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Vishay Precision Group Inc (VPG 2.75%)
Q4Â 2018 Earnings Conference Call
Feb. 20, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning and welcome to the VPG 2018 Fourth Quarter and Full Year Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Ms. Reynee Tung, Director, Global Marketing Communications. Please go ahead.
Reynee Tung -- Director, Global Marketing Communications
Thank you, Operator. Good morning, everyone. Welcome to VPG's 2018 fourth quarter earnings conference call. An audio recording will be made of the conference call today, including any questions or comments that participants may contribute.
By now, you all should have received the earnings press release and we hope you've taken the time to read through it as it contains important information. You can find it, including relevant non-GAAP reconciliations on VPG's website at vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and can be accessed on the VPG website. The content of this conference call is owned by VPG and is protected by U.S. and International copyright law. You may not make any recordings or other copies of this conference call and you may not reproduce, distribute, adapt, transmit, display, or perform the contents of this conference call in whole or in part without our written permission.
Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results, performance or achievements may turn out significantly better or worse than indicated by any forward-looking statements that we may make today. For a more complete discussion of the risks associated with VPG's operations, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2017 and our other recent SEC filings.
And now it's my pleasure to introduce the host for today's call, Ziv Shoshani, CEO and President; and Bill Clancy, CFO. Bill ?
William M. Clancy -- Executive Vice President, Chief Financial Officer
Thanks, Reynee. Good morning, everyone, and thank you for joining us on our call today.
I would like to start by reviewing a few highlights and then summarizing the financials. Following that, Ziv will provide his view of the results and the global business environment.
Referring to Page 3 of the slide deck. We had a good fourth quarter of 2018 with revenues of $77 million, adjusted operating income of $9.9 million, adjusted operating margin of 12.9% and adjusted earnings per diluted share of $0.54. We are pleased at our quarterly performance and also with our fourth quarter cash from operations of $17.4 million and free cash flow of $12.8 million.
On Slide 4, we grew our fourth quarter 2018 revenues by 10.9% to $77.0 million, up $7.5 million compared to $69.4 million of revenues in the fourth quarter of 2017. The negative impact of foreign exchange rates to revenues for the fourth quarter of 2018 as compared to the fourth quarter of 2017 was $1.3 million. We increased our gross profit margin to 40% in comparison to 38.5% in the fourth quarter of 2017. The increase in gross profit of $4.1 million for the fourth quarter of 2018 as compared to the fourth quarter of 2017 was primarily attributable to an increase in volumes of $5.7 million, partially offset by $1 million related to wage increases, $500,000 for supplies and tooling and repairs and maintenance and $200,000 related to the U.S. imposition of tariffs on goods from China.
Selling, general and administrative expenses for the fourth quarter of 2018 were $20.9 million or 27.2% of revenues as compared to $18.8 million or 27.1% for the fourth quarter of 2017. The increase in selling, general and administrative expenses was related to $500,000 of wage increases, $4,000 in bonus reserve adjustments, another $400,000 in commission and travel and $800,000 in professional service fees.
As a result of our regular review of goodwill and indefinite-life intangible assets during the fourth quarter of each year, we recorded $2.8 million pre-tax, non-cash impairment charge to reduce the carrying value of the goodwill and indefinite-life intangible assets related to our Pacific Instruments business, which was part of the Foil Technology Products reporting segment. This charge is preliminary and could change as when we finalize and file our 2018 Form 10-K with the SEC.
Looking at operating income on an adjusted basis, we increased our adjusted operating margin by 24.5% to $9.9 million or 12.9% as compared to $8 million or 11.5% in the fourth quarter of last year. The adjusted net earnings attributable to VPG stockholders for the fourth quarter of 2018 increased 37.5% to $7.3 million or $0.54 per diluted share compared to $5.3 million or $0.39 per diluted share in the fourth quarter of 2017. Foreign currency exchange rates for the fourth quarter of 2018 as compared to the fourth quarter of 2017 increased net earnings by $700,000 or $0.05 per diluted share.
We generated free cash flow of $12.8 million for the fourth quarter of 2018 as compared to $5.4 million for the fourth quarter of 2017. We define free cash flow as the amount of cash generated from operations, which was $17.4 million for the fourth quarter of 2018, less capital expenditures, which were $4.6 million for the fourth quarter of 2018, net of any proceeds in the sale of assets , which were zero in the fourth quarter of 2018. Our GAAP tax rate for the year ended December 31, 2018 was 30.4%.
We continue to closely monitor the developments relating to the U.S. imposition of tariffs on goods from China and trade regulations and the response by other countries related to the U.S. tariffs. In mid-July, the tariffs went into effect and we incurred $500,000 of cost related to the tariffs on goods from China in the second half of 2018. For those product that are impacted, we have been working closely with our customers to minimize the impact and given our current backlog, we expect to see offsetting effects in the coming quarters.
Vishay Advanced Technologies, a subsidiary of the Vishay Precision Group, Inc. entered into a new lease agreement as detailed in our Form 8-K filing on Tuesday, February, 19. This facility will be located in Israel and will allow us to have capacity expansion of our advanced sensors product line as well as streamlining operations as we work to ramp up production in a new state-of-the-art facility. Currently, construction is in progress. So we expect to complete moving all the operations to this facility in the second half of 2020.
And on Slide 5, we remain focused on the execution of our core strategy, which continues to prove very effective in achieving these goals outlined on Slide 5.
With that, let me pass further comments on to Ziv.
Ziv Shoshani -- President, Chief Executive Officer
Thank you, Bill. An important part of our strategy is to grow by developing new product offering, a great example of this, is our advanced sensor line, which continues to gain adoption. We developed this platform as part of our Foil Technology Product segment and it has grown nicely as more customers included in their product design. We saw our advanced sensor revenues increase approximately 37% in the fourth quarter of 2018 versus fourth quarter of 2017. And the revenue increase was approximately 59% for the 12 months ended December 31, 2018 as compared to the prior year period. We are pleased with the continued acceptance of this new sensor platform and are proud to provide enhanced performance to customers. We are also pleased to be manufacturing on an efficient platform.
A second example of our innovation is our value-added OEM transducer business, part of our Force Sensors segment. For the year ended December 31, 2018, its revenues increased by 73% compared to the prior year period. The revenue for the OEM Transducer business was slightly down in the fourth quarter of 2018 compared to the fourth quarter of 2017.
A final example is in our Weighing and Control Systems segment, our TruckWeigh and VanWeigh on-board weighing business revenues increased by 65% in the fourth quarter of 2018 as compared to the fourth quarter of 2017. For the year ended December 31, 2018, the revenues increase was approximately 78% as compared to the comparable prior year period.
We see trends continuing in some important end markets for our business. In particular, I'll note aerospace and defense, steel and semiconductor equipment for testing and measurement.
Turning to our end markets, aerospace continues to see positive demand growth, driven by increasing production rates. In the defense end market, noise related to ongoing budget discussions, mid-term elections, the partial government shutdown and gridlock in Washington create uncertain environment, however order rates and backlogs remain positive with expectations for low single-digit budget increase through 2020.
In the semiconductor end market, following a very robust capital expenditure cycle, spending has moderated at the end of 2018, which is expected to continue in 2019. Overall, the prevailing forecast for the shorter and softer cycle for the semi capital expenditure with improvements in spending in the second half of 2019.
Finally, turning to the steel market. In 2018, global steel demand continued to show resilience supported by the recovery in investment activities in developed economies and the improved performance of the merging economies. Demand for steel is expected to remain positive into 2019, growing at 1.4% . Globally, by region steel demand in developed countries is expected to be healthy, but growth will moderate. In developing nations, particularly China, demand growth is expected to decelerate in the absence of government stimulus on easing of global trade tensions. On balance, we expect growth to remain positive in 2019, but at a more moderate rate than we saw in 2018, given discrete industry uncertainty and isolated areas of moderation throughout the end markets we serve.
On Slide 6, the Company's overall book-to-bill was 0.93 for the fourth quarter of 2018 compared to 1.18 in the fourth quarter of 2017 and 0.98 in the third quarter of 2018. We believe this reflects sustained business environment in our markets as well as our focus on execution. Total orders for the fourth quarter of 2018 was $71.7 million, a decrease of $10.1 million or 12.3% from $81.8 million in the fourth quarter of 2017 and a decrease of $2.3 million or 3% from $74.0 million in the third quarter of 2018. The sequential decrease in orders is primarily attributable to precision resistors for the test and measurement market in the Americas and Asia and also for steel products in Asia. Our backlog at December 31, 2018 decreased to $93.4 million compared to $99.4 million at September 29, 2018, but increased compared to $88.9 million at December 31, 2017.
On Slide 7, some details on our reporting segments. The Foil Technology Products segment had the book-to-bill ratio of 0.88 for the fourth quarter of 2018 compared to 1.36 for the fourth quarter of 2017 and 0.95 for the third quarter of 2018. Sequentially, orders decreased by $1.8 million or 5.4% from the third quarter of 2018, primarily in the Americas, with the decrease coming from precision resistors product line in the test and measurement end market.
The Foil Technology Product segment gross profit margin was 42% for the fourth quarter of 2018, up from 39.3% in the fourth quarter of 2017 and down from 43.9% in the third quarter of 2018. The year-over-year gross profit increase of $3.7 million was primarily due to the increase in volume of $4.5 million across all regions. Our growth in Asia was primarily within the test and measurement market, for precision resistors, in addition to the force measurement market for advanced sensors products. Our growth in Europe was primarily within the test and measurement market for precision resistors. In the Americas, growth was primarily coming from the Pacific Instruments product within the avionics, military and space end markets.
Partially offsetting the volume increase was an increase in wages of $0.7 million, sequentially gross profit margin decreased by $400,000, primarily due to $500,000 for supplies and tooling and repairs and maintenance and manufacturing inefficiencies of $300,000, partially offset by an increase of volume of $600,000. The Foil Technology Product segment backlog was 4.0 months compared to 4.7 months last year and 4.4 months in the prior quarter.
Looking at the Force Sensors segment, the book-to-bill is ratio was 1.05 for the fourth quarter of 2018 compared to 1.18 in the fourth quarter of 2017 and 0.98 for the third quarter of 2018. Sequentially, order increased by $600,000 or 3.2% in Europe within the precision weighing and medical end markets. The gross profit margin for the segment was 26.66% in the fourth quarter of 2018, down from 29.5% in the fourth quarter of 2017 and up from 25.9% in the third quarter of 2018. The gross profit decrease of $700,000 compared to the fourth quarter of 2017 was due to an increase in wages of $300,000, a reduction in inventory of $300,000 and $200,000 related to the U.S. imposition of tariffs on the goods from China.
The gross profit was flat compared to the third quarter of 2018, despite the reduction in volume of $200,000, offset by improved manufacturing efficiencies of $200,000. The Force Sensors segment backlog was 3.1 months compared to 3.7 months in the fourth quarter of 2017 and 2.9 months in the third quarter of 2018.
For Weighing and Control Systems segment, the book-to-bill ratio was 0.92 for the fourth quarter of 2018 compared to 0.92 in the fourth quarter of 2017 and 1.02 for the third quarter of 2018. Sequentially, orders decreased by $1.0 million or 4.4%. The decrease in orders is primarily attributable to the steel products in Asia and due partially offset by an increase in on-board weighing products in the Americas.
The gross profit margin for the segment was 46.8% in the fourth quarter of 2018 versus 44.8% in the fourth quarter of 2017 and 46.6% in the third quarter of 2018. Weighing and Control Systems gross profit increased by $1.1 million from the fourth quarter of 2017 due to an increase in volume of $1.3 million mainly for steel products in Asia and Force Sensor product in the Americas and Europe.
The sequential gross profit increase of $600,000 compared to the third quarter of 2018 was primarily due to an increase in volume of $700,000, mainly from the steel product line in Asia and process weighing in Europe. The Weighing and Control Systems backlog was 3.5 months compared to 2.8 months in the fourth quarter of 2017 and 4.0 months in the third quarter of 2018.
On Slide 8, in light of the continued stable business environment, at the constant fourth fiscal quarter 2018 exchange rates, we expect net revenues in the range of $72 million to $78 million for the first fiscal quarter of 2019.
With that, let's open the lines for questions. Thank you.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from John Franzreb of Sidoti & Company.
John Franzreb -- Sidoti & Company -- Analyst
Good morning, guys, good quarter.
William M. Clancy -- Executive Vice President, Chief Financial Officer
Good morning, John.
John Franzreb -- Sidoti & Company -- Analyst
So I guess, I want to start with the book-to-bill ratio. What should we infer from that? It's been kind of flat for the last two quarters after nearly two years of growing book-to-bill. Is it a function of FX, is it a function of change in geography, you kind of pointed out Asia was weak, how should we think about it now, is it shorter duration orders that are coming through the P&L? Can you just walk us though what we should think about the bookings number at this point?
Ziv Shoshani -- President, Chief Executive Officer
Sure. The book-to-bill for this company, which the product line (inaudible) our business is very diversified and even (technical difficulty) majority of products in different end markets, we still have a book-to-bill over 1. So the way to look at that is looking at the different -- the dynamics of the end market. I think that if I will start with the Foil Technology Products, which we have seen a book-to-bill of 0.8, it really reflects softening of some of the semiconductor testing equipment, which implies softer demand regarding memory supply, Big Data, smartphones, all of those, the softening of that end market is mainly reflected on the precision resistors.
So, in the regards to the industrial end markets, we see a stable environment in the Americas and in Europe, we don't sell much into the industrial market in Asia, so the slowdown in Asia, which is mainly driven by the Chinese, the recession is less affecting our demand in regards to the industrial sector. In the Force -- in the FTP, we have seen a positive book-to-bill this quarter of 1.05. We see, I would say, stable demand regarding precision weighing while we should expect some softening on the precision agricultural equipment due to a depletion of inventory, but we do have new projects and new products with OEMs that are expected to offset the softening of the demand, so we fairly see a stable environment.
Last but not least regarding, Weighing and Control Systems. I think that one of the phenomenon is the steel demand, which based on the macro information, is expected to grow year-over-year in a moderate manner, less in China, more in the developed countries. In regards to process weighing and on-board weighing, I would say process weighing, we should expect to see a stable environment in Europe and in the United States. And in the on-board weighing, we believe that the environment is still solid moving into 2019 despite some uncertainty regarding the Brexit situation whereby we have, I would say, our British subsidiary is providing products to the domestic market.
But all in all, besides the China slowdown in the semiconductor for the complete company, as we have a very diversified product line, which are reaching out to different end markets, we should -- we do expect to see stable business environment.
John Franzreb -- Sidoti & Company -- Analyst
Exposure you have to the semiconductor market, how much is it as a percent of sales overall are (inaudible) FTP?
Ziv Shoshani -- President, Chief Executive Officer
We don't provide the breakdown of the semi, it's part of the test and measurements end markets, which I think that both the FTP, it could be around the 20 -- I would say around 20% of the FTP, around about. But which encompasses more applications than just semiconductors.
John Franzreb -- Sidoti & Company -- Analyst
Okay, fair enough. Also in -- sticking with FTP (inaudible) the gross margin was down sequentially, some tooling and some manufacturing efficiencies, are those issues behind you now?
Ziv Shoshani -- President, Chief Executive Officer
Yes, this is correct. We had some inefficiency in Q4 and higher supply and tooling and repairs and maintenance due to the higher volume that those product lines were running, and during the year-end, it was kind of a catch up mode, but definitely the effect should be behind us as we move forward into Q1 (inaudible).
John Franzreb -- Sidoti & Company -- Analyst
Got it. And I guess lastly, just on Pacific Instruments, the write down there, what went wrong? Why was it -- why did you need to take that write down?
William M. Clancy -- Executive Vice President, Chief Financial Officer
John, it's really, it's an accounting exercise and what you do you go through and you look at your forecast versus your actual and what we saw during 2018 was an unfavorable product mix, but something that we don't forecast, but that could be positive in the future, but we just don't forecast any product mix and due to the unfavorable mix that we had through this accounting exercise, we took this non-cash charge, but the business itself is strong and very good.
John Franzreb -- Sidoti & Company -- Analyst
Okay, that's fair enough. Actually, guys. I'll get back into queue. Thank you.
Operator
(Operator Instructions) And our next question will come from Sarkis Sherbetchyan of B Riley FBR.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Thanks for taking my question and good morning, guys.
Ziv Shoshani -- President, Chief Executive Officer
Good morning.
William M. Clancy -- Executive Vice President, Chief Financial Officer
God morning, Sarkis.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
So wanted to touch on the new lease agreement, you filed the 8-K last night and you touched upon a little bit in this conference call, seems like you're expanding the capacity for advanced sensors, maybe can you help us understand the amount of capacity you plan to bring for advanced sensors?
Ziv Shoshani -- President, Chief Executive Officer
Okay. In the last few years, we have been reporting a dramatic increase year-over-year for advanced sensor volume, which I would say was high double-digits. We, as you know, the advanced sensor line is used one, to generate new applications, new revenues, which the Company never had based on the technology and the new design in conjunction with streaming line -- with streamline of legacy business, which would enable us to provide better product at a lower cost to our customers. As we have been -- so as initially -- we have been doing that in the first few years and the momentum has been picking up very, very nicely. We are at a point now with our existing location is too small in order to support future expansion. Therefore, we went to the new lease agreements in order to allow advanced sensor to expand its capacity, which I would say would be or is expected to be the potential capacity based on the new location is expected to support at least, I would say, 7 times to 8 times of the -- 7 times to 8 times of the revenues and from a capacity standpoint, it should support at least 5 times, 6 times more capacity, which would enable the Company to drive revenues and margin much more substantially and capitalize on this new technology.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
That's super helpful, Ziv and I think you mentioned in the prepared comments, the advanced sensors were up 37% in 4Q year-over-year and 59% for fiscal '18. I'm not sure if you have the annual, maybe revenue in hand that you can kind of share with us? Just trying to gauge how large the advanced sensors business could be for your top line?
Ziv Shoshani -- President, Chief Executive Officer
I would say that we have never provided numbers, but this is already in the double-digit millions of dollars and I would say that with the new lease in place, once we move in, the potential or I would say, the capacity potential would be able to support, I would say, close or north of $100 million business.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Okay. So close to or north of $100 million. And can you just help us understand maybe the cost of production or just, you know, what does the margin profile look like for advanced sensors relative to, call it the corporate average that we see today?
Ziv Shoshani -- President, Chief Executive Officer
The advanced sensor line from a contribution margin is, I would say at least north of 5% of the average -- of the Company's average.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
And can you refresh us on where you stand today on the incremental for the company average/ I think, before it was 50% pre-tax, is that the right way to think about it?
William M. Clancy -- Executive Vice President, Chief Financial Officer
So Sariks, you're talking about the -- our contribution margin in total or?
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Yes, so call it contribution margin (multiple speakers).
William M. Clancy -- Executive Vice President, Chief Financial Officer
Yeah, so I think what we are seeing year-over-year, given all the --somewhat increase in -- we had G&A, it's probably more like in the, I'd say 40% to 45% at the moment (multiple speakers) free cash.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Got it. And then if you add advanced sensors and scale it up, it would be meaningfully above the 40% to 45% that you just stated?
Ziv Shoshani -- President, Chief Executive Officer
This is correct, yes.
William M. Clancy -- Executive Vice President, Chief Financial Officer
Yes.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Okay And just to kind of reiterate, so you could support at least 7 times to 8 times the current revenue level, you know, call it a business that's about $100 million in top line, can you maybe help us understand the pathway to that growth trajectory?
Ziv Shoshani -- President, Chief Executive Officer
Okay. In that advanced sensors, have two platforms, one is what we are defining as (inaudible) this is more of the large OEM type of business, which we have been designing products at different OEMs and once -- and some of the OEMs are running on a high volume projection, while other OEMs are running on a lower volume projection, so doing -- well, let's take the current snapshot, the current snapshot is that more than 50%, I would say, more than 50% of the revenues are generated from new designs. We have a fairly, I would say, good queue of new designs with different OEMs and the expectation is that the momentum will continue. This is one path.
The second path is that this platform in 2019 will develop a new product line, which will go into the end user applications, mostly for testing of structures, we have not been doing that so far. The average selling prices are way, way higher while the volume is slightly lower. So we are going to, once those products will be -- well, those has been developed and already samples has been provided to different beta sites, we do expect to see also a nice, I would say, a nice upturn regarding those end user business for testing of structures and just give you an example, one of the potential end market could be PC board testing, which is considered as a fairly sizable market, which we are planning to offer products to.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Great. That's very helpful, thank you guys.
Operator
And next we have a follow-up question from John Franzreb of Sidoti & Company.
John Franzreb -- Sidoti & Company -- Analyst
Sure. I guess this kind of dovetails into the previous question, CapEx was up a lot last year, it sounds like you're going to be tooling the new facility in 2020, given how much bigger it is, can you kind of walk us through what the CapEx budget (inaudible) is going to be in 2019, but how much it's going to have to go up, maybe incrementally in 2020 to tool up in the facility?
Ziv Shoshani -- President, Chief Executive Officer
Well, in fact the larger CapEx spending is expected to be in 2019, because we are planning already to spend much money into the new facility, despite the fact that we are going only to move in the mid of 2020. The expected capital spending for next year is around about as twice as much for this year, while the incremental spending would be dedicated for two large projects, one is the Modi'in lease for advanced sensors and the other one would be an expansion of our capacity in India to support further growth for Force Sensors.
John Franzreb -- Sidoti & Company -- Analyst
So you're talking about CapEx in the $25 million to $30 million range, is that a right number?
Ziv Shoshani -- President, Chief Executive Officer
This is correct, it will get you close to $30 million. This is correct, 50% is related to those two projects, the Modi'in and India expansion.
John Franzreb -- Sidoti & Company -- Analyst
All right. Got it. And OK, that's fine for now, it's a lot more than I was expecting. Okay. And just a couple other kind of housekeeping type of questions, I think you said there was $800,000 in professional service fees year-over-year in the quarter. What were they for and we should expect them continue on going forward?
William M. Clancy -- Executive Vice President, Chief Financial Officer
Yeah John, most of them were related to fees associated with internal control costs, some consulting costs and the majority of that has been expensed already this year. So, we should see a reduction going into 2019.
John Franzreb -- Sidoti & Company -- Analyst
Got it. And what should we be thinking about as far as the tax rate going forward, it's kind of have been fluctuating over the past year, what do we think in there, Bill?
William M. Clancy -- Executive Vice President, Chief Financial Officer
Yes, it's always tough John, it's always based upon where the profitability is being generated. But I think on an operational basis, I think anywhere between say, 28% to 30% would be a good use for a tax rate.
John Franzreb -- Sidoti & Company -- Analyst
Okay, that's it for now. Thanks guys.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Clancy for any closing remarks.
William M. Clancy -- Executive Vice President, Chief Financial Officer
I appreciate it. Thank you, everyone for joining on the call today and for the good questions. We will also be presenting at the Sidoti Conference in late March. So hope to see people there, I do appreciate everybody dialing in today. Thank you very much.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 40 minutes
Call participants:
Reynee Tung -- Director, Global Marketing Communications
William M. Clancy -- Executive Vice President, Chief Financial Officer
Ziv Shoshani -- President, Chief Executive Officer
John Franzreb -- Sidoti & Company -- Analyst
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
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