Vishay Precision Group, Inc. — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012, including fourth-quarter results. VPG designs and manufactures precision foil resistors, strain gages, force sensors, load cells, weighing instruments, and control systems. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. VPG operates globally and was spun off from Vishay Intertechnology in July 2010.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenues | $217.6 million | $238.1 million | Down 8.6% |
| Gross profit | $75.0 million | $83.1 million | Down 9.7% |
| Gross margin | 34.5% | 34.9% | Down 0.4 percentage points |
| Operating income | $11.1 million | $16.3 million | Down 31.8% |
| Operating margin | 5.1% | 6.8% | Down 1.7 percentage points |
| Net earnings attributable to VPG | $11.7 million | $10.8 million | Up 8.5% |
| Diluted EPS | $0.84 | $0.78 | Up 7.7% |
| Cash from operating activities | $21.1 million | $15.6 million | Up $5.5 million |
| Capital expenditures | $8.3 million | $16.3 million | Down $8.0 million |
| Cash and equivalents at year-end | $93.9 million | $80.8 million | Up $13.1 million |
| Total third-party debt | $11.3 million | $11.6 million | Down $0.3 million |
| Net cash | $82.6 million | $69.2 million | Up $13.4 million |
The 2012 effective tax rate was negative 11.8%, compared with 28.6% in 2011. The benefit primarily reflected a $7.8 million reduction in the valuation allowance on deferred tax assets following a favorable Israeli tax ruling. This discrete tax benefit materially increased net earnings despite lower operating income.
Segment Results
| Segment | 2012 Revenue | 2011 Revenue | 2012 Gross Margin |
|---|---|---|---|
| Foil Technology Products | $105.2 million | $112.2 million | 40.7% |
| Force Sensors | $65.8 million | $71.5 million | 20.5% |
| Weighing and Control Systems | $46.6 million | $54.4 million | 40.1% |
All three segments experienced revenue declines, primarily from lower volume and weaker global industrial demand, especially in Europe. Force Sensors improved gross margin through product mix and efficiencies from the new India facility. Weighing and Control Systems also improved annual gross margin because lower-margin European on-board weighing revenue declined disproportionately.
Fourth-Quarter 2012 and Material Changes
- Fourth-quarter revenue was $51.0 million, down from $55.4 million in the third quarter of 2012 and $56.4 million in the fourth quarter of 2011.
- Fourth-quarter gross margin improved to 34.4%, compared with 33.8% in the third quarter, reflecting improved efficiency in Foil Technology Products and Force Sensors.
- Fourth-quarter backlog declined to $38.9 million from $40.1 million in the third quarter and $42.4 million in the fourth quarter of 2011.
- The fourth-quarter book-to-bill ratio was 0.96, indicating orders were below shipments; inventory turnover declined to 2.73 from 3.02 a year earlier.
- Annual SG&A declined to $63.7 million from $66.8 million, due mainly to lower professional fees, bonuses, and favorable currency effects, partially offset by higher wages. SG&A as a percentage of revenue increased to 29.3% from 28.1%.
- Foreign currency effects reduced 2012 revenue by approximately $5.3 million versus 2011 and favorably affected costs of products sold and SG&A by approximately $5.8 million.
- Research and development expense was $6.4 million, compared with $6.8 million in 2011.
Liquidity, Debt, and Cash Flow
VPG reported a current ratio of 5.8 to 1.0 and stated that cash, available credit facilities, and expected operating cash flow were sufficient for at least the next 12 months. No borrowings were outstanding under the $25.0 million U.S. revolving facility or the $15.0 million Israeli revolving facility at year-end. The company was in compliance with all debt covenants.
Approximately 82% of cash was held by non-U.S. subsidiaries, and $76.4 million was associated with foreign earnings considered indefinitely reinvested. Repatriation could result in additional taxes. The company is restricted from paying cash dividends under its credit agreements.
Outlook, Transactions, and Risks
- Management expected 2013 capital expenditures of approximately $8 million to $10 million and planned additional manufacturing consolidation and cost-reduction initiatives, including expansion in India. Future restructuring and severance costs were possible.
- On January 31, 2013, VPG acquired substantially all assets of George Kelk Corporation for approximately $50.0 million Canadian, or approximately $50.0 million U.S., subject to adjustments. KELK expands the Weighing and Control Systems segment into metals rolling and mining applications.
- The KELK acquisition was financed with cash and new debt under a 2013 credit agreement, including $10 million of U.S. term debt, $15 million of Canadian term debt, and a $15 million revolving facility. The agreement restricts cash dividends and includes leverage and fixed-charge coverage covenants.
- Unaudited pro forma 2012 results including KELK were revenue of $248.0 million and net earnings attributable to VPG of $15.1 million; these figures are not indicative of actual future results.
- Principal risks include cyclical industrial demand, economic weakness in Europe, customer order cancellations, raw-material availability and price volatility, foreign-currency exposure, dependence on qualified technical personnel, competitive pressure, intellectual-property protection, manufacturing transitions, environmental obligations, and acquisition integration.
- VPG’s foreign-currency collar contracts expired in July 2012, and no new contracts were outstanding at year-end. A hypothetical 10% adverse currency movement was estimated to affect annual net earnings by approximately $1.0 million.
- The company disclosed no material litigation, no off-balance-sheet arrangements, and no unresolved SEC staff comments. Management and Ernst & Young concluded that internal control over financial reporting was effective, and the audit opinion was unqualified.
Investor Verification Items
- Separate the recurring operating performance decline from the nonrecurring tax benefit that drove higher 2012 net earnings and EPS.
- Assess whether lower fourth-quarter revenue, backlog, book-to-bill, and inventory turnover indicate continued weakness in industrial demand.
- Verify KELK’s integration progress, actual contribution to revenue and margins, acquisition accounting, and the effect of the new debt on leverage and covenant compliance.
- Review the concentration of cash and earnings outside the United States and the potential tax cost of repatriation.
- Monitor the effectiveness and cost of manufacturing transfers, automation, and restructuring programs, particularly in India and other lower-cost locations.
- Evaluate currency, raw-material, pension, tax-audit, and environmental exposures, including approximately $12.0 million of potential withholding taxes on previously unremitted foreign earnings.