SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the transition period from _______ to _______
Commission file number 1-7416
VISHAY INTERTECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-1686453
-------- ----------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
63 Lincoln Highway
Malvern, Pennsylvania 19355-2143
(Address of principal executive offices)
(610) 644-1300
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value
(Title of Class)
New York Stock Exchange
(Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined Exchange Act Rule 12b-2). Yes __X__ No ____
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter, assuming conversion of all of its Class B common stock held by
non-affiliates into common stock of the registrant, was $3,182,840,000.
As of March 27, 2003, registrant had 144,300,063 shares of its common
stock and 15,383,296 shares of its Class B common stock outstanding.
Portions of the registrant's definitive proxy statement, which will be
filed within 120 days of December 31, 2002, are incorporated by reference into
Part III.
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PART I
Item 1. DESCRIPTION OF BUSINESS
General
Vishay Intertechnology, Inc. is a leading international manufacturer
and supplier of passive and discrete active electronic components. Passive
components include resistors, capacitors, transducers and inductors. Active
components include diodes, transistors, rectifiers, power integrated circuits
(ICs), infrared transceivers, infrared (IR) sensors and optocouplers. Passive
electronic components and discrete active electronic components are the primary
elements of almost every electronic circuit. We offer our customers "one-stop"
access to one of the most comprehensive electronic component lines of any
manufacturer in the United States, Europe and Asia in both the newer surface
mount configuration and the traditional leaded form.
Our components are used in virtually every type of product that
contains electronic circuitry, including:
o computer-related products, o automotive applications,
o power management products, o process control systems,
o telecommunications equipment, o military and aerospace applications,
o measuring instruments, o consumer electronics and appliances,
o industrial equipment, o medical instruments, and
o electronic scales.
Since 1985, we have pursued a business strategy that principally
consists of the following elements:
1. expanding within the electronic components industry, primarily
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 we have substantial marketing and
technical expertise;
2. reducing selling, general and administrative expenses through the
integration or elimination of redundant sales offices and administrative
functions at acquired companies;
3. achieving significant production cost savings through the transfer
and expansion of manufacturing operations to regions such as the Czech Republic,
Hungary, India, Israel, Malaysia, Mexico, the People's Republic of China, the
Philippines, Portugal and the Republic of China (Taiwan), where we can take
advantage of lower labor costs and available tax and other government-sponsored
incentives;
4. maintaining significant production facilities in those regions where
we market the bulk of our products in order to enhance the service and
responsiveness that we provide to our customers;
5. consistency rolling out new and innovative products; and
6. strengthening our relationships with customers and strategic
partners.
As a result of this strategy, we have grown from a small manufacturer
of precision resistors and resistance strain gages to one of the world's largest
manufacturers and suppliers of a broad line of electronic components.
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Our significant acquisitions in the last several years include:
Siliconix and Telefunken. We acquired an 80.4% interest in Siliconix
incorporated (NASDAQ; SILI) in March 1998 from Daimler-Benz A.G. Siliconix is a
publicly traded chip maker, based in Santa Clara, California, which designs,
markets and manufactures power and analog semiconductor products, such as
metal-oxide-semiconductor field-effect transistors (MOSFETs), junction
field-effect transistors (JFETs), bipolar switches, signal processing ICs and
power ICs for computers, cell phones, fixed communications networks, automobiles
and other electronic systems. Siliconix has manufacturing facilities in Santa
Clara, California, maintains assembly and testing facilities in the Republic of
China (Taiwan), is party to a joint venture in Shanghai, the People's Republic
of China and has subcontractors in the Philippines, the People's Republic of
China and the United States. Siliconix reported worldwide sales of $372.9
million in 2002, $305.6 million in 2001, and $473.1 million in 2000.
In the same transaction, we acquired from Daimler-Benz the
semiconductor business unit of TEMIC Telefunken Microelectronic GmbH
headquartered in Heilbronn, Germany, but promptly disposed of its integrated
circuits division. Telefunken launched our expansion into discrete active
components with a product line of diodes, RF transistors, optoelectronic
semiconductors, infrared data transceivers (IRDCs) and light-emitting diodes
(LEDs). Our net cost of these two acquisitions was approximately $444 million.
Electro-Films, Cera-Mite and Spectrol. In May 2000, we acquired
Electro-Films, Inc., a manufacturer of thin film components and networks on
ceramic and silicon. In August 2000, we acquired Cera-Mite Corporation, a
worldwide supplier of ceramic capacitors, used in power supplies, electronic
lighting and other applications, and thermistors (temperature-sensitive
resistors) used in refrigeration, HVAC, telecommunications and other electronic
applications. Separately, in August 2000, we acquired Spectrol, a manufacturer
of sensing potentiometers used primarily in the automotive industry and trimmer
potentiometers used in various kinds of electronic circuitry.
Tansitor and Mallory. In January 2001, we acquired Tansitor, a leading
manufacturer of wet tantalum electrolytic capacitors and miniature conformal
coated solid tantalum capacitors. These components have power management
applications in the military, aerospace and medical industries. Later, in
November 2001, we acquired Yosemite Investment, Inc. d/b/a the North American
Capacitor Company, known as Mallory, a manufacturer and distributor of wet
tantalum capacitors and other products. As a result of these two acquisitions,
we have become the number one manufacturer of wet tantalum capacitors worldwide.
Infineon. In July 2001, we acquired the infrared components business of
Infineon A.G. for approximately $116 million. As a result, we added several new
device types to our optoelectronics portfolio. We also became the largest
supplier outside Japan of optocouplers and the largest supplier worldwide of
IRDCs.
General Semiconductor. On November 2, 2001, we completed the
acquisition of General Semiconductor, Inc., a leader in the design, manufacture
and distribution of semiconductors for the power management market. In the
transaction, we exchanged 0.563 of a share of Vishay common stock for each share
of General Semiconductor stock. Based on the closing price of our common stock
on November 2, 2001, the transaction was valued at approximately $555 million.
General Semiconductor manufactures and distributes a broad range of power
management products, including rectifiers, transient voltage suppressors,
small-signal transistors, diodes, MOSFETs and analog ICs. As a result of this
acquisition, we became the number one manufacturer of diodes and rectifiers
worldwide.
Sensortronics, Tedea-Huntleigh, BLH and Nobel, and Celtron. In January
2002, we acquired the transducer and strain gage business of Sensortronics, Inc.
In June 2002, we acquired Tedea-Huntleigh BV, a leading manufacturer of load
cells used in digital scales by the weighing industry. In July 2002, we
purchased the BLH and Nobel businesses from 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. In October 2002, we acquired Celtron
Technologies, another company engaged in the production and sale of load cells
used in digital scales for the weighing industry. As a result of these
acquisitions, the product portfolio of our Measurements Group has been expanded
and we are now a world leader in stress analysis products and transducers used
in the weighing industry (load cells).
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BCcomponents. In December 2002, we completed the acquisition of
BCcomponents Holdings B.V., a leading manufacturer of passive components with
operations in Europe, India and the People's Republic of China. The product
lines of BCcomponents include linear and non-linear resistors; ceramic, film and
aluminum electrolytic capacitors; switches and trimming potentiometers.
BCcomponents had annual sales in 2001 of approximately $320 million. We 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. In the transaction, outstanding
obligations of BCcomponents, including indebtedness, transaction fees and
expenses in the amount of approximately $224 million were paid or assumed. 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. This
major acquisition has significantly enhanced our global market position in
passive components.
In addition to our acquisition activity, during 2002 we took steps to
assure our competitiveness, enhance our operating efficiency and strengthen our
liquidity in the face of the economic downturn, which broadly impacted the
electronics industry during the year. In this regard, we:
(i) closed or consolidated several manufacturing facilities and
administrative offices;
(ii) reduced our headcount, before acquisitions, by approximately 1,400
employees; or a reduction of approximately 7%;
(iii) integrated our acquisitions within our existing management and
operational infrastructure; and
(iv) relying on the strength of our balance sheet, continued our search
for suitable acquisition candidates.
Vishay was incorporated in Delaware in 1962 and maintains its principal
executive offices at 63 Lincoln Highway, Malvern, Pennsylvania 19355-2143. Our
telephone number is (610) 644-1300.
Products
We design, manufacture and market electronic components that cover a
wide range of products and technologies. Our products primarily consist of:
o resistors, o signal processing ICs,
o tantalum capacitors, o transistors,
o multi-layer and disc ceramic capacitors (MLCCs), o voltage suppressors,
o aluminum and specialty ceramic o infrared data transceivers (IRDCs),
capacitors,
o film capacitors, o optocouplers,
o power MOSFETs, o IR sensors,
o power ICs, o strain gages and load cells, and
o diodes and rectifiers
and, to a lesser extent:
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o inductors, o plasma displays,
o connectors, o thermistors, and
o transformers, o potentiometers.
We manufacture one of the broadest lines of surface mount devices, a format for
electronic components that has evolved into the standard required by most
customers. In addition, we continue to produce components in the traditional
leaded form. We believe that we produce one of the broadest lines of discrete
electronic components available from any single manufacturer.
Passive Components
Passive components include resistors, capacitors and inductors. They
are referred to as "passive" because they do not require power to operate. These
components adjust and regulate voltage and current, store energy and filter
frequencies. We also include in this category the products and services of our
Measurements Group that employ passive components in electro-mechanical
measurements.
Resistors are basic components used in all forms of electronic
circuitry to adjust and regulate levels of voltage and current. They vary widely
in precision and cost, and are manufactured from numerous materials and in many
forms. Resistive components are classified as variable or fixed, depending on
whether or not their resistance is adjustable. Resistors can also be used as
measuring devices. We manufacture a line of thermistors, which are heat
sensitive resistors. Other types of resistive sensors are strain gages for
measurement of mechanical stress. See "Measurements Group" below.
We manufacture virtually all types of fixed resistors, both in discrete
and network forms. These resistors are produced for virtually every segment of
the resistive product market, from resistors used in the highest quality
precision instruments for which the performance of the resistor is the most
important requirement, to low-cost resistors for which price is the most
important factor.
Capacitors perform energy storage, frequency control, timing and
filtering functions in most types of electronic equipment. The more important
applications for capacitors are:
o electronic filtering for linear and switching power supplies;
o decoupling and bypass of electronic signals for integrated circuits
and circuit boards; and
o frequency control, timing and conditioning of electronic signals for
a broad range of applications.
Our capacitor products include solid tantalum surface mount chip capacitors,
solid tantalum leaded capacitors, wet/foil tantalum capacitors, MLCC capacitors,
disc ceramic capacitors, aluminum and specialty ceramic capacitors, and film
capacitors. Each capacitor product has unique physical and electrical
performance characteristics that make that type of capacitor useful for specific
applications. Tantalum and MLCC capacitors are generally used in conjunction
with integrated circuits in applications requiring low to medium capacitance
values, "capacitance" being the measure of the capacitor's ability to store
energy. The tantalum capacitor is the smallest and most stable type of capacitor
for its range of capacitance and is best suited for applications requiring
medium capacitance values. MLCC capacitors, on the other hand, are more
cost-effective for applications requiring lower capacitance. Disc ceramic
capacitors are used for high voltage applications. Aluminum capacitors are used
for high capacitance applications.
Inductors use an internal magnetic field to change the phase of
electric current. They are utilized in electronic circuitry to control
alternating current and voltage, and to filter out unwanted electronic signals.
They are also used in transformers to change voltage levels.
Measurements Group
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Vishay Measurements Group is a leading manufacturer of products for
precision measurement of mechanical strains. Our products include strain gages,
load cells, force measurement sensors, displacement sensors, and photoelastic
sensors. These products are used in experimental stress analysis systems, as
well as in the electronic measurement of loads (electronic scales), acceleration
and fluid pressure. The Measurements Group also provides installation
accessories for its products, instrumentation to sample and record measurement
output, and training seminars in stress analysis testing and transducer
development and manufacture.
As a result of Vishay's acquisitions in 2002, the Measurements Group
has implemented a strategy of vertical market integration, with a product range
from resistance strain gages, to transducers (the metallic structures to which
strain gages are cemented), to the electronic instruments and systems that
measure and control output of the transducers. Vishay Measurements Group now has
two operating divisions: Vishay Micro-Measurements (for strain gages,
instruments and PhotoStress products) and Vishay Transducers (for load cells,
weigh modules, instruments and weighing systems).
Active Components
Our active electronic components include both discrete devices and
integrated circuits (ICs). They are referred to as "active" because they require
power to function. Discrete devices are single components or an arrangement of
components that generate, control, regulate and amplify or switch electronic
signals or energy. Examples of our discrete active components include diodes,
rectifiers, transient voltage suppressors, transistors and power MOSFETs. These
devices are interconnected with passive components or other active components to
create an electronic circuit. Our IC devices consist of a number of active and
passive components interconnected on a single chip to perform a specific
function. Examples of our integrated circuits include power ICs, motor control
ICs and signal processing ICs. Our discrete active components and ICs are
manufactured and marketed primarily through our majority-owned Siliconix
subsidiary, our Telefunken unit and the General Semiconductor business.
We also include in the category of active components our line of
optoelectronic components, manufactured and marketed by our Telefunken unit, and
the infrared components business acquired from Infineon A.G.
Discrete Devices
Diodes and rectifiers are used to convert electrical currents from
alternating current (AC) into direct current (DC) by conducting electricity in
one direction and blocking it in the reverse direction. Because electrical
outlets carry AC while the vast majority of electronic devices use DC,
rectifiers are used in a wide variety of applications. We offer a broad line of
diodes and rectifiers with differing power, speed, cost, packaging and
conversion (half wave or full wave) characteristics. Our rectifiers include a
series of high voltage devices that have been optimized for power correction
circuits.
Transient voltage suppressors protect electronic circuits by limiting
voltage to a safe level. Examples of transient events that could damage
unprotected circuits include static electricity charges and natural or induced
lightning. Voltage suppressors protect circuits by absorbing large amounts of
energy for short periods of time. We offer a broad range of state-of-the-art
transient voltage suppressors for use in most modern electronic equipment.
Small signal diodes and transistors perform amplification, signal
blocking, routing and switching functions at lower current levels. Our
small-signal transistors range from the older junction field-effect transistors
(JFETs), to newer products such as those based upon double-diffused metal oxide
semiconductor (DMOS) technology.
Discrete power MOSFETs are specialized field-effect transistors used to
switch and manage power in a broad range of electronic devices. These include
particularly low-voltage applications such as cell phones, portable and desktop
computers, automobiles, instrumentation and industrial applications. Our
innovative "trench" power MOSFET technology offers very high cell density, very
low on-resistance and optimized switching parameters for high frequency DC-DC
power conversion. Power MOSFETs conserve power and help prevent components from
heating up.
Integrated Circuits
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Power ICs are used in applications such as cell phones, where an input
voltage from a battery or other supply source must be switched, interfaced or
converted to a level that is compatible with logic signals used by
microprocessors and other digital components. Our ICs are designed to operate at
higher frequencies without compromising efficiencies. Often our power MOSFETs
and power ICs can be used together as chip sets with complementary performance
characteristics optimized for a specific application.
Motor control ICs control the starting, speed or position of electric
motors, such as the head positioning and spindle motors in hard disk drives.
Signal processing ICs are used for analog switching and multiplexing in
devices that either receive or output analog (non-digital) signals. A recent
application of this technology is in broadband communications devices such as
DSL modems.
Optoelectronics
Our line of optoelectronic components includes photo emitters and
detectors, optocouplers, IRDCs and LEDs.
Our photo detectors are light-sensitive semiconductor devices, and
include linear photo diodes for light measurement, photo-transistors for light
switching applications in printers, copiers, facsimile machines, vending
machines and automobiles, and high speed photo PIN diodes specially designed for
infrared data transfer. Our photo detector products are available in a wide
variety of sensitivity angles, light sensitivities, daylight filters and
packaging shapes. Our infrared photo emitters are used for optical switching and
data transfer applications, often in conjunction with our photo detectors, and
in devices like infrared remote controls for televisions.
An optocoupler consists of a light emitting diode and a receiver facing
each other through an insulation medium inside a light-isolated housing. The
receiver may either be a photodetector or a pair of MOSFETs, and in the latter
case the device is referred to as a solid-state relay (SSR). The function of an
optocoupler is to electrically isolate input and output signals. Our
optocouplers are used in switchable power supplies, safety circuitry and
programmable controllers for computer monitors, consumer electronics,
telecommunications equipment and industrial systems.
IRDCs consist of a detector photo diode, an infrared light emitting
diode and a control IC. IRDCs are used for short range, two-way wireless,
infrared data transfer between electronic devices such as mobile phones and
other telecommunications equipment, computers and personal digital assistants
(PDAs). LEDs are light emitting diodes used as light indicators in a variety of
industries.
Packaging
We have taken advantage of the growth of the surface mount component
market, and we are an industry leader in designing and marketing surface mount
devices. Surface mount devices adhere to the surface of a circuit board rather
than being secured by leads that pass through holes to the back side of the
board. Surface mounting provides distinct advantages over through-hole mounting.
For example, surface mounting allows the placement of more components on a
circuit board, as well as on both sides of the board. This is particularly
desirable in applications such as hand held computers and cell phones where
there is a continuing design trend towards product miniaturization. Surface
mounting also facilitates automated product assembly, resulting in lower
production costs for equipment manufacturers than those associated with leaded
or through-hole mounted devices. We believe that we are a market leader in the
development and production of a wide range of surface mount devices, including:
o thick film chip resistors, o wirewound chip resistors,
o thick film resistor networks and arrays, o power strip resistors,
o metal film leadless resistors (MELFs), o bulk metal foil chip resistors,
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o molded tantalum chip capacitors, o current sensing chips,
o coated tantalum chip capacitors, o chip inductors,
o multi-layer ceramic chip capacitors, o chip transformers,
o thin film chip resistors, o chip trimmers,
o thin film networks, o NTC chip thermistors,
o certain diodes and transistor products, o PTC chip thermistors, and
o strain gages.
We also provide a number of component packaging styles to facilitate automated
product assembly by our customers.
Military Qualifications
We have qualified certain products under various military
specifications, approved and monitored by the United States Defense Electronic
Supply Center (DESC), and under certain European military specifications. DESC
qualification levels are based in part upon the rate of failure of products. In
order to maintain the classification level of a product, we must continuously
perform tests on the product and the results of these tests must be reported to
DESC. If the product fails to meet the requirements for the applicable
classification level, the product's classification may be reduced to a lower
level. Products from some of our United States manufacturing facilities
experience a reduction in product classification levels from time to time.
During the time that the DESC classification level is reduced for a product with
military application, net sales and earnings attributable to that product may be
adversely affected.
Customers
We sell our products primarily to original equipment manufacturers
(OEMs), electronic manufacturing services (EMS) companies, which manufacture for
OEMs on an outsourcing basis, and independent distributors that maintain large
inventories of electronic components for resale to OEMs.
To better serve our customers, we maintain production facilities in
regions where we market the bulk of our products, principally in the United
States, Germany, France, the United Kingdom and more recently, Asia. We work
with our customers so that our products are incorporated into the design of
electronic equipment at the research and prototype stages. We also employ a
staff of application and field engineers to assist our customers, independent
manufacturers' representatives and distributors in solving technical problems
and developing products to meet specific needs.
Our largest customers vary from year to year, and no customer has
long-term commitments to purchase our products. During 2002, no one customer
accounted for more than 10% of our sales.
During 2002, approximately 31% of our net sales were attributable to
customers in the Americas, approximately 31% were attributable to customers in
Europe, and approximately 38% were attributable to customers in Asia.
Marketing
Our products are marketed through independent manufacturers'
representatives compensated solely on a commission basis, by our own sales
personnel and by independent distributors. We have regional sales personnel in
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several North American locations that make sales directly to OEMs and provide
technical and sales support for independent manufacturers' representatives
throughout the United States, Mexico and Canada. As noted, we also use
independent distributors to resell our products. Outside North America, we use
similar channels to sell our products worldwide.
Research and Development
Many of our products and manufacturing techniques, technologies and
packaging methods have been invented, designed and developed by our engineers
and scientists. We maintain strategically placed design centers where proximity
to customers enables us to more easily gauge and satisfy the needs of local
markets. These design centers are located predominantly in the United States,
France, Germany, Israel, the People's Republic of China, the Republic of China
(Taiwan) and South Korea.
We also maintain research and development staffs and promote programs
at a number of our production facilities to develop new products and new
applications of existing products, and to improve manufacturing techniques. This
decentralized system encourages individual product development at individual
manufacturing facilities that occasionally have applications at other
facilities. Company research and development costs (exclusive of purchased
in-process research and development) were approximately $37.1 million for 2002,
$30.2 million for 2001, and $37.1 million for 2000. These amounts include
expenditures of our Siliconix subsidiary of $19.3 million, $17.2 million and
$21.0 million in 2002, 2001 and 2000, respectively, principally for the
development of new power products and power ICs. These amounts do not include
substantial expenditures for the development and manufacturing of machinery and
equipment for new processes and for cost reduction measures.
Although we have numerous United States and foreign patents covering
certain of our products and manufacturing processes, no particular patent is
considered material to our business.
Sources of Supplies
Although most materials incorporated in our products are available from
a number of sources, certain materials, particularly tantalum and palladium, are
available only from a relatively limited number of suppliers.
Tantalum
We are a major consumer of the world's annual production of tantalum.
Tantalum, a metal purchased in powder or wire form, is the principal material
used in the manufacture of tantalum capacitors. There are currently three major
suppliers that process tantalum ore into capacitor grade tantalum powder. Due to
the strong demand for our tantalum capacitors and difficulty in obtaining
sufficient quantities of tantalum powder from our suppliers, we stockpiled
tantalum ore in 2000 and early 2001. During 2001 and 2002, we and our
competitors experienced a significant decline in the tantalum capacitor business
as well as significant decreases in the market prices for tantalum. As a result,
we recorded in costs of products sold write-downs of $25,700,000 and
$52,000,000, respectively, on tantalum inventories during the years ended
December 31, 2002 and 2001. We also recorded a loss on future purchase
commitments of $106,000,000 for the year ended December 31, 2002. If the
downward pricing trend were to continue, the Company could again be required to
write down the carrying value of its tantalum inventory and record additional
losses on its long-term purchase commitments.
We have two agreements with Cabot Corporation for the supply of
tantalum powder, a July 2000 agreement and a November 2000 agreement. Our
purchase commitments with Cabot were entered into at a time when market demand
for tantalum capacitors was high and tantalum powder was in short supply. With
the decline in market demand and prices for tantalum, we began the process of
negotiating modifications to the agreements with Cabot during 2001. Our major
competitors in the tantalum capacitor business were also seeking modifications
to their contracts with Cabot. In June 2002, following the prior initiation of
legal proceedings by Cabot, we and Cabot agreed to make certain modifications to
the supply agreements. These included price reductions, the extension of the
term of one of the contracts, and the regular scheduling of our purchase
commitments.
Palladium
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Palladium, a metal used to produce multi-layer ceramic capacitors, is
currently found primarily in South Africa and Russia. Palladium is a commodity
product that is subject to price volatility. The price of palladium fluctuated
in the range of approximately $222 to $1,090 per troy ounce during the three
years ended December 31, 2002, and as of December 31, 2002, the price of
palladium was $236 per troy ounce. During the years ended December 31, 2002 and
2001, respectively, we recorded in costs of products sold write-downs on
palladium inventories of $1,700,000 and $18,000,000.
Inventory and Backlog
We manufacture both standardized products and those designed and
produced to meet customer specifications. We maintain an inventory of resistors
and other standardized components. Backlogs of outstanding orders for our
products were $407.6 million, $337.9 million and $773.1 million, respectively,
at December 31, 2002, 2001 and 2000. The backlog at December 31, 2002 includes
$49.8 million of backlog attributable to the business of BCcomponents, which was
acquired in December 2002. The increase in backlog at December 31, 2002,
exclusive of the business of BCcomponents, as compared to the prior year,
primarily reflects the increase in demand during 2002 for our active components
as a result of the increase in computer notebooks and feature rich cell phones
with multiple functions, especially in Asia. The passive components backlog has
decreased in 2002 due to a global slowdown in the electronics industry,
particularly in the general personal computer and cell phone markets.
Many of the orders that comprise our backlog may be canceled by
customers without penalty. Customers may on occasion double and triple order
components from multiple sources to ensure timely delivery when backlog is
particularly long. Customers often cancel orders when business is weak and
inventories are excessive, a phenomenon that we have experienced in the current
economic slowdown. Therefore, the amount of our backlog may exceed the level of
orders that will ultimately be delivered. Our results of operations could be
adversely impacted if customers cancel a material portion of orders in our
backlog.
Competition
We face strong competition in various product lines from both domestic
and foreign manufacturers that produce products using technologies similar to
ours. Our main competitors for tantalum capacitors are KEMET Corporation, AVX
Corporation and NEC Electronics, Inc. For MLCC capacitors, our principal
competitors are KEMET, AVX, Murata and TDK Corp. For thick film chip resistors,
our major competitors include Rohm Corp., Koa Speer Electronics Inc. and Yageo
Corporation. For wirewound and metal film resistors, the principal competitors
are I.R.C. Inc., Rohm Corp. and Ohmite Manufacturing Company. For active
components, main competitors include International Rectifier, Philips, N.V., ON
Semiconductor, Rohm Corp., Motorola, Inc., Fairchild Semiconductor Corp., Maxim,
Shindengen Electric Manufacturing Co. Ltd., Sanken Electric Co. Ltd., ST
Microelectronics N.V. and Samsung Co., Ltd. There are many other companies that
produce products in the markets in which we compete.
Our competitive position depends on our product quality, know-how,
proprietary data, marketing and service capabilities and business reputation, as
well as on price. We compete for sales of certain products on the basis of our
marketing and distribution network, which provides a high level of customer
service. For example, we work closely with our customers to have our components
incorporated into their electronic equipment at the early stages of design and
production and maintain redundant production sites for some of our products to
ensure an uninterrupted supply of products. We have also established a National
Accounts Management Program, which provides our largest customers with one
national account executive who can cut across business unit lines for sales,
marketing and contract coordination. In addition, the breadth of our product
offerings enables us to strengthen our market position by providing customers
with "one-stop" access to one of the broadest selections of passive electronic
components available directly from a manufacturing source.
Manufacturing Operations
We strive to balance the location of our manufacturing facilities. In
order to better serve our customers, we maintain some of our production
facilities in regions where we market the bulk of our products, such as the
United States, Germany, France, the United Kingdom, and more recently, Asia. To
maximize production efficiencies, we seek whenever practicable to establish
manufacturing facilities in countries, such as the Czech Republic, Hungary,
11
India, Israel, Malaysia, Mexico, the People's Republic of China, the
Philippines, Portugal, and the Republic of China (Taiwan), where we can take
advantage of lower labor and tax costs and, in the case of Israel, to take
advantage of various government incentives, including grants and tax relief.
Some of our most sophisticated manufacturing operations are the
production of power semiconductor components. This manufacturing process
involves two phases of production: wafer fabrication and assembly (or
packaging). Wafer fabrication subjects silicon wafers to various thermal,
metallurgical and chemical process steps that change their electrical and
physical properties. These process steps define cells or circuits within
numerous individual devices (termed "dies" or "chips") on each wafer. Assembly
is the sequence of production steps that divides the wafer into individual chips
and encloses the chips in structures (termed "packages") that make them usable
in a circuit. Both wafer fabrication and assembly phases incorporate wafer level
and device level electrical testing to ensure that device design integrity has
been achieved.
At December 31, 2002, approximately 32% of our identifiable assets were
located in the United States, approximately 36% were located in Europe,
approximately 14% were located in Israel, and approximately 18% were located in
Asia. In the United States, our manufacturing facilities are located in
California, Connecticut, Indiana, Maine, Maryland, New York, Nebraska, North
Carolina, Pennsylvania, Rhode Island, South Dakota, Vermont, and Wisconsin. In
Europe, our main manufacturing facilities are located in Germany and France. We
also have manufacturing facilities in Austria, Belgium, the Czech Republic,
Hungary, India, Israel, Malaysia, Mexico, the Netherlands, the People's Republic
of China, the Philippines, Portugal and the Republic of China (Taiwan). Over the
past several years, we have invested substantial resources to increase capacity
and to maximize automation in our plants, which we believe will further reduce
production costs.
We are aggressively undertaking to have the quality systems at most of
our major manufacturing facilities approved under the ISO 9001 international
quality control standard. ISO 9001 is a comprehensive set of quality program
standards developed by the International Standards Organization. A majority of
our manufacturing operations have already received ISO 9001 approval and others
are actively pursuing such approval.
In 2002, we continued the implementation of our strategy to shift
manufacturing emphasis to higher automation in higher labor cost regions and to
relocate a fair amount of production to regions with skilled workforces and
relatively lower labor costs. As a result, we incurred restructuring costs in
the year ended December 31, 2002 associated with the downsizing of manufacturing
facilities in Europe and the United States. We may continue to incur such
expenses in 2003.
See Note 16 to our Consolidated Financial Statements, "Business Segment
and Geographic Area Data," for financial information by geographic area.
Israeli Government Incentives
We have substantial manufacturing operations in Israel, where we
benefit from the government's employment and tax incentive programs designed to
increase employment, lower wage rates and increase our ability to attract a
highly-skilled labor force, all of which have contributed substantially to our
growth and profitability. For the year ended December 31, 2002, sales of
products manufactured in Israel accounted for approximately 13.0% of our net
sales.
Under the terms of the Israeli government's incentive programs, once a
project is approved, the recipient is eligible to receive the benefits of the
related grants for the life of the project, so long as the recipient continues
to meet preset eligibility standards. None of our approved projects has ever
been cancelled or modified, and we have already received approval for a majority
of the projects contemplated by our capital expenditure program. However, as a
result of the recent economic downturn, we were forced to lay off a significant
number of employees in Israel in 2001. In 2002, the Israeli government initially
withheld certain grant monies claiming that we had not maintained employment at
the required minimum levels; however, we were able to settle our dispute in the
fourth quarter and the government agreed to continue making grant payments to
us. While the number of employees continues to satisfy the eligibility
requirements for our Israeli government grants, economic circumstances could
compel future additional layoffs. Also, over the past few years, the Israeli
government has scaled back or discontinued some of its incentive programs. There
can be no assurance that we will maintain our eligibility for existing projects
or that in the
12
future the Israeli government will continue to offer new incentive programs
applicable to us or that, if it does, such programs will provide the same level
of benefits we have historically received or that we will continue to be
eligible to take advantage of them. Because we have received approvals for most
projects currently contemplated, we do not anticipate that cutbacks in the
incentive programs for new projects would have an adverse impact on our earnings
and operations for at least several years.
We might be materially adversely affected if events were to occur in
the Middle East that interfered with our operations in Israel. However, we have
never experienced any material interruption in our Israeli operations in our 32
years of operations there, in spite of several Middle East crises, including
wars.
Environment, Health and Safety
We have adopted an Environmental Health and Safety Corporate Policy
that commits us to achieve and maintain compliance with applicable environmental
laws, to promote proper management of hazardous materials for the safety of our
employees and the protection of the environment, and to minimize the hazardous
materials generated in the course of our operations. This policy is implemented
with accountability directly to the Chairman of the Board of Directors. In
addition, our manufacturing operations are subject to various federal, state and
local laws restricting discharge of materials into the environment.
We are not involved in any pending or threatened proceedings that would
require curtailment of our operations. We continually expend funds to ensure
that our facilities comply with applicable environmental regulations. In regard
to all of our facilities, we have completed our undertaking to comply with
environmental regulations relating to the elimination of chlorofluorocarbons
(CFCs) and ozone depleting substances (ODS) pursuant to the Clean Air Act
amendments of 1990. We have completely eliminated the use of CFCs and ODS in our
manufacturing processes, and all facilities are currently in compliance with the
Clean Air Act.
While we believe that we are in material compliance with applicable
environmental laws, we cannot accurately predict future developments and do not
necessarily have knowledge of past occurrences on sites that we currently
occupy. More stringent environmental regulations may be enacted in the future,
and we cannot determine the modifications, if any, in our operations that any
such future regulations might require, or the cost of compliance with such
regulations. Moreover, the risk of environmental liability and remediation costs
is inherent in the nature of our business and, therefore, there can be no
assurance that material environmental costs, including remediation costs, will
not arise in the future.
We have been named a Potentially Responsible Party (PRP) at nine
Superfund sites, including two Siliconix facilities, and have become responsible
for certain obligations as a PRP in connection with our acquisition of General
Semiconductor. We expend minimal amounts in connection with several of these
sites and do not expect costs associated with the others to be material.
General Semiconductor has also been named as a defendant in two actions
in the United States District Court for the Eastern District of New York in
connection with its former operations at a facility in Hicksville, New York. The
plaintiffs in these actions allege that they have suffered personal injury and
property damage as a result of the facility's operations. Although we will
vigorously defend these actions, we do not currently possess sufficient
information to estimate reasonably the amount of or timing of liabilities that
may be associated with these litigations. It is our policy to record appropriate
liabilities for environmental matters when damage claim payments are probable
and the costs can be reasonably estimated.
The ultimate cost of site cleanup is difficult to predict given the
uncertainties regarding the extent of the required cleanup, the interpretation
of applicable laws and regulations and alternative cleanup methods. Based upon
our experience with the foregoing environmental matters, we have concluded that
there is at least a reasonable possibility that we will incur remedial costs in
the range of $30 million to $35 million. As of December 31, 2002, we concluded
that the best estimate within this range is $34.4 million, which is included in
other long-term liabilities on the Consolidated Balance Sheet. The majority of
the environmental reserve is due to the acquisitions of General Semiconductor,
Inc. and BCcomponents. In view of our financial position and reserves for
environmental matters of $34.4 million, we have concluded that any potential
payment of such estimated amounts will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
13
With each acquisition, we attempt to identify potential environmental
concerns and to minimize, or obtain indemnification for, the environmental
matters we may be required to address. In addition, we establish reserves for
specifically identified potential environmental liabilities. We believe that the
reserves we have established are adequate. Nevertheless, we often unavoidably
inherit certain pre-existing environmental liabilities, generally based on
successor liability doctrines. Although we have never been involved in any
environmental matter that has had a material adverse impact on our overall
operations, there can be no assurance that in connection with any past or future
acquisition we will not be obligated to address environmental matters that could
have a material adverse impact on our operations.
Employees
As of December 31, 2002, we employed approximately 25,250 full time
employees, of whom approximately 20,730 were located outside the United States.
Some of our employees outside the United States are members of trade unions and
employees at one small U.S. facility are represented by a union. Our
relationship with our employees is good. However, no assurance can be given
that, if we continue to restructure our operations in response to changing
economic conditions, labor unrest or strikes, especially at European facilities,
will not occur. See "Legal Proceedings."
Company Information and Website
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The public may read and copy
any materials that we file with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including us,
that file electronically with the SEC. The public can obtain any documents that
we file with the SEC at http://www.sec.gov.
In addition, our company website can be found on the Internet at
www.vishay.com. The website contains information about us and our operations.
Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K,
and all amendments to those reports, can be viewed and downloaded free of charge
as soon as reasonably practicable after the reports and amendments are
electronically filed with or furnished to the SEC. To view the reports, access
www.vishay.com, click on Company Info, then Investor Relations and then SEC
Filings.
Any of the above documents can also be obtained in print by any
shareholder who requests them from our Investor Relations Department at the
following address:
Corporate Investor Relations
Vishay Intertechnology, Inc.
63 Lincoln Highway
Malvern, PA 19355-2143
14
Item 2. PROPERTIES
As of December 31, 2002, we maintained approximately 74 manufacturing
facilities. The principal locations of such facilities, along with available
space including administrative offices, are:
Approx. Available
Owned Locations Space (Square Feet)
- --------------- -------------------
United States
-------------
Columbus and Norfolk, NE* 298,000
Sanford, ME 225,000
Santa Clara, CA 220,000
Grafton and Oconto, WI* 165,000
Wendell and Statesville, NC* 159,000
Monroe, CT 91,000
Greencastle, IN 90,000
Malvern, PA 79,000
- --------------------
* 2 locations
Non-U.S.
--------
Israel (5 locations) 1,060,000
Germany (8 locations) 781,000
France (4 locations) 414,000
Republic of China (Taiwan) (2 locations) 391,000
Czech Republic (5 locations) 368,000
Hungary (2 locations) 325,000
Portugal 301,000
Netherlands 286,000
People's Republic of China (2 locations) 211,000
Belgium (2 locations) 180,000
Austria 153,000
Philippines 149,000
India 140,000
Malaysia 115,000
We own an additional 288,000 square feet of manufacturing facilities
located in Maryland, New York, Rhode Island, South Dakota, Vermont and Mexico.
Leased facilities in the United States include 217,000 square feet of
space located in California, Massachusetts, New York and South Dakota. Foreign
leased facilities consist of 778,000 square feet in China, 127,000 square feet
in Mexico, 13,000 square feet in the United Kingdom, 196,000 square feet in
Germany, 75,000 square feet in the Czech Republic, 39,000 square feet in Israel
and 41,000 square feet in Sweden.
In the opinion of management, our properties and equipment generally
are in good operating condition and are adequate for our present needs. We do
not anticipate difficulty in renewing existing leases as they expire or in
finding alternative facilities.
Item 3. LEGAL PROCEEDINGS
From time to time we are involved in routine litigation incidental to
our business. Management believes that such matters, either individually or in
the aggregate, should not have a material adverse effect on our business or
financial condition.
15
Our 80.4% owned subsidiary, Siliconix, is a party to two environmental
proceedings. The first involves property that Siliconix vacated in 1972. In July
1989, the California Regional Water Quality Control Board (RWQCB) issued Cleanup
and Abatement Order No. 89-115 both to Siliconix and the current owner of the
property. The Order alleged that Siliconix contaminated both the soil and the
groundwater on the property by the improper disposal of certain chemical
solvents. The RWQCB considered both parties to be liable for the contamination
and sought to have them decontaminate the site to acceptable levels. Siliconix
subsequently reached a settlement of this matter with the current owner of the
property. The settlement provided that the current owner will indemnify
Siliconix and its employees, officers, and directors against any liability that
may arise out of any governmental agency actions brought for environmental
cleanup of the subject site, including liability arising out of RWQCB Order No.
89-115, to which Siliconix remains nominally subject.
The second proceeding involves Siliconix's Santa Clara, California
facility, which Siliconix has owned and occupied since 1969. In February 1989,
the RWQCB issued Cleanup and Abatement Order No. 89-27 to Siliconix. The Order
is based on the discovery of contamination of both the soil and the groundwater
on the property by certain chemical solvents. The Order calls for Siliconix to
specify and implement interim remedial actions and to evaluate final remedial
alternatives. The RWQCB issued a subsequent order requiring Siliconix to
complete the decontamination. Siliconix has substantially completed its
compliance with the RWQCB's orders.
Our subsidiary General Semiconductor has been named a PRP at several
Superfund sites and as a defendant in two lawsuits in the United States District
Court for the Eastern District of New York. See "Environment, Health and
Safety."
In February and March 2001, several purported class action complaints
were filed in the Delaware Court of Chancery and the California Superior Court
against us, Siliconix and the directors of Siliconix in connection with our
proposal in February 2001 to purchase all issued and outstanding shares of
Siliconix that we did not already own. The class actions alleged that our
proposed offer was unfair and a breach of fiduciary duty. One of the Delaware
class actions also alleged that we had usurped Siliconix inventory and patents,
appropriated Siliconix's separate corporate identity, and obtained a
below-market loan from Siliconix. The actions sought injunctive relief, damages
and other relief. The Delaware Chancery Court denied a preliminary injunction
motion seeking to enjoin our tender offer, which was commenced in May 2001 but
not successfully completed. In December 2002, the Delaware Chancery Court
dismissed without prejudice the Delaware litigation. Also in December 2002, the
plaintiffs in the action filed in the California Superior Court filed a motion
for dismissal of the action without prejudice. Defendants have consented to that
motion, which is still pending.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our
executive officers as of March 31, 2003.
Name Age Positions Held
Felix Zandman* 74 Chairman of the Board and Chief
Executive Officer
Avi D. Eden* 55 Vice-Chairman of the Board, Executive
Vice President and General Counsel
Gerald Paul* 54 Chief Operating Officer, President and
Director
Marc Zandman 41 Vice-Chairman of the Board,
President-Vishay Israel Ltd.
Richard N. Grubb* 56 Executive Vice President, Treasurer,
Chief Financial Officer and Director
Robert A. Freece* 62 Senior Vice President and Director
William J. Spires 61 Vice President and Secretary
* Member of the Executive Committee of the Board of Directors.
Dr. Felix Zandman, a founder of the Company, has been the Chief
Executive Officer and a Director of the Company since its inception. Dr. Zandman
had been President of the Company from its inception until March 16, 1998, when
Dr. Gerald Paul was appointed President of the Company. Dr. Zandman has been
Chairman of the Board since March 1989.
Avi D. Eden has been a Director and General Counsel of the Company
since June 1988, and has been Vice-Chairman of the Board and an Executive Vice
President of the Company since August 1996.
Dr. Gerald Paul has served as a Director of the Company since May 1993
and has been Chief Operating Officer and an Executive Vice President of the
Company since August 1996. On March 16, 1998, Dr. Paul was appointed President
of the Company. He was President of Vishay Electronic Components, Europe from
January 1994 to August 1996. Dr. Paul has been Managing Director of Draloric
Electronic GmbH, an affiliate of the Company, since January 1991. Dr. Paul has
been employed by Draloric since February 1978.
Marc Zandman was appointed Vice-Chairman of the Board as of March 1,
2003. He has been a Director of the Company since May 2001, President of Vishay
Israel Ltd. since April 1998, and Group Vice President of Measurements Group
since August 2002. Mr. Zandman has served in various other capacities with the
Company since August 1984. He is the son of Dr. Felix Zandman, the Company's
Chief Executive Officer.
Richard N. Grubb has been a Director, Vice President, Treasurer and
Chief Financial Officer of the Company since May 1994, and has been an Executive
Vice President of the Company since August 1996. Mr. Grubb has been associated
with the Company in various capacities since 1972.
Robert A. Freece has been a Director of the Company since 1972. He was
a Vice President of the Company from 1972 until 1994, and has been a Senior Vice
President since May 1994.
17
William J. Spires has been a Vice President and Secretary of the
Company since 1981. Mr. Spires has been Vice President - Industrial Relations
since 1980 and has been employed by the Company since 1970.
18
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock is listed on the New York Stock Exchange under the
symbol VSH. The following table sets forth the high and low sales prices for our
common stock as reported on the New York Stock Exchange Composite Tape for the
quarterly periods within the 2001 and 2002 calendar years indicated. We do not
currently pay cash dividends on our capital stock. Our policy is to retain
earnings to support the growth of our business and we do not intend to change
this policy at the present time. In addition, we are restricted from paying cash
dividends under the terms of our revolving credit agreement. See Note 6 to our
Consolidated Financial Statements. Holders of record of our common stock totaled
approximately 1,791 at March 27, 2003.
COMMON STOCK MARKET PRICES
Calendar 2001 Calendar 2002
------------------------------ -----------------------------
High Low High Low
First Quarter $22.75 $13.75 $22.50 $17.05
Second Quarter $27.98 $17.00 $26.15 $19.31
Third Quarter $25.25 $16.08 $22.00 $ 8.51
Fourth Quarter $21.88 $16.86 $15.10 $ 6.70
At March 27, 2003, we had outstanding 15,383,296 shares of Class B
common stock, par value $.10 per share, each of which entitles the holder to ten
votes. The Class B common stock generally is not transferable except in certain
very limited instances, and there is no market for those shares. The Class B
common stock is convertible, at the option of the holder, into common stock on a
share for share basis. Substantially all of such Class B common stock is owned
by Dr. Felix Zandman, our Chairman and Chief Executive Officer, the estate of
Mrs. Luella B. Slaner, a former director, and trusts for the benefit of the
grandchildren of Mrs. Slaner, either directly or beneficially.
See Item 12 for certain equity compensation information with respect to
equity compensation plans approved by security holders and equity compensation
plans not approved by security holders.
19
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
information of the Company as of and for the fiscal years ended December 31,
2002, 2001, 2000, 1999 and 1998. This table should be read in conjunction with
our Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form 10-K.
As of and for the Year Ended December 31,
-----------------------------------------------------------------
2002(1) 2001 (2) 2000 1999 (3) 1998 (4)
---- ---- ---- ---- ----
Income Statement Data (in thousands,
except per share amounts):
Net sales $1,822,813 $1,655,346 $2,465,066 $1,760,091 $1,572,745
Interest expense 28,761 16,848 25,177 53,296 49,038
(Loss) earnings before income taxes and
minority interest (100,045) 10,103 690,225 134,711 42,646
Income taxes (benefit) (16,900) 5,695 148,186 36,940 30,624
Minority interest 9,469 3,895 24,175 14,534 3,810
Net (loss) earnings (92,614) 513 517,864 83,237 8,212
Basic (loss) earnings per share(5) $(0.58) $0.00 $3.83 $ 0.66 $ 0.07
Diluted (loss) earnings per share(5) $(0.58) $0.00 $3.77 $ 0.65 $ 0.07
Weighted average shares outstanding - basic (5) 159,413 141,171 135,295 126,678 126,665
Weighted average shares outstanding - diluted (5) 159,413 142,514 137,463 128,233 126,797
Balance Sheet Data (in thousands):
Total assets $4,315,159 $3,951,523 $2,783,658 $2,323,781 $2,462,744
Long-term debt 706,316 605,031 140,467 656,943 814,838
Working capital 897,456 1,096,034 1,057,200 604,150 650,483
Stockholders' equity 2,358,787 2,366,545 1,833,855 1,013,592 1,002,519
- -----------------------------------------------------------------------
(1) Includes the results from January 1, 2002 of Infineon Malaysia, January 31,
2002 of Sensortronics, July 1, 2002 of Tedea Huntleigh, August 1, 2002 of
BLH/Nobel, and October 1, 2002 of Celtron. Also includes restructuring
expenses, net of taxes of $11,984,000; write-down of raw materials
inventory, net of taxes of $22,533,000; accrual of loss on long-term
purchase commitments, net of taxes of $91,160,000; and other expenses, net
of taxes, of $10,426,000 for a total of $136,103,000 ($0.85 per share).
(2) Includes the results from January 1, 2001 of Tansitor, July 27, 2001 of
Infineon U.S., November 2, 2001 of General Semiconductor, and November 7,
2001 of Mallory. Also includes restructuring expenses, net of taxes, of
$39,972,000; write-down of raw materials inventory, net of taxes, of
$57,431,000; purchased research and development (no tax effect) of
$16,000,000; and other expenses, net of taxes, of $5,373,000 for a total of
$118,776,000 ($0.84 per share).
(3) The sale of Nicolitch, S.A. and a tax rate change in Germany reduced net
earnings by $14,562,000 ($0.11 per share).
(4) Includes the results from March 1, 1998 of Siliconix and Telefunken and
special charges after taxes of $55,335,000 ($0.44 per share).
(5) Adjusted to reflect a three-for-two stock split distributed June 9, 2000, a
five-for-four stock split distributed June 22, 1999 and a 5% stock dividend
paid on June 11, 1998.
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Market conditions in the electronics industry remained difficult in
2002. The continuing worldwide economic slowdown, general lack of investor
confidence, consumer ambivalence and political instabilities were reflected in
the markets we serve. With regard to particular industries in 2002, our
management perceived stability in the automotive market, continuing weakness in
the markets for telecom equipment and consumer products generally, and signs of
modest recovery in computer laptops and game consoles. Geographically, our
business in the Americas and Europe remained at depressed levels, while our
Asian business faired relatively better. Our visibility of future demand is
limited, and management cannot gauge with any confidence when the current
cyclical downturn is likely to reverse itself.
Product Demand and Pricing
Sales volume and pricing are the top line indicators of demand for our
products. Compared to the substantial drop-off in business in 2001, 2002 results
remained relatively weak but without major signs of increasing deterioration.
Sales rose slightly in 2002 as compared to 2001, with higher volumes offsetting
the effects of still declining prices. The increased volumes were due in part to
the effects of acquisition activity. Average selling prices continued their
decline in 2002, but at a rate that was less than in 2001. We experienced a
weighted average pricing decline in 2002 compared to 2001 of 9%, while the
decline for 2001 compared to 2000 was 3%.
Backlog, which is one indication of trends in customer demand, was
relatively stable in 2002 as compared to 2001, but still down substantially from
2000. In uncertain economic times, such as those we experienced in 2002 and
2001, orders are more susceptible to cancellation. Accordingly, backlog as a
measure of future sales in these circumstances becomes less reliable.
Another important indicator of demand in our industry is the
book-to-bill ratio, which is the ratio of the amount of product ordered during a
period as compared with the product that we ship during that period. A
book-to-bill ratio that is greater than one indicates that our orders are
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 sales.
The quarter-to-quarter trends in backlog and book-to-bill ratio can
also be an important indicator of the likely direction of our business. The
following table shows the end-of-period backlog and the book-to-bill ratio for
our business as a whole during the five quarters beginning with the fourth
quarter of 2001 and through the fourth quarter of 2002. The relatively flat
backlog amounts and book-to-bill ratios hovering at or slightly below one are
consistent with a business environment that remains stagnant and with no clear
signs of recovery.
4th Quarter 2001 1st Quarter 2002 2nd Quarter 2002 3rd Quarter 2002 4th Quarter 2002
---------------- ---------------- ----------------- ---------------- ----------------
End of Period
Backlog $337,883,000 (1) $396,900,000 $421,500,000 $378,500,000 $407,600,000 (2)
Book-to-Bill Ratio 0.89 1.14 1.02 0.90 0.93
(1) Includes $70,360,000 of backlog attributable to the business of
General Semiconductor, which was acquired November 2, 2001.
(2) Includes $49,800,000 of backlog attributable to the business of
BCcomponents, which was acquired in December 2002.
Segments
Our management evaluates our operating results along the lines of two
major segments, passive components and active components. Passive components
include resistors, capacitors and inductors. These are necessary elements of all
electronic circuits and are referred to as passive because they do not require
power to
21
operate. We include in this segment our Measurements Group, which manufactures
and markets strain gages, load cells, transducers, instruments and weighing
systems. The core components of these devices are resistors that are sensitive
to various types of mechanical stress. We began our business as a manufacturer
of passive components, and this remains a significant part of our business. In
December 2002, we completed our first major acquisition in the passive segment
in over ten years with the purchase of BCcomponents Holdings B.V., a
manufacturer of a broad line of resistors and capacitors. We also completed a
series of smaller acquisitions in the Measurements Group in 2002, including
Celtron Technologies, the BLH and Nobel businesses of Thermo Electron
Corporation, Tedea-Huntleigh BV and the transducer and strain gage businesses of
Sensortronics, Inc. With these acquisitions, we established ourselves as one of
the world's leading manufacturers and suppliers of strain gage products.
We are now also one of the world's leading manufacturers of active
electronic components. These include transistors, diodes, rectifiers, certain
types of integrated circuits and optoelectronic products. These components are
referred to as active because they require power to function. We entered the
active component business in 1997 when Vishay purchased a 65% interest in
Lite-On Power Semiconductor Corporation (LPSC), a Taiwan-based company that is a
major supplier of discrete active electronic components in Asia. In March 2000,
we agreed to sell our interest in LPSC to Lite-On JV Corporation (the Lite-On
Group), the owner of the remaining 35% interest in LPSC, for consideration
consisting of cash and the assignment or transfer to Vishay of the Lite-On
Group's rights under stock appreciation rights. In 1998, we increased our entry
into the active components business with the acquisition from Daimler-Benz of
TEMIC Telefunken Microelectronics GmbH, a manufacturer of optoelectronic
components and small signal transistors, and of an 80.4% interest in Siliconix
Incorporated, a manufacturer of power integrated circuits. In 2001, we
substantially increased our presence in the active component market, first with
the acquisition in July of the optoelectronic infrared business of Infineon
A.G., and later with the acquisition in November of General Semiconductor, Inc.,
a manufacturer of rectifiers and power management components whose business is
complementary to that of Siliconix. As a percentage of our total sales, active
components were 58% in 2002, 39% in 2001 and 34% in 2000.
The passive and active segments of our business have historically
responded differently to phases of the business cycle. Having strong
capabilities in both areas not only gives us a broad line of products to offer
our customers, it also smoothes, to some extent, the business swings that we
experience. When business slows down, active components are usually first to
feel the effects of the downturn that are later experienced by passive
components. Similarly, when business begins to increase, our semiconductor
products usually lead the recovery, followed some time later by resistors,
inductors and capacitors. Results in 2002 were on the whole better in the active
segment than the passive segment, but results and trends varied for products
within the two segments. Our resistor and inductor business stabilized in 2002,
but capacitors continued to deteriorate. As in the past, specialty products
performed reasonably well despite the economic downturn, but commodity products
continued to suffer from strong pricing pressures. The active side of our
business evidenced improvement in 2002, mainly at Siliconix and to a lesser
extent in our remaining semiconductor operations. Even in the active segment,
however, backlog and book-to-bill ratios do not reflect strong near-term
recovery.
The following table shows our sales and book-to-bill ratios broken out
by segment for the five quarters beginning with the fourth quarter of 2001 and
through the fourth quarter of 2002:
Sales ($)/
Book-to-bill 4th Quarter 2001 1st Quarter 2002 2nd Quarter 2002 3rd Quarter 2002 4th Quarter 2002
------------ ---------------- ---------------- ---------------- ---------------- ----------------
Passive $178,295,000 $184,572,000 $187,430,000 $196,702,000 $198,542,000
Components 0.83 1.02 0.98 0.96 1.00
Active $202,856,000 (1) $249,568,000 $270,447,000 $274,717,000 $260,835,000
Components 0.94 (1) 1.22(2) 1.04 0.85 0.88
(1) Includes $51,274,000 attributable to General Semiconductor for
active components. Excluding General Semiconductor, the book-to-bill
ratio for active components during the fourth quarter of 2001 would
have been 0.95.
(2) The book-to-bill ratio for the active components for the quarter
ended March 31, 2002 reflected, in part, an unusual spike in orders
in March 2002.
22
The increase in backlog in the actives segment reflects the increase in demand
for computer notebooks and feature rich cell phones with multiple functions,
especially in Asia. The decrease in passives backlog is due to the global
slowdown in the electronics industry, particularly in the general personal
computer and cell phone markets.
Cost and Inventory Management
We place a strong emphasis on reducing our costs. One way we do this is
by moving 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
Israel, Mexico, the Republic of China (Taiwan), the People's Republic of China
and Eastern Europe. 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 65% at the end of 2002 as compared to 61% at
the end of 2001 and 57% at the end of 2000. We expect that this trend will
continue with the acquisition in December 2002 of BCcomponents, where we intend
to move production to lower cost jurisdictions, primarily in Asia.
We are placing particular emphasis on cost reduction in our capacitor
lines, which have been hardest hit by the current downturn and where the
business continues to suffer from worldwide overcapacity. We expect to complete
the transfer of our power capacitor production from Western Europe to the Czech
Republic by mid-year and to begin moving our molded tantalum capacitor business
to the People's Republic of China. We also expect to consolidate our existing
film capacitor line within the newly acquired business of BCcomponents.
We also focus on our inventory turns as a measure of how well we are
managing our inventory. We define inventory turns for a financial reporting
period as our cost of products sold for that period divided by our average
inventory for the period. A higher level of inventory turns reflects more
efficient use of our capital. In 2002, inventory turns improved to 2.52 from
2.26 in 2001, which we attribute to somewhat improved selling conditions and
enhanced selling efficiencies implemented during the year.
Israeli Government Incentives
Our production facilities in Israel benefit from incentives offered by
the Israeli government for creation of jobs and capital investment in that
country. These benefits take the form of government grants and reduced tax rates
that are lower than those in the United States. These reduced tax rates apply to
projects specifically approved by the Israeli government and, depending on
project size, are available for periods of ten or fifteen years. Due to the
write-down of inventories and the loss on long-term purchase commitments in
2002, the application of the Israeli tax rates rather than United States tax
rates resulted in an increase in net loss of $24,769,000. In 2001 and 2000,
lower tax rates in Israel, as compared to the statutory rate in the United
States, resulted in an increase in net earnings of $3,009,000 and $89,745,000,
respectively.
Israeli government grants are awarded to specific projects. These
grants are intended to promote sales and employment in Israel's industrial
sector and are conditioned on the recipient maintaining certain prescribed
employment levels. Grants are paid when the related projects become operational,
and the Israeli government approves the project. Israeli government grants,
recorded as a reduction in the costs of products sold, were $17,322,000,
$19,064,000 and $15,721,000 in the years 2002, 2001 and 2000, respectively. At
December 31, 2002, our balance sheet reflected $42,345,000 in deferred grant
income.
During the second quarter of 2002, the government of Israel informed us
that since the headcount in our Israeli subsidiaries decreased significantly
over the previous 18 months, the government intended to withhold a $15,000,000
grant otherwise due to us. The grant, which was made by the Israeli government
under an economic stimulus program, was conditioned in part on the employment
levels at certain of our Israeli facilities. The Israeli government argued that
we had not maintained employment at the required minimum levels. During the
fourth quarter of 2002, we settled our dispute with the government of Israel by
negotiating certain of our commitments, and the government agreed to continue
making grant payments to us. We therefore recorded a catch up adjustment of
approximately $1,070,000 of grant income for the fourth quarter of 2002 and
reversed the allowances against the grant and deferred income reflected on the
September 30, 2002 balance sheet.
23
If we were no longer able to maintain the required level of employment
in the future, we could be required to return some grant funds that were
previously awarded to us. The effect of the return of these funds would be to
reduce our income in future years. Also, if the current business climate
continues, we might not initiate new projects that qualify for grants or reduced
tax rates or the Israeli government could curtail or eliminate the programs from
which we have benefited in the past.
Write-Downs of Inventory and Purchase Commitments
Tantalum is the principal material used in the manufacture of tantalum
capacitors. We generally purchase this metal in powder or wire form, although in
2000 and early 2001, when we perceived possible supply shortages, we also
stockpiled quantities of tantalum ore. In July and November of 2000, we entered
into purchase contracts with Cabot Corporation for tantalum powder and wire that
committed us to minimum purchases of these materials at fixed prices through
2005. We regularly utilize tantalum powder and wire in the production of
tantalum capacitors but have not used our stockpile of tantalum ore since 2000.
Palladium is a precious metal used in the production of multi-layer ceramic
capacitors that we purchase under short-term contracts.
In 2001, as a result of the general downturn in the electronics
business, we experienced a significant decrease in capacitor sales. Prices of
tantalum ore, powder and wire and of palladium also experienced significant
declines. Accordingly, we recorded write-downs of our raw material inventories
of these metals including $38,000,000 for tantalum ore, $14,000,000 for tantalum
wire and powder and $18,000,000 for palladium.
In June 2002, following initiation of a lawsuit by Cabot regarding its
tantalum supply contracts with Vishay, we agreed with Cabot to modify the
contracts, including reducing prices, providing for purchases at regular
intervals and extending one of the contracts through 2006. In the fourth quarter
of 2002, our management concluded that the depressed prices for tantalum were
not attributable to temporary imbalances in distributor inventories for tantalum
capacitors and that the prices for tantalum were likely to remain at their
currently depressed levels for the foreseeable future. Also during the fourth
quarter, one of our competitors settled its dispute with Cabot regarding
long-term tantalum purchase commitments at prices that we understand are in the
same range as the prices under our June 2002 settlement with Cabot. Our
management therefore concluded that it was unlikely to obtain further price
concessions from Cabot. Accordingly, we determined that it was appropriate to
accrue a loss of our purchase commitments under our supply contracts with Cabot
to reflect the difference between the prices that we are required to pay under
the contracts and current market prices for tantalum. For the same reasons, we
also determined to further write down our raw material inventories of tantalum
ore, powder and wire. These charges amounted to approximately $106,000,000 for
the purchase commitments and $25,700,000 for inventory. In 2002, we also
recorded a write-down of $1,700,000 on palladium inventories.
We anticipate, based on current and foreseeable demand for tantalum
capacitors, that our minimum purchase commitments under the contracts with Cabot
will substantially exceed our requirements over the terms of the contracts. See
"Contractual Commitments" below. Also, we do not anticipate utilizing our
stockpile of tantalum ore at any time in the foreseeable future. Tantalum ore,
powder and wire have an indefinite shelf life; therefore, we believe that we
will eventually utilize all of the material in our inventory or purchased under
the contracts. Our visibility of future demand is limited, however, and actual
consumption may differ substantially from the amounts that we now estimate.
Foreign Currency
In 2002, we realized approximately 69% of our revenues from customers
outside the United States. Any third party sales not using the U.S. dollar as
the functional currency must be reported in the local currency and be translated
at the weighted average exchange rate. This translation will have an impact on
the net sales line of the income statement and also on the expense lines of the
income statement. We generally do not purchase foreign currency exchange
contracts or other derivative instruments to hedge our exposure to foreign
currency fluctuations.
24
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 to our
Consolidated Financial Statements. We identify here a number of policies that
entail significant judgments or estimates.
Revenue recognition
We record revenues at the time that we ship products to our customers.
Many of our shipments are to distributors, who purchase for resale to end-users.
The distributors have certain limited rights to return products. They are also
entitled to certain price protection benefits, which give them credit for unsold
products that they continue to hold in inventory when we reduce our book prices
for these items. At the time we record sales to these distributors, we also
recognize allowances against net sales for estimated product returns and price
protection. To estimate these allowances, we review historical returns and price
adjustments on both a consolidated level and on an individual distributor level
as well as the general business and economic climate. These procedures require
the exercise of significant judgments, but we believe they enable us to estimate
reasonably future credits for returns and price adjustments.
Accounts Receivable
Our receivables represent a significant portion of our current assets.
We are required to estimate the collectability of our receivables and to
establish allowances for the amount of receivables that will prove
uncollectible. We base these allowances on our historical collection experience,
the length of time our receivables are outstanding, the financial circumstances
of individual customers, and general business and economic conditions.
Inventories
We value our inventories at the lower of cost or market, with cost
determined under the first-in first-out method and market based upon net
realizable value. The valuation of our inventories requires our management to
make market estimates. For instance, in the case of tantalum powder, we estimate
market value by obtaining current quotations from available sources of supply.
For work in progress goods, we are required to estimate the cost to completion
of the products and the prices at which we will be able to sell the products.
For finished goods, we must assess the prices at which we believe the inventory
can be sold. As noted, we recorded substantial write-downs of our tantalum and
palladium inventories in 2002.
Estimates of Restructuring Expense and Purchase Related Restructuring
Costs
In 2002, we recorded restructuring costs of approximately $48,000,000
related to our acquisitions and $30,970,000 related to our existing businesses.
Our acquisition-related restructuring costs included, among other things, costs
related to our acquisition of BCcomponents in December 2002. Our restructuring
activities related to our existing business were designed to reduce both our
fixed and variable costs, particularly in response to the reduced demand for our
products occasioned by the continuing electronics industry downturn in 2002.
These included the disposition of fixed assets and the termination of employees.
Acquisition-related costs are included in the allocation of the cost of the
acquired business and generally add to goodwill. Other restructuring costs are
expensed during the period in which we determine that we will incur those costs,
and all of the requirements for accrual are met.
Because these costs are recorded based upon estimates, our actual
expenditures for the restructuring activities may differ from the initially
recorded costs. If this happens, we will have to adjust our estimates in future
periods. In the case of acquisition-related restructuring costs, this would
generally require a change in value of the goodwill appearing on our balance
sheet, but would not affect our earnings. In the case of other restructuring
costs, we could be required either to record additional expenses in future
periods, if our initial estimates were too low, or to reverse part of the
charges that we recorded initially, if our initial estimates were too high.
Raw Material Write-downs
25
As indicated, in the fourth quarter of 2002 we took charges of
approximately $106,000,000 against contractual commitments to purchase tantalum
powder and wire through 2006 and wrote-off approximately $25,700,000 of our
existing inventory of tantalum ore, powder and wire. We did this because the
current market prices of tantalum are substantially below the prices at which we
are committed to purchase tantalum in the future under long-term contracts and
the prices at which we were carrying our tantalum raw materials inventory. These
actions involved significant judgments on our part, including decisions of
whether to take these charges and write-downs, their timing and their amount.
We made the decision to take the charges and write-downs after our
management concluded that the substantial fall-off in the demand for tantalum
capacitors was likely to continue for the foreseeable future. Combining this
assessment with the worldwide over-capacity in tantalum production, we could not
foresee when tantalum prices might recover from their currently depressed
levels. We made this determination in the fourth quarter of 2002 after it was
apparent that the inventory levels of our customers had dropped without any
effect on the demand or pricing for tantalum capacitors and after the settlement
of our competitor's tantalum pricing litigation, described above. Although we
believe that both the charges and write-downs as well as their timing were
appropriate under the circumstances, our visibility for future demand and
pricing is limited and the judgments made by our management necessarily involved
subjective assessments.
The write-down of our current tantalum inventory and the charges with
respect to our future tantalum commitments were calculated based on current
market prices for tantalum. There is no established market on which tantalum raw
materials are regularly traded and quoted. We based our determination of current
market price on quotations from two suppliers of these materials. We cannot say
that the prices at which we could currently enter into contracts for the
purchase of tantalum would be the same as these quoted prices. Also, in
quantifying the charges that we took against our future purchase commitments, we
assumed for lack of any other benchmark that current market prices would
continue through 2006, when our purchase commitments end. Had we made other
assumptions on current and future prices for tantalum, the amount of the
inventory write-downs and the charges against our purchase commitments would
have been different.
If tantalum prices were to recover in the future, we would not reverse
the write-downs that we have taken on our raw materials inventory or the charges
that we have recorded against our purchase commitments, so that our cost of
materials will continue to reflect these write-downs and charges regardless of
future price increases in tantalum. This could have the effect of increasing the
earnings that we realize in future periods from what they would have been had we
not taken these actions until future raw material prices were known with
certainty. We could also be required to take further write-downs and charges if
tantalum prices experience further declines.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over
the fair value of the related net assets at the date of acquisition. In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, we no longer amortize goodwill, but test for
impairment of goodwill using a market multiple approach.
Long-Lived Assets
We assess the impairment of our long-lived assets, other than goodwill
and trademarks, including property, plant and equipment, and identifiable
intangible assets subject to amortization whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Factors we
consider important which could trigger an impairment review include significant
changes in the manner of our use of the acquired asset, changes in historical or
projected operating performance and significant negative economic trends.
Results of Operations
Income statement captions as a percentage of sales and the effective
tax rates were as follows:
26
Year Ended December 31
------------------------------------------------
2002 2001 2000
---- ---- ----
Costs of products sold 79.8% 77.0% 59.2%
Gross profit 20.2 23.0 40.8
Selling, general and
administrative expenses 17.1 16.8 12.1
Operating (loss) income (4.4) 0.9 28.3
(Loss) earnings before income
taxes (benefit) and minority
interest (5.5) 0.6 28.0
Net (loss) earnings (5.1) 0.0 21.0
Effective tax rate (16.9) 56.4 21.5
Net Sales, Gross Profits and Margins
Sales for the year ended December 31, 2002 increased by $167,467,000 or
10.1% over the prior year. This combines a substantial increase in sales in the
active segment, attributable in large measure to 2001 acquisitions reflected
only partially in 2001 but fully in 2002, and a continuing drop in sales in the
passive segment in 2002. The weakening of the U.S. dollar against
foreign currencies for the year ended December 31, 2002, in comparison to the
prior year, resulted in increases in reported sales of $18,000,000.
Costs of products sold as a percentage of net sales were 79.8% for the
year ended December 31, 2002 as compared to 77.0% for the prior year. Gross
profit, as a percentage of net sales, for the year ended December 31, 2002 was
20.2% as compared to 23.0% for the prior year. The erosion in overall profit
margins reflects the continuing weakness in the passive segment, offset in
substantial part by improvements in the active segment. Both volume reduction
and further declines in average selling prices contributed to the declining
profit margins in the passive segment. Profit margins in the active segment
benefited from higher volumes, even as average selling prices continued to
decline in various product lines. For the year ended December 31, 2002, costs of
products sold included $27,400,000 for the write-down of tantalum and palladium
inventories as compared to $70,000,000 for the write-down of tantalum and
palladium inventories in 2001.
Sales for the year ended December 31, 2001 decreased $809,720,000 or
32.9% from the prior year, reflecting the downturn in the electronics industry
that we experienced in 2001. The strengthening of the U.S. dollar against
foreign currencies for the year ended December 31, 2001, in comparison to the
prior year, resulted in decreases in reported sales of $16,338,000. We
experienced lower sales in both our active and passive components businesses.
The decline was particularly pronounced in our commodity business for passive
components such as capacitors and resistors. The decline in the year-to-year
sales numbers reflects both lower unit sales volume and substantial downward
pricing pressure. The decline was evidenced in virtually all of our end markets,
but was particularly pronounced in wireless communications and computers.
Costs of products sold as a percentage of net sales were 77.0% for the
year ended December 31, 2001 as compared to 59.2% for the prior year. Gross
profit, as a percentage of net sales, for the year ended December 31, 2001 was
23.0% as compared to 40.8% for the prior year. The erosion in profit margins, in
both the active and passive segments, reflected reduced volume and lower prices
in 2001, offset, to some extent, by a reduction in fixed costs during the year.
For the year ended December 31, 2001, costs of products sold included
$70,000,000 for the write-down of tantalum and palladium inventories.
See "Israeli Government Incentives" regarding Israeli government
grants, which are recorded as a reduction in costs of products sold.
The following tables show sales and gross profit margins separately for
our passive and active segments.
27
Passive Components
Year Ended December 31
-----------------------------------------------------------
2002 2001 2000
---- ---- ----
Net Sales $ 767,246,000 $ 1,010,634,000 $ 1,627,860,000
Gross Profit Margin 8.9% 20.6% 41.7%
Net sales of passive components for the year ended December 31, 2002
decreased by $243,388,000 or 24.1% from comparable sales of the prior year. The
decrease in net sales was attributable to a combination of lower volume and a
continuing slide in prices. While our resistor and inductor business has
stabilized and even showed signs of improvement in the second half of the year
over the prior year's depressed results, the capacitor business continues to be
extremely problematic. This business is suffering from the poor environment for
electronics generally, and worldwide overcapacity for capacitor production and
supply in particular. However, with a slowing of the erosion in average selling
prices for capacitors in the fourth quarter of 2002, it is possible that the
capacitor business may also be stabilizing, albeit at a low level. Additionally,
write-downs of $27,400,000 on tantalum and palladium inventories were taken
during the year ended December 31, 2002, negatively impacting gross profit.
Gross profit margin for the segment in 2002 combined a positive profit margin of
19% for resistors and inductors and a negative 6% for capacitors.
The passive segment includes our Measurements Group, which experienced
significant acquisition activity in 2002. See "Overview-Segments" above.
Excluding these acquisitions, sales in the passive segment decreased by
$288,939,000 or 29% from the prior year. The acquisition of BCcomponents, a
worldwide manufacturer of resistors and capacitors, in December 2002 had no
effect on the 2002 results for the passive segment.
Net sales of passive components for the year ended December 31, 2001
decreased by $617,227,000 or 37.9% from comparable sales of the prior year. The
decrease in net sales was primarily due to low volume and strong pricing
pressure with respect to commodity products and, in particular, for tantalum
molded capacitor products. The decrease in the passive components business gross
profit margins in 2001 was related to strong pricing pressure, particularly with
respect to commodity products, excess capacity and higher costs for palladium
and tantalum powder. Additionally, write-downs of $70,000,000 on tantalum and
palladium inventories were taken during the year ended December 31, 2001,
negatively impacting gross profit.
Active Components
Year Ended December 31
-------------------------------------------------------
2002 2001 2000
---- ---- ----
Net Sales $1,055,567,000 $644,712,000 $837,206,000
Gross Profit Margin 28.4% 26.9% 39.0%
Net sales of the active components business for the year ended December
31, 2002 increased by $410,855,000 or 63.7% from comparable sales of the prior
year. The increase was in substantial measure due to the acquisitions of General
Semiconductor and the Infineon infrared business in 2001, which were included in
our results for all of 2002 but for only portions of 2001. However, it also
reflects sales recovery at our existing semiconductor operations. The increased
volume that we experienced in 2002 was offset to some extent by modest declines
in average selling prices in various product lines. The improvement in gross
profit margins to 28.4% from 26.9% is attributable primarily to improvements at
our 80.4% owned Siliconix subsidiary and to a lesser extent at our other
semiconductor operations. Siliconix's net sales for 2002 were $372,944,000 as
compared to $305,566,000 in 2001, a 22.1% increase, and its gross profit margins
rose from 24.6% for the year ended December 31, 2001 to 30.9% for the year ended
December 31, 2002.
Revenues in the active segment for 2002 included revenues of
$350,885,000 from the Infineon infrared business and General Semiconductor,
compared to revenues of $82,655,000 from these businesses in 2001. Excluding the
contribution of these acquisitions, net sales in 2002 would have increased by
25.4% as compared to 2001 and gross profit margin would have been 29.5%.
28
Net sales of the active components business for the year ended December
31, 2001 decreased by $192,494,000 or 23% from comparable sales of the prior
year. The decrease in the active components business net sales was primarily due
to the decrease in net sales of Siliconix. Siliconix's net sales for the year
ended December 31, 2001 were $305,566,000 as compared to $473,145,000, a 35.4%
decrease. The decrease from the prior year was primarily due to the downturn in
the computer and cell phone handset markets, which resulted in reduced demand
for our products, and overly optimistic industry forecasts for the cell phone
handset market, which led to excess handset inventories.
Revenues in the active segment for 2001 reflect revenues of $82,655,000
from the Infineon infrared business acquired in July 2001 and General
Semiconductor acquired in November 2001. Excluding the contribution of these
acquisitions, net sales in 2001 would have decreased by 32.9% as compared to
2000 and gross profit margin would have been 26.9%.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses for the year ended
December 31, 2002 were 17.1% of net sales as compared to 16.8% of net sales for
the prior year. The amount of these expenses increased by $33,080,000 for the
year ended December 31, 2002 as compared to the prior year. The higher
percentage and amount in 2002 was due primarily to acquisition activity. We
continue to implement cost reduction initiatives company-wide, with particular
emphasis on reducing headcount in high labor cost countries.
Selling, general, and administrative expenses for the year ended
December 31, 2001 were 16.8% of net sales as compared to 12.1% of net sales for
the prior year. The higher percentage in 2001 was due to reduced sales levels.
Selling, general and administrative expenses decreased by $19,144,000 for the
year ended December 31, 2001 as compared to the prior year.
Restructuring Expense
Our 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 included the closing of facilities and the termination of employees.
Restructuring costs are expensed during the period in which we determine that we
will incur those costs and all applicable requirements of accrual accounting for
recognizing such expenses are satisfied. 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 the restructuring through lower labor costs and other operating
expenses in future periods, although it is not possible to quantify the expected
savings.
We recorded restructuring expense for the year ended December 31, 2002
of $30,970,000. These expenses are comprised of termination costs for 1,438
employees in Europe, Israel and the United States. Through the end of 2002, we
paid $18,440,000 of these costs, corresponding to the termination of 783
employees. The balance remaining at December 31, 2002 is expected to be paid out
by the end of 2003. We recorded $61,908,000 in restructuring expense in 2001,
including costs for both employee termination and facility closure. The
remaining balance at December 31, 2002 of $1,564,000 is expected to be paid out
by the end of 2003. For additional detail on restructuring expense in 2001 and
2002, see Note 4 to our Consolidated Financial Statements.
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. For a discussion of these costs in 2001 and 2002, see Note 2 to our
Consolidated Financial Statements.
29
Interest Expense
Interest expense for the year ended December 31, 2002 increased by
$11,913,000 compared to the prior year. This increase was a result of higher
average outstanding bank borrowings attributable to our acquisition activity,
offset in part by somewhat lower interest rates.
Interest expense for the year ended December 31, 2001 decreased by
$8,329,000 compared to the prior year. This decrease was a result of lower
average outstanding bank borrowings and lower interest rates on borrowings in
2001 as compared to the prior year. During the second quarter of 2001, we paid
down the debt then outstanding under our revolving credit agreement with the
proceeds received from the issuance of Liquid Yield Option Notes (LYONs). We
also added $172,500,000 principal amount of 5.75% Convertible Subordinated
Debentures and $85,000,000 of bank debt in November 2001 from the acquisition of
General Semiconductor.
Other Income
Other income for the year ended December 31, 2002 was $8,664,000 as
compared to $12,701,000 for the comparable prior year period. Other income for
the year ended December 31, 2001 was $12,701,000 as compared to $18,904,000 for
the comparable prior year period. Other income in both 2002 and 2001 consisted
primarily of interest income, as well as gains on disposal of property and
equipment, and foreign exchange gains. For additional information, see Note 8 to
our Consolidated Financial Statements.
Minority Interest
Minority interest increased by $5,574,000 for the year ended December
31, 2002 as compared to the prior year, primarily due to the increase in net
earnings of Siliconix, of which we own 80.4%. Minority interest decreased by
$20,280,000 for the year ended December 31, 2001 as compared to the prior year,
primarily due to the decrease in net earnings of Siliconix.
Income Taxes
The effective tax rate for the year ended December 31, 2002 was 16.9%,
reflecting an income tax benefit, compared to 56.4% for the prior year,
reflecting income tax expense. The low effective rate in 2002 is primarily a
consequence of the losses before income taxes in low tax jurisdictions. While we
continue to benefit from low tax rates in Israel, we recognized a large taxable
loss in Israel in 2002, with the effect of reducing our overall tax benefit on
our losses. The more favorable Israeli tax rates are applied to specific
approved projects and are normally available for a period of ten or fifteen
years (see the discussion of our Israeli tax benefits in "Overview-Israeli
Government Incentives" above). Comparatively, in 2001, the high effective tax
rate was due to low net earnings and the non-tax deductibility of purchased
research and development expense related to the General Semiconductor
acquisition.
The effective tax rate for the year ended December 31, 2001 was 56.4%
as compared to 21.5% for the prior year. The increase in the tax rate for 2001
reflected a significant decrease in net earnings, as compared to 2000, in low
tax jurisdictions, and the non-tax deductibility of the purchased research and
development expense ($16,000,000) related to the acquisition of General
Semiconductor. The low tax rates in Israel applicable to us, as compared to the
statutory rate in the United States, resulted in increases in net earnings of
$3,009,000 and $89,745,000 for the years ended December 31, 2001 and 2000,
respectively.
Financial Condition and Liquidity
Cash flows from operations were $366,871,000 for the year ended
December 31, 2002 compared to $161,418,000 for the prior year. The increase in
cash generated from operations reflects improved working capital management,
including reductions in inventory and accounts receivable. The inventory
reduction reflects production adjustments we implemented in response to the
business slowdown in order to control inventory levels. Net purchases of
property and equipment for the year ended December 31, 2002 were $110,074,000
compared to $162,493,000 in the prior year. The decrease reflects an effort to
rationalize our capital spending to the realities of
30
the current economic environment, while making prudent investments in our
capital infrastructure in order to remain competitive and efficient. We also
used $278,735,000 in cash for acquisitions in 2002, primarily for our
acquisitions of BCcomponents in December 2002 and other smaller acquisitions in
our Measurements Group during the year. The acquisitions were funded in part by
our cash balances and in part from borrowings. See Note 2 to our Consolidated
Financial Statements for discussion of these acquisitions.
We made net payments of $14,000,000 on our revolving credit lines
during 2002, funded from cash flow from operations. See Notes 2 and 4 to our
Consolidated Financial Statements for discussion of acquisition related
restructuring costs paid during 2002 and expected to be paid in the future.
Other accrued expenses include $95,470,000 of acquisition-related costs and
other restructuring costs expected to be paid in cash subsequent to 2002.
In May 2001, we completed the offering of $550 million aggregate
principal amount at maturity of Liquid Yield Option Notes (LYONs) at an offering
price of $551.26 per $1,000 aggregate principal amount at maturity of notes. The
net proceeds to us of this offering were approximately $294.1 million. The LYONs
are convertible into approximately 9.7 million shares of our common stock. The
LYONs may be put to us at their accreted value on June 4 of each of 2004, 2006,
2011 and 2016 at a purchase price per $1,000 aggregate principal amount at
maturity of $602.77, $639.76, $742.47 and $816.67, respectively. See Note 6 to
our Consolidated Financial Statements for discussion of the terms of the LYONs.
We completed our acquisition of General Semiconductor on November 2,
2001 in a stock-for-stock transaction resulting in the issuance of 21,305,127
shares of our common stock. General Semiconductor had outstanding $172.5 million
principal amount 5.75% convertible notes, which as a result of the acquisition
are now convertible into approximately 6.3 million shares of our common stock.
As required by the terms of the notes, following the merger, General
Semiconductor made an offer to repurchase the notes at 101% of their principal
amount plus accrued interest. As a result of this offer, we acquired notes with
a principal amount of $1.5 million in January 2002.
In connection with our acquisition of BCcomponents in December 2002, we
issued $105,000,000 principal amount of our 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 could be further
reduced to 50% of LIBOR after December 31, 2010 if the price of our 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 us in exchange for 6,176,471 shares of our common stock in the
aggregate, and we may call the notes in exchange for cash or for shares of our
common stock after 15 years from the date of issuance.
Also in December 2002, we amended our long-term revolving credit and
swing line facility to, among other things, reduce the aggregate bank
commitments under this facility from $660,000,000 to $500,000,000. This amount
may be increased in the future under certain circumstances. As of December 31,
2002, we had $111,000,000 outstanding under this facility. Letters of credit
tota