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VIAS > SEC Filings for VIAS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for VIASYSTEMS GROUP INC


8-Nov-2012

Quarterly Report


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 (the "Report").

We have made certain "forward-looking" statements in this Report under the protection of the safe harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform 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 Report, except to the extent required by law.

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, our ability to protect our patents and trade secrets, environmental laws and regulations, our substantial indebtedness, risks associated with integration of DDi Corp. and being controlled by VG Holdings,
LLC. Please refer to the "Risk Factors" section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 2011, for additional factors that could materially affect our financial performance.

Recent Developments

Guangzhou Fire

On September 5, 2012, we experienced a fire contained to a part of one building on the campus of our PCB manufacturing facility in Guangzhou, China which resulted in damage to inventory and fixed assets and has temporarily reduced the facility's manufacturing capacity. As of the date of this Report, we have restored a portion of the lost capacity and expect the facility's capacity will be fully restored by the end of 2012, pending delivery and installation of certain replacement equipment. While we work to restore the lost capacity, where possible, we have shifted production of affected products to our other PCB facilities.

The DDi Acquisition

On May 31, 2012, we acquired DDi Corp. ("DDi") in an all cash purchase transaction pursuant to which DDi became our wholly owned subsidiary (the "DDi Acquisition"). DDi was a leading manufacturer of technologically advanced, multi-layer printed circuit boards with operations in the United States and Canada. The DDi Acquisition increased our PCB manufacturing capacity by adding seven additional PCB production facilities, added flexible circuit manufacturing capabilities and enhanced our North American quick-turn services capability. The total consideration we paid in the merger was $282.0 million. On a preliminary basis, we have recorded the assets acquired and liabilities assumed from DDi at their estimated fair values.


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Issuance of Senior Secured Notes due 2019 and Redemption of Senior Secured Notes due 2015

On April 30, 2012, our subsidiary, Viasystems, Inc., completed a private offering of $550.0 million of 7.875% Senior Secured Notes due 2019 (the "2019 Notes"). On May 30, 2012, Viasystems, Inc. redeemed all of its outstanding $220.0 million aggregate principal amount of 12.0% senior secured notes due 2015 (the "2015 Notes") at a redemption price of 107.4% plus accrued interest. In connection with the redemption of the 2015 Notes, we incurred a loss on the early extinguishment of debt of $24.2 million, which included a call premium of $16.3 million, the write-off of unamortized original issue discount of $4.1 million and the write-off of unamortized deferred financing fees of $3.8 million.

Company Overview

We are a leading worldwide provider of complex multi-layer rigid, flexible and rigid-flex 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, and busbars. The components we manufacture include, or can be found in, a wide variety of commercial products, including automotive engine controls, hybrid converters, automotive electronics for navigation, safety, entertainment and anti-lock braking systems, telecommunications switching equipment, data networking equipment, computer storage equipment, semi-conductor test equipment, wind and solar energy applications, off-shore drilling equipment, flight control systems, military communications applications and complex industrial, medical and other technical instruments.

We have fifteen manufacturing facilities, including eight in the United States and seven located outside of the United States that allow us to take advantage of low cost, high quality manufacturing environments, while serving a broad base of customers around the globe. Our PCB products are produced in our eight domestic facilities, three of our five facilities in China and our one facility in Canada. Our E-M Solutions products and services are provided from our other two facilities in China and our one facility in Mexico. In addition to our manufacturing facilities, in order to support our customers' local needs, we maintain engineering and customer service centers in Hong Kong, China, the Netherlands, England, Canada, Mexico and the United States. We operate our business in two segments: Printed Circuit Boards, which includes our PCB products, and Assembly, which includes our E-M Solutions products and services.

We are a supplier to more than 1,000 original equipment manufacturers ("OEMs") and contract electronic manufacturers ("CEMs") in numerous end markets. Our OEM customers include industry leaders such as Agilent Technologies, Inc., Alcatel-Lucent SA, Apple Inc., Autoliv, Inc., BAE Systems, Inc., Bosch Group, Broadcom Corporation, Ciena Corporation, Cisco Systems, Inc., Continental AG, Dell Inc., Danahar Corporation, Ericsson AB, General Electric Company, Goodrich Corporation, Harris Communications, Hitachi, Ltd., Huawei Technologies Co. Ltd., L-3 Communications Holdings, Inc., Motorola Inc., NetApp, Inc., Q-Logic Corporation, Qualcomm Incorporated, Raytheon Company, Rockwell Automation, Inc., Rockwell Collins, Tellabs, Inc., TRW Automotive Holdings Corp., and Xyratex Ltd. In addition, we have good working relationships with industry-leading CEMs 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.


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Business Overview

As a component manufacturer, our sales trends generally reflect the market conditions in the industries we serve. In the automotive sector, we are adding capacity at our principal automotive qualified PCB manufacturing facilities
i) as a result the closure of our manufacturing facility in Huizhou, China during the third quarter of 2012 and ii) in anticipation of long-term demand trends in the global automotive electronics market, which according to Prismark Partners LLC, a leading PCB industry research firm, is expected to grow at a compound annual growth rate of 7.7% from 2011 to 2016. Market growth of automotive electronics is expected to be driven primarily by growth in worldwide vehicle sales, particularly to customers in emerging markets such as China, increased sales of hybrid and electric vehicles, and increased electronic content per vehicle. In the industrial & instrumentation market, we have experienced increased demand from our broad base of customers, and we expect sales trends in this diverse market will follow global economic trends. The telecommunications end-user market remains dynamic as the customers we supply produce a mixture of products which include both new cutting edge applications as well as more mature products with varying levels of demand. We continue to try to position ourselves to take advantage of growth opportunities related to the introduction of next generation wireless technology standards, but this portion of the market has been slow to develop. In the computer and datacommunications end market, we continue to pursue new customers and programs for both our Printed Circuit Boards and Assembly segments, especially in the high-end server and storage sectors. In the military and aerospace market, we continue to pursue market share gains as a result of continuing customer qualification activity; however, overall demand trends in this market have been negatively impacted by the ongoing budget debate in Washington. 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 and pricing pressures remains limited.

With the acquisition of DDi, we have begun to market our high-volume, low-price China PCB manufacturing facilities to legacy DDi customers who had primarily purchased quick-turn PCBs as part of prototype development programs. At the same time, we have begun to market our newly acquired flexible circuit capabilities and expanded North America quick-turn capabilities to legacy Viasystems customers. In addition, we have begun to integrate the newly acquired North America PCB facilities into our global PCB operations and have, for example, been able to manage capacity constraints at one facility by shifting production to another.

Results of Operations

Three Months Ended September 30, 2012, Compared with the Three Months Ended September 30, 2011

Net Sales. Net sales for the three months ended September 30, 2012, were $327.4 million, representing a $48.5 million, or 17.4%, increase from net sales during the same period in 2011. Driving this increase were sales from manufacturing and distribution facilities acquired in the DDi Acquisition and increased sales at legacy Viasystems Assembly facilities, partially offset by decreased sales at legacy Viasystems Printed Circuit Boards facilities. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales decreased by approximately $17.6 million or 5.1% to $327.4 million for the three months ended September 30, 2012, as compared with the same period in 2011.

Net sales by end-user market for the three months ended September 30, 2012 and 2011, on i) a historical basis and ii) a pro forma basis as if the DDi Acquisition had been completed on January 1, 2011, were as follows:

                                                   Historical           Pro Forma
       End-User Market (dollars in millions)    2012        2011          2011
       Automotive                              $  92.7     $ 113.5     $     114.3
       Industrial & Instrumentation               95.5        67.4            87.8
       Computer and Datacommunications            57.7        40.3            54.1
       Telecommunications                         50.3        47.5            55.5
       Military and Aerospace                     31.2        10.1            33.3

       Total Net Sales                         $ 327.4     $ 278.8     $     345.0


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Our net sales of products for end use in the automotive market decreased by approximately $20.8 million, or 18.3%, during the three months ended September 30, 2012, compared with the same period in 2011. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales of products for use in this market decreased by approximately $21.6 million, or 18.9%, to $92.7 million for the three months ended September 30, 2012, as compared with the same period in 2011. The decrease was a result of reduced global demand from our automotive customers, reduced sales to a customer that is transitioning a portion of their business to other suppliers and production delays as a result of a fire at one of our principal automotive PCB manufacturing facilities during the quarter.

Net sales of products ultimately used in the industrial & instrumentation markets for the three months ended September 30, 2012, increased by approximately $28.1 million, or 41.7%, compared with the same period in 2011. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales of products for use in this market increased by approximately $7.7 million, or 8.8%, to $95.5 million for the three months ended September 30, 2012, as compared with the same period in 2011. The increase in net sales was driven primarily by increased global demand across our broad base of existing industrial and instrumentation customers, including wind power related programs and new customer and program wins, partially offset by a decline in sales in elevator controls related programs.

During the third quarter of 2012, net sales of our products for use in the computer and datacommunications market increased by approximately $17.4 million, or 43.0%, as compared with the same period in the prior year. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales of products for use in this market increased by approximately $3.6 million, or 6.6%, to $57.7 million for the three months ended September 30, 2012, as compared with the same period in 2011. The increase was driven by increased demand and sales associated with new customers and programs.

Net sales of products ultimately used in the telecommunications market increased by approximately $2.8 million, or 5.8%, for the quarter ended September 30, 2012, as compared with the quarter ended September 30, 2011. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales of products for use in this market decreased by approximately $5.2 million, or 9.5%, to $50.3 million for the three months ended September 30, 2012, as compared with the same period in 2011. The sales decline was primarily a result of reduced demand for certain programs we supply, partially offset by new program wins.

Net sales to the military and aerospace end-user market increased $21.1 million, or 209.9%, to $31.2 million for the quarter ended September 30, 2012, as compared with the quarter ended September 30, 2011. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, net sales of products for use in this market decreased by approximately $2.1 million, or 6.3%, to $31.2 million for the three months ended September 30, 2012, as compared with the same period in 2011. The pro forma sales decline is a result of ongoing budget pressures on U.S. government defense spending which has continued to hamper demand and apply downward pricing pressures.

Net sales by segment for the three months ended September 30, 2012 and 2011, were as follows:

                                               Historical            Pro Forma
          Segment (dollars in millions)    2012         2011           2011
          Printed Circuit Boards          $ 271.3      $ 226.6      $     292.8
          Assembly                           57.9         54.4             54.4
          Eliminations                       (1.8 )       (2.2 )           (2.2 )

          Total Net Sales                 $ 327.4      $ 278.8      $     345.0

Printed Circuit Boards segment net sales, including intersegment sales, for the three months ended September 30, 2012, increased by $44.7 million, or 19.7%, to $271.3 million. Assuming the DDi Acquisition had occurred on January 1, 2011, on a pro forma basis, Printed Circuit Boards segment net sales decreased by approximately $21.5 million, or 7.3%, to $271.3 million for the three months ended September 30, 2012, as compared with the same period in 2011. The decrease was a result of decreases in net sales in our automotive, telecommunications and military and aerospace end-user markets, partially offset by increased net sales in our computer and datacommunications and industrial & instrumentation end-user markets.


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Assembly segment net sales increased by $3.5 million, or 6.4%, to $57.9 million for the three months ended September 30, 2012, compared with the third quarter of 2011. The increase was primarily the result of improved demand in wind power and industrial manufacturing equipment programs in our industrial & instrumentation end-user market, partially offset by reduced demand in our computer and datacommunications end-user market and reduced demand in elevator controls related programs in our industrial & instrumentation market.

Cost of Goods Sold. Cost of goods sold, exclusive of items shown separately in the condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2012, was $262.0 million, or 80.0%, of consolidated net sales. This represents a 1.4 percentage point increase from the 78.6% of consolidated net sales for the third quarter of 2011. Cost of goods sold as a percentage of net sales was negatively impacted during the quarter by
i) costs of approximately $3.0 million related to manufacturing inefficiencies at our Guangzhou, China manufacturing facility as a result of a fire in September 2012 which damaged a portion of the facility and interrupted production and ii) a $0.5 million charge to write off inventory which was impaired as a result of the closure of our Huizhou manufacturing facility.

The costs of materials, labor and overhead in our Printed Circuit Boards segment can be impacted by trends in global commodities prices and currency exchange rates, as well as other cost trends which can impact minimum wage rates, electricity and diesel fuel costs in China. Economies of scale can help to offset any adverse trends in these costs. Our results for the three months ended September 30, 2012, reflect increased incentive compensation costs and a stabilization of material and labor costs which had increased in 2011. With anticipated changes in minimum wage laws in China, we expect our labor costs may increase over the next twelve months. As part of our ongoing efforts to better align overhead costs and operating expenses with market demand, during the third quarter of 2012, we gave notice and began to reduce staffing at certain of our PCB manufacturing facilities in China. We expect these headcount reductions will be completed by the end of 2012.

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 quarter were negatively impacted by increased overhead costs at our Juarez, Mexico facility as it prepares for new product introductions at its new larger location.

Selling, General and Administrative Costs. Selling, general and administrative costs increased $6.4 million, or 30.3%, to $27.6 million for the three months ended September 30, 2012, compared to the same period in the prior year. The increase in selling, general and administrative costs is primarily a result of costs associated with manufacturing and administrative sites acquired in the DDi Acquisition and increased non-cash stock compensation expense.

Depreciation. Depreciation expense for the three months ended September 30, 2012, was $22.2 million, including $21.1 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 approximately $5.5 million, or 35.3%, compared to the same period last year primarily as a result of increased investments in new equipment during the past twelve months and the effect of additional depreciation during the period on fixed assets acquired in the DDi Acquisition. Depreciation expense in our Assembly segment increased by approximately $0.2 million primarily as a result of investments in the fourth quarter of 2011 to relocate and expand our Juarez, Mexico facility.


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Restructuring and Impairment. During 2012, the Company initiated certain restructuring activities as a result of i) the expiration of the lease of its Huizhou China PCB manufacturing facility, ii) the integration of the DDi business it acquired in May 2012 and iii) to achieve general cost savings as part of the Company's ongoing efforts to align capacity, overhead costs and operating expenses with market demand. During the three months ended September 30, 2012, the Company recognized $9.4 million and $0.1 million of restructuring and impairment charges in its Printed Circuit Boards segment and Assembly segment, respectively. Restructuring and impairment charges incurred in the Printed Circuit Boards segment during the period included i) $2.0 million related to the closure of our Huizhou facility, ii) $0.5 million associated with integrating the newly acquired DDi business, iii) $5.9 million related to general cost savings and iv) a $0.9 million impairment charge related to inventory destroyed in a fire at our Guangzhou PCB facility. Restructuring and impairment charges incurred in the Assembly segment during the period related to general cost savings activities which primarily included the closure of our Qingdao, China facility.

Huizhou PCB Facility Closure

The district where our Huizhou facility is located is being redeveloped away from industrial use, and we were unable to renew our lease of the facility beyond its December 31, 2012, expiration date. During the third quarter of 2012, we completed the process of transitioning this facility's customers to our other China PCB manufacturing facilities and the Huizhou facility ceased operations. We expect that the total related restructuring and impairment charges will not exceed $12.0 million, of which approximately $9.7 million will relate to personnel and severance, $1.3 million will relate to the impairment of fixed assets and $1.0 million will relate to lease terminations and other costs.

Integration of the DDi Business

In connection with the integration of the DDi business, we identified potential annualized cost synergies of approximately $10.0 million, and during the second and third quarter of 2012 we initiated certain actions to realize these cost synergies. These actions are primarily expected to include staff reductions, and we expect that the total related restructuring charges will not exceed $2.0 million. In addition, at the time of the DDi Acquisition, DDi was in the process of building a new PCB manufacturing facility in Anaheim, California with plans to relocate its existing Anaheim operations from a leased facility. We expect the new facility will be completed and the Anaheim operations will be relocated during the first quarter of 2013. In connection with the relocation of the Anaheim operations, we expect to incur restructuring costs in our Printed Circuit Boards segment of approximately $1.0 million.

General Cost Savings Activities

During the third quarter of 2012, the Company gave notice it would reduce staffing at certain of its PCB manufacturing facilities in China during the remainder of 2012 in order to better align overhead costs and operating expenses with market demand for its PCB products. Total related severance charges are expected to be approximately $6.0 million.

Our Qingdao, China facility had primarily operated as a satellite facility supporting the operations of our E-M Solutions facility in Shanghai, China. In order to achieve operational efficiencies and cost reductions, we consolidated the operations of the Qingdao facility into our other E-M Solutions facilities in China. The Qingdao facility ceased operations in July 2012, and the facility was decommissioned and returned to its landlord during the third quarter of 2012. Total related restructuring and impairment charges were $0.6 million which primarily related to personnel and severance costs. The Company does not expect to incur significant additional costs related to the closure of the Qingdao facility.

Guangzhou Fire

On September 5, 2012, the Company experienced a fire contained to a part of one building on the campus of its PCB manufacturing facility in Guangzhou, China which resulted in the loss of inventory with a carrying value of approximately $4.7 million and property, plant and equipment with a net book value of approximately $2.0 million. The Company maintains insurance coverage for property losses caused by fire which is subject to certain deductibles. The Company expects it will recover the full value of machinery and equipment destroyed, and as of September 30, 2012, recorded an impairment charge of $0.9 million for amount of the inventory loss which it expects will not be covered by insurance.


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Operating Income. Operating income of $4.4 million for the three months ended September 30, 2012, represents a decrease of $17.0 million compared to operating income of $21.4 million for the three months ended September 30, 2011. The primary sources of operating income (loss) for the three months ended September 30, 2012 and 2011, were as follows:

                 Source (dollars in millions)      2012        2011
                 Printed Circuit Boards segment   $  3.0      $ 20.8
                 Assembly segment                    1.6         0.7
                 Other                              (0.2 )      (0.1 )

                 Operating income                 $  4.4      $ 21.4

Operating income from our Printed Circuit Boards segment decreased by $17.8 million to $3.0 million for the three months ended September 30, 2012, compared to $20.8 million for the same period in the prior year. The decrease is primarily the result of increased restructuring and impairment charges, lower cost of goods sold relative to sales and increased selling, general and administrative costs and depreciation costs partially offset by higher sales volumes.

Operating income from our Assembly segment was $1.6 million for the three months ended September 30, 2012, compared to $0.7 million in the third quarter of 2011. The increase is primarily the result of increased sales volumes, partially . . .

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