VISHAY INTERTECHNOLOGY INC (VSH) FY 2021 MD&A

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. To foster intensified internal growth, we have increased our worldwide R&D and engineering technical staff; we are expanding critical manufacturing capacities; 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 connectivity, mobility, and sustainability growth drivers of our business.  In addition to our growth plan, we also have opportunistically repurchased our stock and, as further described below, reduced dilution risks by repurchasing substantially all of our convertible senior debentures.  Over the next few years, we expect to experience higher growth rates than over the last decade.  This expectation is based upon accelerated electrification, such as factory automation, electrical vehicles, and 5G infrastructures.

In 2014, our Board of Directors instituted a quarterly dividend payment program and declared the first cash dividend in the history of Vishay. We have paid dividends each quarter since the first fiscal quarter of 2014, and further increased the quarterly cash dividend by 5% to $0.10 per share in the fourth fiscal quarter of 2021.  We expect to continue to pay quarterly dividends, although each dividend is subject to approval by our Board of Directors.

We have been re-shaping our capital structure since the enactment of the U.S. Tax Cuts and Jobs Act (“TCJA”) in December 2017.  We repatriated over $1 billion (net of withholding taxes) of cash to the United States since the enactment of the TCJA.  We used the repatriated cash, the net proceeds from the 2018 issuance of $600 million principal amount of convertible senior notes due 2025, and our operating cash flows to fully retire the convertible senior debentures, which had become less tax-efficient because of the TCJA.  We repurchased $134.7 million principal amount of convertible senior notes due 2025 in the year ended December 31, 2020 and remain authorized by our Board of Directors to repurchase an additional $65.3 million principal amount.  Our debt instruments and transactions are more fully described in Note 6 to the consolidated financial statements.

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 permanently reinvested.  We recorded additional tax expense of $53.3 million 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.

On February 8, 2022, we announced that our Board of Directors has adopted a Stockholder Return Policy that will remain in effect until such time as the Board votes to amend or rescind the policy.  The Stockholder Return Policy 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 directly, in the form of dividends, or indirectly, in the form of stock repurchases. For 2022, we expect to return at least $100 million to stockholders consisting of approximately $58 million through our existing quarterly dividend program and at least $42 million through share repurchases.  The distribution of earnings from Israel to the United States will initially be 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.

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 impacted by the COVID-19 pandemic, particularly in 2020.  The pandemic significantly impacted the global market, including our customers, suppliers, and shipping partners, which impacted our net revenues.  In 2020, we also incurred incremental costs separable from normal operations that are directly attributable to the pandemic and containment efforts, primarily salaries and wages for employees impacted by quarantines and additional safety measures, including masks and temperature scanners, which were partially offset by government subsidies.  The net impact of the costs and subsidies are classified as cost of products sold of $4.6 million and selling, general, and administrative benefits of $1.5 million based on employee function on the consolidated statement of operations for the year ended December 31, 2020.  Directly attributable costs of the pandemic are no longer incremental and have become part of normal operations.  Accordingly, in 2021, they are considered normal operating costs.  We excluded indirect financial changes from the COVID-19 pandemic such as general macroeconomic effects and higher shipping costs due to reduced shipping capacity from the COVID-19 pandemic amounts reported.  See additional information regarding our competitive strengths and key challenges as disclosed in Part 1.

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While the COVID-19 pandemic continues to have a global impact, the widespread economic impact of the COVID-19 pandemic on Vishay was temporary, as evidenced by our record 2021 revenues.  Similar disruptions may continue to occur on a more limited scale.  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 have significant liquidity to withstand temporary disruptions in the economic environment.  The global cost reduction and management rejuvenation programs that we began as part of our continuous efforts to improve efficiency and operating performance in 2019 have been fully implemented.  Our cost reduction program is more fully described in Note 4 to the consolidated financial statements and in "Cost Management" below.

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 COVID-19 pandemic impacted almost all key financial metrics in 2020.  We experienced a broad recovery in orders and sales beginning in the third fiscal quarter of 2020 that continued through 2021.  We continue to increase manufacturing capacities and have broadly implemented strategic price increases, which positively impacted almost all key financial metrics versus the prior year.  The key financial metrics remained strong in the fourth fiscal quarter of 2021, but were slightly negatively impacted by cost increases, particularly in transportation and metal prices, and a slower rate of order and backlog increase versus the prior fiscal quarter.

Net revenues for the year ended December 31, 2021 were $3.240 billion, compared to net revenues of $2.502 billion and $2.668 billion for the years ended December 31, 2020 and 2019, respectively.  Net earnings attributable to Vishay stockholders for the year ended December 31, 2021 were $298.0 million, or $2.05 per diluted share, compared to $122.9 million, or $0.85 per diluted share, and $163.9 million, or $1.13 per share, for the years ended December 31, 2020 and 2019, 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, 2021, 2020, and 2019 include items affecting comparability.  The items affecting comparability are (in thousands, except per share amounts):

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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):

Our results for 2021 and 2020 represent the impacts of the COVID-19 pandemic on our business that resulted in a sharp decrease in demand in first half of 2020 followed by a sharp and broad recovery in the latter part of 2020 that continued through 2021.  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 payment of cash taxes related to the cash repatriated to the U.S. of $16.3 million and $38.8 million in 2020 and 2019, respectively, and the installment payments of the U.S. transition tax of $14.8 million in each year in the reporting period.

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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. Gross profit margin is clearly a function of net revenues, but also reflects our cost management programs and our ability to contain fixed costs.

Operating margin is computed as gross profit less operating expenses as a percentage of net revenues. We evaluate business segment performance on segment operating margin. Only dedicated, direct selling, general, and administrative expenses of the segments are included in the calculation of segment operating income. Segment operating margin is computed as operating income less items such as restructuring and severance costs, asset write-downs, goodwill and indefinite-lived intangible asset impairments, inventory write-downs, gain or losses on purchase commitments, global operations, sales and marketing, information systems, finance and administrative groups, and other items, expressed as a percentage of net revenues. We believe that evaluating segment performance excluding such items is meaningful because it provides insight with respect to intrinsic operating results of the segment. Operating margin is clearly a function of net revenues, but also reflects our cost management programs and our ability to contain fixed costs.

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 2020 through the fourth fiscal quarter of 2021 (dollars in thousands):

_______________

(1) Gross margin for the fourth fiscal quarter of 2020 includes $0.3 million of expenses directly related to the COVID-19 pandemic (see Note 8 to our consolidated financial statements).

(2) Operating margin for the fourth fiscal quarter of 2020 also includes in total $(0.3) million of expenses (benefits) directly related to the COVID-19 outbreak (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 significantly versus the fourth fiscal quarter of 2020 and slightly versus the prior fiscal quarter, primarily due to higher volume.  We continue to experience robust demand for our products, with the backlog continuing to grow.  Sales at this time continue to be limited by our capacity.  Pressure on average selling prices continues to be very low and we are implementing strategic price increases across the product portfolio to offset increased materials and transportation costs.

Gross profit margin decreased versus the prior fiscal quarter primarily due to higher transportation and metals and materials costs.  Gross profit margin increased versus the fourth fiscal quarter of 2020 primarily due to increased volume and manufacturing efficiencies.

The book-to-bill ratio in the fourth fiscal quarter of 2021 remained strong, but decreased to 1.09 versus 1.26 in the third fiscal quarter of 2021.  The book-to-bill ratios in the fourth fiscal quarter of 2021 for distributors and original equipment manufacturers ("OEM") were 1.06 and 1.15, respectively, versus ratios of 1.29 and 1.23, respectively, during the third fiscal quarter of 2021.

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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 2020 through the fourth fiscal quarter of 2021 (dollars in thousands):

_________

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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 in the mid-term.  The increased capital expenditures will be primarily used to increase manufacturing capacity for our strategic product lines.  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.

Changes in Israel tax law enacted effective November 15, 2021 provide us with an opportunity to efficiently repatriate earnings that we intend to use to enhance stockholder value.

On February 8, 2022, we announced that our Board of Directors has adopted a Stockholder Return Policy that will remain in effect until such time as the Board votes to amend or rescind the policy.  The Stockholder Return Policy 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 directly, in the form of dividends, or indirectly, in the form of stock repurchases. For 2022, we expect to return at least $100 million to stockholders consisting of approximately $58 million through our existing quarterly dividend program and at least $42 million through share repurchases.  The distribution of earnings from Israel to the United States will initially be 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.

Our confidence in the sustainability of our strong cash flow generation and balance sheet allows us to increase our allocation of capital to stockholders and enhance stockholder returns over the long-term.

The structure of the Stockholder Return Policy enables us to allocate capital between 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.

As a direct result of a change in tax law in Israel, we made the determination during the fourth fiscal quarter of 2021 that substantially all unremitted foreign earnings in Israel are no longer permanently reinvested.  Because most of our operating cash flow is typically generated by our non-U.S. subsidiaries, we may in the future need to change our permanent reinvestment assertion on current earnings of certain subsidiaries, which would have the effect of increasing the effective tax rate.  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.

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Acquisition Activity

As part of our growth strategy, we seek to expand through targeted acquisitions of other manufacturers of electronic components that have established positions in major markets, reputations for product quality and reliability, and product lines with which we have substantial marketing and technical expertise. This includes exploring opportunities to acquire targets to gain market share, penetrate different geographic markets, enhance new product development, round out our existing product lines, or grow our high margin niche market businesses. Acquisitions of passive components businesses would likely be made to strengthen and broaden our position as a specialty product supplier; acquisitions of discrete semiconductor businesses would be made to increase market share and to generate synergies. 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 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.  Based on our estimate of their fair values pending finalization of the net working capital adjustment, we allocated $9.6 million of the purchase price to definite-lived intangible assets.  After allocating the purchase price to the assets acquired and liabilities assumed based on a preliminary estimation of their fair values at the date of acquisition, we recorded goodwill of $7.8 million related to this acquisition.  The inclusion of this acquisition did not have an impact on the Company's consolidated results for the year ended December 31, 2021.  The goodwill related to this acquisition is included in the Resistors reporting unit for goodwill impairment testing.

On October 1, 2020, we acquired the worldwide business and substantially all of the U.S. assets of Applied Thin-Film Products ("ATP"), a California-based, privately-held manufacturer of custom, build-to-print thin film substrates for the microwave, fiber optic, and life science industries.  The total acquisition price was $25.9 million.  The results and operations of this acquisition have been included in the Resistors segment since October 1, 2020.  ATP did not have a material impact on our consolidated results for the years ended December 31, 2021 and 2020.

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.

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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.

In 2019, we announced global cost reduction and management rejuvenation programs as part of our continuous efforts to improve efficiency and operating performance.  The programs were primarily designed to reduce manufacturing fixed costs and selling, general, and administrative ("SG&A") costs company-wide, and provide management rejuvenation. The programs are fully implemented.  We incurred restructuring expense of $24.9 million, primarily related to cash severance costs, to implement these programs.  The implementation of these programs did not impact planned research and development activities.  No manufacturing facility closures occurred pursuant to these programs.

We do not anticipate any material restructuring activities in 2022.  However, a worsening business environment for the electronics industry, a prolonged impact of the COVID-19 pandemic, or a significant economic downturn may require us to implement additional restructuring initiatives.

See Note 4 to our consolidated financial statements for additional information.

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 2021 versus 2020 and 2020 versus 2019, with the translation of foreign currency revenues and expenses into U.S. dollars increasing reported revenues and expenses in 2021 versus 2020 and 2020 versus 2019.

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 years ended December 31, 2021 and 2020 have been unfavorably impacted (compared to the respective prior years) 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, 2021, 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.

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 - 2016, which were utilized in the year ended December 31, 2017.  During 2021, 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 (2013 through 2016), India (2004 through 2017), Israel (2018 and 2019), Singapore (2015 through 2019), and the Republic of China (Taiwan) (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.

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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:

Net Revenues

Net revenues were as follows (dollars in thousands):

Changes in net revenues were attributable to the following:

Net revenues increased significantly in 2021 versus the prior year.  Net revenues for 2020 were negatively impacted by a significant decrease in demand due to the COVID-19 pandemic that began to broadly recover in the third fiscal quarter of 2020 and continued through 2021.  The increasing demand and manufacturing capacities resulted in increased sales volume compared to 2020.  Due to high demand, we were able to implement strategic price increases across the product portfolio.

Gross Profit and Margins

Gross profit margins for the year ended December 31, 2021 were 27.4%, as compared to 23.3% for the year ended December 31, 2020.  The increase in gross profit margin is primarily due to increased sales volume.  Higher transportation and metals and materials costs negatively impacted the contributive margin.

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Segments

Analysis of revenues and gross profit margins for our segments is provided below.

MOSFETs

Net revenues of the MOSFETs segment were as follows (dollars in thousands):

Changes in MOSFETs segment net revenues were attributable to the following:

Gross profit margins for the MOSFETs segment were as follows:

The MOSFETs segment net revenues increased significantly in 2021 versus the prior year.  The increase is primarily due to increased volume.  Net revenues were negatively impacted by the temporary closure of our main manufacturing facility in China in the first fiscal quarter of 2020, while we had no significant closures in 2021.  All end markets, particularly automotive, regions, and all customer channels, particularly distributors, contributed to the increase.

The gross profit margin in 2021 increased versus the prior year primarily due to increased sales volume and cost reduction measures, partially offset by cost inflation and negative foreign currency impacts.

We experienced a slight decrease in average selling prices versus 2020.  The net decrease was limited due to price increases in the second half of 2021 and positive customer mix.  Due to increased demand, we anticipate prices will stabilize in 2022.

We continue to invest to expand mid- and long-term manufacturing capacity for strategic product lines.  We are 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.

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Diodes

Net revenues of the Diodes segment were as follows (dollars in thousands):

Changes in Diodes segment net revenues were attributable to the following:

Gross profit margins for the Diodes segment were as follows:

Net revenues of the Diodes segment increased significantly in 2021.  The prior years were negatively impacted by excess inventory held by distributors, which was mostly consumed prior to 2021.  The increase is primarily due to increased sales volume, increased average selling prices, and foreign currency impacts.  All regions and customer channels, particularly distributors, contributed to the growth.

Gross profit margin increased versus the prior year primarily due to increases in sales volume and average selling prices and cost reduction measures, partially offset by cost inflation.

Average selling prices increased versus the prior year.  Strong demand allowed us to increase prices.  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):

Changes in Optoelectronic Components segment net revenues were attributable to the following:

Gross profit margins for the Optoelectronic Components segment were as follows:

The Optoelectronic Components segment net revenues increased significantly versus the prior year.  The increase is primarily due to increased sales volume, increased average selling prices, and foreign currency impacts.  The increase was limited by COVID-19-related restrictions on our manufacturing facility in Malaysia.  All regions and customer channels, particularly distributors, contributed to the increase.

The gross profit margin increased versus the prior year. The increase is primarily due to the significant increase in sales volume, increased average selling prices, and our cost reduction measures, partially offset by cost inflation.

Average selling prices increased versus the prior year.  The high level of demand and cost inflation allowed us to increase average selling prices for certain customers.

We have modernized and expanded our Heilbronn wafer fab and plan to increase production in the facility during 2022.

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Resistors

Net revenues of the Resistors segment were as follows (dollars in thousands):

Changes in Resistors segment net revenues were attributable to the following:

Gross profit margins for the Resistors segment were as follows:

Net revenues of the Resistors segment increased significantly versus the prior year.  All regions, particularly Asia and Europe, contributed to the increase.  Sales to distributor customers and the industrial and automotive end markets increased significantly.

The gross profit margin increased versus the prior year.  The increase is due to increased sales volume, manufacturing efficiencies, increased average selling prices, and cost reduction measures, partially offset by increased labor, materials, metals, and transportation costs.

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, such as Applied Thin Film Products and Barry Industries.

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Inductors

Net revenues of the Inductors segment were as follows (dollars in thousands):

Changes in Inductors segment net revenues were attributable to the following:

Gross profit margins for the Inductors segment were as follows:

Net revenues of the Inductors segment increased significantly versus the prior year.  All regions, particularly Europe and Americas, contributed to the increase.  Sales to distributor customers and automotive and industrial end markets increased significantly.

The gross profit margin increased versus the prior year.  The increase is primarily due to increased sales volume, manufacturing efficiencies, and cost reductions, partially offset by lower average selling prices, increased metals and transportation costs, and negative foreign currency impacts.

Average selling prices decreased slightly versus the prior year.

We expect long-term growth in this segment, and are continuously expanding manufacturing capacity and evaluating acquisition opportunities, particularly of specialty businesses.

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Capacitors

Net revenues of the Capacitors segment were as follows (dollars in thousands):

Changes in Capacitors segment net revenues were attributable to the following:

Gross profit margins for the Capacitors segment were as follows:

Net revenues of the Capacitors segment increased significantly versus the prior year.  All regions, particularly Europe, increased.  The increase is primarily due to increased sales to distributor customers and the industrial end market.

The gross profit margin increased versus the prior year.  The increase is due to increased sales volume, increased average selling prices, and manufacturing efficiencies, partially offset by the negative impact of product mix and increased metals costs.

Average selling prices have increased versus the prior year.  Increased prices for certain materials were passed through to our customers.

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses are summarized as follows (dollars in thousands):

SG&A expenses for the year ended December 31, 2021 increased versus the year ended December 31, 2020 due to increased incentive compensation accruals.  SG&A expenses for the year ended December 31, 2020 includes $(1.5) million of incremental net costs (benefits) separable from normal operations directly attributable to the COVID-19 outbreak.

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Other Income (Expense)

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.  See Note 1 to our consolidated financial statements for further information.

The following table analyzes the components of the line “Other” on the consolidated statements of operations (in thousands):

2020 Compared to 2019

Interest expense for the year ended December 31, 2020 decreased by $2.1 million versus the year ended December 31, 2019.  The decrease is primarily attributable to repurchases of convertible debt instruments and the lower interest rate environment due to the COVID-19 pandemic.

We repurchased $151.5 million principal amount of convertible debt instruments in 2020.  We recognized a $8.1 million loss on early extinguishment of the repurchased convertible debt instruments in 2020.

The following table analyzes the components of the line “Other” on the consolidated statements of operations (in thousands):

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Income Taxes

For the years ended December 31, 2021, 2020, and 2019, the effective tax rates were 31.2%, 21.8%, and 27.2%, 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 $39.3 million in 2021, $2.0 million in 2020, and $0.8 million (tax benefit) in 2019.

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 will elect 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.

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 outside the U.S. and $8.3 million of tax benefits recognized due to changes in tax regulations.

We repatriated $104.1 million and $188.7 million to the United States, and paid withholding and foreign taxes of $16.3 million and $38.8 million in the years ended December 31, 2020 and 2019, respectively, 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 and $9.6 million during the years ended December 31, 2020 and 2019, respectively, 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.

As part of our cash repatriation activity, we settled an intercompany loan, which previously had been accounted for at the historical foreign exchange rate (akin to an equity contribution) because the debtor entity did not have the intent or ability to repay such intercompany loan.   Currency translation adjustments were recorded in accumulated other comprehensive income, and were not included in U.S. GAAP pre-tax income.  Our cash repatriation activity resulted in the ability to repay such intercompany loan.  Upon settlement of this intercompany loan, the foreign entity realized a taxable gain.  Income tax expense for the year ended December 31, 2019 includes tax expense of $7.6 million related to this tax-basis foreign exchange gain.

The effective tax rates for the years ended December 31, 2020 and 2019 were impacted by the effect of the repurchase of convertible debentures.  We recognized tax benefits of $1.6 million in both 2020 and 2019, reflecting the reduction in deferred tax liabilities related to the special tax attributes of the convertible debentures. See Note 6 to our consolidated financial statements.

The effective tax rates for the years ended December 31, 2020 and 2019 were also impacted by $3.8 million and $2.8 million, respectively, of net tax expense 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

We focus on our ability to generate cash flows from operations. 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 20 years, and cash flows from operations in excess of $100 million in each of the last 27 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 25 years, and "free cash" in excess of $80 million in each of the last 20 years. In this volatile economic environment, we continue to focus on the generation of free cash, including an emphasis on cost controls.

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 the same levels, or at all, going forward if the economic environment worsens.  We generated cash flows from operations of $457.1 million and "free cash" of $240.0 million in 2021.

The COVID-19 pandemic and the mitigation efforts by governments to control its spread did not have 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 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.

On February 8, 2022, we announced that our Board of Directors has adopted a Stockholder Return Policy that will remain in effect until such time as the Board votes to amend or rescind the policy.  The Stockholder Return Policy 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 directly, in the form of dividends, or indirectly, in the form of stock repurchases. For 2022, we expect to return at least $100 million to stockholders consisting of approximately $58 million through our existing quarterly dividend program and at least $42 million through share repurchases.  The distribution of earnings from Israel to the United States will initially be 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.

We repatriated $104.1 million and $188.7 million to the United States, and paid cash taxes of $16.3 million and $38.8 million related to the repatriations in 2020 and 2019, respectively.  The payment of these cash taxes significantly impacted cash flows from operations and free cash for the years ended December 31, 2020 and 2019.  These repatriations completed our cash repatriation program that we initiated in response to the TCJA.

We maintain a revolving credit facility, which 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.

At December 31, 2021, we had no amounts outstanding on our revolving credit facility.  We had no amounts outstanding at December 31, 2020.  We borrowed $897.0 million and repaid $897.0 million on the revolving credit facility during the year ended December 31, 2021.  The average outstanding balance on our revolving credit facility calculated at fiscal month-ends was $93.6 million and the highest amount outstanding on our revolving credit facility at a fiscal month end was $162.0 million during the year ended December 31, 2021.

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, 2021.  Our interest coverage ratio and leverage ratio were 28.49 to 1 and 0.75 to 1, respectively.  We expect to continue to be in compliance with these covenants based on current projections.  Based on our current EBITDA and outstanding revolver balance, the full amount of the revolving credit facility is useable.

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.

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The credit facility allows an unlimited amount of defined “Investments,” which include certain intercompany transactions and acquisitions, provided our pro forma leverage ratio is equal to or less than 2.75 to 1.00.  If our pro forma leverage ratio is greater than 2.75 to 1.00, such Investments are subject to certain limitations.

The credit facility also allows an unlimited amount of defined "Restricted Payments," which include cash dividends and share repurchases, provided our pro forma leverage ratio is equal to or less than 2.50 to 1.00.  If our pro forma leverage ratio is greater than 2.50 to 1.00, the credit facility allows such payments up to $100 million per annum (subject to a cap of $300 million for the term of the facility, with up to $25 million of any unused amount of the $100 million per annum base available for use in the next succeeding calendar year).

Borrowings under the credit facility bear interest at LIBOR plus an interest margin.  The applicable interest margin is based on our leverage ratio.  Based on our current leverage ratio, any new borrowings will bear interest at LIBOR plus 1.50%.  The interest rate on any borrowings increases to LIBOR plus 1.75% if our leverage ratio is between 1.50 to 1 and 2.50 to 1 and further increases to 2.00% if our leverage ratio equals or exceeds 2.50 to 1.

We also pay a commitment fee, also based on its leverage ratio, on undrawn amounts.   The undrawn commitment fee, based on Vishay's current leverage ratio, is 0.25% per annum.  Such undrawn commitment fee increases to 0.30% per annum if our leverage ratio is between 1.50 to 1 and 2.50 to 1 and further increases to 0.35% per annum if our leverage ratio equals or exceeds 2.50 to 1.

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.

During 2021, we redeemed the remaining $0.3 million principal amount of convertible senior debentures due 2041 for $0.3 million.  We have no remaining convertible senior debentures.

As of December 31, 2021, 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 to the United States will initially 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.  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 2025 and our revolving credit facility expires in June 2024.

The convertible senior notes due 2025 are not currently convertible.  Pursuant to the indenture governing 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 debt instruments using borrowings under our credit facility.  No conversions have occurred to date.

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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).

The interest rates on our short-term investments vary by location.  The average interest rate on our short-term investments was approximately 0.14% due to the low interest rate environment.  Transactions related to these investments are classified as investing activities on our consolidated statements of cash flows.

The following table summarizes the components of net cash and short-term investments (debt) (in thousands):

*Represents the carrying amount of the convertible debt instruments, which is comprised of the principal amount of the instruments, net of the unamortized discount.

"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.

Our financial condition as of December 31, 2021 continued to be strong, with the current ratio (current assets to current liabilities) of 2.9 to 1, as compared to 3.0 to 1 as of December 31, 2020.  The slight decrease is primarily due to the increase in trade accounts payable and accrued expenses.  Our ratio of total debt to Vishay stockholders' equity was 0.26 to 1 at December 31, 2021 as compared to a ratio of 0.25 to 1 at December 31, 2020.  The slight increase in the ratio is primarily due to the increase in the carrying value of our long-term debt upon the adoption of ASU No. 2020-06, partially offset by an increase in retained earnings.  See Notes 1 and 6 to our consolidated financial statements.

Cash flows provided by operating activities were $457.1 million for the year ended December 31, 2021, as compared to cash flows provided by operations of $314.9 million for the year ended December 31, 2020.

Cash paid for property and equipment for the year ended December 31, 2021 was $218.4 million, as compared to $123.6 million for the year ended December 31, 2020. 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.  For the year 2022, we expect to invest approximately $325 million in capital expenditures.

Cash paid for dividends to our common and Class B common stockholders totalled $55.8 million and $55.0 million for the years ended December 31, 2021 and 2020, respectively.  We expect dividend payments in 2022 to total approximately $58.0 million and stock repurchases of at least $42.0 million pursuant to our Stockholder Return Policy.  However, any future dividend declaration and payment remains subject to authorization by our Board of Directors.

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In evaluating our liquidity and capital resources, we consider our outstanding contractual commitments.  As of December 31, 2021 we had contractual obligations as follows (in thousands):

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, 2021.  Additionally, interest commitments for our revolving credit facility are based on the rate prevailing at December 31, 2021, but actual rates are variable and are certain to change over time.

The TCJA imposed a one-time transition tax on deferred foreign earnings, payable in defined increments over eight years.  As a result of this requirement, we expect to pay $184.5 million, net of estimated applicable foreign tax credits, and after utilization of net operating loss and R&D and FTC Credit carryforwards.  As of December 31, 2021, $59.0 million has been paid.

Estimated costs to complete construction in progress excludes costs to complete projects that have just begun and we are not contractually required to complete, including the significant Itzehoe, Germany 12-inch wafer fab construction project.

Our consolidated balance sheet at December 31, 2021 includes liabilities associated with uncertain tax positions in multiple taxing jurisdictions where we conduct business.  Due to the uncertain and complex application of tax regulations, combined with the difficulty in predicting when tax audits throughout the world may be concluded, we cannot make reliable estimates of the timing of the remaining cash outflows relating to these liabilities. Accordingly, we have classified the amount recorded as a current liability as payable within one year, and the remaining uncertain tax positions are classified as payments due thereafter, although actual timing of payments may be sooner.

Expected pension and postretirement plan funding is based on a projected schedule of benefit payments under the plans.

We maintain long-term foundry arrangements with subcontractors to ensure access to external front-end capacity for our semiconductor products. The purchase commitments in the table above represent the estimated minimum commitments for silicon wafers under these arrangements.  Our actual purchases in future periods are expected to be greater than these minimum commitments.

Other long-term liabilities in the table above include obligations that are reflected on our consolidated balance sheets as of December 31, 2021.  We include the current portion of the long-term liabilities in the table above. Other long-term liabilities for which we are unable to reasonably estimate the timing of the settlement are classified as payments due thereafter in the table above, although actual timing of payments may be sooner.

For a further discussion of our long-term debt, pensions and other postretirement benefits, leases, uncertain tax positions, and purchase commitments, see Notes 3, 5, 6, 11, and 13 to our consolidated financial statements.

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Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements for information about recent accounting pronouncements.