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VIAS > SEC Filings for VIAS > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for VIASYSTEMS GROUP INC

Form 10-Q for VIASYSTEMS GROUP INC


8-May-2014

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 or 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 and being influenced by our significant stockholders. 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, 2013, for additional factors that could materially affect our financial performance.

Recent Developments

Senior Secured Notes due 2019

On April 15, 2014, our subsidiary, Viasystems, Inc., completed an offering of $50.0 million aggregate principal amount of 7.875% Senior Secured Notes due 2019 (the "New Notes"). The New Notes were issued at a premium of 7.000%, or $3.5 million, which will be amortized as a reduction of interest expense over the term of the New Notes. We incurred approximately $3.5 million of financing fees related to the New Notes that have been capitalized and will be amortized over the term of the New Notes. The net proceeds of the New Notes will be used for general corporate purpose, including to supplement our short-term cash on hand while we aggressively pursues recovery of losses related to the September 2012 fire in our Guangzhou, China PCB manufacturing facility from our insurer, and to pay fees and expenses related to the offering of the New Notes.

Previously we had issued $550.0 million aggregate principal amount of 7.875% Senior Secured Notes due 2019 (the "Existing Notes" and, together with the New Notes, the "2019 Notes") pursuant to an indenture dated as of April 30, 2012. The New Notes constitute an additional issuance of, and are fungible with, the Existing Notes and form a single class of debt securities with the Existing Notes for all purposes and have the same terms as the Existing Notes, except for the issue price and issue date. With the issuance of the New Notes, as of the date of this Report, we had $600.0 million in aggregate principal amount of the 2019 Notes outstanding.


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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, cable assemblies and busbars.

The products 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, semiconductor 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.     Hitachi, Ltd.
         Alcatel-Lucent SA              Huawei Technologies Co. Ltd.
         Apple Inc.                     Intel Corporation
         Autoliv, Inc.                  L-3 Communications Holdings, Inc.
         BAE Systems, Inc.              Motorola Inc.
         Robert Bosch GmbH              NetApp, Inc.
         Broadcom Corporation           Phoenix International Corporation
         Ciena Corporation              Q-Logic Corporation
         Cisco Systems, Inc.            Qualcomm Incorporated
         Continental AG                 Raytheon Company
         Dell Inc.                      Rockwell Automation, Inc.
         Danaher Corporation            Rockwell Collins, Inc.
         Ericsson AB                    Tellabs, Inc.
         General Electric Company       Tesla Motors, Inc.
         Goodrich Corporation           TRW Automotive Holdings Corp.
         Harris Communications          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.        Foxconn Technology Group
           Celestica, Inc.                    Jabil Circuit, Inc.
           Flextronics International Ltd.     Plexus Corp.


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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.

We expect sales in the automotive end market to improve as we continue working 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 7.7% from 2012 to 2016. 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.

Sales trends to our customers in the diverse industrial & instrumentation end market typically follow global economic trends. The small sequential sales growth we experienced in this end market early in 2014 was due, in part, to the timing of customer orders, and we are uncertain whether we will be able to sustain this trend in the near term. However, we see 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, and have begun to benefit from opportunities related to the 4G LTE build out in China.

In the computer and datacommunications end market, we have experienced softening demand in the first quarter of 2014, consistent with demand drops many of our customers are experiencing in their businesses. 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 end market we have experienced a recent improvement in customer orders which we expect will lead to sales growth in the near term. In the domestic market, while we have begun to experience some market share gains as a result of continuing customer qualification activity, overall demand and pricing trends have been negatively impacted by the U.S. government budget sequester. 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

Three Months Ended March 31, 2014, Compared with the Three Months Ended March 31, 2013

Net Sales. Net sales for the three months ended March 31, 2014, were $295.9 million, a $23.0 million, or 8.4%, increase from net sales during the same period in 2013.

Net sales by end market for the three months ended March 31, 2014 and 2013, were as follows:

                                                       Historical
                End Market (dollars in millions)    2014        2013
                Automotive                         $  93.2     $  78.9
                Industrial & Instrumentation          73.2        68.8
                Telecommunications                    51.7        44.3
                Computer and Datacommunications       46.9        49.3
                Military and Aerospace                30.9        31.6

                Total Net Sales                    $ 295.9     $ 272.9

Our net sales of products for end use in the automotive end market increased by approximately $14.3 million, or 18.1%, during the three months ended March 31, 2014, compared with the same period in 2013. The increase was primarily a result of increased sales volume of approximately 15.9% in our Printed Circuit Boards segment driven by i) the restoration of manufacturing capacity and continued customer requalification activities following the Guangzhou Fire and ii) additional capacity we added to our principal automotive manufacturing facility in China. In addition, the first quarter 2014 net sales reflect new program wins with some of our existing automotive customers.

Net sales of products ultimately used in the industrial & instrumentation end market for the three months ended March 31, 2014, increased by approximately $4.3 million, or 6.3%, compared with the same period in 2013. The increase in net sales was driven primarily by increased demand for wind power and automated test equipment related programs and increased demand for products we supply to a customer that manufactures locomotives.

Net sales of products ultimately used in the telecommunications end market increased by approximately $7.4 million, or 16.7%, for the quarter ended March 31, 2014, as compared with the quarter ended March 31, 2013. The sales increase was primarily a result of increased demand from i) a customer whose products support the 4G LTE build-out in China and ii) a ramp up in demand for a new program we won in 2013, partially offset by iii) an inventory correction by one of our largest customers in this end market and iv) a decline in demand from certain programs which went end-of-life in 2013.

During the first quarter of 2014, net sales of our products for use in the computer and datacommunications end market decreased by approximately $2.4 million, or 4.8%, as compared with the same period in the prior year. The decrease was primarily a result of reduced sales volume of approximately 16.1% in our Printed Circuit Boards segment driven by a decline in demand from certain programs which went end-of-life, partially offset by improved sales mix in our Printed Circuit Boards Segment and new program wins with existing customers in our Assembly segment.

Net sales to the military and aerospace end market decreased by $0.7 million, or 2.2%, to $30.9 million for the quarter ended March 31, 2014, as compared with the quarter ended March 31, 2013. We continue to experience downward pricing pressures in this end market, and the sales decline was primarily a result of lost market share with certain customers due to price competitiveness, partially offset by market share growth with other customers.


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Net sales by segment for the three months ended March 31, 2014 and 2013, were as follows:

                                                     Historical
                Segment (dollars in millions)    2014         2013
                Printed Circuit Boards          $ 255.9      $ 243.8
                Assembly                           42.6         31.9
                Eliminations                       (2.6 )       (2.8 )

                Total Net Sales                 $ 295.9      $ 272.9

Printed Circuit Boards segment net sales, including intersegment sales, for the three months ended March 31, 2014, increased by $12.1 million, or 5.0%, to $255.9 million. The increase was a result of increases in net sales in the automotive and telecommunications end markets, partially offset by decreases in sales in the computer and datacommunications, military and aerospace, and industrial & instrumentation end markets.

Assembly segment net sales increased by $10.7 million, or 33.4%, to $42.6 million for the three months ended March 31, 2014, compared with the first quarter of 2013. The increase was the result of increased demand across all end markets, with the largest sales growth in the industrial & instrumentation end market. Because the growth in the industrial & instrumentation end market was driven, in part, by the timing of customer orders, we are uncertain whether we will be able to sustain this trend in the near term.

Cost of Goods Sold. Cost of goods sold, exclusive of items shown separately in the condensed consolidated statement of operations and comprehensive (loss) income for the three months ended March 31, 2014, was $239.8 million, or 81.0%, of consolidated net sales. This represents a 0.7 percentage point increase from the 80.3% of consolidated net sales for the first quarter of 2013. As compared with the first quarter of 2013, cost of goods sold as a percentage of net sales was negatively impacted during the quarter ended March 31, 2014, by i) a higher sales mix of Assembly segment sales which typically earn a lower margin than Printed Circuit Boards segment sales, ii) increased incentive compensation expense and iii) minimum wage increases that were implemented in China during the second quarter of 2013.

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. With anticipated changes in minimum wage laws in China during the second quarter of 2014, we expect our labor costs may increase over the next twelve months. As part of our ongoing efforts to align capacity, overhead costs and operating expense with market demand, during 2013 we continued a staffing reduction plan we initiated in 2012 at certain of our PCB manufacturing facilities in China. We expect the balance of these headcount reductions will be completed during the first half of 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. As compared with the first quarter of 2013, cost of goods sold as a percentage of net sales during the three months ended March 31, 2014, were negatively impacted by inefficiencies at our Juarez, Mexico facility related to new product introductions, unfavorable product mix at our Shanghai, China facility and minimum wage increases that were implemented in China during the second quarter of 2013.

Selling, General and Administrative Costs. Selling, general and administrative costs decreased by $0.8 million, or 3.0%, to $26.8 million for the three months ended March 31, 2014, compared to the same period in the prior year. The decrease in selling, general and administrative costs is primarily a result of
i) a $1.4 million reduction in non-cash stock compensation expense and ii) costs associated with management meetings that occurred in 2013 but not 2014, partially offset by iii) increased cash based incentive compensation expense.

Depreciation. Depreciation expense for the three months ended March 31, 2014, was $21.8 million, including $20.6 million related to our Printed Circuit Boards segment and $1.2 million related to our Assembly segment. Depreciation expense was substantially unchanged as compared with the same period in the prior year as our base of depreciable assets in both segments remained relatively constant.


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Restructuring and Impairment. During the three months ended March 31, 2014, we incurred an additional $0.3 million of restructuring charges which consisted of lease and moving costs related to the relocation of our Anaheim, California PCB manufacturing operations from a leased facility to a new facility we own. Our new facility began operations during the second half of 2013 and, in connection with the relocation of the Anaheim operations, we have incurred $1.0 million of cumulative restructuring costs through March 31, 2014. We do not expect to incur significant additional charges related to the move.

Operating Income. Operating income of $5.5 million for the three months ended March 31, 2014, represents an increase of $2.9 million compared to operating income of $2.6 million for the three months ended March 31, 2013. The primary sources of operating income (loss) for the three months ended March 31, 2014 and 2013, were as follows:

                 Source (dollars in millions)      2014        2013
                 Printed Circuit Boards segment   $  9.4      $  3.7
                 Assembly segment                   (3.9 )      (1.0 )
                 Other                                -         (0.1 )

                 Operating income                 $  5.5      $  2.6

Operating income from our Printed Circuit Boards segment increased by $5.7 million to $9.4 million for the three months ended March 31, 2014, compared to $3.7 million for the same period in the prior year. The increase is primarily the result of increased net sales, lower selling, general and administrative costs and lower costs of goods sold relative to net sales, partially offset by increased restructuring costs.

The operating loss in our Assembly segment was $3.9 million for the three months ended March 31, 2014, compared with a loss of $1.0 million in the first quarter of 2013. The increase is primarily the result of higher cost of goods sold relative to net sales during the first quarter of 2014, as compared to the same period in the prior year.

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.


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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:

Stock Compensation-non-cash charges associated with recognizing the fair value of stock options and other equity 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 these 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 three months ended March 31, 2014 and 2013, were as follows:

                                                              Three Months Ended
                                                                   March 31,
  Source (dollars in millions)                                2014           2013
  Operating income                                          $     5.5       $   2.6
  Add-back:
  Depreciation and Amortization                                  23.5          23.6
  Non-cash stock compensation expense                             1.7           3.2
  Restructuring and impairment                                    0.3            -
  Costs relating to acquisitions and equity registrations          -            0.1

  Adjusted EBITDA                                           $    31.0       $  29.5

Adjusted EBITDA increased by $1.5 million, or 5.1%, as compared to the same period in the prior year primarily as a result of higher sales levels, partially offset by higher cost of goods sold relative to net sales levels.

Interest Expense, Net. Interest expense, net of interest income, of $11.3 million for the three months ended March 31, 2014, was substantially unchanged as compared with interest expense, net of interest income, of $11.2 million for the quarter ended March 31, 2013. With the issuance of the New Notes on April 15, 2014, we expect interest expense will increase by approximately $0.8 million per quarter during the term the New Notes are outstanding.

Income Taxes. Our income tax provision relates to i) taxes provided on our pre-tax earnings based on the effective tax rates in the jurisdictions where the income is earned and ii) other tax matters, including changes in tax-related contingencies and changes in the valuation allowance established for deferred tax assets. Taxes provided on pre-tax income relate primarily to our profitable operations in China. Because of substantial net operating loss carryforwards related to the U.S. and other tax jurisdictions, we have not recognized income tax benefits in those jurisdictions for those losses. For the three months ended March 31, 2014, our tax provision included net expense of $3.5 million related to our pre-tax earnings and $0.6 million related to other tax matters. For the three months ended March 31, 2013, our tax provision includes net expense of $2.5 million related to pre-tax earnings and a net expense of $0.6 million related to other tax matters. We estimate approximately $0.6 million of our liabilities for uncertain tax positions could be reversed during the remainder of 2014.


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Liquidity and Capital Resources

Liquidity

We had cash and cash equivalents at March 31, 2014 and December 31, 2013, of $39.1 million and $54.7 million, respectively, of which $26.6 and $34.5 million, respectively, were held outside the United States. At March 31, 2014, we had outstanding borrowings and letters of credit of $20.0 million and $1.9 million, respectively, under various credit facilities, and approximately $91.6 million . . .

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