Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Vishay's financial condition, results of operations
and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Consolidated Financial Statements and accompanying Notes filed herewith, commencing on page F-1 of this report. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed
elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
Overview
Vishay Intertechnology, Inc. ("Vishay," "we," "us," or "our") manufactures one of the world’s largest portfolios of discrete semiconductors and passive electronic
components that are essential to innovative designs in the automotive, industrial, computing, consumer, telecommunications, military, aerospace, and medical markets.
We operate in six segments based on product functionality: MOSFETs, Diodes, Optoelectronic Components, Resistors, Inductors, and Capacitors.
We are focused on enhancing stockholder value by growing our business and improving earnings per share. Since 1985, we have pursued a business strategy of growth through focused research and development and acquisitions.
We plan to continue to grow our business through intensified internal growth supplemented by opportunistic acquisitions, while at the same time maintaining a prudent capital structure. Over the next few years, we expect to experience higher growth
rates than over the last decade. To foster intensified internal growth, we have increased our worldwide R&D and engineering technical staff; we are increasing our technical field sales force in Asia to increase our market access to the
industrial segment and increase the design-in of our products in local markets; and we are directing increased funding and focus on developing products to capitalize on the mega trends of electrification, data storage, and wireless communications.
We have identified thirty key product lines for growth and are planning to invest more to expand these key product lines. We expect to invest approximately $385 million in 2023 and approximately $1.2 billion over the next three years primarily for
capital expansion projects outside of China as part of our growth and margin expansion plan.
In addition to enhancing stockholder value through growing our business, on February 7, 2022, our Board of Directors adopted a Stockholder Return Policy, which calls for us to return at least 70% of free cash flow, net of
scheduled principal payments of long-term debt, on an annual basis. See further discussion in “Stockholder Return Policy” below.
Our business and operating results have been, and will continue to be, impacted by worldwide economic conditions. Our revenues are dependent on end
markets that are impacted by consumer and industrial demand, and our operating results can be adversely affected by reduced demand in those global markets. The worldwide economy and, specifically, our business were and continue to be impacted by
the COVID-19 pandemic, particularly in 2020. While the wide-spread economic impact of the COVID-19 pandemic on Vishay was temporary as evidenced by our revenues
since the beginning of 2021, similar disruptions have continued to occur on a more limited scale.
Our operations in the People's Republic
of China, particularly in Shanghai, were impacted by COVID-19 government mandated shut-downs in the second fiscal quarter of 2022. These manufacturing facilities were temporarily closed and some were operating at levels less than full
capacity. We incurred incremental costs separable from normal operations that are directly related to these government mandated shut-downs, primarily wages paid to manufacturing employees during the shut-downs, additional wages and hardship
allowances for working during lockdown periods, and temporary housing for employees due to travel restrictions, which were partially offset by government subsidies. The net
impact of the costs and subsidies are reported as cost of products sold ($6.7 million) and selling, general, and administrative expenses ($0.5 million) based on
employee function on the consolidated statement of operations for the year ended December 31, 2022. Since 2021, certain costs directly attributable to the pandemic, such as additional costs of cleaning and disinfecting facilities and costs
of additional safety equipment for employees, are no longer incremental and are considered normal operating costs. These expenses and all indirect financial changes from the
COVID-19 pandemic, such as general macroeconomic effects and higher shipping costs due to reduced shipping capacity, are excluded from the amounts reported as COVID-19 pandemic expenses. In this volatile economic environment, we continue
to closely monitor our fixed costs, capital expenditure plans, inventory, and capital resources to respond to changing conditions and to ensure we have the management, business processes, and resources to meet our future needs. We will react
quickly and professionally to changes in demand to minimize manufacturing inefficiencies and excess inventory build in periods of decline and maximize opportunities in periods of growth. We believe we have sufficient liquidity to withstand
temporary disruptions in the economic environment. See additional information regarding our competitive strengths and key challenges as disclosed in Part 1.
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We utilize several financial metrics, including net revenues, gross profit margin, segment operating income, end-of-period backlog, book-to-bill ratio, inventory
turnover, change in average selling prices, net cash and short-term investments (debt), and free cash generation to evaluate the performance and assess the future direction of our business. See further discussion in “Financial Metrics” and
“Financial Condition, Liquidity, and Capital Resources” below. The key financial metrics remained strong in the fourth fiscal quarter of 2022, but were slightly negatively impacted by cost inflation, the beginning of a distributor inventory
correction that resulted in lower orders, and foreign currency effects. Net revenues and margins increased versus the prior year period. Average selling prices remained stable in the fourth fiscal quarter of 2022 after broad increases in prior
periods.
Net revenues for the year ended December 31, 2022 were
$3.497 billion, compared to net revenues of $3.240 billion and $2.502 billion for the years ended December 31, 2021 and 2020, respectively. Net
earnings attributable to Vishay stockholders for the year ended December 31, 2022 were $428.8 million, or $2.98 per diluted share, compared to $298.0 million, or $2.05 per diluted
share, and $122.9 million, or $0.85
per share, for the years ended December 31, 2021 and 2020, respectively.
We define adjusted net earnings as net earnings determined in accordance with GAAP adjusted for various items that management believes are not indicative of the
intrinsic operating performance of our business. We define free cash as the cash flows generated from continuing operations less capital expenditures plus net proceeds from the sale of property and equipment. The reconciliations below include
certain financial measures which are not recognized in accordance with GAAP, including adjusted net earnings, adjusted earnings per share, and free cash. These non-GAAP measures should not be viewed as alternatives to GAAP measures of performance or
liquidity. Non-GAAP measures such as adjusted net earnings, adjusted earnings per share, and free cash do not have uniform definitions. These measures, as calculated by Vishay, may not be comparable to similarly titled measures used by other
companies. Management believes that adjusted net earnings and adjusted earnings per share are meaningful because they provide insight with respect to our intrinsic operating results. Management believes that free cash is a meaningful measure of our
ability to fund acquisitions, repay debt, and otherwise enhance stockholder value through stock repurchases or dividends.
Net earnings attributable to Vishay stockholders for the years ended December 31, 2022, 2021, and 2020 include items affecting comparability. The items affecting comparability are (in thousands, except per
share amounts):
Years ended December 31,
Reconciling items affecting gross profit:
Other reconciling items affecting operating income:
Restructuring and severance costs - - 743
Reconciling items affecting other income (expense):
Loss on early extinguishment of debt - - 8,073
Reconciling items affecting tax expense (benefit):
Effects of changes in uncertain tax positions $ (5,941 ) $ - $ 3,751
Effects of changes in valuation allowances (33,669 ) (5,714 ) -
Effect of change in indefinite reversal assertion 59,642 - -
Change in tax laws and regulations - 45,040 -
Change in deferred taxes due to early extinguishment of debt - - (1,563 )
Effects of cash repatriation program - - (190 )
Tax effects of pre-tax items above (1,802 ) - (2,799 )
Adjusted earnings per diluted share $ 3.16 $ 2.32 $ 0.92
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The following table reconciles gross profit by segment to consolidated gross profit. Direct costs of the COVID-19 pandemic are not allocated to the segments as the chief operating decision maker's evaluation of segment
performance does not include these costs (in thousands):
Years ended December 31,
Unallocated gross profit (loss) (6,661 ) - (4,563 )
Although the term "free cash" is not defined in GAAP, each of the elements used to calculate free cash is presented as a line item on the face of our consolidated
statements of cash flows prepared in accordance with GAAP. Our free cash results are as follows (in thousands):
Years ended December 31,
Proceeds from sale of property and equipment 1,198 1,317 403
Our results for 2022 and 2021 represent the continuation of the favorable business conditions that we have been experiencing since the latter part of 2020. Our percentage of
euro-based sales approximates our percentage of euro-based expenses so the euro foreign currency impact on revenues was substantially offset by the impact on expenses. Our pre-tax results were consistent with expectations based on our business
model.
Our free cash results were significantly impacted by the installment payments of the U.S. transition tax of $14.8 million in 2022
and 2021 and $25.2 million of payments of foreign, withholding, and claw-back cash taxes on foreign earnings in Israel for the $81.2 million (net of taxes) that was repatriated to the U.S. in 2022.
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Financial Metrics
We utilize several financial metrics to evaluate the performance and assess the future direction of our business. These key financial measures and metrics include net
revenues, gross profit margin, operating margin, segment operating income, end-of-period backlog, and the book-to-bill ratio. We also monitor changes in our inventory turnover and our or publicly available 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. We also regularly evaluate gross profit by segment to assist in the analysis of consolidated gross profit. Gross profit margin and gross
profit margin by segment are clearly a function of net revenues, but also reflect our cost management programs and our ability to contain fixed costs.
Operating margin is computed as gross profit less operating expenses, expressed as a percentage of net revenues. Operating margin is clearly a function of net revenues, but also reflects our cost management programs and
our ability to contain fixed costs.
Our chief operating decision maker makes decisions, allocates resources, and evaluates business segment performance based on segment operating income. Only dedicated, direct selling, general, and administrative
("SG&A") expenses of the segments are included in the calculation of segment operating income. We do not allocate certain SG&A expenses that are managed at the regional or corporate global level to our segments. Accordingly, segment
operating income excludes these SG&A expenses that are not directly traceable to the segments. Segment operating income would also exclude costs not routinely used in the management of the segments in periods when those items are present, such
as restructuring and severance costs, the direct impact of the COVID-19 pandemic, and other items affecting comparability. Segment operating income is clearly a function of net revenues, but also reflects our cost management programs and our
ability to contain fixed costs. Segment operating margin is segment operating income expressed as a percentage of net revenues.
End-of-period backlog is one indicator of future revenues. We include in our backlog only open orders that we expect to ship 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 fiscal quarter-end balance) for this same period. A higher level of inventory turnover reflects more
efficient use of our capital.
Pricing in our industry can be volatile. Using our and publicly available data, we analyze trends and changes in average selling prices to evaluate likely future
pricing. The erosion of average selling prices of established products is typical for semiconductor products. We attempt to offset this deterioration with ongoing cost reduction activities and new product introductions. Our specialty passive
components are more resistant to average selling price erosion. All pricing is subject to governing market conditions and is independently set by us.
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The quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business. The following table shows net
revenues, gross profit margin, operating margin, end-of-period backlog, book-to-bill ratio, inventory turnover, and changes in ASP for our business as a whole during the five fiscal quarters beginning with the fourth fiscal quarter of 2021 through the fourth fiscal quarter of 2022
(dollars in thousands):
Change in ASP vs. prior quarter 1.3 % 2.4 % 2.9 % 0.0 % 0.6 %
_______________
(1) Gross margin for the second fiscal quarter of 2022 includes $6.7 million of expenses directly related to the COVID-19 pandemic
(see Note 8 to our consolidated financial statements).
(2) Operating margin for the second fiscal quarter of 2022 includes $7.2 million of expenses directly related to the COVID-19 pandemic (see Note 8 to our consolidated
financial statements).
See “Financial Metrics by Segment” below for net revenues, book-to-bill ratio, and gross profit margin broken out by segment.
Revenues increased slightly versus the fourth fiscal quarter of 2021
primarily due to higher average selling prices. Revenues decreased significantly versus the prior fiscal quarter, primarily due to lower volume. The decrease versus the prior fiscal quarter is partially due to a sales catch-up experienced in the
third fiscal quarter of 2022 following the government mandated COVID-19 shut-down of our manufacturing facilities in Shanghai, People's Republic of China in the second fiscal quarter and the beginning of a distributor inventory correction in the
fourth fiscal of 2022. We expect that the distributor inventory correction will continue in the first and second fiscal quarters of 2023. We continue to increase manufacturing capacity for critical product lines. Average selling prices were stable
in the fourth fiscal quarter following broad price increases that we implemented in prior periods across the product portfolio to offset increased materials and transportation costs and general inflation.
Gross profit margin decreased versus the prior fiscal quarter primarily due to lower volume. Gross profit margin increased versus the prior year quarter primarily due
to higher average selling prices.
The book-to-bill ratio in the fourth fiscal quarter of 2022 increased to 0.94 versus 0.88 in the third fiscal quarter of 2022.
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Financial Metrics by Segment
The following table shows net revenues, book-to-bill ratio, gross profit margin, and segment operating margin broken out by segment for the five fiscal quarters
beginning with the fourth fiscal quarter of 2021 through the fourth fiscal quarter of 2022 (dollars in thousands):
MOSFETs
Diodes
Optoelectronic Components
Resistors
Inductors
Capacitors
_________
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Stockholder Value
We are focused on enhancing stockholder value by growing our business and improving earnings per share. Over the next few years, we expect to experience higher internal growth rates than over the last decade. This
expectation is based upon accelerated electrification, such as factory automation, electrical vehicles, and 5G infrastructures. To meet this expected increase in demand and to fully participate in growing markets, we intend to increase our capital
expenditures for expansion outside of China in the mid-term. The increased capital expenditures will be primarily used to increase manufacturing capacity for the thirty key product lines for growth that we identified. The most significant
expansion projects include building a 12-inch wafer fab in Itzehoe, Germany adjacent to our existing 8-inch fab, expanding our Inductors manufacturing, and expanding our GaAs fab in Heilbronn, Germany.
On February 7, 2022, our Board of Directors adopted a Stockholder Return Policy, which calls for us to return at least 70% of free cash flow, net of scheduled principal payments of long-term debt, on an annual basis. We
intend to return such amounts to stockholders directly, in the form of dividends, or indirectly, in the form of stock repurchases.
The following table summarizes activity pursuant to this policy (in thousands):
Year ended
Dividends paid to stockholders $ 57,187
As a direct result of a change in tax law in Israel, we made the determination during the fourth quarter of 2021 that substantially all unremitted
foreign earnings in Israel are no longer permanently reinvested. We intend to primarily utilize these earnings, distributed from Israel to the United States, to initially fund our Stockholder Return Policy. We repatriated $81.2 million (net
of taxes) to the United States from Israel during 2022. The repatriated cash is being used to fund our Stockholder Return Policy.
Over the long-term, we expect to fund the Stockholder Return Policy from our historically strong cash flows from operations. However, because most
of our operating cash flow is typically generated by our non-U.S. subsidiaries, we made the determination during the fourth fiscal quarter of 2022 that substantially all unremitted earnings in Germany are no longer indefinitely reinvested and
recorded additional tax expense of $59.6 million. Substantially all of these additional taxes would be withholding and foreign taxes on cash remitted to the U.S., as such dividends are generally not subject to U.S. federal income tax. The
change in this indefinite reinvestment assertion will provide greater access to our worldwide cash balances to fund our growth plan and our Stockholder Return Policy, but will also increase our effective tax rate.
The structure of our Stockholder Return Policy enables us to allocate capital responsibly among our business, our lenders, and our stockholders. We
will continue to invest in growth initiatives including key product line expansions, targeted R&D, and synergistic acquisitions.
We have paid dividends each quarter since the first quarter of 2014, and
the Stockholder Return Policy will remain in effect until such time as the Board votes to amend or rescind the policy. Implementation of the Stockholder
Return Policy is subject to future declarations of dividends by the Board of Directors, market and business conditions, legal requirements, and other factors. The policy sets forth our intention, but does not obligate us to acquire any
shares of common stock or declare any dividends, and the policy may be terminated or suspended at any time at our discretion, in accordance with applicable laws and regulations.
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Acquisition Activity
As
part of its growth strategy, the Company seeks to expand through targeted acquisitions of other manufacturers of electronic components. These acquisition targets include businesses that have established positions in major markets, reputations for
product quality and reliability, and product lines with which the Company has substantial marketing and technical expertise. It also includes certain businesses that possess technologies which the Company expects to further develop and
commercialize. To limit our financial exposure, we have implemented a policy not to pursue acquisitions if our post-acquisition debt would exceed 2.5x our pro forma earnings before interest, taxes, depreciation, and amortization (“EBITDA”). For
these purposes, we calculate pro forma EBITDA as the adjusted EBITDA of Vishay and the target for Vishay’s four preceding fiscal quarters, with a pro forma adjustment for savings which management estimates would have been achieved had the target
been acquired by Vishay at the beginning of the four fiscal quarter period.
On October 28, 2022, we acquired MaxPower Semiconductor, Inc. ("MaxPower"), a San Jose, California-based fabless power semiconductor provider dedicated
to delivering innovative and cost-effective technologies that optimize power management solutions. MaxPower's proprietary device structures and process techniques provide leading edge silicon and silicon carbide ("SiC") MOSFET products. Its SiC
product development targets automotive and industrial applications. We paid cash of $50.0 million, net of cash acquired, at closing. Related to the transaction, we may also be required to make certain contingent payments of up to $57.5 million,
which would be payable upon the achievement of certain technology milestones, upon favorable resolution of certain technology licensing matters with a third party, and upon the disposition of MaxPower's investment in an equity affiliate.
MaxPower is included in our MOSFETs segment. The inclusion of this acquisition did not have a material impact on the Company's consolidated results for the year ended December 31, 2022.
On December 31, 2021, we acquired substantially all of the assets and certain liabilities of Barry Industries, a Massachusetts-based, privately-held manufacturer of
resistive products for $20.8 million. Barry Industries is included in our Resistors segment. The inclusion of this acquisition did not have an impact on the Company's consolidated results for the years ended December 31, 2022 and 2021.
There is no assurance that we will be able to identify and acquire additional suitable acquisition candidates at price levels and on terms and conditions we consider
acceptable.
See Note 2 to our consolidated financial statements.
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Cost Management
We place a strong emphasis on controlling our costs, and use various measures and metrics to evaluate our cost structure.
We define variable costs as expenses that vary with respect to quantity produced. Fixed costs do not vary with respect to quantity produced over the relevant time
period. Contributive margin is calculated as net revenue less variable costs. It may be expressed in dollars or as a percentage of net revenue. Management uses this measure to determine the amount of profit to be expected for any change in
revenues. While these measures are typical cost accounting measures, none of these measures are recognized in accordance with GAAP. The classification of expenses as either variable or fixed is judgmental and other companies might classify such
expenses differently. These measures, as calculated by Vishay, may not be comparable to similarly titled measures used by other companies.
We closely monitor variable costs and seek to achieve the contributive margin in our business model. Over a period of many years, we have generally maintained a
contributive margin of between 45% and 47% of revenues. The erosion of average selling prices, particularly of our semiconductor products, that is typical of our industry, and inflation negatively impact contributive margin and drive us to
continually seek ways to reduce our variable costs. Our variable cost reduction efforts include increasing the efficiency in our production facilities by expending capital for automation, reducing materials costs, materials substitution, increasing
wafer size and shrinking dies to maximize efficiency in our semiconductor production processes, and other yield improvement activities.
Our cost management strategy also includes a focus on controlling fixed costs recorded as costs of products sold or selling, general, and administrative expenses and
maintaining our break-even point (adjusted for acquisitions). We seek to limit increases in selling, general, and administrative expenses to the rate of inflation, excluding foreign currency exchange effects and substantially independent of sales
volume changes. At constant fixed costs, we would expect each $1 million increase in revenues to increase our operating income by approximately $450,000 to $470,000. Sudden changes in the business conditions, however, may not allow us to quickly
adapt our manufacturing capacity and cost structure.
Occasionally, our ongoing cost containment activities are not adequate and we must take actions to maintain our cost competitiveness. We incurred significant
restructuring expenses in our past to reduce our cost structure. Historically, our primary cost reduction technique was through the transfer of production to the extent possible from high-labor-cost countries to lower-labor-cost countries. We
believe that our manufacturing footprint is suitable to serve our customers and end markets, while maintaining lower manufacturing costs. Since 2013, our cost reduction programs have primarily focused on reducing fixed costs, including selling,
general, and administrative expenses.
We continue to monitor the economic environment and its potential effects on our customers and the end markets that we serve.
We do not anticipate any material restructuring activities in 2023. However, a worsening business environment for the electronics industry or a significant economic
downturn may require us to implement additional restructuring initiatives.
In uncertain times, we focus on managing our production capacities in accordance with customer requirements, and maintain discipline in terms of our fixed costs and
capital expenditures. Even as we seek to manage our costs, we remain cognizant of the future requirements of our demanding markets. We continue to pursue our growth plans through investing in capacities for strategic product lines, and through
increasing our resources for R&D, technical marketing, and field application engineering; supplemented by opportunistic acquisitions of specialty businesses.
Our long-term strategy includes growth through the integration of acquired businesses, and GAAP requires plant closure and employee termination costs that we incur in
connection with our acquisition activities to be recorded as expenses in our consolidated statement of operations, as such expenses are incurred. We have not incurred any material plant closure or employee termination costs related to any of the
businesses acquired since 2011, but we expect to have some level of future restructuring expenses due to acquisitions.
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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. We
occasionally use forward exchange contracts to economically hedge a portion of our projected cash flows from these exposures.
GAAP 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. We have both situations
among our 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 the functional currency, assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not
impact the results of operations and are reported as a separate component of stockholders’ equity.
For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the year. While the
translation of revenues and expenses into U.S. dollars does not directly impact the consolidated statement of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in
those foreign currencies. The dollar was stronger during 2022 versus 2021, but weaker during 2021 versus 2020, with the translation of foreign currency revenues and expenses into U.S. dollars decreasing reported revenues and expenses in 2022 versus 2021, but increasing reported revenues and
expenses in 2021 versus 2020.
Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency
Our operations in Israel and most significant locations in Asia are largely financed in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as
their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of
foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly payroll-related, which are incurred
in the local currency. The cost of products sold and selling, general, and administrative expense for the year ended December 31, 2022
have been favorably impacted compared to 2021 by local currency transactions of subsidiaries which use the U.S. dollar as their functional currency, while the cost of products sold and selling, general, and administrative expense for the year ended
December 31, 2021 were unfavorably impacted compared to 2020 by local currency transactions of subsidiaries which use the U.S. dollar as their functional currency.
See Item 7A for additional discussion of foreign currency exchange risk.
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Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. We identify here a number of policies that entail significant
judgments or estimates.
Revenue Recognition
Revenue is measured based on the consideration specified in contracts with customers, and excludes any sales incentives and amounts collected on behalf of third
parties. We recognize revenue when we satisfy our performance obligations.
We have a broad line of products that we sell to OEMs, electronic manufacturing services ("EMS") companies, which manufacture for OEMs on an outsourcing basis, and
independent distributors that maintain large inventories of electronic components for resale to OEMs and EMS companies.
We recognize revenue on sales to distributors when the distributor takes control of the products ("sold-to" model). We have agreements with distributors that allow
distributors a limited credit for unsaleable products, which we refer to as a "scrap allowance." Consistent with industry practice, we also have a "stock, ship and debit" program whereby we consider requests by distributors for credits on previously
purchased products that remain in distributors' inventory, to enable the distributors to offer more competitive pricing. In addition, we have contractual arrangements whereby we provide distributors with protection against price reductions initiated
by us after product is sold by us to the distributor and prior to resale by the distributor.
We recognize the estimated variable consideration to be received as revenue and record a related accrued expense for the consideration not expected to be received, based
upon an estimate of product returns, scrap allowances, "stock, ship and debit" credits, and price protection credits that will be attributable to sales recorded through the end of the period. We make these estimates based upon sales levels to our
customers during the period, inventory levels at the distributors, current and projected market conditions, and historical experience under the programs. While we utilize a number of different methodologies to estimate the accruals, all of the
methodologies take into account sales levels to customers during the relevant period, inventory levels at the distributors, current and projected market trends and conditions, recent and historical activity under the relevant programs, changes in
program policies, and open requests for credits. These procedures require the exercise of significant judgments. We believe that we have a reasonable basis to estimate future credits under the programs.
See Notes 1 and 9 to our consolidated financial statements for further information.
Inventories
We value our inventories at the lower of cost or net realizable value, with cost determined under the first-in, first-out method. The valuation of our inventories
requires our management to make market estimates. For work in process goods, we are required to estimate the cost to completion of the products and the prices at which we will be able to sell the products. For finished goods, we must assess the
prices at which we believe the inventory can be sold. Inventories are also adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions.
Goodwill
See Note 1 to our consolidated financial statements for a description of our goodwill impairment tests.
The fair value of reporting units for goodwill impairment testing purposes is measured primarily using present value techniques based on projected cash flows from the
reporting unit. The calculated results are evaluated for reasonableness using comparable company data. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and
assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of
revenue, operating income, depreciation and amortization, and capital expenditures.
Due to the inherent uncertainty involved in making these estimates, actual financial results could differ from those estimates. In addition, changes in assumptions
concerning future financial results or other underlying assumptions could have a significant impact on the fair value of the reporting unit and the amount of the goodwill impairment charge.
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Pension and Other Postretirement Benefits
Our defined benefit plans are concentrated in the United States, Germany, and the Republic of China (Taiwan). At December 31, 2022, our U.S. plans include various non-qualified plans. The table below summarizes information about our pension and other postretirement benefit plans. This information
should be read in conjunction with Note 11 to our consolidated financial statements (amounts in thousands):
Accounting for defined benefit pension and other postretirement plans involves numerous assumptions and estimates. The discount rate at which obligations could
effectively be settled and the expected long-term rate of return on plan assets are two critical assumptions in measuring the cost and benefit obligations of our pension and other postretirement benefit plans. Other important assumptions include the
anticipated rate of future increases in compensation levels, estimated mortality, and for certain postretirement medical plans, increases or trends in health care costs. Management reviews these assumptions at least annually. We use independent
actuaries and investment advisers to assist us in formulating assumptions and making estimates. These assumptions are updated periodically to reflect the actual experience and expectations on a plan specific basis as appropriate.
In the U.S., we utilize published long-term high quality bonds to determine the discount rate at the measurement date. In Germany and the Republic of China (Taiwan), we
utilize published long-term government bond rates to determine the discount rate at the measurement date. We utilize bond yields at various maturity dates that reflect the timing of expected future benefit payments. We believe the discount rates
selected are the rates at which these obligations could effectively be settled.
Non-qualified plans in the U.S. are considered by law to be unfunded. However, the Company maintains assets in a rabbi trust to fund benefit payments under certain of
these plans. Such assets would be subject to creditor claims under certain conditions. (See also Notes 11 and 18 to our consolidated financial statements.)
Many of our non-U.S. plans are unfunded based on local laws and customs. For those non-U.S. plans that do
maintain investments, their asset holdings are primarily cash and fixed income securities, based on local laws and customs. Some non-U.S. plans also informally fund their plans by holding certain available-for-sale investments. Such assets would
be subject to creditor claims under certain conditions. (See also Note 18 to our consolidated financial statements.)
We set the expected long-term rate of return based on the expected long-term average rates of return to be achieved by the underlying investment portfolios. In
establishing this rate, we consider historical and expected returns for the asset classes in which the plans are invested, advice from pension consultants and investment advisors, and current economic and capital market conditions. The expected
return on plan assets is incorporated into the computation of pension expense. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset losses (gains) affects the calculated value
of plan assets and, ultimately, future pension expense (income).
We continue to seek to de-risk our global pension exposures. Such actions could result in increased net periodic pension cost due to lower expected rates of return on
plan assets and/or possible additional charges to recognize unamortized actuarial items if all or a portion of the obligations were to be settled.
We believe that the current assumptions used to estimate plan obligations and annual expenses are appropriate. However, if economic conditions change or if our
investment strategy changes, we may be inclined to change some of our assumptions, and the resulting change could have a material impact on the consolidated statements of operations and on the consolidated balance sheet.
40
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our
provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of
whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these
reserves in light of changing facts and circumstances and the provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
These accruals for tax-related uncertainties are based on our best estimate of potential tax exposures. When particular matters arise, a number of years may elapse
before such matters are audited by tax authorities and finally resolved. Favorable resolution of such matters could be recognized as a reduction to our effective tax rate in the year of resolution. Unfavorable resolution of any particular issue
could increase the effective tax rate and may require the use of cash in the year of resolution.
Our U.S. federal income tax returns are under examination for the years ended December 31, 2017 through 2019. The IRS may, however, ask for supporting documentation for
net operating losses for the years ended December 31, 2013 through 2016, which were utilized in the year ended December 31, 2017. During 2022, certain tax examinations were concluded and certain statutes of limitations lapsed. Our tax provision for those years includes adjustments related to the resolution of
these matters. The tax returns of significant non-U.S. subsidiaries currently under examination are located in the following jurisdictions: Germany (2017 through 2021), India (2004 through 2020), and Italy (2017 through 2019). The Company and its
subsidiaries also file income tax returns in other taxing jurisdictions in the U.S. and around the world, many of which are still open to examination.
See Notes 1 and 5 to consolidated financial statements for additional information.
41
Results of Operations
Statement of operations’ captions as a percentage of net revenues and the effective tax rates were as follows:
Years ended December 31,
Selling, general, and administrative expenses 12.7 % 13.0 % 14.8 %
Income before taxes and noncontrolling interest 17.0 % 13.4 % 6.3 %
Net earnings attributable to Vishay stockholders 12.3 % 9.2 % 4.9 %
________
Net Revenues
Net revenues were as follows (dollars in thousands):
Percentage change versus prior year 7.9 % 29.5 %
Changes in net revenues were attributable to the following:
Change attributable to:
Increase in volume 4.3 % 25.5 %
Increase in average selling prices 7.2 % 1.0 %
Foreign currency effects (4.0 )% 1.4 %
Acquisitions 0.4 % 0.7 %
Net revenues increased significantly in 2022 and 2021 versus the prior years. We experienced good economic conditions while we increased critical manufacturing capacities through 2022. We implemented broad price increases across
the product portfolio. Net revenues increased versus 2021 primarily due to increases in volume and average selling prices.
Gross Profit and Margins
Gross profit margins for the year ended December 31, 2022
were 30.3%, as compared to 27.4%
for the year ended December 31, 2021. The increase in gross profit margin is primarily due to increased average selling prices and
increased sales volume. Higher transportation and metals and materials costs negatively impacted the contributive margin.
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Segments
Analysis of revenues and margins for our segments is provided below. Direct costs of the COVID-19 pandemic are not allocated to the segments.
MOSFETs
Net revenues of the MOSFETs segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ 94,262 $ 166,618
Percentage change versus comparable prior year period 14.1 % 33.2 %
Changes in MOSFETs segment net revenues were attributable to the following:
Change attributable to:
Increase in volume 4.1 % 33.1 %
Change in average selling prices 11.8 % (0.3 )%
Foreign currency effects (2.4 )% 0.6 %
Acquisition 0.1 % 0.0 %
Gross profit margins and segment operating margins for the MOSFETs segment were as follows:
Years ended December 31,
The MOSFETs segment net revenues increased significantly in 2022 versus the prior year. The increase is primarily due to increased average selling prices and sales
volume. The increase in net revenues was achieved despite the two-month government mandated COVID-19 shut-down in Shanghai, People's Republic of China that required an almost complete closure of our main manufacturing facility in the second fiscal
quarter of 2022, while we had no significant closures in 2021. All regions and customer channels, particularly distribution customers in the Americas region, contributed to the increase.
The gross profit margin in 2022 increased versus the
prior year primarily due to increased average selling prices and sales volume, partially offset by significant cost inflation.
The segment operating margin increased versus the prior year primarily due to increased gross profit. Increased segment SG&A expenses
primarily due to increased R&D activity, including those of recently acquired MaxPower, limited the increase.
Average selling prices increased versus the prior year due to the strategic price increases implemented beginning in the second half of 2021.
We continue to invest to expand mid- and long-term manufacturing capacity for strategic product lines. We
have begun building a 12-inch wafer fab in Itzehoe, Germany adjacent to our existing 8-inch wafer fab, which we expect will increase our in-house wafer capacity by approximately 70% within 3-4 years and allow us to balance our in-house and foundry
wafer supply.
We acquired leading edge silicon and silicon carbide MOSFETs products with our
acquisition of MaxPower in the fourth fiscal quarter of 2022.
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Diodes
Net revenues of the Diodes segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ 55,804 $ 206,868
Percentage change versus comparable prior year period 7.9 % 41.2 %
Changes in Diodes segment net revenues were attributable to the following:
Change attributable to:
Increase in volume 1.8 % 34.2 %
Increase in average selling prices 9.7 % 2.9 %
Foreign currency effects (3.7 )% 1.2 %
Gross profit margins and segment operating margins for the Diodes segment were as follows:
Years ended December 31,
Net revenues of the Diodes segment increased significantly in 2022.
The increase in net revenues was achieved despite various government mandated COVID-19 shut-downs in the People's Republic of China that impacted our operations in Tianjin, Shanghai, and Xi'an, while we had no significant closures in 2021. The
increase is primarily due to increased average selling prices and sales volume, partially offset by negative foreign currency impacts. End market customers in all regions and distribution customers in the Americas region contributed to the growth.
Gross profit margin increased versus the prior year primarily due to increased average selling prices, our cost reduction measures, and increases in sales volume,
partially offset by cost inflation.
Segment operating margin increased versus the prior year primarily due to increased gross profit. The impact of a weaker euro decreased segment SG&A
expenses. The decrease in segment SG&A expenses was partially offset by cost inflation and increased R&D activities.
Average selling prices increased versus the prior year. Ongoing strong demand allowed us to continue with strategic price increases. Positive customer and product mix
also contributed to the increased prices.
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Optoelectronic Components
Net revenues of the Optoelectronic Components segment were as follows (dollars in
thousands):
Years ended December 31,
Change versus comparable prior year period $ (6,330 ) $ 66,098
Percentage change versus comparable prior year period (2.1 )% 27.9 %
Changes in Optoelectronic Components segment net revenues were attributable to the following:
Change attributable to:
Change in volume (3.6 )% 22.2 %
Increase in average selling prices 6.7 % 2.7 %
Foreign currency effects (4.7 )% 1.7 %
Gross profit margins and segment operating margins for the Optoelectronic Components segment were as follows:
Years ended December 31,
The Optoelectronic Components segment net revenues decreased slightly versus the prior year. The decrease was primarily due to the negative impact of a weaker euro and
decreased sales volume, partially offset by increased average selling prices. Sales to customers in the Asia region, particularly consumer and telecommunications end market customers, decreased, partially offset by increased sales to customers in
the Americas region.
The gross profit margin increased versus the prior year. The increase is primarily due to increased average selling prices, a more profitable product mix, and our cost
reduction measures, partially offset by cost inflation and lower sales volume.
The segment operating margin increased primarily due to the increase in gross profit. Decreased segment SG&A expenses, primarily due to the weaker
euro, positively impacted the segment operating margin.
Average selling prices increased versus the prior year. The high level of demand and cost inflation allowed us to continue to increase average selling prices for certain customers.
We are now using our recently modernized and expanded wafer fab in Heilbronn, Germany.
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Resistors
Net revenues of the Resistors segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ 80,252 $ 146,371
Percentage change versus comparable prior year period 10.7 % 24.1 %
Changes in Resistors segment net revenues were attributable to the following:
Change attributable to:
Increase in volume 10.4 % 18.2 %
Increase in average selling prices 4.6 % 0.3 %
Foreign currency effects (5.6 )% 2.0 %
Acquisitions 1.5 % 3.0 %
Gross profit margins and segment operating margins for the Resistors segment were as follows:
Years ended December 31,
Net revenues of the Resistors segment increased significantly versus the prior year. All regions, particularly the Americas, contributed to the increase. Sales to
distributor and EMS customers and industrial end market customers increased significantly, partially offset by decreased sales to automotive end market customers. The acquisition of Barry Industries in the fourth fiscal quarter of 2021 also
contributed to the increase in net revenues.
The gross profit margin increased versus the prior year. The increase is due to increased sales volume, increased average selling prices, manufacturing efficiencies,
and cost reduction measures, partially offset by increased labor, materials, metals, and logistics costs.
Segment operating margin increased versus the prior year. The increase is primarily due to increased gross profit.
Average selling prices increased versus the prior year.
We are increasing critical manufacturing capacities for certain product lines. We continue to broaden our
business with targeted acquisitions of specialty resistors businesses.
46
Inductors
Net revenues of the Inductors segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ (4,552 ) $ 42,009
Percentage change versus comparable prior year period (1.4 )% 14.3 %
Changes in Inductors segment net revenues were attributable to the following:
Change attributable to:
Change in volume (0.8 )% 15.4 %
Change in average selling prices 1.2 % (1.3 )%
Foreign currency effects (1.8 )% 0.6 %
Gross profit margins and segment operating margins for the Inductorssegment were
as follows:
Years ended December 31,
Net revenues of the Inductors segment decreased slightly versus the prior year. The Asia and Europe regions contributed to the decrease, while the Americas region
increased. Sales to distributor customers and automotive and industrial end markets decreased, partially offset by increases to EMS customers and military and aerospace end market customers.
The gross profit margin decreased versus the prior year. The decrease is primarily due to increased logistics, labor, and materials costs, manufacturing inefficiencies,
lower sales volume, and negative foreign currency impacts, partially offset by increased average selling prices and cost reductions.
Segment operating margin decreased versus the prior year. The decrease is primarily due to decreased gross profit.
Average selling prices increased slightly versus the prior year.
We expect long-term growth in this
segment, and are continuously expanding manufacturing capacity for certain product lines and evaluating acquisition opportunities, particularly of specialty businesses.
47
Capacitors
Net revenues of the Capacitors segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ 37,478 $ 110,625
Percentage change versus comparable prior year period 7.9 % 30.6 %
Changes in Capacitors segment net revenues were attributable to the following:
Change attributable to:
Increase in volume 8.0 % 25.0 %
Increase in average selling prices 5.6 % 1.8 %
Foreign currency effects (5.5 )% 2.0 %
Gross profit margins and segment operating margins for the Capacitors segment were as follows:
Years ended December 31,
Net revenues of the Capacitors segment increased significantly versus the prior year. Sales to the Americas and Asia regions increased, while sales to the Europe region
decreased slightly. The increase is primarily due to increased sales to EMS customers and the industrial end market, partially offset by decreased sales to the automotive end market.
The gross profit margin increased versus the prior year. The increase is due to increased sales volume, increased average selling prices, and positive impact of product
mix, partially offset by increased materials, metals, and labor costs and manufacturing inefficiencies.
Segment operating margin increased versus the prior year. The increase is primarily due to increased gross profit.
Average selling prices have increased versus the prior year.
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses are summarized as follows (dollars in
thousands):
Years ended December 31,
SG&A expenses for the year ended December 31, 2022
increased versus the year ended December 31, 2021 due to cost inflation. SG&A expenses for the year ended December 31, 2022
includes $0.5 million of incremental net costs separable from normal operations directly attributable to the COVID-19 pandemic.
49
Other Income (Expense)
2022 Compared to 2021
Interest expense for the year ended December 31, 2022 decreased by $0.4 million versus the year ended December
31, 2021.
The following table analyzes the components of the line “Other” on the consolidated statements of operations (in thousands):
Years ended December 31,
Other components of net periodic pension expense (11,090 ) (13,206 ) 2,116
2021 Compared to 2020
Interest expense for the year ended December 31, 2021 decreased by $14.0 million versus the year ended December 31, 2020. The decrease is primarily due to the elimination
of non-cash debt discount amortization upon the adoption of ASU No. 2020-06 effective January 1, 2021 and repurchases of convertible notes in the second and third fiscal quarters of 2020.
The following table analyzes the components of the line “Other” on the consolidated statements of operations (in thousands):
Years ended December 31,
Other components of net periodic pension expense (13,206 ) (13,613 ) 407
50
Income Taxes
For the years ended December 31, 2022, 2021, and 2020, the effective tax
rates were 27.5%, 31.2%,
and 21.8%, respectively. With the reduction in the U.S. statutory rate to 21% beginning January 1, 2018, we expect that our effective
tax rate will be higher than the U.S. statutory rate, excluding unusual transactions. Historically, the effective tax rates were generally less than the U.S. statutory rate of 35% primarily because of earnings in foreign jurisdictions. Discrete tax
items impacted our effective tax rate for each period presented. These items were $20.0 million in 2022, $39.3 million in 2021, and $2.0 million in 2020.
The effective tax rate for the year ended December 31, 2022 was impacted by $5.9 million of tax benefits recognized for changes in uncertain tax positions following the resolution of a tax audit, $59.6 million of tax
expense recognized upon the change in indefinite reversal assertion on earnings in Germany, and $33.7 million of tax benefits recognized upon the release of a valuation allowance.
We made the determination during the fourth fiscal quarter of 2022 that substantially all unremitted earnings in Germany are no longer indefinitely reinvested. We
recorded additional tax expense during the fourth fiscal quarter of 2022 to accrue the $59.6 million of withholding taxes necessary to distribute these approximately $360.0 million of accumulated earnings to the United States.
The effective tax rate for the year ended December 31, 2021 was impacted by $53.3 million of tax expense recognized upon a change in Israeli tax law that was enacted on
November 15, 2021. We have historically benefited from tax incentive programs offered by the Israeli government, including the generation of income not subject to current income tax. Any tax-exempt earnings generated under these programs would
incur an additional “claw-back” tax at approximately 11.1% if they were distributed or invested outside of Israel, in addition to normal withholding taxes on earnings distributed from Israel. Otherwise, taxes on such earnings were indefinitely
deferred.
The change in Israeli tax law provided companies with an election to currently pay a reduced claw-back rate of as low as 6% upon meeting certain conditions, with the
ability to distribute or invest those amounts outside of Israel at any time in the future. We elected to pay taxes on all previously untaxed earnings at the reduced 6% claw-back rate. As a direct result of this change in tax law, we made the
determination during the fourth fiscal quarter of 2021 that substantially all unremitted foreign earnings in Israel are no longer permanently reinvested. We recorded the additional tax expense during the fourth fiscal quarter of 2021 to accrue the
claw-back tax on applicable earnings and withholding taxes necessary to distribute these approximately $385.0 million of accumulated earnings to the United States. We repatriated
$81.2 million (net of taxes) to the United States in 2022 pursuant to this repatriation program. We paid withholding taxes, foreign taxes, and Israeli clawback taxes of $25.2 million due to the repatriation.
The effective tax rate for the year ended December 31, 2021 was also impacted by a $5.7 million tax benefit recognized upon the release of a valuation allowance and $8.3
million of tax benefits recognized due to changes in tax regulations.
We repatriated $104.1 million to the United States, and paid withholding and foreign taxes of $16.3 million in the year ended December 31, 2020, which completed the cash repatriation program that we initiated in 2017 in response to the TCJA enacted in the United States. We recorded tax
benefits of $0.2 million during the year ended December 31, 2020 due to adjustments to remeasure the deferred taxes related to our cash
repatriation program, such as foreign currency effects, and to consider certain corporate reorganizational activities that impact repatriation.
The effective tax rate for the year ended December 31, 2020
was also impacted by a $1.6 million tax benefit recognized upon the repurchase of convertible debentures reflecting the reduction in deferred tax liabilities related to the special tax attributes of the convertible debentures and $3.8 million of net
tax expense recognized for changes in uncertain tax positions.
We operate in a global environment with significant operations in various locations outside the United States. Accordingly, the consolidated income tax rate is a
composite rate reflecting our earnings and the applicable tax rates in the various locations where we operate. Part of our historical strategy has been to achieve cost savings through the transfer and expansion of manufacturing operations to
countries where we can take advantage of lower labor costs and available tax and other government-sponsored incentives.
Additional information about income taxes is included in Note 5 to our consolidated financial statements.
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Financial Condition, Liquidity, and Capital Resources
Our financial condition as of December 31, 2022 continued to be strong. Cash and short-term investments
exceed our long-term debt balances, and we have historically been a strong generator of operating cash flows. The cash generated from operations is used to fund our capital expenditure plans, and cash in excess of our capital expenditure needs is
available to fund our acquisition strategy, to reduce debt levels, and to pay dividends and repurchase stock. We have generated cash flows from operations in excess of $200 million in each of the last 21 years, and cash flows from operations in
excess of $100 million in each of the last 28 years.
Management uses a non-GAAP measure, "free cash," to evaluate our ability to fund acquisitions, repay debt, and otherwise enhance stockholder value through stock
repurchases or dividends. See "Overview" above for "free cash" definition and reconciliation to GAAP. Vishay has generated positive "free cash" in each of the past 26 years, and "free cash" in excess of $80 million in each of the last 21 years. In
this volatile economic environment, we continue to focus on the generation of free cash, including an emphasis on cost controls.
Cash flows provided by operating activities were $484.3 million for the year ended December 31, 2022, as compared to
cash flows provided by operations of $457.1 million for the year ended December 31, 2021.
Cash paid for property and equipment for the year ended December 31, 2022 was $325.3 million, as compared to $218.4 million for the year ended December 31, 2021. To be well positioned to service our customers and to fully participate in growing markets, we
intend to increase our capital expenditures for expansion in the mid-term. We expect to invest approximately $385 million in 2023 and approximately $1.2 billion over the next three years primarily for capital expansion projects outside of China.
Free cash flow for the year ended December 31, 2022 was negatively impacted by working capital changes, higher than usual capital expenditures, and cash taxes paid for repatriation. We expect our business to continue to be a
reliable generator of free cash. There is no assurance, however, that we will be able to continue to generate cash flows from operations and free cash at our historical levels, or at all, going forward if the economic environment worsens. The
COVID-19 pandemic and the mitigation efforts by governments to control its spread have not had a significant impact on our financial condition, liquidity, or capital resources.
As a direct result of a change in Israeli tax law, we made the determination during the fourth fiscal quarter of 2021 that substantially all unremitted foreign earnings
in Israel are no longer indefinitely reinvested. We recorded the additional tax expense during the fourth fiscal quarter of 2021 to accrue the claw-back tax on applicable earnings and withholding taxes necessary to distribute these approximately
$385.0 million of accumulated earnings to the United States. We repatriated $81.2 million (net of taxes) to the United States in 2022 pursuant to this repatriation
program.
We made the determination during the fourth fiscal quarter of 2022 that substantially all unremitted earnings in Germany are no longer indefinitely
reinvested. We recorded additional tax expense during the fourth fiscal quarter of 2022 to accrue the $59.6 million of withholding taxes necessary to distribute these approximately $360.0 million of accumulated earnings to the United States.
These changes in this indefinite reinvestment assertion provide greater access to our worldwide cash balances to fund our growth plan and our Stockholder
Return Policy. While the change in assertion provides access to these balances, these amounts will be repatriated only as needed. The withholding taxes associated with any distribution to the United States is payable upon distribution.
On February 7, 2022, our Board of Directors adopted a Stockholder Return Policy that will remain in effect until such time as the Board votes to amend or rescind the policy. See “Stockholder Value” above for additional
information.
The following table summarizes the components of net cash and short-term investments (debt) (in thousands):
Credit Facility $ 42,000 $ -
Deferred financing costs (6,407 ) (9,678 )
Net cash and short-term investments (debt) $ 415,160 $ 465,185
"Net cash and short-term investments (debt)" does not have a uniform definition and is not recognized in accordance with GAAP. This measure should not be viewed as an alternative to GAAP measures of performance or liquidity. However, management
believes that an analysis of "net cash and short-term investments (debt)" assists investors in understanding aspects of our cash and debt management. The measure, as calculated by us, may not be comparable to similarly titled measures used by other
companies.
We invest a portion of our excess cash in highly liquid, high-quality instruments with maturities greater than 90 days, but less than 1 year, which we classify as
short-term investments on our consolidated balance sheets. As these investments were funded using a portion of excess cash and represent a significant aspect of our cash management strategy, we include the investments in the calculation of net
cash and short-term investments (debt).
52
The interest rates on our short-term investments vary by location. Transactions related to these investments are classified as investing activities on our consolidated
statements of cash flows.
As of December 31, 2022, substantially all of our cash
and cash equivalents and short-term investments were held in countries outside of the United States. Cash dividends to stockholders, share repurchases, and principal and interest payments on our debt instruments need to be paid by the U.S. parent
company, Vishay Intertechnology, Inc. Our U.S. subsidiaries also have cash operating needs. The distribution of earnings from Israel and Germany to the United States will be used to fund our Stockholder Return Policy. We expect that cash on-hand
and cash flows from operations will be sufficient to meet our longer-term financing needs related to normal operating requirements, regular dividend payments, share repurchases pursuant to our Stockholder Return Policy, and our research and
development and capital expenditure plans. Our substantially undrawn credit facility provides us with significant operating liquidity in the United States.
Our revolving credit facility provides an aggregate commitment of $750 million of revolving loans available until June 5, 2024. The maximum amount available on the revolving credit facility is restricted by the financial
covenants described below. The credit facility also provides us the ability to request up to $300 million of incremental facilities, subject to the satisfaction of certain conditions, which could take the form of additional revolving commitments,
incremental “term loan A” or “term loan B” facilities, or incremental equivalent debt.
We had no amounts outstanding on our revolving credit facility at December 31, 2021 and $42 million outstanding at December 31, 2022. We borrowed $759 million and repaid $717 million on the revolving credit facility during the
year ended December 31, 2022. The average outstanding balance on our revolving credit facility calculated at fiscal month-ends was
$48.9 million and the highest amount outstanding on our revolving credit facility at a fiscal month end was $124.0 million during the year ended December 31, 2022.
The revolving credit facility limits or restricts us from, among other things, incurring indebtedness, incurring liens on its respective assets, making investments and acquisitions (assuming our pro forma leverage ratio is greater
than 2.75 to 1.00), making asset sales, and paying cash dividends and making other restricted payments (assuming our pro forma leverage ratio is greater than 2.50 to 1.00), and requires us to comply with other covenants, including the maintenance
of specific financial ratios.
The financial maintenance covenants include (a) an interest coverage ratio of not less than 2.00 to 1; and (b) a leverage ratio of not more than 3.25 to 1 (and a pro forma ratio of 3.00 to 1 on the date of incurrence of additional
debt). The computation of these ratios is prescribed in Article VI of the Credit Agreement between Vishay Intertechnology, Inc. and JPMorgan Chase Bank, N.A., which has been filed with the SEC as Exhibit 10.1 to our current report on Form 8-K filed
June 5, 2019.
We were in compliance with all financial covenants under the credit facility at December 31, 2022. Our interest
coverage ratio and leverage ratio were 32.78 to 1 and 0.65 to 1, respectively. We expect to continue to be in compliance with these covenants based on current projections.
If we are not in compliance with all of the required financial covenants, the credit facility could be terminated by the lenders, and any amounts then outstanding pursuant to the credit facility could become immediately payable.
Additionally, our convertible senior notes due 2025 have cross-default provisions that could accelerate repayment in the event the indebtedness under the credit facility is accelerated.
Borrowings under the credit facility bear interest at LIBOR plus an interest margin. The applicable interest margin is based on our leverage ratio. We also pay a commitment fee, also based on our leverage ratio, on undrawn
amounts. Based on our current leverage ratio, any new borrowings will bear interest at LIBOR plus 1.50%, and the undrawn commitment fee is 0.25% per annum.
The borrowings under the credit facility are secured by a lien on substantially all assets, including accounts receivable, inventory, machinery and equipment, and general intangibles (but excluding real estate, intellectual
property registered or licensed solely for use in, or arising solely under the laws of, any country other than the United States, assets located solely outside of the United States and deposit and securities accounts), of Vishay and certain
significant subsidiaries located in the United States, and pledges of stock in certain significant domestic and foreign subsidiaries; and are guaranteed by certain significant subsidiaries.
We expect, at least initially, to fund certain future obligations required to be paid by the U.S. parent company by borrowing under our revolving credit facility. We also expect to continue to use the credit facility from
time-to-time to meet certain short-term financing needs. Additional acquisition activity, convertible debt repurchases, or conversion of our convertible debt instruments may require additional borrowing under our credit facility or may otherwise
require us to incur additional debt. No principal payments on our debt are due before June 2024 when our revolving credit facility expires.
The convertible senior notes due 2025 are not currently convertible. Pursuant to the indenture governing the convertible senior notes due 2025 and the amendments thereto incorporated in the Supplemental Indenture dated December
23, 2020, we will cash-settle the principal amount of $1,000 per note and settle any additional amounts in shares of our common stock. We intend to finance the principal amount of any converted notes using borrowings under our credit facility. No
conversions have occurred to date.
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In evaluating our liquidity and capital resources, we consider our outstanding commitments. As of
December 31, 2022 our commitments were as follows (in
thousands):
Payments due by period
Letters of credit 939 - 939 - - - -
Other long-term liabilities 74,547 - - - - - 74,547
Commitments for long-term debt are based on the amount required to settle the obligation. Accordingly, the capitalized deferred financing costs associated with our
convertible notes are excluded from the calculation of long-term debt commitments in the table above.
Commitments for interest payments on long-term debt are cash commitments based on the stated maturity dates of each agreement and include fees under our revolving credit
facility, which expires on June 4, 2024. Commitments for interest payments on long-term debt exclude non-cash interest expense related to the amortization of deferred financing costs.
Various factors could have a material effect on the amount of future principal and interest payments. Principal and interest commitments associated with our convertible
notes are based on the amounts outstanding as of December 31, 2022. Additionally, interest commitments for our revolving credit