Business Context and Reporting Period
Vishay Precision Group, Inc. 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. The filing covers the fiscal year ended December 31, 2014, including the fourth quarter.
VPG serves industrial, medical, agricultural, transportation, military, aerospace, steel, construction, and other markets. No single customer accounted for more than 5% of annual revenue. The company employed approximately 2,536 people at year-end, approximately 86% outside the United States.
Financial Performance and Position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenue | $250.8 million | $240.3 million | +4.4% |
| Gross profit | $92.1 million | $83.9 million | +9.9% |
| Gross margin | 36.7% | 34.9% | +180 bps |
| Operating income | $8.7 million | $8.0 million | +8.2% |
| Net earnings attributable to VPG stockholders | $3.9 million | $4.3 million | -10.2% |
| Diluted EPS | $0.28 | $0.31 | Declined |
| Operating cash flow | $24.0 million | $14.6 million | +$9.4 million |
| Capital expenditures | $9.8 million | $6.7 million | +$3.1 million |
Adjusted net earnings, excluding specified acquisition, impairment, restructuring, and tax items, were $10.4 million, or $0.74 per diluted share, compared with $8.6 million, or $0.62 per diluted share, in 2013. These are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.
- Fourth quarter: Revenue was $61.2 million, gross margin was 35.3%, operating loss was $3.1 million, and net loss attributable to VPG stockholders was $4.4 million, or $0.32 per diluted share. The quarterly loss primarily reflected a $5.4 million goodwill and indefinite-lived intangible impairment charge.
- Liquidity: Cash and cash equivalents were $79.6 million, compared with $72.8 million in 2013. Working capital was $138.5 million and the current ratio was 3.9 to 1.0.
- Debt: Total third-party debt was $22.8 million, down from $27.1 million. Net cash, as defined by management, was $56.8 million. The company had no borrowings under its revolving facility and was in compliance with debt covenants.
- Free cash: Management-defined free cash was $14.3 million, calculated as operating cash flow less capital expenditures plus asset-sale proceeds.
- Tax: Income tax expense was $2.9 million and the effective tax rate was 41.9%, compared with 19.5% in 2013, reflecting several discrete tax items and foreign earnings-related effects.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from higher volume in Foil Technology Products and Force Sensors. Foil Technology Products revenue rose 11.3% to $108.0 million, while Force Sensors revenue increased 5.3% to $68.3 million.
- Weighing and Control Systems revenue declined 4.9% to $74.5 million, principally because excess steel-making capacity, particularly in China, reduced steel-industry demand. Improved on-board weighing revenue partly offset the decline.
- The 2014 gross margin benefited from the absence of $4.9 million of KELK purchase-accounting adjustments recorded in 2013. Excluding those adjustments, 2014 adjusted gross margin of 36.8% was slightly below 2013 adjusted gross margin of 36.9%.
- Fourth-quarter backlog declined to $58.5 million from $60.0 million in the prior-year quarter, although the company-wide book-to-bill ratio was 1.00.
- SG&A increased 3.8% to $77.3 million, driven mainly by headcount and wage increases and an additional month of KELK-related expenses.
- The company recorded $5.4 million of non-cash goodwill and indefinite-lived intangible impairment charges, driven by weaker steel-industry conditions and reduced forecasts for the KELK-related reporting unit. Goodwill declined to $12.8 million from $18.9 million.
- Restructuring costs increased to $0.7 million from $0.5 million, relating primarily to employee termination costs in Canada and the United States.
- Foreign-currency effects reduced revenue by approximately $0.8 million versus 2013 and reduced costs by approximately $1.2 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash, credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months.
- Capital expenditures for 2015 were expected to be approximately $12.0 million to $14.0 million. Management also planned additional manufacturing consolidation and cost-reduction initiatives, which may generate further restructuring and severance charges.
- Management expected a slow recovery in the steel industry over the next several years. Fourth-quarter performance was pressured by lower steel and process-weighing revenue, inventory adjustments, and costs associated with expanding the advanced-sensor platform.
- Management intends to increase research and development spending; 2014 R&D expense was $10.1 million versus $9.3 million in 2013.
- The filing provides no formal revenue or earnings guidance. Backlog may be cancelled or rescheduled by customers without penalty and is therefore not necessarily predictive of future revenue.
- Key operating risks include industrial cyclicality, intense competition, foreign-exchange exposure, commodity-price volatility, reliance on selected suppliers, geopolitical and operational risks in foreign locations, and challenges associated with ERP implementation, automation, manufacturing transfers, and acquisitions.
- Approximately $58.0 million of cash was held outside the United States and associated with foreign earnings considered indefinitely reinvested. Repatriation could create additional tax costs.
- The company reported a material weakness in internal control over financial reporting related to review controls for the 2014 goodwill impairment calculation. A mathematical error was corrected in the financial statements, and management expected remediation during 2015. Ernst & Young issued an adverse opinion on internal control effectiveness but an unqualified opinion on the financial statements.
- The credit agreement restricts cash dividends and requires compliance with leverage, fixed-charge coverage, and tangible-net-worth covenants. The company was compliant at December 31, 2014.
Most Important Facts for Investors to Verify
- Whether the decline in steel-related demand and the $5.4 million impairment indicate continuing weakness in the Weighing and Control Systems reporting unit.
- Whether cost reductions, manufacturing transfers, and advanced-sensor investments improve gross margins after the 2014 fourth-quarter decline.
- Whether backlog, book-to-bill trends, and segment volumes support sustainable revenue growth following the second-half slowdown.
- Progress in remediating the material weakness in goodwill-impairment controls and the effectiveness of the revised review procedures.
- Availability and geographic concentration of cash, including potential tax consequences of repatriating foreign earnings.
- Debt repayment requirements, covenant compliance, and the company’s ability to fund planned 2015 capital expenditures, acquisitions, and share repurchases.
- Exposure to foreign exchange, raw-material prices, supplier concentration, pension obligations, uncertain tax positions, and customer order cancellations.