Vishay Precision Group, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter ended April 2, 2016, compared with the quarter ended March 28, 2015. Results are unaudited.
Prior-period information was restated for errors at an Indian subsidiary and certain other immaterial errors. The restatement increased prior-year quarterly net earnings attributable to VPG stockholders by approximately $0.2 million, or $0.01 per share.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenues | $56.6 million | $56.6 million | Flat |
| Gross profit / margin | $19.8 million / 34.9% | $21.0 million / 37.1% | Margin down 2.2 percentage points |
| Operating income / margin | $1.0 million / 1.7% | $2.2 million / 3.8% | Down $1.2 million |
| Net earnings attributable to VPG | $0.5 million | $0.9 million | Down $0.4 million |
| Diluted EPS | $0.04 | $0.06 | Down $0.02 |
| Operating cash flow | $0.7 million | $(2.3) million | Improved $3.0 million |
| Capital expenditures | $2.2 million | $2.8 million | Down $0.6 million |
SG&A declined to $18.0 million from $18.7 million, but restructuring costs increased to $0.7 million from $0.1 million and acquisition costs were $0.1 million versus none in the prior-year period. The effective tax rate increased to 54.4% from 18.3%, principally because VPG did not recognize a tax benefit on U.S. losses and had a full valuation allowance on U.S. deferred tax assets.
Foreign exchange produced a $0.4 million gain in Q1 2016 compared with a $1.0 million loss in Q1 2015. Foreign currency effects reduced reported revenue by approximately $1.2 million year over year.
Segment performance
| Segment | Q1 2016 revenue | Year-over-year change | Q1 2016 gross margin |
|---|---|---|---|
| Foil Technology Products | $26.3 million | Up 5.0% | 42.3% |
| Force Sensors | $14.8 million | Down 2.6% | 18.4% |
| Weighing and Control Systems | $15.5 million | Down 5.1% | 38.3% |
Foil Technology Products benefited from higher volume in Asia’s test and measurement market. Force Sensors was affected by foreign exchange and lower pricing. Weighing and Control Systems was pressured by lower steel-industry demand, weaker process weighing in Europe, lower U.S. on-board weighing activity, unfavorable mix, and foreign exchange, partly offset by Stress-Tek revenue.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $61.4 million at April 2, 2016, compared with $62.6 million at December 31, 2015.
- Total third-party debt was $33.2 million, including $4.0 million of revolving borrowings, compared with $33.7 million at year-end.
- Management reported net cash of $28.2 million, a non-GAAP measure, versus $28.9 million at December 31, 2015.
- Current assets were $162.3 million and current liabilities were $40.1 million, producing a current ratio of 4.0 to 1.0.
- Approximately 81% of cash was held by non-U.S. subsidiaries, which could create additional tax costs if repatriated.
- VPG stated that cash, available 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 quarter-end.
Operating cash flow was positive, but capital expenditures and $1.7 million of restructuring payments resulted in no year-to-date free cash under management’s non-GAAP definition.
Material changes, outlook, and unusual items
- VPG completed the $20.1 million Stress-Tek acquisition on December 30, 2015. Stress-Tek contributed to the Weighing and Control Systems segment beginning January 1, 2016, and generated purchase accounting adjustments of approximately $0.3 million in Q1.
- VPG completed the acquisition of Pacific Instruments for approximately $11.0 million on April 6, 2016, financed with cash and credit-facility borrowings. Its results will be included in Foil Technology Products beginning April 6. The filing recorded $0.1 million of related acquisition costs as of April 2.
- The company continued a global cost-reduction program expected to generate approximately $6.0 million of annual savings beginning in 2016. Approximately $1.1 million of savings had been realized by April 2, 2016.
- The Costa Rica facility closure is expected to generate approximately $0.7 million of annual savings in 2016, with substantial implementation expected by the end of Q3 2016. Expected cash costs are approximately $0.6 million.
- The broader global restructuring program is expected to have approximately $4.0 million of cash costs, with completion expected by the end of Q2 2017. Further manufacturing consolidation could result in additional restructuring and severance costs.
- Management expected to generate free cash during the remaining months of 2016, but provided no formal revenue or earnings guidance in the filing.
- Key risks include industrial and steel-market weakness, foreign exchange volatility, acquisition integration, cost-reduction execution, production transfers, ERP implementation, product development, competition, technology changes, and potential goodwill impairment.
- In May 2016, VPG incurred an additional $0.3 million of restructuring costs at its Canadian subsidiary, expected to be paid in Q2 2016.
Important facts for investors to verify
- Whether lower steel-related demand and weaker Weighing and Control Systems margins persist.
- The operating contribution, financing impact, and integration progress of Pacific Instruments and Stress-Tek.
- Whether the restructuring programs achieve the stated savings and whether additional closure or severance charges arise.
- The sustainability of positive operating cash flow after restructuring payments and acquisition spending.
- Debt-covenant compliance and the effect of additional borrowings used to fund Pacific Instruments.
- The impact of foreign exchange movements and the tax consequences of cash held overseas.
- The effect of the Indian subsidiary restatement and the company’s continuing internal-control and reporting processes.