Vishay Precision Group, Inc. — Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages for stress, force, weight, pressure, and current measurement applications. The company 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 1, 2016, compared with September 26, 2015. The financial statements are unaudited. Prior-period amounts reflect restatements for errors at an Indian subsidiary and other immaterial corrections.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net revenues | $54.5 million | $57.1 million | $169.1 million | $173.3 million |
| Gross profit | $20.3 million | $21.5 million | $61.5 million | $63.5 million |
| Gross margin | 37.2% | 37.5% | 36.4% | 36.6% |
| Operating income | $2.6 million | $(1.7) million | $5.3 million | $2.8 million |
| Net earnings attributable to VPG | $1.1 million | $(1.9) million | $3.4 million | $0.4 million |
| Diluted EPS | $0.08 | $(0.15) | $0.25 | $0.03 |
| Cash flow from operations | Not separately provided | Not separately provided | $6.5 million | $5.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $6.3 million | $7.5 million |
Q3 operating margin was 4.8%, compared with negative 3.0% in the prior-year quarter. Nine-month operating margin was 3.1%, compared with 1.6% in the prior-year period. Management-reported free cash was $0.5 million for the nine months, defined as operating cash flow less capital expenditures plus asset-sale proceeds.
At October 1, 2016, cash and equivalents were $56.1 million, compared with $62.6 million at December 31, 2015. Total third-party debt was $37.2 million, versus $33.7 million at year-end, producing reported net cash of $18.9 million. Current assets were $161.1 million and current liabilities were $40.8 million, resulting in a current ratio of 3.9 to 1.0.
Material changes versus the prior comparable period
- Q3 revenue decreased 4.7%; nine-month revenue decreased 2.4%. Volume declines were partly offset by acquisition-related revenue and modest pricing benefits.
- Foil Technology Products revenue declined 11.7% in Q3 and 3.4% year to date, primarily because of lower test-and-measurement and precision-weighing demand. Its Q3 gross margin fell to 36.2% from 42.0%.
- Force Sensors revenue increased 4.5% in Q3 and was flat year to date. Gross margin improved to 31.0% from 21.0% in Q3, benefiting from headcount reductions, plant closures, manufacturing relocations, and higher volume.
- Weighing and Control Systems revenue declined 1.0% in Q3 and 3.0% year to date. Results were affected by lower process-weighing and steel activity and unfavorable British pound and Canadian dollar effects.
- Q3 operating results improved substantially because the prior-year period included a $4.9 million goodwill and indefinite-lived-intangible impairment charge. The 2016 quarter included $0.7 million of restructuring costs and $1.1 million of strategic-alternative evaluation costs.
- SG&A declined to $16.9 million in Q3 from $17.8 million, as personnel savings and lower compensation costs more than offset acquisition-related expenses and strategic-alternative fees.
Guidance, outlook, commentary, risks, and unusual items
- Management expects approximately $6.0 million of annual savings from the global cost-reduction program; approximately $5.3 million had been realized by October 1, 2016. Full implementation was expected by the end of the second quarter of 2017.
- The Costa Rica facility closure was substantially complete in Q3; management expected approximately $0.7 million of annual savings from that action. Additional manufacturing consolidation could generate further restructuring and severance costs.
- Management stated that cash, available credit, and projected operating cash flow should satisfy liquidity needs for at least the next 12 months. The company was in compliance with its credit-agreement covenants at October 1, 2016.
- The $30.0 million secured revolving facility had $9.0 million outstanding at October 1, 2016, and the credit agreement terminates December 30, 2020. The agreement restricts cash dividends and requires compliance with financial ratios.
- VPG acquired Pacific Instruments on April 6, 2016 for $10.7 million. The preliminary allocation included $6.5 million of goodwill. Stress-Tek, acquired December 30, 2015, had a preliminary purchase price of $20.1 million.
- Management is evaluating strategic alternatives to enhance stockholder value; the filing provides no assurance that any transaction or other alternative will result.
- Foreign currency remains a risk. Exchange rates reduced Q3 revenue by approximately $0.5 million and reduced nine-month revenue by approximately $1.8 million versus the comparable periods.
- Approximately 88% of cash was held by non-U.S. subsidiaries, which may create additional tax costs if repatriated.
- Goodwill impairment remains a risk, particularly if weakness in the steel industry continues. Other disclosed risks include acquisition integration, product development, competition, ERP implementation, production transfers, labor issues, and economic conditions.
- The Karmiel, Israel facility and related assets, totaling $2.0 million, were classified as held for sale.
- The company adopted guidance requiring debt issuance costs to be presented as a deduction from debt; the filing states that the adoption had no material impact.
Important facts for investors to verify
- Whether volume weakness in Foil Technology Products and Weighing and Control Systems persists and whether Force Sensors margin gains are sustainable.
- The timing, remaining cost, and realized savings from restructuring and manufacturing relocations.
- Final purchase-accounting valuations and the operating contribution of Pacific and Stress-Tek.
- Compliance with debt covenants, revolver utilization, debt repayment requirements, and the effect of higher interest expense.
- The outcome and costs of the strategic-alternatives review.
- Potential goodwill impairment if steel-market weakness or other demand declines continue.
- Availability and tax consequences of the company’s predominantly foreign-held cash.
- The impact of foreign exchange movements, particularly the British pound and Canadian dollar, on revenue and margins.