Business Context and Reporting Period
Vishay Precision Group, Inc. designs, manufactures, and markets 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. This Form 10-Q covers the fiscal quarter and six fiscal months ended July 3, 2021, compared with June 27, 2020.
On June 1, 2021, VPG acquired Diversified Technical Systems, Inc. (DTS), a manufacturer of data acquisition systems and sensors, for $47.2 million. DTS is reported within Weighing and Control Systems.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net revenues | $75.3 million | $59.1 million | $145.9 million | $126.8 million |
| Gross profit | $29.8 million | $23.1 million | $58.4 million | $48.2 million |
| Gross margin | 39.6% | 39.1% | 40.0% | 38.0% |
| Operating income | $4.9 million | $4.0 million | $11.4 million | $8.6 million |
| Operating margin | 6.5% | 6.7% | 7.8% | 6.8% |
| Net earnings attributable to VPG | $3.9 million | $1.8 million | $8.9 million | $5.1 million |
| Diluted EPS | $0.29 | $0.13 | $0.65 | $0.37 |
Six-month operating cash flow was $12.4 million, versus $16.7 million in the prior-year period. Capital expenditures were $8.3 million, producing management-defined adjusted free cash flow of $4.1 million. Cash and cash equivalents were $73.5 million at July 3, 2021, down from $98.4 million at December 31, 2020.
Total debt was $60.7 million, consisting primarily of $61.0 million drawn under the revolving facility, compared with $40.6 million at year-end 2020. Net cash, as defined by management, was $12.8 million. The revolving facility has $75.0 million of capacity, may be increased by up to $25.0 million subject to conditions, and matures in March 2025. VPG reported compliance with its financial covenants at July 3, 2021.
The current ratio was 4.2 to 1.0, compared with 4.7 to 1.0 at December 31, 2020. Approximately 87% of cash was held by non-U.S. subsidiaries. Management stated that cash, credit facilities, and projected operating cash flow should meet liquidity needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 27.4%, driven by higher volume, favorable foreign currency effects, and acquisition-related revenue. Six-month revenue increased 15.0%.
- Force Sensors revenue increased 93.1% in the quarter and 44.6% year to date, partly reflecting operational limitations at the India facility during the 2020 COVID-19 period.
- Weighing and Control Systems revenue increased 34.5% in the quarter, aided by DTS, transportation and industrial weighing demand, and DSI products.
- Foil Technology Products revenue increased 4.8% in the quarter, while its gross margin declined to 38.9% from 41.8%, primarily due to start-up costs at the new advanced sensors facility and COVID-19-related effects.
- Consolidated gross margin improved year over year, but quarterly operating margin declined modestly because of $1.2 million of acquisition costs and a $1.2 million non-cash impairment charge.
- The effective tax rate declined to 6.1% for the quarter and 18.4% for the six-month period, from 28.1% and 30.9%, respectively. VPG attributed the reduction primarily to DTS-related changes in deferred tax valuation allowances, foreign tax-rate changes, and the worldwide income mix.
- Backlog increased to $130.9 million at quarter-end from $90.8 million a year earlier. The company-wide book-to-bill ratio increased to 1.40 from 0.95.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management described demand trends as favorable, citing increased backlog, book-to-bill above one, continued product development, manufacturing optimization, and potential strategic acquisitions.
VPG expects to complete the transition of its advanced sensors business to a new Israel facility in the third quarter of 2021. Start-up costs associated with that facility affected 2021 margins. Management is also evaluating additional manufacturing consolidations that could generate future restructuring and severance costs.
- DTS contributed approximately $3.0 million of revenue and a $0.2 million net loss during the period since acquisition, including inventory step-up and intangible-asset amortization.
- The company recorded a $1.1 million goodwill impairment and a $0.1 million indefinite-lived trade-name impairment after revised projections indicated slower revenue growth. The related instrumentation reporting unit had no remaining goodwill at July 3, 2021.
- COVID-19 uncertainty remains a risk to demand, manufacturing, supply chains, staffing, and operating costs, although all facilities were open and operational as of August 10, 2021.
- Other significant risks include foreign-currency volatility, acquisition integration and synergy execution, technology and competitive changes, tariffs and trade restrictions, manufacturing transfers, labor and restructuring matters, and political, economic, health, or military instability in operating countries.
- Foreign exchange increased reported second-quarter revenue by approximately $2.8 million and increased costs by approximately $3.5 million versus the prior-year quarter.
- No material changes were reported in previously disclosed market risks, no legal proceedings were reported, and management concluded that disclosure controls were effective as of July 3, 2021.
Investor Verification Checklist
- Verify the final purchase-price allocation for DTS, which remained provisional at quarter-end, including goodwill, acquired intangibles, and deferred tax liabilities.
- Monitor DTS integration, earnings contribution, purchase-accounting amortization, and the company’s increased revolving debt.
- Assess whether backlog and the 1.40 book-to-bill ratio convert into revenue and cash flow, noting that orders may be canceled or rescheduled.
- Evaluate the sustainability of improved Force Sensors profitability and the impact of advanced-sensors facility start-up costs on future margins.
- Track cash generation, inventory growth, capital expenditures, debt repayment capacity, and covenant compliance.
- Consider the sustainability of the unusually low effective tax rate and potential changes from tax audits, valuation allowances, or income mix.
- Review foreign-currency exposure and the concentration of cash outside the United States.