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Growth and Company Transformation Initiatives

In 2023, a new executive leadership team at Vishay embarked on a three-year plan to expand capacity and position the company for the next phase of growth in e-mobility, sustainability, and connectivity. This “Vishay 3.0” initiative involves focusing investment on the company’s highest growth and highest return product lines, implementing organizational changes to become more responsive to customers, and aligning employee incentives with growth and profitability goals.

The key strategies being used to achieve these goals include expanding manufacturing capacity, improving technical performance of products, fostering internal and external collaboration, and redesigning compensation plans. These initiatives are laying the foundation for Vishay to drive top-line growth, expand margins, and optimize returns.

Stockholder Return Policy

In 2022, Vishay’s Board of Directors adopted a Stockholder Return Policy that calls for the company to return at least 70% of free cash flow, net of debt payments, to shareholders annually through dividends or share repurchases. This policy provides greater access to Vishay’s global cash balances to fund growth initiatives and shareholder returns, though it also negatively impacts the effective tax rate.

Vishay has paid dividends each quarter since 2014, and the Stockholder Return Policy will remain in effect until the Board decides to amend or rescind it. Implementation is subject to future declarations by the Board and is not an obligation.

Financial Metrics

Vishay uses several key financial metrics to evaluate performance and guide the business, including:

• Net Revenues: Vishay saw revenues decrease 13.7% in 2024 compared to 2023, primarily due to lower sales volume and average selling prices.
• Gross Profit Margin: Gross margin declined from 28.6% in 2023 to 21.3% in 2024, driven by lower volume, price erosion, and higher costs.
• Operating Margin: Operating margin fell from 14.3% in 2023 to 0.2% in 2024, impacted by the gross margin decline as well as restructuring and impairment charges.
• Segment Performance: Each of Vishay’s segments saw revenue and margin declines in 2024, with the MOSFETs segment being the most significantly impacted.
• Backlog and Book-to-Bill: Backlog and the book-to-bill ratio declined through 2024 as the industry experienced an inventory correction, though the book-to-bill improved to 1.01 in Q4 2024.
• Inventory Turnover: Inventory turns decreased from 3.6 in Q4 2023 to 3.3 in Q4 2024 as Vishay continued to invest in capacity expansion.
• Average Selling Prices: ASPs declined between 0.6% and 2.5% each quarter in 2024 compared to the prior quarter.

These metrics indicate that Vishay faced significant headwinds in 2024, with lower demand, pricing pressure, and rising costs impacting profitability. However, the company’s book-to-bill ratio improved in Q4, suggesting a potential turnaround may be on the horizon.

Acquisition Activity

Vishay continues to pursue a growth strategy that includes targeted acquisitions of other electronic component manufacturers. Recent acquisitions include:

• MaxPower Semiconductor: Acquired in 2022 to enhance Vishay’s SiC MOSFET and diode capabilities.
• Nexperia’s Newport Fab: Acquired in 2024 to serve as a manufacturing center for MaxPower products and expand Vishay’s in-house wafer capacity.
• Ametherm and Birkelbach: Acquired in 2024 to vertically integrate key materials and technologies.

These acquisitions are viewed as long-term investments that will strengthen Vishay’s competitive position, even though they are currently generating net losses and increasing costs. The company remains committed to these strategic initiatives.

Cost Management

Vishay places a strong emphasis on controlling costs, monitoring variables such as contributive margin, fixed costs, and the break-even point. The company seeks to limit increases in SG&A expenses to the rate of inflation and maintain a contributive margin between 45-47% of revenues.

However, Vishay is currently incurring additional costs as part of its transformation initiatives, including:

• Increased depreciation and other costs from the Newport fab acquisition
• Higher engineering and customer-facing resources to support growth
• New long-term incentive compensation program
• Restructuring charges to optimize the manufacturing footprint

These investments are expected to position Vishay for long-term profitable growth, though they are negatively impacting current profitability. The company remains focused on managing its cost structure while also making necessary strategic expenditures.

Goodwill

Vishay recorded a $66.5 million goodwill impairment charge in Q4 2024 related to its MOSFETs reporting unit. This was driven by a further decline in Vishay’s share price combined with the increased asset base from acquisitions and capital spending.

The company remains committed to its long-term initiatives in the MOSFETs segment, including the MaxPower and Newport fab acquisitions. However, the execution risks and high discount rate used in the valuation analysis resulted in the fair value of the MOSFETs unit falling below its carrying value, necessitating the impairment.

Vishay will continue to monitor its reporting units for potential future goodwill impairments, as further declines in performance or the company’s share price could adversely impact the fair value assessments.

Foreign Currency Translation

Vishay has both foreign subsidiaries that use the local currency as the functional currency, as well as those that use the U.S. dollar. For local currency subsidiaries, translation of revenues and expenses into U.S. dollars can impact reported financial results, though the impact was not material in 2024 compared to 2023.

For U.S. dollar functional subsidiaries, foreign currency transactions can affect the cost of products sold and SG&A expenses. These impacts were favorable in 2024 and 2023 compared to the prior years.

Pension and Other Postretirement Benefits

Vishay maintains defined benefit pension and other postretirement plans, primarily in the U.S., Germany, and Taiwan. The company uses various assumptions, such as discount rates and expected returns on plan assets, to estimate the obligations and costs associated with these plans.

Vishay continues to seek ways to de-risk its global pension exposures, which could result in increased net periodic pension costs due to lower expected returns. The company believes its current assumptions are appropriate, but changes in economic conditions or investment strategy could impact future expense.

Income Taxes

Vishay’s effective tax rate was highly unfavorable at (1,145.5)% in 2024, compared to 30.4% in 2023 and 27.5% in 2022. The 2024 rate is not meaningful given the low level of pre-tax income.

There were no unusual tax transactions impacting the 2024 or 2023 rates. However, the 2022 rate was affected by changes in uncertain tax positions, the impact of no longer asserting indefinite reinvestment of earnings in Germany, and the release of a valuation allowance.

Vishay operates globally, so its consolidated tax rate reflects the mix of earnings and applicable tax rates in the various jurisdictions. The company’s historical strategy has included locating operations in countries with lower labor costs and favorable tax incentives.

Financial Condition, Liquidity, and Capital Resources

Vishay maintains a strong financial position, with the company historically generating robust operating cash flows. However, cash flows provided by operations declined from $365.7 million in 2023 to $173.7 million in 2024, primarily due to lower earnings.

Vishay’s cash conversion cycle increased from 120 days in Q4 2023 to 128 days in Q4 2024, as the company continued to invest in inventory and receivables to support capacity expansion. Capital expenditures remained high at $320.1 million in 2024, as Vishay focused on increasing manufacturing capabilities for strategic product lines.

Free cash flow, defined as cash from operations less capital expenditures and scheduled debt payments, decreased in 2024 compared to 2023 due to the lower earnings. However, Vishay expects free cash flow to improve in the coming years as the strategic investments begin to pay off.

The company ended 2024 with $590.3 million in cash and short-term investments, offset by $905.0 million in total debt, resulting in a net debt position of $298.6 million. Vishay’s Stockholder Return Policy and acquisition strategy will continue to be funded through this cash flow and debt capacity, subject to the Board’s discretion.

Outlook

Despite the challenges faced in 2024, Vishay remains committed to its long-term growth initiatives and capacity expansion plans. The company believes the strategic investments being made, including targeted acquisitions, will position it well to capitalize on megatrends in e-mobility, sustainability, and connectivity.

However, Vishay faces execution risks with these initiatives, as well as ongoing industry headwinds such as pricing pressure and cost inflation. The company’s profitability and cash flow generation will likely remain under pressure in the near-term as it works to transform the business.

Vishay’s focus on cost management, capital allocation, and strategic positioning should help the company navigate the current environment. The improvement in the Q4 2024 book-to-bill ratio suggests demand may be stabilizing, which could allow Vishay to return to growth and margin expansion in the coming years.

Overall, Vishay is undertaking a significant transformation to enhance its long-term competitiveness, though the short-term financial results reflect the investments and challenges faced by the business. The company’s strong liquidity and commitment to shareholder returns provide a solid foundation as it executes on its strategic plan.