Vishay Precision Group, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
VPG designs, manufactures, and markets precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and nine fiscal months ended September 30, 2017, compared with October 1, 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net revenues | $62.8 million | $54.5 million | $184.9 million | $169.1 million |
| Gross profit / margin | $24.3 million / 38.6% | $20.3 million / 37.2% | $71.5 million / 38.7% | $61.5 million / 36.4% |
| Operating income / margin | $5.3 million / 8.5% | $2.6 million / 4.8% | $14.7 million / 7.9% | $5.3 million / 3.1% |
| Net earnings attributable to VPG | $4.3 million | $1.1 million | $9.9 million | $3.4 million |
| Diluted EPS | $0.32 | $0.08 | $0.73 | $0.25 |
| Cash from operating activities | Not separately provided | Not separately provided | $14.8 million | $6.6 million |
Q3 revenue increased 15.3% year over year, driven primarily by 14.6% volume growth, with positive foreign-currency effects of 1.1% partly offset by a 0.4% decline in average selling prices. Nine-month revenue increased 9.3%, reflecting volume growth across all segments and contributions from the Pacific acquisition.
- Segment revenue, Q3: Foil Technology Products $29.3 million, up 22.9%; Force Sensors $16.6 million, up 9.0%; Weighing and Control Systems $16.9 million, up 9.7%.
- Cash and liquidity: Cash was $69.9 million at September 30, 2017, compared with $58.5 million at December 31, 2016. The current ratio was 3.9 to 1.0.
- Debt: Total debt, net of deferred financing costs, was $33.0 million versus $36.2 million at year-end 2016. Management reported net cash of $36.9 million, a non-GAAP measure.
- Capital expenditures: $4.4 million for the first nine months, compared with $6.3 million in the prior-year period. Management-defined free cash was $10.9 million.
- Backlog and demand: Company-wide backlog increased to $76.2 million from $50.3 million in Q3 2016. The book-to-bill ratio was 1.12, compared with 0.98 in the prior-year quarter.
Material changes versus the prior comparable period
- Profitability improved substantially: Q3 operating margin rose 3.7 percentage points and nine-month operating margin rose 4.8 percentage points.
- Gross margin benefited from higher volume and manufacturing efficiencies, particularly in Foil Technology Products. Force Sensors experienced Q3 inefficiencies associated with increased production in India, while Weighing and Control Systems was affected by product mix and lower-margin steel revenue.
- SG&A increased in dollars because of higher personnel costs, but declined as a percentage of revenue to 29.5% from 31.0% in Q3 and to 30.0% from 31.6% year to date. The prior-year periods included $1.1 million of strategic-alternative evaluation costs and $0.4 million of acquisition costs year to date.
- Restructuring costs declined to $0.4 million in Q3 and $1.3 million year to date, compared with $0.7 million and $2.4 million, respectively.
- Q3 other income included $1.5 million of net proceeds from a lease termination related to the completed relocation of the Tianjin, China operations.
- A holder exchanged approximately $1.3 million of exchangeable notes for 57,729 common shares, leaving approximately $2.8 million principal amount outstanding.
- Foreign-currency translation generated $6.1 million of other comprehensive income for the first nine months, reducing accumulated other comprehensive loss to $34.3 million.
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 expects continued investment in research and development, automation, manufacturing transfers, cost reduction, and potentially strategic acquisitions. No specific revenue, earnings, or margin guidance was provided in the filing.
- Further manufacturing consolidation may produce future restructuring and severance costs and carries execution risks, including production-transfer delays, underutilized facilities, labor issues, and customer-service impacts.
- Key risks include economic conditions, competition and technology changes, product mix, foreign-currency volatility, acquisition integration and synergy realization, new-product development, and potential goodwill impairment.
- Approximately 94% of cash was held by non-U.S. subsidiaries, creating potential tax and withholding costs if funds are repatriated.
- The credit agreement provides a $30.0 million secured revolving facility, subject to a possible $15.0 million increase, and term facilities. The agreement restricts cash dividends and requires compliance with financial covenants; VPG reported compliance at September 30, 2017.
- The effective tax rate was 34.1% in Q3 versus 51.2% in the prior-year quarter, but 30.7% for the first nine months versus 25.3% in the prior-year period. The prior year benefited from a valuation-allowance release related to the Pacific acquisition.
- Management identified no legal proceedings, material off-balance-sheet arrangements, or material changes in previously disclosed market risks.
Investor verification checklist
- Verify whether backlog conversion and the 1.12 book-to-bill ratio continue to support revenue growth.
- Assess whether manufacturing inefficiencies in India and product-mix pressure in Weighing and Control Systems improve.
- Separate recurring operating performance from the $1.5 million Tianjin lease-termination gain and restructuring charges.
- Monitor foreign-currency exposure and the concentration of cash in non-U.S. subsidiaries.
- Review compliance with credit-agreement covenants and the availability and cost of revolving debt.
- Evaluate the timing and potential financial effects of announced cost reductions, future restructuring, acquisitions, and pending accounting standards, including revenue recognition and leases.