Item 2
.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Vishay
Intertechnology, Inc. is an international manufacturer and supplier of discrete
semiconductors and passive electronic components, including power MOSFETs, power
integrated circuits, transistors, diodes, optoelectronic components, resistors,
capacitors, and inductors. Discrete semiconductors and passive electronic
components manufactured by Vishay are used in virtually all types of electronic
products, including those in the industrial, computer, automotive, consumer
electronic products, telecommunications, military/aerospace, and medical
industries.
Prior to
the completion of the spin-off of Vishay Precision Group, Inc. (“VPG”) on July
6, 2010, we operated in six product segments, MOSFETs, Diodes, Optoelectronic
Components, Resistors and Inductors, Capacitors, and Vishay Precision Group.
Following the spin-off we operate in five product segments.
Revenues
for the fiscal quarter ended July 3, 2010 were $701.7 million, compared to
$460.3 million for the fiscal quarter ended June 27, 2009. The net earnings
attributable to Vishay stockholders for the fiscal quarter ended July 3, 2010
were $76.7 million, or $0.40 per diluted share, compared to a net loss
attributable to Vishay stockholders of $58.9 million, or $0.32 per share for the
fiscal quarter ended June 27, 2009.
Revenues
for the six fiscal months ended July 3, 2010 were $1,342.1 million, compared to
$909.8 million for the six fiscal months ended June 27, 2009. The net earnings
attributable to Vishay stockholders for the six fiscal months ended July 3, 2010
were $122.1 million, or $0.63 per diluted share, compared to a net loss
attributable to Vishay stockholders of $88.0 million, or $0.47 per share for the
six fiscal months ended June 27, 2009.
The net
loss attributable to Vishay stockholders for the fiscal quarter and six fiscal
months ended June 27, 2009 includes various items affecting comparability as
listed in the reconciliation below. There were no such items for the fiscal
quarter and six fiscal months ended July 3, 2010. The reconciliation below
includes certain financial measures which are not recognized in accordance with
generally accepted accounting principles (“GAAP”), including adjusted net
earnings (loss) and adjusted net earnings (loss) per share. These non-GAAP
measures should not be viewed as an alternative to GAAP measures of performance.
Non-GAAP measures such as adjusted net earnings (loss) and adjusted net earnings
(loss) per share do not have uniform definitions. These measures, as calculated
by Vishay, may not be comparable to similarly titled measures used by other
companies. Management believes that these measures are meaningful because they
provide insight with respect to our intrinsic operating results. Reconciling
items to arrive at adjusted net earnings represent significant charges or
credits that are important to understanding our intrinsic operations.
32
The items
affecting comparability are (
in thousands, except for per
share
):
|
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
GAAP net earnings (loss)
attributable to Vishay stockholders
|
|
$
|
76,659
|
|
$
|
(58,865
|
)
|
|
$
|
122,079
|
|
$
|
(87,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items affecting
operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and severance
costs
|
|
$
|
-
|
|
$
|
12,090
|
|
|
$
|
-
|
|
$
|
31,023
|
|
Settlement agreement
gain
|
|
|
-
|
|
|
(28,195
|
)
|
|
|
-
|
|
|
(28,195
|
)
|
Executive employment agreement
charge
|
|
|
-
|
|
|
57,824
|
|
|
|
-
|
|
|
57,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items affecting
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effects of items above and
other one-time tax expense (benefit)
|
|
$
|
-
|
|
$
|
(1,303
|
)
|
|
$
|
-
|
|
$
|
(5,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
(loss)
|
|
$
|
76,659
|
|
$
|
(18,449
|
)
|
|
$
|
122,079
|
|
$
|
(33,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average
diluted shares outstanding
|
|
|
193,084
|
|
|
186,586
|
|
|
|
193,076
|
|
|
186,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings (loss) per
diluted share *
|
|
$
|
0.40
|
|
$
|
(0.10
|
)
|
|
$
|
0.63
|
|
$
|
(0.18
|
)
|
____________________
* Includes
add-back of interest on exchangeable notes in periods where the notes are
dilutive.
Our results
for the second fiscal quarter and six fiscal months ended June 27, 2009 were
substantially impacted by the global economic recession. Due to our quick
reaction to the recession, we mitigated the loss of volume that we experienced
through significant reductions of fixed costs and inventories, we continued to
generate positive cash flows from operations, and following several quarters of
experiencing losses we began to recover from the global economic recession and
produced positive net earnings beginning in the third quarter of 2009. Our
results for the second fiscal quarter and six fiscal months ended July 3, 2010
represent the acceleration of the upturn of our business due to increased
overall demand for electronic components over previous periods and the effects
of the cost reductions initiated in the prior year that enabled us to achieve
significantly higher earnings than before the beginning of the global economic
recession at the same sales volume.
33
Financial Metrics
We utilize
several financial metrics to evaluate the performance and assess the future
direction of our business. These key financial measures and metrics include net
revenues, gross profit margin, end-of-period backlog, and the book-to-bill
ratio. We also monitor changes in inventory turnover and average selling prices
(“ASP”).
Gross
profit margin is computed as gross profit as a percentage of net revenues. Gross
profit is generally net revenues less costs of products sold, but also deducts
certain other period costs, particularly losses on purchase commitments and
inventory write-downs. Losses on purchase commitments and inventory write-downs
have the impact of reducing gross profit margin in the period of the charge, but
result in improved gross profit margins in subsequent periods by reducing costs
of products sold as inventory is used. Gross profit margin is clearly a function
of net revenues, but also reflects our cost management programs and our ability
to contain fixed costs.
End-of-period backlog is one indicator of future revenues. We include in
our backlog only open orders that we expect to ship in the next twelve months.
If demand falls below customers’ forecasts, or if customers do not control their
inventory effectively, they may cancel or reschedule the shipments that are
included in our backlog, in many instances without the payment of any penalty.
Therefore, the backlog is not necessarily indicative of the results to be
expected for future periods.
An
important indicator of demand in our industry is the book-to-bill ratio, which
is the ratio of the amount of product ordered during a period as compared with
the product that we ship during that period. Only orders that are expected to
ship in the next twelve months are included in the computation of the
book-to-bill ratio. A book-to-bill ratio that is greater than one indicates that
our backlog is building and that we are likely to see increasing revenues in
future periods. Conversely, a book-to-bill ratio that is less than one is an
indicator of declining demand and may foretell declining revenues.
We focus on
our inventory turnover as a measure of how well we are managing our inventory.
We define inventory turnover for a financial reporting period as our costs of
products sold for the four fiscal quarters ending on the last day of the
reporting period divided by our average inventory (computed using each fiscal
quarter-end balance) for this same period. The inventory balance used for
computation of this ratio includes tantalum inventories in excess of a one year
supply, which are classified as other assets in the consolidated balance sheet.
See Note 14 to our consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2009. A higher level of
inventory turnover reflects more efficient use of our capital.
Pricing in
our industry can be volatile. We analyze trends and changes in average selling
prices to evaluate likely future pricing. The erosion of average selling prices
of established products is typical for the Semiconductors industry. We attempt
to offset this deterioration with ongoing cost reduction activities and new
product introductions. Our specialty Passive Components are more resistant to
average selling price erosion.
34
The
quarter-to-quarter trends in these financial metrics can also be an important
indicator of the likely direction of our business. The following table shows net
revenues, gross profit margin, end-of-period backlog, book-to-bill ratio,
inventory turnover, and changes in ASP for our business as a whole during the
five quarters beginning with the second fiscal quarter of 2009 through the
second fiscal quarter of 2010
(dollars in
thousands)
:
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
1st Quarter
|
|
2nd
Quarter
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
Net revenues
|
$
|
460,258
|
|
$
|
525,304
|
|
$
|
606,960
|
|
$
|
640,460
|
|
$
|
701,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
17.1%
|
|
|
19.9%
|
|
|
22.6%
|
|
|
26.1%
|
|
|
30.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End-of-period
backlog
|
$
|
432,800
|
|
$
|
502,200
|
|
$
|
630,100
|
|
$
|
907,700
|
|
$
|
987,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book-to-bill ratio
|
|
1.06
|
|
|
1.11
|
|
|
1.22
|
|
|
1.46
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory turnover
|
|
3.02
|
|
|
3.53
|
|
|
4.12
|
|
|
4.22
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in ASP vs. prior
quarter
|
|
-1.1%
|
|
|
-0.8%
|
|
|
-0.1%
|
|
|
-0.5%
|
|
|
1.9%
|
____________________
See
“Financial Metrics by Segment” below for net revenues, book-to-bill ratio, and
gross profit margin broken out by segment.
We
experienced a phase of steep recovery of our business in the second fiscal
quarter of 2010. Despite manufacturing capacity limitations and negative
exchange rate effects, net revenues for the second fiscal quarter of 2010
increased on a sequential basis due to historically high levels of overall
market demand for electronic components across all geographies, markets, and
sales channels in the quarter. Gross margins also increased sequentially, due to
increased volume and the benefits of our restructuring and other cost cutting
initiatives initiated in prior periods. Net revenues exclusive of VPG for the
second fiscal quarter of 2010 were $648.7 million versus $592.3 million and
$418.9 million, respectively for the first fiscal quarter of 2010 and the second
fiscal quarter of 2009.
Although we
expect the current trend of revenues to continue, there is no assurance that we
will be able to continue to generate cash flows from operations and free cash
going forward if the current recovery stalls or does not continue as expected.
The
book-to-bill ratio remained strong in the second fiscal quarter of 2010. Due in
part to orders with delivery dates longer than twelve months from the current
date not being included in the calculation of the book-to-bill ratio and
increases in average sales prices in the fiscal quarter, the book-to-bill ratio
declined to 1.15 from 1.46 in the first fiscal quarter of 2010 despite continued
strong overall volume demand for our products. The book-to-bill ratios for
distributors and original equipment manufacturers (“OEM”) were 1.17 and 1.14,
respectively, versus ratios of 1.67 and 1.22, respectively, during the first
fiscal quarter of 2010. The book to bill ratio exclusive of VPG was 1.16 for the
second fiscal quarter of 2010.
Average
selling prices increased versus the first fiscal quarter of 2010 and the
previous year due to price stability for our Passive Component products and
overall price increases for our Semiconductors products.
Based on
the strong book-to-bill ratio and increasing manufacturing capacities, we
anticipate revenues of between $650 million and $690 million at slightly
improved results for the third fiscal quarter of 2010. Our expected revenues for
the third fiscal quarter exclude VPG due to the spin-off.
35
Financial Metrics by Segment
The
following table shows net revenues, book-to-bill ratio, and gross profit margin
broken out by segment for the five quarters beginning with the second fiscal
quarter of 2009 through the second fiscal quarter of 2010
(dollars in
thousands)
:
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
1st Quarter
|
|
2nd
Quarter
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
MOSFETs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
95,622
|
|
$
|
123,017
|
|
$
|
124,348
|
|
$
|
127,624
|
|
$
|
153,255
|
Book-to-bill ratio
|
|
1.30
|
|
|
1.13
|
|
|
1.39
|
|
|
1.65
|
|
|
0.75
|
Gross profit margin
|
|
13.9%
|
|
|
15.0%
|
|
|
18.4%
|
|
|
21.2%
|
|
|
30.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diodes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
91,240
|
|
$
|
110,408
|
|
$
|
128,374
|
|
$
|
140,246
|
|
$
|
151,026
|
Book-to-bill ratio
|
|
1.02
|
|
|
1.14
|
|
|
1.28
|
|
|
1.63
|
|
|
1.35
|
Gross profit margin
|
|
11.6%
|
|
|
15.4%
|
|
|
14.9%
|
|
|
19.7%
|
|
|
23.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optoelectronic
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
40,485
|
|
$
|
43,320
|
|
$
|
49,117
|
|
$
|
58,429
|
|
$
|
57,684
|
Book-to-bill ratio
|
|
1.06
|
|
|
1.14
|
|
|
1.21
|
|
|
1.25
|
|
|
1.26
|
Gross profit margin
|
|
21.8%
|
|
|
23.7%
|
|
|
25.0%
|
|
|
33.6%
|
|
|
35.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resistors and
Inductors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
99,685
|
|
$
|
107,481
|
|
$
|
135,866
|
|
$
|
148,655
|
|
$
|
153,430
|
Book-to-bill ratio
|
|
0.99
|
|
|
1.13
|
|
|
1.18
|
|
|
1.26
|
|
|
1.22
|
Gross profit margin
|
|
19.9%
|
|
|
23.6%
|
|
|
30.9%
|
|
|
34.9%
|
|
|
36.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacitors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
91,893
|
|
$
|
100,973
|
|
$
|
122,407
|
|
$
|
117,331
|
|
$
|
133,346
|
Book-to-bill ratio
|
|
1.00
|
|
|
1.07
|
|
|
1.07
|
|
|
1.54
|
|
|
1.31
|
Gross profit margin
|
|
16.5%
|
|
|
20.5%
|
|
|
21.4%
|
|
|
20.2%
|
|
|
24.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vishay Precision
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
41,333
|
|
$
|
40,105
|
|
$
|
46,848
|
|
$
|
48,175
|
|
$
|
52,914
|
Book-to-bill ratio
|
|
0.85
|
|
|
1.05
|
|
|
1.06
|
|
|
1.12
|
|
|
1.06
|
Gross profit margin
|
|
26.6%
|
|
|
31.6%
|
|
|
32.0%
|
|
|
35.4%
|
|
|
37.8%
|
____________________
36
Acquisition and Divestiture
Activity
As part of
our growth strategy, we seek to expand through targeted and synergistic
acquisitions of other manufacturers of electronic components that have
established positions in major markets, reputations for product quality and
reliability, and product lines with which we have substantial marketing and
technical expertise. This includes exploring opportunities to acquire smaller
targets to gain market share, effectively penetrate different geographic
markets, enhance new product development, round out our product lines, or grow
our high margin niche market businesses. Acquisitions of passive components
businesses would likely be made to strengthen and broaden our position as a
specialty product supplier; acquisitions of discrete semiconductor businesses
would be made to increase market share and to exploit synergies. To limit our
financial exposure, we have implemented a policy not to pursue acquisitions if
our post-acquisition debt would exceed 2.5x our pro forma earnings before
interest, taxes, depreciation, and amortization (“EBITDA”). For these purposes,
we will calculate pro forma EBITDA as the adjusted EBITDA of Vishay and the
target for Vishay’s four preceding fiscal quarters, with a pro forma adjustment
for savings which management estimates would have been achieved had the target
been acquired by Vishay at the beginning of the four fiscal quarter
period.
Due to
deteriorating economic conditions that began in the fourth fiscal quarter of
2008, we did not actively pursue acquisitions from the fourth fiscal quarter of
2008 to the third fiscal quarter of 2009. Due to improving economic conditions,
our strong liquidity and cash position, and our ability to generate free cash in
every quarter of 2009, we returned to our strategy of exploring synergistic
acquisition opportunities in the fourth fiscal quarter of 2009, but did not
announce or complete any acquisitions in 2009 or the six fiscal months ended
July 3, 2010. There is no assurance that we will be able to identify and acquire
suitable acquisition candidates at price levels and on terms and conditions we
consider acceptable.
Consummation of the Spin-off of
Vishay Precision Group, Inc.
On October
27, 2009, we announced that we intended to spin off our measurements and foil
resistors businesses into an independent, publicly-traded company to be named
Vishay Precision Group, Inc.
On July 6,
2010, we completed the spin-off through a tax-free stock dividend to our
stockholders. Our common stockholders received 1 share of VPG common stock for
every 14 shares of Vishay common stock they held on the record date, June 25,
2010, and our Class B common stockholders received 1 share of VPG Class B common
stock for every 14 shares of Vishay Class B common stock they held on the record
date. Upon completion of the spin-off certain executive officers received
bonuses aggregating approximately $2.1 million, which is reflected in the second
fiscal quarter results.
Until July
6, 2010, including all periods presented in the accompanying consolidated
condensed financial statements, VPG was part of Vishay and its assets,
liabilities, results of operations, and cash flows are included in the balances
reported in the accompanying consolidated condensed financial statements. The
product lines that comprise VPG are included in the VPG reporting segment. See
Note 9 to our accompanying consolidated condensed financial statements for
further information on the effect that VPG had on our consolidated results.
37
Cost Management
We place a
strong emphasis on reducing our costs. Since 2001, we have been implementing
aggressive cost reduction programs to enhance our competitiveness, particularly
in light of the erosion of average selling prices of established products that
is typical of the industry.
Historically, our primary cost reduction technique was through the
transfer of production to the extent possible from high-labor-cost markets, such
as the United States and Western Europe, to lower-labor-cost markets, such as
the Czech Republic, Israel, India, Malaysia, Mexico, the People’s Republic of
China, and the Philippines. The percentage of our total headcount in
lower-labor-cost countries is a measure of the extent to which we are successful
in implementing this program. This percentage was 76.0% at the end of the second
fiscal quarter of 2010 as compared to 74.6% at the end of 2009 and 2008, and 57%
when this program began in 2001. Our target is to have between 75% and 80% of
our headcount in lower-labor-cost countries. As we maintain this target
headcount allocation, our cost reduction efforts are more directed towards
consolidating facilities and other cost cutting measures to control fixed costs,
rather than transfers of production to lower-labor-cost markets.
Our cost
management strategy also includes a focus on reducing selling, general, and
administrative expenses through the integration or elimination of redundant
sales offices and administrative functions at acquired companies, achieving
significant production cost savings through the transfer and expansion of
manufacturing operations to countries where we can benefit from available tax
and other government-sponsored incentives, and expansion of certain critical
capacities, which will reduce average materials and processing
costs.
Production
transfers and other restructuring activities may require us to initially incur
significant severance and other exit costs and to record losses on excess
buildings and equipment. We evaluate potential restructuring projects based on
an expected payback period. The payback period represents the number of years of
annual cost savings necessary to recover the initial cash outlay for severance
and other exit costs plus the noncash expenses recognized for asset write-downs.
In general, a restructuring project must have a payback period of less than 3
years to be considered beneficial. On average, our restructuring projects have a
payback period of between 1 and 1.5 years.
Between
2001 and 2009, we recorded, in the consolidated statements of operations,
restructuring and severance costs totaling $323 million and related asset
write-downs totaling $87 million in order to reduce our cost structure going
forward. We have realized, and expect to continue to realize, significant annual
net cost savings associated with these restructuring activities. These programs
to improve our profitability also involve certain risks which could materially
impact our future operating results, as further detailed in Item 1A, “Risk
Factors,” of our Annual Report on Form 10-K.
In response
to the economic downturn during the latter half of 2008, we undertook
significant measures to cut costs. This included a strict adaptation of
manufacturing capacity to sellable volume, limiting the building of product for
inventory. It also included permanent employee terminations, temporary layoffs
and shutdowns, and minimizing the use of foundries and subcontractors in order
to maximize the load of our owned facilities.
Our
significant cost-cutting measures continued into 2009 as we initiated
restructuring programs that included headcount reductions in virtually every
facility and every country in which we operate, as well as selected plant
closures. We closed two facilities in the United States and consolidated
manufacturing for these product lines into other facilities. We also
consolidated our optoelectronics packaging facilities in Asia. We successfully
closed a film capacitor plant in Shanghai and increased production on existing
equipment in Loni, India to replace the production volume of the closed
plant.
38
We incurred
restructuring and severance costs of $28.6 million during the fourth fiscal
quarter of 2008, and incurred additional restructuring and severance costs of
$37.9 million during the year ended December 31, 2009. These costs were incurred
as part of our goal to reduce manufacturing and SG&A fixed costs in 2009 by
$200 million compared to the year ended December 31, 2008 in response to the
economic downturn. Our fixed costs for the year ended December 31, 2009
decreased by $176 million versus the comparable prior year. Of these amounts,
approximately 45% reduced costs of products sold and approximately 55% reduced
SG&A expenses. Some of our cost reductions realized in 2009 are the result
of temporary measures, which we intend to replace with more permanent actions,
and certain components of our costs, while fixed in that they do not vary with
changes in volume, are subject to volatility. This would include, for example,
the effect of certain assets that are marked-to-market through the statement of
operations, and certain transactions in foreign currencies. Accordingly, there
is no assurance that all of the cost reductions achieved in 2009 will be
maintained in 2010.
Since the
beginning of the economic downturn, we have drastically reduced our break-even
point by approximately $400 million to $500 million. While streamlining and
reducing fixed overhead, we are exercising caution so that we will not
negatively impact our customer service or our ability to further develop
products and processes.
The
perpetual erosion of average selling prices of established products that is
typical of our industry makes it imperative that we continually seek ways to
reduce our costs. Furthermore, our long-term strategy is to grow through the
integration of acquired businesses, and GAAP requires plant closure and employee
termination costs that we incur in connection with our acquisition activities to
be recorded as expenses in our consolidated statement of operations, as such
expenses are incurred. For these reasons, we expect to have some level of future
restructuring expenses. However, we do not anticipate any material restructuring
expenses during 2010 or 2011.
We did not
initiate any new restructuring projects in the second fiscal quarter of 2010 and
thus did not record any restructuring and severance expenses during the fiscal
quarter.
39
Foreign Currency Translation
We are
exposed to foreign currency exchange rate risks, particularly due to
transactions in currencies other than the functional currencies of certain
subsidiaries. While we have in the past used forward exchange contracts to hedge
a portion of our projected cash flows from these exposures, we generally have
not done so in recent periods.
GAAP
requires that we identify the “functional currency” of each of our subsidiaries
and measure all elements of the financial statements in that functional
currency. A subsidiary’s functional currency is the currency of the primary
economic environment in which it operates. In cases where a subsidiary is
relatively self-contained within a particular country, the local currency is
generally deemed to be the functional currency. However, a foreign subsidiary
that is a direct and integral component or extension of the parent company’s
operations generally would have the parent company’s currency as its functional
currency. We have both situations among our subsidiaries.
Foreign Subsidiaries which use the
Local Currency as the Functional Currency
We finance
our operations in Europe and certain locations in Asia in local currencies, and
accordingly, these subsidiaries utilize the local currency as their functional
currency. For those subsidiaries where the local currency is the functional
currency, assets and liabilities in the consolidated balance sheets have been
translated at the rate of exchange as of the balance sheet date. Translation
adjustments do not impact the results of operations and are reported as a
separate component of stockholders’ equity. The general strength of the U.S.
dollar at the end of the second fiscal quarter of 2010 compared to December 31,
2009 has significantly decreased the accumulated other comprehensive income
recorded on our consolidated condensed balance sheet.
For those
subsidiaries where the local currency is the functional currency, revenues and
expenses are translated at the average exchange rate for the year. While the
translation of revenues and expenses into U.S. dollars does not directly impact
the statement of operations, the translation effectively increases or decreases
the U.S. dollar equivalent of revenues generated and expenses incurred in those
foreign currencies. The dollar generally has been stronger during the first six
fiscal months and second fiscal quarter of 2010 compared to the prior year
period and sequentially to the first fiscal quarter of 2010, with the
translation of foreign currency revenues and expenses into U.S. dollars
decreasing reported revenues and expenses versus the comparable prior year
period and prior fiscal quarter.
Foreign Subsidiaries which use the
U.S. Dollar as the Functional Currency
Our
operations in Israel and most significant locations in Asia are largely financed
in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as
their functional currency. For those foreign subsidiaries where the U.S. dollar
is the functional currency, all foreign currency financial statement amounts are
remeasured into U.S. dollars. Exchange gains and losses arising from
remeasurement of foreign currency-denominated monetary assets and liabilities
are included in the results of operations. While these subsidiaries transact
most business in U.S. dollars, they may have significant costs, particularly
payroll-related, which are incurred in the local currency. The cost of products
sold and selling, general, and administrative expense for first six fiscal
months of 2010 have been slightly favorably impacted (compared to the prior year
period) by local currency transactions of subsidiaries which use the U.S. dollar
as their functional currency.
40
Results of
Operations
Statement
of operations’ captions as a percentage of net revenues and the effective tax
rates were as follows:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Cost of products
sold
|
70.0%
|
|
82.9%
|
|
71.9%
|
|
83.9%
|
Gross profit
|
30.0%
|
|
17.1%
|
|
28.1%
|
|
16.1%
|
Selling, general &
administrative expenses
|
15.6%
|
|
18.2%
|
|
15.7%
|
|
18.8%
|
Operating income
(loss)
|
14.4%
|
|
-10.1%
|
|
12.4%
|
|
-9.3%
|
Income (loss) before taxes and
noncontrolling interest
|
14.9%
|
|
-11.9%
|
|
12.5%
|
|
-9.2%
|
Net earnings (loss)
attributable to Vishay stockholders
|
10.9%
|
|
-12.8%
|
|
9.1%
|
|
-9.7%
|
__________
|
|
|
|
|
|
|
|
Effective tax rate
|
26.6%
|
|
-6.8%
|
|
26.9%
|
|
-5.3%
|
Net Revenues
Net
revenues were as follows
(dollars in
thousands)
:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
701,655
|
|
$
|
460,258
|
|
$
|
1,342,115
|
|
$
|
909,769
|
Change versus comparable prior
year period
|
$
|
241,397
|
|
|
|
|
$
|
432,346
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
52.4%
|
|
|
|
|
|
47.5%
|
|
|
|
Changes in
net revenues were attributable to the following:
|
vs. Prior
Year
|
|
vs. Prior
|
|
Quarter
|
|
Year-to-Date
|
Change attributable
to:
|
|
|
|
Increase in volume
|
53.7%
|
|
47.8%
|
Increase (decrease) in average
selling prices
|
1.1%
|
|
-0.2%
|
Foreign currency
effects
|
-2.5%
|
|
0.1%
|
Other
|
0.1%
|
|
-0.2%
|
Net change
|
52.4%
|
|
47.5%
|
|
|
|
|
41
Our results
for the second fiscal quarter of 2009 were substantially impacted by the global
economic recession. The recovery of our business that we began experiencing in
the second half of 2009 entered a phase of steep recovery in the second fiscal
quarter of 2010 due to historically high overall demand for electronic
components and the effects of the cost reductions initiated in the prior year
that enabled us to achieve significantly higher earnings than before the
beginning of the global economic recession at the same sales volume. The demand
in all markets and all regions remains strong to overheated driven by demand for
consumer products such as netbooks, the strong recovery of demand for products
utilized in automotive applications, and the steady recovery of demand for
products for end-uses in industrial applications.
We deduct,
from the sales that we record to distributors, allowances for future credits
that we expect to provide for returns, scrapped product, and price adjustments
under various programs made available to the distributors. We make deductions
corresponding to particular sales in the period in which the sales are made,
although the corresponding credits may not be issued until future periods. We
estimate the deductions based on sales levels to distributors, inventory levels
at the distributors, current and projected market trends and conditions, recent
and historical activity under the relevant programs, changes in program
policies, and open requests for credits. We recorded deductions from gross sales
under our distributor incentive programs of $39 million and $30 million for the
six fiscal months ended July 3, 2010 and June 27, 2009 respectively, or 2.8% and
3.2% of gross sales, respectively. Actual credits issued under the programs
during the six fiscal months ended July 3, 2010 and June 27, 2009, were $29
million and $38 million, respectively. Increases and decreases in these
incentives are largely attributable to the then-current business
climate.
As a result
of a concentrated effort to defend our intellectual property and generate
additional licensing income, we began receiving royalties in the fourth fiscal
quarter of 2004. Royalty revenues, included in net revenues on the consolidated
condensed statements of operations, were approximately $2.8 million and $2.7
million for the six fiscal months ended July 3, 2010 and June 27, 2009,
respectively.
Gross Profit and Margins
Gross
profit margins for the fiscal quarter and six fiscal months ended July 3, 2010
were 30.0% and 28.1%, versus 17.1% and 16.1%, respectively, for the comparable
prior year periods. The gross profit margin for the six fiscal months ended July
3, 2010 was 29% excluding VPG. The increase in gross profit margin reflects
manufacturing efficiencies from significantly higher volume and our fixed cost
reduction programs.
Segments
Analysis of
revenues and gross profit margins for our segments is provided below.
MOSFETs
Net
revenues of the MOSFETs segment were as follows
(dollars in thousands):
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
153,255
|
|
$
|
95,622
|
|
$
|
280,879
|
|
$
|
179,816
|
Change versus comparable prior
year period
|
$
|
57,633
|
|
|
|
|
$
|
101,063
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
60.3%
|
|
|
|
|
|
56.2%
|
|
|
|
42
Changes in
MOSFETs segment net revenues were attributable to the following:
|
vs. Prior
Year
|
|
vs. Prior
|
|
Quarter
|
|
Year-to-Date
|
Change attributable
to:
|
|
|
|
Increase in volume
|
48.8%
|
|
53.2%
|
Increase in average selling
prices
|
5.5%
|
|
1.2%
|
Foreign currency
effects
|
-0.7%
|
|
0.1%
|
Other
|
6.7%
|
|
1.7%
|
Net change
|
60.3%
|
|
56.2%
|
|
|
|
|
Gross
profit as a percentage of net revenues for the MOSFETs segment was as follows:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Gross margin
percentage
|
30.6%
|
|
13.9%
|
|
26.3%
|
|
8.9%
|
The
increase in gross profit margin reflects significantly higher volume, increased
average selling prices and the effects of our fixed cost reduction programs
initiated in prior periods.
Our MOSFETs
segment suffered significantly from low sales volume during the global economic
recession. The substantial recovery that the segment began experiencing in the
second half of 2009 further accelerated in the second fiscal quarter of 2010 due
to significantly higher sales volume and increased average selling prices.
Despite a book-to-bill ratio below 1.0 for the second fiscal quarter of 2010 due
to orders that are expected to ship beyond the next twelve months being excluded
from the computation of the book-to-bill ratio, we expect continued strong
segment net revenues.
Diodes
Net
revenues of the Diodes segment were as follows
(dollars in thousands):
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
151,026
|
|
$
|
91,240
|
|
$
|
291,272
|
|
$
|
171,633
|
Change versus comparable prior
year period
|
$
|
59,786
|
|
|
|
|
$
|
119,639
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
65.5%
|
|
|
|
|
|
69.7%
|
|
|
|
Changes in
Diodes segment net revenues were attributable to the following:
|
vs. Prior
Year
|
|
vs. Prior
|
|
Quarter
|
|
Year-to-Date
|
Change attributable
to:
|
|
|
|
Increase in volume
|
66.9%
|
|
71.9%
|
Increase (decrease) in average
selling prices
|
0.7%
|
|
-0.8%
|
Foreign currency
effects
|
-2.0%
|
|
0.1%
|
Other
|
-0.1%
|
|
-1.5%
|
Net change
|
65.5%
|
|
69.7%
|
|
|
|
|
43
Gross
profit as a percentage of net revenues for the Diodes segment was as follows:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Gross margin
percentage
|
23.7%
|
|
11.6%
|
|
21.8%
|
|
9.0%
|
The
increase in gross profit margin reflects significantly higher volume and the
effects of our fixed cost reduction programs initiated in prior periods.
Our Diodes
segment suffered significantly from low sales volume during the global economic
recession. The substantial recovery that the segment began experiencing in the
fourth fiscal quarter of 2009 continued in the second fiscal quarter of 2010 due
to significantly higher sales volume. Pricing pressure stopped in the second
fiscal quarter of 2010 and we experienced increases in average selling prices
versus the first fiscal quarter of 2010 and the second fiscal quarter of 2009.
The revenues of the segment have returned to pre-economic crisis levels.
Optoelectronic
Components
Net
revenues of the Optoelectronic Components segment were as follows
(dollars in thousands):
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
57,684
|
|
$
|
40,485
|
|
$
|
116,113
|
|
$
|
74,893
|
Change versus comparable prior
year period
|
$
|
17,199
|
|
|
|
|
$
|
41,220
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
42.5%
|
|
|
|
|
|
55.0%
|
|
|
|
Changes in
Optoelectronic Components segment net revenues were attributable to the
following:
|
vs. Prior
Year
|
|
vs. Prior
|
|
Quarter
|
|
Year-to-Date
|
Change attributable
to:
|
|
|
|
Increase in volume
|
50.6%
|
|
61.1%
|
Decrease in average selling
prices
|
-1.4%
|
|
-2.3%
|
Foreign currency
effects
|
-3.5%
|
|
-0.1%
|
Other
|
-3.2%
|
|
-3.7%
|
Net change
|
42.5%
|
|
55.0%
|
|
|
|
|
Gross
profit as a percentage of net revenues for the Optoelectronic Components segment
was as follows:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Gross margin
percentage
|
35.2%
|
|
21.8%
|
|
34.4%
|
|
19.5%
|
The
increase in gross profit margin reflects significantly higher volume and the
effects of our fixed cost reduction programs initiated in prior periods,
partially offset by modestly lower average selling prices.
Our
Optoelectronic Components segment suffered significantly from low sales volume
during the global economic recession. The substantial recovery that the segment
began experiencing in the fourth fiscal quarter of 2009 continued in the first
fiscal quarter of 2010 due to significantly higher sales volume and decreased
pricing pressure. The average selling price for the second fiscal quarter of
2010 increased versus the first fiscal quarter of 2010 and decreased at below
its historical average versus the prior year periods. The revenues of the
segment have approached pre-economic crisis levels.
44
Resistors and
Inductors
Net
revenues of the Resistors and Inductors segment were as follows
(dollars in thousands):
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
153,430
|
|
$
|
99,685
|
|
$
|
302,085
|
|
$
|
200,879
|
Change versus comparable prior
year period
|
$
|
53,745
|
|
|
|
|
$
|
101,206
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
53.9%
|
|
|
|
|
|
50.4%
|
|
|
|
Changes in
Resistors and Inductors segment net revenues were attributable to the following:
|
vs. Prior
Year
|
|
vs. Prior
|
|
Quarter
|
|
Year-to-Date
|
Change attributable
to:
|
|
|
|
Increase in volume
|
59.2%
|
|
51.2%
|
Increase (decrease) in average
selling prices
|
0.2%
|
|
-0.5%
|
Foreign currency
effects
|
-4.1%
|
|
-0.1%
|
Other
|
-1.4%
|
|
-0.2%
|
Net change
|
53.9%
|
|
50.4%
|
|
|
|
|
Gross
profit as a percentage of net revenues for the Resistors and
Inductors
segment was as follows:
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Gross margin
percentage
|
36.0%
|
|
19.9%
|
|
35.5%
|
|
20.8%
|
The
increase in gross profit margin reflects significantly higher volume, the
effects of our fixed cost reduction programs initiated in prior periods, and
improved product mix, partially offset by foreign currency effects.
In light of
the economic challenges experienced in 2009, our Resistors and Inductors segment
maintained a respectable gross margin percentage. Average selling prices have
been generally stable versus the prior year. The recovery that we began to
experience in the second half of 2009 continued in the second fiscal quarter of
2010. Driven by strong demand for our resistors and inductors used in automotive
and industrial applications, revenues have increased to pre-crisis
levels.
Capacitors
Net
revenues of the Capacitors segment were as follows
(dollars in thousands):
|
Fiscal quarters
ended
|
|
Six fiscal months
ended
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27,
2009
|
Net revenues
|
$
|
133,346
|
|
$
|
91,893
|
|
$
|
250,677
|
|
$
|
197,510
|
Change versus comparable prior
year period
|
$
|
41,453
|
|
|
|
|
$
|
53,167
|
|
|
|
Percentage change
versus
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year
period
|
|
45.1%
|
|
|
|
|
|
26.9%
|
|
|
|
45
Changes in Capacitors
segment net revenues were attributable to the following:
|
|
vs. Prior Year
|
|
vs. Prior
|
|
|
Quarter
|
|
Year-to-Date
|
Change attributable to:
|
|
|
|
|
Increase in volume
|
|
51.7%
|
|
26.8%
|
Increase (decrease) in average selling
prices
|
|
-0.3%
|
|
0.5%
|
Foreign
currency effects
|
|
-3.3%
|
|
-0.2%
|
Other
|
|
-3.0%
|
|
-0.2%
|
Net
change
|
|
45.1%
|
|
26.9%
|
|
|
|
|
|
Gross profit as a
percentage of net revenues for the Capacitors segment was as follows:
|
|
Fiscal quarters ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27, 2009
|
Gross margin percentage
|
|
24.4%
|
|
16.5%
|
|
22.4%
|
|
17.2%
|
The increase in gross
profit margin reflects significantly higher volume and the effects of our fixed
cost reduction programs initiated in prior periods, partially offset by foreign
currency effects.
In light of the
economic challenges experienced in 2009, our Capacitors segment maintained a
respectable gross margin percentage. Average selling prices have been generally
stable versus the prior year. The recovery that we began to experience in the
second half of 2009 continued in the second fiscal quarter of 2010. Driven by
strong demand for our capacitors used in automotive and industrial applications,
revenues have increased to pre-crisis levels.
Vishay Precision
Group
Net revenues of the
Vishay Precision Group segment were as follows
(dollars in thousands):
|
|
Fiscal quarters ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27, 2009
|
Net revenues
|
|
$
|
52,914
|
|
$
|
41,333
|
|
$
|
101,089
|
|
$
|
85,038
|
Change versus comparable prior year period
|
|
$
|
11,581
|
|
|
|
|
$
|
16,051
|
|
|
|
Percentage change versus
|
|
|
|
|
|
|
|
|
|
|
|
|
comparable prior year period
|
|
|
28.0%
|
|
|
|
|
|
18.9%
|
|
|
|
Changes in the Vishay
Precision Group segment net revenues were attributable to the following:
|
|
vs. Prior Year
|
|
vs. Prior
|
|
|
Quarter
|
|
Year-to-Date
|
Change attributable to:
|
|
|
|
|
Increase in volume
|
|
31.2%
|
|
18.0%
|
Decrease in average selling
prices
|
|
-0.9%
|
|
-0.4%
|
Foreign
currency effects
|
|
-1.2%
|
|
1.3%
|
Other
|
|
-1.1%
|
|
0.0%
|
Net
change
|
|
28.0%
|
|
18.9%
|
|
|
|
|
|
46
Gross profit as a
percentage of net revenues for the Vishay Precision Group
segment was as follows:
|
|
Fiscal quarters ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27, 2009
|
Gross margin percentage
|
|
37.8%
|
|
26.6%
|
|
36.6%
|
|
29.4%
|
The increase in gross
profit margin reflects significantly higher volume and the effects of our fixed
cost reduction programs initiated in prior periods, partially offset by modestly
lower average selling prices.
Selling, General, and Administrative Expenses
Selling, general, and
administrative expenses are summarized as follows
(dollars in thousands):
|
|
Fiscal quarters ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27, 2009
|
Total SG&A expenses
|
|
$
|
109,266
|
|
$
|
83,752
|
|
$
|
211,154
|
|
$
|
171,206
|
as a percentage of
revenues
|
|
|
15.6%
|
|
|
18.2%
|
|
|
15.7%
|
|
|
18.8%
|
The overall increase
in SG&A expenses is primarily attributable to the resumption of bonus
programs and the discontinuation of short-work and temporary shut-downs, which
is partially offset by the effects of our cost containment initiatives. The
decrease in SG&A as a percentage of revenues is primarily due to the
increase in revenues and the effects of our cost containment initiatives.
Additionally, several items included in SG&A expenses impact the
comparability of these amounts, as summarized below
(in thousands):
|
|
Fiscal quarters ended
|
|
Six fiscal months
ended
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
July 3, 2010
|
|
June 27, 2009
|
Amortization of intangible
assets
|
|
$
|
5,201
|
|
|
$
|
5,515
|
|
$
|
10,730
|
|
|
$
|
11,258
|
Net
(gain) loss on sales of assets
|
|
|
(24
|
)
|
|
|
160
|
|
|
(92
|
)
|
|
|
239
|
Costs associated with the VPG
spin-off
|
|
|
6,000
|
|
|
|
-
|
|
|
8,100
|
|
|
|
-
|
47
Restructuring and Severance Costs and Related Asset Write-Downs
Our restructuring
activities have been designed to reduce both fixed and variable costs. These
activities include the closing of facilities and the termination of employees.
Because costs are recorded based upon estimates, actual expenditures for the
restructuring activities may differ from the initially recorded costs. If the
initial estimates are too low or too high, we could be required either to record
additional expenses in future periods or to reverse previously recorded
expenses. We anticipate that we will realize the benefits of our restructuring
through lower labor costs and other operating expenses in future periods. We did
not initiate any new programs during the six fiscal months ended July 3, 2010
and thus did not record any restructuring and severance costs expenses during
the six fiscal months.
Other Income (Expense)
Interest expense for
the fiscal quarter and six fiscal months ended July 3, 2010 decreased by $0.4
million and $0.8 million, respectively, versus the comparable prior year
periods. The decrease is primarily due to lower interest rates on our variable
rate debt and lower principal amounts outstanding.
The following tables
analyze the components of the line “Other” on the consolidated condensed
statements of operations
(in thousands):
|
|
Fiscal quarters ended
|
|
|
|
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
Change
|
Foreign exchange gain (loss)
|
|
$
|
5,462
|
|
|
$
|
(6,168
|
)
|
|
$
|
11,630
|
|
Interest income
|
|
|
506
|
|
|
|
871
|
|
|
|
(365
|
)
|
Dividend income
|
|
|
97
|
|
|
|
-
|
|
|
|
97
|
|
Other
|
|
|
(109
|
)
|
|
|
(213
|
)
|
|
|
104
|
|
|
|
$
|
5,956
|
|
|
$
|
(5,510
|
)
|
|
$
|
11,466
|
|
|
|
|
Six fiscal months ended
|
|
|
|
|
|
|
July 3, 2010
|
|
June 27, 2009
|
|
Change
|
Foreign exchange gain (loss)
|
|
$
|
4,987
|
|
|
$
|
5,624
|
|
|
$
|
(637
|
)
|
Interest income
|
|
|
1,178
|
|
|
|
1,856
|
|
|
|
(678
|
)
|
Dividend income
|
|
|
97
|
|
|
|
-
|
|
|
|
97
|
|
Other
|
|
|
(262
|
)
|
|
|
(107
|
)
|
|
|
(155
|
)
|
|
|
$
|
6,000
|
|
|
$
|
7,373
|
|
|
$
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Income Taxes
For the fiscal
quarter and six fiscal months ended July 3, 2010, the effective tax rate was
26.6% and 26.9%, respectively. The effective tax rate is less than the U.S.
statutory rate primarily because of earnings in foreign jurisdictions. For the
fiscal quarter and six fiscal months ended June 27, 2009, we recorded a negative
effective tax rate, tax expense on a pre-tax loss, primarily because we recorded
tax expense on earnings in certain jurisdictions while realizing losses in other
jurisdictions without recording tax benefits.
We recognized no tax
benefit associated with the executive employment agreement charge of $57.8
million discussed in Note 10 to our consolidated condensed financial statements.
We recorded no tax expense associated with the gain of $28.2 million recognized
upon reimbursement of purchase price described in Note 2 to our consolidated
condensed financial statements.
We operate in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate is a
composite rate reflecting our earnings and the applicable tax rates in the
various locations where we operate. Part of our strategy is to achieve cost
savings through the transfer and expansion of manufacturing operations to
countries where we can take advantage of lower labor costs and available tax and
other government-sponsored incentives. Accordingly, our effective tax rate is
generally less than the U.S. statutory tax rate. Changes in the effective tax
rate are largely attributable to changes in the mix of pretax income among our
various taxing jurisdictions.
The negative
effective tax rate for the fiscal quarter and six fiscal months ended June 27,
2009 reflects the fact that we could not recognize for accounting purposes the
tax benefit of losses incurred in certain jurisdictions, although these losses
may be available to offset future taxable income. Under applicable accounting
guidance, we may not recognize deferred tax assets for loss carryforwards in
jurisdictions where there is a recent history of cumulative losses, where there
is no taxable income in the carryback period, where there is insufficient
evidence of future earnings to overcome the loss history, and where there is no
other positive evidence, such as the likely reversal of taxable temporary
differences, that would result in the utilization of loss carryforwards for tax
purposes.
During the six fiscal
months ended July 3, 2010, the liabilities for unrecognized tax benefits
decreased by a net $2.6 million, principally due to settlements and foreign
exchange effects.
49
Financial Condition, Liquidity, and Capital
Resources
We focus on our
ability to generate cash flows from operations. The cash generated from
operations is used to fund our capital expenditure plans, and cash in excess of
our capital expenditure needs is available to fund our acquisition strategy and
to reduce debt levels. We have generated cash flows from operations in excess of
$200 million in each of the past 8 years, and cash flows from operations in
excess of $100 million in each of the past 15 years. A portion of the cash flows
from operations was generated by the Vishay Precision Group that was spun-off on
July 6, 2010
.
We refer to the
amount of cash generated from operations in excess of our capital expenditure
needs and net of proceeds from the sale of assets as “free cash,” a measure
which management uses to evaluate our ability to fund acquisitions and repay
debt. Vishay has generated positive “free cash” in each of the past 13 years,
and “free cash” in excess of $80 million in each of the past 8 years. In this
volatile economic environment, we continue to focus on the generation of free
cash, including an emphasis on cost controls.
We continued to
generate strong cash flows from operations and free cash during the fiscal
quarter ended July 3, 2010. There is no assurance, however, that we will be able
to continue to generate cash flows from operations and free cash going forward
if the current recovery stalls or does not continue as expected.
VPG assumed
approximately $12 million of debt in connection with the spin-off, including
approximately $10 million of exchangeable unsecured notes due 2102.
The following table
summarizes the components of net debt (cash) at July 3, 2010, December 31, 2009,
and subsequent to the completion of the spin-off of VPG on July 6, 2010
(in thousands)
:
|
|
July 3,
|
|
July 6,
|
|
December 31,
|
|
|
2010
|
|
2010
|
|
2009
|
|
|
(reflecting VPG spin-off)
|
Credit facility - revolving
debt
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
Credit
facility - term loan
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
87,500
|
|
Exchangeable unsecured notes, due
2102
|
|
|
105,000
|
|
|
|
95,042
|
|
|
|
105,000
|
|
Convertible subordinated notes, due 2023
|
|
|
1,870
|
|
|
|
1,870
|
|
|
|
1,870
|
|
Other debt
|
|
|
15,107
|
|
|
|
13,499
|
|
|
|
16,736
|
|
Total
debt
|
|
|
321,977
|
|
|
|
310,411
|
|
|
|
336,106
|
|
|
Cash and cash equivalents
|
|
|
674,581
|
|
|
|
603,981
|
|
|
|
579,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
debt (cash)
|
|
$
|
(352,604
|
)
|
|
$
|
(293,570
|
)
|
|
$
|
(243,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurements such as
“free cash” and “net debt” do not have uniform definitions and are not
recognized in accordance with GAAP. Such measures should not be viewed as
alternatives to GAAP measures of performance or liquidity. However, management
believes that “free cash” is a meaningful measure of our ability to fund
acquisitions and repay debt, and that an analysis of “net debt” assists
investors in understanding aspects of our cash and debt management. These
measures, as calculated by Vishay, may not be comparable to similarly titled
measures used by other companies.
Substantially all of
the July 3, 2010 cash and cash equivalents balance was held by our non-U.S.
subsidiaries. We expect that we will need to repatriate additional cash to repay
a portion of the term loan outstanding under our credit facility. At the present
time, we expect the remaining cash and profits generated by foreign subsidiaries
will continue to be reinvested outside of the United States indefinitely. If
additional cash is needed to be repatriated to the United States, we would be
subject to additional U.S. income taxes (subject to an adjustment for foreign
tax credits), state income taxes, incremental foreign income taxes, and
withholding taxes payable to various foreign countries.
50
Our financial
condition as of July 3, 2010 continued to be strong, with a current ratio
(current assets to current liabilities) of 2.9 to 1, as compared to a ratio of
3.5 to 1 at December 31, 2009. This decrease is primarily due to changes in
working capital. Our ratio of total debt to Vishay stockholders’ equity was 0.21
to 1 at July 3, 2010 as compared to a ratio of 0.22 to 1 at December 31, 2009.
This decrease is primarily due to an increase in stockholder’s equity primarily
driven by net income available to Vishay stockholders and a decrease in debt due
to principal payments made in the fiscal period.
Cash flows provided
by continuing operating activities were $177.6 million for the six fiscal months
ended July 3, 2010, as compared to cash flows provided by continuing operating
activities of $68.9 million for the comparable prior year period. This increase
is principally due to more favorable operating results (adjusted for noncash
expenses and charges) in the six fiscal months ended July 3, 2010 compared to
the prior year period, partially offset by unfavorable changes in net working
capital during the 2010 period.
Cash paid for
property and equipment for the six fiscal months ended July 3, 2010 was $49.2
million, as compared to $18.3 million for the six fiscal months ended June 27,
2009. As a result of the economic uncertainty and to preserve cash, we limited
our capital spending in 2009 to $50.3 million. The reduced level of capital
spending was temporary and not sustainable. We estimate that 2010 capital
expenditures will be approximately $150 million.
We maintain a credit
facility, which provides a revolving commitment of up to $250 million through
April 20, 2012, and a term loan which requires semi-annual principal payments
through 2011. At July 3, 2010, the term loan balance was $75.0 million, and $125
million was outstanding under the revolving credit facility as compared to a
term loan balance of $87.5 million and $125 million outstanding under the
revolving credit facility as of December 31, 2009.
Interest on the
credit facility is payable at prime or other variable interest rate options. We
are required to pay facility commitment fees. As a result of the amendment to
the credit facility entered effective June 11, 2010, the interest rates
applicable to amounts outstanding under the revolving credit commitment were
increased by 47.5 basis points (to LIBOR plus 1.875% based on the April 3, 2010
leverage ratio). The interest rates applicable to amounts outstanding under the
term loan arrangement have not changed (LIBOR plus 2.50% based on the April 3,
2010 leverage ratio).
The credit facility
restricts us from paying cash dividends and requires us to comply with other
covenants, including the maintenance of specific financial measures and ratios.
The financial
maintenance covenants include (a) tangible net worth (as defined in the credit
facility) of $1 billion plus 50% of net income (without offset for losses) and
75% of net proceeds of equity offerings since December 31, 2006; (b) a leverage
ratio of not more than 3.50 to 1; (c) a fixed charges coverage ratio (“FCCR”) of
not less than 2.50 to 1; (d) and a senior debt (as defined in the credit
facility) to consolidated EBITDA ratio of not more than 2.00 to 1. The
computation of these ratios is prescribed in Article 7 of the Vishay
Intertechnology, Inc. Fourth Amended and Restated Credit Agreement, which has
been filed with the SEC as Exhibit 10.1 to our current report on Form 8-K filed
June 25, 2008.
In connection with
the amendment of the credit facility entered effective June 11, 2010, the
tangible net worth covenant (as prescribed in the Consent and Third Amendment to
the Vishay Intertechnology, Inc. Fourth Amended and Restated Credit Agreement,
which has been filed with the SEC as Exhibit 10.1 to our current report on Form
8-K filed June 14, 2010) was revised to reflect the decrease in tangible net
worth expected to occur upon the spin-off of VPG, to $1 billion plus 75% of net
proceeds of equity offerings since July 6, 2010 plus, commencing with the fiscal
quarter ending March 31, 2011, 50% of net income (without offset for losses) for
each fiscal quarter ending after December 31, 2010. The remaining financial
maintenance covenants are not affected by the amendment.
We were in compliance
with all covenants at July 3, 2010. Our tangible net worth, calculated pursuant
to the terms of the credit facility, was $1,406 million, which is $264 million
more than the minimum required under the related credit facility covenant. Our
leverage ratio, fixed charge coverage ratio, and senior debt ratio were 0.75 to
1, 10.10 to 1, and 0.51 to 1, respectively.
We expect to continue
to be in compliance with these covenants based on current projections. We also
have mechanisms, including deferral of capital expenditures and other
discretionary spending, to facilitate on-going compliance.
51
If we are not in
compliance with all of the required financial covenants, the credit facility
could be terminated by the lenders, and all amounts outstanding pursuant to the
credit facility (including the term loan) could become immediately payable.
Additionally, our exchangeable unsecured notes due 2102 have cross-default
provisions that could accelerate repayment in the event the indebtedness under
the credit facility is accelerated.
Borrowings under the
credit facility are secured by accounts receivable, inventory, machinery and
equipment, and general intangibles (but excluding real estate and bank accounts)
of Vishay and subsidiaries located in the United States, pledges of stock in
certain significant subsidiaries, and certain guarantees by significant
subsidiaries. The subsidiaries would be required to perform under the guarantees
in the event that Vishay failed to make principal or interest payments under the
credit facility. Certain of our subsidiaries are permitted to borrow up to a
limit of $125 million under the credit facility. Any borrowings by these
subsidiaries under the credit facility are guaranteed by Vishay.
In conjunction with
the acquisition of the wet tantalum capacitor business of KEMET on September 15,
2008, we issued a three-year term loan of $15 million to KEMET. On May 5, 2010,
KEMET prepaid the entire principal amount of the term loan plus
interest.
While the timing and
location of scheduled payments for certain liabilities will require us to draw
additional amounts on our credit facility from time to time, for the next twelve
months, management expects that cash on-hand and cash flows from operations will
be sufficient to meet our normal operating requirements, to meet our obligations
under restructuring and acquisition integration programs, to fund scheduled debt
maturities, and to fund our research and development and capital expenditure
plans. Acquisition activity may require additional borrowing under our credit
facility or may otherwise require us to incur additional debt.
52
Contractual Commitments
Our Annual Report on
Form 10-K includes a table of contractual commitments as of December 31, 2009.
There were no material changes to these commitments during the six fiscal months
ended July 3, 2010.
Safe Harbor Statement
From time to time,
information provided by us, including but not limited to statements in this
report, or other statements made by or on our behalf, may contain
“forward-looking” information within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve a number of risks,
uncertainties, and contingencies, many of which are beyond our control, which
may cause actual results, performance, or achievements to differ materially from
those anticipated.
Such statements are
based on current expectations only, and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected. Among the factors that could cause actual results to materially
differ include: general business and economic conditions, changes in the current
pace of economic recovery, including if such recovery stalls or does not
continue as expected; difficulties in integrating acquired companies, the
inability to realize anticipated synergies and expansion possibilities, and
other unanticipated conditions adversely affecting the operation of these
companies; difficulties in new product development;
changes in
competition and technology in the markets that we serve and the mix of our
products required to address these changes; an inability to attract and retain
highly qualified personnel, particularly in respect of our acquired businesses;
changes in foreign currency exchange rates; difficulties in implementing our
cost reduction strategies such as labor unrest or legal challenges to our
lay-off or termination plans, underutilization of production facilities in
lower-labor-cost countries, operation of redundant facilities due to
difficulties in transferring production to lower-labor-cost
countries;
and other factors affecting our operations,
markets, products, services, and prices that are set forth in our Annual Report
on Form 10-K for the year ended December 31, 2009, filed with the Securities and
Exchange Commission (the “SEC”). We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
53