Vishay Precision Group, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its three reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the 13-week fiscal quarter and six fiscal months ended June 27, 2020, compared with periods ended June 29, 2019. Results were materially affected by the COVID-19 pandemic, particularly production restrictions at the company’s Force Sensors facility in India.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $59.1 million | $70.9 million | $126.8 million | $147.4 million |
| Gross profit | $23.1 million | $28.6 million | $48.2 million | $61.7 million |
| Gross margin | 39.1% | 40.4% | 38.0% | 41.8% |
| Operating income | $4.0 million | $8.1 million | $8.6 million | $20.7 million |
| Operating margin | 6.7% | 11.4% | 6.8% | 14.0% |
| Net earnings attributable to VPG stockholders | $1.8 million | $5.6 million | $5.1 million | $13.8 million |
| Diluted EPS | $0.13 | $0.41 | $0.37 | $1.02 |
- Operating cash flow for the six months was $16.7 million, compared with $17.0 million in the prior-year period.
- Capital expenditures were $11.0 million, versus $5.8 million in the prior-year period. Management reported adjusted free cash flow of $6.1 million.
- Cash and cash equivalents were $87.2 million at June 27, 2020, compared with $86.9 million at December 31, 2019.
- Total debt was $40.7 million, compared with $44.5 million at year-end 2019. Management reported net cash of $46.5 million.
- The current ratio was 4.5 to 1.0, compared with 2.4 to 1.0 at December 31, 2019. Approximately 93% of cash was held by non-U.S. subsidiaries.
- The effective tax rate was 28.1% for Q2 and 30.9% for the first six months, compared with 26.4% and 26.9%, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Q2 revenue declined 16.5%; six-month revenue declined 13.9%. The decreases were driven primarily by lower volume, partly offset by acquisitions and modest pricing benefits.
- Force Sensors revenue fell 45.5% in Q2 and 28.6% year to date. Its Q2 gross margin fell to 11.6% from 26.9%, and segment operating income was a loss of $1.0 million versus income of $2.0 million.
- Foil Technology Products revenue declined 3.7% in Q2 and 11.1% year to date, with Q2 gross margin declining to 41.8% from 43.6%.
- Weighing and Control Systems revenue declined 14.3% in Q2 and 7.4% year to date, although Q2 gross margin improved to 47.6% from 45.6%, helped by product mix and the Dynamic Systems acquisition.
- SG&A declined to $18.6 million from $19.9 million in Q2 and to $38.9 million from $40.3 million year to date, primarily due to lower travel, personnel, commissions, and professional fees.
- Q2 2020 included $0.5 million of restructuring costs; Q2 2019 included $0.6 million of executive severance costs. Six-month 2020 restructuring costs were $0.6 million.
- Other expense increased in Q2 to $1.5 million from $0.5 million, largely due to a $1.2 million foreign-exchange loss.
- The company refinanced its prior facilities in March 2020 with a secured $75.0 million revolving credit facility, terminating March 20, 2025. Borrowings outstanding at quarter-end were $41.0 million.
- During Q2, VPG recognized a $14.8 million operating lease right-of-use asset and liability for a new Israeli manufacturing facility with a 12.5-year lease term.
Guidance, outlook, commentary, and risks
- All facilities were operating without government-imposed limitations as of July 1, 2020, although some employees continued to work remotely.
- Management expected Q3 Force Sensors revenue to remain approximately $3 million to $4 million below pre-COVID run-rate levels, with operating profit adversely affected by approximately $1.0 million to $1.5 million.
- Management stated that the pandemic’s duration and economic effects remain uncertain and could continue to adversely affect demand, manufacturing, supply chains, and financial results.
- Management expected cash, credit facilities, and projected operating cash flow to meet liquidity needs for at least the next 12 months. The company was in compliance with its interest coverage and leverage covenants at June 27, 2020.
- The credit agreement restricts cash dividends and is secured by substantially all assets, excluding real estate, of the company and specified guarantors.
- Other risks include foreign-currency volatility, changes in tariffs and trade rules, acquisition integration, goodwill impairment, production transfers and restructuring, technology and competition, tax exposures, and political, economic, health, and military instability in operating regions.
- No material changes to previously reported risk factors were disclosed, and no legal proceedings were reported.
Facts investors should verify
- Whether Force Sensors production and margins recovered as projected after the Indian facility returned to unrestricted operations.
- The pace and sustainability of revenue recovery across transportation, industrial weighing, and test-and-measurement markets.
- Compliance with the secured credit facility’s financial covenants and the availability of unused revolving capacity.
- Whether elevated capital spending and the new Israeli facility generate expected capacity, efficiency, and growth benefits.
- The effect of foreign-currency movements, COVID-19 disruption, restructuring actions, and potential goodwill impairment on future earnings and cash flow.
- The comparability of management’s non-GAAP adjusted gross profit, operating income, earnings, and free cash flow measures with GAAP results and peer-company measures.