Business Context and Reporting Period
Vishay Precision Group, Inc. (VPG) designs, manufactures, and markets precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. The company reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. This unaudited Form 10-Q covers the fiscal quarter and six fiscal months ended June 30, 2018, compared with July 1, 2017.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net revenues | $74.2 million | $62.3 million | $147.3 million | $122.1 million |
| Gross profit | $31.4 million | $24.8 million | $59.9 million | $47.3 million |
| Gross margin | 42.3% | 39.7% | 40.6% | 38.7% |
| Operating income | $11.3 million | $5.9 million | $19.5 million | $9.8 million |
| Operating margin | 15.2% | 9.4% | 13.2% | 8.0% |
| Net earnings attributable to VPG stockholders | $7.7 million | $3.6 million | $12.7 million | $5.6 million |
| Diluted EPS | $0.57 | $0.27 | $0.94 | $0.42 |
| Operating cash flow | Not separately provided | Not separately provided | $7.4 million | $7.3 million |
At June 30, 2018, cash and cash equivalents were $74.7 million, total debt was $30.8 million, and reported net cash was $43.9 million. Current assets were $203.9 million versus current liabilities of $49.7 million, producing a current ratio of 4.1 to 1.0. Capital expenditures were $6.1 million for the first six months, resulting in management-defined free cash of $1.4 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 19.1%, driven primarily by 15.9% volume growth and 3.4% favorable foreign currency effects; average selling prices declined 0.2%.
- Six-month revenue increased 20.7%, driven by 16.2% volume growth and 4.7% favorable foreign currency effects.
- All segments grew in the quarter: Foil Technology Products revenue increased 16.7%, Force Sensors 23.6%, and Weighing and Control Systems 19.1%.
- Gross margin expanded 260 basis points in the quarter and 190 basis points year to date. Management attributed the improvement to higher volume, manufacturing and labor efficiencies, lower freight costs, favorable currency effects, and a stronger mix in Weighing and Control Systems.
- SG&A increased in absolute dollars because of higher personnel costs, bonuses, headcount, and foreign currency effects, but declined as a percentage of revenue to 26.9% from 29.8% in the quarter.
- Restructuring costs declined to $0.1 million in the quarter and year to date from $0.3 million and $0.9 million, respectively, in the prior-year periods.
- On February 26, 2018, the remaining $2.8 million of exchangeable notes was converted into 123,808 common shares. No exchangeable notes remained outstanding at June 30, 2018.
- Backlog increased to $101.0 million at quarter-end from $67.5 million a year earlier, while the company-wide book-to-bill ratio was 1.13 versus 1.08.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that cash, credit facilities, and projected operating cash flow should meet liquidity needs for at least the next 12 months. The company was in compliance with its debt covenants at June 30, 2018.
- Management continues to pursue automation, manufacturing transfers, facility consolidation, cost reduction, research and development, and strategic acquisitions. Further restructuring or severance costs may occur.
- No specific quantitative revenue or earnings guidance was provided in the filing. Backlog and book-to-bill trends indicate positive demand, but backlog may be canceled or rescheduled without penalty.
- The company expects to complete its analysis of the 2017 Tax Act in the fourth quarter of 2018. Tax effects remain provisional, and future adjustments could be material. VPG was also evaluating its accounting policy for GILTI.
- Foreign currency exposure remains material. Foreign exchange translation reduced other comprehensive income by $2.5 million for the first six months, while exchange rates increased year-to-date revenue by approximately $5.1 million and costs by approximately $5.3 million versus the prior year.
- New or expanded tariffs, trade restrictions, retaliatory measures, and changes in trade agreements could affect demand, costs, suppliers, customers, and manufacturing economics.
- The company reported a material weakness in internal control over financial reporting that existed at December 31, 2017 and continued at June 30, 2018. Remediation was underway and expected to extend through multiple 2018 reporting periods; management concluded disclosure controls were not effective as of quarter-end.
- The filing reported no legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed market risks or contractual commitments.
Important Facts for Investors to Verify
- Confirm the sustainability of the substantial margin expansion and whether manufacturing efficiencies and favorable product mix persist.
- Monitor Force Sensors backlog and book-to-bill, which declined to 0.88 and $17.3 million, respectively, in the second quarter despite strong year-over-year revenue growth.
- Assess the effect of tariffs, trade restrictions, and foreign exchange movements on revenue, input costs, and margins.
- Review subsequent filings for final 2017 Tax Act and GILTI accounting impacts.
- Track remediation and auditor evaluation of the material weakness in internal controls.
- Evaluate liquidity and cash deployment given $74.7 million of cash, $30.8 million of debt, $6.1 million of capital expenditures, and the concentration of approximately 95% of cash at non-U.S. subsidiaries.