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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2003
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
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(State or other jurisdiction (IRS employer
incorporation or organization) of identification no.)
63 Lincoln Highway
Malvern, Pennsylvania 19355-2143
(Address of principal executive offices)
(610) 644-1300
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(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
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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
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The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the common equity was last sold 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 $1,909,596,000. There is
no non-voting stock outstanding.
As of March 9, 2004, registrant had 145,539,733 shares of its common stock
and 14,979,440 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, 2003, are incorporated by reference into
Part III.
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PART I
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Item 1. DESCRIPTION OF BUSINESS
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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 o military and aerospace
equipment, 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. consistently 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, Israel, and the United States. Siliconix reported worldwide sales of
$392.1 million in 2003, $372.9 million in 2002, and $305.6 million in 2001.
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. 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, we
paid or assumed outstanding obligations of BCcomponents, including indebtedness,
transaction fees and expenses in the amount of approximately $224 million. Also,
we exchanged $105 million in principal amount of BCcomponents' mezzanine
indebtedness and certain other securities of BCcomponents 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 in recent years, we have taken
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 in recent years. In this regard, we:
(i) closed or consolidated several manufacturing facilities and
administrative offices;
(ii) reduced our headcount, particularly in high labor cost countries;
(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 also intends to explore opportunities for investments of
non-controlling interests in privately held developers or manufacturers of
electronic components, where Vishay believes that it can forge strategic
alliances with such companies.
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 o voltage suppressors,
capacitors (MLCCs),
o aluminum and specialty ceramic o infrared data transceivers
capacitors, (IRDCs),
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
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and, to a lesser extent:
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. Linear resistive components are classified as variable or fixed,
depending on whether or not their resistance is adjustable. Non-linear 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, as well as many variable types. 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, discharge, coupling,
timing and filtering functions. 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 type of capacitor for its range
of capacitance. 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. Film capacitors are for general use in telecommunications,
automotive, consumer and industrial products. They are the most stable
capacitors.
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.
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Measurements Group
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
over-heating.
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Integrated Circuits
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 light emitting diodes
(LEDs), infrared emitters (IREDs) and photo detectors, infrared receiver
modules, optocouplers, solid-state relays (SSRs), optical sensors, and infrared
transceivers (IRDCs).
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 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 an infrared 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 switch mode 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 the
surface of a circuit board, and also allows placement 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.
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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 o power strip resistors,
and arrays,
o metal film leadless o bulk metal foil chip
resistors (MELFs), resistors,
o molded tantalum chip o current sensing chips,
capacitors,
o coated tantalum chip o chip inductors,
capacitors,
o multi-layer ceramic chip o chip transformers,
capacitors,
o thin film chip resistors, o chip trimmers,
o thin film networks, o NTC chip thermistors,
o certain diodes and o PTC chip thermistors, and
transistor products,
o power MOSFETs, 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, Israel, Mexico, Germany, France, the United Kingdom, Austria, Hungary,
and the Czech Republic. In Asia, we have facilities in the People's Republic of
China, Taiwan, Malaysia, and the Philippines. 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 top 30 customers are quite stable despite not having long-term
commitments to purchase our products. With selected customers, we have signed
two to three year contracts for specific products.
During 2003, approximately 26% of our net sales were attributable to
customers in the Americas, approximately 38% were attributable to customers in
Europe, and approximately 36% were attributable to customers in Asia.
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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
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. Our research and development costs (exclusive of purchased
in-process research and development) were approximately $45.4 million for 2003,
$37.1 million for 2002, and $30.2 million for 2001. These amounts include
expenditures of our Siliconix subsidiary of $19.5 million, $19.3 million, and
$17.2 million in 2003, 2002, and 2001, 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. From 2001 to 2003, 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 $25.7 million and $52.0
million, respectively, on tantalum inventories during the years ended December
31, 2002 and 2001. We also recorded a loss on future purchase commitments of
$106.0 million for the year ended December 31, 2002. In 2003, prices of tantalum
continued to decline. As a result, we recorded write-downs of $5.4 million to
reduce our tantalum inventories to current market value in 2003. We also
recorded a loss on future purchase commitments of $11.4 million in 2003. Our
purchase commitments were entered into at a time when market demand for tantalum
capacitors was high and tantalum powder was in short supply. If the downward
pricing trend were to continue, we could again be required to write down the
carrying value of its tantalum inventory and record additional losses on its
long-term purchase commitments.
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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
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 $148 to $1,090 per troy ounce during the three
years ended December 31, 2003, and as of December 31, 2003, the price of
palladium was approximately $195 per troy ounce. During the years ended December
31, 2003, 2002 and 2001, we recorded in costs of products sold write-downs on
palladium inventories of $1.6 million, $1.7 million and $18.0 million,
respectively.
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
$532.0 million, $407.6 million, and $337.9 million, respectively, at December
31, 2003, 2002, and 2001. The backlog at December 31, 2003 and 2002 includes
$58.9 million and $49.8 million, respectively, of backlog attributable to the
business of BCcomponents, which was acquired in December 2002. The increase in
our backlog at December 31, 2003 compared to December 31, 2002 is indicative of
improving market conditions.
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 situation that we experienced in the recent 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, our 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., STMicroelectronics N.V. and Samsung Co., Ltd.
There are many other companies that produce products in the markets in which
we compete.
11
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,
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, 2003, approximately 21% of our fixed assets were located
in the United States, approximately 30% were located in Europe, approximately
26% were located in Israel, and approximately 30% 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, France, Hungary, and the
Czech Republic, with other facilities in Austria, Belgium, Portugal and the
Netherlands. We also have manufacturing facilities in India, Israel, Malaysia,
Mexico, the People's Republic of China, the Philippines 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 2003, 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, 2003 associated with the downsizing of manufacturing
facilities in Europe and the United States. We may continue to incur such
expenses in 2004.
See Note 16 to our consolidated financial statements, "Business Segment
and Geographic Area Data," for financial information by geographic area.
12
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, 2003, sales of
products manufactured in Israel accounted for approximately 17% 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 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 33
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.
13
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 three 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, 2003, we concluded
that the best estimate within this range is $32.7 million, of which $23.5
million is included in other non-current liabilities on the consolidated balance
sheet, and $9.2 million is included in accrued expenses on the consolidated
balance sheet. Of this reserve, approximately $18.7 million is due to the
acquisition of General Semiconductor, but not including any liability that we
may incur in connection with the litigation relating to the Hicksville, New York
facility described above; approximately $8.4 million is due to the acquisition
of BCcomponents; and approximately $5.6 million is reserved for other
miscellaneous environmental liabilities, primarily at our Vitramon subsidiary in
the United States. In view of our financial position and provisions for
environmental matters of $32.7 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.
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, 2003, we employed approximately 25,200 full time
employees, of whom approximately 21,850 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.
14
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.
The following corporate governance related documents are also available on
our website:
o Corporate Governance Principles
o Code of Business Conduct and Ethics
o Code of Ethics Applicable to the Company's Chief Executive Officer,
Chief Financial Officer, Principal Accounting Officer or Controller
and Financial Managers
o Audit Committee Charter
o Nominating and Corporate Governance Committee Charter
o Compensation Committee Charter.
To review these documents, go to our website, click on Company Info, then
Investor Relations and then Corporate Governance.
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
15
Item 2. PROPERTIES
- ------ ----------
As of December 31, 2003, we maintained approximately 77 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) 1,058,000
Hungary (2 locations) 961,000
Germany (8 locations) 561,000
People's Republic of China (4 locations) 514,000
Czech Republic (5 locations) 446,000
Republic of China (Taiwan) (3 locations) 397,000
France (3 locations) 332,000
Portugal 301,000
Netherlands 286,000
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 190,000 square feet of
space located in California, Massachusetts, New York, Connecticut and South
Dakota. Foreign leased facilities consist of 817,000 square feet in China,
204,000 square feet in Germany, 127,000 square feet in Mexico, 120,000 square
feet in Austria, 75,000 square feet in the Czech Republic, 43,000 square feet in
Sweden, 24,000 square feet in Israel, and 13,000 square feet in the United
Kingdom, and 3,000 square feet in Taiwan.
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.
16
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.
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."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None.
17
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- ------------------------------------
The following table sets forth certain information regarding our executive
officers as of March 15, 2004.
Name Age Positions Held
- ---- --- --------------
Dr. Felix Zandman* 75 Chairman of the Board and
Chief Executive Officer
Dr. Gerald Paul* 55 Chief Operating Officer, President
and Director
Marc Zandman* 42 Vice-Chairman of the Board,
President-Vishay Israel Ltd.
Richard N. Grubb 57 Executive Vice President,
Treasurer, and Chief Financial
Officer
Ziv Shoshani* 38 Executive Vice President,
Resistor and Inductor Group and
Director
* 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.
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 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, and was a Director from 1994 through 2003.
Ziv Shoshani has been Executive Vice President of the Resistor and
Inductor Group since 2002. He was Executive Vice President of the Capacitors
Group in 2001 and 2002 and was Executive Vice President, Specialty Products
Division in 2000 and 2001, including responsibility for oversight of Vishay's
Measurements Group Division. Prior to that, Mr. Shoshani served in various
capacities including Senior Vice President Precision Resistors, Worldwide Foil
Resistors Manager, Plant Manager, Holon, Israel, and Quality Control Manager,
Holon. Mr. Shoshani has been employed by the Company since 1995. He is the
nephew of Dr. Felix Zandman, the Company's Chief Executive Officer.
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 2002 and 2003 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 2,007 at March 9, 2004.
COMMON STOCK MARKET PRICES
Calendar 2002 Calendar 2003
------------- -------------
High Low High Low
---- --- ---- ---
First Quarter $22.50 $17.05 $13.24 $ 8.77
Second Quarter $26.15 $19.31 $15.15 $ 9.93
Third Quarter $22.00 $ 8.51 $19.00 $12.47
Fourth Quarter $15.10 $ 6.70 $23.15 $17.45
At March 9, 2004, we had outstanding 14,979,440 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 the 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, the children of Mrs. Slaner, and trusts for
the benefit of the grandchildren of Mrs. Slaner, either directly or
beneficially. Directly, and as voting trustee under a voting trust agreement,
Dr. Zandman has voting power over substantially all of the outstanding Class B
common stock.
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, 2003, 2002,
2001, 2000, and 1999. 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,
-----------------------------------------------------------
2003 (1) 2002 (2) 2001 (3) 2000 1999 (4)
---- ---- ---- ---- ----
Income Statement Data (in thousands,
except per share amounts):
Net sales $2,170,597 $1,822,813 $1,655,346 $2,465,066 $1,760,091
Interest expense 37,831 28,761 16,848 25,177 53,296
Earnings (loss) before income
tax provision (benefit) and
minority interest 46,426 (100,045) 10,103 690,225 134,711
Income tax provision (benefit) 11,528 (16,900) 5,695 148,186 36,940
Minority interest 8,056 9,469 3,895 24,175 14,534
Net earnings (loss) 26,842 (92,614) 513 517,864 83,237
Basic earnings (loss) per
share(5) $0.17 $(0.58) $0.00 $3.83 $ 0.66
Diluted earnings (loss) per
share(5) $0.17 $(0.58) $0.00 $3.77 $ 0.65
Weighted average shares
outstanding - basic (5) 159,631 159,413 141,171 135,295 126,678
Weighted average shares
outstanding - diluted (5) 160,443 159,413 142,514 137,463 128,233
Balance Sheet Data (in thousands):
Total assets $4,572,513 $4,315,159 $3,951,523 $2,783,658 $2,323,781
Long-term debt 836,606 706,316 605,031 140,467 656,943
Working capital 1,049,892 897,456 1,096,034 1,057,200 604,150
Stockholders' equity 2,514,034 2,358,787 2,366,545 1,833,855 1,013,592
- -----------------------------------------------------------------------
(1) Includes the results of BCcomponents, acquired in December 2002. Also
includes net charge of $22,362,000 for restructuring and severance costs,
inventory write-downs, a loss on purchase commitments, and a loss on
extinguishment of debt, partially offset by a gain on insurance proceeds.
These items and their tax related consequences had a negative $0.11 effect
on earnings per share. These items are more fully described in the notes to
the consolidated financial statements.
(2) Includes the results from January 1, 2002 of Infineon Malaysia
optoelectronic infrared components business, 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 charges for restructuring and
severance costs, inventory write-downs, a loss on purchase commitments and
other charges of $169,900,000. These items and their tax related
consequences had a negative $0.85 effect on earnings per share. These items
are more fully described in the notes to the consolidated financial
statements.
(3) Includes the results from January 1, 2001 of Tansitor, July 27, 2001 of
Infineon U.S. optoelectronic infrared components business, November 2, 2001
of General Semiconductor, and November 7, 2001 of Mallory. Also includes
charges for restructuring and severance costs, inventory write-downs, a
write-off of purchased in-process research and development, and other
charges of $156,590,000. These items and their tax related consequences had
a negative $0.84 effect on earnings per share. These items are more fully
described in the notes to the consolidated financial statements.
(4) The sale of Nicolitch, S.A. and a tax rate change in Germany reduced net
earnings by $14,562,000 ($0.11 per share).
(5) Adjusted to reflect a three-for-two stock split distributed June 9, 2000,
and a five-for-four stock split distributed June 22, 1999.
Management believes that stating the impact on net earnings of items such as
restructuring, inventory write-downs, losses on purchase commitments, losses on
early extinguishment of debt, gains on insurance proceeds, write-offs of
in-process research and development, and other charges is meaningful to
investors because its provides insight with respect to ongoing operating results
of the Company.
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Sales for the year ended December 31, 2003 were $2.171 billion compared to
sales of $1.823 billion for the year ended December 31, 2002. Net earnings for
the year ended December 31, 2003 were $26.8 million or $0.17 per share, compared
with a net loss for the year ended December 31, 2002 of $92.6 million or $0.58
per share. Earnings for the year ended December 31, 2003 were impacted by
restructuring and severance costs of $29.6 million, a loss on extinguishment of
debt of $9.9 million, a loss on long-term purchase commitments of $11.4 million,
and a write-down of tantalum inventories on hand to market value of $5.4
million, offset by a gain on an insurance claim of $33.9 million. These items
and their tax related consequences had a negative $0.11 effect on earnings per
share. The year ended December 31, 2002 included charges for restructuring,
inventory write-downs, a loss on purchase commitments and other charges of
$169.9 million resulting in a reduction of $0.85 in net earnings per share.
Following a difficult 2002 and 2001, in which the electronic components
business generally was depressed both in the United States and much of the
world, market conditions remained difficult in first half of 2003. In the latter
half of the year, we noted substantial improvement of the general economic
outlook worldwide. We have seen a rapid acceleration of demand in electronics in
all regions, in almost all market segments, beyond pure seasonality and stock
replenishment. We noted, in particular, strength in automotive products,
computers and mobile phones. The economic recovery began in the actives
business, consistent with historical trends and as seen in the third quarter of
2003. The passives business is also showing indications of recovery. Pricing
pressure has started to abate in the active products markets, but its presence
continues to be felt in the passive segment, particularly for commodity
products.
Capacity utilization is a reflection, in part, of product demand trends.
We were approaching full capacity in most of our active facilities during the
latter half of the year. We are working to alleviate capacity constraints in the
active segment by addressing production bottlenecks in our fabrication
facilities, expanding our backend operations and expanding and broadening our
foundry activities. Capacity utilization showed some improvement in the passive
segment during 2003, where capacity for resistors and inductors ranged from 60%
to 75%, while in the capacitor lines it averaged around 50%.
Despite these positive trends, operating results for 2003 remained
depressed because of pricing pressures. Average selling prices continued to
decline during 2003 in both the passive and active segments, though considerably
less rapidly in the second half of the year. Operating results for the first
half of 2003 also suffered from the severe acute respiratory syndrome, or SARS,
outbreak, particularly in the active segment which does a substantial portion of
its business in Asia.
Financial Metrics
We utilize several financial measures and metrics to evaluate the
performance and assess the future direction of our business. These key financial
measures and metrics include sales, end-of-period backlog, the book-to-bill
ratio, and inventory turnover. We also monitor changes in average selling
prices.
End-of-period backlog is one indicator of future sales. However, if demand
falls below customers' forecasts, or if customers do not control their inventory
effectively, they may cancel or reschedule the shipments that are included in
our backlog, in many instances without the payment of any penalty. Therefore,
the backlog is not necessarily indicative of the results of future periods.
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.
21
We also focus on our inventory turnover as a measure of how well we are
managing our inventory. We define inventory turnover for a financial reporting
period as our cost of products sold for that period divided by our average
inventory for the period. A higher level of inventory turnover reflects more
efficient use of our capital. In 2003, inventory turnover improved to 3.16 from
2.52 in 2002, which we attribute to somewhat improved selling conditions and
enhanced selling efficiencies implemented during the year. Exclusive of tantalum
and palladium write-downs, inventory turnover would have been approximately 3.15
in 2003 as compared to 2.47 in 2002.
The quarter-to-quarter trends in these financial metrics can also be an
important indicator of the likely direction of our business. The following table
shows sales, 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 2002 and through the fourth quarter of 2003.
4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------ -----------
2002 2003 2003 2003 2003
---- ---- ---- ---- ----
Sales $459,377,000 $532,127,000(1) $538,103,000(1) $533,168,000(1) $567,199,000(1)
End-of-Period
Backlog $407,600,000 $438,200,000 $419,800,000 $434,000,000 $532,000,000
Book-to-Bill
Ratio 0.93 1.05 0.96 1.03 1.14
(1) Includes $69,300,000, $63,600,000, $60,800,000, and $63,900,000
attributable to BCcomponents for the first, second, third and fourth
quarters of 2003, respectively.
Management believes that these trends are an encouraging indication of
broad-based demand into 2004, in all of our major markets and all geographic
areas.
Pricing in our industry is volatile. During 2003, we experienced
significant declines in average selling prices, particularly in the first half
of the year in our actives business. Prices stabilized in the second half of the
year, and we expect relatively stable pricing to continue into 2004.
Segments
Vishay operates in two segments, passive components and active components.
We are the leading manufacturer of passive components in the United States and
Europe. These components include resistors, capacitors, inductors, strain gages
and load cells. 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 are also one of the world's
leading manufacturers of active electronic components, also referred to as
discrete semiconductors. These include transistors, diodes, rectifiers, certain
types of integrated circuits and optoelectronic products. Our active segment
includes our 80.4% owned subsidiary, Siliconix. The passive components business
had historically predominated at Vishay until the purchase of General
Semiconductor in November 2001, after which the lead position shifted to the
active business. With the acquisition of BCcomponents in December 2002, revenues
from our active and passive businesses are essentially split evenly between the
segments. For 2003, approximately 51% of our revenues were attributable to our
passive business and 49% to our active business.
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 for the second half of 2003 are indicative of
these past trends, where we saw improvements in active products beginning in the
third quarter, which was followed by improvements in our passive products in the
fourth quarter. We expect these trends to continue into 2004.
22
The following table shows sales and book-to-bill ratios broken out by
segment for the five quarters beginning with the fourth quarter of 2002 through
the fourth quarter of 2003:
4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- ----------- -----------
2002 2003 2003 2003 2003
---- ---- ---- ---- ----
Passive
Components
Sales $198,542,000 $274,874,000(1) $280,056,000(1) $268,368,000(1) $281,558,000(1)
Book-to-Bill
Ratio 1.00 1.07 0.96 0.97 1.06
Active
Components
Sales $260,835,000 $257,253,000 $258,047,000 $264,800,000 $285,641,000
Book-to-Bill
Ratio 0.88 1.03 0.96 1.09 1.23
(1) Includes $69,300,000, $63,600,000, $60,800,000, and $63,900,000
attributable to BCcomponents for the first, second, third and fourth
quarters of 2003, respectively.
Cost 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 69% at the end of 2003, as compared to 65% at
the end of 2002, 61% at the end of 2001, and 57% at the end of 2000. We continue
to target improvement in this area as we proceed with the integration of the
business of BCcomponents, acquired in December 2002. The long-term target
remains between 75% and 80% of our headcount in lower-labor-cost countries.
We are placing particular emphasis on cost reduction in our capacitor
lines, which have been hardest hit by the recent market downturn and where the
business continues to suffer from worldwide overcapacity. In 2003, we completed
the transfer of our power capacitor production from Western Europe to the Czech
Republic and began moving our molded tantalum capacitor business to the People's
Republic of China. We also began to consolidate our existing film capacitor line
within the business of BCcomponents.
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-downs of
inventories and the losses on long-term purchase commitments in 2002 and 2003,
the application of the Israeli tax rates rather than United States tax rates
resulted in an increase in net loss of $24.8 million in 2002 and a decrease in
net earnings of $3.1 million in 2003. In 2001, lower tax rates in Israel, as
compared to the statutory rate in the United States, resulted in an increase in
net earnings of $3.0 million.
23
Israeli government grants are awarded to specific projects. These grants
are intended to promote 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 $12.4 million, $17.3 million and
$19.1 million in the years 2003, 2002 and 2001, respectively. At December 31,
2003, our balance sheet reflected $27.7 million 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 up to $15
million 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, and the government agreed to continue making grant payments to us. Under
the terms of the settlement with the Israeli government, Vishay is required to
employ at least an additional 1,500 employees in Israel over the next three
years in order to preserve its eligibility for the government grant. We have
hired an additional 1,319 employees to date and expect to comply with these
requirements. We therefore recorded a catch up adjustment of approximately $1.0
million 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.
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 $38.0 million for tantalum ore, $14.0 million for tantalum wire
and powder and $18.0 million 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 on 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 $106.0 million for
the purchase commitments and $25.7 million for inventory. In 2002, we also
recorded a write-down of $1.7 million on palladium inventories.
24
Prices for tantalum continued to decline in 2003. We recorded write-downs
of $5.4 million to reduce tantalum inventories to current market value, and a
loss on purchase commitments for future delivery of tantalum of $11.4 million.
In addition, we recorded a write-down of $1.6 million of palladium inventory in
the first quarter of 2003.
The raw materials write-downs have the effect of improving gross margins
in subsequent periods by reducing cost of goods sold as inventory is utilized.
This effect cannot be quantified in any specific reporting period, however,
because of the large number of affected products and the impracticality of
tracking raw material inventory usage on a product-by-product basis.
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. Based on usage currently expected in 2004, our purchase
commitments represent approximately 7.5 years of usage. We have little
visibility of the demand for our tantalum capacitor products beyond twelve
months. It is almost certain that our actual requirements of tantalum will
differ from those projected, and likely that the difference will be material.
Foreign Currency
In 2003, we realized approximately 74% 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 has an impact on the net
sales line of the consolidated statements of operations and also on the expense
lines of the consolidated statements of operations. We generally do not purchase
foreign currency exchange contracts or other derivative instruments to hedge our
exposure to foreign currency fluctuations.
Critical Accounting Policies and Estimates
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 recognize revenue on product sales during the period when the sales
process is complete. This generally occurs when products are shipped to the
customer in accordance with terms of an agreement of sale, title and risk of
loss have been transferred, collectibility is reasonably assured and pricing is
fixed or determinable. We have agreements with distributors that historically
provided limited rights of product return. Beginning in 2002, we modified these
arrangements to allow distributors a limited credit for unsaleable products,
which we term a "scrap allowance." Consistent with industry practice, we also
have a "stock, ship and debit" program whereby we consider, and grant in our
discretion, requests by distributors for credits on previously purchased
products that remain in distributors' inventory, to enable the distributors to
offer more competitive pricing. In addition, we have contractual arrangements
whereby we provide distributors with protection against price reductions that we
initiate after sale of product to the distributor and prior to resale by the
distributor.
We record end of period accruals for each of the programs based upon our
estimate of future credits under the programs that will be attributable to sales
recorded through the end of the period. We calculate reductions of revenue
attributable to each of the programs during any period by computing the change
in the accruals from the prior period and adding the credits actually given to
distributors during the period under the programs. These procedures require the
exercise of significant judgments, but we believe they enable us to estimate
reasonably future credits under the programs.
25
Recording and monitoring of these accruals takes place at our subsidiaries
and divisions, with input from sales and marketing personnel and review,
assessment and, if necessary, adjustment by corporate management. While our
subsidiaries and divisions utilize different methodologies based on their
individual experiences, all of the methodologies take into account sales to
distributors during the relevant period, inventory levels at the distributors,
current and projected market trends and conditions, recent and historical
activity under the relevant programs, changes in program policies, and open
requests for credits. These are the elements that management considers relevant,
and, in our judgment, the different methodologies provide us with equally
reliable estimates upon which to base our accruals. We do not track the credits
that we record against specific products sold from distributor inventories, so
as to directly compare revenue reduction for credits recorded during any period
with credits ultimately awarded in respect of products sold during that period.
Nevertheless, we believe that we have an adequate basis to assess the
reasonableness and reliability of our estimates.
Accounts Receivable
Our receivables represent a significant portion of our current assets. We
are required to estimate the collectibility 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 write-downs of our tantalum and palladium
inventories in 2002 and 2003. Inventories are also adjusted for estimated
obsolescence and written down to net realizable value based upon estimates of
future demand, technology developments and market conditions.
Estimates of Restructuring and Severance Costs and Purchase Related
Restructuring Costs
In 2003, we recorded restructuring costs of approximately $29.6 million
related to our existing businesses. In 2002, we recorded restructuring costs of
approximately $48.0 million related to our acquisitions and $31.0 million
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 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 electronics industry
downturn. 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.
26
Raw Material Write-downs
In 2002 and 2003, we took charges against contractual commitments to
purchase tantalum powder and wire through 2006 and wrote-down our existing
inventory of tantalum ore, powder and wire to present market value. 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. 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 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. 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, so that our cost
of materials will continue to reflect these write-downs 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.
Based upon similar considerations, we recorded write-downs of our
palladium inventory to market value in both 2002 and 2003.
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. Goodwill is
tested for impairment at least annually. These tests will be performed more
frequently if there are triggering events. SFAS No. 142 prescribes a two-step
method for determining goodwill impairment. In the first step, we determine the
fair value of the reporting unit using a comparable companies market multiple
approach. If the net book value of the reporting unit exceeds the fair value, we
would then perform the second step of the impairment test which requires
allocation of the reporting unit's fair value to all of its assets and
liabilities in a manner similar to a purchase price allocation, with any
residual fair value being allocated to goodwill. An impairment charge will be
recognized only when the implied fair value of a reporting unit's goodwill is
less than its carrying amount.
Fair value of reporting units is determined using comparable company
market multiples. The comparable companies utilized in our evaluation are the
members of our peer group utilized in the presentation of our stock performance
in our annual proxy statement.
27
Impairment of Long-Lived Assets
We assess the impairment of our long-lived assets, other than goodwill and
tradenames, including property 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:
Year Ended December 31
----------------------------------------------
2003 2002 2001
---- ---- ----
Costs of products sold 77.9% 79.8% 77.0%
Gross profit* 21.6% 14.4% 23.0%
Selling, general and
administrative expenses 17.6% 17.1% 16.8%
Operating income (loss) 2.7% (4.4%) 0.9%
Earnings (loss) before
income taxes (benefit)
and minority interest 2.1% (5.5%) 0.6%
Net earnings (loss) 1.2% (5.1%) 0.0%
Effective tax rate 24.8% 16.9% 56.4%
* - Reflects losses on purchase commitments of $11.4 million and $106.0
million during the years ended December 31, 2003 and 2002.
Net Sales, Gross Profits and Margins
Net sales for the year ended December 31, 2003 increased by $347.8 million
or 19.1% over the prior year. The increase primarily reflects the acquisitions
of BCcomponents in December 2002, Celtron Technologies in October 2002, BLH and
Nobel in July 2002 and Tedea-Huntleigh BV in September 2002. Excluding these
acquisitions, net sales increased $49.1 million, or 3%. The weakening of the
U.S. dollar against foreign currencies for the year ended December 31, 2003, in
comparison to the prior year, resulted in increases in reported sales of $74
million.
Net sales for the year ended December 31, 2002 increased by $167.5 million
or 10.1% over the prior year. This reflects 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, partially offset by 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 million.
28
We deduct, from the sales that we record to distributors, allowances for
future credits that we expect to provide for returns, scrapped product and price
adjustments under various programs made available to the distributors. We make
deductions corresponding to particular sales in the period in which the sales
are made, although the corresponding credits may not be issued until future
periods. We estimate the deductions based on sales levels to distributors,
inventory levels at the distributors, current and projected market trends and
conditions, recent and historical activity under the relevant programs, changes
in program policies and open requests for credits. We recorded deductions from
gross sales under our distributor incentive programs of $67.2 million, $67.4
million, and $56.1 million for the years ended December 31, 2003, 2002, and
2001, respectively, or, as a percentage of gross sales 3.0%, 3.6%, and 3.2%,
respectively. Actual credits issued under the programs for the years ended
December 31, 2003, 2002, and 2001, were approximately $62.4 million, $63.4
million, and $52.7 million, respectively. The increase in the incentives from
2001 is attributable primarily to the adverse business climate that developed
following 2000 and the resulting pricing pressures that affected our
distributors and the electronic component industry generally.
Costs of products sold as a percentage of net sales for the year ended
December 31, 2003 was 77.9% as compared to 79.8% for the prior year. Gross
profit as a percentage of net sales for year ended December 31, 2003 was 21.6%
as compared to 14.4% for the prior year. Price declines were offset in
substantial part by volume increases and cost savings programs. Gross profit for
2003 reflects write-downs of raw material inventory to lower of cost or market
of $7.0 million, which is included in cost of products sold, and an accrual of
loss on long-term purchase commitments of $11.4 million. Gross profit for 2002
reflects a write-down of raw material inventory to market value of $27.4
million, which is included in cost of products sold, and an accrual of loss on
long-term purchase commitments of $106.0 million.
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
14.4% as compared to 23.0% for the prior year. Gross profit for 2002 includes a
write-down of raw material inventory to market value of $27.4 million, which is
included in cost of goods sold, and accruals for losses on purchase commitments
of $106.0 million. The erosion in overall profit margins in 2002 reflected 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, 2001, gross profit reflected write-downs
of tantalum and palladium inventories of $70.0 million.
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.
Passive Components
Year Ended December 31
----------------------------------------------
2003 2002 2001
---- ---- ----
Net Sales $1,104,856,000 $767,246,000 $1,010,634,000
Gross Profit Margin 17.3% (4.9%) 20.6%
Net sales of passive components for the year ended December 31, 2003
increased $337.6 million or 44% as compared to the prior year. Without the
acquisition of BCcomponents, Celtron Technologies, BLH and Nobel, and
Tedea-Huntleigh, the passive components business sales would have increased by
$38.9 million or 5% as compared to the prior year. The organic increase in net
sales is attributable to the volume increases in the resistor and inductor
product lines, partially offset by price declines, and the positive impact of
foreign currency exchange rates. The average selling price was down versus the
prior year.
29
Our resistor and inductor business stabilized in 2002 and began an
improvement in the latter part of that year which continued into 2003. Our
capacitor business, which was particularly hard hit during the recent global
slowdown in the electronics industry, continues to experience the lingering
effects of worldwide overcapacity in both production and supply. However, with
the slowing of the erosion in average selling prices that began in the fourth
quarter of 2002, the capacitor business appears to have stabilized and is
showing modest signs of improvement.
Gross margins were 17.3% for the year ended December 31, 2003, as compared
to negative 4.9% for the prior year. Results for 2003 reflected average margins
of 29% for our resistor and inductor lines and 5% for our capacitor lines.
Margins were affected negatively by raw material related write-downs in 2003 and
2002, as market prices for these materials continued to decline. During 2003, we
recorded write-downs of $5.4 million to reduce tantalum inventories to current
market value, and a loss on purchase commitments for future delivery of tantalum
of $11.4 million. In addition, we recorded a write-down of $1.6 million of
palladium inventory. In 2002, we recorded a loss on long-term purchase
commitments of tantalum of $106.0 million and write-downs of $27.4 million on
tantalum and palladium inventories. The raw material write-downs have the effect
of improving gross margins in subsequent periods by reducing cost of goods sold
as inventory is utilized. This effect cannot be quantified in any specific
reporting period, however, because of the large number of affected products and
the impracticality of tracking raw material inventory usage on a
product-by-product basis.
We continue to implement cost reduction programs, particularly in our
passives business, in order to reduce costs and thereby stabilize our margins.
We have initiated several significant cost reduction programs in all of our
products lines, including facility combinations and shifts of production to
lower-cost regions, with particular emphasis on reducing headcount in
high-labor-cost countries. Sixty-nine percent of our labor force was in
low-labor-cost countries as of December 31, 2003. The impact of these cost
savings plans has been partially offset by the underutilization of capacity in
the commodity products.
Net sales of passive components for the year ended December 31, 2002
decreased by $243.4 million 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. Excluding the significant acquisition activity in
our Measurements Group in 2002, sales in the passive segment would have
decreased by $288.9 million or 29% from the prior year. Gross profit margin in
2002 was negatively impacted by a loss on long-term purchase commitments of
tantalum of $106.0 million and write-downs of $27.4 million on tantalum and
palladium inventories. Even excluding the loss on long-term purchase
commitments, our capacitor business had negative average gross margins of 6% in
2002, compared with positive average gross margins of 19% for resistors and
capacitors. The acquisition of BCcomponents, a worldwide manufacturer of
resistors and capacitors, in December 2002 had no material effect on the 2002
results for the passive segment.
30
Active Components
Year Ended December 31
----------------------------------------------
2003 2002 2001
---- ---- ----
Net Sales $1,065,741,000 $1,055,567,000 $644,712,000
Gross Profit Margin 26.1% 28.4% 26.9%
Net sales of the active components business for year ended December 31,
2003 increased by $10.2 million, or 1%, from sales of the comparable prior year
period. The active segment continued to experience pricing pressure in 2003,
especially during the first half of the year. Sales for the first half of 2003
actually decreased from the comparable 2002 period, primarily as a result of the
SARS outbreak in Asia where Siliconix sells approximately 75% of its total
sales. The modest revenue growth for the year was fueled by a significant
rebound in Asian business during the second half, driven by demand for computer
components and by distributors restocking inventories. Gross margins were 26.1%
for the year ended December 31, 2003 as compared to 28.4% for the prior year.
Margins were negatively impacted by product mix changes at Siliconix, where
there was a higher share of commodity products as compared to the comparable
prior year periods. Also, because of capacity constraints that it has begun to
experience, Siliconix made greater use of subcontractors during 2003, which has
the effect of driving down margins. Siliconix's net sales for 2003 were $392.1
million, compared to $372.9 million in 2002, a 5% increase, and its gross profit
margins declined from 31% for 2002 to 29% for 2003.
Net sales of the active components business for the year ended December
31, 2002 increased by $410.9 million or 63.7% from comparable sales of the prior
year. As detailed below, 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. It also reflects sales recovery at our existing semiconductor
operations that began in 2002. 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 Siliconix and to a lesser
extent at our other semiconductor operations. Siliconix's net sales for 2002
were $372.9 million as compared to $305.6 million in 2001, a 22.1% increase, and
its gross profit margins rose from 25% for 2001 to 31% for 2002.
Revenues in the active segment for 2002 included revenues of $350.9
million from the Infineon infrared business and General Semiconductor, compared
to revenues of $82.7 million 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%.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year ended December
31, 2003 were 17.6% of net sales as compared to 17.1% of net sales for the prior
year. This increase was mainly due to the costs associated with the acquisition
and integration of BCcomponents. Our continuing cost reduction initiatives
referred to above also target selling, general, and administrative costs and
offset, in part, the acquisition related increases in SG&A margins.
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 higher percentage and amount in 2002 was due primarily to acquisition
activity.
31
Restructuring and Severance Costs
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 include the closing of facilities and the termination of employees.
Beginning January 1, 2003, restructuring costs have been accounted for under
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Because costs
are recorded based upon estimates, actual expenditures for the restructuring
activities may differ from the initially recorded costs. If the initial
estimates are too low or too high, we could be required either to record
additional expenses in future periods or to reverse previously recorded
expenses. We anticipate that we will realize the benefits of our restructuring
through lower labor costs and other operating expenses in future periods.
We recorded restructuring and severance costs for the year ended December
31, 2003 of $29.6 million, $28.6 million of which was workforce reduction
expense and $1.0 million of which was fixed asset impairment. The workforce
reduction expense was comprised of termination costs for 708 employees in
Europe, Asia and the U