Vishay Precision Group, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Vishay Precision Group designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages using proprietary foil technology. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. This filing covers the fiscal year ended December 31, 2015, including fourth-quarter results. Prior-period amounts were restated for currency-accounting errors at an Indian subsidiary and other immaterial errors.
Financial performance and key metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $232.2 million | $250.0 million | Down 7.1% |
| Gross profit | $84.2 million | $90.8 million | Down 7.2% |
| Gross margin | 36.3% | 36.3% | Flat |
| Operating income | $3.4 million | $7.5 million | Down $4.1 million |
| Net earnings attributable to VPG | $(13.0) million | $3.1 million | Turned to loss |
| Diluted EPS | $(0.96) | $0.22 | Down $1.18 |
| Cash flow from operations | $13.9 million | $23.3 million | Down $9.3 million |
- Revenue decline was principally attributable to foreign exchange, which reduced revenue by approximately 7.0%; volume and pricing were each approximately negative 0.1%.
- Segment revenue was $104.5 million for Foil Technology Products, $61.0 million for Force Sensors, and $66.7 million for Weighing and Control Systems.
- Segment gross margins were 39.9%, 20.5%, and 45.1%, respectively. Foil Technology Products improved, while Force Sensors and Weighing and Control Systems declined year over year.
- SG&A declined to $71.3 million from $77.0 million, largely reflecting foreign-exchange effects. Research and development expense was $9.6 million.
- The reported $13.5 million tax expense on $0.5 million of pretax income produced an unusual 2,668% effective tax rate. The primary driver was a $12.3 million increase in valuation allowances, including approximately $16.7 million of valuation allowance against U.S. deferred tax assets at year-end.
- Adjusted net earnings, excluding specified acquisition, impairment, restructuring, and tax items, were $7.7 million, or $0.57 per diluted share, versus $9.8 million, or $0.70, in 2014. These are non-GAAP measures.
Fourth-quarter 2015
- Revenue was $58.9 million, up 3.0% sequentially but down 2.2% from fourth-quarter 2014. Foreign exchange reduced year-over-year revenue by approximately $3.6 million.
- Gross margin was 35.2%, compared with 34.0% in fourth-quarter 2014 and 37.5% in the third quarter of 2015.
- Net loss attributable to VPG stockholders was $13.4 million, or $(1.02) per diluted share, compared with a $4.9 million loss, or $(0.36) per diluted share, in fourth-quarter 2014.
- Backlog declined to $48.8 million from $58.5 million in fourth-quarter 2014; the company cautions that customers may cancel or reschedule orders without penalty. The fourth-quarter book-to-bill ratio was 0.95.
Liquidity, cash flow, debt, and capital allocation
- Year-end cash and cash equivalents were $62.6 million, compared with $79.6 million at December 31, 2014. Working capital was $121.1 million and the current ratio was 3.9 to 1.0.
- Total third-party debt was $33.7 million, versus $22.8 million in 2014; reported net cash was $28.9 million, versus $56.8 million. Debt included $25.0 million of term loans, $4.0 million of revolving debt, $4.1 million of exchangeable notes, and $0.6 million of Japanese subsidiary debt.
- The company entered into a new secured credit agreement on December 30, 2015, with a $30.0 million revolving facility and additional term facilities. The agreement matures December 30, 2020, restricts cash dividends, and requires compliance with financial covenants. VPG was in compliance at year-end.
- Capital expenditures were $10.0 million in 2015. Management expected 2016 capital expenditures of approximately $13 million to $15 million.
- Management believes cash, available credit, and projected operating cash flow will satisfy liquidity needs for at least the next 12 months. Approximately 90% of cash and cash equivalents was held outside the United States, and approximately $56.6 million was associated with indefinitely reinvested foreign earnings.
- VPG repurchased 617,667 shares for $8.7 million during 2015. The credit agreement restricts cash dividends.
Material changes, outlook, and unusual items
- VPG acquired Stress-Tek on December 30, 2015, for $20.1 million. The acquisition added load-cell and force-measurement products for transportation, trucking, mining, and related markets. The purchase accounting remains preliminary and included $6.4 million of preliminary goodwill.
- The company recorded $4.9 million of non-cash goodwill and indefinite-lived intangible impairment related to the KELK business, principally because of excess steel capacity, particularly in China. Additional impairment remains possible if actual results are weaker than forecasts.
- Restructuring costs were $4.5 million in 2015, including approximately $3.6 million in the fourth quarter. Management expected the November 2015 cost-reduction program to require approximately $4.0 million of cash costs, generate approximately $6.0 million of annual savings beginning in 2016, and be fully implemented by the end of the second quarter of 2017.
- Further restructuring actions were recorded in January 2016, and additional actions approved in March 2016 were expected to cost approximately $0.5 million and be completed by the third quarter of 2016.
- Management continued to emphasize automation, relocation of production to lower-cost regions, consolidation of facilities and functions, product innovation, and selective acquisitions. No quantitative revenue or earnings guidance was provided.
- Foreign exchange was a significant risk: compared with 2014, 2015 exchange rates reduced revenue by $17.5 million and reduced product costs and SG&A by $16.4 million. The company had no currency hedging arrangements at year-end.
- Management identified material weaknesses in prior-period controls related to goodwill impairment calculations and foreign-currency accounting at the Indian subsidiary. Remediation was implemented and tested in the fourth quarter; management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2015. The acquired Stress-Tek controls were excluded from the evaluation.
Most important facts for investors to verify
- Whether restructuring and manufacturing transfers deliver the expected approximately $6.0 million of annual savings without disrupting customers, capacity, or quality.
- Whether KELK-related goodwill and intangible assets require additional impairment, particularly given continuing weakness in the steel industry.
- The sustainability of operating cash flow after the Stress-Tek acquisition, higher debt, planned 2016 capital expenditures, and pension contributions.
- The realization of U.S. deferred tax assets and the potential impact of future tax payments, foreign earnings repatriation, or tax audits.
- Trends in backlog, book-to-bill, segment margins, and precision-weighing demand, especially in Force Sensors and Weighing and Control Systems.
- Exposure to foreign exchange, commodity prices, limited-source suppliers, industrial cyclicality, customer cancellations, and credit-facility covenants.
- The final purchase accounting for Stress-Tek and the integration of its operations, personnel, systems, and internal controls.