Vishay Precision Group, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Vishay Precision Group designs and manufactures precision foil resistors, strain gages, force sensors, load cells, weighing modules, instrumentation, and weighing and control systems. Its products primarily serve industrial, medical, agricultural, transportation, military/aerospace, and other specialized applications.
The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results. VPG became an independent public company through its July 6, 2010 tax-free spin-off from Vishay Intertechnology; therefore, pre-spin-off historical results are presented on a carve-out basis and may not be directly comparable to stand-alone results.
Beginning in the fourth quarter of 2011, VPG reported three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Key financial metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenues | $238.1 million | $207.5 million | +14.7% |
| Gross profit | $83.1 million | $77.1 million | +7.8% |
| Gross margin | 34.9% | 37.2% | Down 2.3 points |
| Operating income | $16.3 million | $19.8 million | Down 18.0% |
| Operating margin | 6.8% | 9.6% | Down 2.8 points |
| Net earnings attributable to VPG | $10.8 million | $11.7 million | Down 8.0% |
| Diluted EPS | $0.78 | $0.85 | Down $0.07 |
| Cash flow from operations | $15.6 million | $21.7 million | Down $6.1 million |
| Capital expenditures | $16.3 million | $8.4 million | Nearly doubled |
FY2011 revenue growth was driven primarily by higher volume across all three segments and favorable foreign-currency effects. Average selling prices were broadly flat to slightly lower.
| Segment | FY2011 revenue | FY2010 revenue | FY2011 margin |
|---|---|---|---|
| Foil Technology Products | $112.2 million | $101.6 million | 43.5% |
| Force Sensors | $71.5 million | $60.1 million | 19.1% |
| Weighing and Control Systems | $54.4 million | $45.9 million | 38.0% |
At December 31, 2011, cash and cash equivalents were $80.8 million, total third-party debt was $11.6 million, and reported net cash was $69.2 million. Working capital was $141.0 million and the current ratio was 4.8 to 1.0. Approximately 80% of cash was held by non-U.S. subsidiaries, and repatriation could create additional taxes.
VPG had no borrowings outstanding under its $25.0 million U.S. revolving facility or its $15.0 million Israeli revolving facility. It also had $10.0 million of exchangeable notes due in 2102 and approximately $1.7 million of Japanese subsidiary debt. The company was in compliance with all debt covenants at year-end.
Fourth-quarter performance and material changes
| Metric | Q4 2011 | Q3 2011 | Q4 2010 |
|---|---|---|---|
| Net revenues | $56.4 million | $60.0 million | $54.8 million |
| Gross margin | 33.4% | 35.3% | 38.2% |
| Operating income | $1.9 million | $4.7 million | $5.1 million |
| Net earnings attributable to VPG | $1.2 million | $3.3 million | $3.3 million |
| Diluted EPS | $0.09 | $0.24 | $0.24 |
Quarterly revenue declined sequentially after the second quarter. Management attributed the fourth-quarter decline to significantly lower European demand and manufacturing-capacity issues in Foil Technology Products. Fourth-quarter gross margin was pressured by lower volume, Foil Technology capacity constraints, start-up costs at the new India facility, and Force Sensors product mix.
Full-year gross margin declined because of higher material, wage, freight, duty, depreciation, fixed manufacturing, and inventory-obsolescence costs. SG&A increased to $66.8 million from $57.3 million, reflecting higher wages, IT, travel, commissions, public-company personnel and fees, and unfavorable currency effects.
Revenue increased in each segment, but annual segment margins were mixed: Foil Technology Products declined from 47.7% to 43.5%, Force Sensors declined from 20.6% to 19.1%, and Weighing and Control Systems improved from 35.7% to 38.0%.
Cash flow, investment, outlook, and risks
Operating cash flow declined primarily because of higher tax payments, bonus and profit-sharing payments, and working-capital changes. Capital spending supported a new Force Sensors manufacturing facility in India, a new Foil Technology product line, and business-system and facility maintenance. The India facility was substantially complete at year-end, with production expected to ramp in the first quarter of 2012 and approximately $4.0 million of related spending expected to carry into 2012.
Management stated that existing cash, credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. The company expected to remain in compliance with its debt covenants. The filing does not provide formal revenue or earnings guidance.
Management expected to increase research and development spending, pursue organic growth through design wins and new products, improve manufacturing efficiency through automation and lower-cost locations, and consider strategic acquisitions, particularly in Force Sensors and Weighing and Control Systems.
- Demand weakened in Europe during the second half of 2011, and the company remains exposed to cyclical industrial markets and further economic deterioration.
- Backlog declined to $42.4 million at year-end from $45.9 million at September 30, 2011. Customers may cancel or reschedule many orders without penalty, limiting backlog visibility.
- Foreign-exchange losses were $1.3 million for 2011; collar options generated a $0.6 million net loss. A hypothetical 10% adverse currency movement was estimated to affect annual net earnings by approximately $1.5 million.
- Raw-material availability and pricing, including exposure to specialized single-source materials and volatile metals, could reduce margins.
- Manufacturing transfers and the India start-up could create temporary inefficiencies, higher costs, capacity constraints, and restructuring or severance charges.
- Defined-benefit pension and other postretirement obligations increased, with accrued obligations of approximately $12.8 million at year-end and expected 2012 plan contributions of approximately $1.2 million.
- Undistributed foreign earnings were approximately $102.5 million and were considered indefinitely reinvested; withholding taxes of approximately $19.5 million would be payable upon remittance of all previously unremitted earnings.
- The company has significant exposure to Israel, including dependence on government tax and employment incentives and regional geopolitical risk.
Facts investors should verify
- Whether European demand and the sub-one book-to-bill ratio in the fourth quarter persist into 2012.
- Timing, cost, and expected benefits of the India facility consolidation and new Foil Technology production line.
- Whether gross-margin pressure from materials, labor, capacity constraints, product mix, and start-up costs reverses.
- Actual 2012 capital spending, restructuring costs, operating cash flow, and progress toward free-cash generation.
- Availability of overseas cash for U.S. needs after considering potential repatriation taxes.
- Compliance with the U.S. and Israeli revolving-facility covenants and the effect of variable interest rates.
- Potential dilution from exchangeable notes, warrants, stock options, restricted stock units, and Class B common stock voting control.
- Tax exposures, including the India tax audit, unrecognized tax benefits, and obligations under the spin-off tax matters agreement.