Vishay Precision Group, Inc. — Q3 2019 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. It operates in three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and nine fiscal months ended September 28, 2019, compared with September 29, 2018. Interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenues | $67.4 million | $75.5 million | $214.8 million | $222.8 million |
| Gross profit | $25.8 million | $30.6 million | $87.5 million | $90.5 million |
| Gross margin | 38.3% | 40.5% | 40.7% | 40.6% |
| Operating income | $6.2 million | $10.6 million | $26.9 million | $30.1 million |
| Operating margin | 9.2% | 14.1% | 12.5% | 13.5% |
| Net earnings attributable to VPG | $4.5 million | $7.5 million | $18.3 million | $20.2 million |
| Diluted EPS | $0.33 | $0.56 | $1.35 | $1.50 |
| Cash flow from operations | Not separately provided | Not separately provided | $24.6 million | $18.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $8.6 million | $10.0 million |
Management-defined free cash was $16.3 million for the first nine months of 2019, calculated as operating cash flow less capital expenditures and net proceeds from asset sales. These non-GAAP measures may not be comparable with similarly titled measures used by other companies.
At September 28, 2019, cash and cash equivalents were $101.3 million, compared with $90.2 million at December 31, 2018. Total debt was $23.7 million, down from $27.1 million, resulting in reported net cash of $77.6 million versus $63.1 million at year-end. The current ratio was 4.4 to 1.0, compared with 3.9 to 1.0 at December 31, 2018.
Material changes versus comparable periods
- Q3 revenue declined 10.7%, primarily because of lower volume across all three segments. Nine-month revenue declined 3.6%.
- Q3 gross margin decreased 2.2 percentage points, reflecting lower volume, adverse foreign exchange effects, and higher wages and manufacturing costs, particularly in Foil Technology Products.
- Q3 operating income decreased 41.8%, and diluted EPS decreased 41.1%. Nine-month operating income declined approximately 10.8% and diluted EPS declined 10.0%.
- Q3 segment revenue changes were: Foil Technology Products down 10.6%, Force Sensors down 7.9%, and Weighing and Control Systems down 13.2%. For the first nine months, the corresponding changes were down 2.0%, down 12.3%, and up 1.6%.
- Force Sensors gross margin improved to 30.4% in Q3 from 25.9%, supported by Indian export grants, favorable foreign exchange, and manufacturing efficiencies. Weighing and Control Systems margin was unchanged at 46.6%.
- Backlog declined to $79.3 million from $99.4 million in Q3 2018 and $83.4 million in Q2 2019. The company-wide book-to-bill ratio was 0.96, below one.
- Foreign exchange reduced Q3 revenue by approximately $0.8 million and increased costs by approximately $0.5 million versus the prior-year quarter. For the nine-month period, foreign exchange reduced revenue by $5.1 million and costs by $5.4 million.
Outlook, management commentary, risks, and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It stated that cash, credit facilities, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. The company expects to continue investing in research and development, automation, manufacturing transfers, cost reduction, and strategic acquisitions.
- VPG adopted the new lease standard on January 1, 2019, recognizing an operating lease right-of-use asset of $8.8 million and operating lease liabilities totaling approximately $9.0 million at September 28, 2019.
- The company recorded $0.5 million of restructuring costs in Q3 and $0.5 million year-to-date, plus $0.6 million of executive severance costs during the second quarter.
- Other income included a one-time gain of approximately $0.8 million from liquidation of a subsidiary.
- On November 1, 2019, after the reporting date, VPG acquired Dynamic Systems Inc. for $41.0 million, subject to customary adjustments, plus a potential earn-out of up to $3.0 million. DSI will report within Weighing and Control Systems.
- On October 23, 2019, after the reporting date, VPG exercised a $15.0 million accordion feature, increasing revolving credit availability to $45.0 million. The credit agreement terminates December 30, 2020.
- VPG was in compliance with its debt covenants at September 28, 2019. The credit agreement restricts cash dividends and requires compliance with financial maintenance ratios.
- Approximately 94% of cash was held by non-U.S. subsidiaries. Remaining planned foreign cash distributions were approximately $15.9 million, with a related deferred tax liability of approximately $1.6 million.
- Principal risks include weaker economic conditions and customer demand, order cancellations or delays, foreign exchange volatility, tariffs and trade regulation, political and economic instability, acquisition integration, technology and product-development risks, and execution of restructuring and manufacturing transfers.
- No legal proceedings, material changes in previously reported market risks, or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective as of the period end.
Important facts for investors to verify
- Whether the declining backlog and sub-one book-to-bill ratio persist and translate into further revenue pressure.
- The sustainability of gross-margin performance, particularly in Foil Technology Products, amid lower volumes, wage increases, manufacturing costs, and currency effects.
- The purchase-price allocation, financing, earn-out exposure, and operating contribution of the post-period DSI acquisition.
- Compliance with debt covenants and the December 2020 credit agreement maturity, including the impact of acquisition-related funding needs.
- The timing and tax cost of planned foreign cash distributions and the extent to which cash is accessible to fund U.S. obligations.
- Future restructuring charges, savings, and execution risks associated with manufacturing consolidation and transfers.