Upcoming Spin-off: Vishay Precision Group

VPG is in the business of designing, manufacturing and marketing Foil Technology Products (strain gages, ultra-precision foil resistors, and current sensors) and Weighing Modules and Control Systems (transducers/load cells, instruments, weigh modules, and control systems) for a wide variety of applications.

Unlike First American Financial Corporation (FAF) which I wrote about recently, there will not be any retention of stock by any of the newly independent companies. Instead this will be a more typical spin-off transaction where a distribution of VPG stock will be made to holders of Vishay Intertechnology on the effective date.

After reading up on Vishay Precision Group, I will be passing on the opportunity. There are simply a number of things that I don’t like about this particular spin-off.

Looking at Morningstar, we see the following stats on insider ownership of the parent company:

Chances are things will remain very similar with regard to insider ownership at VPG. The one thing we will probably see however, is a large number of funds/institutional investors dump their shares onto the market (from the chart above we see that institutions own 80%+ of the stock of the parent). This will almost certainly cause a lot of forced selling by those institutional investors.

Even with all of the selling that I expect, I still don’t want to touch VPG after the spin-off. Why? Because the way I see it, VPG is like a family business. From the preliminary form 10 we see that many of the insiders are related in some form or fashion to the company founder. This is a huge red flag for me.

Another thing that I really don’t like about this spinoff is that the founder of the company will retain almost all of the class B shares after the spin off. According to the form 10, he will retain approximately 45% of the voting power of all shares outstanding (class A shares entitled to one vote; class B shares each entitled to 10 votes). This will again make owners of VPG owners of a family business without a real voice to get anything changed should it be required.

For those of you still interested in this spin-off it might be worthwhile to know how to measure the success of the business. Since many of us might not be familiar with the business of VPG the guidance we are given in the information statement is quite useful:

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 sales, gross profit margin, end-of-period backlog, the book-to-bill ratio, and inventory turnover.

Gross profit margin is computed as gross profit 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 as compared with the product that we ship during that period. A book-to-bill ratio that is greater than one indicates that our backlog is building and that we potentially will generate increasing revenues in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of declining demand 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.