Vishay Precision Group, Inc. — Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision foil products, force sensors, and weighing and control systems for industrial, medical, agricultural, transportation, avionics, military, and other applications. The filing covers the fiscal quarter and nine fiscal months ended September 27, 2014, compared with September 28, 2013. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net revenues | $63.4 million | $57.7 million | $189.6 million | $178.0 million |
| Gross profit | $23.8 million | $19.2 million | $70.5 million | $60.8 million |
| Gross margin | 37.5% | 33.3% | 37.2% | 34.1% |
| Operating income | $4.0 million | $0.6 million | $11.8 million | $4.7 million |
| Net earnings attributable to VPG stockholders | $3.1 million | $1.5 million | $8.3 million | $3.2 million |
| Diluted EPS | $0.22 | $0.11 | $0.59 | $0.23 |
| Operating cash flow | Not separately provided | Not separately provided | $12.5 million | $6.2 million |
At September 27, 2014, cash and cash equivalents were $75.4 million, total debt was $23.9 million, and management-defined net cash was $51.5 million. The current ratio was 4.2 to 1.0. Nine-month capital expenditures were $5.6 million, producing management-defined free cash of approximately $7.0 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 9.8%; nine-month revenue increased 6.5%. Volume was the primary driver, with limited pricing impact and modest favorable currency effects.
- Foil Technology Products revenue increased 21.8% in the quarter and 14.1% year to date, benefiting from higher shipments after prior-year ERP implementation disruptions. Its quarterly gross margin improved to 41.4% from 36.7%.
- Force Sensors revenue increased 6.7% in the quarter and 4.1% year to date, reflecting higher OEM volume and manufacturing efficiencies.
- Weighing and Control Systems revenue decreased 1.7% in the quarter and 0.9% year to date because of lower volume and seasonal weakness in Europe, although margins improved.
- Operating margin increased to 6.3% from 1.0% in the quarter and to 6.2% from 2.6% for the nine-month period.
- Prior-year results included $0.9 million of quarterly and $4.4 million of nine-month KELK acquisition purchase-accounting adjustments, plus $57,000 and $752,000 of acquisition costs, respectively. These items depressed prior-year comparability.
- Foreign-currency translation produced a $4.0 million quarterly comprehensive loss and a $2.8 million nine-month loss, reducing accumulated other comprehensive income.
Outlook, commentary, risks, and unusual items
- Management stated that cash, available credit facilities, and projected operating cash flow should be sufficient to meet liquidity needs for at least the next 12 months.
- Management expects further manufacturing consolidation and cost-reduction actions. Additional restructuring and severance costs are expected, although significant recurring costs are not anticipated outside acquisition integration.
- Backlog declined to $60.2 million and the overall book-to-bill ratio fell to 0.95 in the third quarter, from 0.98 in the second quarter. Foil Technology Products and Weighing and Control Systems experienced order declines; the company cited nonrecurring large annual orders in the prior quarter and normal European seasonality.
- The company approved a plan to repurchase up to 500,000 common shares; no shares had been repurchased as of September 27, 2014.
- The company was in compliance with its credit-agreement covenants. The principal credit agreement terminates January 29, 2018; an Israeli subsidiary’s $15.0 million revolving facility terminates November 30, 2014 and had no outstanding balance.
- A corporate-structure reorganization is expected to be completed in the fourth quarter of 2014. Related prior-quarter tax items included a $1.9 million expense and a $2.0 million benefit.
- Approximately 85% of cash was held by non-U.S. subsidiaries and could incur additional taxes if repatriated. Key risks include foreign exchange, economic conditions, acquisition integration, ERP execution, product development, competition, and manufacturing transfers or restructuring.
- Restructuring charges were $144,000 in the quarter and $475,000 year to date. Remaining related payments are expected through the remainder of 2014 and the first quarter of 2015.
- The company adopted no early guidance for the new revenue-recognition standard; the impact of the standard was not yet known.
Investor verification priorities
- Verify whether the declining third-quarter backlog and 0.95 book-to-bill ratio persisted in subsequent quarters.
- Assess the sustainability of gross-margin improvement after excluding prior-year KELK purchase-accounting effects.
- Review the effect of the corporate reorganization and international cash repatriation on future tax rates and cash availability.
- Confirm completion, cost, and operational impact of planned manufacturing consolidations and restructuring programs.
- Monitor covenant compliance, debt maturities, the Israeli revolving facility renewal, and any share repurchases.
- Evaluate foreign-exchange exposure and the effect of currency movements on revenue, operating costs, and comprehensive income.