.1% 26.1% 28.6%
Net sales of the active components business for the quarter ended June 30,
2003 decreased by $12,400,000, or 4.6%, from sales of the comparable prior year
period. The outbreak of SARS in Asia, particularly at Siliconix, was the
significant factor in the decrease of net sales for the quarter ended June 30,
2003. Siliconix sales into Asia comprise approximately 70% of its total sales.
Net sales of the active components business for the six months ended June 30,
2003 decreased by $4,715,000, or 0.9%, from sales of the comparable prior year
period. Pricing pressure continues to increase in the active components
business. Gross margins were 26.9% and 26.1%, respectively, for the quarter and
six months ended June 30, 2003 as compared to 30.1% and 28.6%, respectively, for
the comparable prior year periods. Margins were negatively impacted by product
mix changes at Siliconix where there was a higher share of commodity products as
compared to the prior year.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the quarter and six
months ended June 30, 2003 were 17.8% and 18.0% of net sales, respectively, as
compared to 16.5% and 16.9% of net sales, respectively, for the comparable prior
year periods. This increase was mainly due to the acquisition of BCcomponents.
The Company continues to implement cost reduction initiatives company-wide, with
particular emphasis placed on reducing headcount in high labor cost countries.
Sixty-six percent of the Company's labor force was in low labor cost countries
as of June 30, 2003. Additionally, the Company has recorded $1.3 million of
expenses for the six months ended June 30, 2003 associated with improving
internal controls in response to the provisions of the Sarbanes-Oxley Act.
Restructuring Expense
The Company's restructuring activities have been designed to cut both
fixed and variable costs, particularly in response to the reduced demand for
products occasioned by the electronics industry downturn beginning in 2001.
These activities include the closing of facilities and the termination of
employees. Beginning January 1, 2003, restructuring costs are accounted for
under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred.
Because costs are recorded based upon estimates, actual expenditures for the
restructuring activities may differ from the initially recorded costs. If the
initial estimates were 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
24
restructuring through lower labor costs and other operating expenses in future
periods, although it is not possible to quantify the expected savings.
The Company recorded restructuring expense of $12,258,000 for the quarter
ended June 30, 2003. Restructuring of European operations included $11,343,000
of employee termination costs covering 301 technical, production, administrative
and support employees located in Germany, France, Hungary, Portugal, the United
Kingdom, Austria and the Far East. The remaining $915,000 of restructuring
expense related to termination costs for 89 technical, production,
administrative and support employees located in the United States. As a result
of restructuring related to workforce reduction, we expect an annual increase in
gross profit of approximately $1,100,000.
The Company recorded restructuring expense of $1,907,000 for the quarter
ended June 30, 2002. Restructuring of European and Israeli operations included
$1,243,000 of employee termination costs covering approximately 101 technical,
production, administrative and support employees located in Czech Republic,
France, Hungary, Israel, Portugal, and Austria. The remaining $664,000 of
restructuring expense related to termination costs for approximately 70
technical, production, administrative and support employees located in the
United States.
Restructuring expense is separate from plant closure, employee termination
and similar integration costs we incur in connection with our acquisition
activities. These amounts are included in the costs of our acquisitions and do
not affect earnings or losses on our statement of operations.
Interest Expense
Interest expense for the quarter and six months ended June 30, 2003
increased by $2,383,000 and $5,475,000, respectively, as compared to the
comparable prior year periods. This increase was primarily a result of the
various acquisitions made in 2002. The Company borrowed $116,000,000 on its
revolving credit facility and issued $105,000,000 principal amount of unsecured
loan notes, currently bearing interest at LIBOR plus 1.5%, in connection with
the BCcomponents acquisition in December 2002.
Other Income
Other income was $294,000 for the quarter ended June 30, 2003, as compared
to $80,000 for the comparable prior year quarter. Other income was $937,000 for
the six months ended June 30, 2003 as compared to $2,629,000 for the comparable
prior year period. This decrease was primarily due to higher foreign exchange
losses. Foreign exchange losses of $2,484,000 were reported for the six months
ended June 30, 2003 as compared to foreign exchange losses of $847,000 for the
comparable prior year period.
Minority Interest
Minority interest for the six months ended June 30, 2003 increased $71,000
as compared to the comparable prior year period. This increase was primarily due
to an increase in the net earnings of Siliconix.
25
Income Taxes
The effective tax rate for the first six months of 2003, based on earnings
before income taxes and taking into account minority interest, was 23.4% as
compared to 21.6% for the comparable prior year period. The higher effective tax
rate in 2003 is due primarily to the fact that the Company did not recognize the
tax benefit of losses incurred in certain high tax jurisdictions. Vishay is not
recognizing 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 availability of temporary differences turning around to offset the loss
carryforwards. In addition, Vishay is not considering the use of any tax
planning strategies to support the recognition of the deferred tax asset without
the associated valuation allowance. While the losses described above are
available to offset future taxable income, accounting rules do not allow for
Vishay to recognize the benefit currently.
The Company enjoys favorable tax rates on its income in Israel from
specific approved projects. The low rates, which generally are available for a
period of ten or fifteen years, ordinarily result in greater earnings than what
they would be if the Israeli income was subject to statutory United States tax
rates. However, due to losses reported in Israel, the low rates did not
materially impact net earnings for the six months ended June 30, 2003 and 2002,
respectively.
Financial Condition and Liquidity
Cash flows from operations were $94,455,000 for the six months ended June
30, 2003 as compared to $236,648,000 for the six months ended June 30, 2002. For
the six months ended June 30, 2002, there were significant reductions in
accounts receivable and inventory in response to the business slowdown. Accounts
receivable levels at June 30, 2003 have increased from December 31, 2002
primarily due to the net sales of BCcomponents, which was acquired in December
2002. This increase was only partially offset by higher depreciation and
amortization. Net purchases of property and equipment for the six months ended
June 30, 2003 were $41,104,000 as compared to $30,241,000 for the comparable
prior year period. This increase was mainly due to spending in connection with
the active components business. Purchase of businesses, net of cash acquired of
$14,668,000, for the six months ended June 30, 2003 represents payments made
related to liabilities assumed from previous acquisitions.
The Company paid down $20,000,000 on its revolving credit lines during the
first six months of 2003, primarily from the cash generated from operations. At
June 30, 2003, the Company had $91,000,000 outstanding under its revolving
credit facility. In connection with the acquisition of BCcomponents in December
2002, the Company issued $105,000,000 principal amount of floating rate
unsecured loan notes due 2102. The notes bear interest at LIBOR plus 1.5%
through December 31, 2006 and at LIBOR thereafter. The interest payable on the
notes may be further reduced to 50% of LIBOR after December 31, 2010 if the
price of Vishay common stock trades above a specified target price, as provided
in the notes. The notes are subject to a put and call agreement under which the
holders may at any time put the notes to the Company in exchange for 6,176,471
shares of Vishay common stock in the aggregate, and the Company may call the
notes in exchange for cash or for shares of Vishay common stock after 15 years
from the date of issuance.
26
The Company's financial condition at June 30, 2003 was strong, with a
current ratio of 2.58 to 1. The Company's ratio of long-term debt, less current
portion, to stockholders' equity was .29 to 1 at June 30, 2003 as compared to
..20 to 1 at June 30, 2002 and .30 to 1 at December 31, 2002. The increase in
long-term debt ratio from June 30, 2002 to June 30, 2003 reflects the debt
incurred in connection with the BCcomponents acquisition.
On August 6, 2003, Vishay sold $450 million aggregate principal amount of
3-5/8% convertible subordinated notes due 2023 and granted the initial
purchasers an option to purchase, within 30 days of the date of the offering
memorandum relating to the notes, an additional $50 million of the notes. The
notes will pay interest semi-annually. The Company used approximately $130
million of the proceeds of the offering of the convertible subordinated notes to
pay down its revolving credit facility and approximately $97.4 million to fund
the purchase of approximately $97.0 million accreted principal amount ($165.0
million face amount) of its LYONs. The Company expects to use approximately
$176.6 million of the offering proceeds (exclusive of accrued interest of
approximately $2.3 million) to fund the redemption of the convertible notes of
its General Semiconductor subsidiary referred to below. The Company estimates
that the purchase of the LYONs and the General Semiconductor debentures will
result in a pretax loss of approximately $11 million in the third quarter of
2003. The Company intends to use the remaining proceeds for general corporate
purposes. In June 2004, holders of the LYONs will have the right to "put" these
notes to the Company at an aggregate price of $235 million.
Vishay has agreed with the lenders under its secured revolving credit
facility to an amendment and restatement of the agreement governing the
facility. The maximum availability under the facility, in light of the Company's
anticipated liquidity needs, has been changed from $500 million to $400 million,
and the final maturity of the facility has been extended from June 2005 to May
2007. The restatement decreases the Company's minimum tangible net worth
requirement to $850 million, eliminates the minimum earnings before interest and
tax requirement, permits securitization of up to $200 million of non-U.S.
accounts receivable, allows for the release of all collateral (other than
subsidiary stock and pledges by Vishay and its subsidiaries of intercompany
notes) under certain circumstances and creates an event of default upon the
occurrence of a fundamental change as defined under the Company's convertible
subordinated notes.
The Company expects to call for redemption on September 10, 2003 all of
the outstanding 5.75% convertible subordinated notes due 2006 of its General
Semiconductor subsidiary. There are presently $171,000,000 principal amount of
the General Semiconductor notes outstanding. These notes are redeemable at a
price of 103.286% of their principal amount, plus accrued but unpaid interest to
the date of redemption.
Inflation
Normally, inflation does not have a significant impact on the Company's
operations. The Company's products are not generally sold on long-term
contracts. Consequently, selling prices, to the extent permitted by competition,
can be adjusted to reflect cost increases caused by inflation.
27
Safe Harbor Statement
Statements in this report that are not clearly historical are
"forward-looking statements" within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. These include, but are not limited to,
anticipated results for the remainder of 2003 and expectations with respect to
recoveries in the economic and business climate in general and the Company's
businesses in particular. All forward-looking statements made by or on behalf of
the Company involve risks, uncertainties and contingencies, whether they are
contained in this report or other reports and documents filed with the
Securities and Exchange Commission, in press releases or in communications and
discussions with investors and analysts through meetings, webcasts, phone calls
or conference calls. Many of these risks, uncertainties and contingencies are
beyond the Company's control, and they may cause actual results, performance or
achievements to differ materially from those anticipated. Please refer to the
Company's 2002 Annual Report on Form 10-K/A for important factors that could
cause the Company's actual results, performance or achievements to differ
materially from those in any forward-looking statements made by or on behalf of
the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's cash flows and earnings are subject to fluctuations
resulting from changes in foreign currency exchange rates and interest rates.
The Company manages its exposure to these market risks through internally
established policies and procedures and, when deemed appropriate, through the
use of derivative financial instruments. The Company's policies do not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. The Company
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives. The Company monitors its underlying market risk
exposures on an ongoing basis and believes that it can modify or adapt its
hedging strategies as needed.
The Company is exposed to changes in U.S. dollar LIBOR interest rates on
borrowings under its floating rate revolving credit facility. On a selective
basis, the Company from time to time enters into interest rate swap or cap
agreements to reduce the potential negative impact that increases in interest
rates could have on its outstanding variable rate debt. At June 30, 2003, a
fixed rate swap agreement with a notional amount of $100,000,000 was in place.
The impact of interest rate derivative instruments on the Company's results of
operations for the six months ended June 30, 2003 was not significant.
Item 4. Controls and Procedures
An evaluation was performed as of June 30, 2003, under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been reported, recorded, processed and
summarized in a timely fashion. There have been no significant changes in the
Company's internal control over
28
financial reporting during the quarter ended June 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 22,
2003.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A
of the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees for the
directors as listed in the definitive proxy statement of the
Company dated April 21, 2003, and all such nominees were elected.
(c) Briefly described below is each matter voted upon at the Annual
Meeting of Stockholders.
(i) Election of the following individuals to hold office as
Directors of the Company until the next Annual Meeting of
Stockholders.
Total Class A Common Stock voted was 132,134,004.
Broker
For Against Abstain Non-votes
----------- ------------ ------------- -------------
Felix Zandman 105,731,416 26,402,588 0 0
Gerald Paul 105,730,827 26,403,177 0 0
Jean-Claude Tine 123,270,836 8,863,168 0 0
Philippe Gazeau 123,172,459 8,961,545 0 0
Eliyahu Hurvitz 123,471,020 8,662,984 0 0
Abraham Ludomirski 123,461,483 8,672,521 0 0
Edward Shils 123,269,444 8,864,560 0 0
Mark Solomon 123,272,316 8,861,698 0 0
Avi Eden 105,824,614 26,309,390 0 0
Ziv Shoshani 120,307,548 11,826,456 0 0
Marc Zandman 104,253,428 27,880,576 0 0
Ruta Zandman 106,968,273 25,165,731 0 0
Total Class B Common Stock voted was 15,267,801 in
favor, 0 against, 0 abstained and 0 broker non-votes.
30
(ii) Ratification of the appointment of Ernst & Young LLP,
independent certified public accountants, to audit the
books and accounts of the Company for the calendar year
ending December 31, 2003. Total Class A Common Stock voted
was 129,181,415 in favor, 2,952,589 against, and 0 broker
non-votes. Total Class B Common Stock voted was 15,267,801
in favor, 0 against, 0 abstained and 0 broker non-votes.
(iii) Amendment of Section 162 (m) Cash Bonus Plan. Total Class
A Common Stock voted was 122,025,865 in favor, 10,108,139
against, and 0 broker non-votes. Total Class B Common
Stock voted was 15,267,801 in favor, 0 against, 0
abstained and 0 broker non-votes.
(iv) Amendment of Certificate of Incorporation and Bylaws.
Total Class A Common Stock voted was 129,200,271 in favor,
2,933,733 against, and 0 broker non-votes. Total Class B
Common Stock voted was 15,264,816 in favor, 2,985 against,
0 abstained and 0 broker non-votes.
Each share of Class A Common Stock is entitled to one vote and each share
of Class B Common Stock is entitled to 10 votes on matters voted upon by
stockholders.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1 - Certification pursuant to Rules 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. Felix Zandman, Chief Executive Officer
Exhibit 31.2 - Certification pursuant to Rules 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 -
Richard N. Grubb, Chief Financial Officer
31
Exhibit 32.1 - Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Dr. Felix Zandman, Chief Executive Officer
Exhibit 32.2 - Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Richard N. Grubb, Chief Financial Officer
(b) Reports on Form 8-K:
On May 2, 2003, the Company filed a current report dated April
30, 2003 under Item 12 of Form 8-K, reporting the financial
results of the Company for the quarter ended March 31, 2003.
On May 7, 2003, the Company filed a current report dated April
30, 2003 under Item 12 of Form 8-K, furnishing the transcript
to the Company's April 30, 2003 conference call reporting and
discussing the financial results of the Company for the
quarter ended March 31, 2003.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISHAY INTERTECHNOLOGY, INC.
/s/ Richard N. Grubb
------------------------------
Richard N. Grubb
Executive Vice President, Treasurer
(Duly Authorized and Chief Financial
Officer)
Date: August 14, 2003
33