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VIAS > SEC Filings for VIAS > Form 10-K on 14-Feb-2014All Recent SEC Filings

Show all filings for VIASYSTEMS GROUP INC

Form 10-K for VIASYSTEMS GROUP INC


14-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes included elsewhere in this Report. The following discussion contains forward-looking statements based upon current expectations and related to future events, and our future financial performance involves risks and uncertainties. We based these statements on assumptions we consider reasonable. Actual results and the timing of events could differ materially from those discussed in the forward-looking statements; see "Cautionary Statements Concerning Forward-Looking Statements." Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this document, particularly in "Risk Factors."

Recent Developments

Dissolution of VG Holdings

On June 30, 2013, VG Holdings, LLC, an entity that held approximately 75% of our common stock, completed a mandatory distribution of its ownership of our company to its respective owners, which included affiliates of HM Capital Partners, affiliates of Black Diamond Capital Management, L.L.C. and TCW Shared Opportunities Fund III, L.P., and dissolved in accordance with its governing documents. Immediately following the mandatory distribution, affiliates of HM Capital Partners, affiliates of Black Diamond Capital Management, L.L.C. and TCW Shared Opportunities Fund III, L.P. owned approximately 48%, 19% and 8% of our outstanding common stock, respectively. As a result of this transaction, the stockholder agreement by and between us and VG Holdings, LLC was effectively terminated.

Guangzhou Fire

On September 5, 2012, we experienced a fire on the campus of our PCB manufacturing facility in Guangzhou, China which temporarily reduced the facility's manufacturing capacity (the "Guangzhou Fire"). While we were able to restore some of the lost capacity during the fourth quarter of 2012, it was not until the first quarter of 2013 that all manufacturing processes were restored. Where possible we shifted production of affected products to our other PCB facilities; however, due to customer qualification requirements, we were not able to shift all affected work orders. Production delays caused by the fire resulted in lost business and caused us to incur premium shipping costs to maintain on-time delivery for our customers. In addition, the installation and calibration required to bring new equipment online caused labor inefficiencies and increased scrap rates during the year.


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During 2013, we submitted our claims for property damage and losses incurred as a result of the disruption to our business. In December 2013, we received an initial partial reimbursement of $1.6 million from our insurance carrier related to our property damage claim. As of the date of this Report, we continue to actively pursue collection of both our property and business interruption claims through negotiation with our insurance carrier. However, we continue to maintain our rights to pursue our claims in litigation should such negotiations not produce a satisfactory result. We may file litigation against our insurance carrier in the near future in order to preserve our rights and maximize the potential recovery of losses suffered from the fire. The final payment from our insurance carrier for these claims is dependent on many variables that are difficult to predict, and we are not able to estimate the total amount of the recovery we may receive or the timing of such recovery.

Company Overview

We are a technology leader and 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. 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.

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 and entertainment, telecommunications switching equipment, data networking equipment, computer storage equipment, semiconductor test equipment, wind and solar energy applications, off-shore drilling equipment, communications applications, flight control systems and complex industrial, medical and other technical instruments.

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.

Robert Bosch GmbH

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.

Intel Corporation

L-3 Communications Holdings, Inc.

Motorola Inc.

NetApp, Inc.

Phoenix International Corporation

Q-Logic Corporation

Qualcomm Incorporated

Raytheon Company

Rockwell Automation, Inc.

Rockwell Collins, Inc.

Tellabs, Inc.

Tesla Motors, Inc.

TRW Automotive Holdings Corp.

Xyratex Ltd.

In addition, we have good working relationships with industry-leading CEMs and we supply PCBs and E-M Solutions products to them as well. These customers include:

Benchmark Electronics, Inc.

Celestica, Inc.

Flextronics International Ltd.

Foxconn Technology Group

Jabil Circuit, Inc.

Plexus Corp.


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We have fifteen manufacturing facilities, including eight in the United States and seven located outside of the United States, which allows 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, 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. The locations of our engineering and customer service centers correspond directly to the primary areas where we ship our products. For the year ended December 31, 2013, approximately 51.3%, 30.3% and 18.4% of our net sales were generated by shipments to destinations in North America, Asia and Europe, respectively.

Business Overview

As a component manufacturer, our sales trends generally reflect the market conditions in the industries we serve. While we believe the long-term growth prospects for our PCB and E-M Solutions products are positive, economic uncertainty and pricing pressures continue to exist, and our visibility to future demand trends remains limited. During 2013, we completed projects to restore capacity lost due to the Guangzhou Fire and replace capacity lost due to the 2012 closure of our Huizhou, China PCB factory. As this increased capacity has come online, we have experienced increased sales volumes in our Printed Circuit Boards segment.

We expect sales in the automotive end market to improve as we work to optimize our available capacity. In addition, long-term industry demand trends in the automotive electronics market are positive. According to Prismark Partners LLC, a leading PCB industry research firm, the global automotive electronics market is expected to grow at a compound annual growth rate of 6.8% from 2012 to 2017. Market growth in automotive electronics is expected to be driven primarily by growth in worldwide vehicle sales, particularly to customers in emerging markets such as China, increased electronic content per vehicle and increased sales of hybrid and electric vehicles.

While sales trends to our customers in the diverse industrial & instrumentation end market typically follow global economic trends, we have experienced sales declines beginning in the second half of 2012 from certain customers which began manufacturing in-house a portion of the components we supply. We see growth opportunities in this end market as a result of growing demand for alternative energy, market share opportunities in the automated test equipment market and cross selling opportunities between our Printed Circuit Boards and Assembly segments.

The telecommunications end market remains dynamic as the customers we supply produce a mix 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 which are being driven, in part, by the "Cloud" infrastructure build-out.

In the military and aerospace market, while we continue to pursue market share gains as a result of continuing customer qualification activity, overall demand trends in this market have been negatively impacted by the U.S. government budget sequester. We expect continued pressures on U.S. government defense spending will continue to hamper demand and cause downward pricing pressures. With facilities in China that maintain aerospace quality management certifications, we see growth opportunities in this end market from the growing aerospace production in China.


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Results of Operations

Year Ended December 31, 2013, Compared with Year Ended December 31, 2012

Net Sales. Net sales for the year ended December 31, 2013, were $1,171.0 million, representing a $11.1 million, or 1.0%, increase from net sales for the year ended December 31, 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales decreased by approximately $101.9 million, or 8.0%, for the year ended December 31, 2013, as compared with the same period in 2012.

Net sales by end market on a historical basis for the years ended December 31, 2013 and 2012, and on a pro forma basis for the year ended December 31, 2012, were as follows:

                                                 Historical            Pro Forma
        End Market (dollars in millions)     2013          2012           2012
        Automotive                         $   353.4     $   376.7     $    378.6
        Industrial & Instrumentation           297.2         311.6          352.3
        Telecommunications                     201.6         180.0          191.9
        Computer and Datacommunications        196.0         199.1          224.3
        Military and Aerospace                 122.8          92.5          125.8

        Total Net Sales                    $ 1,171.0     $ 1,159.9     $  1,272.9

Our net sales of products for end use in the automotive market decreased by approximately $23.3 million, or 6.2%, during the year ended December 31, 2013, compared with 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales of products for end use in this market decreased by approximately $25.2 million, or 6.7%, for the year ended December 31, 2013, as compared to 2012. The decrease was primarily a result of
i) reduced sales volume of approximately 8.1% in our Printed Circuit Boards segment driven by manufacturing capacity constraints due to the Guangzhou Fire and closure of our Huizhou, China facility late in 2012 and ii) price reductions on certain programs implemented at the beginning of 2013, partially offset by
iii) sales growth to customers in our Assembly segment and iv) positive product
mix. Despite lowering selling prices in light of reductions in some material costs, we experienced reduced market share on some programs due to price competitiveness.

Net sales of products ultimately used in the industrial & instrumentation market decreased by approximately $14.4 million, or 4.6%, during the year ended December 31, 2013, compared with 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales of products for end use in this market decreased by approximately $55.1 million, or 15.6%, for the year ended December 31, 2013, as compared with 2012. The decrease in net sales was driven primarily by a decline in sales of wind power and elevator control related programs as certain customers began manufacturing in-house a portion of the components we supply and a decline in demand from customers that support the semiconductor industry.

Net sales of products ultimately used in the telecommunications market increased by approximately $21.6 million, or 12.0%, during the year ended December 31, 2013, as compared with 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales of products for use in this end market increased by approximately $9.7 million, or 5.0%, for the year ended December 31, 2013, as compared with 2012. The increase was primarily a result of demand from a new customer in our Assembly segment and increased sales volume of approximately 2.7% in our Printed Circuit Boards segment.

Net sales of our products for use in the computer and datacommunications markets decreased by approximately $3.1 million, or 1.5%, during the year ended December 31, 2013, as compared with 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales of products for use in this end market decreased by approximately $28.3 million, or 12.6%, for the year ended December 31, 2013, as compared with 2012. The decrease in net sales was primarily a result of reduced demand for certain programs we supply through our Printed Circuit Boards segment and the loss of sales from a program supplied through our Assembly segment that went end-of-life, partially offset by a new customer and program wins in our Assembly segment.


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Net sales to customers in the military and aerospace market increased by approximately $30.3 million, or 32.8%, during the year ended December 31, 2013, compared with 2012. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, net sales of products for use in this market decreased by approximately $3.0 million, or 2.3%, for the year ended December 31, 2013, as compared with 2012. While we have increased our market share with certain customers during the year, the decline in sales reflects weakened demand from our customers as a result of uncertainty caused by the U.S. government's budget processes.

Net sales by segment on a historical basis for the years ended December 31, 2013 and 2012, and on a pro forma basis for the year ended December 31, 2012, were as follows:

                                               Historical             Pro Forma
        Segment (dollars in millions)     2013           2012            2012
        Printed Circuit Boards          $ 1,008.1      $   967.2      $  1,080.2
        Assembly                            174.5          200.1           200.1
        Eliminations                        (11.6 )         (7.4 )          (7.4 )

        Total Net Sales                 $ 1,171.0      $ 1,159.9      $  1,272.9

Printed Circuit Boards segment net sales, including intersegment sales, for the year ended December 31, 2013, increased by $40.9 million, or 4.2%. Assuming the DDi Acquisition had occurred on January 1, 2012, on a pro forma basis, Printed Circuit Boards net sales, including intersegment sales, for the year ended December 31, 2013, decreased by $72.1 million, or 6.7%. This decrease is a result of decreases in net sales in all end markets except the telecommunications end market.

Assembly segment net sales decreased by $25.6 million, or 12.8%, for the year ended December 31, 2013, compared with 2012. The decrease was primarily the result of reduced demand in wind power programs in our industrial & instrumentation end market, partially offset by increased sales to other customers in all our other end markets.

Cost of Goods Sold. Cost of goods sold, exclusive of items shown separately in the consolidated statement of operations and comprehensive (loss) income for year ended December 31, 2013, was $949.5 million, or 81.1%, of consolidated net sales. This represents a 1.2 percentage point increase from the 79.9% of consolidated net sales for the year ended December 31, 2012.

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 and energy costs in China. Economies of scale can help to offset any adverse trends in these costs. Cost of goods sold as a percentage of sales was impacted during 2013 by costs related to manufacturing inefficiencies at our Guangzhou, China PCB facility as a result of a fire in September 2012 and production inefficiencies in our Anaheim, California PCB operation as we relocated those operations to a new facility. Our results for the year ended December 31, 2013, also reflect a stabilization of material costs which had increased in 2012. With anticipated changes in minimum wage laws in China, we expect our labor costs will increase during 2014, similar to 2013 and prior years. As part of our ongoing efforts to better align overhead costs and operating expenses with market demand, during the third quarter of 2012, we began to reduce staffing at certain of our PCB manufacturing facilities in China. We expect these headcount reductions will be completed during 2014.

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 year ended December 31, 2013, were negatively impacted by inefficiencies and increased overhead costs at our Juarez, Mexico facility as it launched new products and by reduced sales volume and unfavorable product mix at our Shanghai, China facility.

Selling, General and Administrative Costs. Selling, general and administrative costs for the year ended December 31, 2013, decreased by $9.0 million, or 8.2%, to $100.5 million as compared to the year ended December 31, 2012. The decrease was primarily due to i) a $9.2 million decrease in merger and acquisition related costs, ii) a $3.1 million decrease in cash based incentive compensation expense and iii) a $1.2 million decrease in non-cash stock compensation expense, partially offset by a full year of costs associated with manufacturing, sales and administrative sites acquired in the DDi Acquisition as compared to seven months of these costs during 2012. Excluding merger and acquisition related costs, selling, general and administrative costs for the year ended December 31, 2013, decreased by 0.1% to 8.5% as a percentage of sales, as compared with 2012.


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Depreciation. Depreciation expense for the year ended December 31, 2013, was $88.1 million, including $83.6 million related to our Printed Circuit Boards segment and $4.5 million related to our Assembly segment. Depreciation expense in our Printed Circuit Boards segment increased by approximately $8.1 million, or 10.7%, 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 a full year of depreciation on fixed assets acquired through the DDi Acquisition as compared with only seven months during 2012. Depreciation expense in our Assembly segment during 2013 was essentially unchanged compared to 2012.

Restructuring and Impairment. During the year ended December 31, 2013, we recognized net restructuring charges of $1.1 million, including $0.8 million in our Printed Circuit Boards, $0.2 million in our Assembly segment and $0.1 million in "Other." Charges incurred in the Printed Circuit Boards segment were primarily related to $0.7 million for the relocation of our Anaheim, California facility. Charges incurred in the Assembly segment related to staffing reductions during the fourth quarter of 2013, and charges incurred in "Other" related to an increase in estimated long-term obligations incurred in connection with plant closures that occurred early in the previous decade.

Anaheim Move

During the second half of 2013, we relocated a PCB manufacturing facility we were leasing in Anaheim, California to a facility we had purchased and renovated in the same city (the "Anaheim Move"). The charges related to the Anaheim Move during 2013 related to lease and moving costs and we expect the total costs related to the move will approximate $1.0 million.

The primary components of restructuring and impairment expense for the years ended December 31, 2013 and 2012, are as follows:

         Restructuring Activity (dollars in millions)       2013        2012
         Lease and other contractual commitment expenses   $  1.2      $  1.7
         Personnel and severance                             (0.1 )      16.1
         Asset impairment                                      -          1.7

         Total expense, net                                $  1.1      $ 19.5

Operating Income. Operating income of $25.2 million for the year ended December 31, 2013, represents an increase of $5.9 million compared with operating income of $19.3 million during the year ended December 31, 2012. The primary sources of operating income for the years ended December 31, 2013 and 2012, are as follows:

                 Source (dollars in millions)      2013        2012
                 Printed Circuit Boards segment   $ 25.3      $ 27.4
                 Assembly segment                    0.5         1.6
                 Other                              (0.6 )      (9.7 )

                 Operating income                 $ 25.2      $ 19.3

The decrease in operating income in our Printed Circuit Boards segment was primarily the result of higher levels of cost of goods sold relative to sales and increased depreciation and amortization expense, partially offset by decreased selling, general and administrative expense and restructuring costs. Operating income during the second quarter of 2012 reflected a one-time inventory fair value adjustment of approximately $3.9 million related to the DDi Acquisition, which negatively impacted cost of goods sold.

The decrease in operating income in our Assembly segment is primarily the result of lower net sales, partially offset by decreased restructuring costs.


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The $0.6 million operating loss in the "Other" segment for the year ended December 31, 2013, relates to restructuring charges related to an increase in estimated long-term obligations incurred in connection with manufacturing facilities which were closed in previous years. The $9.7 million operating loss in the "Other" segment for the year ended December 31, 2012, relates primarily to professional fees associated with the DDi Acquisition.

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-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 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 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 our future operating cash flows as follows:

Stock Compensation-non-cash charges associated with recognizing the fair value of stock options and restricted stock awards granted to employees and directors. We exclude these charges to more clearly reflect comparable year-over-year cash operating performance.

Restructuring and Impairment Charges-which consist primarily of facility closures and other headcount reductions. We exclude restructuring and impairment charges to more clearly reflect our ongoing operating performance.

Costs Relating to Acquisitions and Equity Registrations - professional fees and other non-recurring costs and expenses associated with mergers and acquisition activity as well as costs associated with capital transactions, such as equity registrations. 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 years ended December 31, 2013 and 2012, were as follows:

                                                                 December 31,
    Source (dollars in millions)                               2013        2012
    Operating income                                          $  25.2     $  19.3
    Add-back:
    Depreciation and amortization                                94.8        84.6
. . .
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