Vishay Precision Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, including fourth-quarter results. Filed March 14, 2019. VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $299.8 million | $254.4 million | +17.9% |
| Gross profit | $121.3 million | $98.3 million | +23.4% |
| Gross margin | 40.5% | 38.6% | +1.9 percentage points |
| Operating income | $37.2 million | $22.5 million | +65.5% |
| Operating margin | 12.4% | 8.8% | +3.6 percentage points |
| Net earnings attributable to VPG stockholders | $23.6 million | $14.3 million | +64.8% |
| Diluted EPS | $1.75 | $1.07 | +63.6% |
| Cash provided by operating activities | $35.4 million | $22.7 million | +$12.7 million |
| Capital expenditures | $14.5 million | $7.0 million | +$7.5 million |
| Cash and cash equivalents | $90.2 million | $74.3 million | +$15.9 million |
| Total third-party debt | $27.1 million | $32.4 million | -$5.3 million |
Management-defined free cash was $21.0 million, calculated as operating cash flow less capital expenditures and adjusted for asset-sale proceeds. Net cash, another non-GAAP measure, was $63.1 million at year-end versus $41.9 million in 2017. The current ratio was 3.9 to 1.0, compared with 3.7 to 1.0.
Segment Performance
| Segment | 2018 Revenue | 2017 Revenue | 2018 Gross Margin | Margin Change |
|---|---|---|---|---|
| Foil Technology Products | $141.0 million | $116.3 million | 43.7% | +2.6 points |
| Force Sensors | $73.2 million | $65.4 million | 27.3% | -0.5 points |
| Weighing and Control Systems | $85.6 million | $72.6 million | 46.4% | +1.9 points |
Revenue growth was primarily volume-driven across all three segments. The Foil Technology Products segment benefited from precision resistor, strain gage, advanced sensor, and Pacific Instruments demand. Weighing and Control Systems benefited from precision weighing and steel applications. Force Sensors grew revenue but experienced pressure from labor and manufacturing inefficiencies, higher wages, tariffs on Chinese goods, and unfavorable Indian rupee effects.
Fourth-Quarter 2018
| Metric | Q4 2018 | Q3 2018 | Q4 2017 |
|---|---|---|---|
| Net revenues | $77.0 million | $75.5 million | $69.4 million |
| Gross margin | 40.0% | 40.5% | 38.5% |
| Net earnings attributable to VPG stockholders | $3.4 million | $7.5 million | $4.5 million |
| Diluted EPS | $0.25 | $0.56 | $0.33 |
| End-of-period backlog | $93.4 million | $99.4 million | $88.9 million |
| Book-to-bill ratio | 0.93 | 0.98 | 1.18 |
Fourth-quarter revenue increased 10.9% year over year and 2.0% sequentially. Foil Technology Products revenue rose 22.9% year over year, and Weighing and Control Systems revenue rose 6.5%; Force Sensors revenue declined 4.1%. Fourth-quarter earnings were reduced by impairment and pension-related charges.
Material Changes Versus 2017
- Revenue growth accelerated to 17.9%, with reported volume growth of 16.3% and favorable foreign-exchange effects of 1.5%.
- Gross margin expanded from 38.6% to 40.5%, principally from higher volume, partly offset by wage increases, labor inefficiencies, and China-related tariffs.
- SG&A increased to $80.9 million from $73.8 million, but declined as a percentage of revenue from 29.0% to 27.0%.
- Operating income benefited from higher volume, improved margins, and lower restructuring costs, which declined to $0.3 million from $2.0 million.
- The company recorded a $2.8 million non-cash impairment charge, including $2.5 million against goodwill and $0.3 million against indefinite-lived intangible assets, primarily related to the Pacific Instruments instrumentation reporting unit.
- The company incurred a $0.7 million UK pension-plan settlement charge and adopted accounting guidance that moved non-service pension costs outside operating income.
- The remaining $2.8 million of exchangeable notes was converted into 123,808 common shares in February 2018; no exchangeable notes remained outstanding at year-end.
- Debt declined, while cash increased. Approximately 93% of cash and cash equivalents was held by non-U.S. subsidiaries.
- A material weakness in internal control over financial reporting identified at December 31, 2017 was remediated. Management and Ernst & Young concluded controls were effective at December 31, 2018.
Liquidity, Outlook, and Management Commentary
Management stated that cash, credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. The secured credit agreement matures December 30, 2020, carries variable rates, restricts cash dividends, and requires compliance with financial covenants. VPG was in compliance with its covenants at year-end.
- 2019 capital expenditures were expected to be approximately $30 million, including approximately $15 million for capacity expansion in Israel and India.
- VPG plans to continue automation, manufacturing transfers, facility consolidation, research and development, organic product development, and complementary acquisitions.
- R&D expense was $11.8 million in 2018, compared with $11.7 million in 2017.
- The company entered into a long-term lease for a new approximately 121,400-square-foot facility in Israel, intended to consolidate operations and expand advanced sensor capacity.
- The filing does not provide formal revenue or earnings guidance for 2019.
Principal Risks and Contingencies
- Industrial-sector cyclicality, economic downturns, order cancellations, and backlog volatility; backlog orders may be canceled or rescheduled without penalty.
- Competitive pressure, pricing pressure, and the need to achieve successful product qualifications and customer design wins.
- Raw-material availability and pricing, reliance on certain specialized single-source suppliers, and potential margin pressure from metals volatility.
- Tariffs and trade restrictions, particularly involving China, Europe, Canada, and the United States.
- Foreign-currency exposure, with no hedging arrangements in place at December 31, 2018; management estimated that a hypothetical 10% adverse currency movement could affect annual net earnings by approximately $2.8 million.
- Execution risk from manufacturing transfers, automation, restructuring, ERP implementations, and construction of the new Israel facility.
- Goodwill and intangible-asset valuation sensitivity. Management disclosed that a 50-basis-point reduction in forecast gross margin, with other assumptions unchanged, would have increased the goodwill impairment by approximately $1.0 million.
- Tax exposure, including approximately $17.6 million of estimated additional withholding taxes if remaining previously unremitted foreign earnings were distributed, excluding the planned $17.5 million distribution associated with a $1.6 million deferred tax liability.
- Underfunded pension and other postretirement obligations, totaling approximately $14.1 million at year-end, and expected 2019 contributions of approximately $1.3 million.
- Credit-facility covenant risk, cybersecurity, environmental compliance, product liability, intellectual-property protection, political instability, Brexit uncertainty, and concentrated voting power of Class B shareholders.
Investor Verification Checklist
- Verify whether 2019 capital spending, particularly Israel and India expansion, remains near the projected $30 million and whether expected capacity benefits are realized.
- Track Force Sensors margins, including the effects of tariffs, wage inflation, manufacturing efficiency, and Indian currency movements.
- Assess whether the Pacific Instruments reporting unit meets forecast revenue and margin assumptions and whether additional impairment is required.
- Monitor backlog and book-to-bill trends, which declined to $93.4 million and 0.93, respectively, in Q4 2018.
- Review the location and repatriation costs of foreign cash, including withholding-tax exposure and the planned distribution of foreign earnings.
- Confirm compliance with the secured credit agreement and the effect of variable interest rates as debt maturities approach in 2020.
- Evaluate execution of the new Israel facility, restructuring programs, automation initiatives, and related customer-service or production risks.
- Reconcile management’s non-GAAP free cash and net cash measures to GAAP cash-flow and debt disclosures.