Vishay Precision Group, Inc. — Q2 2016 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. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and six fiscal months ended July 2, 2016, compared with June 27, 2015. Prior-period amounts reflect a previously disclosed restatement related primarily to functional-currency accounting at an Indian subsidiary.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net revenues | $58.0 million | $59.5 million | $114.6 million | $116.1 million |
| Gross profit | $21.5 million | $21.0 million | $41.3 million | $42.0 million |
| Gross margin | 37.1% | 35.3% | 36.0% | 36.2% |
| Operating income | $1.7 million | $2.3 million | $2.7 million | $4.5 million |
| Operating margin | 2.9% | 3.9% | 2.3% | 3.9% |
| Net earnings attributable to VPG stockholders | $1.9 million | $1.5 million | $2.3 million | $2.3 million |
| Diluted EPS | $0.14 | $0.11 | $0.18 | $0.17 |
Cash provided by operating activities was $0.2 million in the first six months, compared with cash used of $0.05 million in the prior-year period. Capital expenditures were $4.4 million, producing negative management-defined free cash of approximately $4.0 million. Cash and cash equivalents were $52.2 million at July 2, 2016, down from $62.6 million at December 31, 2015.
Total third-party debt was $37.7 million, compared with $33.7 million at year-end 2015. Management-defined net cash was $14.5 million versus $28.9 million at year-end. The company reported a current ratio of 4.2 to 1.0 and stated that it was in compliance with all credit agreement covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 2.5%, while year-to-date revenue declined 1.3%. Volume declines across all segments, particularly test and measurement and steel markets, more than offset revenue from recent acquisitions.
- Quarterly gross margin improved 180 basis points to 37.1%, primarily from cost savings in Force Sensors and Weighing and Control Systems. Year-to-date gross margin was essentially stable at 36.0%.
- Operating income declined because of $1.0 million of restructuring costs and $0.4 million of acquisition costs in the quarter, compared with $0.3 million of restructuring costs and no acquisition costs in the prior-year quarter.
- Net earnings and EPS increased despite lower operating income, primarily because of a $1.6 million release of the valuation allowance on U.S. deferred tax assets and improved foreign-exchange results. The quarterly effective tax rate was negative 43.7%, compared with 16.5% in the prior-year quarter.
- Force Sensors quarterly gross margin increased to 29.0% from 19.0%, reflecting headcount reductions, plant closures, and manufacturing relocations. Foil Technology Products margin declined to 36.8% from 39.6% because of lower volume and labor inefficiencies related to advanced-sensor expansion.
- VPG acquired Pacific Instruments on April 6, 2016, for $10.7 million. Pacific expands the Foil Technology Products segment with high-performance data acquisition systems. Stress-Tek, acquired in December 2015, contributed to the Weighing and Control Systems segment.
Outlook, Commentary, Risks, and Unusual Items
- Management expects approximately $6.0 million of annual savings from the global cost-reduction program beginning in 2016; approximately $2.7 million had been realized by July 2, 2016. Full implementation is expected by the end of Q2 2017.
- The Alajuela, Costa Rica facility closure is expected to be substantially complete by the end of Q3 2016 and is expected to generate approximately $0.7 million of annual savings in 2016. Additional manufacturing-consolidation actions may create further restructuring and severance costs.
- Management expected positive free cash during the remainder of fiscal 2016 and believed cash, credit facilities, and projected operating cash flow would meet liquidity needs for at least the next 12 months.
- The Karmiel, Israel facility was classified as held for sale. A sale and partial leaseback were agreed in July 2016, with closing expected by November 2016 subject to customary conditions.
- Backlog was $51.4 million at quarter-end, down from $54.6 million in Q2 2015; the company-wide book-to-bill ratio was 0.98. Backlog may be canceled or rescheduled and is not necessarily indicative of future revenue.
- Principal risks include weaker industrial, steel, and test-and-measurement demand; foreign-currency exposure; integration of Pacific and Stress-Tek; execution of restructuring and production transfers; ERP implementation; goodwill impairment; and possible covenant consequences if financial ratios are not maintained.
Important Facts for Investors to Verify
- Whether cost-reduction savings and manufacturing relocations offset restructuring costs and improve operating margins.
- Whether volume trends, backlog, and book-to-bill ratios recover in the test-and-measurement, steel, and process-weighing markets.
- The final purchase accounting for Pacific and Stress-Tek, including goodwill and acquired intangible assets.
- Progress and final proceeds from the Karmiel facility sale and leaseback.
- Conversion of negative year-to-date free cash flow into positive cash generation and the company’s ability to reduce debt.
- Future tax rates after the discrete $1.6 million deferred-tax valuation allowance release and the continuing valuation allowance on U.S. deferred tax assets.