Vishay Precision Group, Inc. — Q1 2017 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 reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter ended April 1, 2017, compared with the quarter ended April 2, 2016. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenues | $59.8 million | $56.6 million |
| Gross profit | $22.5 million | $19.8 million |
| Gross margin | 37.7% | 34.9% |
| Operating income | $3.7 million | $1.0 million |
| Operating margin | 6.3% | 1.7% |
| Net earnings attributable to VPG stockholders | $2.0 million | $0.5 million |
| Diluted EPS | $0.15 | $0.04 |
| Net cash provided by operating activities | $2.9 million | $0.7 million |
| Capital expenditures | $2.0 million | $2.2 million |
Cash and cash equivalents were $59.3 million at April 1, 2017, compared with $58.5 million at December 31, 2016. Total debt was $35.5 million, including $9.0 million drawn on the revolving facility, producing reported net cash of $23.7 million. The current ratio was 4.0 to 1.0. Approximately 93% of cash was held by non-U.S. subsidiaries, and repatriation could result in additional taxes.
Management-defined “free cash” was $1.1 million, calculated as operating cash flow of $2.9 million less capital expenditures of $2.0 million and net of $0.2 million of asset-sale proceeds. The company was in compliance with its debt covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue increased 5.6%, driven primarily by higher volume in all three segments and approximately 2.0 percentage points of contribution from the Pacific acquisition. Foreign currency effects reduced reported revenue by approximately 2.1 percentage points.
- Foil Technology Products revenue rose 5.5% to $27.8 million; Force Sensors revenue rose 4.2% to $15.5 million; and Weighing and Control Systems revenue rose 7.0% to $16.6 million.
- Gross margin expanded 280 basis points, reflecting improved volume, product mix, and cost savings in Force Sensors and Weighing and Control Systems. Foil Technology Products margin declined to 41.4% from 42.3% due partly to inventory reduction and foreign currency effects.
- Operating income increased substantially despite restructuring costs of $0.6 million in Q1 2017. The prior-year period included $0.1 million of acquisition costs and $0.3 million of acquisition purchase-accounting adjustments.
- The effective tax rate declined to 32.4% from 54.4%, primarily because of a lower impact from discrete tax items. The prior-year rate benefited from a reduction in an uncertain tax position liability that did not recur.
- Operating cash flow improved to $2.9 million from $0.7 million, although the 2017 amount included $1.2 million of restructuring payments and was affected by a $3.4 million increase in accounts receivable.
Guidance, outlook, risks, and unusual items
The filing does not provide specific revenue or earnings guidance. Management expects to continue pursuing product innovation, acquisitions, manufacturing automation, facility consolidation, and transfers to lower-cost locations. The global cost-reduction program exceeded its anticipated annual savings of $6.0 million, and complete implementation was expected by the end of the second quarter of 2017.
Additional restructuring and severance costs may arise from further manufacturing consolidation. Restructuring estimates could require additional charges or reversals if actual costs differ from estimates. The company also noted continued exposure to foreign currency fluctuations; in Q1 2017, exchange rates reduced revenue by approximately $1.1 million and reduced costs by approximately $0.5 million versus the prior-year period. Other expense included a $0.4 million foreign-exchange loss, compared with a $0.4 million gain in the prior year.
Management believes cash, credit facilities, and projected operating cash flow will satisfy liquidity needs for at least the next 12 months. Key risks include economic and market conditions, acquisition integration and realization of synergies, product development and technology changes, competition, foreign currency movements, execution of cost-reduction programs, potential production-transfer disruptions, customer order cancellations or rescheduling, and goodwill impairment. Backlog was $61.4 million and book-to-bill was 1.06 at quarter-end, but management cautions that backlog is not necessarily indicative of future revenue.
The company adopted ASU 2016-09 regarding employee share-based payment accounting and ASU 2015-11 regarding inventory measurement effective January 1, 2017; neither had a significant reported impact. Other recently issued accounting standards, including revenue recognition, leases, and pension-cost presentation guidance, remained under evaluation.
Important facts for investors to verify
- Confirm the sustainability of margin improvement after restructuring benefits, product-mix changes, inventory reductions, and foreign currency effects.
- Assess whether the Pacific acquisition and other strategic acquisitions are generating expected revenue, cost synergies, and cash flow.
- Monitor restructuring completion, remaining accrued restructuring liability of $0.7 million, and any additional consolidation charges.
- Review the concentration of cash outside the United States and potential tax costs of repatriation.
- Track foreign currency exposure, particularly to the Israeli shekel, British pound, Canadian dollar, and euro.
- Evaluate liquidity and covenant headroom under the secured credit agreement, including the $30.0 million revolving commitment and term-debt repayment requirements.
- Verify backlog quality and order trends because customers may cancel or reschedule orders without significant penalties.