Business Context and Reporting Period
Vishay Precision Group, Inc. filed this unaudited Form 10-Q for the fiscal quarter and six fiscal months ended June 30, 2012, compared with the quarter and six months ended July 2, 2011. VPG designs and manufactures precision foil products, force sensors, and weighing and control systems for industrial, medical, transportation, agricultural, aerospace, military, and other applications. Reportable segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net revenues | $55.3 million | $62.1 million | $111.2 million | $121.7 million |
| Gross profit | $19.9 million | $22.1 million | $38.7 million | $43.1 million |
| Gross margin | 35.9% | 35.6% | 34.8% | 35.4% |
| Operating income | $4.1 million | $5.0 million | $6.5 million | $9.7 million |
| Operating margin | 7.4% | 8.1% | 5.8% | 8.0% |
| Net earnings attributable to VPG | $3.0 million | $3.0 million | $4.6 million | $6.3 million |
| Diluted EPS | $0.21 | $0.22 | $0.33 | $0.46 |
Quarterly revenue declined 10.9%, while six-month revenue declined 8.6%. Volume was the primary driver of the decline, particularly weaker European demand; foreign currency effects reduced reported revenue by approximately $1.9 million in the quarter and $2.5 million year to date. Average selling prices provided modest offsets.
- Segment revenue: Q2 Foil Technology Products revenue was $26.6 million, Force Sensors revenue was $17.2 million, and Weighing and Control Systems revenue was $11.6 million.
- Segment margins: Q2 gross margins were 42.6% for Foil Technology Products, 21.5% for Force Sensors, and 41.7% for Weighing and Control Systems.
- Cash flow: Six-month operating cash flow was $6.2 million versus $0.3 million in the prior-year period. Capital expenditures were $4.2 million versus $5.1 million, resulting in positive management-defined free cash flow.
- Liquidity: Cash and cash equivalents were $82.1 million at June 30, 2012, compared with $80.8 million at December 31, 2011. Current assets were $179.2 million and current liabilities were $32.1 million, producing a 5.6-to-1 current ratio.
- Debt: Total third-party debt was $11.5 million, consisting primarily of $10.0 million of exchangeable notes and $1.6 million of Japanese subsidiary debt. No amounts were outstanding under the U.S. or Israeli revolving facilities. Net cash was $70.6 million.
- Taxes: The effective tax rate decreased to 27.2% for the quarter and 30.0% for the six months, from 36.8% and 33.9%, respectively, primarily because of changes in geographic earnings mix.
Material Changes Versus the Prior Comparable Period
- Revenue decreased across all three segments. The largest percentage decline was in Weighing and Control Systems, reflecting reduced European on-board weighing revenue.
- Quarterly gross margin improved modestly despite lower sales; Force Sensors benefited from product mix and efficiencies from production transferred to the new India facility.
- Six-month gross margin declined because of lower volume and higher fixed manufacturing costs, including wages, utilities, and depreciation.
- Operating income and operating margin declined due to the revenue reduction and unfavorable cost absorption, although SG&A decreased to $15.8 million for the quarter and $32.3 million for the six months.
- Comprehensive income was materially affected by foreign currency translation losses of $2.9 million in the quarter and $1.9 million year to date, compared with translation gains in the prior-year periods.
- The transition services agreement with Vishay Intertechnology terminated on March 1, 2012. VPG continues to have certain shared-facility leases and supply arrangements with Vishay Intertechnology.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash, available credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. No formal revenue or earnings guidance was provided.
- Management expects continued cost optimization, including manufacturing expansion and consolidation in India and transfers to lower-labor-cost locations. Future restructuring or severance costs may arise, although no new restructuring expenses were recorded in the reported periods.
- Backlog at June 30, 2012 was $43.6 million and the book-to-bill ratio was 1.02. Management cautioned that backlog may be canceled or rescheduled and is not necessarily indicative of future results.
- The company expects continued investment in research and development and may pursue strategic acquisitions, particularly in Force Sensors and Weighing and Control Systems.
- VPG was in compliance with its revolving-credit covenants. The U.S. facility had a $25.0 million commitment and terminates October 14, 2013; the Israeli facility had a $15.0 million commitment and terminates November 30, 2014.
- VPG filed for an Israeli tax ruling. If favorable, the company expected a 2012 tax benefit of approximately $0.7 million to $0.8 million and potentially a lower effective tax rate.
- Approximately 84% of cash was held by non-U.S. subsidiaries at June 30, 2012. Repatriation could result in additional taxes.
- Key risks include European economic weakness, foreign-exchange volatility, acquisition integration, new-product development, competitive and technology changes, production transfers, underutilized facilities, labor issues, and execution of cost-reduction programs.
- The company maintained foreign-currency collar derivatives with a June 30, 2012 fair value liability of approximately $0.1 million; no new contracts were entered into after July 2012.
Investor Verification Checklist
- Verify whether European demand and the Weighing and Control Systems segment recovered after the reported period.
- Track revenue volume, backlog, book-to-bill, and inventory turnover; companywide inventory turnover declined to 2.85 in Q2 2012.
- Assess whether India-related production efficiencies offset lower volume and fixed-cost absorption pressure.
- Confirm the outcome of the Israeli tax ruling and its effect on deferred tax assets and the effective tax rate.
- Review the location and repatriation constraints on overseas cash and the renewal or replacement of revolving facilities before their stated termination dates.
- Monitor foreign-currency translation effects and the company’s exposure to European demand and Israeli shekel movements.