Vishay Precision Group, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Vishay Precision Group designs, manufactures, and markets 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 and nine fiscal months ended October 2, 2021, compared with September 26, 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 | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenues | $82.0 million | $67.5 million | $227.9 million | $194.4 million |
| Gross profit | $31.8 million | $27.3 million | $90.3 million | $75.5 million |
| Gross margin | 38.8% | 40.5% | 39.6% | 38.9% |
| Operating income | $7.3 million | $8.1 million | $18.6 million | $16.7 million |
| Operating margin | 8.9% | 12.0% | 8.2% | 8.6% |
| Net earnings attributable to VPG | $5.4 million | $5.6 million | $14.3 million | $10.7 million |
| Diluted EPS | $0.39 | $0.41 | $1.04 | $0.78 |
Q3 adjusted non-GAAP operating income was $9.7 million, or an 11.8% margin, compared with $7.9 million, or an 11.7% margin, in the prior-year quarter. Q3 adjusted EBITDA was $13.7 million, or 16.8% of revenue, versus $10.6 million, or 15.8%. For the nine-month period, adjusted EBITDA was $35.7 million, or 15.7% of revenue, compared with $26.9 million, or 13.9%.
Cash provided by operating activities for the first nine months was $18.1 million, compared with $22.8 million in the prior-year period. Capital expenditures were $11.2 million, producing management-defined adjusted free cash flow of $7.1 million. Cash used in investing activities was $58.2 million, including the $47.2 million DTS acquisition.
Cash and cash equivalents were $75.5 million at October 2, 2021, compared with $98.4 million at December 31, 2020. Revolving debt was $61.0 million versus $41.0 million at year-end, and reported net cash was $14.9 million versus $57.8 million. The company had a $75.0 million secured revolving facility, with potential expansion of up to $25.0 million, maturing March 20, 2025. Management stated that liquidity is expected to cover requirements for at least the next 12 months, and the company was in compliance with its financial covenants.
The current ratio was 4.1 to 1.0 at October 2, 2021, compared with 4.7 to 1.0 at December 31, 2020. Approximately 90% of cash was held by non-U.S. subsidiaries.
Material changes versus the prior comparable periods
- Q3 revenue increased 21.4%, driven by higher volume, favorable foreign currency effects, and acquisitions. Nine-month revenue increased 17.3%.
- Force Sensors revenue increased 27.7% in Q3 and 38.4% year to date, primarily reflecting recovery from COVID-related operating limitations at the India facility in the prior year.
- Weighing and Control Systems revenue increased 51.7% in Q3 and 25.1% year to date, benefiting from DTS, higher onboard weighing revenue, and stronger DSI steel-market revenue.
- Foil Technology Products revenue declined 0.4% in Q3 but increased 3.8% year to date. Q3 segment gross margin fell to 32.1% from 41.1%, primarily due to advanced-sensor facility start-up costs, labor inefficiencies, higher rent and overhead, unfavorable foreign exchange, and lower volume.
- Consolidated Q3 gross margin declined 170 basis points, while nine-month gross margin improved 70 basis points. Q3 operating margin declined because SG&A increased to 30.0% of revenue from 28.4% and because of lower gross margin.
- The company recorded $1.2 million of non-cash goodwill and indefinite-lived trade-name impairment in the second quarter, driven mainly by slower forecast revenue growth. The affected instrumentation reporting unit had no remaining goodwill at October 2, 2021.
- Nine-month results included $1.2 million of DTS acquisition costs, $2.3 million of acquisition purchase-accounting adjustments, $2.3 million of advanced-sensor start-up costs, and the $1.2 million impairment charge. Prior-year results included $0.7 million of restructuring costs.
- The effective tax rate decreased to 23.4% from 27.1% in Q3 and to 20.3% from 29.0% for the nine-month period, primarily due to DTS-related changes in deferred tax valuation allowances, foreign tax-rate changes, and worldwide earnings mix.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management highlighted continued opportunities from proprietary foil technology, sensor integration, research and development, manufacturing automation, geographic cost optimization, and strategic acquisitions. The transition of the advanced-sensors business to the new Israel facility was completed in Q3, although start-up costs and production inefficiencies continued to pressure margins.
Backlog increased to $146.7 million at the end of Q3 2021 from $90.8 million at the end of Q3 2020. The company-wide book-to-bill ratio was 1.21, compared with 0.95 in the prior-year quarter. Management cautioned that backlog can be canceled or rescheduled and is not necessarily indicative of future revenue.
All facilities were open and operational as of November 12, 2021, but COVID-19-related disruption remained a risk. Other principal risks include global labor and supply-chain challenges, shortages of qualified manufacturing workers, foreign currency volatility, geopolitical and economic instability, tariffs and trade regulation, acquisition integration and synergy execution, goodwill valuation, manufacturing transfers, and potential future restructuring costs.
The filing identifies a shortage of qualified labor, particularly among manufacturing workers in the United States, Israel, and Japan, as a newly emphasized risk that could limit production, increase costs, and adversely affect results. No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective as of October 2, 2021.
Important facts for investors to verify
- Whether DTS delivers the anticipated growth and synergies after acquisition, including the effect of purchase-accounting adjustments and integration costs.
- Whether the new Israel advanced-sensors facility reaches expected utilization and margin levels after the reported transition-related inefficiencies.
- Whether labor shortages, supply-chain constraints, COVID-19 developments, and inflationary pressures affect production capacity, costs, and backlog conversion.
- Whether the elevated $146.7 million backlog and greater-than-one book-to-bill ratio translate into sustained revenue growth.
- Whether operating cash flow improves after the DTS acquisition and increased working-capital investment, particularly the $9.6 million inventory increase during the first nine months.
- Debt capacity, covenant compliance, interest-rate exposure, and the availability of cash held by foreign subsidiaries.
- The assumptions supporting goodwill and indefinite-lived intangible valuations, given the 2021 impairment charge and slower forecast growth.
- The comparability of GAAP results with management’s adjusted measures, including EBITDA, adjusted free cash flow, start-up costs, COVID-19 impacts, and acquisition-related adjustments.