Vishay Precision Group, Inc. — 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. Its reporting segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and nine fiscal months ended September 29, 2018, compared with September 30, 2017.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenues | $75.5 million | $62.8 million | $222.8 million | $184.9 million |
| Gross profit | $30.6 million | $24.3 million | $90.5 million | $71.5 million |
| Gross margin | 40.5% | 38.6% | 40.6% | 38.7% |
| Operating income | $10.6 million | $5.5 million | $30.1 million | $15.3 million |
| Operating margin | 14.1% | 8.8% | 13.5% | 8.3% |
| Net earnings attributable to VPG | $7.5 million | $4.3 million | $20.2 million | $9.9 million |
| Diluted EPS | $0.56 | $0.32 | $1.50 | $0.73 |
| Operating cash flow | Not separately provided | Not separately provided | $18.0 million | $14.8 million |
Quarterly revenue increased 20.2%, driven primarily by a 20.9% increase in volume. Nine-month revenue increased 20.5%, driven by volume growth and favorable foreign-exchange effects. The effective tax rate declined to 24.7% in the quarter and 27.1% year to date, from 34.1% and 30.7%, respectively.
At September 29, 2018, cash and cash equivalents were $78.6 million, total debt was $27.9 million, and management-defined net cash was $50.7 million. Current assets were $209.8 million versus current liabilities of $51.3 million, producing a current ratio of 4.1 to 1.0. Capital expenditures were $10.0 million year to date, and management-defined free cash was $8.2 million.
Segment Results and Material Changes
- Foil Technology Products: Q3 revenue increased 22.5% to $35.9 million; gross margin increased to 43.9% from 41.7%.
- Force Sensors: Q3 revenue increased 6.1% to $17.6 million, but gross margin declined to 25.9% from 28.6%, primarily due to tariffs on goods from China, wage increases, and inventory reduction.
- Weighing and Control Systems: Q3 revenue increased 30.1% to $22.0 million; gross margin increased to 46.6% from 43.1%, primarily due to higher volume.
- Overall Q3 gross margin declined sequentially from 42.3% in Q2 2018 to 40.5%, reflecting manufacturing inefficiencies, unfavorable product mix, inventory reduction, and tariffs.
- Backlog was $99.4 million at quarter-end, down from $101.0 million at June 30, 2018 but up from $76.2 million at September 30, 2017. The quarterly book-to-bill ratio was 0.98.
- Restructuring costs decreased to $0.2 million in Q3 and $0.3 million year to date, compared with $0.4 million and $1.3 million in the respective 2017 periods.
- Debt declined from $32.4 million at December 31, 2017 to $27.9 million. The remaining $2.8 million of exchangeable notes was converted into 123,808 common shares and canceled in February 2018.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash, credit facilities, and projected operating cash flow should fund liquidity needs for at least the next 12 months. The company was in compliance with its credit agreement covenants at September 29, 2018. The revolving facility provides $30.0 million of capacity, subject to the agreement’s terms, and the credit agreement terminates December 30, 2020.
Management expects continued investment in research and development, automation, manufacturing transfers, acquisitions, and cost reduction. Further consolidation or relocation of manufacturing operations could result in additional restructuring and severance costs.
Key risks include tariffs and other trade restrictions, particularly on Chinese imports; foreign-currency volatility; manufacturing inefficiencies; acquisition integration and synergy execution; product development and technology changes; customer order cancellations or rescheduling; and potential goodwill impairment.
The company had not completed its analysis of all effects of the 2017 Tax Cuts and Jobs Act, including GILTI. Final tax adjustments could materially affect income tax expense. Q3 2017 results included a $1.5 million net lease-termination gain that did not recur in 2018.
Management disclosed a material weakness in internal control over financial reporting that continued from December 31, 2017 through September 29, 2018. Remediation was in progress and was expected to continue through the fourth quarter of 2018; disclosure controls and procedures were therefore concluded to be ineffective at quarter-end.
Important Facts for Investors to Verify
- Whether tariffs, manufacturing inefficiencies, and unfavorable product mix continue to pressure Force Sensors and consolidated margins.
- Whether the book-to-bill ratio below 1.0 signals weaker near-term demand despite the elevated backlog.
- The final accounting impact of the 2017 Tax Act and the company’s eventual GILTI accounting policy.
- Completion and effectiveness testing of the remediation plan for the material weakness in internal controls.
- Future restructuring charges and the financial benefits of manufacturing transfers, automation, and cost reduction programs.
- Cash availability by jurisdiction, given that approximately 90% of cash was held by non-U.S. subsidiaries at quarter-end.