Overview

Vishay Intertechnology, Inc. is an international manufacturer and supplier of discrete semiconductors and passive electronic components, including power MOSFETs, power integrated circuits, transistors, diodes, optoelectronic components, resistors, capacitors, inductors, strain gages, load cells, force measurement sensors, displacement sensors, and photoelastic sensors. Discrete semiconductors and passive electronic components manufactured by Vishay are used in virtually all types of electronic products, including those in the industrial, computer, automotive, consumer electronic products, telecommunications, military/aerospace, and medical industries.

Vishay operates in two product segments, Semiconductors and Passive Components. Semiconductors segment products include transistors, diodes, rectifiers, certain types of integrated circuits, and optoelectronic products. Passive Components segment products include resistors, capacitors, and inductors. We include in the Passive Components segment our Measurements Group, which manufactures and markets strain gages, load cells, transducers, instruments, and weighing systems whose core components are resistors that are sensitive to various types of mechanical stress. On October 27, 2009, Vishay announced that it intends to spin-off its measurements and foil resistors businesses into an independent, publicly-traded company to be named Vishay Precision Group, Inc.

As described in Note 1 to our consolidated condensed financial statements, effective January 1, 2009, Vishay adopted two accounting standards that require retrospective adjustment to previously issued financial statements. All prior period amounts have been adjusted to reflect the retrospective adoption of these new accounting standards. We have published unaudited selected financial data reflecting the retrospective adoption of these accounting standards, which was filed with the U.S. Securities and Exchange Commission as Exhibit 99 to our current report on Form 8-K dated April 13, 2009.

Revenues for the fiscal quarter ended September 26, 2009 were $525.3 million, compared to $739.1 million for the fiscal quarter ended September 27, 2008. The net earnings attributable to Vishay stockholders for the fiscal quarter ended September 26, 2009 were $2.3 million, or $0.01 per share, compared to a net loss attributable to Vishay stockholders of $301.3 million, or $1.62 per share for the fiscal quarter ended September 27, 2008.

The net earnings attributable to Vishay stockholders for the fiscal quarter ended September 26, 2009 was impacted by pretax charges for restructuring and severance costs of $3.5 million which, including its related tax effect, had a negative $0.02 per share effect on the net earnings attributable to Vishay stockholders.

The net loss attributable to Vishay stockholders for the fiscal quarter ended September 27, 2008 was substantially attributable to a noncash goodwill and indefinite-lived intangible assets impairment charge of $357.9 million ($328.8 million, net of tax). The third quarter 2008 results also include a pretax charge for restructuring and severance costs of $6.8 million, and $4.0 million of costs associated with Vishay's terminated tender offer for all outstanding shares of International Rectifier. On an after tax basis, these items and the goodwill impairment charge had a negative $1.79 per share effect on the net earnings (loss) attributable to Vishay stockholders.

Revenues for the nine fiscal months ended September 26, 2009 were $1,435.1 million, compared to $2,246.8 million for the nine fiscal months ended September 27, 2008. The net loss attributable to Vishay stockholders for the nine fiscal months ended September 26, 2009 was $85.7 million, or $0.46 per share, compared to a net loss attributable to Vishay stockholders of $1,079.9 million, or $5.79 per share for the nine fiscal months ended September 27, 2008.

The net loss attributable to Vishay stockholders for the nine fiscal months ended September 26, 2009 was impacted by pretax charges for restructuring and severance costs of $34.5 million and for an amended executive employment agreement of $57.8 million, partially offset by a gain of $28.2 million on settlement of matters related to the acquisition of International Rectifier's Power Control Systems business. These items and their related tax effects had a negative $0.31 per share effect on the net loss attributable to Vishay stockholders.

As previously disclosed, the results of operations for the fiscal quarter and nine fiscal months ended September 27, 2008 have been recast to include the retrospective effects of FSP APB 14-1 (ASC Topic 470-20). The retrospective application of this guidance decreased the reported loss from continuing operations for the quarter by $11.5 million ($0.06 per share) and increased the reported loss from continuing operations for the nine fiscal months ended September 27, 2008 by $0.8 million, or ($0.01) per share, respectively.

Vishay's results for the third fiscal quarter and nine fiscal months ended September 26, 2009 have been substantially impacted by the on-going global economic recession. Due to our quick reaction to the recession, we have mitigated the loss of volume that we experienced through significant reductions of fixed costs and inventories, we have continued to generate positive cash flows from operations, and we are once again profitable following several quarters of realizing losses. During the third quarter, our business has begun to recover from the global economic recession.

Financial Metrics

We utilize several financial metrics to evaluate the performance and assess the future direction of our business. These key financial metrics include net revenues, gross profit margin, end-of-period backlog, and the book-to-bill ratio. We also monitor changes in inventory turnover and average selling prices ("ASP").

Gross profit margin is computed as gross profit as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but also deducts certain other period costs, particularly losses on purchase commitments and inventory write-downs. Losses on purchase commitments and inventory write-downs have the impact of reducing gross profit margin in the period of the charge, but result in improved gross profit margins in subsequent periods by reducing costs of products sold as inventory is used. Gross profit margin is clearly a function of net revenues, but also reflects our cost management programs and our ability to contain fixed costs.

End-of-period backlog is one indicator of future revenues. We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. If demand falls below customers' forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, the backlog is not necessarily indicative of the results to be expected for future periods.

An important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period as compared with the product that we ship during that period. A book-to-bill ratio that is greater than one indicates that our backlog is building and that we are likely to see increasing revenues in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of declining demand and may foretell declining revenues.

We focus on our inventory turnover as a measure of how well we are managing our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. The inventory balance used for computation of this ratio includes tantalum inventories in excess of one year supply, which are classified as other assets in the consolidated balance sheet. See Note 14 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. A higher level of inventory turnover reflects more efficient use of our capital.

                                3rd Quarter      4th Quarter      1st Quarter      2nd Quarter      3rd Quarter
                                    2008             2008             2009             2009             2009
Net revenues                    $    739,092     $    575,442     $    449,511     $    460,258     $    525,304
Gross profit margin*                   21.6%            14.8%            15.1%            17.1%            19.9%
End-of-period backlog           $    619,000     $    459,700     $    400,400     $    432,800     $    502,200
Book-to-bill ratio                      0.92             0.74             0.89             1.06             1.11
Inventory turnover                      3.85             3.40             2.84             3.02             3.53
Change in ASP vs. prior quarter        -1.4%             0.0%            -1.0%            -1.1%            -0.8%


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* Gross profit margin for the fourth quarter of 2008 includes losses on adverse purchase commitments of $6.0 million.

See "Financial Metrics by Segment" below for net revenues, book-to-bill ratio, and gross profit margin broken out by segment.

As expected, net revenues for the third quarter of 2009 increased on a sequential basis, indicating signs of stabilization and macro economic recovery. Gross margins also increased sequentially, due to our restructuring and other cost cutting initiatives.

We have experienced a broad recovery in the book-to-bill ratio in the third quarter. The book-to-bill ratio improved to 1.11 from 1.06 in the second quarter of 2009. For the third quarter of 2009, the book-to-bill ratios for distributors and original equipment manufacturers ("OEM") were 1.17 and 1.06, respectively, versus ratios of 1.20 and 0.93, respectively, during the second quarter of 2009.

Growing shortages of supplies have helped to moderate price declines, although, as expected, we experienced some increasing pricing pressure for Semiconductors segment products. We expect continued pricing pressure for our Semiconductors segment products.

For the fourth quarter of 2009 we anticipate sales of between $530 million and $570 million, at improved margins supported by permanently reduced fixed costs.

Financial Metrics by Segment

The following table shows net revenues, book-to-bill ratio, and gross profit
margin broken out by segment for the five quarters beginning with the third
quarter of 2008 through the third quarter of 2009 (dollars in thousands):

                            3rd Quarter      4th Quarter      1st Quarter      2nd Quarter      3rd Quarter
                                2008             2008             2009             2009             2009
Semiconductors
Net revenues                $    392,934     $    272,669     $    198,995     $    227,347     $    276,745

Book-to-bill ratio                  0.85             0.59             0.96             1.14             1.13

Gross profit margin(1)             21.8%            11.5%             6.6%            14.4%            16.5%

Passive Components
Net revenues                $    346,158     $    302,773     $    250,516     $    232,911     $    248,559

Book-to-bill ratio                  0.98             0.88             0.84             0.97             1.09

Gross profit margin(2)             21.4%            17.8%            21.9%            19.7%            23.6%


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(1) Gross profit margin for the Semiconductors segment for the fourth quarter of 2008 includes losses on adverse purchase commitments of $3.7 million.

(2) Gross profit margin for the Passive Components segment for the fourth quarter of 2008 includes losses on adverse purchase commitments of $2.3 million.

As part of our growth strategy, we seek to expand through targeted and synergistic acquisitions of other manufacturers of electronic components that have established positions in major markets, reputations for product quality and reliability, and product lines with which we have substantial marketing and technical expertise. This includes exploring opportunities to acquire smaller targets to gain market share, effectively penetrating different geographic markets, enhancing new product development, rounding out our product lines, or growing our high margin niche market businesses. Acquisitions of passive components businesses would likely be made to strengthen and broaden our position as a specialty product supplier; acquisitions of discrete semiconductor businesses would be made to increase market share and to exploit synergies.

Due to improving economic conditions, our strong cash position, and our ability to generate free cash, we are returning to our strategy of exploring synergistic acquisition opportunities.

Proposed Spin-off of Vishay Precision Group, Inc.

On October 27, 2009, Vishay announced that it intends to spin-off its measurements and foil resistors businesses into an independent, publicly-traded company to be named Vishay Precision Group, Inc. The spin-off is expected to take the form of a tax-free stock dividend to Vishay's stockholders and it is anticipated that holders of Vishay common stock will receive common stock of Vishay Precision Group and holders of Vishay Class B common stock will receive Class B common stock of Vishay Precision Group. Vishay has not yet finalized details of the spin-off.

The spin-off would enable the management teams of both companies to better focus on the unique issues facing their respective businesses and permit each company to pursue its own business plan, resource allocation and growth strategies, as well as attract the best personnel through compensation that is more closely tied to the performance of each company. If the spin-off is completed, Vishay is expected to be a more competitive, pure-play discrete electronic components company.

Vishay's Board and management team, in consultation with independent financial and legal advisors, are working on the requirements to finalize and execute the spin-off and expect the spin-off to occur in the second quarter of 2010. The spin-off will be subject to a number of conditions, including, among other things: final approval of Vishay's Board of Directors, favorable market conditions, receipt of U.S. and Israeli tax rulings or opinions, compliance with applicable rules and regulations of the U.S. Securities and Exchange Commission (SEC) and other customary conditions.

We place a strong emphasis on reducing our costs. Since 2001, we have been implementing aggressive cost reduction programs to enhance our competitiveness, particularly in light of the erosion of average selling prices of established products that is typical of the industry.

Historically, our primary cost reduction technique was through the transfer of production to the extent possible from high-labor-cost markets, such as the United States and Western Europe, to lower-labor-cost markets, such as the Czech Republic, Israel, India, Malaysia, Mexico, the People's Republic of China, and the Philippines. The percentage of our total headcount in lower-labor-cost countries is a measure of the extent to which we are successful in implementing this program. This percentage was 73.9% at the end of the third quarter of 2009 as compared to 73.1% at the end of the second quarter of 2009, 74.6% at the end of 2008, and 57% when this program began in 2001. Our target is to have between 75% and 80% of our headcount in lower-labor-cost countries. As we approach, and then maintain, this target headcount allocation, our cost reduction efforts are more directed towards consolidating facilities and other cost cutting measures to control fixed costs, rather than transfers of production to lower-labor-cost markets.

These production transfers, facility consolidations, and other long-term cost cutting measures require us to initially incur significant severance and other exit costs and to record losses on excess buildings and equipment. We anticipate that we will realize the benefits of our restructuring through lower labor costs and other operating expenses in future periods. Between 2001 and 2008, we recorded, in the consolidated statements of operations, restructuring and severance costs totaling $285 million and related asset write-downs totaling $86 million in order to reduce our cost structure going forward. We have realized, and expect to continue to realize, significant annual net cost savings associated with these restructuring activities.

A primary tenet of our business strategy is the expansion within the electronic components industry through acquisitions. In addition to the objectives of broadening our product portfolio and increasing our market reach, our acquisition strategy includes a focus on reducing selling, general, and administrative expenses through the integration or elimination of redundant sales offices and administrative functions at acquired companies, and achieving significant production cost savings through the transfer and expansion of manufacturing operations to countries where we can benefit from lower labor costs and available tax and other government-sponsored incentives. These plant closure and employee termination costs subsequent to acquisitions are also integral to our cost reduction programs, although these amounts were not significant in the years ended December 31, 2008, 2007, and 2006.

Under previous accounting standards, plant closure and employee termination costs that we incur in connection with our acquisition activities are included in the costs of our acquisitions and do not affect earnings or losses on our consolidated statement of operations. Statement of Financial Accounting Standards ("SFAS") No. 141-R, Business Combinations (ASC Topic 805), which Vishay adopted effective January 1, 2009, requires such costs to be recorded as expenses in our consolidated statement of operations, as such expenses are incurred.

We evaluate potential restructuring projects based on an expected payback period. The payback period represents the number of years of annual cost savings necessary to recover the initial cash outlay for severance and other exit costs plus the noncash expenses recognized for asset write-downs. In general, a restructuring project must have a payback of less than 3 years to be considered beneficial. On average, our restructuring projects have a payback of between 1 and 1.5 years.

The perpetual erosion of average selling prices of established products that is typical of our industry makes it imperative that we continually seek ways to reduce our costs. Furthermore, our long-term strategy is to grow through the integration of acquired businesses, and the accounting standards for these integration costs has changed effective January 1, 2009. For these reasons, we expect to have some level of restructuring expenses each period for the foreseeable future.

We expect these restructuring programs to result in higher profitability through better gross margins and lower selling, general, and administrative expenses. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Item 1A, "Risk Factors," of our Annual Report on Form 10-K.

In response to the economic downturn during the latter half of 2008, we undertook significant measures to cut costs. This included a strict adaptation of manufacturing capacity to sellable volume, limiting the building of product for inventory. It also included permanent employee terminations, temporary layoffs and shutdowns, and minimizing the use of foundries and subcontractors in order to maximize the load of our owned facilities.

We incurred restructuring and severance costs of $28.6 million during the fourth quarter of 2008, and incurred additional restructuring and severance costs of $34.5 million during the first nine months of 2009. These costs were incurred as part of our program to reduce manufacturing and SG&A fixed costs in 2009 by $200 million compared to the year ended December 31, 2008. Our cost reduction programs are ahead of schedule. Our fixed costs in the third quarter of 2009 decreased by $49 million compared to the third quarter of 2008, and our fixed costs for the nine fiscal months ended September 26, 2009 decreased by $173 million versus the comparable prior year period. Of these amounts, approximately 47% reduced costs of products sold and approximately 53% reduced SG&A expenses.

Certain components of our costs, while fixed in that they do not vary with changes in volume, are subject to volatility. This would include, for example, the effect of certain assets that are marked-to-market through the statement of operations, and certain transactions in foreign currencies. Furthermore, as described above, some of our cost reductions realized in the first nine months of 2009 are the result of temporary measures, which we intend to replace with more permanent actions. Accordingly, there is no assurance that all of the fixed cost reductions achieved in the first nine months of 2009 will be maintained in the last three months of the year or in 2010.

We expect total restructuring and severance costs for the full year of 2009 to be less than $50 million. Including unpaid balances from 2008 programs, we expect the 2009 cash outlay for restructuring and severance programs to be approximately $50 million, with additional amounts to be paid in future periods.

Our 2009 restructuring programs include headcount reductions in virtually every facility and every country in which we operate, as well as selected plant closures. In 2009, we plan to close two facilities in the United States and consolidate manufacturing for these product lines into other facilities. We also are consolidating our optoelectronics packaging facilities in Asia. We have successfully closed a film capacitor plant in Shanghai during the third quarter. Production on existing equipment in Loni, India will be increased to replace the production volume of the closed plant.

While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively impact our customer service or our ability to further develop products and processes. Our cost management plans also include expansion of certain critical capacities, which we hope will reduce average materials and processing costs.

Certain metals used in the manufacture of our products are traded on active markets, and can be subject to significant price volatility. Our policy is to enter into short-term commitments to purchase defined portions of annual consumption of these metals if market prices decline below budget. For much of 2008, these metals were trading near all-time record-high prices. During the fourth quarter of 2008, as metals prices declined significantly from these record-high prices, we entered into commitments to purchase a portion of our estimated 2009 metals needs, principally for copper and palladium. After entering into these commitments, the market prices for these metals continued to decline. As a result, we recorded losses on these adverse purchase commitments during the fourth quarter of 2008 totaling $6.0 million.

Foreign Currency Translation

We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. While we have in the past used forward exchange contracts to hedge a portion of our projected cash flows from these exposures, we generally have not done so in recent periods.

Statement of Financial Accounting Standards ("SFAS") No. 52 (ASC Topic 830) requires that entities identify the "functional currency" of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary's functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign subsidiary that is a direct and integral component or extension of the parent company's operations generally would have the parent company's currency as its functional currency. Vishay has both situations among its subsidiaries.

Foreign Subsidiaries which use the Local Currency as the Functional Currency

We finance our operations in Europe and certain locations in Asia in local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is . . .