Vishay Precision Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
VPG designs and manufactures precision sensors, resistive foil products, weighing modules, and control systems used in industrial, medical, agricultural, transportation, avionics, military, and other applications. It reports two segments: Foil Technology Products and Weighing Modules and Control Systems.
This unaudited filing covers the fiscal quarter and six fiscal months ended July 2, 2011, compared primarily with July 3, 2010. VPG was spun off from Vishay Intertechnology on July 6, 2010; therefore, prior-year results are presented partly on a carve-out basis and may not reflect the costs of operating as an independent public company.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenues | $62.1 million | $52.9 million | $121.7 million | $101.1 million |
| Gross profit | $22.1 million | $20.0 million | $43.1 million | $37.0 million |
| Gross margin | 35.6% | 37.8% | 35.4% | 36.6% |
| Operating income | $5.0 million | $6.2 million | $9.7 million | $10.0 million |
| Net earnings attributable to VPG stockholders | $3.0 million | $4.0 million | $6.3 million | $5.8 million |
| Diluted EPS | $0.22 | $0.30 | $0.46 | $0.44 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $0.3 million | $9.4 million |
Q2 revenue increased 17.4%, while six-month revenue increased 20.3%. Revenue growth reflected higher volume in both segments and favorable foreign-currency effects, partly offset by lower average selling prices.
Q2 gross margin declined 220 basis points year over year, and six-month gross margin declined 120 basis points. Management cited lower selling prices, higher manufacturing costs, unfavorable product mix, manufacturing inefficiencies, and inventory obsolescence. SG&A increased to $17.1 million in Q2 from $13.8 million and represented 27.5% of revenue versus 26.1%.
Q2 operating income declined despite higher revenue, primarily because of increased SG&A and lower gross margin. Six-month net earnings increased because of the revenue growth and a lower effective tax rate, partially offset by higher operating costs.
Segment Performance and Operating Indicators
| Segment | Q2 2011 Revenue | Year-over-Year Change | Q2 2011 Gross Margin |
|---|---|---|---|
| Foil Technology Products | $29.0 million | 13.5% increase | 46.0% |
| Weighing Modules and Control Systems | $33.1 million | 21.1% increase | 26.4% |
Six-month revenue increased 15.6% in Foil Technology Products and 24.9% in Weighing Modules and Control Systems. Q2 ending backlog was $48.5 million, book-to-bill was 1.02, and inventory turnover was 3.27. Management reported steady demand growth through the first half of 2011.
Cash Flow, Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $79.9 million at July 2, 2011, compared with $82.2 million at December 31, 2010.
- Net cash was $67.5 million, compared with $70.5 million at year-end 2010. Total third-party debt was $12.4 million, including $10.0 million of exchangeable notes, $1.7 million of Japanese subsidiary debt, and $0.7 million of bank notes.
- The company had no borrowings under its $25.0 million secured revolving credit facility. The facility terminates October 14, 2013 and includes a potential additional secured facility of up to $15.0 million.
- Operating cash flow fell to $0.3 million from $9.4 million, primarily because of approximately $5.5 million of tax payments, bonus and profit-sharing payments, and working-capital changes.
- Capital expenditures were $5.1 million, versus $3.9 million in the prior-year period. Consequently, management stated that the company did not generate “free cash” during the period.
- The current ratio was 5.2 to 1.0, compared with 4.6 to 1.0 at December 31, 2010. Approximately 87% of cash was held by non-U.S. subsidiaries and could incur additional taxes if repatriated.
Material Changes, Outlook, Risks, and Unusual Items
- Management reported increasing demand across both segments and expected continued growth in precision sensors and sensor-based systems.
- The company plans to increase research and development spending, continue strategic acquisitions, automate operations, and shift some manufacturing to lower-labor-cost countries, including India, Israel, China, Taiwan, Costa Rica, and other locations.
- A new manufacturing facility in India is under construction to consolidate weighing-module capacity. A related construction contract totals approximately $7.9 million and is expected to be paid in 2011.
- Management expects future restructuring and severance costs related to manufacturing consolidation, although no new restructuring programs were initiated during the reported period.
- The March 2011 earthquake in Japan had no significant operational impact; the Akita site was closed for only a few days.
- Debt covenants were satisfied at July 2, 2011. The leverage ratio was 0.4 to 1.0 versus a maximum of 2.5 to 1.0, and the fixed-charge coverage ratio was 40.2 to 1.0 versus a minimum of 2.5 to 1.0. The credit agreement restricts cash dividends and permits acceleration if covenants are breached.
- Foreign-exchange exposure remains material. Q2 included a $0.2 million foreign-exchange loss compared with a $0.1 million gain in the prior-year quarter.
- The effective tax rate was 36.8% in Q2 versus 33.2% in the prior-year quarter, but 33.9% for the six-month period versus 39.6% previously. Tax rates are affected by the geographic mix of earnings and losses for which tax benefits cannot be recognized.
- Comparability is affected by the post-spin-off increase in stand-alone public-company costs, including personnel, compliance, and information technology expenses. Transition services from Vishay Intertechnology are expected to cost less than $0.5 million in aggregate; $0.4 million had been paid by July 2, 2011.
- Management identified risks involving economic conditions, acquisition integration, new product development, competition, foreign currency, cost-reduction execution, labor or legal challenges, production transfers, and underutilized facilities.
Important Facts for Investors to Verify
- Whether revenue growth and backlog conversion continue, given the Q2 book-to-bill ratio of 1.02.
- Whether gross-margin pressure from pricing, product mix, manufacturing costs, and inventory obsolescence improves.
- Whether SG&A growth associated with stand-alone operations moderates relative to revenue growth.
- Cash conversion, working-capital requirements, tax payments, and the effect of continued capital spending on free cash flow.
- Execution, cost, and timing of the India manufacturing facility and related production transfers.
- Potential dilution from the exchangeable notes, stock options, and restricted stock units.
- Availability and geographic concentration of cash, including potential tax costs of repatriating foreign cash.
- Compliance with credit-facility covenants and restrictions on dividends.
- The reliability of prior-year comparisons because the 2010 results include carve-out allocations from Vishay Intertechnology rather than fully stand-alone operating costs.