Vishay Precision Group, Inc. — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, with fourth-quarter 2020 metrics discussed. VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | $269.8 million | $284.0 million | Down 5.0% |
| Gross profit | $104.3 million | $111.6 million | Down 6.6% |
| Gross margin | 38.6% | 39.3% | Down 0.7 percentage points |
| Operating income | $22.7 million | $28.6 million | Down 20.9% |
| Operating margin | 8.4% | 10.1% | Down 1.7 percentage points |
| Net earnings attributable to VPG | $10.8 million | $22.2 million | Down 51.4% |
| Diluted EPS | $0.79 | $1.63 | Down $0.84 |
| Cash flow from operations | $35.3 million | $30.9 million | Up $4.4 million |
| Capital expenditures | $22.9 million | $11.2 million | Up $11.8 million |
Adjusted, non-GAAP net earnings were $18.0 million, or $1.32 per diluted share, compared with $24.3 million, or $1.79 per diluted share, in 2019. Adjusted operating income was $26.2 million, with a 9.7% margin, compared with $33.2 million and an 11.7% margin in 2019.
Fourth-quarter 2020 revenue was $75.4 million, up 9.1% year over year and 11.7% sequentially. Fourth-quarter gross margin was 38.1%, compared with 35.0% in the fourth quarter of 2019 and 40.5% in the third quarter of 2020. Fourth-quarter backlog was $87.6 million, and the book-to-bill ratio was 0.93.
Segment results
| Segment | 2020 revenue | 2019 revenue | 2020 margin | 2019 margin |
|---|---|---|---|---|
| Foil Technology Products | $131.6 million | $131.8 million | 39.5% | 40.4% |
| Force Sensors | $53.7 million | $64.4 million | 25.3% | 28.0% |
| Weighing and Control Systems | $84.4 million | $87.8 million | 45.8% | 45.9% |
Force Sensors revenue declined primarily because COVID-19 restrictions limited production at the India facility until July 1, 2020. Weighing and Control Systems revenue was affected by lower transportation and KELK steel-related sales, partly offset by the DSI acquisition. Foil Technology Products benefited from advanced sensors and avionics, military, and space demand, offset by weaker test-and-measurement and general industrial sales.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $98.4 million at December 31, 2020, compared with $86.9 million at year-end 2019.
- Net cash, as defined by management, was $58.2 million, compared with $42.4 million in 2019. This calculation excludes deferred financing costs from reported debt.
- Debt consisted primarily of $41.0 million outstanding under a $75.0 million secured revolving facility maturing March 20, 2025. The facility may be increased by up to $25.0 million, subject to conditions.
- The company was in compliance with its debt covenants at December 31, 2020. The facility restricts cash dividends and contains leverage and interest-coverage requirements.
- The current ratio improved to 4.7:1 from 2.4:1. Management believes cash, available credit, and projected operating cash flow are sufficient for at least the next 12 months.
- Approximately 90% of cash and cash equivalents were held by non-U.S. subsidiaries. The company disclosed approximately $18.0 million of potential additional withholding taxes if previously unremitted foreign earnings were distributed to the United States.
- Adjusted free cash flow was $13.3 million, calculated as operating cash flow of $35.3 million less capital expenditures of $22.9 million and net of $0.9 million of asset-sale proceeds.
Material changes versus the prior comparable period
- Revenue declined 5.0%, driven primarily by lower volume across the segments, particularly Force Sensors, transportation, industrial weighing, KELK steel, and precision resistor test-and-measurement markets.
- Profitability declined because of lower volume, unfavorable mix, foreign-exchange effects, a $2.4 million non-cash impairment charge, and a higher effective tax rate.
- The effective tax rate increased to 41.0% from 15.7%, primarily due to valuation allowance changes, DSI purchase accounting, impairment-related effects, foreign currency, and geographic income mix.
- Operating cash flow increased despite lower earnings, helped by favorable working-capital changes and non-cash charges.
- Capital spending increased substantially, largely for the new Israel facility, capacity expansion, maintenance, and cost-reduction programs.
- VPG recorded $0.9 million of restructuring costs, down from $2.3 million in 2019. No acquisition costs were recorded in 2020, compared with $0.4 million in 2019.
- The company completed purchase accounting for the 2019 DSI acquisition, including a $1.7 million increase in deferred tax assets and a corresponding valuation allowance and a $1.7 million reduction in DSI goodwill from purchase-price adjustments.
Outlook, management commentary, risks, and unusual items
Management expects to continue pursuing organic growth through product development, customer design wins, automation, manufacturing transfers, and strategic acquisitions. The company expects approximately $26.1 million of capital expenditures in 2021, including approximately $6.1 million for building projects supporting capacity expansion in Israel and Asia.
- COVID-19 remains a material uncertainty. All facilities were operating without limitations as of March 11, 2021, but future restrictions, customer disruption, supply-chain interruptions, or economic weakness could adversely affect results.
- The company is transitioning advanced-sensor operations into a new 121,400-square-foot Israel facility and expects to complete the transition in 2021. Delays or operational inefficiencies could affect costs and production.
- Foreign exchange reduced 2020 net earnings by approximately $1.9 million versus 2019. The company had no hedging arrangements for foreign-currency exposure at year-end.
- Goodwill and indefinite-lived intangible assets remain sensitive to forecasts and valuation assumptions. The Instrumentation reporting unit recorded a $2.4 million impairment; DSI fair value exceeded carrying value by approximately 12% for goodwill and 16% for its indefinite-lived trade name.
- Backlog is not a firm forecast because customers may cancel or reschedule orders, often without penalty. The year-end book-to-bill ratio below one indicates orders were below shipments in the fourth quarter.
- Specialized materials may be sourced from limited or single vendors, and commodity-price volatility could pressure margins. A 10% change in relevant raw-material costs was estimated to affect annual net earnings by approximately $1.5 million.
- The company faces competition, cyclical industrial demand, technology and product-qualification risks, ERP implementation risks, cybersecurity threats, political and operating risks in Israel, India, China, and other international locations, and potential tax-audit exposure.
- The Class B convertible common stock carries ten votes per share. Concentrated ownership gives Class B holders effective influence over director elections, change-of-control transactions, and other stockholder matters.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2020.
Most important facts for investors to verify
- Whether the post-pandemic recovery in Force Sensors and transportation-related markets offsets continued weakness in industrial weighing and steel-related demand.
- Whether the 2021 Israel and Asia capacity investments generate the expected productivity, capacity, and margin benefits without additional restructuring costs.
- The sensitivity of DSI and Instrumentation goodwill and intangible-asset valuations to revenue, margin, discount-rate, and growth assumptions.
- Available borrowing capacity, covenant headroom, interest-rate exposure, and the restriction on cash dividends under the 2020 credit agreement.
- The extent to which foreign cash can be accessed without additional withholding or other taxes, given the concentration of cash outside the United States.
- The sustainability of the 2020 cash-flow improvement and the company’s ability to fund approximately $26.1 million of expected 2021 capital expenditures internally.
- Customer cancellation and rescheduling risk associated with the $87.6 million year-end backlog and the fourth-quarter 0.93 book-to-bill ratio.