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 maintaining a prudent capital structure. To drive growth and optimize stockholder value, we plan to
capitalize on the mega trends of e-mobility, sustainability, and connectivity through initiatives. We are developing go-to-market strategies and investing in and expanding the key product lines for growth that we have identified. We have
increased our capacity internally by investing approximately $329 million in 2023 and plan to invest approximately $1.2 billion in total from 2023 - 2025 primarily for capital expansion projects outside of China. In addition, we are
strategically expanding our outsourced production of commodity products to subcontractors. At the same time, we are enhancing our channel management while investing in internal resources by adding customer-facing engineers and filling gaps in
technology and market coverage. Taken together, each of these initiatives supports our Think Customer First organizational culture.
On November 8, 2023, we and Nexperia BV announced that we have entered
into an agreement whereby we will acquire Nexperia’s wafer fabrication facility and operations located in Newport, South Wales, U.K. for approximately $177 million in cash, subject to customary post-closing adjustments. The closing of
the transaction is subject to U.K. government review and customary closing conditions, and is expected to occur in the first quarter of 2024.
In addition to enhancing stockholder value through growing our business, in 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.
On September 12, 2023, we issued $750 million convertible senior notes due 2030. We used the net proceeds from the issuance of these notes to
repurchase $370.2 million principal amount of convertible senior notes due 2025, $94.2 million to enter into capped call transactions intended to mitigate the dilution risk of convertible senior notes due 2030 by synthetically increasing the
conversion price of the notes to approximately $43.98 per share, to repay amounts outstanding on our amended and restated credit facility, and for other general corporate purposes. We recognized a loss of $18.9 million due to the early
extinguishment of the repurchased convertible senior notes due 2025.
On May 8, 2023, we amended and restated our $750 million revolving credit agreement, which replaced our credit agreement that was scheduled to mature
in June 2024. The amendment and restatement extended the maturity date of the revolving credit agreement until May 8, 2028, replaced the previous total leverage ratio used for financial covenant compliance measurement with a net leverage
ratio, and replaced the LIBOR-based interest rate and related LIBOR-based mechanics applicable to U.S. dollar borrowings under the revolving credit agreement with an interest rate based on the Secured Overnight Financing Rate ("SOFR")
(including a customary spread adjustment) and related SOFR-based mechanics. The maturity date of the credit facility will accelerate if within ninety-one days prior to the maturity of our convertible senior notes due 2025, the outstanding
principal amount of such notes exceeds a defined liquidity measure as set forth in the credit facility. The repurchase of $370.2 million principal amount of convertible senior notes due 2025 in September 2023 substantially reduces the risk of
maturity date acceleration. Other terms and conditions are substantially unchanged.
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. 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 I.
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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 decreased in the fourth fiscal quarter of 2023 primarily due to the negative impacts of an on-going distributor inventory correction that resulted in lower
orders. Net revenues and margins decreased versus the prior year period primarily due to lower volume.
Net revenues for the year ended December 31, 2023 were
$3.402 billion, compared to net revenues of $3.497 billion and $3.240 billion for the years ended December 31, 2022 and 2021, respectively. Net
earnings attributable to Vishay stockholders for the year ended December 31, 2023 were $323.8 million, or $2.31 per diluted share, compared to $428.8 million, or $2.98 per diluted
share, and $298.0 million, or $2.05
per share, for the years ended December 31, 2022 and 2021, 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, 2023, 2022, and 2021 include items affecting comparability. The items affecting comparability are (in thousands, except per
share amounts):
Years ended December 31,
Reconciling items affecting gross profit:
Impact of COVID-19 pandemic $ - $ 6,661 $ -
Other reconciling items affecting operating income:
Impact of COVID-19 pandemic $ - $ 546 $ -
Reconciling items affecting other income (expense):
Loss on early extinguishment of debt $ 18,874 $ - $ -
Reconciling items affecting tax expense (benefit):
Effects of changes in uncertain tax positions $ - $ (5,941 ) $ -
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
Tax effects of pre-tax items above (498 ) (1,802 ) -
Adjusted earnings per diluted share $ 2.44 $ 3.16 $ 2.32
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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 ) -
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 1,156 1,198 1,317
Orders are lower due to a distributor inventory correction that began in the fourth fiscal quarter of 2022 and continued throughout 2023. Our results for 2023 remained strong, although weaker than our 2022
results.
Our free cash results were significantly impacted by the installment payments of the U.S. transition tax of $27.7 million in 2023
and $14.8 million in 2022 and 2021, respectively, and $63.6 million and $25.2 million of payments of foreign, withholding, and claw-back cash taxes on foreign earnings for the $276.8 million and $81.2 million (net of taxes) that were repatriated to
the U.S. in 2023 and 2022, respectively.
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Growth and Company Transformation Initiatives
Effective January 1, 2023, a new executive leadership team, promoted from within, embarked on a new era at Vishay. The new executive management team
laid out a three-year plan to expand capacity to support our highest growth and highest return product lines and to position Vishay to be ready for the next phase of megatrends in e-mobility, sustainability, and connectivity. The year 2023 is
generally seen as the staging year for this plan, and all elements of the plan are progressing throughout the organization. In 2024, we expect to advance many of these initiatives and begin to have increased manufacturing capacity available.
Beginning in late 2024 and into 2025, we expect to be in a better position to capture the next step in the growing demand for electrification in our key end-markets.
To focus this growth, we have identified product lines for growth across each reportable segment Most of these product lines serve multiple end-market
segments, applications, and business channels. We have developed go-to market strategies for each one of these product lines, concentrating our resources on improving the technical performance of non-commodity and custom products, to better
position Vishay to support the mega trends toward electrification and data communications.
To be ready for this next phase of growth, we intend to invest a total of about $1.2 billion between 2023 and 2025. These projects include our new
power inductor site in Mexico; a resistor manufacturing expansion in Mexico; expanded 8" diode manufacturing in Taiwan and Turin, Italy; and the new MOSFET 12” fab in Itzehoe, Germany. Our plan was to invest approximately $385 million in 2023;
however, capital spending for 2023 came in at $329 million due to some delays in delivery and installing equipment. We intend to carry over the remaining $56 million into 2024.
We have also expanded our external capacity, engaging in developing partnerships with subcontractors to outsource some commodity products and create
incremental capacity for our higher growth and higher return products. Each reportable segment is evaluating subcontractors, including supporting front-end capacities for our semiconductor segments.
By growing capacity and capabilities, we are also enhancing our ability to support all the business channels of OEM, distribution, and EMS, while
maximizing the profitability of each one through a focus on higher margin customers.
At the same time, we are focusing on increasing our technical resources, adding additional customer-facing engineers, and intensifying our activities in
R&D. We have seen and will continue to see an increase in operating expenses over the next couple of years as we add these engineering talents, fill gaps in our technology, and become a preferred supplier to more customers and more broadly
sell our product portfolio. This includes investments in technology, including enhanced Customer Relationship Management and planning tools, to improve our operational excellence.
The acquisition of MaxPower and its silicon carbide technology in 2022 is an illustration of this increased investment. During the fourth fiscal
quarter, we released our 1,200-volt silicon carbide ("SiC") planar MOSFETs. We are planning to have the SiC package types for three different resistance and current capabilities available during the first half of 2024. In parallel, we continue to
advance the development of the 1,200-volt dual-trench technology, the 1,700-volt planar technology, and the 650-volt planar technology. We plan to utilize our pending acquisition of the Newport wafer fab as the home for MaxPower to further develop
and scale our SiC capabilities.
Another area of focus is our introduction of solution selling, speaking to customer engineers about applications and the performance improvement that
Vishay components can bring, from the full array of our portfolio. Customer engineers look for suppliers who can provide solutions to advance their technologies. Vishay’s semiconductors and passive components can populate greater than 80% of the
components on the circuit board in many applications.
All of this is being done as we implement organizational and structural change at Vishay, focused on a “Think Customer First” philosophy, and becoming a
more responsive company. We are fostering collaboration internally and externally, particularly in the functions connected to customer programs. To facilitate that change internally, we re-designed our short- and long-term incentive plans to
align the performance of about 1,000 key employees with Company growth and profitability objectives and stockholder interests. The equity-based plan was approved by our stockholders at our 2023 annual meeting.
These initiatives are the foundation for our ambitions to unleash the potential at Vishay, realizing the full value of our broad product portfolio and
becoming a customer-first company, and for our goals of driving top line growth, expanding margins and optimizing returns.
.
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Stockholder Return Policy
In 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):
Years ended
During the fourth quarters of 2022 and 2021, we determined that substantially all unremitted foreign earnings in Germany and Israel, respectively,
are no longer indefinitely reinvested. The changes in these indefinite reinvestment assertions will provide greater access to our worldwide cash balances to fund our growth plan and our Stockholder Return Policy, but also increased 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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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, segment operating margin, 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 2022 through the fourth fiscal quarter of 2023
(dollars in thousands):
Change in ASP vs. prior quarter 0.6 % 1.2 % (0.7 )% (0.8 )% (0.7 )%
_______________
See “Financial Metrics by Segment” below for net revenues, book-to-bill ratio, and gross profit margin by segment.
Revenues decreased versus the fourth fiscal quarter of 2022 and versus the prior fiscal quarter primarily due to lower sales volume. The book-to-bill ratio and backlog
were negatively impacted by the distributor inventory correction that began in 2022 and continued through 2023. We continue to increase manufacturing capacity for critical product lines. Average selling prices decreased versus the fourth fiscal
quarter of 2022 and prior fiscal quarter.
Gross profit margin decreased versus the prior fiscal quarter and prior year quarter primarily due to lower volume.
The book-to-bill ratio in the fourth fiscal quarter of 2023 increased to 0.75 versus 0.63 in the third fiscal quarter of 2023.
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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 2022 through the fourth fiscal quarter of 2023 (dollars in thousands):
MOSFETs
Diodes
Optoelectronic Components
Resistors
Inductors
Capacitors
_________
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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, such as MaxPower Semiconductor, Inc. ("MaxPower"), acquired in 2022, and key niche suppliers to vertically integrate our supply chain, such as Centerline Technologies, LLC, acquired in 2023. 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 November 8, 2023, we and Nexperia BV announced that we have entered into an agreement whereby we will acquire Nexperia’s wafer fabrication
facility and operations located in Newport, South Wales, U.K. for approximately $177 million in cash, subject to customary post-closing adjustments. The closing of the transaction is subject to U.K. government review and customary closing
conditions, and is expected to occur in the first quarter of 2024.
On October 28, 2022, we acquired 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 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. The transaction also included possible 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. One of the contingencies was resolved in the fourth fiscal quarter of
2023, which resulted in no additional payments to the former employees and stockholders of MaxPower. Significant developments occurred in another of the contingencies in January 2024. Our estimate of the maximum possible contingent payments is
$17.5 million. 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 years ended December 31, 2023 and 2022.
There is no assurance that we will be able to close the transaction for the Nexperia wafer fabrication facility, or 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 generally 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.
During 2023, we implemented the Vishay Intertechnology, Inc. 2023 Long-Term Incentive Plan (the "2023 Plan") to enable us to recruit and
retain highly qualified employees, directors, consultants and other service providers, provide them with an incentive for productivity, and create an opportunity for them to share in the growth and value of the Company. The 2023 Plan is the first
broad-based stock compensation program at Vishay in over 20 years. This program increased operating expenses by $8.8 million in 2023 and is expected to increase operating expenses by between $7 million and $10 million in 2024 versus 2023.
Management believes such additional non-cash costs will enhance the long-term performance of the Company by providing selected participants with an incentive to improve the growth and profitability of the Company.
Also beginning in 2023, we made and are making significant investments in capital expenditures primarily for capital expansion projects outside of China,
which will increase depreciation expense. At the same time, we are focusing on increasing our technical resources, adding additional customer-facing engineers, and intensifying our activities in R&D. We have seen and expect to continue to see
an increase in operating expenses over the next couple of years as we add these engineering talents, fill gaps in our technology, and become a preferred supplier to more customers and more broadly sell our product portfolio. Management believes such
additional costs will enhance our long-term performance by accelerating our growth.
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 2024. 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 weaker during 2023 versus 2022, but stronger during 2022 versus 2021, with the translation of foreign currency revenues and expenses into U.S. dollars increasing reported revenues and expenses in 2023 versus 2022, but decreasing
reported revenues and expenses in 2022 versus 2021.
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 have been favorably impacted for the year ended December 31, 2023 compared to 2022 and for the year ended December 31, 2022 compared to 2021 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. We utilize a number of different methodologies and consider several factors when estimating the
accruals. Some of the factors that we consider are 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 on age of the inventory and 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, 2023, 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.
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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.
During 2023,
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. We settled an examination of our U.S. federal income tax
returns for the periods ended December 31, 2017 through 2019. Our federal income tax returns for subsequent years remain subject to examination. The tax returns of significant non-U.S. subsidiaries currently under examination are located in the
following jurisdictions: Israel (2021), Germany (2017 through 2021), India (2004 through 2021), and Philippines (2017 through 2022). 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.
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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 14.4 % 12.7 % 13.0 %
Income before taxes and noncontrolling interest 13.7 % 17.0 % 13.4 %
Net earnings attributable to Vishay stockholders 9.5 % 12.3 % 9.2 %
________
Net Revenues
Net revenues were as follows (dollars in thousands):
Percentage change versus prior year (2.7 )% 7.9 %
Changes in net revenues were attributable to the following:
Change attributable to:
Change in volume (5.2 )% 4.3 %
Increase in average selling prices 1.7 % 7.2 %
Foreign currency effects 0.7 % (4.0 )%
Acquisitions 0.2 % 0.4 %
Net change (2.7 )% 7.9 %
Despite the inventory correction that we are experiencing, the long-term prospects for our business remain favorable, and we
continue to increase manufacturing capacities for critical product lines. The decrease in net revenues in 2023 is primarily sales volume-driven, partially offset by increased average selling prices. The increase in net revenues in 2022 was
primarily due to increased sales volume and average selling prices.
Gross Profit and Margins
Gross profit margins for the year ended December 31, 2023
were 28.6%, as compared to 30.3%
for the year ended December 31, 2022. The decrease in gross profit margin is primarily due to decreased sales volume. Higher labor,
materials, and utilities costs also negatively impacted the gross profit 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 $ 16,494 $ 94,262
Percentage change versus comparable prior year period 2.2 % 14.1 %
Changes in MOSFETs segment net revenues were attributable to the following:
Change attributable to:
Change in volume (1.8 )% 4.1 %
Increase in average selling prices 2.3 % 11.8 %
Foreign currency effects 0.5 % (2.4 )%
Acquisition 1.0 % 0.1 %
Gross profit margins and segment operating margins for the MOSFETs segment were as follows:
Years ended December 31,
Net revenues of the MOSFETs segment increased slightly in 2023 versus the prior year. The increase is primarily due to increased sales to automotive, power supply, and
industrial end market customers in the Europe region, partially offset decreased sales to customers in the Americas and Asia regions.
The gross profit margin in 2023 decreased versus the
prior year primarily due to higher utilities, labor, and repair and maintenance costs.
The segment operating margin decreased versus the prior year primarily due to decreased gross profit. Increased segment SG&A expenses
primarily due to acquisition-related expenses also contributed to the decrease.
Average selling prices increased versus the prior year.
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 2-3 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. Our pending acquisition of Nexperia's Newport fab is expected to enhance the manufacturing capacity and capabilities of our MOSFETs segment.
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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 $ (74,680 ) $ 55,804
Percentage change versus comparable prior year period (9.8 )% 7.9 %
Changes in Diodes segment net revenues were attributable to the following:
Change attributable to:
Change in volume (11.0 )% 1.8 %
Increase in average selling prices 1.0 % 9.7 %
Foreign currency effects 0.4 % (3.7 )%
Net change (9.8 )% 7.9 %
Gross profit margins and segment operating margins for the Diodes segment were as follows:
Years ended December 31,
Net revenues of the Diodes segment decreased significantly in 2023.
The decrease is primarily due to decreased sales to distribution and EMS customers, power supply end market customers, and customers in the Americas and Asia regions, partially offset by increased sales to automotive end market customers.
Gross profit margin decreased versus the prior year primarily due to lower sales volume and higher materials, labor, and fixed costs, partially offset by higher
average selling prices.
Segment operating margin decreased versus the prior year primarily due to decreased gross profit.
Average selling prices increased versus the prior year.
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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 $ (53,238 ) $ (6,330 )
Percentage change versus comparable prior year period (18.0 )% (2.1 )%
Changes in Optoelectronic Components segment net revenues were attributable to the following:
Change attributable to:
Decrease in volume (19.2 )% (3.6 )%
Increase in average selling prices 0.5 % 6.7 %
Foreign currency effects 0.9 % (4.7 )%
Other (0.2 )% (0.5 )%
Net change (18.0 )% (2.1 )%
Gross profit margins and segment operating margins for the Optoelectronic Components segment were as follows:
Years ended December 31,
Net revenues of the Optoelectronic Components segment decreased significantly versus the prior year. The decrease was primarily due to general consumer weakness that
impacted many of the products we sell. The result was decreased sales to distribution customers and customers in all regions. We expect long-term growth for this segment.
The gross profit margin decreased versus the prior year. The decrease is primarily due to lower sales volume, higher materials, services, labor, and utilities costs,
and inventory and higher depreciation expense.
The segment operating margin decreased primarily due to the decrease in gross profit.
Average selling prices increased versus the prior year.
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 $ 10,666 $ 80,252
Percentage change versus comparable prior year period 1.3 % 10.7 %
Changes in Resistors segment net revenues were attributable to the following:
Change attributable to:
Change in volume (1.4 )% 10.4 %
Increase in average selling prices 1.8 % 4.6 %
Foreign currency effects 1.0 % (5.6 )%
Acquisitions 0.0 % 1.5 %
Other (0.1 )% (0.2 )%
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 slightly versus the prior year. The increase was primarily due to increased sales to military and aerospace, automotive,
and industrial end market customers and customers in the Europe region, partially offset by decreased sales to distribution customers.
The gross profit margin decreased versus the prior year. The decrease is due to lower sales volume, higher labor and materials costs, and other inflationary impacts,
partially offset by increased average selling prices, lower metals and logistics costs, and favorable exchange rate impacts.
Segment operating margin decreased versus the prior year. The decrease is primarily due to decreased 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.
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Inductors
Net revenues of the Inductors segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ 16,306 $ (4,552 )
Percentage change versus comparable prior year period 4.9 % (1.4 )%
Changes in Inductors segment net revenues were attributable to the following:
Change attributable to:
Change in volume 2.4 % (0.8 )%
Increase in average selling prices 1.9 % 1.2 %
Foreign currency effects 0.5 % (1.8 )%
Net change 4.9 % (1.4 )%
Gross profit margins and segment operating margins for the Inductorssegment were
as follows:
Years ended December 31,
Net revenues of the Inductors segment increased moderately versus the prior year. The increase is primarily due to increased sales to EMS customers, medical,
automotive, and military and aerospace end market customers, and customers in the Americas and Europe regions, partially offset by decreased sales to distribution customers, industrial and telecommunications end market customers, and customers in the
Asia region.
The gross profit margin increased versus the prior year. The increase is primarily due to increased average selling prices, higher sales volume, lower logistics and
metals prices, and positive foreign currency impacts, partially offset by higher labor and materials costs, other inflationary impacts, and start-up costs of a new manufacturing facility.
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 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. We have greatly increased our manufacturing capacity for power inductors in
the past year.
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Capacitors
Net revenues of the Capacitors segment were as follows (dollars in thousands):
Years ended December 31,
Change versus comparable prior year period $ (10,904 ) $ 37,478
Percentage change versus comparable prior year period (2.1 )% 7.9 %
Changes in Capacitors segment net revenues were attributable to the following:
Change attributable to:
Change in volume (5.1 )% 8.0 %
Increase in average selling prices 2.2 % 5.6 %
Foreign currency effects 0.9 % (5.5 )%
Other (0.1 )% (0.2 )%
Net change (2.1 )% 7.9 %
Gross profit margins and segment operating margins for the Capacitors segment were as follows:
Years ended December 31,
Net revenues of the Capacitors segment decreased slightly versus the prior year. The decrease is primarily due to decreased sales to distribution and EMS customers and
customers in the Americas and Asia regions, partially offset by increased sales to industrial end market customers.
The gross profit margin increased versus the prior year. The increase is due to increased average selling prices, positive impact of product mix, positive foreign
currency impacts, and lower metals, freight, and utility costs, partially offset by lower sales volume and higher labor and tantalum costs.
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, 2023
increased versus the year ended December 31, 2022 due to general inflation and higher compensation costs, including the implementation
of the 2023 Long-Term Incentive Plan in 2023.
Other Income (Expense)
2023 Compared to 2022
Interest expense for the year ended December 31, 2023 increased by $8.0 million versus the year ended December
31, 2022. The increase is primarily due to higher interest rates and higher average balances outstanding on the revolving credit
facility in 2023 prior to September 2023 when it was paid down to $0.
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 (8,730 ) (11,090 ) 2,360
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
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Income Taxes
For the years ended December 31, 2023, 2022, and 2021, the effective tax
rates were 30.4%, 27.5%,
and 31.2%, 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 and $39.3 million in 2021.
There were no unusual tax transactions that impacted the effective tax rate for the year ended December 31, 2023.
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 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, 2023 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.
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.
Cash flows provided by operating activities were $365.7 million for the year ended December 31, 2023, as compared to cash
flows provided by operations of $484.3 million for the year ended December 31, 2022.
In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle. The following table presents the components of our cash conversion cycle during the five fiscal quarters beginning with
the fourth fiscal quarter of 2022 through the fourth fiscal quarter of 2023:
Days payable outstanding ("DPO") (c) (31 ) (32 ) (32 ) (33 ) (31 )
a) DSO measures the average collection period of our receivables. DSO is calculated by dividing the average accounts receivable by the average net revenue per day for the respective fiscal quarter.
b) DIO measures the average number of days from procurement to sale of our product. DIO is calculated by dividing the average inventory by average cost of goods sold per day for the respective fiscal
quarter.
c) DPO measures the average number of days our payables remain outstanding before payment. DPO is calculated by dividing the average accounts payable by the average cost of goods sold per day for the
respective fiscal quarter.
Cash paid for property and equipment for the year ended December 31, 2023 was $329.4 million, as compared to $325.3 million for the year ended December 31, 2022. To be well positioned to service our customers and to fully participate in growing markets, we have
increased and expect to maintain a relatively high level of capital expenditures for expansion in the mid-term. We expect to invest approximately $450 million in 2024 and approximately $1.2 billion from 2023 to 2025 primarily for capital expansion
projects outside of China.
Free cash flow for the year ended December 31, 2023 decreased versus the year ended December 31, 2022 primarily due to decreased net earnings, increased transition and repatriation taxes paid, and a working capital increase. We
expect that free cash flow will be negatively impacted by the expected high level of capital expenditures for expansion in 2023 - 2025 after which we expect to generate increasingly higher levels 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.
In 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 Return Policy” above for additional
information.
The following table summarizes the components of net cash and short-term investments (debt) (in thousands):
Credit facility $ - $ 42,000
Net cash and short-term investments (debt) $ 190,339 $ 415,160
"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).
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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. We aligned the maturity dates of our cash equivalents and short-term investments in preparation of the planned cash repatriation that was completed in the fourth fiscal quarter of 2023, which resulted in a decrease in our
short-term investment balance.
As of December 31, 2023, 65.5% 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. A U.S.-domiciled subsidiary is expected to be the acquiring entity of Nexperia's wafer fabrication facility and operations in Newport, South Wales, U.K. Our U.S. subsidiaries also have cash operating needs. The recent
distribution of earnings from Israel and Germany to the United States will be used to fund our Stockholder Return Policy and the Nexperia transaction. 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.
On May 8, 2023, we amended and restated our $750 million revolving credit agreement, which replaced our credit agreement that was scheduled to mature in June 2024. The amendment and restatement extended the maturity date of the
revolving credit agreement until May 8, 2028.
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 $42 million outstanding on our revolving credit facility at December 31, 2022 and no amounts outstanding at December 31, 2023. We borrowed $501 million and repaid $543 million on the revolving credit facility during the year
ended December 31, 2023. The average outstanding balance on our revolving credit facility calculated at fiscal month-ends was $93.3
million and the highest amount outstanding on our revolving credit facility at a fiscal month end was $185 million during the year ended December 31, 2023.
We used $185 million of the net proceeds from the convertible senior notes due 2030 to repay amounts outstanding on the revolving credit facility in the third fiscal quarter of 2023.
The amendment and restatement of the facility replaced the leverage ratio used for compliance measurement with a net leverage ratio, reducing the measure of outstanding debt by up to $250 million of unrestricted cash.
Measurements prior to the amendment and restatement were based on a total leverage ratio.
Pursuant to the credit facility, the financial maintenance covenants include (a) an interest coverage ratio of not less than 2.00 to 1; and (b) a net 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 was filed with the SEC as Exhibit 10.1
to our current report on Form 8-K filed May 8, 2023.