Vishay Precision Group, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages using proprietary foil technology. It reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. This Form 10-K covers the fiscal year ended December 31, 2017, including fourth-quarter results. The filing was signed March 15, 2018.
- Approximately 2,250 employees at year-end; approximately 87% were outside the United States.
- No customer represented more than 5% of net revenues. Revenue by customer region was 42% Americas, 33% Europe, and 25% Asia.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenues | $254.4 million | $224.9 million | +13.1% |
| Gross profit | $98.3 million | $82.8 million | +18.7% |
| Gross margin | 38.6% | 36.8% | +1.8 percentage points |
| Operating income | $21.6 million | $10.7 million | +102.0% |
| Operating margin | 8.5% | 4.8% | +3.7 percentage points |
| Net earnings attributable to VPG stockholders | $14.3 million | $6.4 million | +124.0% |
| Diluted EPS | $1.07 | $0.48 | +123.0% |
| Cash flow from operations | $22.7 million | $11.5 million | +97.6% |
| Capital expenditures | $7.0 million | $10.4 million | Down $3.5 million |
Adjusted gross profit was $98.4 million, or 38.7% of revenue, and adjusted net earnings attributable to VPG stockholders were $15.3 million, or $1.14 per diluted share. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
Segment performance and fourth quarter
| Segment | 2017 revenue | 2017 versus 2016 | 2017 gross margin |
|---|---|---|---|
| Foil Technology Products | $116.3 million | +15.2% | 41.1% |
| Force Sensors | $65.4 million | +8.7% | 27.8% |
| Weighing and Control Systems | $72.6 million | +13.9% | 44.5% |
Fourth-quarter revenue was $69.4 million, up 24.4% year over year and 10.6% sequentially. Fourth-quarter diluted EPS was $0.33 versus $0.22 in the prior-year quarter. Fourth-quarter backlog increased to $88.9 million from $56.8 million a year earlier, and the company-wide book-to-bill ratio was 1.18. Weighing and Control Systems benefited from deliveries of steel-related projects, while Foil Technology Products experienced fourth-quarter margin pressure from inventory adjustments, higher wages and repairs, and adverse foreign currency effects.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $74.3 million at December 31, 2017, compared with $58.5 million at December 31, 2016.
- Total third-party debt, net of deferred financing costs, was $32.4 million; reported net cash was $41.9 million versus $22.3 million in 2016.
- Debt consisted primarily of $20.5 million of term loans, $9.0 million of revolving debt, and $2.8 million of exchangeable notes. The principal credit agreement terminates December 30, 2020.
- The company was in compliance with its debt covenants at year-end. The credit agreement restricts cash dividends and includes leverage, tangible net worth, and fixed-charge coverage requirements.
- Approximately 93% of cash and cash equivalents was held by non-U.S. subsidiaries. The company expected existing cash, operating cash flow, and credit facilities to fund needs for at least the next 12 months.
- Management expected 2018 capital expenditures of approximately $15 million to $17 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher volume across all three segments, particularly test and measurement, force measurement, precision weighing, steel, and on-board weighing applications.
- Gross margin improved primarily because of higher volume, labor efficiencies, and cost reductions. SG&A increased to $74.6 million from $68.9 million, largely due to personnel costs, bonuses, incentive compensation, and Pacific Instruments costs; however, SG&A as a percentage of revenue declined to 29.3% from 30.6%.
- Operating results benefited from the absence of 2016 strategic alternative evaluation costs of $1.3 million and acquisition costs of $0.5 million. Restructuring costs declined to $2.0 million from $2.7 million.
- The global cost-reduction program was completed in 2017. VPG closed two U.S. leased facilities and continued shifting production toward more cost-effective locations and greater automation.
- Foreign exchange reduced 2017 revenue by approximately $0.1 million and increased costs of products sold and SG&A by approximately $2.8 million compared with 2016.
- The company recorded a provisional $2.2 million tax cost related to the 2017 Tax Cuts and Jobs Act, including a $1.8 million deferred tax liability for withholding taxes associated with a planned $25.5 million distribution of previously unremitted foreign earnings.
- In May 2017, approximately $1.3 million of exchangeable notes converted into 57,729 common shares. The remaining $2.8 million converted into 123,808 shares on February 26, 2018, eliminating all exchangeable notes.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance was provided in the filing. Management indicated that it expected continued investment in research and development, automation, cost reduction, and potential strategic acquisitions.
- Research and development expense was $11.7 million in 2017, up from $11.1 million in 2016.
- Management identified growth opportunities from sensor adoption in intelligent products, advanced sensors, MEMS-based on-board weighing, and expansion into additional precision measurement applications.
- Key risks include cyclical industrial demand, customer cancellation or rescheduling of backlog, intense competition, raw-material availability and price volatility, foreign currency exposure, execution risk in manufacturing transfers and ERP implementations, cyber and operational disruptions, and dependence on qualified technical personnel.
- A material weakness existed in internal control over financial reporting related to risk identification, control design, documentation, and monitoring following restructurings and acquisitions. Management expected remediation to continue through multiple reporting periods in 2018. Ernst & Young issued an adverse opinion on internal control effectiveness but an unqualified opinion on the consolidated financial statements.
- Potentially unusual items included $1.5 million of net proceeds from a Tianjin lease termination, restructuring costs of $2.0 million, inventory write-offs for obsolescence of $2.1 million, and provisional tax effects of the 2017 Tax Act.
- Foreign currency sensitivity analysis indicated that a hypothetical 10% adverse movement in exchange rates could affect annual net earnings by approximately $2.5 million. A 10% change in raw-material costs was estimated to affect annual net earnings by approximately $1.2 million.
Most important facts for investors to verify
- Whether the strong 2017 revenue and margin improvement, backlog growth, and 1.18 book-to-bill ratio continued after year-end, particularly in the steel and advanced-sensor businesses.
- Progress and effectiveness of the 2018 remediation plan for the material weakness in internal control over financial reporting.
- The final accounting impact of the 2017 Tax Cuts and Jobs Act, including GILTI and foreign withholding taxes, which remained subject to evaluation.
- Execution of planned 2018 capital expenditures of $15 million to $17 million and the resulting effect on free cash flow.
- Exposure to foreign exchange, raw-material costs, customer cancellations, and the company’s ability to maintain debt-covenant compliance while pursuing acquisitions or further restructuring.