Vishay Precision Group, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Vishay Precision Group 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. The filing covers the fiscal year ended December 31, 2019, including fourth-quarter results.
The company operates globally across industrial, test and measurement, precision weighing, force measurement, steel, medical, avionics, military, and space markets. No customer represented more than 5% of annual revenue. VPG employed approximately 2,400 people at year-end, with approximately 85% outside the United States.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $284.0 million | $299.8 million | Down 5.3% |
| Gross profit | $111.6 million | $121.3 million | Down 8.0% |
| Gross margin | 39.3% | 40.5% | Down 1.2 points |
| Operating income | $28.6 million | $37.2 million | Down 23.0% |
| Operating margin | 10.1% | 12.4% | Down 2.3 points |
| Net earnings attributable to VPG | $22.2 million | $23.6 million | Down 6.2% |
| Diluted EPS | $1.63 | $1.75 | Down 6.9% |
| Cash from operations | $30.9 million | $35.4 million | Down $4.4 million |
| Capital expenditures | $11.2 million | $14.5 million | Down $3.3 million |
| Adjusted free cash flow | $20.4 million | Not clearly provided in the filing text | Not clearly provided |
| Cash and cash equivalents | $86.9 million | $90.2 million | Down $3.2 million |
| Total third-party debt | $44.5 million | $27.1 million | Up $17.5 million |
| Net cash | $42.4 million | $63.1 million | Down $20.7 million |
The effective tax rate declined to 15.7% from 30.4%, primarily due to foreign exchange effects, a reduction in deferred-tax-asset valuation allowances associated with the DSI acquisition, and changes in geographic earnings mix.
Segment performance
| Segment | 2019 revenue | 2018 revenue | Revenue change | 2019 gross margin |
|---|---|---|---|---|
| Foil Technology Products | $131.8 million | $141.0 million | Down 6.5% | 40.4% |
| Force Sensors | $64.4 million | $73.2 million | Down 12.1% | 28.0% |
| Weighing and Control Systems | $87.8 million | $85.6 million | Up 2.6% | 45.9% |
Revenue declines were driven primarily by lower volumes in precision resistors, test and measurement, avionics, military and space, and precision weighing. Weighing and Control Systems benefited from the DSI acquisition and higher steel-related volume, partially offset by lower process-weighing and U.S. onboard-weighing sales.
Fourth-quarter 2019
- Revenue was $69.1 million, up 2.6% sequentially from the third quarter and down 10.2% from fourth-quarter 2018.
- Gross margin was 35.0%, compared with 38.3% in the third quarter and 40.0% in fourth-quarter 2018.
- Operating income was $1.8 million, compared with $6.2 million in the third quarter and $7.1 million in fourth-quarter 2018.
- Net earnings attributable to VPG stockholders were $3.9 million, or $0.28 diluted EPS, compared with $3.4 million, or $0.25 diluted EPS, in fourth-quarter 2018.
- Backlog increased to $90.9 million from $79.3 million at the end of the third quarter. The company-wide book-to-bill ratio improved to 1.15 from 0.96.
Fourth-quarter margin was affected by lower volume, product mix, inventory reductions, and a $1.3 million purchase-accounting adjustment related to DSI. Excluding the DSI adjustment, company gross margin would have been approximately 36.8% based on the reported figures, and the Weighing and Control Systems margin would have been 46.8%.
Material changes versus the prior comparable period
- VPG acquired Dynamic Systems Inc. on November 1, 2019, for $40.5 million, plus a potential earn-out of up to $3.0 million. DSI added $18.6 million of preliminary goodwill and $17.9 million of identifiable intangible assets and operates within Weighing and Control Systems.
- The DSI acquisition increased debt and investing cash outflows. Purchase of the business used $40.5 million of cash, while revolving debt increased to $34.0 million from $12.0 million.
- VPG exercised the full $15.0 million accordion under its revolving facility, increasing total revolving availability to $45.0 million.
- Restructuring costs rose to $2.3 million from $0.3 million, primarily for employee termination costs and facility closure or downsizing tied to manufacturing transfers to India and China.
- VPG recorded $0.6 million of executive severance costs and $0.4 million of DSI acquisition costs in 2019.
- No goodwill or indefinite-lived intangible impairment was recorded in 2019, compared with $2.8 million in 2018.
- Foreign exchange reduced 2019 revenue by approximately $5.7 million and net earnings by approximately $1.3 million, or $0.10 per diluted share, versus 2018.
- The company adopted ASC 842 lease accounting in 2019, recognizing an $8.7 million operating lease right-of-use asset and $8.6 million of related lease liabilities at year-end.
Liquidity, debt, outlook, and risks
Management stated that cash, available credit facilities, and projected operating cash flow should be sufficient to meet liquidity needs for at least the next 12 months. The company was in compliance with its credit-facility covenants at December 31, 2019. The credit agreement restricts cash dividends and requires compliance with tangible net worth, leverage, and fixed-charge coverage ratios.
Approximately 93% of cash and cash equivalents was held by non-U.S. subsidiaries. Approximately $159.0 million of foreign earnings were undistributed at year-end; the company estimated approximately $17.5 million of additional withholding taxes could be payable if the remaining earnings were remitted, in addition to a $1.5 million deferred tax liability associated with a planned $14.1 million distribution.
VPG expected 2020 capital expenditures of approximately $33 million, including approximately $20 million for building projects and capacity expansion in Israel and Asia. The company also entered into a long-term lease for a new approximately 121,400-square-foot facility in Israel, with occupancy expected in the second half of 2020.
The filing does not provide formal revenue or earnings guidance. Management emphasized continued investment in research and development, automation, manufacturing transfers, cost reduction, organic product development, and strategic acquisitions. R&D expense was $12.1 million in 2019.
- Principal risks include cyclical industrial demand, order cancellations or rescheduling, competitive pressure, raw-material availability and pricing, reliance on certain suppliers, foreign exchange exposure, tariffs and trade restrictions, and political or operational disruption in overseas facilities.
- The company relies on Chinese manufacturing for load cells and identified COVID-19-related supply and operating disruption as a risk, although it reported no material impact as of the filing date.
- Backlog is not necessarily predictive because customers may cancel or reschedule orders without penalty.
- Goodwill and intangible valuations are sensitive to revenue, margin, cash-flow, discount-rate, and other assumptions. The instrumentation reporting unit exceeded carrying value by approximately 12% in the 2019 impairment analysis.
- Management and the independent auditor concluded that internal control over financial reporting was effective. The DSI acquisition was excluded from management’s control assessment and represented 4.3% of total assets and 1.4% of 2019 revenue.
Most important facts for investors to verify
- Whether the DSI acquisition produces the expected growth, margins, synergies, and cash flow after only two months of 2019 contribution.
- Whether demand recovers in Foil Technology Products and Force Sensors, particularly in test and measurement, avionics, military and space, and precision weighing.
- Whether the fourth-quarter improvement in backlog and book-to-bill is sustained and converts into revenue without material cancellations.
- Execution, cost, and timing of manufacturing transfers and the new Israel and Asia capacity projects.
- Ability to fund approximately $33 million of expected 2020 capital expenditures while managing $44.5 million of debt and the credit facility’s December 2020 termination date.
- Exposure to foreign exchange, tariffs, COVID-19-related disruption, specialized suppliers, raw-material prices, and potential tax costs on foreign cash repatriation.
- Progress integrating DSI into financial controls and operations, including final purchase-accounting adjustments and the potential earn-out.