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EX-32.1 - CERTIFICATION PURSUANT TO 18U.S.C.SECTION 1350-CEO - VIASYSTEMS GROUP INCexhibit321.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18U.S.C.SECTION 1350-CFO - VIASYSTEMS GROUP INCexhibit322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - VIASYSTEMS GROUP INCexhibit311ceo.htm
EX-31.2 - CERTIFICATIOIN OF CHIEF FINANCIAL OFFICER - VIASYSTEMS GROUP INCexhibit312cfo.htm

                                                                                                                                          
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

Form 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________to ____________________

001-15755
(Commission File Number)


 
Viasystems Group, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

75-2668620
(I.R.S. Employer Identification No.)

101 South Hanley Road, Suite 400
St. Louis, MO  63105
(314) 727-2087
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  [X] YES    [   ] NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [  ] YES [  ] NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  [  ]
Accelerated Filer  [  ]
Non-Accelerated Filer  [X]    Smaller Reporting Company  [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[  ] YES    [X] NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 6, 2010, there were 20,225,820 shares of Viasystems Group, Inc.’s Common Stock outstanding.

 
 

 

VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010

 
   
PAGE
 
       
PART I - FINANCIAL INFORMATION
     
       
Item 1.       Financial Statements
     
       
Viasystems Group, Inc. and Subsidiaries
     
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
    2  
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2010 and 2009
    3  
Condensed Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Income
    (Loss) for the six months ended June 30, 2010
    4  
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2010 and 2009
    5  
Notes to Condensed Consolidated Financial Statements
    6  
 
Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations
    21  
         
Item 3.       Quantitative and Qualitative Disclosures About Market Risk
    36  
         
Item 4.       Controls and Procedures
    37  
         
PART II - OTHER INFORMATION
       
         
Item 1.       Legal Proceedings
    37  
         
Item 6.       Exhibits
    38  
 
SIGNATURES
    39  
         
EXHIBIT INDEX
 
    40  
CERTIFICATIONS
    41  


 
 

 

VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)


   
June 30,
2010
   
December 31,
2009
 
ASSETS
 
(Unaudited)
       
             
Current assets:
           
Cash and cash equivalents                                                                                                    
  $ 80,065     $ 108,993  
Restricted cash                                                                                                    
    -       105,734  
Accounts receivable, net                                                                                                    
    165,010       89,512  
Inventories                                                                                                    
    83,971       49,197  
Prepaid expenses and other                                                                                                    
    22,093       11,388  
Property held for sale                                                                                                    
    12,379       -  
Total current assets                                                                                                     
    363,518       364,824  
Property, plant and equipment, net                                                                                                        
    264,299       199,044  
Goodwill                                                                                                        
    97,977       79,485  
Intangible assets, net                                                                                                        
    10,066       4,676  
Deferred financing costs, net                                                                                                        
    8,541       7,986  
Other assets                                                                                                        
    3,005       1,223  
Total assets                                                                                                     
  $ 747,406     $ 657,238  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
Current liabilities:
               
Current maturities of long-term debt                                                                                                    
  $ 17,843     $ 118,207  
Accounts payable                                                                                                    
    154,226       90,661  
Accrued and other liabilities                                                                                                    
    73,524       42,348  
Total current liabilities                                                                                                     
    245,593       251,216  
Long-term debt, less current maturities                                                                                                        
    214,427       212,673  
Mandatory redeemable Class A Junior preferred stock                                                                                                        
    -       118,836  
Other non-current liabilities                                                                                                        
    52,415       34,226  
Total liabilities                                                                                                     
    512,435       616,951  
                 
Redeemable Class B Senior Convertible preferred stock                                                                                                        
    -       98,327  
                 
Stockholders’ equity (deficit):
               
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 20,225,820 and 2,415,266 shares issued and outstanding
    202       24  
Paid-in capital
    2,373,742       1,944,413  
Accumulated deficit
    (2,150,347 )     (2,010,069 )
Accumulated other comprehensive income
    8,020       7,592  
Total Viasystems stockholders’ equity (deficit)                                                                                                     
    231,617       (58,040 )
Noncontrolling interest                                                                                                        
    3,354       -  
Total stockholders’ equity (deficit)                                                                                                     
    234,971       (58,040 )
Total liabilities and stockholders’ equity (deficit)                                                                                                     
  $ 747,406     $ 657,238  

See accompanying notes to condensed consolidated financial statements.

 
 

 

VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)


 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
       
2009
   
2010
   
2009
 
                   
Net sales
  $ 239,411     $ 120,561     $ 426,051     $ 243,998  
Operating expenses:
                               
  Cost of goods sold, exclusive of items shown separately
     182,954        97,323        329,093        200,199  
  Selling, general and administrative
    20,591       11,455       39,286       21,659  
  Depreciation
    14,437       12,614       27,067       25,294  
  Amortization
    450       299       820       603  
  Restructuring and impairment
    2,415       3,847       8,724       4,570  
Operating income (loss)
    18,564       (4,977 )     21,061       (8,327 )
Other expense (income):
                               
Interest expense, net
    7,424       8,167       16,326       16,262  
Amortization of deferred financing costs
    513       516       979       1,032  
Loss on early extinguishment of debt
    -       -       706       -  
Other, net
    (110 )     224       405       346  
Income (loss) before income taxes
    10,737       (13,884 )     2,645       (25,967 )
Income taxes
    3,660       (1,020 )     7,511       1,397  
Net income (loss)
  $ 7,077     $ (12,864 )   $ (4,866 )   $ (27,364 )
                                 
Less:
                               
Net income attributable to noncontrolling interest
  $ 537     $ -     $ 674     $ -  
Accretion of Redeemable Class B Senior Convertible preferred stock
     -        2,085       1,053        4,169  
Conversion of Mandatory Redeemable Class A Junior preferred stock
     -        -        29,717        -  
Conversion of Redeemable Class B Senior Convertible preferred stock
     -        -        105,021        -  
Net income (loss) attributable to common stockholders
  $ 6,540     $ (14,949 )   $ (141,331 )   $ (31,533 )
                                 
Basic earnings (loss) per share
  $ 0.33     $ (6.19 )   $ (8.89 )   $ (13.06 )
Diluted earnings (loss) per share
  $ 0.33     $ (6.19 )   $ (8.89 )   $ (13.06 )
Basic weighted average shares outstanding
    19,979,015       2,415,266       15,893,378       2,415,266  
Diluted weighted average shares outstanding
    19,982,252       2,415,266       15,893,378       2,415,266  

See accompanying notes to condensed consolidated financial statements.
 
 
 

 

VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
(Unaudited)

   
Common
Stock Shares
   
Common
Stock
   
Paid-in
Capital
   
Accumulated
Deficit
    Accumulated Other Comprehensive Income (Loss)    
Non-controlling Interest
   
Total
 
Balance at December 31, 2009                                                  
    2,415,266     $ 24     $ 1,944,413     $ (2,010,069 )   $ 7,592     $ -     $ (58,040 )
Accretion of Class B Senior Convertible preferred stock
    -       -       (1,053 )     -       -       -       (1,053 )
Common stock issued in exchange for Class B Senior
Convertible preferred stock                                               
    6,028,258       60       204,340       (105,021 )     -       -       99,379  
Common stock issued in exchange for Class A Junior
preferred stock                                               
    7,658,187       77       149,791       (29,717 )     -       -       120,151  
Common stock issued in connection with the Merix Acquisition
    3,877,304       39       75,838       -       2,680               78,557  
Issuance of restricted stock awards
    246,805       2       (2             -       -       -  
Comprehensive income (loss):
                                                       
Net (loss) income                                                  
    -       -       -       (5,540 )     -       674       (4,866 )
Change in fair value of derivatives, net of taxes of $0
    -       -       -       -       428       -       428  
Total comprehensive income (loss)
                                    -               (4,438 )
Stock compensation expense                                                  
    -       -       415       -               -       415  
Balance at June 30, 2010                                                  
    20,225,820     $ 202     $ 2,373,742     $ (2,150,347 )   $ 8,020     $ 3,354     $ 234,971  
                                                         

Accumulated other comprehensive income at June 30, 2010, and December 31, 2009, includes the following:

 
 
June 30,
2010
   
December 31,
2009
 
Foreign currency translation
  $ 7,919     $ 7,919  
Unrecognized gain (loss) on derivatives
    101       (327 )
    $ 8,020     $ 7,592  

See accompanying notes to condensed consolidated financial statements.

 
 

 
VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

   
Six Months Ended
June 30,
 
   
2010
     
2009
 
Cash flows from operating activities:
             
Net loss                                                                                                        
  $ (4,866 )     $ (27,364 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                 
Depreciation and amortization                                                                                                      
    27,887         25,897  
Amortization of deferred financing costs                                                                                                      
    979         1,032  
Amortization of preferred stock discount                                                                                                      
    871         1,658  
Amortization of original issue discount on 2015 Notes                                                                                         
    798         -  
Loss on early extinguishment of debt                                                                                                      
    706         -  
Accretion of Class A Junior preferred stock dividends                                                                                                      
    444         3,586  
Non-cash stock compensation expense                                                                                                      
    415         461  
Deferred income taxes                                                                                                      
    237         920  
Loss (gain) on disposition of assets, net                                                                                                      
    182         (244 )
Non-cash impact of exchange rate changes                                                                                                      
    (101 )       351  
Change in assets and liabilities:
                 
Accounts receivable                                                                                                   
    (25,449 )       17,049  
Inventories                                                                                                   
    (11,531 )       21,184  
Prepaid expenses and other                                                                                                   
    (3,829 )       5,503  
Accounts payable                                                                                                   
    21,214         (1,445 )
Accrued and other liabilities                                                                                                   
    8,132         (11,821 )
Net cash provided by operating activities                                                                                                        
    16,089         36,767  
Cash flows from investing activities:
                 
Acquisition of Merix                                                                                                   
    (35,326 )       -  
Cash acquired in acquisition of Merix                                                                                                   
    13,667         -  
Capital expenditures                                                                                                   
    (20,405 )       (9,279 )
Proceeds from disposals of property                                                                                                   
    13         2,803  
Net cash used in investing activities                                                                                                        
    (42,051 )       (6,476 )
Cash flows from financing activities:
                 
Repayment of 10.5% Senior Subordinated Notes 
    (105,904 )       -  
Change in restricted cash                                                                                                   
    105,734         -  
Proceeds from borrowings under credit facilities                                                                                                   
    10,000         -  
Repayments of borrowings under credit facilities                                                                                                   
    (10,000 )       (3,500 )
Repayment of 2013 Notes                                                                                                   
    (515 )       -  
Repayment of capital lease obligations                                                                                                   
    (58 )       -  
Financing and other fees                                                                                                   
    (2,223 )       -  
Net cash used in financing activities                                                                                              
    (2,966 )       (3,500 )
                   
Net change in cash and cash equivalents                                                                                                        
    (28,928 )       26,791  
                   
Cash and cash equivalents, beginning of the period         
    108,993         83,053  
Cash and cash equivalents, end of the period                
  $ 80,065       $ 109,844  
 
Supplemental cash flow information:
                 
Interest paid     
  $ 5,992       $ 10,866  
Income taxes paid, net                
  $ 7,618       $ 908  
                   
Supplemental disclosure of noncash transactions:
                 
Fair value of common shares issued for acquisition of Merix                                                   
  $ 75,877  
 
  $ -  
Fair value of common shares issued in exchange for Mandatory redeemable Class A Junior
preferred stock
  $ 149,868       $ -  
Fair value of common shares issued in exchange for Redeemable Class B Senior Convertible preferred stock  
  $ 117,970       $ -  
See accompanying notes to condensed consolidated financial statements.


 
 

 

VIASYSTEMS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(Unaudited)

1.      Basis of Presentation

Unaudited Interim Condensed Consolidated Financial Statements

The unaudited interim condensed consolidated financial statements of Viasystems Group, Inc. and its subsidiaries (“Viasystems” or the “Company”) reflect all adjustments consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations and cash flows.  The results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for a full fiscal year.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission.

Nature of Business

Viasystems is a leading worldwide provider of complex multi-layer printed circuit boards and electro-mechanical solutions.  The Company’s products are used in a wide range of applications including, for example, automotive engine control modules, data networking equipment, telecommunications switching equipment, complex medical and technical instruments, and flight control systems.

Recapitalization Agreement

In connection with the Merix Acquisition (see Note 2), on February 11, 2010, pursuant to an agreement dated October 6, 2009, (the “Recapitalization Agreement”), by and among the Company and affiliates of Hicks, Muse, Tate & Furst, Incorporated (“HMTF”), affiliates of GSC Recovery II, L.P. (“GSC”) and TCW Shared Opportunities Fund III, L.P. (“TCW” and together with HMTF and GSC, the “Funds”), the Company and the Funds approved a recapitalization of the Company such that (i) each outstanding share of common stock of the Company was exchanged for 0.083647 shares of common stock of the Company (the “Reverse Stock Split”), (ii) each outstanding share of the Mandatory Redeemable Class A Junior preferred stock of the Company (the “Class A Preferred”) was reclassified as, and converted into, 8.478683 shares of newly issued common stock of the Company and (iii) each outstanding share of the Redeemable Class B Senior preferred stock of the Company (the “Class B Preferred”) was reclassified as, and converted into, 1.416566 shares of newly issued common stock of the Company.  In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin Topic 4.C, Changes in Capital Structure, all share amounts have been adjusted retroactively to reflect the Reverse Stock Split.

In connection with the conversion of the Class A Preferred into common shares of the Company, for financial reporting purposes related to the presentation of net loss attributable to common stockholders, the Company recorded a non-cash adjustment to net loss of $29,717.  The $29,717 non-cash item is equal to the difference between i) the fair value of the common shares issued and ii) the carrying value of the Class A Preferred at the time of conversion; and is reflected in the Condensed Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) as a reduction to accumulated deficit and a corresponding increase to paid-in capital.  In connection with the conversion of the Class B Preferred into common shares of the Company, for financial reporting purposes related to the presentation of net loss attributable to common stockholders, the Company recorded a non-cash adjustment to net loss of $105,021.  The $105,021 non-cash item is equal to the difference between i) the fair value of the common shares issued and ii) the fair value of the number of common shares that would have been issued according to the terms of the Indenture governing the Class B Preferred without consideration of the Recapitalization Agreement; and is reflected in the Condensed Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) as a reduction to accumulated deficit and a corresponding increase to paid-in capital.

As a result of the completion of the recapitalization and the Merix Acquisition, (i) the holders of the Company’s common stock prior to the recapitalization received 2,415,266 shares of common stock of the Company, (ii) the holders of the Class A Preferred prior to the recapitalization received 7,658,187 shares of newly issued common stock of the Company, (iii) the holders of the Class B Preferred prior to the recapitalization received 6,028,258 shares of newly issued common stock of the Company, (iv) the holders of the Merix common stock prior to the closing of the Merix Acquisition received 2,479,053 shares of newly issued common stock of the Company and (v) the holders of Merix’ convertible notes prior to the closing of the Merix Acquisition received a cash payment of $34,908 and 1,398,251 shares of newly issued common stock of the Company.  The total issued and outstanding common stock of the Company immediately after the closing of the Merix Acquisition was 19,979,015 shares of common stock.

 
 

 
New Stockholder Agreement

Pursuant to the terms of the Recapitalization Agreement and, in connection with the Merix Acquisition, on February 11, 2010, the Company entered into a new stockholder agreement (the “2010 Stockholder Agreement”), by and among the Company and VG Holdings, LLC (“VG Holdings”) which was formed by the Funds and which, immediately after the closing of the Merix Acquisition, held approximately 77.8% of the common stock of the Company.  Under the terms of the 2010 Stockholder Agreement, VG Holdings has the right, subject to certain reductions, to designate up to five directors to serve on the board of directors of the Company.  Subject to certain exceptions, VG Holdings agreed not to sell any of the Company’s common stock held by VG Holdings for 180 days after the closing of the Merix Acquisition.  In addition, the 2010 Stockholder Agreement provides VG Holdings with certain registration rights related to its shares of the Company’s common stock.  The 2010 Stockholder Agreement will terminate on February 11, 2020.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Viasystems Group, Inc. and its wholly-owned and majority-owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect i) the reported amounts of assets and liabilities, ii) the disclosure of contingent assets and liabilities at the date of the financial statements and iii) the reported amounts of revenues and expenses during the reporting period.

Estimates and assumptions are used in accounting for the following significant matters, among others:

·  
allowances for doubtful accounts;
·  
inventory valuation;
·  
fair value of derivative instruments and related hedged items;
·  
fair value of assets acquired and liabilities assumed in the Merix Acquisition;
·  
useful lives of property, equipment and intangible assets;
·  
long-lived and intangible asset impairments;
·  
restructuring charges;
·  
warranty and product returns allowances;
·  
deferred compensation agreements;
·  
tax related items;
·  
contingencies; and
·  
fair value of options granted under our stock-based compensation plans.

Actual results may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period in which the revision is made.  The Company does not consider as material any revisions made to estimates or assumptions during the periods presented in the accompanying condensed consolidated financial statements.

Commitments and Contingencies

The Company is a party to contracts with third party consultants, independent contractors and other service providers in which the Company has agreed to indemnify such parties against certain liabilities in connection with their performance.  Based on historical experience and the likelihood that such parties will ever make a claim against the Company, in the opinion of the Company’s management, the ultimate liabilities resulting from such indemnification obligations will not have a material adverse effect on its financial condition and results of operations and cash flows.

Viasystems provides that none of the directors and officers of the Company bear the risk of personal liability for monetary damages for breach of fiduciary duty as a director or officer, except in cases where the action involves a breach of the duty of loyalty, acts in bad faith or intentional misconduct, the unlawful payment of dividends or repurchasing of capital stock, or transactions from which the director or officer derived improper personal benefits.

The Company is subject to various lawsuits and claims with respect to such matters as product liability, product development and other actions arising in the normal course of business.  In the opinion of the Company’s management, the ultimate liabilities resulting from such lawsuits and claims will not have a material adverse effect on its financial condition and results of operations and cash flows.

 
 

 
Earnings or Loss Per Share

The Company computes basic earnings (loss) per share by dividing its net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period.  The computation of diluted earnings (loss) per share is based on the weighted average number of common shares outstanding during the period plus, to the extent they are dilutive, common stock equivalents which would arise from i) the exercise of stock options and warrants, ii) the conversion of convertible debt and preferred stock and iii) the weighted average number of unvested restricted stock awards outstanding.

The shares used in the computation of our basic and diluted earnings per share are reconciled as follows:

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
   
2010
       
2009
 
 
2010
   
2009
 
 
Weighted average number of shares - basic
    19,979,015       2,415,266       15,893,378       2,415,266  
Dilutive effect of restricted stock awards
    3,237       -       -       -  
Weighted average number of shares- diluted
    19,982,252       2,415,266       15,893,378       2,415,266  

No stock options, warrants, convertible debt, or convertible preferred stock were included in the computation of the diluted weighted average shares outstanding for the three and six months ended June 30, 2010 and 2009, and no unvested restricted stock awards were included in the computation of diluted weighted average shares outstanding for the six months ended June 30, 2010, because the effect would be anti-dilutive.  As of June 30, 2010, the Company had i) outstanding options to purchase a total of 1,174,072 shares of common stock and ii) long-term debt convertible into 6,593 shares of common stock that could have a future dilutive effect on the calculation of earnings per share.

Fair Value of Financial Instruments

The Company measures the fair value of assets and liabilities using a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:  Level 1 - observable inputs such as quoted prices in active markets; Level 2 - inputs, other than quoted market prices in active markets, which are observable, either directly or indirectly; and Level 3 - valuations derived from valuation techniques in which one or more significant inputs are unobservable.  In addition, the Company may use various valuation techniques including the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; and the cost approach, using the replacement cost of assets.

The Company records deferred gains and losses related to cash flow hedges based on the fair value of active derivative contracts on the reporting date, as determined using a market approach (see Note 7).  When applicable, all such contracts covered by master netting agreements are reported net, with gross positive fair values netted with gross negative fair values by counterparty.  As quoted prices in active markets are not available for identical contracts, Level 2 inputs are used to determine fair value.  These inputs include quotes for similar but not identical derivative contracts and market interest rates that are corroborated with publicly available market information.

 
 

 
The Company’s financial instruments consist of cash equivalents, accounts receivable, notes receivable, long-term debt, preferred stock and other long-term obligations.  For cash equivalents, accounts receivable, notes receivable and other long-term obligations, the carrying amounts approximate fair value.  The estimated fair market values of the Company’s debt instruments, preferred stock and cash flow hedges are as follows:

 
June 30, 2010
 
Fair Value
 
Carrying Amount
 
Balance Sheet Classification
Senior Secured Notes due 2015
  $ 237,325     $ 212,754  
Long-term debt, less current maturities
Senior Secured 2010 Credit Facility
    -       -    
Zhongshan 2010 Credit Facility
    10,000       10,000  
Current maturities of long-term debt
Huiyang 2009 Credit Facility
    5,200       5,200  
Current maturities of long-term debt
Senior Subordinated Convertible Notes due 2013
    895       895  
Long-term debt, less current maturities
Cash flow hedges
    101       101  
Prepaid expenses and other
Guangzhou 2009 Credit Facility
    -       -    
Senior Subordinated Notes due 2011
    -       -    
Class A Junior preferred stock
    -       -    
Class B Senior Convertible preferred stock
    -       -    
                   
 
December 31, 2009
 
Fair Value
 
Carrying Amount
 
Balance Sheet Classification
Senior Secured Notes due 2015
  $ 231,000     $ 211,956  
Long-term debt, less current maturities
Senior Secured 2010 Credit Facility
    -       -    
Zhongshan 2010 Credit Facility
    -       -    
Huiyang 2009 Credit Facility
    -       -    
Senior Subordinated Convertible Notes due 2013
    -       -    
Cash flow hedges
    (327 )     (327 )
Accrued and other liabilities
Guangzhou 2009 Credit Facility
    10,000       10,000  
Current maturities of long-term debt
Senior Subordinated Notes due 2011
    105,876       105,876  
Current maturities of long-term debt
Class A Junior preferred stock
    124,943       118,836  
Mandatory redeemable Class A Junior preferred stock
Class B Senior Convertible preferred stock
    98,823       98,327  
Redeemable Class B Senior Convertible preferred stock

The Company determined the fair values of the Senior Secured Notes due 2015 and the Senior Subordinated Notes due 2011 using quoted market prices for the notes.  The Company estimated the fair value of the Senior Subordinated Convertible Notes due 2013 to be their par value based upon their most recent trading activity.  As the balance owed on the Zhongshan 2010 Credit Facility, the Guangzhou 2009 Credit Facility and the Huiyang 2009 Credit Facility (see Note 5) bear interest at a variable rate, the carrying value of the these debt instruments approximates their fair value.  The Company estimated the fair values of its preferred stock instruments to approximate the current liquidation value of each instrument at December 31, 2009.

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board issued new guidance amending and clarifying requirements for fair value measurements.  The new guidance requires disclosure of transfers in and out of Level 1 and Level 2 inputs and a reconciliation of all activity in Level 3 inputs.  The Company adopted the new guidance as of March 31, 2010, and upon adoption there was no material effect on our financial position, results of operations or cash flows.

 
 

 
2.  The Merix Acquisition

On February 16, 2010, the Company acquired Merix Corporation (“Merix”) in a transaction pursuant to which Merix became a wholly owned subsidiary of the Company (the “Merix Acquisition”).  Merix was a leading manufacturer of technologically advanced, multi-layer printed circuit boards with operations in the United States and China.  The Merix Acquisition increased the Company’s PCB manufacturing capacity by adding four additional PCB production facilities, added North American quick-turn services capability and added military and aerospace to the Company’s already diverse end-user markets.  The total consideration paid by the Company in the merger was $111,203, and included cash of $35,326 and 3,877,304 shares of common stock of the Company representing approximately 19.4% of the Company’s outstanding common stock immediately after the closing of the Merix Acquisition.  Cash consideration paid in the merger included payments of $34,908 to the former holders of Merix Senior Subordinated Convertible Notes due 2013, payments of $25 in lieu of fractional shares issued to former Merix stockholders; and payments of $393 to Merix employees related to tax liabilities arising from the exercise of their Merix stock options upon the change in control.  For the six months ended June 30, 2010, net sales of approximately $125,000 were attributable to manufacturing facilities acquired from Merix.  Although the Company has made a reasonable effort to do so, synergies achieved through the integration of the acquired Merix business into the Company’s Printed Circuit Boards segment and the allocation of shared overhead specific to the acquired Merix business cannot be precisely determined.  Accordingly, the Company has deemed it impracticable to calculate the precise impact the acquired Merix business has had on its earnings for the six months ending June 30, 2010.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the Merix Acquisition as of February 16, 2010.  The estimated fair values are preliminary, subject to the finalization of certain tax returns.

Cash and equivalents                                                                                         
  $ 13,667  
Accounts receivable                                                                                         
    50,049  
Inventories                                                                                         
    23,243  
Property, plant and equipment                                                                                         
    72,743  
Property held for sale                                                                                         
    12,379  
Goodwill                                                                                         
    18,492  
Identifiable intangible assets                                                                                         
    6,190  
Other current and long-term assets                                                                                         
    10,109  
      206,872  
         
Accounts payable and other accrued liabilities                                                                                         
    (69,558 )
Convertible notes and other indebtedness                                                                                         
    (7,039 )
Accrued and deferred taxes                                                                                         
    (15,585 )
Other long-term liabilities                                                                                         
    (807 )
      (92,989 )
      113,883  
Less:  noncontrolling interest                                                                                         
    (2,680 )
Net assets acquired                                                                                         
  $ 111,203  

 
 

 
Goodwill and Identifiable Intangible Assets

Goodwill of $18,492 is calculated as the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired; and represents the additional value to the Company expected to be derived from synergies in combining the business and other intangible benefits.  None of the goodwill is expected to be deductible for income tax purposes.  As of December 31, 2009, the Company had recorded goodwill of $79,485 from prior acquisitions which related entirely to its Printed Circuit Boards segment.  With the goodwill derived from the Merix Acquisition, the balance of goodwill as of June 30, 2010, is $97,977 which relates entirely to the Company’s Printed Circuit Boards segment.

Identifiable intangible assets acquired included Merix’ customer list, manufacturer sales representative network and trade name, and were valued at $4,100, $1,700 and $390, respectively.  The value of the customer list and manufacturer sales representative network are being amortized over twelve years, and the value of the trade name is being amortized over two years.

Property Held for Sale

On July 22, 2010, the Company concluded the sale of a previously vacated manufacturing facility in Hong Kong, China, which was classified as property held for sale when acquired in the Merix Acquisition.  Net proceeds from the sale were approximately $9,739, which approximates the fair value at the time of the Merix Acquisition.

The remaining $2,640 of property held for sale relates to land adjacent to the Company’s manufacturing facility in Forest Grove, Oregon.

Other Accrued Liabilities

In connection with the Merix Acquisition, the Company assumed obligations of $6,935 for certain Merix employee benefit related amounts that became payable as a result of the Merix Acquisition pursuant to terms of existing contractual agreements, of which $2,430 remains payable as of June 30, 2010.

Noncontrolling Interest

In connection with the Merix Acquisition, the Company acquired a majority interest in manufacturing facilities in Huiyang and Huizhou, China, in which a noncontrolling interest holder retained an ownership of 5% and 15%, respectively.  The acquired noncontrolling interest was measured using the income approach based on a discounted cash flow methodology.  The noncontrolling interest is reported as a component of equity, and the net income attributable to the noncontrolling interest is reported as a reduction from net income (loss) to arrive at net income (loss) attributable to the Company’s common stockholders.  The Company leases the manufacturing facilities in Huiyang and Huizhou, China and purchases consulting and other services from the noncontrolling interest holder.  During the three and six months ended June 30, 2010, the Company paid the noncontrolling interest holder $377 and $510, respectively, related to rental and service fees.

Pro Forma Information (unaudited)

The following unaudited pro forma information presents the combined results of operations of Viasystems and Merix for the six months ended June 30, 2010 and 2009, as if the Merix Acquisition had been completed on January 1, 2010 and 2009, respectively, with adjustments to give effect to pro forma events that are directly attributable to the Merix Acquisition.  The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the companies, nor do they include restructuring expenses incurred related to the Merix Acquisition and the recapitalization.  Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

 
 

 
The following table summarizes the unaudited pro forma results of operations:

      Six Months Ended
June 30,
 
   
2010
   
2009
 
Net sales
  $ 468,006     $ 363,598  
Net income (loss)
  $ 11,833     $ (53,598 )
                 
 
Transaction costs

The Company recognized $4,649 of transaction costs related to the Merix Acquisition in selling, general and administrative expenses for the six months ended June 30, 2010, which consisted primarily of investment banker fees and legal and accounting costs.  Total acquisition related transaction costs incurred by the Company, excluding costs incurred by Merix prior to the acquisition, totaled $8,697.

3.      Inventories

The composition of inventories is as follows:

   
June 30,
2010
   
December 31,
2009
 
Raw materials
  $ 31,029     $ 15,090  
Work in process
    23,278       15,720  
Finished goods
    29,664       18,387  
Total
  $ 83,971     $ 49,197  

Inventories are stated at the lower of cost (valued using the first-in, first-out method) or market.  In connection with the Merix Acquisition, the Company acquired inventory which was recorded at its fair value of $23,243.  The estimate of fair value included an adjustment of $933 to increase the carrying value of finished goods and work in process inventories such that it approximated its selling price less an estimated profit from the selling effort.

4.      Property, Plant and Equipment

The composition of property, plant and equipment is as follows:

   
June 30,
2010
   
December 31,
2009
 
Land and buildings
  $ 81,637     $ 54,603  
Machinery, equipment and systems
    488,806       427,619  
Leasehold improvements
    44,508       42,102  
Construction in progress
    1,889       1,063  
      616,840       525,387  
Less: Accumulated depreciation
    (352,541 )     (326,343 )
Total
  $ 264,299     $ 199,044  

In connection with the Merix Acquisition, the Company acquired property, plant and equipment which was recorded at its fair value of $72,743, including land and buildings of $26,889, machinery and equipment of $43,563, leasehold improvements of $962 and construction in progress of $1,329.

 
 

 
5.      Credit Facilities and Long-term Debt

The composition of long-term debt is as follows:

   
June 30,
2010
   
December 31,
2009
 
Senior Secured Notes due 2015, net                                                                                   
  $ 212,754     $ 211,956  
Senior Secured 2010 Credit Facility                                                                                   
    -       -  
Zhongshan 2010 Credit Facility                                                                                   
    10,000       -  
Huiyang 2009 Credit Facility                                                                                   
    5,200       -  
Senior Subordinated Convertible Notes due 2013                                                                                   
    895       -  
Capital leases                                                                                   
    3,421       3,048  
Guangzhou 2009 Credit Facility                                                                                   
    -       10,000  
Senior Subordinated Notes due 2011                                                                                   
    -       105,876  
      232,270       330,880  
Less: Current maturities                                                                              
    (17,843 )     (118,207 )
    $ 214,427     $ 212,673  
 
As of June 30, 2010, $15,200 was outstanding under the Company’s various credit facilities, the Company had issued letters of credit totaling $300 and approximately $72,674 of the credit facilities were unused and available.

Senior Secured Notes due 2015

The Company’s $220,000 12% Senior Secured Notes due 2015 (the “2015 Notes”) were issued at an original issue discount (“OID”) of 96.269%.  The OID was recorded on the Company’s balance sheet as a reduction of the liability for the 2015 Notes and is being amortized to interest expense over the life of the 2015 Notes.  As of June 30, 2010, the unamortized OID was $7,246.

Senior Secured 2010 Credit Facility

On February 16, 2010, the Company entered into a senior secured revolving credit agreement (the “Senior Secured 2010 Credit Facility”), with Wachovia Capital Finance Corporation (New England), which provides a secured revolving credit facility in an aggregate principal amount of up to $75,000 with an initial maturity of four years. The annual interest rates applicable to loans under the Senior Secured 2010 Credit Facility are, at the Company’s option, either the Base Rate or Eurodollar Rate (each as defined in the Senior Secured 2010 Credit Facility) plus, in each case, an applicable margin. The applicable margin is tied to the Company’s Quarterly Average Excess Availability (as defined in the Senior Secured 2010 Credit Facility) and ranges from 2.00% to 2.50% for Base Rate loans and 3.50% to 4.00% for Eurodollar Rate loans. In addition, the Company is required to pay an Unused Line Fee and other fees defined in the Senior Secured 2010 Credit Facility.  The Company incurred $2,262, including $2,210 incurred during the six months ended June 30, 2010, of deferred financing fees related to the Senior Secured 2010 Credit Facility which have been capitalized and are being amortized over the life of the facility.

The Senior Secured 2010 Credit Facility is guaranteed by and secured by substantially all of the assets of the Company’s current and future domestic subsidiaries, subject to certain exceptions as set forth in the Senior Secured 2010 Credit Facility. The Senior Secured 2010 Credit Facility contains certain negative covenants restricting and limiting the Company’s ability to, among other things:

incur debt, incur contingent obligations and issue certain types of preferred stock;
create liens;
pay dividends, distributions or make other specified restricted payments;
make certain investments and acquisitions;
enter into certain transactions with affiliates; and
merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets.

The Senior Secured 2010 Credit Facility includes a financial covenant requirement that, if the Excess Availability (as defined in the Senior Secured 2010 Credit Facility) is less than $15,000, then the Company must maintain, on a monthly basis, a minimum fixed charge coverage ratio of 1.1.  As of June 30, 2010, the Senior Secured 2010 Credit Facility was undrawn, and approximately $53,300 was unused and available based on eligible collateral.

 
 

 
Zhongshan 2010 Credit Facility

In March 2010, the Company’s Kalex Multi-Layer Circuit Board (Zhongshan) Limited (“KMLCB”) subsidiary consummated a 200 million Renminbi (approximately $29,374 U.S. dollars based on the exchange rate as of June 30, 2010) revolving credit facility (the “Zhongshan 2010 Credit Facility”) with China Construction Bank, Zhongshan Branch.  The Zhongshan 2010 Credit Facility provides for borrowings denominated in Renminbi and foreign currencies, including the U.S. dollar.  Borrowings are guaranteed by KMLCB’s sole Hong Kong parent company, Kalex Circuit Board (China) Limited.  This revolving credit facility is renewable annually upon mutual agreement.  Loans under the credit facility bear interest at the rate of (i) LIBOR plus a margin negotiated prior to each U.S. dollar denominated loan or (ii) the interest rate quoted by the Peoples Bank of China for Renminbi denominated loans.  The Zhongshan 2010 Credit Facility has certain restrictions and other covenants that are customary for similar credit arrangements; however, there are no financial covenants contained in this facility.  As of June 30, 2010, $10,000 in U.S. dollar loans was outstanding under the Zhongshan 2010 Credit Facility at a rate of LIBOR plus 3.0%, and approximately $19,374 of the revolving credit facility was unused and available.
 
Huiyang 2009 Credit Facility

In connection with the Merix Acquisition, the Company assumed a $5,200 debt obligation under a credit facility (the “Huiyang 2009 Credit Facility”) between its Merix Printed Circuits Technology Limited subsidiary and Industrial and Commercial Bank of China, Limited (“ICBC”).  The Huiyang 2009 Credit Facility provides for borrowings denominated in Renminbi and foreign currencies, including the U.S. dollar.  Borrowings are secured by a mortgage lien on the building and land lease at the Company’s manufacturing facility in Huiyang, China.  This revolving credit facility is renewable annually upon mutual agreement.  Loans under the credit facility bear interest at the rate of i) LIBOR plus a margin negotiated before each U.S. dollar denominated loan, ii) an annual fixed rate negotiated before each U.S. dollar denominated loan or iii) an interest rate based on the base lending rate published by ICBC.  The Huiyang 2009 Credit Facility has certain restrictions and other covenants that are customary for similar credit arrangements; however, there are no financial covenants contained in this facility.  As of June 30, 2010, $5,200 in U.S. dollar loans was outstanding under the Huiyang 2009 Credit Facility at a weighted average rate of 1.72%.

Senior Subordinated Convertible Notes due 2013

In connection with the Merix Acquisition, the Company assumed $1,410 of convertible senior subordinated notes which mature on May 15, 2013, and bear interest at the rate of 4.0% per year (the “2013 Notes”).  Interest is payable in arrears on May 15, and November 15, of each year.  Pursuant to the terms of the indenture governing the 2013 Notes and the merger agreement between the Company and Merix, the 2013 Notes are convertible at the option of the holder into shares of the Company’s common stock at a ratio of 7.367 shares per one thousand dollars of principal amount subject to certain adjustments.  This is equivalent to a conversion price of $135.74 per share.  The 2013 Notes are general unsecured obligations of the Company and are subordinate in right of payment to all the Company’s existing and future senior debt.  On April 15, 2010, the Company redeemed $515 aggregate principal amount of the 2013 Notes at par pursuant to a tender offer, leaving $895 aggregate principle amount of the 2013 Notes outstanding.

Capital Leases

In connection with the Merix Acquisition, in February 2010 the Company assumed $429 of obligations under capital leases.  The assets acquired under these capital leases include transportation and other equipment which were recorded at their fair value upon acquisition of $427.

Guangzhou 2009 Credit Facility

In June 2010, the Company repaid the outstanding $10,000 U.S. dollar loan under the Guangzhou 2009 Credit Facility, and elected not to pursue renewal of the credit facility upon its June 30, 2010, expiration date.
 
Senior Subordinated Notes due 2011

In January 2010, the Company redeemed all of its 10.5% Senior Subordinated Notes due 2011.  In connection with the redemption, the Company incurred a $706 loss on the early extinguishment of the debt.  Restricted cash of $105,734, which was held in escrow as of December 31, 2009, was used to fund the redemption.

 
 

 
6.      Restructuring and Charges

During the six months ended June 30, 2010, the Company initiated certain actions to realize cost synergies it had identified in connection with the integration of the Merix business (the “2010 Acquisition Restructuring”). These actions included staff reductions and the consolidation of certain sales and administrative offices.

The reserve for restructuring activities at June 30, 2010, also includes accruals for liabilities incurred as part of i) the 2009 shutdown of the Company’s metal fabrication facility in Milwaukee, Wisconsin (the “Milwaukee Facility”) and ii) restructuring activities initiated during 2001 as a result of the economic downturn that began in 2000 and resulted in asset impairments, plant shutdowns and downsizings which continued through 2005 (the “2001 Restructuring”).
 
As of June 30, 2010, the reserve for restructuring and impairment charges include $2,672, $225 and $682, related to the 2010 Acquisition Restructuring, the closure of the Milwaukee Facility and the 2001 Restructuring, respectively.  The following tables summarize changes in the reserve for restructuring charges for the six months ended June 30, 2010 and 2009:

         
Six Months Ended June 30, 2010
         
   
Balance
at
12/31/09
   
Net Charges
   
Cash Payments
   
Adjustments
     
Balance
at
6/30/10
 
Restructuring Activities:
                               
Personnel and severance                                        
  $ 843     $ 3,171     $ (2,594 )   $ -       $ 1,420  
Lease and other contractual commitments
    2,481       5,553       (6,622 )     747  
(a)
    2,159  
Total restructuring charges                                           
  $ 3,324     $ 8,724     $ (9,216 )   $ 747       $ 3,579  
                                           
           
Six Months Ended June 30, 2009
           
   
Balance
at
12/31/08
   
Net Charges
   
Cash Payments
   
Adjustments
     
Balance
at
6/30/09
 
Restructuring Activities:
                                         
Personnel and severance                                        
  $ 8,896     $ (299 )   $ (7,419 )   $ -       $ 1,178  
Lease and other contractual commitments
    3,226       5,164       (878 )     115  
(b)
    7,627  
Asset impairment                                        
    -       (295 )     -       295  
(c)
    -  
Total restructuring charges                                           
  $ 12,122     $ 4,570     $ (8,297 )   $ 410       $ 8,805  
                                           
   
(a)  
Represents $732 of restructuring liabilities assumed in the Merix Acquisition and $15 of accretion of interest on discounted restructuring liabilities.
(b)  
Represents accretion of interest on discounted restructuring liabilities.
(c)  
Represents gains realized from disposal of assets in connection with the closure of the Milwaukee Facility.

The Company recorded $8,724 of restructuring charges for the six months ended June 30, 2010, of which $4,661 was incurred in the Printed Circuit Boards segment related to the 2010 Acquisition Restructuring, and $4,063 of which was incurred in “Other” which primarily related to the cancellation of the monitoring and oversight agreement with Hicks, Muse & Co. Partners L.P., an affiliate of HMTF, in connection with the Recapitalization Agreement (see Note 1). The charges related to the 2010 Acquisition Restructuring include $3,513 related to personnel and severance and $1,233 related to lease termination and other costs.  During the quarter ended June 30, 2010, the Company identified additional costs related to accomplishing the expected synergies to be achieved in the 2010 Acquisition Restructuring.  As a result, the Company revised its estimate of the total cost of 2010 Acquisition Restructuring to approximate $5,000, of which approximately $3,750 relates to personnel and severance costs and $1,250 relates to lease termination and other costs.  The Company expects these costs will all be incurred in the Printed Circuit Boards segment.

 
 

 
7.      Derivative Financial Instruments and Cash Flow Hedging Strategy

The Company uses foreign exchange forward contracts that are designated and qualify as cash flow hedges to manage certain of its foreign exchange rate risks.  The Company’s objective is to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements.  The Company’s foreign currency exposure arises from the transacting of business in a currency other than the U.S. dollar, which is the currency in which the Company incurs the majority of its costs.
 
The Company’s decision to enter into foreign exchange forward contracts is made after considering future use of foreign currencies, desired foreign exchange rate sensitivities and the foreign exchange rate environment.  Prior to entering into a hedge transaction, the Company formally documents the relationship between hedging instruments to be used and the hedged items, as well as the risk management objective for undertaking the hedge transactions.  The maximum term over which the Company hedges exposure to the exchange rate variability of future cash flows is generally less than one year.

The Company recognizes all such derivative contracts as either assets or liabilities in the balance sheet and measures those contracts at fair value (see Note 1) through adjustments to other comprehensive income, current earnings, or both, as appropriate.  Accumulated other comprehensive income as of June 30, 2010, included an unrecognized gain on derivatives of $101, and as of December 31, 2009, an unrecognized loss on derivatives of $327.
 
The Company records deferred gains and losses related to cash flow hedges based on the fair value of active derivative contracts on the reporting date, as determined using a market approach and Level 2 inputs (see Note 1).  As of June 30, 2010 and 2009, all of the Company’s derivative contracts were in the form of Chinese Renminbi (“RMB”) foreign exchange forward contracts which were designated and qualified as cash flow hedging instruments.  The following table summarizes the Company’s outstanding derivative contracts:

   
June 30,
2010
   
December 31,
 2009
 
Notional amount in thousands of Chinese RMB
    358,860       480,000  
Weighted average remaining maturity in months
    3.3       4.0  
Weighted average exchange rate to one U.S. Dollar
    6.7824       6.770  
Deferred gain (loss) measured at fair value
  $ 101     $ (327 )
Balance sheet classification of deferred gain (loss)
 
Prepaid expenses and other
   
Accrued and other liabilities
 

Amounts received or paid to settle foreign exchange forward contracts are recorded in cost of goods sold at the time of settlement.  For the three and six months ended June 30, 2010, losses of $226 and $404, respectively, were recorded in cost of goods sold related to the settlement of foreign exchange forward contracts.  For the three and six months ended June 30, 2009, losses of $1,243 and $2,003, respectively, were recorded in cost of goods sold related to the settlement of foreign exchange forward contracts.

 
 

 
8.         Stock-based Compensation

On April 15, 2010, the Company adopted the Viasystems Group, Inc. 2010 Equity Incentive Plan (the “2010 Plan”), which provides for grants of stock options, restricted stock awards and other stock-based awards to the Company’s employees and directors.  Subject to additions and adjustments, 3,000,000 shares are authorized for granting under the 2010 Plan.  On May 11, 2010, the Company made initial stock option grants representing 975,594 shares, and on June 23, 2010, the Company issued restricted stock awards representing 246,805 shares under the 2010 Plan.

Upon adoption of the 2010 Plan, the Company elected generally to discontinue the use of the 2003 Stock Option Plan (the “2003 Plan”) and intends to make no new awards under the 2003 Plan.  In addition, the Company reevaluated the estimated forfeiture rate for the 2003 Plan based on actual forfeitures to date, which resulted in a reduction of cost of goods sold of $261.

Stock compensation expense recognized in the condensed consolidated statements of operations was as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Cost of goods sold
  $ (185 )   $ 39     $ (158 )   $ 64  
Selling, general and administrative
    470       208       573       397  
    $ 285     $ 247     $ 415     $ 461  
 
Stock Options

The following table summarizes the stock option activity under both the 2003 Plan and the 2010 Plan from January 1, 2010, through June 30, 2010:

   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2009
    209,435     $ 150.99  
Granted
    975,594       21.88  
Exercised
    -       -  
Forfeited
    (10,957 )     91.78  
Outstanding at June 30, 2010
    1,174,072       44.23  
                 
Options exercisable at June 30, 2010
    199,630     $ 150.99  

 
 

 
There were no stock options granted during the six months ended June 30, 2009.  For options granted during the six months ended June 30, 2010, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions.

     
Expected life of options
 
4.34 years
Risk free interest rate
 
2.26%
Expected volatility of stock
 
59.66%
Expected dividend yield
 
None

The Company’s common stock was listed and began trading on the NASDAQ on February 17, 2010.  As there was insufficient historical data about the Company’s common stock, the Company estimated the expected volatility of the underlying shares based on the blended historical stock volatility of peer companies.  As there was insufficient historical data about the option activity under the 2010 Plan, the Company estimated the expected life of new option grants using the simplified method.
 
As of June 30, 2010, outstanding stock options under the 2003 Plan and 2010 Plan had an exercise price of $150.99 and $21.88, respectively.  The following table summarizes information regarding outstanding stock options under these plans as of June 30, 2010:

     
Outstanding
   
Exercisable
 
Exercise Price
   
Number of Options
   
Weighted average remaining contractual life
   
Weighted average exercise price
   
Number of options
   
Weighted average exercise price
 
$ 21.88       970,594       6.87     $ 21.88       -     $ 21.88  
$ 150.99       203,478       3.63       150.99       199,630       150.99  
          1,174,072       6.31     $ 44.23       199,630     $ 150.99  

Restricted Stock Awards

The following table summarizes restricted stock activity from January 1, 2010, through June 30, 2010:

   
Shares
   
Weighted
Average
Grant Date Per Share Fair Value
 
Outstanding at December 31, 2009
    -     $ -  
Granted
    246,805       16.62  
Vested
    -       -  
Forfeited
    -       -  
Outstanding at June 30, 2010
    246,805     $ 16.62  
                 

 
 

 
9.  Income Taxes

The Company’s income tax provision relates primarily to our profitable operations in China and Hong Kong.  Because of the substantial net operating loss carryforwards previously existing in the Company’s U.S. and other tax jurisdictions, the Company has not recognized certain income tax benefits in those jurisdictions.

In connection with the Merix Acquisition, the Company assumed liabilities for uncertain tax positions of $11,480, which primarily relate to the manufacturing facilities acquired in China (see Note 2).

10.      Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, are as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss)
  $ 7,077     $ (12,864 )   $ (4,866 )   $ (27,364 )
Change in fair value of derivatives, net of tax of $0
    308       1,157       428       3,891  
Comprehensive income (loss)
  $ 7,385     $ (11,707 )   $ (4,438 )   $ (23,473 )
 
11.      Business Segment Information

The Company operates in two segments: (i) Printed Circuit Boards and (ii) Assembly.  The Printed Circuit Boards segment consists of printed circuit board manufacturing facilities located in the United States and China.  These facilities manufacture double-sided and multi-layer printed circuit boards and backpanels.  The Assembly segment consists of assembly operations including backpanel assembly, printed circuit board assembly, cable assembly, custom enclosures, and full system assembly and testing.  The assembly operations are conducted in manufacturing facilities in China and Mexico.  Assets and liabilities of the Company’s corporate headquarters, along with those of its closed printed circuit board and assembly operations, have not been allocated and remain in “Other” for purpose of segment disclosures.  Operating expenses of the Company’s corporate headquarters are allocated to each segment based on a number of factors, including sales.

Total assets by segment are as follows:

   
June 30,
2010
   
December 31,
2009
 
Total assets:
           
Printed Circuit Boards
  $ 617,122     $ 382,238  
Assembly
    95,681       85,448  
Other
    34,603       189,552  
    $ 747,406     $ 657,238  

 
 

 
Net sales and operating income (loss) by segment, together with a reconciliation to income (loss) before income taxes, are as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales to external customers:
                       
Printed Circuit Boards
  $ 195,714     $ 77,664     $ 346,316     $ 155,285  
Assembly
    43,697       39,315       79,735       74,952  
Other
    -       3,582       -       13,761  
Total
  $ 239,411     $ 120,561     $ 426,051     $ 243,998  
                                 
Intersegment sales:
                               
Printed Circuit Boards
  $ 3,857     $ 2,559     $ 6,004     $ 4,993  
Assembly
    -       2       -       11  
Other
    -       178       -       363  
Total
  $ 3,857     $ 2,739     $ 6,004     $ 5,367  
                                 
Operating  income (loss):
                               
Printed Circuit Boards
  $ 18,330     $ 1,094     $ 27,757     $ (3,218 )
Assembly
    954       2,025       1,948       3,636  
Other
    (720 )     (8,096 )     (8,644 )     (8,745 )
Total
    18,564       (4,977 )     21,061       (8,327 )
                                 
Interest expense, net
    7,424       8,167       16,326       16,262  
Amortization of deferred financing costs
    513       516       979       1,032  
Loss on early extinguishment of debt
    -       -       706       -  
Other, net
    (110 )     224       405       346  
 Income (loss) before income taxes
  $ 10,737     $ (13,884 )   $ 2,645     $ (25,967 )


 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

We have made certain “forward-looking” statements in this Quarterly Report on Form 10-Q under the protection of the safe harbor of forward-looking statements within the meaning of the Private Securities Litigation Act.  Such forward-looking statements include those statements made in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations” that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities and effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “may,” “anticipates,” “intends,” “plans,” “estimates” or the negative thereof or other similar expressions or comparable terminology.

Forward-looking statements involve risks, uncertainties and assumptions and are not guarantees of future events and results.  Actual results may differ materially from anticipated results expressed or implied in these forward-looking statements.  You should not put undue reliance on any forward-looking statements.  We do not have any intention or obligation to update forward-looking statements after we file this Quarterly Report on Form 10-Q.

You should understand that many important factors could cause our results to differ materially from those expressed in forward-looking statements.  These factors include, but are not limited to, global economic conditions, fluctuations in our operating results and customer orders, our competitive environment, our reliance on our largest customers, risks associated with our international operations, failure to realize the expected benefits of the acquisition of Merix Corporation (“Merix”) and the incurrence of significant related costs, our ability to protect our patents and trade secrets, environmental laws and regulations, our substantial indebtedness and our ability to comply with the terms thereof and being controlled by VG Holdings, LLC (“VG Holdings”).  Please refer to the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2009, for additional factors that could materially affect our financial performance.

Overview

We are a leading worldwide provider of complex multi-layer printed circuit boards (“PCBs”) and electro-mechanical solutions (“E-M Solutions”).  PCBs serve as the “electronic backbone” of almost all electronic equipment, and our E-M Solutions products and services integrate PCBs and other components into finished or semi-finished electronic equipment, which include custom and standard metal enclosures, metal cabinets, metal racks and sub-racks, backplanes, cable assemblies and busbars.  As of June 30, 2010, we have ten manufacturing facilities, including two in the United States, and eight located outside the United States to take advantage of low cost, high quality manufacturing environments.  Of the manufacturing facilities located outside the United States, seven are in The People’s Republic of China (“China”) and one is in Mexico.  In order to support our customers’ local needs, we also maintain engineering and customer service centers in Hong Kong, China, the Netherlands, England, Canada, Mexico and the United States.

We are a supplier to over 800 manufacturers of original equipment in numerous end markets, including industry leaders Alcatel-Lucent SA, Autoliv, Inc., Bosch Group, Ciena Corporation, Cisco Systems, Inc., Continental AG, Dell Inc., Delphi Corporation, EMC Corporation, Ericsson AB, General Electric Company, Harris Communications, Hewlett-Packard Company, Huawei Technologies Co. Ltd., Motorola Inc., Rockwell Automation, Inc., Rockwell Collins, Siemens AG, Tellabs, Inc., TRW Automotive Holdings Corp. and Xyratex Ltd.  We have good working relationships with industry-leading contract manufacturers such as Benchmark Electronics, Inc., Celestica, Inc., Jabil Circuit, Inc. and Plexus Corp., and we supply PCBs and E-M Solutions products to these customers as well.

2010 Equity Incentive Plan

On April 15, 2010, we adopted the Viasystems Group, Inc. 2010 Equity Incentive Plan (the “2010 Plan”), which provides for grants of stock options, restricted stock awards and other stock-based awards to our employees and directors.  Subject to additions and adjustments, three million shares are authorized for granting under the 2010 Plan.  On May 11, 2010, we made initial stock option grants representing 975,594 shares, and on June 23, 2010, we issued restricted stock awards representing 246,805 shares under the 2010 Plan.  Going forward, we expect we will incur non-cash stock compensation expense of approximately $1.2 million per quarter through the first quarter 2013 as a result of these grants and awards.

Upon adoption of the 2010 Plan, we elected to generally discontinue the use of the 2003 Stock Option Plan (the “2003 Plan”) and intend to make no new awards under the 2003 Plan.

 
 

 
The Merix Acquisition

On February 16, 2010, we acquired Merix in a transaction pursuant to which Merix became a wholly owned subsidiary of our company (the “Merix Acquisition”).  Merix was a leading manufacturer of technologically advanced, multi-layer printed circuit boards with operations in the United States and China.  The Merix Acquisition increased our PCB manufacturing capacity by adding four additional PCB production facilities, added North American quick-turn services capability and added military and aerospace to our already diverse end-user markets.  The consideration paid in the Merix Acquisition was valued at $111.2 million and included cash of $35.3 million and common stock of our company representing, after giving effect to the Recapitalization Agreement (see below), approximately 19.4% of the total outstanding amount of our common stock immediately after the closing of the Merix Acquisition.  On a preliminary basis, we have recorded the assets acquired and liabilities assumed from Merix at their estimated fair values.

Recapitalization Agreement

In connection with the Merix Acquisition, on February 11, 2010, pursuant to an agreement dated October 6, 2009, (the “Recapitalization Agreement”), by and among us and affiliates of Hicks, Muse, Tate & Furst, Incorporated (“HMTF”), affiliates of GSC Recovery II, L.P. (“GSC”) and TCW Shared Opportunities Fund III, L.P. (“TCW” and together with HMTF and GSC, the “Funds”), we and the Funds approved a recapitalization of our company such that (i) each outstanding share of common stock was exchanged for 0.083647 shares of common stock, (ii) each outstanding share of our Mandatory Redeemable Class A Junior Preferred Stock (the “Class A Preferred”) was reclassified as, and converted into, 8.478683 shares of newly issued common stock and (iii) each outstanding share of our Redeemable Class B Senior Convertible Preferred Stock (the “Class B Preferred”) was reclassified as, and converted into, 1.416566 shares of newly issued common stock.

As a result of the completion of the recapitalization and the Merix Acquisition, (i) the holders of our common stock prior to the recapitalization received 2,415,266 shares of our common stock, (ii) the holders of our Class A Preferred prior to the recapitalization received 7,658,187 newly issued shares of our common stock, (iii) the holders of our Class B Preferred prior to the recapitalization received 6,028,258 newly issued shares of our common stock, (iv) the holders of the Merix common stock prior to the closing of the Merix Acquisition received 2,479,053 newly issued shares of our common stock and (v) the holders of Merix’ convertible notes prior to the closing of the Merix Acquisition received a cash payment of approximately $34.9 million and 1,398,251 newly issued shares of our common stock.  The total issued and outstanding common stock immediately after the closing of the Merix Acquisition was 19,979,015 shares.
 
New Stockholder Agreement

Pursuant to the terms of the Recapitalization Agreement, in connection with the closing of the Merix Acquisition, on February 11, 2010, we entered into a new stockholder agreement (the “2010 Stockholder Agreement”), by and among us and VG Holdings, LLC (“VG Holdings”) which was formed by the Funds and which, immediately after the closing of the Merix Acquisition, held approximately 77.8% of our common stock.  Under the terms of the 2010 Stockholder Agreement, VG Holdings has the right, subject to certain reductions, to designate up to five directors to serve on the board of directors of the Company.  Subject to certain exceptions, VG Holdings agreed not to sell any of our common stock held by VG Holdings for 180 days after the closing of the Merix Acquisition.  In addition, the 2010 Stockholder Agreement provides VG Holdings with certain registration rights related to its shares of our common stock.  The 2010 Stockholder Agreement will terminate on February 11, 2020.

Critical Accounting Policies

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions. We believe that some of our accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2009, our critical accounting policies included revenue recognition, accounts receivable and the allowance for doubtful accounts, inventories, long-lived assets, goodwill, income taxes, derivatives financial instruments and fair value measurements. These critical accounting policies are discussed more fully in our annual report on Form 10-K for the year ended December 31, 2009. We have added accounting for acquisitions as a critical accounting policy in 2010 as a result of the Merix Acquisition. There have been no other changes in the Company’s evaluation of our critical accounting policies since December 31, 2009.

Accounting for Acquisitions

The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their estimated fair value as of that date.  Extensive use of estimates and judgments are required to allocate the consideration paid in a business combination to the assets acquired and liabilities assumed.  If necessary, these estimates can be revised during an allocation period when information becomes available to further define and quantify the value of assets acquired and liabilities assumed.  The allocation period does not exceed a period of one-year from the date of acquisition.  To the extent additional information to refine the original allocation becomes available during the allocation period, the purchase price allocation would be adjusted accordingly. Should information become available after the allocation period, the effects would be reflected in operating results.
 
Industry Overview

Our results for the first half of 2010 reflect a strong year-over-year and sequential recovery from the global economic recession which began during 2008.  Sustained strong demand from our broad base of customers contributed to another quarter of sequential sales growth and improved profitability.  As the economy continues to recover, we expect to experience sustained inflationary pressures on our costs of materials and labor.  In addition, recent announcements by the Chinese government regarding their currency policy suggest the RMB may strengthen against the U.S. dollar, which would also have a negative impact on costs at our China based facilities.  As a result of these factors, we have been negotiating price increases with our customers to compensate for the actual and expected increases to our costs.

As a component manufacturer, our sales trends generally reflect the market conditions in the industries we serve.  In the automotive sector we are building on our base of industry leading customers by adding additional “next tier” customers and by adding capabilities to supply the expected demand for products related to the growing electric vehicles market.  In the telecommunications market, we have seen the market begin to stabilize in the western world and expect to see some growth in Asia as new technology continues to be rolled out.  In addition, we have successfully been able to cross-sell Assembly products to existing Printed Circuit Boards segment customers in this market; and continue to pursue cross-selling opportunities with new customers gained in our acquisition of Merix.  In the industrial & instrumentation, medical, consumer and other markets, our broad base of customers has remained stable.  In the computer and datacom market, we continue to see general market improvement, and continue to aggressively pursue new customers and programs from both our Printed Circuit Boards and Assembly segments.  In the military and aerospace market, we continue to pursue market share gains as a result of our strong new customer qualification activity.  While we believe the long-term growth prospects for our PCB and E-M Solutions products remain solid, economic uncertainty continues to exist, and our visibility to future demand trends remains limited.

 
 

 
Results of Operations

Three Months Ended June 30, 2010, Compared with the Three Months Ended June 30, 2009

Net Sales.  Net sales for the three months ended June 30, 2010, were $239.4 million, representing a $118.8 million, or 98.6%, increase from net sales during the same period in 2009. Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales increased by approximately $60.0 million, or 33.4%, for the three months ended June 30, 2010, as compared to the same period in 2009.  This increase is due to increased demand across all of our end-user markets, partially offset by a $3.6 million decline in sales resulting from the closure of our Milwaukee Facility in 2009.  While we are encouraged by this recovery in demand, our visibility to future trends remains limited.
 
Net sales by end-user market on a historical basis for the three months ended June 30, 2010 and 2009, and on a pro forma basis for the three months ended June 30, 2009, as if the Merix Acquisition had been completed on January 1, 2009, were as follows:

   
Historical
     
Pro
Forma
 
 
End-User Market (dollars in millions)
 
2010
       2009    
2009
   
 
Automotive
  $ 82.4     $ 43.0     $ 53.8  
Telecommunications                                                                     
    60.3       38.5       57.5  
Industrial & Instrumentation, Medical, Consumer and Other                                                                  
     55.5        28.9       39.2  
Computer and Datacommunications                                                                     
    31.1       10.2       20.5  
Military and Aerospace                                                                     
    10.1       -       8.4  
Total Net Sales                                                                     
  $ 239.4     $ 120.6     $ 179.4  

Our net sales of products for end use in the automotive market increased by approximately $39.4 million, or 91.6%, during the three months ended June 30, 2010, compared to the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for end use in this market increased by approximately $28.6 million, or 53.2%, for the three months ended June 30, 2010, as compared to the same period in 2009, which was driven by increased global demand from our automotive customers.

Net sales of products ultimately used in the telecommunications market increased by approximately $21.8 million, or 56.6%, for the quarter ended June 30, 2010, as compared to the quarter ended June 30, 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in this end market increased by approximately $2.8 million, or 4.9%, for the three months ended June 30, 2010, as compared to the same period in 2009.  Increased global demand in this market, as well as new customer and program wins, was partially offset by spending stimulus projects sponsored by the Chinese government in 2009 which did not recur in 2010 and programs with certain customers going end of life.

Net sales of products ultimately used in the industrial & instrumentation, medical, consumer and other markets, increased by approximately $26.6 million, or 92.0%, compared to the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for end use in this market increased by approximately $16.3 million, or 41.6%, for the three months ended June 30, 2010, as compared with the same period in 2009.  The increase in net sales was driven primarily by increased global demand, including wind power related programs, as well as new customer and program wins, partially offset by a $3.4 million decline in sales resulting from the closure of our Milwaukee Facility in May 2009.

Net sales of our products for use in the computer and datacommunications markets increased by approximately $20.9 million, or 204.9%, as compared to the same period in the prior year.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in this end market increased by approximately $10.6 million, or 51.7%, for the three months ended June 30, 2010, as compared with the same period in 2009, driven by increased global demand from our computer and datacommunication customers.

With the Merix Acquisition, the Company began supplying customers in the military and aerospace end-user market.  Sales to this end-user market were $10.1 million for the quarter ended June 30, 2010. Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in the military and aerospace end-user market increased by approximately $1.7 million, or 20.2%, for the three months ended June 30, 2010, as compared with the same period in 2009.

 
 

 
Net sales by segment on a historical basis for the three months ended June 30, 2010 and 2009, and on a pro forma basis for the three months ended June 30, 2009, as if the Merix Acquisition had been completed on January 1, 2009, were as follows:

   
Historical
   
Pro
Forma
 
Segment (dollars in millions)
 
2010
   
2009
   
2009
 
Printed Circuit Boards
  $ 199.6     $ 80.2     $ 139.0  
Assembly
    43.7       39.3       39.3  
Other
    -       3.8       3.8  
Eliminations
    (3.9 )     (2.7 )     (2.7 )
Total Net Sales
  $ 239.4     $ 120.6     $ 179.4  
 
Printed Circuit Boards segment net sales, including intersegment sales, for the three months ended June 30, 2010, increased by $119.4 million, or 148.8% to $199.6 million.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, Printed Circuit Boards net sales, including intersegment sales, for the three months ended June 30, 2010, increased by $60.6 million, or 43.6%.  The increase is a result of an increase in volume of more than 44.0% which was driven by increased demand across all end-user market segments.

Assembly segment net sales increased by $4.4 million, or 11.1%, to $43.7 million for the three months ended June 30, 2010, compared with the second quarter of 2009.  The increase was primarily the result of improved demand in wind power related programs in our industrial & instrumentation, medical, consumer and other end-user market and new customer and program wins in our telecommunications end-user market, partially offset by certain customer programs going end-of-life in the telecommunications end-user market.

Other sales relate to our Milwaukee Facility, which for segment reporting purposes, are included in “Other” as a result of its closure in May 2009.

Cost of Goods Sold.  Cost of goods sold, exclusive of items shown separately in the condensed consolidated statement of operations for the three months ended June 30, 2010, was $183.0 million, or 76.4% of consolidated net sales.  This represents an improvement of 4.3 percentage points from the 80.7% of consolidated net sales for the second quarter of 2009.

The costs of materials, labor and overhead in our Printed Circuit Boards segment can be affected by trends in global commodities prices and currency exchange rates, as well as other cost trends which can influence wage rates, electricity and diesel fuel costs in China. Economies of scale can help to offset any adverse trends in these costs.  Cost of goods sold for the second quarter of 2010, as compared to the same period in the prior year, was positively impacted by higher sales volumes and the positive effects of the restructuring that occurred during the first half of 2009.  With the successful implementation of our restructuring plans during 2009, going into 2010 our overhead costs and operating expenses were better aligned with sales demand.

Cost of goods sold in our Assembly segment relates primarily to component materials costs.  As a result, trends in sales volume for the segment drive similar trends in cost of goods sold.  Costs as a percentage of sales during the second quarter of 2010 were negatively impacted by product mix.

As a result of discussions with suppliers and changes in compensation laws in China, we have begun to experience significant pressures on materials cost and wages in both of our operating segments.

Selling, General and Administrative Costs.  Selling, general and administrative costs increased $9.1 million, or 79.8%, to $20.6 million for the three months ended June 30, 2010, compared to the same period in the prior year.  The increase relates primarily to costs associated with new manufacturing, sales and administrative sites acquired with the Merix Acquisition, additional incentive compensation expense, and $0.8 million of acquisition related costs recognized during the quarter.  As a percent of sales, selling, general and administrative costs were 8.6% and 9.5% for the three months ended June 30, 2010 and 2009, respectively.

 
 

 
Depreciation.  Depreciation expense for the three months ended June 30, 2010, was $14.4 million, including $13.3 million related to our Printed Circuit Boards segment and $1.1 million related to our Assembly segment.  Depreciation expense in our Printed Circuit Boards segment increased by $1.9 million compared to the same period last year primarily as a result of depreciation on fixed assets acquired through the Merix Acquisition, partially offset by lower depreciation at legacy Viasystems facilities due to reduced investments in new equipment during 2009. Depreciation expense in our Assembly segment decreased by approximately $0.1 million compared to the same period last year primarily due to reduced investments in new equipment in 2009.

Restructuring and Impairment.  In connection with the integration of the Merix business we identified potential annualized cost synergies of approximately $20.0 million; and during the three months ended June 30, 2010, we continued to implement certain actions to realize these cost synergies. These actions included staff reductions and the consolidation of certain administrative offices.  For the three months ended June 30, 2010, we recorded restructuring charges of approximately $2.4 million, which included approximately $2.3 million related to personnel and severance and approximately $0.1 million related to leases and other contractual commitments.  We expect we will incur additional restructuring charges in our Printed Circuit Boards segment of approximately $0.3 million in 2010 related to achieving synergies from the Merix Acquisition.
 
Operating Income (Loss).  Operating income of $18.6 million for the three months ended June 30, 2010, represents an increase of $23.6 million compared to an operating loss of $5.0 million during the three months ended June 30, 2009.  The primary sources of operating income (loss) for the three months ended June 30, 2010 and 2009, were as follows:

Source (dollars in millions)
 
2010
   
2009
 
Printed Circuit Boards segment
  $ 18.3     $ 1.1  
Assembly segment
    1.0       2.0  
Other
    (0.7 )     (8.1 )
Operating income (loss)
  $ 18.6     $ (5.0 )

Operating income from our Printed Circuit Boards segment increased by $17.2 million to $18.3 million for the three months ended June 30, 2010, compared to $1.1 million for the same period in the prior year.  The increase is primarily the result of increased sales volume and the positive effect of the restructuring activities undertaken in 2009, partially offset by increased selling, general and administrative expense and restructuring charges of $2.4 million related to the Merix Acquisition.

Operating income from our Assembly segment was $1.0 million for the three months ended June 30, 2010, compared to operating income of $2.0 million in the second quarter of 2009.  The decrease is primarily the result of product mix.

Operating loss in the “Other” segment for the second quarter of 2010 of $0.7 million relates primarily to professional fees associated with the Merix Acquisition.  The operating loss from the same quarter of the prior year relates to the Milwaukee Facility which was closed in 2009, as well as approximately $1.4 million in merger related professional fees.

Adjusted EBITDA.  We measure our performance primarily through our operating income.  In addition to our consolidated financial statements presented in accordance with U.S. GAAP, management uses certain non-U.S. GAAP financial measures, including “Adjusted EBITDA.”  Adjusted EBITDA is not a recognized financial measure under U.S. GAAP, and does not purport to be an alternative to operating income or an indicator of operating performance.  Adjusted EBITDA is presented to enhance an understanding of our operating results and is not intended to represent cash flows or results of operations.

Our board of directors, lenders and management use Adjusted EBITDA primarily as an additional measure of operating performance for matters including executive compensation and competitor comparisons.  In addition, the use of this non-U.S. GAAP measure provides an indication of our ability to service debt, and we consider it an appropriate measure to use because of our highly leveraged position.

Adjusted EBITDA has certain material limitations, primarily due to the exclusion of certain amounts that are material to our consolidated results of operations, such as interest expense, income tax expense and depreciation and amortization.  In addition, Adjusted EBITDA may differ from the Adjusted EBITDA calculations of other companies in our industry, limiting its usefulness as a comparative measure.

We use Adjusted EBITDA to provide meaningful supplemental information regarding our operating performance and profitability by excluding from EBITDA certain items that we believe are not indicative of our ongoing operating results or will not impact future operating cash flows as follows:

·  
Restructuring and Impairment Charges – which consist primarily of facility closures and other headcount reductions.  Historically, a significant amount of these restructuring charges are non-cash charges related to the write-down of property, plant and equipment to estimated net realizable value.  We exclude these restructuring and impairment charges to more clearly reflect our ongoing operating performance.

·  
Stock Compensation – non-cash charges associated with recognizing the fair value of stock-based compensation.  We exclude these charges to more clearly reflect a comparable year-over-year cash operating performance.

·  
Costs Relating to the Merger – professional fees and other non-recurring costs and expenses related to the Merix Acquisition.  We exclude these costs and expenses because they are not representative of our customary operating expenses.

 
 

 
Reconciliations of operating income to Adjusted EBITDA for the three months ended June 30, 2010 and 2009, were as follows:

   
Three Months Ended
June 30,
 
Source (dollars in millions)
 
2010
   
2009
 
Operating income (loss)
  $ 18.6     $ (5.0 )
Add-back
               
Depreciation and Amortization
    14.9       12.9  
Restructuring and impairment
    2.4       3.8  
Non-cash stock compensation expense.
    0.3       0.2  
Costs relating to the merger
    0.8       1.4  
Adjusted EBITDA
  $ 37.0     $ 13.3  

Adjusted EBITDA increased by $23.7 million, or 178.2%, primarily as a result of a 98.5% increase in net sales and a 4.3 percentage point improvement in cost of goods sold relative to consolidated net sales, partially offset by increased selling, general and administrative expense.

Interest Expense, net.  Interest expense, net of interest income, was $7.4 million for the three month period ended June 30, 2010, compared to $8.2 million of interest expense, net of interest income, for the quarter ended June 30, 2009.  Interest expense related to our 12.0% Senior Secured Notes due 2015 (the “2015 Notes”) is approximately $7.0 million in the quarter ended June 30, 2010, based on the $220 million principal, the 12.0% interest rate, and the amortization of the $8.2 million original issue discount.  The $0.8 million decrease in interest expense for the quarter ended June 30, 2010, as compared to the same period in the prior year, is primarily a result of an absence of interest expense associated with the Class A Preferred, which was exchanged for common stock during the first quarter of 2010, partially offset by the $1.7 million incremental quarterly interest cost associated with the 2015 Notes as compared to the 2011 Senior Subordinated 10.5% Notes which had been retired prior to the second quarter of 2010, and interest associated with indebtedness acquired as part of the Merix Acquisition.

Income Taxes.  Income tax expense of $3.7 million for the three months ended June 30, 2010, compares to an income tax benefit of $1.0 million for the quarter ended June 30, 2009.  Our income tax provision relates primarily to income tax expense in China and Hong Kong.  Because of the substantial net operating loss carryforwards previously existing in our U.S. and other tax jurisdictions, we have not recognized certain income tax benefits in those jurisdictions.

Results of Operations

Six Months Ended June 30, 2010, Compared with the Six Months Ended June 30, 2009

Net Sales.  Net sales for the six months ended June 30, 2010, were $426.1 million, representing a $182.1 million, or 74.6%, increase from net sales during the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales increased by approximately $104.4 million, or 28.7%, to $468.0 million for the six months ended June 30, 2010, as compared to the same period in 2009.  This increase is due to increased demand across all of our end-user markets, partially offset by a $13.8 million decline in sales resulting from the closure of our Milwaukee Facility in 2009.  While we are encouraged by this recovery in demand, our visibility to future trends remains limited.

Net sales by end-user market on a historical basis for the six months ended June 30, 2010 and 2009, and on a pro forma basis for the six months ended June 30, 2010 and 2009, as if the Merix Acquisition had been completed on January 1, 2009, were as follows:


   
Historical
   
Pro Forma
 
End-User Market (dollars in millions)
 
2010
   
2009
   
2010
   
2009
 
Automotive                                                                                  
  $ 154.8     $ 82.6     $ 163.0     $ 103.9  
Industrial & Instrumentation, Medical, Consumer and Other
    100.0       63.0       109.4       84.4  
Telecommunications                                                                                  
    99.6       78.1       111.2       116.8  
Computer and Datacommunications                                                                                  
    56.4       20.3       64.0       42.6  
Military and Aerospace                                                                                  
    15.3       -       20.4       15.9  
Total Net Sales                                                                                  
  $ 426.1     $ 244.0     $ 468.0     $ 363.6  

 
 

 
Our net sales of products for end use in the automotive market increased by approximately $72.2 million, or 87.4%, during the six months ended June 30, 2010, compared to the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for end use in this market increased by approximately $59.1 million, or 56.9%, to $163.0 million for the six months ended June 30, 2010, as compared to the same period in 2009, which was driven by increased global demand from our automotive customers.

Net sales of products ultimately used in the industrial & instrumentation, medical, consumer and other markets, increased by approximately $37.0 million, or 58.7%, compared to the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for end use in this market increased by approximately $25.0 million, or 29.6%, to $109.4 million for the six months ended June 30, 2010, as compared with the same period in 2009.  The increase in net sales was driven primarily by increased global demand, including wind power related programs, as well as new customer and program wins, partially offset by a $13.1 million decline in sales resulting from the closure of our Milwaukee Facility in May 2009.

Net sales of products ultimately used in the telecommunications market increased by approximately $21.5 million, or 27.5%, for the six months ended June 30, 2010, as compared to the same period in 2009.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in this end market decreased by approximately $5.6 million, or 4.8%, to $111.2 million for the six months ended June 30, 2010, as compared to the same period in 2009.  Spending stimulus projects sponsored by the Chinese government which had driven sales levels in the telecommunications market during the first half of 2009 did not recur in the first half of 2010.  In addition, $0.6 million of the decline is a result of the closure of our Milwaukee Facility in May 2009.

Net sales of our products for use in the computer and datacommunications markets increased by approximately $36.1 million, or 177.8%, as compared to the same period in the prior year.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in this end market increased by approximately $21.4 million, or 50.2%, to $64.0 million for the six months ended June 30, 2010, as compared with the same period in 2009, driven by increased global demand from our computer and data communication customers.

With the Merix Acquisition, the Company began supplying customers in the military and aerospace end-user market.  Sales to this market were $15.3 million for the six months ended June 30, 2010. Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, net sales of products for use in the military and aerospace end-user market increased by approximately $4.5 million, or 28.3%, to $20.4 million for the six months ended June 30, 2010, as compared with the same period in 2009.

Net sales by segment on a historical basis for the six months ended June 30, 2010 and 2009, and on a pro forma basis for the six months ended June 30, 2010 and 2009, as if the Merix Acquisition had been completed on January 1, 2009, were as follows:


   
Historical
   
Pro Forma
 
Segment (dollars in millions)
 
2010
   
2009
   
2010
   
2009
 
Printed Circuit Boards
  $ 352.3     $ 160.3     $ 394.2     $ 279.9  
Assembly
    79.8       75.0       79.8       75.0  
Other
    -       14.1       -       14.1  
Eliminations
    (6.0 )     (5.4 )     (6.0 )     (5.4 )
Total Net Sales
  $ 426.1     $ 244.0     $ 468.0     $ 363.6  

Printed Circuit Boards segment net sales, including intersegment sales, for the six months ended June 30, 2010, increased by $192.0 million, or 119.8%, to $352.3 million.  Assuming the Merix Acquisition had occurred on January 1, 2009, on a pro forma basis, Printed Circuit Boards net sales, including intersegment sales, for the six months ended June 30, 2010, increased by $114.3 million, or 40.8%. The increase is primarily a result of an increase in volume of more than 35.0% which was driven by increased demand across all end-user market segments.

 
 

 
Assembly segment net sales increased by $4.8 million, or 6.4%, to $79.8 million for the six months ended June 30, 2010, compared with the first half of 2009.  The increase was primarily the result of improved demand in wind power related programs in our industrial & instrumentation, medical, consumer and other end-user market, and new customer and program wins in our telecommunications end-user market,  partially offset by certain customer programs going end-of-life in the telecommunications end-user market.

Other sales relate to our Milwaukee Facility, which for segment reporting purposes, are included in “Other” as a result of its closure in May 2009.
 
Cost of Goods Sold.  Cost of goods sold, exclusive of items shown separately in the condensed consolidated statement of operations for the six months ended June 30, 2010, was $329.1 million, or 77.2%, of consolidated net sales.  This represents an improvement of 4.8 percentage points from the 82.0% of consolidated