Overview

VPG is an internationally recognized designer, manufacturer and marketer of components based on resistive foil technology, sensors and sensor-based systems specializing in the growing markets of stress, force, weight, pressure, and current measurements. We provide vertically integrated products and solutions that are primarily based upon our proprietary foil technology. These 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 geographical locations that also optimize our resources for specific technologies, sensors, assemblies and systems.

The Company's products are precision foil resistors, foil strain gages, and force sensors that convert mechanical force into an electronic signal for display, processing, interpretation, or control by our instrumentation and systems products. 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 marketplace in a wide variety of applications. Our products are not typically used in the consumer market.

The precision sensor market is growing as a result of the significant increase in intelligent products across virtually all end markets, including medical, agricultural, transportation, industrial, avionics, military, and space applications. We believe that as original equipment manufacturers ("OEMs") strive to make products "smarter", they are generally integrating more sensors to link the analog/physical world with digital control and/or response.

Until July 6, 2010, our business was part of Vishay Intertechnology, and our assets and liabilities consisted of those that Vishay Intertechnology attributed to its precision measurement and foil resistor businesses. Since the spin-off on July 6, 2010, we have operated as an independent, publicly traded company, and Vishay Intertechnology does not retain any ownership interest in us.

Prior to the fourth quarter of 2011, we had two reporting segments: Foil Technology Products (the aggregation of our foil resistors and strain gage operating segments); and Weighing Modules and Control Systems (the aggregation of our transducers/load cells and weighing systems operating segments). As of December 31, 2011, based on our current expectations and in order to improve the reporting transparency of our financial information, we began to disclose the results of our operations based on three reporting segments: Foil Technology Products; Force Sensors (operating segment formerly referred to as transducers/load cells); and Weighing and Control Systems (operating segment formerly referred to as weighing systems). This presentation is consistent with management's approach to reviewing our Company's financial performance and making operating decisions. The Foil Technology Products reporting segment includes precision foil resistors and strain gages. The Force Sensors reporting segment is comprised of transducers, load cells and modules. The Weighing and Control Systems reporting segment is comprised of instruments, complete systems for process control and on-board weighing applications.

Net revenues for the fiscal quarter ended March 31, 2012 were $55.8 million versus $59.5 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended March 31, 2012 were $1.6 million, or $0.12 per diluted share, versus $3.3 million, or $0.24 per diluted share, for the comparable prior year period.

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 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 primarily 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 first quarter of 2011 and through the first quarter of 2012 (dollars in thousands):

                          1st Quarter      2nd Quarter      3rd Quarter      4th Quarter      1st Quarter
                             2011             2011             2011             2011             2012
Net revenues             $    59,525      $    62,133      $    60,037      $    56,412      $    55,844

Gross profit margin             35.3 %           35.6 %           35.3 %           33.4 %           33.8 %

End-of-period backlog    $    47,100      $    48,500      $    45,900      $    42,400      $    43,300

Book-to-bill ratio              1.09             1.02             0.97             0.95             1.01

Inventory turnover              3.17             3.27             3.11             3.02             2.99

See "Financial Metrics by Segment" below for net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover broken out by segment.

Net revenues increased from the first to the second quarter of 2011; however, there has been a sequential decrease in revenues since the second quarter of 2011. The decline from the second to the third quarter reflects the historical seasonal slowdown in Europe. The decline from the third quarter to the fourth quarter of 2011 was the result of a significant decrease in demand from our European customer base and manufacturing capacity issues in our Foil Technology Products segment. The capacity issues have improved in the Foil Technology product segment in the first quarter of 2012, and demand from our European customer base has begun to improve.

Gross profit margins remained fairly consistent over the first three quarters of 2011 with a decline to 33.4% in the fourth quarter. The gross margins in the fourth quarter of 2011 were impacted by capacity issues in our Foil Technology Products segment and lower volume; start-up costs at our new India facility; and product mix in the Force Sensors segment. In the first quarter of 2012, the Foil Technology Products and Weighing and Control Systems segments increased slightly resulting in the 0.4% improvement.

Financial Metrics by Segment

The following table shows net revenues, gross profit margin, end-of-period
backlog, book-to-bill ratio, and inventory turnover broken out by segment for
the five quarters beginning with the first quarter of 2011 and through the first
quarter of 2012 (dollars in thousands):

                             1st Quarter      2nd Quarter      3rd Quarter      4th Quarter      1st Quarter
                                2011             2011             2011             2011             2012
Foil Technology Products
Net revenues                $    28,178      $    29,030      $    28,407      $    26,561      $    27,801
Gross profit margin                44.3 %           46.0 %           43.1 %           40.5 %           40.7 %
End-of-period backlog       $    24,800      $    25,300      $    24,000      $    22,500      $    21,500
Book-to-bill ratio                 1.13             1.01             0.97             0.95             0.97
Inventory turnover                 3.71             3.60             3.65             3.54             3.68

Force Sensors
Net revenues                $    17,738      $    18,550      $    18,029      $    17,216      $    16,603
Gross profit margin                20.3 %           16.4 %           21.6 %           18.1 %           17.9 %
End-of-period backlog       $    13,800      $    15,000      $    14,100      $    13,200      $    14,600
Book-to-bill ratio                 1.02             1.07             0.96             0.96             1.07
Inventory turnover                 2.28             2.55             2.26             2.24             2.18

Weighing and Control
Systems
Net revenues                $    13,609      $    14,553      $    13,601      $    12,635      $    11,440
Gross profit margin                36.3 %           39.1 %           37.3 %           39.2 %           40.0 %
End-of-period backlog       $     8,500      $     8,200      $     7,800      $     6,700      $     7,200
Book-to-bill ratio                 1.11             0.97             0.99             0.93             1.03
Inventory turnover                 5.04             4.87             4.74             4.59             4.17

Optimize Core Competence

The Company's core products incorporate certain technologies to provide customers with precision foil products, force measurement sensors, and systems. Our foil technology products are recognized as global market leaders of strain gages and resistors that provide high precision and tight tolerance over extreme temperature ranges, and over a long period of time. 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, tilt, motion, torque, and acceleration. While these competencies form a solid basis for our products, we believe there are several areas that can be optimized, including: increasing our technical sales efforts; innovations in product performance and design; and refining our manufacturing processes.

Our foil technology research group continues to provide innovations that enhance the capability and performance of our strain gages, while simultaneously reducing their size and power consumption. We believe this new level of 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 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.

Acquisition Strategy

To date, our growth and acquisition strategy largely focused on vertical product integration, using our foil strain gages in our force sensor products and incorporating our load cells and electronic measurement instrumentation and software into our weighing and control systems. Precision foil resistor products are also used in many of the control systems that we manufacture.

We expect to make strategic acquisitions, particularly where opportunities present themselves to grow our Force Sensors segment and our Weighing and Control Systems segment. Upon completion of acquisitions, we will seek to reduce selling, general, and administrative expenses through the integration or elimination of redundant sales offices and administrative functions at acquired companies. In addition, we believe acquired businesses will benefit from our current global manufacturing operations and distribution channels.

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. To that end, we expect to increase our R&D expenditures in order to fill the product development pipeline and lay the foundation for future sales growth.

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 from higher-labor-cost countries to lower-labor-cost countries, such as Costa Rica, India, and Israel. This will enable us to become more efficient and cost competitive, and also maintain tighter controls of the operation.

A primary tenet of our business strategy is expansion through acquisitions. Our acquisition strategy includes a focus on reducing selling, general, and administrative expenses and achieving significant production cost savings at acquired companies. The plant closure and employee termination costs subsequent to acquisitions are also integral to our cost reduction programs.

Production transfers, facility consolidations, and other long-term cost-cutting measures require us to initially incur significant severance and other exit costs. We anticipate that we will realize the benefits of our restructuring through lower labor costs and other operating expenses 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 Item 1A "Risk Factors" of our 2011 Annual Report on Form 10-K.

We did not initiate any new restructuring programs during the fiscal quarter ended March 31, 2012 or during 2011, and thus did not record any restructuring expenses during those periods.

We are presently executing plans to further reduce our costs by consolidating additional manufacturing operations with our expansion in India. These plans will require us to incur restructuring and severance costs in future periods. However, after implementing these plans, we do not anticipate significant restructuring and severance costs for our business except in the context of acquisition integration.

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. generally accepted accounting principles ("GAAP") require 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.

Foreign Subsidiaries which use the Local Currency as the Functional Currency

We finance our operations in Europe and certain locations in Asia 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 condensed 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 statement 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 are largely financed 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. For the fiscal quarter ended March 31, 2012, exchange rates negatively impacted net revenues by $0.6 million and positively impacted costs of products sold and selling, general, and administrative expenses by $0.8 million when compared to the comparable prior year period.

Results of Operations

Statement of operations' captions as a percentage of net revenues and the
effective tax rates were as follows:

                                               Fiscal quarter ended
                                              March 31,     April 2,
                                                2012          2011
Costs of products sold                            66.2%         64.7%
Gross profit                                      33.8%         35.3%
Selling, general, and administrative expenses     29.6%         27.4%
Operating income                                   4.2%          7.9%
Income before taxes                                4.5%          8.2%
Net earnings                                       2.9%          5.7%
Net earnings attributable to VPG stockholders      2.9%          5.5%

Effective tax rate                                34.5%         31.0%

Net Revenues

Net revenues were as follows (dollars in thousands):

                             Fiscal quarter ended
                           March 31,        April 2,
                             2012             2011
Net revenues             $    55,844       $    59,525
Change versus comparable
    prior year period    $    (3,681 )
Percentage change versus
    prior year period           -6.2 %

Changes in net revenues were attributable to the following:

vs. prior year quarter Change attributable to:

Change in volume                          -5.3%
Change in average selling prices           0.0%
Foreign currency effects                  -1.0%
Other                                      0.1%
Net change                                -6.2%

During the fiscal quarter ended March 31, 2012, our sales volume decreased in all of our reportable segments, compared to the comparable prior year period, primarily due to a drop in demand from our European customers that began in the third quarter of 2011.

Gross Profit and Margins

Gross profit as a percentage of net revenues was as follows:

                         Fiscal quarter ended
                        March 31,     April 2,
                          2012          2011
Gross margin percentage     33.8%         35.3%

The decrease in the gross margin percentage was due to the reduction in volume discussed above and increased manufacturing fixed costs, such as wages, utilities, and depreciation.

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):

                             Fiscal quarter ended
                           March 31,        April 2,
                             2012             2011
Net revenues             $    27,801       $    28,178
Change versus comparable
    prior year period    $      (377 )
Percentage change versus
    prior year period           -1.3 %

Changes in Foil Technology Products segment net revenues were attributable to the following:

vs. prior year quarter Change attributable to:

Change in volume                          -1.3%
Change in average selling prices           0.3%
Foreign currency effects                  -0.4%
Other                                      0.1%
Net change                                -1.3%

Gross profit as a percentage of net revenues for the Foil Technology Products segment was as follows:

                         Fiscal quarter ended
                        March 31,     April 2,
                          2012          2011
Gross margin percentage     40.7%         44.3%

The gross margin percentage decreased from the comparable prior year period largely due to reduction in volume, increases in variable costs, such as material usage and labor inefficiencies, and increased manufacturing fixed costs, including wages and utilities.

Force Sensors

Net revenues of the Force Sensors segment were as follows (dollars in
thousands):

                             Fiscal quarter ended
                           March 31,        April 2,
                             2012             2011
Net revenues             $    16,603       $    17,738
Change versus comparable
    prior year period    $    (1,135 )
Percentage change versus
    prior year period           -6.4 %

Changes in Force Sensors segment net revenues were attributable to the following:

vs. prior year quarter Change attributable to:

Change in volume                          -4.6%
Change in average selling prices          -0.8%
Foreign currency effects                  -1.1%
Other                                      0.1%
Net change                                -6.4%

Gross profit as a percentage of net revenues for the Force Sensors segment was as follows:

                         Fiscal quarter ended
                        March 31,     April 2,
                          2012          2011
Gross margin percentage     17.9%         20.3%

For the fiscal quarter ended March 31, 2012, the decrease in the gross margin percentage from the comparable prior year period is due to lower volume, and higher manufacturing fixed costs, which include the start-up costs associated with our new facility in India and wage increases.

Weighing and Control Systems

Net revenues of the Weighing and Control Systems segment were as follows
(dollars in thousands):

                             Fiscal quarter ended
                           March 31,        April 2,
                             2012             2011
Net revenues             $    11,440       $    13,609
Change versus comparable
    prior year period    $    (2,169 )
Percentage change versus
    prior year period          -15.9 %

Changes in the Weighing and Control Systems segment net revenues were attributable to the following:

vs. prior year quarter Change attributable to:

Change in volume                         -14.7%
Change in average selling prices           0.5%
Foreign currency effects                  -2.2%
Other                                      0.5%
Net change                               -15.9%

The large decrease in volume is primarily attributable to the reduction in on-board weighing revenues in Europe.

Gross profit as a percentage of net revenues for the Weighing and Control Systems segment were as follows:

                         Fiscal quarter ended
                        March 31,     April 2,
                          2012          2011
Gross margin percentage     40.0%         36.3%

The gross margin percentage increased from the comparable prior year period mainly due to product mix. A portion of our European on-board weighing business, where the significant volume decrease occurred, has relatively low margins . . .