Business Context and Reporting Period
Vishay Precision Group, Inc. designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. The company reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems. This unaudited Form 10-Q covers the fiscal quarter ended March 31, 2018, compared with the quarter ended April 1, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $73.1 million | $59.8 million | 22.3% increase |
| Gross profit | $28.5 million | $22.5 million | 26.6% increase |
| Gross margin | 39.0% | 37.7% | Up 1.3 percentage points |
| Operating income | $8.2 million | $3.9 million | 107.5% increase |
| Operating margin | 11.2% | 6.6% | Up 4.6 percentage points |
| Net earnings attributable to VPG | $5.0 million | $2.0 million | 150.0% increase |
| Diluted EPS | $0.37 | $0.15 | Increase of $0.22 |
| Operating cash flow | $1.8 million | $2.9 million | Decrease of $1.1 million |
| Capital expenditures | $4.3 million | $2.0 million | Increase of $2.3 million |
Revenue growth reflected a 16.4% volume increase and a 6.2% favorable foreign-currency effect, partly offset by a 0.3% decline in average selling prices. SG&A increased to $20.3 million from $18.0 million, primarily due to higher personnel costs and approximately $1.0 million of foreign-currency effects.
Segment Performance
- Foil Technology Products: Revenue of $34.2 million, up 23.0%; gross margin was 42.8%, versus 41.4%.
- Force Sensors: Revenue of $19.2 million, up 24.3%; gross margin was 27.3%, versus 23.9%.
- Weighing and Control Systems: Revenue of $19.7 million, up 19.1%; gross margin was 43.9%, versus 44.3%, mainly due to product mix.
Liquidity, Cash, and Debt
- Cash and cash equivalents were $73.7 million at March 31, 2018, compared with $74.3 million at December 31, 2017.
- Total debt was $31.6 million, compared with $32.4 million at year-end. Management reported net cash of $42.1 million, a non-GAAP measure.
- Free cash, defined by management as operating cash flow less capital expenditures plus asset-sale proceeds, was negative $2.4 million.
- The current ratio was 3.8 to 1.0, compared with 3.7 to 1.0 at December 31, 2017.
- Operating cash flow was reduced by increases in accounts receivable, inventories, and prepaid expenses. The company used $4.2 million in investing activities, primarily for capital expenditures.
- The company believes cash, credit facilities, and projected operating cash flow will meet liquidity needs for at least the next 12 months. It was in compliance with its credit-agreement covenants at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased $13.3 million, supported by higher volume across all three segments and favorable currency translation.
- Gross margin improved from 37.7% to 39.0%, primarily from higher volume in Foil Technology Products and Force Sensors.
- Operating income more than doubled, benefiting from revenue growth, margin expansion, and the absence of the $0.6 million restructuring charge recorded in Q1 2017.
- The effective tax rate declined to 30.1% from 32.4%, primarily due to fewer discrete tax items related to loss entities for which no tax benefit was recognized.
- Capital expenditures increased substantially, causing free cash to be negative despite positive operating cash flow.
- The remaining $2.8 million of exchangeable notes was converted into 123,808 common shares in February 2018; all exchangeable notes were canceled.
- Backlog increased to $93.9 million from $61.4 million at the end of Q1 2017, while the consolidated book-to-bill ratio was 1.05.
Outlook, Commentary, Risks, and Unusual Items
Management cited continued opportunities from precision measurement, advanced sensors, automation, product development, and potential strategic acquisitions. The company is also pursuing manufacturing transfers, facility consolidation, and other cost-reduction initiatives. No formal quantitative revenue or earnings guidance is provided in the filing.
- Management expects restructuring, severance, or facility-related costs could occur in future periods as additional manufacturing operations are consolidated or relocated.
- The company had not completed its analysis of all effects of the 2017 Tax Cuts and Jobs Act, including GILTI. Additional tax adjustments could be material to income tax expense, with completion expected in the fourth quarter of 2018.
- Approximately 92% of cash was held by non-U.S. subsidiaries at March 31, 2018, which may create tax and repatriation considerations.
- Key disclosed risks include foreign-currency volatility, acquisition integration, new product development, changing technology and competition, cost-reduction execution, production transfers, customer order cancellations or rescheduling, and potential goodwill impairment.
- The company reported a continuing material weakness in internal control over financial reporting. Disclosure controls and procedures were therefore deemed ineffective as of March 31, 2018. Remediation efforts were underway and expected to continue through multiple reporting periods in 2018.
- The company adopted ASC 606 using the modified retrospective method with no cumulative-effect adjustment and stated that adoption did not materially affect revenue timing or amounts.
- No material legal proceedings or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether revenue and backlog growth continued and whether the 1.05 book-to-bill ratio translated into subsequent shipments.
- Whether higher volume-driven margins were sustained, particularly in Force Sensors, and whether Weighing and Control Systems mix pressure persisted.
- The final tax effects of the 2017 Tax Act and the company’s eventual GILTI accounting policy.
- Progress toward remediation of the material internal-control weakness and whether any additional reporting issues arise.
- Future restructuring and severance costs associated with manufacturing relocations or consolidations.
- Conversion of operating cash flow into free cash after elevated capital expenditures and working-capital needs.
- Compliance with credit-agreement covenants and the availability and cost of revolving debt.