Vishay Precision Group, Inc. 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview VPG is an internationally recognized designer, manufacturer and marketer of sensors, and sensor-based measurement systems, as well as specialty resistors and strain gages based upon our proprietary technology. We provide precision products and solutions, many of which are “designed-in” by our customers, specializing in the growing markets of stress, force, weight, pressure, and current measurements. A significant portion of our products and solutions are primarily based upon our proprietary foil technology and are produced as part of our vertically integrated structure. We believe this strategy results in higher quality, more cost effective and focused solutions for our customers. Our products are marketed under a variety of brand names that we believe are characterized as having a very high level of precision and quality. Our global operations enable us to produce a wide variety of products in strategically effective geographic locations that also optimize our resources for specific technologies, sensors, assemblies, and systems. The Company also has a long heritage of innovation in precision foil resistors, foil strain gages, and sensors that convert mechanical inputs into an electronic signal for display, processing, interpretation, or control by our instrumentation and systems products. Our advanced sensor product line continues this heritage by offering high-quality foil strain gages produced in a proprietary, highly automated environment. Precision sensors are essential to the accurate measurement, resolution and display of force, weight, pressure, torque, tilt, motion, or acceleration, especially in the legal-for-trade, commercial, and industrial marketplaces. This expertise served as a foundation for our expansion into strain gage instrumentation, load cells, transducers, weighing modules, and complete systems for process control and on-board weighing. Although our products are typically used in the industrial market, our advanced sensors have been used in a consumer electronics product and are being evaluated for other non-industrial applications. The precision sensor market is integral to the development of intelligent products across a wide variety of end markets upon which we focus, including medical, agricultural, transportation, industrial, avionics, military, and space applications. We believe that as original equipment manufacturers (“OEMs”) continue a drive to make products “smarter,” they will integrate more sensors and related systems into their solutions to link the mechanical/physical world with digital control and/or response. We believe this offers a substantial growth opportunity for our products and expertise. Impact of COVID-19 on our Business As the COVID-19 pandemic began to unfold around the world, the Company took measures to protect its employees and customers. Those measures included suspending business travel, enabling certain employees to work from home, implementing workplace distancing, and adjusting work shifts to minimize employees’ contact with other employees. While the majority of the Company’s operations were able to operate despite the impacts from the COVID-19 pandemic, the Company’s Force Sensors manufacturing facility in India had operated at partial capacity as a result of government-mandated restrictions. The Company received approval from the Indian government to operate its facility without limitations on July 1, 2020, and since that date, has been operating at pre-pandemic capacity. As of March 11, 2021, all of the Company’s facilities are operating without limitations with the Company implementing COVID-19 best practices with respect to working conditions and enabling some employees to work remotely where possible. Nonetheless, given the impacts to date and the ongoing uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic, the ongoing economic disruption may continue to adversely affect the Company’s business and financial results. Overview of Financial Results VPG reports in three product segments: the Foil Technology Products segment, the Force Sensors segment, and the Weighing and Control Systems segment. The Foil Technology Products reporting segment is comprised of the foil resistor and strain gage operating segments. The Force Sensors reporting segment is comprised of transducers, load cells, and modules. The Weighing and Control Systems reporting segment is comprised of complete systems which include load cells and instrumentation for weighing, force control and force measurement for a variety of uses such as process control and on-board weighing applications. Net revenues for the year ended December 31, 2020 were $269.8 million compared to net revenues of $284.0 million for the year ended December 31, 2019. Net earnings attributable to VPG stockholders for the year ended December 31, 2020 were $10.8 million, or $0.79 per diluted share, compared to $22.2 million, or $1.63 per diluted share, for the year ended December 31, 2019. - 26 - The results of operations for the years ended December 31, 2020 and 2019 include items affecting comparability as listed in the reconciliations below. The reconciliations below include certain financial measures which are not recognized in accordance with U.S. generally accepted accounting principles ("GAAP"), including adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted net earnings per diluted share. These non-GAAP measures should not be viewed as an alternative to GAAP measures of performance. Non-GAAP measures such as adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted net earnings per diluted share do not have uniform definitions. These measures, as calculated by VPG, may not be comparable to similarly titled measures used by other companies. Management believes that these non-GAAP measures are useful to investors because each presents what management views as our core operating results for the relevant period. The adjustments to the applicable GAAP measures relate to occurrences or events that are outside of our core operations, and management believes that the use of these non-GAAP measures provides a consistent basis to evaluate our operating profitability and performance trends across comparable periods. In addition, the Company has historically provided these or similar non-GAAP measures and understands that some investors and financial analysts find this information helpful in analyzing the Company’s performance and in comparing the Company’s financial performance to that of its peer companies and competitors. Management believes that the Company’s non-GAAP measures are regarded as supplemental to its GAAP financial results. Beginning in the fourth quarter of 2020, the Company has determined to include the impact of foreign currency exchange rates on its assets and liabilities in certain of its non-GAAP measures for its current and comparative periods. The items affecting comparability are (dollars in thousands, except per share amounts) : Gross Profit Operating Income Net Earnings Attributable to VPG Stockholders Diluted Earnings Per share Fiscal Year Ended December 31, 2020 2019 2020 2019 2020 2019 2020 2019 As reported - GAAP 104,271 111,617 22,657 28,648 $ 10,787 $ 22,188 $ 0.79 $ 1.63 As reported - GAAP Margins 38.6 % 39.3 % 8.4 % 10.1 % Acquisition purchase accounting adjustments (a) 569 1,254 569 1,254 569 1,254 0.04 0.09 Acquisition costs (b) — 443 — 443 — 0.03 COVID-19 impact (c) 434 — (366) — (366) — (0.03) Executive Severance costs (d) — 611 — 611 — 0.04 Impairment of goodwill and indefinite-lived intangibles 2,440 — 2,440 — 0.18 — Restructuring costs 918 2,293 918 2,293 0.07 0.17 Foreign exchange (gain)/loss (e) 2,246 1,638 0.16 0.12 Less: Tax effect of reconciling items and discrete tax items (f) (1,381) 4,102 (0.11) 0.29 As Adjusted - Non GAAP $ 105,274 $ 112,871 $ 26,218 $ 33,249 $ 17,975 $ 24,325 $ 1.32 $ 1.79 As Adjusted - Non GAAP Margins 39.0 % 39.7 % 9.7 % 11.7 % (a) Acquisition purchase accounting adjustments include fair market value adjustments associated with inventory recorded as a component of costs of products sold. (b) Acquisition costs associated with the acquisition of DSI in 2019. (c) COVID-19 impact is the net impact to the Company of costs incurred as a result of the COVID-19 pandemic, net of government subsidies received. (d) Severance costs associated with the resignation of an executive officer of the Company in 2019. (e) Impact of foreign currency exchange rates on assets and liabilities. The change in the dollar-shekel exchange rate, particularly in the fourth quarter of 2020, resulted in an unfavorable foreign exchange impact primarily related to the shekel-denominated lease liability for a new Foil Technology Products facility in Israel. (f) Included in the discrete items for 2020 is a $1.7 million tax expense related to the acquisition of DSI, and in 2019, a $3.4 million tax benefit primarily related to the acquisition of DSI. - 27 - Financial Metrics We utilize several financial measures and metrics to evaluate the performance and assess the future direction of our business. These key financial measures and metrics include net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover. Gross profit margin is gross profit shown as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but could also include certain other period costs. Gross profit margin is clearly a function of net revenues, but also reflects our cost-cutting programs and our ability to contain fixed costs. End-of-period backlog is one indicator of potential future sales. We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. If demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, the backlog is not necessarily indicative of the results to be expected for future periods. Another important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period compared with the product that we ship during that period. A book-to-bill ratio that is greater than one indicates that demand is higher than current revenues and manufacturing capacities, and it indicates that we may generate increasing revenues in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of lower demand compared to existing revenues and current capacities and may foretell declining sales. We focus on our inventory turnover as a measure of how well we are managing our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital. The quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business. The following table shows net revenues, gross profit margin, the end-of-period backlog, the book-to-bill ratio, and the inventory turnover for our business as a whole during the five quarters beginning with the fourth quarter of 2019 and through the fourth quarter of 2020 (dollars in thousands) : 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2019 2020 2020 2020 2020 Net revenues $ 69,142 $ 67,696 $ 59,146 $ 67,525 $ 75,445 Gross profit margin 35.0 % 37.0 % 39.1 % 40.5 % 38.1 % End-of-period backlog $ 90,900 $ 94,300 $ 92,900 $ 90,800 $ 87,600 Book-to-bill ratio 1.15 1.08 0.95 0.95 0.93 Inventory turnover 2.72 2.58 2.20 2.38 2.86 - 28 - 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2019 2020 2020 2020 2020 Foil Technology Products Net revenues $ 29,636 $ 30,477 $ 31,785 $ 32,906 $ 36,477 Gross profit margin 34.9 % 36.7 % 41.8 % 41.1 % 38.4 % End-of-period backlog $ 44,600 $ 51,700 $ 47,500 $ 48,500 $ 43,700 Book-to-bill ratio 1.18 1.25 0.85 1.01 0.84 Inventory turnover 2.66 2.74 2.58 2.63 3.05 Force Sensors Net revenues $ 15,059 $ 14,695 $ 8,916 $ 13,862 $ 16,251 Gross profit margin 24.2 % 24.3 % 11.6 % 30.5 % 29.1 % End-of-period backlog $ 17,100 $ 16,900 $ 22,300 $ 21,300 $ 24,700 Book-to-bill ratio 1.11 1.02 1.58 0.90 1.18 Inventory turnover 2.43 2.64 2.02 2.28 2.74 Weighing and Control Systems Net revenues $ 24,447 $ 22,524 $ 18,445 $ 20,757 $ 22,717 Gross profit margin 41.6 % 45.7 % 47.6 % 46.2 % 44.0 % End-of-period backlog $ 29,200 $ 25,700 $ 23,100 $ 21,000 $ 19,200 Book-to-bill ratio 1.15 0.90 0.82 0.88 0.88 Inventory turnover 3.10 2.31 1.81 2.13 2.67 Net revenues for the fourth quarter of 2020 increased 11.7% from the net revenues of $67.5 million reported in the third quarter of 2020, and increased 9.1% from $69.1 million for the comparable prior year period. Net revenues in the Foil Technology Products segment of $36.5 million in the fourth quarter of 2020 increased 10.9% from $32.9 million in the third quarter of 2020, and increased 23.1% from $29.6 million in the fourth quarter of 2019. The sequential and year over year increases in revenues was primarily attributable to an increase in our advanced sensors product line primarily in our consumer-related markets and higher sales of precision resistors and our Pacific Instruments product line in the avionics, military and space market. Sequentially, the increase in revenue reflected higher precision resistor sales in the test and measurement market, an increase in our Pacific Instruments product line in the avionics, military and space market, and an increase in our advanced sensors product line primarily in our consumer-related markets. Net revenues in the Force Sensors segment of $16.3 million in the fourth quarter of 2020 increased 17.2% compared to revenues of $13.9 million in the third quarter of 2020. The sequential increase in revenues, which was attributable to higher sales in the precision agriculture and industrial weighing markets, reflected the return to full production capability at the end of the third quarter of the Force Sensors operations that had been constrained due to the COVID-19 pandemic.Net revenues in the fourth quarter of 2020 increased 7.9% compared to $15.1 million in the fourth quarter of 2019 mainly due to an increase in our OEM customers in the precision agriculture market, partially offset by lower sales in the industrial weighing market. Net revenues in the Weighing and Control Systems segment of $22.7 million in the fourth quarter of 2020 increased 9.4% from $20.8 million in the third quarter of 2020 and decreased 7.1% from $24.4 million in the fourth quarter of 2019. The sequential increase in revenue was primarily attributable to our onboard weighing products for the transportation market and an increase in our process weighing business. The year-over-year decrease in revenues was primarily attributable lower KELK and DSI steel-related sales and lower sales in our process weighing business, partially offset by an increase in our onboard weighing products for the transportation market. The gross profit margin for the fourth quarter of 2020 decreased 2.4% compared to the third quarter of 2020, and increased 3.1% from the fourth quarter of 2019. Sequentially, gross profit margins declined in all reporting segments. In the Foil Technology Products segment, the decline in gross profit margin was primarily due to manufacturing inefficiencies, unfavorable product mix and one-time inventory adjustments, partially offset by an increase in volume. In the Force Sensors segment, the decline in gross profit margin was primarily due to a reduction of inventory, partially offset by an increase in volume. In the Weighing and Control System segment, gross profit margin decreased due to unfavorable product mix and inventory reductions, partially offset by higher volume. - 29 - Compared to the fourth quarter of 2019, gross profit margins increased in all reporting segments. In the Foil Technology Products segment, the increase in gross profit margin was primarily due to higher volume. In the Force Sensors segment, the increase in g ross profit margin was primarily due to higher volume, structural cost savings initiatives, an increase in inventories and a positive impact of foreign exchange, partially offset by a reduction of export grants. In the Weighing and Control Systems segment, gross profit margin increased due to recording of purchase accounting adjustments related to the DSI acquisition and the impact of COVID-19 subsidies. Excluding those adjustments, the gross profit margin declined 4.8% primarily due to lower volume and an unfavorable product mix. Optimize Core Competence The Company’s core competency and key value proposition is providing customers with proprietary foil technology products and precision measurement sensors and sensor-based systems. Our foil technology resistors and strain gages are recognized as global market leading products that provide high precision and high stability over extreme temperature ranges, and long life. Our force sensor products and our weighing and control systems products are also certified to meet some of the highest levels of precision measurements of force, weight, pressure, torque, tilt, motion, and acceleration. We continue to optimize all aspects of our development, manufacturing and sales processes, including by increasing our technical sales efforts; continuing to innovate in product performance and design; and refining our manufacturing processes. Our foil technology research group developed innovations that enhance the capability and performance of our strain gages, while simultaneously reducing their size and power consumption as part of our advanced sensors product line. We believe this unique foil technology will create new markets as customers “design in” these next generation products in existing and new applications. Our development engineering team is also responsible for creating new processes to further automate manufacturing, and improve productivity and quality. Our advanced sensors manufacturing technology also offers us the capability to produce high-quality foil strain gages in a highly automated environment, which we believe results in reduced manufacturing and lead times, improved quality and increased margins. As a sign of our commitment to these businesses, we signed a long-term lease for a state of the art facility which has been constructed in Israel. Our administrative personnel have moved to the new facility, and we have begun the transition of our advanced sensors business to that facility. Our design, research, and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We intend to leverage our insights into customer demand to continually develop and roll out new, innovative products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends in terms of form, fit, and function. We also seek to achieve significant production cost savings through the transfer, expansion, and construction of manufacturing operations in countries such as India, China, and Israel, where we can benefit from lower labor costs, improved efficiencies, or available tax and other government-sponsored incentives. For example, in 2019 we incurred restructuring expense related to closing and downsizing of facilities as part of the manufacturing transitions of our force sensor products to facilities in India and China, which marked key milestones in our ongoing strategic initiatives to align and consolidate our manufacturing footprint. - 30 - Acquisition Strategy We expect to continue to make strategic acquisitions where opportunities present themselves to grow our segments. Historically, our growth and acquisition strategy has been largely focused on vertical product integration, using our foil strain gages in our force sensor products, and incorporating those products into our weighing and control systems. The acquisitions of Stress-Tek and KELK, each of which employ our foil strain gages to manufacture load cells for their systems, continued this strategy. Additionally, the KELK acquisition resulted in the acquisition of certain optical sensor technology. The Pacific Instruments acquisition significantly broadened our existing data acquisition offerings and opened new markets for us. Our most recent acquisition, DSI, expands our position in the steel market. We expect to expand our expertise, and our acquisition focus, outside our traditional vertical approach to other precision sensor solutions in the fields of measurement of force, weight, pressure, torque, tilt, motion, and acceleration. We believe acquired businesses will benefit from improvements we implement to reduce redundant functions and from our current global manufacturing and distribution footprint. Research and Development Research and development will continue to play a key role in our efforts to introduce innovative products to generate new sales and to improve profitability. We expect to continue to expand our position as a leading supplier of precision foil technology products. We believe our R&D efforts should provide us with a variety of opportunities to leverage technology, products, and our manufacturing base in order to ultimately improve our financial performance. The amount charged to expense for research and development aggregated $12.6 million, $12.1 million, and $11.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Cost Management To be successful, we believe we must seek new strategies for controlling operating costs. Through automation in our plants, we believe we can optimize our capital and labor resources in production, inventory management, quality control, and warehousing. We are in the process of moving some manufacturing to more cost effective locations. This may enable us to become more efficient and cost competitive, and also maintain tighter controls of the operation. Production transfers, facility consolidations, and other long-term cost-cutting measures require us to initially incur significant severance and other exit costs. We are realizing the benefits of our restructuring through lower labor costs and other operating expenses, and expect to continue reaping these benefits in future periods. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K. The Company recorded restructuring costs of $0.9 million, $2.3 million, and $0.3 million during the years ended December 31, 2020, 2019, and 2018, respectively. In 2020 and 2018, restructuring costs were comprised primarily of employee termination costs, including severance and statutory retirement allowances. In 2019, restructuring costs included $1.2 million of employee termination costs, including severance and statutory retirement allowances incurred in connection with various cost reduction programs, and $1.1 million of other exit costs associated with the closure and downsizing of facilities as part of the manufacturing transitions of the Company's force sensors products to facilities in India and China. We are evaluating plans to further reduce our costs by consolidating additional manufacturing operations. These plans may require us to incur restructuring and severance costs in future periods. While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively impact our customer service or our ability to further develop products and processes. Foreign Currency We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. U.S. GAAP requires that entities identify the “functional currency” of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary’s functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign subsidiary that is a direct and integral component or extension of the parent company’s operations generally would have the parent company’s currency as its functional currency. We have subsidiaries that fall into each of these categories. - 31 - Foreign Subsidiaries which use the Local Currency as the Functional Currency Our operations in Europe, Canada, and certain locations in Asia primarily generate and expend cash using local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is the functional currency, assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not impact the results of operations and are reported as a separate component of equity. For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the year. While the translation of revenues and expenses into U.S. dollars does not directly impact the consolidated statements of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in those foreign currencies. Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency Our operations in Israel and certain locations in Asia primarily generate cash in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly related to payroll, which are incurred in the local currency and significant lease assets and liabilities. Effects of Foreign Exchange Rate on Operations For the year ended December 31, 2020, exchange rate impacts increased net revenues by $0.9 million, increased costs of products sold and selling, general, and administrative expenses by $2.8 million, and decreased net earnings by $1.9 million or $0.13 per diluted share, when compared to the prior year. Refer to Item 7. “Overview” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of the year ended December 31, 2019 and the year ended December 31, 2018, which comparison is hereby incorporated by reference. Off-Balance Sheet Arrangements As of December 31, 2020 and 2019, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. We identify here a number of policies that entail significant judgments or estimates by management. Inventories We value our inventories at the lower of cost or market, with cost determined under the first-in, first-out method, and market based upon net realizable value. The valuation of our inventories requires management to make costing and market estimates. For work in process goods, we are required to estimate the cost to completion of the products and the prices at which we will be able to sell the products. For finished goods, we must assess the prices at which we believe the inventory can be sold. Inventories are also adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments, and market conditions. Business Combinations The Company allocates the purchase price of an acquired company, including when applicable, the fair value of contingent consideration between tangible and intangible assets acquired and liabilities assumed from the acquired businesses based on estimated fair values, with any residual of the purchase price recorded as goodwill. Third party appraisal firms and other consultants are engaged to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating fair values requires significant judgments, estimates and assumptions, including but not limited to: discount rates, future cash flows and the economic lives of trade names, technology, customer relationships, property, plant and equipment, as well as income taxes. These estimates are based on historical experience and information obtained from the management of the acquired companies, and are inherently uncertain. - 32 - Goodwill and Other Indefinite-lived Intangible Assets Goodwill and indefinite-lived trademarks are tested for impairment at least annually, and whenever events or changes in circumstances occur indicating that it is "more likely than not" impairment may have been incurred. We have the option to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining if it is necessary to perform the quantitative goodwill impairment test. However, if we conclude otherwise, then we are required to perform the quantitative impairment test by calculating the fair value of the reporting unit and comparing it against its carrying amount. We have four reporting units to which goodwill is allocated: steel, on-board weighing, instrumentation, and DSI. For the steel and on-board weighing goodwill reporting units, we performed the qualitative assessment, which included assessment of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other entity specific events which could impact the reporting unit. Based on this review, it was determined that the fair value of each of those reporting units was in excess of its carrying value and therefore no quantitative impairment test was required. For the instrumentation and DSI goodwill reporting units, we performed the quantitative impairment test. In estimating the fair value of our instrumentation and DSI reporting units we use the income approach. We further use the market approach to evaluate the estimated fair value of the reporting units that was obtained by using the income approach. The income approach to valuation requires management to make significant estimates and assumptions related to future revenues, profitability, working capital requirements and selection of discount rate and long term growth rate. Changes in these estimates and assumptions could have a significant impact on the fair value of the reporting units. If the fair value exceeds the carrying value, no further evaluation is required and no impairment loss is recognized. An impairment charge would be recognized to the extent the carrying amount of goodwill exceeds the reporting unit fair value. The indefinite-lived trade names are tested for impairment either by employing the qualitative approach outlined above, or by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess carrying value over the applicable fair value is recognized as impairment. Any impairment would be recognized in the reporting period in which it has been identified. Pension and Other Postretirement Benefits Accounting for defined benefit pension and other postretirement plans involves numerous assumptions and estimates. The discount rate at which obligations could effectively be settled and the expected long-term rate of return on plan assets are two critical assumptions in measuring the cost and benefit obligations of our pension and other postretirement benefit plans. Other important assumptions include the anticipated rate of future increases in compensation levels, estimated mortality, and for postretirement medical plans, increases or trends in health care costs. Management reviews these assumptions at least annually. We use independent actuaries to assist us in formulating assumptions and making estimates. These assumptions are updated periodically to reflect the actual experience and expectations on a plan-specific basis, as appropriate. Our defined benefit plans are concentrated in the United States, Japan and the United Kingdom. Plans in these countries comprise approximately 87% of our retirement obligations at December 31, 2020. We utilize published long-term high-quality bond indices to determine the discount rate at the measurement date. We utilize bond yields at various maturity dates to reflect the timing of expected future benefit payments. We believe the discount rates selected are the rates at which these obligations could effectively be settled. For benefit plans which are funded, we establish strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. We set the expected long-term rate of return based on the expected long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this rate, we consider historical and expected returns for the asset classes in which the plans are invested, advice from pension consultants and investment advisors, and current economic and capital market conditions. The expected return on plan assets is incorporated into the computation of pension expense. The difference between this expected return and the actual return on plan assets is deferred. We believe that the current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change, we may be inclined to change some of our assumptions, and the resulting change could have a material impact on the consolidated statements of operations and on the consolidated balance sheets. - 33 - Income Taxes We are subject to income taxes in the United States and numerous foreign jurisdictions. Our annual effective tax rate is based on pre-tax earnings, statutory tax rates and enacted tax laws. Significant judgments and estimates must be made in determining our consolidated income tax expense as presented in our financial statements. We must assess the likelihood that we will realize deferred tax assets which requires significant judgment. If we determine that deferred tax assets are not "more likely than not" to be realized, we record a valuation allowance to reduce deferred tax assets to a level that is expected to be realized. If we subsequently determine that realization of a deferred tax asset becomes "more likely than not", the valuation allowance will be reversed. Any change in valuation allowances could have a significant impact on our financial results. The calculation of our tax liabilities involves an assessment of uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. We record a benefit from an uncertain tax position when it is "more likely than not" that a tax return position will be sustained upon examination, including resolutions of any related appeals or litigation based on the technical merits of the position. If the position is not "more likely than not" to be sustained, a liability for the tax return position is established. We adjust the liability when our judgment changes as a result of the evaluation of new information. The ultimate tax due in a jurisdiction may result in a payment that is materially different from our most recent estimate of the liability. Further judgment is required in determining whether an uncertain tax position is effectively settled. Any change in the analysis will impact income tax expense. We consider the earnings of most of our non-U.S. subsidiaries to be indefinitely invested outside the United States based on our estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our plans for reinvestment of foreign subsidiary earnings. As a result of the Tax Cut and Jobs Act, in 2017 the Company had recorded a deferred tax liability of approximately $1.8 million of withholding tax associated with a planned distribution of approximately $25.5 million of previously unremitted earnings. As of December 31, 2020, the planned distribution amount is approximately $14.1 million with a remaining deferred tax liability of approximately $1.5 million. In addition, we estimate that additional withholding taxes of approximately $18.0 million would be payable upon the distribution of the balance of our previously unremitted earnings at December 31, 2020. If we decide to distribute any portion of the balance of our unremitted earnings to the United States from a foreign country, we would adjust our income tax provision in the period we determine that the earnings are no longer indefinitely invested outside the United States. Additional information about income taxes is included in Note 6 to our consolidated financial statements. - 34 - Results of Operations – Years Ended December 31, 2020, and 2019 Refer to Item 7. “Results of Operations - Years Ended December 31, 2019, and 2018 in our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of the year ended December 31, 2019 to the year ended December 31, 2018. Statement of operations’ captions as a percentage of net revenues and the effective tax rates were as follows: Years ended December 31, 2020 2019 Costs of products sold 61.4 % 60.7 % Gross profit 38.6 % 39.3 % Selling, general, and administrative expenses 29.0 % 28.0 % Operating income 8.4 % 10.1 % Income before taxes 6.8 % 9.3 % Net earnings 4.0 % 7.9 % Net earnings attributable to VPG stockholders 4.0 % 7.8 % Effective tax rate 41.0 % 15.7 % Net Revenues Net revenues were as follows (dollars in thousands) : Years ended December 31, 2020 2019 Net revenues $ 269,812 $ 283,958 Change versus prior year $ (14,146) Percentage change versus prior year (5.0) % Changes in net revenues were attributable to the following: 2020 vs. 2019 Change attributable to: Change in volume (10.0) % Change in average selling prices 0.3 % Foreign currency effects 0.2 % Acquisitions 4.5 % Net change (5.0) % During the year ended December 31, 2020, net revenues decreased 5.0% over the prior year. Volume decreased across all reporting segments, with the most significant declines coming from the industrial weighing market in Force Sensor reporting segment, transportation market and KELK for the steel market in the Weighing and Control Systems reporting segment, and the precision resistor foil for the test and measurement market in the Foil Technology Products reporting segment. This was partially offset by an increase in revenues attributable to the addition of DSI. - 35 - Gross Profit Margin Gross profit as a percentage of net revenues was as follows: Years ended December 31, 2020 2019 Gross profit margin 38.6 % 39.3 % The gross profit margin for the year ended December 31, 2020 decreased 0.7% over the prior year. The reduction in gross profit margin was primarily due to lower volume in the Force Sensors and Weighing and Control Systems reporting segments, and negative impacts of foreign currency exchange rates of $1.0 million, partially offset by manufacturing efficiencies, primarily from the Foil Technology Products reporting segment. Segments Analysis of revenues and gross profit margins for our reportable segments is provided below. Foil Technology Products Net revenues of the Foil Technology Products segment were as follows (dollars in thousands) : Years ended December 31, 2020 2019 Net revenues $ 131,645 $ 131,803 Change versus prior year $ (158) Percentage change versus prior year (0.1) % Changes in Foil Technology Products segment net revenues were attributable to the following: 2020 vs. 2019 Change attributable to: Change in volume (1.1) % Change in average selling prices 0.5 % Foreign currency effects 0.5 % Net change (0.1) % For the year ended December 31, 2020, net revenues decreased 0.1% as compared to the prior year. Increases in our net revenues from the advanced sensors product line, primarily in our consumer-related markets, and net revenues from our precision resistor products in the avionics, military and space market, were offset by declines in net revenues from our precision resistor products in the test and measurement market and net revenues from strain gage products in our general industrial market. Gross profit as a percentage of net revenues for the Foil Technology Products segment was as follows: Years ended December 31, 2020 2019 Gross profit margin 39.5 % 40.4 % For the year ended December 31, 2020, the gross profit margin decreased 0.9% as compared to the prior year primarily due to lower volume from products in the test and measurement and general industrial market segments, unfavorable product mix and negative impacts from foreign currency exchange rates, primarily from the Israeli shekel. - 36 - Force Sensors Net revenues of the Force Sensors segment were as follows (dollars in thousands) : Years ended December 31, 2020 2019 Net revenues $ 53,724 $ 64,357 Change versus prior year $ (10,633) Percentage change versus prior year (16.5) % Changes in Force Sensors segment net revenues were attributable to the following: 2020 vs. 2019 Change attributable to: Change in volume (16.5) % Change in average selling prices (0.2) % Foreign currency effects 0.2 % Net change (16.5) % For the year ended December 31, 2020, net revenues decreased 16.5% from the prior year mainly reflecting the impact of the COVID-19 pandemic on our India facility, where production was limited. The manufacturing facility in India operated at partial capacity as a result of government mandated restrictions until July 1, 2020, when restrictions were lifted. By the end of the third quarter of 2020, the facility was back to running at pre-pandemic capacity. Gross profit as a percentage of net revenues for the Force Sensors segment was as follows: Years ended December 31, 2020 2019 Gross profit margin 25.3 % 28.0 % For the year ended December 31, 2020, the gross profit margin decreased 2.7% when compared to the prior year primarily due to volume declines resulting from the government mandated restrictions, partially offset by cost savings initiatives. Weighing and Control Systems Net revenues of the Weighing and Control Systems segment were as follows (dollars in thousands) : Years ended December 31, 2020 2019 Net revenues $ 84,443 $ 87,798 Change versus prior year $ (3,355) Percentage change versus prior year (3.8) % Changes in Weighing and Control Systems segment net revenues were attributable to the following: 2020 vs. 2019 Change attributable to: Change in volume (19.3) % Change in average selling prices 0.1 % Foreign currency effects 0.2 % Acquisitions 15.2 % Net change (3.8) % For the year ended December 31, 2020, net revenues decreased 3.8% when compared to the prior year. The revenues generated by DSI were offset by lower volume from our onboard weighing products for the transportation market in Europe and lower KELK steel-related sales. - 37 - Gross profit as a percentage of net revenues for the Weighing and Control Systems segment was as follows: Years ended December 31, 2020 2019 Gross profit margin 45.8 % 45.9 % For the year ended December 31, 2020, the gross profit margin decreased 0.1% from the prior year. Volume declines and unfavorable product mix were partially offset by government subsidies received in Canada, which resulted in gross profit margin remaining fairly flat compared to the prior year. We also recorded less purchase accounting adjustments in 2020 as compared to 2019, which had a positive impact to the gross profit margin. Selling, General, and Administrative Expenses Selling, general, and administrative (“SG&A”) expenses were as follows (dollars in thousands) : Years ended December 31, 2020 2019 Total SG&A expenses $ 78,256 $ 79,622 as a percentage of net revenues 29.0 % 28.0 % SG&A expenses for the year ended December 31, 2020 decreased $1.4 million versus the prior year due to lower travel costs, personnel costs, commissions, and professional fees, partially offset by SG&A expenses related to DSI, and unfavorable foreign currency exchange rate impacts, mainly from the Israeli shekel. Impairment of Goodwill and Indefinite-lived Intangible Assets For the year ended December 31, 2020, as a result of our required annual impairment test performed on goodwill and indefinite-lived intangible assets, we recorded a $2.4 million pre-tax, non-cash impairment charge which reduced the carrying value of our goodwill and indefinite-lived intangible assets. See our critical accounting policies and Note 4 for further discussion. For the year ended December 31, 2019, there were no impairment charges recorded as a result of our annual impairment test. Executive Severance Costs During 2019, the Company recorded $0.6 million of severance costs associated with the resignation of an executive officer of the Company. The severance costs consisted of payments and other benefits as specified in the executive officers resignation agreement. Restructuring Costs Restructuring costs reflect the cost reduction programs implemented by the Company. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements for accrual are met. Because these costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, the Company could be required to either record additional expense in future periods, or to reverse part of the previously recorded charges. The Company recorded restructuring costs of $0.9 million and $2.3 million during the years ended December 31, 2020 and 2019, respectively. In 2020, restructuring costs were comprised primarily of employee termination costs, including severance and statutory retirement allowances, and were incurred in connection with various cost reduction programs. In 2019, restructuring costs included $1.2 million of employee termination costs, including severance and statutory retirement allowances incurred in connection with various cost reduction programs, and $1.1 million of other exit costs associated with the closure and downsizing of facilities as part of the manufacturing transitions of the Company's force sensors products to facilities in India and China. - 38 - Acquisition Costs There were no acquisition costs recorded in our consolidated statements of operations for the year ended December 31, 2020. For the year ended December 31, 2019, we recorded acquisition costs in our consolidated statements of operations of $0.4 million in connection with the acquisitions of DSI. Other Income (Expense) Interest Expense The Company recorded interest expense of $1.4 million and $1.5 million for the years ended December 31, 2020 and 2019, respectively. Interest expense was lower in 2020 compared to 2019, mainly due to the lower debt balances during 2020 and the favorable borrowing rates negotiated with the 2020 Restated and Amended Revolving Credit Facility in March 2020. Other The following table analyzes the components of the line “Other” on the consolidated statements of operations (in thousands) : Years ended December 31, 2020 2019 Change Foreign exchange gain/(loss) $ (2,246) $ (1,638) $ (608) Interest income 246 622 (376) Pension expense (738) (643) (95) Other (244) 958 (1,202) $ (2,982) $ (701) $ (2,281) Foreign currency exchange gains and losses represent the impact of changes in foreign currency exchange rates. The change in foreign exchange gains / (losses) during the period, as compared to the prior year period, is primarily due to fluctuations in the Israeli shekel. The change in the dollar-shekel exchange rate, particularly in the fourth quarter of 2020, resulted in an unfavorable foreign exchange impact primarily related to the shekel-denominated lease liability for a new Foil Technology Products facility in Israel . Included within Other, for the year ended December 31, 2019, is net proceeds of $0.8 million related to a liquidation of a foreign subsidiary. Income Taxes Our effective tax rate for the year ended December 31, 2020 was 41.0%, compared to 15.7% for the year ended December 31, 2019. Our effective tax rate was higher in 2020 compared to 2019 primarily due to a net increase in valuation allowance on deferred tax assets as a result of our acquisition of Dynamic Systems, Inc., reserves for impairment of certain intangible assets, foreign currency, and changes in the geographical mix of income. We reassessed our ability to realize our U.S. deferred tax assets during 2020 and have concluded that realization of those deferred tax assets is still not "more likely than not". Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions as compared to the U.S. federal statutory tax rate, and the relative amount of income earned in each jurisdiction. The tax rate is also impacted by discrete items that vary from year to year and may not be indicative of the tax rate on continuing operations. The following items had the most significant impact on the difference between the statutory U.S. federal income tax rate and our effective tax rate: 2020 • 13.4% increase related to an increase in valuation allowance, primarily a result of the completion of purchase accounting for Dynamic Systems, Inc. • 5.8% increase related to the loss of the benefit of current year U.S. net operating loss as a result of the Tax Cuts and Jobs Act ("2017 Tax Act") enacted on December 22, 2017 and the effects of GILTI. • 4.0% increase related to the effects of foreign operations primarily related to the difference between the U.S. statutory rate and foreign tax rates. • 2.8% increase related to the impairment of certain intangible assets. • 1.9% decrease related to foreign currency primarily attributable to our operations in China, India, Israel and Taiwan. • 1.4% decrease related to specialty tax credits. - 39 - 2019 • 4.4% decrease related to foreign currency primarily attributable to our operations in Israel and India. • 2.4% decrease related to a reduction in valuation allowance. This reduction was primarily a result of the acquisition of Dynamic Systems, Inc. • 1.4% decrease related to stock compensation. • 2.5% increase related to changes in reserves for uncertain tax positions. • 3.7% increase related to the loss of the benefit of current year U.S. net operating loss as a result of the 2017 Tax Act and the effects of GILTI. Additional information about income taxes is included in Note 6 to our consolidated financial statements. Financial Condition, Liquidity, and Capital Resources Refer to Item 7. “Financial Condition, Liquidity, and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of the year ended December 31, 2019 to the year ended December 31, 2018. We believe that our current cash and cash equivalents, credit facilities, and projected cash from operations will be sufficient to meet our liquidity needs for at least the next 12 months. On March 20, 2020, the Company entered into a Third Amended and Restated Credit Agreement (the “2020 Credit Agreement”) among the Company, the lenders named therein, Citizens Bank, National Association and Wells Fargo Bank, National Association as joint lead arrangers and JPMorgan Chase Bank, National Association as agent for such lenders (the “Agent”), pursuant to which the terms of the Company’s multi-currency, secured credit facility were revised to provide a secured revolving facility (the “2020 Revolving Facility”) in an aggregate principal amount of $75.0 million, with a sublimit of $10.0 million which can be used for letters of credit for the account of the Company or its subsidiaries that are parties to the Credit Agreement. The proceeds of the 2020 Revolving Facility may be used for working capital and general corporate purposes, and a portion of such proceeds was used to refinance the Company’s existing revolving credit facility in the amount of $34.0 million and the Company’s existing term loans as follows: (1) the “2015 U.S. Closing Date Term Facility” in an aggregate principal amount of $2.0 million; and (2) the "2015 U.S. Delayed Draw Term Facility" in an aggregate principal amount of $5.0 million. The aggregate principal amount of the 2020 Revolving Facility may be increased by a maximum of $25.0 million upon the request of the Company, subject to the terms of the 2020 Credit Agreement. The 2020 Credit Agreement terminates on March 20, 2025. The 2020 Credit Agreement replaced the 2015 Credit Agreement. Interest payable on amounts borrowed under the 2020 Revolving Facility is based upon, at the Company’s option, (1) the greatest of: the Agent’s prime rate, the Federal Funds rate, or a LIBOR floor (the “Base Rate”), or (2) LIBOR or CDOR plus a specified margin. An interest margin of 0.25% is added to Base Rate loans. Depending upon the Company’s leverage ratio, an interest rate margin ranging from 1.50% to 2.75% per annum is added to the applicable LIBOR or CDOR rate to determine the interest payable on the LIBOR or CDOR loans. The Company is required to pay a quarterly fee of 0.25% per annum to 0.40% per annum on the unused portion of the 2020 Revolving Facility, which is determined based on the Company’s leverage ratio each quarter. Additional customary fees apply with respect to letters of credit. The obligations of the Company under the 2020 Credit Agreement are secured by pledges of stock in certain domestic and foreign subsidiaries, as well as guarantees by substantially all of the Company’s domestic subsidiaries. The obligations of the Company and the guarantors under the 2020 Credit Agreement are secured by substantially all the assets (excluding real estate) of the Company and such guarantors. The 2020 Credit Agreement restricts the Company from paying cash dividends and requires the Company to comply with other customary covenants, representations, and warranties, including the maintenance of specific financial ratios. The financial maintenance covenants include an interest coverage ratio and a leverage ratio. The Company was in compliance with its financial maintenance covenants at December 31, 2020. If the Company is not in compliance with any of these covenant restrictions, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility could become immediately payable. Our other long-term debt is not significant and consists of debt held by one of our Japanese subsidiaries of approximately $0.0 million at December 31, 2020 and $0.1 million at December 31, 2019. The debt is payable monthly over the next 1 year at a zero interest rate. See Note 7 to our consolidated financial statements for additional details. Our business has historically generated significant cash flow. Our cash provided by operating activities for the year ended December 31, 2020 was $35.3 million as compared to $30.9 million for the year ended December 31, 2019. Our net cash used in investing activities for the year ended December 31, 2020 was $21.8 million, comprised mainly of capital spending as - 40 - compared to $51.1 million for the year ended December 31, 2019, which included the purchase of DSI for $40 million. Our net cash used for financing activities for the year ended December 31, 2020 was $5.0 million which reflects the repayment of the Canadian term loans and the conversion of the US term loans to revolver under the 2020 credit facility, as compared to net cash provided by financing activities of $16.5 million for the year ended December 31, 2019, which reflects the higher borrowings on the revolving credit facility which were used to fund the purchase of DSI. Approximately 90% of our cash and cash equivalents balance at December 31, 2020 and 2019, respectively, was held by our non-U.S. subsidiaries. See the following table for the percentage of cash and cash equivalents, by region, at December 31, 2020 and December 31, 2019: December 31, 2020 2019 Asia 18 % 23 % United States 10 % 7 % Israel 26 % 28 % Europe 16 % 14 % United Kingdom 18 % 17 % Canada 12 % 11 % Total 100 % 100 % We earn a significant amount of our operating income outside the United States, the majority of which is deemed to be indefinitely reinvested in the foreign jurisdictions. As a result, as discussed above, a significant portion of our cash and short-term investments are held by foreign subsidiaries. The Company will continue to evaluate its cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds in excess of what is already planned. The Company will evaluate the possibility of repatriating future cash provided such repatriation can be accomplished in a tax efficient manner. In addition, we expect existing domestic cash, short-term investments, and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities, such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt or equity issuances. These alternatives could result in higher tax expense, increased interest expense, or dilution of our earnings. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of December 31, 2020, to be indefinitely reinvested. For the year ended December 31, 2020, we generated adjusted free cash flow of $13.3 million. We refer to “adjusted free cash flow,” a measure which management uses to evaluate our ability to fund acquisitions, as the amount of cash provided by operating activities ($35.3 million) in excess of our capital expenditures ($22.9 million) and net of proceeds from the sale of assets ($0.9 million). The following table summarizes the components of net cash at December 31, 2020 and at December 31, 2019 (in thousands) : December 31, 2020 2019 Cash and cash equivalents $ 98,438 $ 86,910 Third-party debt, including current and long-term Term loans $ — $ 10,496 Revolving debt 41,000 34,000 Third-party debt held by Japanese subsidiary 18 149 Deferred financing costs (374) (112) Total third-party debt (356) 44,533 Net cash $ 98,794 $ 42,377 Measurements such as “adjusted free cash flow” and “net cash" do not have uniform definitions and are not recognized in accordance with U.S. GAAP. Such measures should not be viewed as alternatives to GAAP measures of performance or liquidity. However, management believes that “adjusted free cash flow” is a meaningful measure of our ability to fund - 41 - acquisitions, and that an analysis of “net cash” assists investors in understanding aspects of our cash and debt management. These measures, as calculated by us, may not be comparable to similarly titled measures used by other companies. Our financial condition as of December 31, 2020 is strong, with a current ratio (current assets to current liabilities) of 4.7 to 1.0, as compared to a current ratio of 2.4 to 1.0 at December 31, 2019. Cash paid for property and equipment for the year ended December 31, 2020 and December 31, 2019 was $22.9 million and $11.2 million, respectively. Capital spending for 2020 was comprised of building projects related to capacity expansion in Israel and other projects related to the normal maintenance of business, cost reduction programs, and some carryover projects from 2019. Capital expenditures for 2021 are expected to be approximately $26.1 million, which includes capital equipment for capacity expansion in the Foil Technology Products reporting segment and expected building projects of approximately $6.1 million for capacity expansion in Israel and Asia. Inflation Normally, inflation does not have a significant impact on our operations as our products are not generally sold on long-term contracts. Consequently, we can adjust our selling prices, to the extent permitted by competition, to reflect cost increases caused by inflation. Recent Accounting Pronouncements See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.