Vishay Precision Group, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides fourth-quarter results for the quarter ended December 31, 2013.
Business context
VPG designs and manufactures precision foil resistors, strain gages, force sensors, load cells, transducers, weighing modules, instrumentation, and sensor-based control systems. It reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. The company operates globally and serves primarily industrial, medical, agricultural, transportation, aerospace, military, steel, mining, and construction applications.
VPG acquired substantially all assets of George Kelk Corporation (“KELK”) on January 31, 2013, for approximately $49.0 million. KELK expanded the Weighing and Control Systems segment with optical and electronic roll-force measurement and control products.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net revenues | $240.3 million | $217.6 million | +10.4% |
| Gross profit | $83.9 million | $75.0 million | +11.8% |
| Gross margin | 34.9% | 34.5% | +0.4 percentage points |
| Operating income | $8.0 million | $11.1 million | -27.8% |
| Operating margin | 3.3% | 5.1% | Down 1.8 percentage points |
| Net earnings attributable to VPG stockholders | $4.3 million | $11.7 million | -63.3% |
| Diluted EPS | $0.31 | $0.84 | Down $0.53 |
| Cash flow from operations | $14.6 million | $21.1 million | Down $6.5 million |
| Capital expenditures | $6.7 million | $8.3 million | Down $1.6 million |
Adjusted gross profit was $88.7 million and adjusted gross margin was 36.9%, excluding $4.9 million of KELK purchase-accounting adjustments. Adjusted net earnings were $8.6 million, or $0.62 per diluted share, compared with $8.6 million, or $0.62 per diluted share, in 2012. These are non-GAAP measures defined by management.
Fourth-quarter 2013
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Net revenues | $62.2 million | $51.0 million |
| Gross margin | 37.1% | 34.4% |
| Net earnings attributable to VPG stockholders | $1.2 million | $5.2 million |
| Diluted EPS | $0.08 | $0.37 |
| Backlog | $60.6 million | $38.9 million |
| Book-to-bill ratio | 1.00 | 0.96 |
Segment performance
| Segment | FY2013 revenue | FY2012 revenue | FY2013 margin |
|---|---|---|---|
| Foil Technology Products | $97.0 million | $105.2 million | 38.3% |
| Force Sensors | $64.8 million | $65.8 million | 21.6% |
| Weighing and Control Systems | $78.4 million | $46.6 million | 41.7% |
KELK contributed $31.1 million of 2013 revenue and a $1.3 million net loss attributable to VPG stockholders, including purchase-accounting adjustments, acquisition costs, restructuring costs, and intercompany interest expense.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $72.8 million at December 31, 2013, compared with $93.9 million at December 31, 2012.
- Total third-party debt was $27.1 million, up from $11.3 million, primarily due to $25.0 million of term facilities used to fund the KELK acquisition. Net cash was $45.7 million versus $82.6 million in the prior year.
- Long-term debt, less current portion, was $22.9 million; the current portion was $4.1 million.
- The company had a $15.0 million secured revolving facility with no balance outstanding at year-end, plus a separate $15.0 million Israeli revolving facility that was also undrawn.
- The 2013 Credit Agreement matures January 29, 2018. It includes leverage and fixed-charge coverage covenants; VPG was in compliance at December 31, 2013.
- Management reported a current ratio of 4.0 to 1.0, compared with 5.8 to 1.0 in 2012.
- Management-defined free cash was $7.9 million, consisting of $14.6 million of operating cash flow less $6.7 million of capital expenditures and net asset-sale proceeds.
- Approximately 75% of cash was held by non-U.S. subsidiaries. Approximately $54.1 million of cash was associated with indefinitely reinvested foreign earnings.
- Management expected 2014 capital expenditures of approximately $9.0 million to $11.0 million and believed available cash, credit facilities, and operating cash flow would meet liquidity needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven principally by the KELK acquisition, which contributed 14.3 percentage points of reported revenue growth. Organic volume declined, particularly in Foil Technology Products and Force Sensors.
- Foil Technology Products revenue fell 7.8%, and its margin declined to 38.3% from 40.7%, reflecting lower demand, foreign exchange effects, and ERP implementation inefficiencies.
- Force Sensors revenue declined 1.4%, while its margin improved to 21.6% from 20.5%, aided by production transfers to India, lower fixed costs, and favorable foreign exchange.
- Weighing and Control Systems revenue increased 68.1%, largely from KELK. The segment margin increased to 41.7% from 40.1%; excluding $4.9 million of KELK purchase-accounting adjustments, 2013 margin was 47.9%.
- SG&A increased $10.9 million to $74.5 million, primarily due to KELK, including $10.8 million of KELK SG&A.
- Interest expense increased to $1.0 million from $0.3 million, and other expense increased to $1.6 million from $0.3 million, including a $1.7 million foreign-exchange loss largely associated with Canadian-dollar exposure on debt.
- Net earnings declined substantially despite higher revenue because of higher SG&A, acquisition and restructuring costs, purchase-accounting adjustments, increased interest expense, and foreign-exchange losses.
- A new ERP system implemented at three Foil Technology Products locations in the third quarter caused shipment delays, manufacturing inefficiencies, and lower third-quarter revenue; management reported improvement in the fourth quarter.
- Restructuring costs were $0.5 million in 2013, principally related to workforce reductions in Japan and at KELK. An additional $0.3 million of Canadian restructuring costs was recorded in March 2014.
Outlook, risks, contingencies, and unusual items
- Management’s strategy emphasizes organic growth through design wins, expanded technical sales, product innovation, automation, lower-cost manufacturing, and strategic acquisitions.
- Backlog increased to $60.6 million, but management cautioned that many orders may be canceled or rescheduled without penalty and therefore backlog is not necessarily predictive of future revenue.
- The company expects continued R&D investment; R&D expense was $9.3 million in 2013 versus $6.4 million in 2012.
- Key risks include industrial cyclicality, customer order cancellations, intense competition, long development and acceptance cycles, raw-material availability and price volatility, foreign-exchange exposure, political and operating risks in foreign jurisdictions, intellectual-property protection, ERP execution, and acquisition integration.
- A hypothetical 10% adverse currency movement was estimated to affect annual net earnings by approximately $1.6 million. A 10% change in relevant raw-material costs was estimated to affect annual net earnings by approximately $1.0 million, assuming no pricing response.
- The company has approximately $12.1 million of potential withholding taxes on previously unremitted foreign earnings if those earnings are repatriated.
- Unrecognized tax benefits, including interest and penalties, totaled approximately $1.0 million in contractual obligations; $0.1 million to $0.3 million may reverse within 12 months.
- The company reported no material litigation, no off-balance-sheet arrangements, and unqualified audit opinions on the financial statements and internal controls. However, internal-control assessments excluded KELK and the auditor’s internal-control audit excluded VPG Canada.
- VPG’s credit facilities restrict cash dividends and impose financial covenants. The Class B convertible common stock carries ten votes per share, and concentrated ownership provides significant voting control to related holders.
Investor verification checklist
- Verify the sustainability of reported revenue growth after separating KELK’s contribution from organic volume trends.
- Track whether ERP-related shipment and manufacturing problems remain resolved and whether Foil Technology Products margins recover.
- Reconcile GAAP earnings with management’s adjusted earnings, particularly the $4.9 million KELK purchase-accounting adjustment and other excluded costs.
- Review KELK’s post-acquisition profitability, backlog conversion, integration costs, goodwill, and intangible-asset amortization.
- Monitor debt repayment, leverage and fixed-charge coverage compliance, foreign-exchange losses, and the Canadian-dollar debt exposure.
- Assess the availability and location of cash, including restrictions and tax costs associated with repatriating foreign earnings.
- Evaluate customer-cancellable backlog, book-to-bill trends, industrial demand, raw-material costs, and future restructuring expenditures.
- Confirm the scope limitation relating to KELK and VPG Canada when assessing internal-control assurance.