Vishay Precision Group, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
VPG designs and manufactures precision foil products, force sensors, and weighing and control systems for industrial, medical, transportation, agricultural, avionics, military, and other applications. The filing covers the unaudited fiscal quarter ended March 30, 2013, compared with the quarter ended March 31, 2012.
VPG completed its acquisition of substantially all assets of George Kelk Corporation (“KELK”) on January 31, 2013, for approximately $50.0 million. KELK’s results are included from February 1, 2013, in the Weighing and Control Systems segment.
Financial Results and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $57.5 million | $55.8 million | Up 2.9% |
| Gross profit | $21.2 million | $18.9 million | Up 12.3% |
| Gross margin | 36.9% | 33.8% | Up 3.1 percentage points |
| Operating income | $2.5 million | $2.4 million | Up 7.2% |
| Operating margin | 4.4% | 4.2% | Up 0.2 percentage points |
| Net earnings attributable to VPG stockholders | $1.3 million | $1.6 million | Down 20.2% |
| Diluted EPS | $0.09 | $0.12 | Down $0.03 |
| Cash flow from operations | $(1.4) million | $4.1 million | Down $5.5 million |
| Capital expenditures | $0.8 million | $2.6 million | Down $1.8 million |
Revenue growth was primarily acquisition-driven: KELK contributed $5.5 million of revenue and $0.4 million of net earnings attributable to VPG stockholders. Excluding KELK, volume declined across the reportable segments.
- Foil Technology Products: Revenue of $24.4 million, down 12.4%; gross margin declined to 37.6% from 40.7%, principally because of lower demand in Japan, lower volume, and currency effects.
- Force Sensors: Revenue of $16.4 million, down 1.2%; gross margin improved to 26.8% from 17.9%, reflecting manufacturing efficiencies from the new India facility and lower variable and fixed costs.
- Weighing and Control Systems: Revenue of $16.7 million, up 46.1%; gross margin increased to 45.8% from 40.0%, primarily due to KELK and favorable product mix and cost savings.
SG&A expense increased to $17.8 million from $16.5 million, including $1.9 million of KELK-related SG&A. VPG also recorded $0.5 million of acquisition costs and $0.4 million of restructuring costs. Other expense was $0.6 million versus other income of $0.1 million in the prior-year quarter, largely because of a $0.4 million foreign-exchange loss. The effective tax rate decreased to 31.5% from 34.5%.
Liquidity, Cash Flow, Debt, and Balance Sheet
| Balance-sheet metric | March 30, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $64.7 million | $93.9 million |
| Total debt | $35.4 million | $11.3 million |
| Net cash | $29.3 million | $82.6 million |
| Current ratio | 4.0 to 1 | 5.8 to 1 |
| Total assets | $294.6 million | $263.2 million |
Operating cash flow was negative because of increases in accounts receivable and prepaid expenses. Investing cash flow was $(50.7) million, including $49.9 million for the KELK acquisition. Financing cash flow was $23.8 million, including $25.0 million of new term-loan borrowings.
The January 2013 amended credit agreement provides a $15.0 million secured revolving facility, a $10.0 million U.S. term facility, and a $15.0 million Canadian term facility. Term debt outstanding at quarter-end was $24.3 million. VPG was in compliance with the principal credit-agreement financial covenants, including maximum leverage of 2.5 to 1.0 and minimum fixed-charge coverage of 1.5 to 1.0.
VPG expects current cash, available credit facilities, and projected operating cash flow to meet liquidity needs for at least the next 12 months. Approximately 89% of cash was held by non-U.S. subsidiaries, which could create additional tax costs if repatriated.
Material Changes, Outlook, Risks, and Unusual Items
- Backlog increased to $63.1 million from $38.9 million in the prior quarter, mainly because of KELK. Excluding KELK, backlog was $40.6 million.
- Company-wide book-to-bill was 1.02, compared with 0.96 in the prior quarter and 1.01 in Q1 2012. Excluding KELK, Q1 2013 book-to-bill was 1.04.
- Management expects to generate “free cash” by year-end 2013, although the filing does not provide a specific forecast amount.
- Management plans additional manufacturing consolidation and expansion in India, which may require future restructuring and severance costs.
- A Japanese restructuring program covered 16 employees and was initiated in response to declining Japanese business conditions. The $0.4 million charge is expected to be paid in Q2 2013; actual costs may differ from estimates.
- KELK purchase-price allocations remain preliminary and may be adjusted. The acquisition added $24.4 million of preliminary goodwill and $19.2 million of identifiable intangible assets, creating future amortization and impairment risk.
- VPG’s Israeli subsidiary was not in compliance with certain tangible-net-worth covenants following a legal-entity merger, although the company obtained a lender waiver. Future non-compliance could result in termination of the facility and accelerated repayment.
- Key risks include weaker economic conditions, declining Japanese demand, foreign-currency volatility, acquisition integration and synergy execution, competition and technology changes, and risks associated with transferring production to lower-cost countries.
- Management stated that disclosure controls were effective at March 30, 2013, while evaluation of KELK’s impact on internal control over financial reporting remained in progress.
Important Facts for Investors to Verify
- Verify KELK’s integration progress, sustainable revenue and margin contribution, purchase-price allocation, and goodwill and intangible-asset impairment exposure.
- Monitor whether operating cash flow and expected free cash improve after the acquisition and working-capital investment.
- Review compliance with the 2013 Credit Agreement and the Israeli subsidiary’s waived covenants.
- Assess whether the sharp improvement in Force Sensors and Weighing and Control Systems margins is sustainable.
- Track demand and restructuring progress in Japan, particularly in the Foil Technology Products segment.
- Consider the concentration of cash outside the United States and potential tax costs associated with repatriation.
- Reconcile reported earnings with acquisition costs, restructuring costs, foreign-exchange losses, higher interest expense, and future amortization.