Vishay Precision Group, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
VPG designs, manufactures, and markets precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. The filing covers the unaudited fiscal quarter ended March 28, 2020, compared with the quarter ended March 30, 2019. VPG reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenues | $67.7 million | $76.5 million | Down 11.5% |
| Gross profit | $25.1 million | $33.1 million | Down 24.2% |
| Gross margin | 37.0% | 43.2% | Down 6.2 percentage points |
| Operating income | $4.6 million | $12.6 million | Down 63.1% |
| Operating margin | 6.9% | 16.5% | Down 9.6 percentage points |
| Net earnings attributable to VPG stockholders | $3.3 million | $8.2 million | Down 59.8% |
| Diluted EPS | $0.24 | $0.61 | Down $0.37 |
| Cash flow from operations | $6.3 million | $8.1 million | Down $1.8 million |
| Capital expenditures | $3.3 million | $3.3 million | Comparable |
Revenue declined primarily because of lower volume across all segments. Reported adjusted gross profit was $25.6 million, adjusted operating income was $5.3 million, adjusted net earnings attributable to VPG stockholders were $4.0 million, and adjusted diluted EPS was $0.29. These are non-GAAP measures.
Segment performance
| Segment | Q1 2020 revenue | Year-over-year change | Q1 2020 gross margin |
|---|---|---|---|
| Foil Technology Products | $30.5 million | Down 17.7% | 36.7% |
| Force Sensors | $14.7 million | Down 12.2% | 24.3% |
| Weighing and Control Systems | $22.5 million | Down 1.0% | 45.7% |
Company-wide backlog increased to $94.3 million from $90.9 million at year-end 2019, and the book-to-bill ratio was 1.08. Management cautions that backlog may be canceled or rescheduled and is not necessarily indicative of future revenue.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $82.7 million at March 28, 2020, compared with $86.9 million at December 31, 2019.
- Total debt was $40.7 million, including $41.0 million of revolving debt and $0.1 million of other debt, net of $0.4 million of deferred financing costs. Net cash was $42.0 million.
- Cash decreased by $4.2 million during the quarter, including $4.6 million used in financing activities and a $2.5 million unfavorable foreign-exchange effect.
- Adjusted free cash flow, as defined by VPG as operating cash flow less capital expenditures and asset-sale proceeds, was $3.0 million.
- The current ratio was 4.4 to 1.0, versus 2.4 to 1.0 at December 31, 2019. Approximately 95% of cash was held by non-U.S. subsidiaries.
- On March 20, 2020, VPG refinanced its prior facilities with a secured $75.0 million revolving credit facility, expandable by up to $25.0 million subject to conditions, maturing March 20, 2025. The facility includes financial covenants and restricts cash dividends.
- Management stated that cash, available credit, and expected operating cash flow should satisfy liquidity needs for at least the next 12 months. VPG was in compliance with its debt covenants at March 28, 2020.
Material changes versus the prior comparable period
- Revenue and profitability declined substantially, primarily due to lower volume, unfavorable product mix, foreign-exchange effects, inventory reductions, and lower export grants.
- Gross margin fell in all three segments. SG&A declined slightly to $20.3 million but increased to 30.0% of revenue from 26.7%.
- The effective tax rate increased to 32.3% from 27.2%, primarily due to the mix of worldwide income.
- Other income improved by $1.5 million, largely because of a $0.9 million foreign-exchange gain versus a $0.7 million loss in the prior-year quarter.
- VPG recorded $0.1 million of restructuring costs and $0.5 million of acquisition purchase-accounting adjustments related to DSI inventory.
- The November 2019 acquisition of Dynamic Systems Inc. added revenue to Weighing and Control Systems but did not prevent that segment’s revenue from declining 1.0% year over year.
- Accumulated other comprehensive loss increased by $5.5 million, primarily from foreign-currency translation losses.
Guidance, outlook, commentary, and risks
VPG did not provide broad full-year financial guidance. Management stated that the COVID-19 pandemic had already adversely affected results and was expected to continue affecting operations, demand, supply chains, staffing, transportation, and customer purchasing.
- The Tianjin, China force-sensor facility was closed for three weeks and reopened in February 2020.
- The India force-sensor facility operated with a significantly reduced workforce beginning in late March. Partial operations resumed May 4, 2020, and management expected full reopening on May 17, 2020, subject to government action.
- Assuming full reopening on May 17, management expected Q2 2020 Force Sensors revenue to be reduced by $5 million to $7 million and operating profit to be adversely affected by approximately $3.5 million. A delayed reopening could cause additional adverse effects.
- Management expected at least the second quarter’s Force Sensors and Weighing and Control Systems results to be negatively affected, with softer demand particularly in transportation and industrial weighing.
- VPG reduced hiring, adjusted salary programs, limited discretionary spending, and reduced planned capital investment. It could not predict the duration or total magnitude of the pandemic’s effect.
- Key risks include additional facility or customer closures, supply-chain disruption, foreign-exchange volatility, economic deterioration, covenant compliance, acquisition integration, restructuring execution, tariffs and trade restrictions, and potential goodwill impairment.
Important facts for investors to verify
- Whether the India facility fully reopened as expected and whether the disclosed Q2 Force Sensors revenue and operating-profit impacts were realized.
- Subsequent revenue, backlog, book-to-bill, and margin trends by segment, particularly in transportation, industrial weighing, and test and measurement.
- Availability under the $75.0 million revolving facility, covenant headroom, borrowing costs, and any additional debt or liquidity actions.
- The pace of cash generation, capital spending reductions, and the location and repatriation constraints of VPG’s cash balances.
- Whether COVID-19 conditions, foreign-currency movements, or weaker demand require goodwill or other asset impairment testing.
- Integration benefits and purchase-accounting effects associated with the Dynamic Systems acquisition.