Business Context and Reporting Period
Vishay Precision Group, Inc. designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages based largely on proprietary foil technology. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing is the Form 10-K for the fiscal year ended December 31, 2016, filed March 16, 2017; fourth-quarter results are also disclosed.
VPG completed the $10.6 million acquisition of Pacific Instruments on April 6, 2016. Pacific expanded the Foil Technology Products segment with high-performance data acquisition and control systems serving aerospace, commercial aviation, and defense markets. The company also included a full year of Stress-Tek operations following its December 30, 2015 acquisition.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | $224.9 million | $232.2 million | Down 3.1% |
| Gross profit | $82.8 million | $84.2 million | Down $1.4 million |
| Gross margin | 36.8% | 36.3% | Up 0.5 percentage points |
| Operating income | $10.7 million | $3.4 million | Up $7.4 million |
| Income before taxes | $9.6 million | $0.5 million | Up $9.1 million |
| Net earnings attributable to VPG stockholders | $6.4 million | $(13.0) million | Returned to profitability |
| Diluted earnings per share | $0.48 | $(0.96) | Improved $1.44 |
| Cash flow from operating activities | $11.4 million | $13.9 million | Down $2.5 million |
Adjusted net earnings attributable to VPG stockholders were $9.9 million, or $0.74 per diluted share, compared with $7.7 million, or $0.57 per diluted share, in 2015. These non-GAAP measures exclude or adjust for acquisition purchase accounting adjustments, acquisition costs, strategic alternative evaluation costs, restructuring, the gain on sale of a building, impairment charges, and related tax items.
- Foil Technology Products revenue was $100.9 million, down 3.4%; gross margin was 39.0%, compared with 39.9%.
- Force Sensors revenue was $60.2 million, down 1.3%; gross margin improved to 26.0% from 20.5%, principally due to production relocation and cost savings.
- Weighing and Control Systems revenue was $63.8 million, down 4.4%; gross margin declined to 43.6% from 45.1%.
- Research and development expense increased to $11.1 million from $9.6 million.
- Capital expenditures were $10.4 million, compared with $10.0 million in 2015. Management expected 2017 capital expenditures of approximately $14 million to $16 million.
Fourth Quarter 2016
| Metric | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Net revenues | $55.8 million | $54.5 million | $58.9 million |
| Gross margin | 38.1% | 37.2% | 35.2% |
| Operating income | $5.4 million | $2.6 million | $0.6 million |
| Net earnings attributable to VPG stockholders | $3.0 million | $1.1 million | $(13.4) million |
| Backlog | $56.8 million | $50.3 million | $48.8 million |
| Book-to-bill ratio | 1.16 | 0.98 | 0.95 |
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $58.5 million at December 31, 2016, down from $62.6 million.
- Total third-party debt was $36.2 million, compared with $33.2 million; net cash was $22.3 million versus $29.5 million.
- Long-term debt, including the current portion, consisted primarily of $32.0 million under the secured 2015 Credit Agreement, $4.1 million of exchangeable notes, and $0.5 million of other debt.
- The company had a $30.0 million secured revolving facility, of which $9.0 million was outstanding at year-end. The facilities mature or terminate on December 30, 2020, subject to scheduled term-loan amortization.
- VPG was in compliance with its debt covenants at year-end. The credit agreement restricts cash dividends and requires compliance with tangible net worth, leverage, and fixed-charge coverage ratios.
- Working capital was $119.0 million, and the current ratio was 4.2 to 1.0.
- Operating cash flow was reduced by $4.2 million of restructuring payments and $1.1 million related to evaluating strategic alternatives. Management reported $5.2 million of “free cash,” a non-GAAP measure defined as operating cash flow less capital expenditures and net of asset-sale proceeds.
- Approximately 83% of cash and cash equivalents was held outside the United States. Cash associated with indefinitely reinvested foreign earnings was approximately $48.6 million; estimated withholding taxes upon remittance of previously unremitted earnings were approximately $14.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined despite acquisition contributions, primarily because of lower volumes in Foil Technology Products and Weighing and Control Systems and unfavorable foreign exchange effects. Currency effects reduced 2016 revenue by $2.8 million relative to 2015.
- Profitability improved materially. Operating income rose from $3.4 million to $10.7 million, helped by lower SG&A, cost-reduction benefits, the absence of the $4.9 million goodwill and indefinite-lived intangible impairment recorded in 2015, and improved Force Sensors margins.
- The effective tax rate fell to 33.3% from 2,668.0% in 2015. The 2015 rate was distorted by a significant valuation allowance established against U.S. deferred tax assets. VPG continued to maintain substantial valuation allowances in 2016.
- Restructuring costs declined to $2.7 million from $4.5 million. The company closed its Costa Rica facility, relocated significant Force Sensors manufacturing to India, and consolidated other operations. Management stated that the cost-reduction program had exceeded its targeted annual savings of at least $6.0 million, with implementation expected to be completed by the end of the second quarter of 2017.
- Interest expense increased to $1.5 million from $0.8 million because of higher acquisition-related debt.
- The company recorded a $1.7 million gain on the sale of its Karmiel, Israel facility; $0.8 million was recognized immediately and $0.9 million was deferred over the five-year lease term.
Guidance, Outlook, Commentary, and Risks
Management stated that current cash, credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. The company expects continued investment in automation, advanced sensors, research and development, manufacturing transfers, and strategic acquisitions. It also expects 2017 capital expenditures of approximately $14 million to $16 million.
Management identified the growing integration of sensors into intelligent products, design wins, advanced sensor technology, manufacturing automation, and acquisitions as principal growth opportunities. However, the filing does not provide formal revenue or earnings guidance.
- Demand remains cyclical and concentrated in industrial markets. Weakness affected test and measurement, precision weighing, steel, oil and gas, and certain European markets.
- Backlog and book-to-bill are indicators of potential demand but are not firm forecasts because customers may cancel or reschedule orders without penalty.
- Foreign exchange exposure is significant; a hypothetical 10% adverse currency movement was estimated to affect annual net earnings by approximately $1.7 million.
- A 10% increase or decrease in raw-material costs was estimated to reduce or increase annual net earnings by approximately $1.0 million, assuming no pricing response.
- Pacific Instruments was excluded from management’s internal-control assessment. Pacific represented 6.0% of consolidated total assets and 1.7% of 2016 net revenues. Management and Ernst & Young nevertheless concluded that internal control over financial reporting was effective.
- Risks include competition, customer concentration by market rather than by individual customer, dependence on specialized suppliers, production-transfer execution, acquisition integration, cybersecurity, regulatory qualifications, tax audits, foreign operations, pension obligations, and debt-covenant compliance.
- The company had approximately $55.9 million of contractual cash obligations, including debt, interest, operating leases, tax liabilities, and pension and postretirement obligations.
Most Important Facts for Investors to Verify
- Whether cost-reduction and manufacturing-relocation initiatives deliver sustainable margin improvement after restructuring programs are completed.
- Whether the Q4 2016 backlog increase to $56.8 million and book-to-bill ratio of 1.16 convert into revenue, given cancellation and rescheduling rights.
- Whether Pacific Instruments and Stress-Tek achieve expected growth and integration benefits without additional acquisition or restructuring costs.
- The sustainability of the 2016 return to profitability, excluding favorable comparability items and the Karmiel building-sale gain.
- The company’s ability to fund planned 2017 capital expenditures, scheduled debt repayments, acquisitions, and pension contributions while maintaining covenant compliance.
- The realization of U.S. deferred tax assets, which remained subject to substantial valuation allowances, and the potential cash cost of repatriating foreign earnings.
- The sensitivity of earnings and cash flow to foreign exchange rates, raw-material prices, industrial demand, and government-related aerospace and defense spending.
- The implications of Class B shares carrying ten votes per share; holders of Class B stock held approximately 45.7% of voting power as of March 16, 2017.