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 stress, force, weight, pressure, and current measurement applications. The filing covers the fiscal quarter and nine fiscal months ended September 29, 2012, compared with October 1, 2011. VPG reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $55.4 million | $60.0 million | $166.6 million | $181.7 million |
| Gross profit | $18.7 million | $21.2 million | $57.5 million | $64.3 million |
| Gross margin | 33.8% | 35.3% | 34.5% | 35.4% |
| Operating income | $3.1 million | $4.7 million | $9.5 million | $14.4 million |
| Operating margin | 5.6% | 7.8% | 5.7% | 7.9% |
| Net earnings attributable to VPG stockholders | $1.9 million | $3.3 million | $6.5 million | $9.6 million |
| Diluted EPS | $0.14 | $0.24 | $0.47 | $0.69 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $13.5 million | $9.7 million |
Cash and cash equivalents were $89.3 million at September 29, 2012, compared with $80.8 million at December 31, 2011. Total third-party debt was $11.5 million, consisting primarily of $10.0 million of exchangeable notes and $1.6 million of Japanese subsidiary debt. Reported net cash was $77.7 million. Current assets were $186.8 million and current liabilities were $33.6 million, producing a current ratio of 5.6 to 1.0.
Capital expenditures were $5.8 million during the first nine months of 2012, compared with $10.3 million in the prior-year period. Cash used in investing activities was $5.5 million, while financing activities used $0.2 million. Approximately 85% of cash was held by non-U.S. subsidiaries and could be subject to additional taxes if repatriated.
Material changes versus the prior comparable period
- Quarterly revenue declined 7.7%, and nine-month revenue declined 8.3%, primarily from lower sales volume and unfavorable foreign currency effects. Volume decreased in all segments, with particularly weak European demand.
- Quarterly operating income declined 34.3%, and nine-month operating income declined 33.7%. Lower volume, capacity-related inefficiencies, and higher manufacturing fixed costs reduced profitability.
- Foil Technology Products revenue declined 7.4% in the quarter and 5.7% year to date; quarterly segment gross margin fell to 38.9% from 43.1%.
- Force Sensors revenue declined 8.5% in the quarter and 7.4% year to date. Quarterly margin decreased to 20.2%, although the nine-month margin improved to 19.9% from 19.4% due to product mix and India-related cost savings.
- Weighing and Control Systems revenue declined 7.2% in the quarter and 14.7% year to date, primarily because of lower European on-board weighing revenue. Margin improved to 40.9% from 37.3% due largely to product mix.
- Quarterly SG&A declined to $15.6 million from $16.5 million, but increased as a percentage of revenue to 28.2% from 27.5%.
- The quarterly effective tax rate increased to 29.8% from 16.5%; the nine-month rate increased to 29.9% from 28.9%, reflecting geographic earnings mix and unrecognized tax benefits in certain loss jurisdictions.
- Other expense improved to $0.3 million from $0.8 million in the quarter, primarily because foreign exchange losses were lower.
Guidance, outlook, management commentary, risks, and unusual items
Management did not provide formal revenue or earnings guidance. Management reported weakening macroeconomic indicators across North America, Asia—particularly Japan—and Europe, and stated that distributors appeared to be reducing inventory before placing new orders. Third-quarter backlog was $40.1 million, down from $45.9 million in the third quarter of 2011, and the book-to-bill ratio was 0.92.
Management expects current cash, available credit facilities, and projected operating cash flow to satisfy liquidity needs for at least the next 12 months. Both the company and its Israeli subsidiary were in compliance with their debt covenants. The principal U.S. revolving facility had a $25.0 million capacity and was scheduled to terminate October 14, 2013; the Israeli facility had a $15.0 million capacity and was scheduled to terminate November 30, 2014. Neither facility had outstanding borrowings at quarter end.
VPG is consolidating manufacturing operations and expanding production in India and other lower-cost locations. Management expects future restructuring or severance costs may arise from these plans, although no restructuring expenses were recorded in the quarter or first nine months. Management also expects increased research and development spending and may pursue strategic acquisitions.
The company had requested Israeli authorities’ approval for a legal-structure reorganization. A favorable ruling could produce a tax benefit of approximately $0.7 million to $0.8 million and potentially reduce the estimated annual effective tax rate; the filing stated that a response was expected in the fourth quarter of 2012. VPG also anticipated reversal of $0.6 million to $0.8 million of unrecognized tax benefits within the following twelve months.
Key risks include continued economic weakness and reduced capital spending, customer inventory reductions, foreign exchange volatility, production-transfer and facility-consolidation execution, underutilized capacity, difficulties developing new products or integrating acquisitions, tax uncertainty, and potential covenant breaches. The company’s Israeli shekel derivative contracts ended in July 2012, and no new contracts were entered into afterward.
Most important facts for investors to verify
- Whether weak demand, distributor destocking, European exposure, and the 0.92 book-to-bill ratio persist into subsequent quarters.
- Whether gross margins recover from 33.8% as plant shutdowns, labor inefficiencies, and fixed-cost absorption pressures ease.
- The renewal or refinancing status of the $25.0 million U.S. revolving facility before its October 2013 termination date.
- The outcome and timing of the Israeli tax ruling and any resulting tax benefit or effective-rate change.
- The cash availability and tax consequences of cash held by foreign subsidiaries.
- The scale, timing, and expected savings from India-related manufacturing consolidation and any associated restructuring costs.
- The sustainability of operating cash flow and whether future capital expenditures or acquisitions reduce reported net cash.