Vishay Precision Group, Inc. — Form 10-Q Summary
Business context and reporting period
Vishay Precision Group designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and six fiscal months ended June 27, 2015, compared primarily with June 28, 2014. Results are unaudited and prior-period amounts were restated for immaterial errors, including incorrect functional-currency accounting at an Indian subsidiary.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenues | $59.5 million | $65.2 million | $116.1 million | $126.4 million |
| Gross profit | $21.0 million | $24.9 million | $42.0 million | $46.6 million |
| Gross margin | 35.3% | 38.2% | 36.2% | 36.9% |
| Operating income | $2.3 million | $5.0 million | $4.5 million | $7.2 million |
| Net earnings attributable to VPG stockholders | $1.5 million | $3.6 million | $2.3 million | $4.8 million |
| Diluted EPS | $0.11 | $0.26 | $0.17 | $0.34 |
- Revenue declined 8.7% in the quarter and 8.1% year to date. Foreign-currency effects accounted for approximately 7.7 percentage points of the quarterly decline and 7.5 percentage points year to date; volume also declined modestly.
- SG&A decreased to $18.4 million in the quarter and $37.1 million year to date, although SG&A increased as a percentage of revenue to 30.9% and 32.0%, respectively.
- Foreign exchange reduced gross margins by approximately $1.8 million in the quarter and $3.4 million year to date. Force Sensors and Weighing and Control Systems experienced the most significant margin pressure.
- Cash used in operating activities was $49 thousand in the first six months, compared with $4.9 million of cash provided in the prior-year period. Capital expenditures were $5.0 million versus $3.4 million.
- Cash and cash equivalents were $65.5 million at June 27, 2015, compared with $79.6 million at December 31, 2014. Total debt was $21.0 million, producing reported net cash of $44.5 million.
- The company repurchased 433,083 shares for $6.1 million during the first six months and 352,654 shares during the second quarter.
Material changes versus the prior comparable period
- All three segments reported lower year-over-year quarterly revenue: Foil Technology Products decreased 6.7% to $26.2 million, Force Sensors decreased 7.9% to $15.6 million, and Weighing and Control Systems decreased 12.1% to $17.7 million.
- Quarterly segment gross margins were 39.6% for Foil Technology Products, 19.0% for Force Sensors, and 43.6% for Weighing and Control Systems, compared with 40.5%, 22.7%, and 48.2%, respectively.
- Backlog declined to $54.6 million from $65.2 million a year earlier, and the book-to-bill ratio fell to 0.91 from 0.98. The company’s steel-industry business remained affected by excess capacity, particularly in China.
- Restructuring costs increased to $304 thousand in the quarter and $382 thousand year to date, compared with $7 thousand and $331 thousand, respectively. The programs primarily involved employee terminations at facilities in Asia and the United Kingdom.
- The effective tax rate declined to 16.5% for the quarter and 17.2% year to date, compared with 21.0% in both prior-year periods, reflecting geographic earnings mix and foreign-exchange-related tax benefits.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that it expected to begin generating free cash during the remaining six months of fiscal 2015, but the filing does not provide formal revenue or earnings guidance.
- Management expects continued cost reduction, manufacturing transfers, facility consolidation, automation, and product development. Additional restructuring and severance costs are expected in future periods.
- The company was not in compliance with the fixed-charges coverage covenant under its credit agreement during the second quarter. Lenders granted a waiver on July 31, 2015, and a separate waiver on August 18, 2015, extended the deadline for required financial statements and compliance certification to September 11, 2015.
- Borrowings under the credit agreement were classified as current because management expected possible future noncompliance. The company was pursuing an amendment and stated it believed available cash could repay the outstanding credit-agreement borrowings, but gave no assurance that an amendment would be completed.
- Management concluded that disclosure controls were ineffective at June 27, 2015 because two material weaknesses remained: review controls over goodwill impairment calculations and controls over functional-currency accounting at the Indian subsidiary. Remediation was not complete, although completion was expected during 2015.
- Approximately 84% of cash was held by non-U.S. subsidiaries, and repatriation could generate additional taxes. The company remains exposed to foreign-currency movements, economic weakness, customer order cancellations, ERP implementation issues, manufacturing-transfer risks, acquisition integration, and product-development risks.
- In July 2015, the company initiated an additional U.S. cost-reduction program involving 14 production employees and approximately $0.1 million of expected restructuring costs. It also repurchased an additional 184,584 shares from June 28 through September 3, 2015.
Investor verification points
- Verify the status and terms of the credit-agreement amendment, covenant compliance, and any subsequent lender waivers.
- Assess whether the company remediated the two material weaknesses and whether further restatements or control deficiencies were identified.
- Monitor backlog, book-to-bill trends, segment margins, and demand in the Force Sensors, Weighing and Control Systems, and steel-related markets.
- Evaluate the sustainability of operating cash flow and the effect of working-capital requirements and capital expenditures on free cash generation.
- Track foreign-currency exposure, the geographic location of cash, and potential tax costs of repatriation.
- Reconcile the company’s non-GAAP adjusted earnings and free-cash measures to GAAP results and review the assumptions underlying those adjustments.