Vishay Precision Group, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision sensors, sensor-based measurement systems, specialty resistors, and strain gages. Its three segments are Foil Technology Products, Force Sensors, and Weighing and Control Systems. The filing covers the fiscal quarter and nine fiscal months ended September 26, 2015, compared with September 27, 2014.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenues | $57.1 million | $63.4 million | $173.3 million | $189.8 million |
| Gross profit | $21.5 million | $23.7 million | $63.5 million | $70.3 million |
| Gross margin | 37.5% | 37.3% | 36.6% | 37.0% |
| Operating income (loss) | $(1.7) million | $3.9 million | $2.8 million | $11.1 million |
| Net earnings attributable to VPG | $(1.9) million | $3.2 million | $0.4 million | $8.0 million |
| Diluted EPS | $(0.15) | $0.23 | $0.03 | $0.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $5.3 million | $12.5 million |
Q3 gross margin improved modestly despite lower revenue. Nine-month SG&A was $54.9 million, or 31.7% of revenue, versus $58.7 million, or 30.9%, in the prior-year period. The reported effective tax rate was 13.5% for Q3 and 32.9% year to date; excluding impairment-related effects, management reported rates of 24.9% and 21.0%, respectively.
At September 26, 2015, cash and cash equivalents were $63.2 million, down from $79.6 million at December 31, 2014. Total debt was $19.0 million, down from $22.8 million, resulting in reported net cash of $44.2 million. The current ratio was 4.0 to 1.0. Approximately 86% of cash was held by non-U.S. subsidiaries and could incur additional taxes if repatriated.
Material changes versus the prior comparable period
- Q3 revenue declined 9.9%; nine-month revenue declined 8.7%. Foreign currency effects reduced Q3 revenue by 6.9 percentage points and nine-month revenue by 7.3 percentage points.
- Force Sensors revenue declined 16.6% in Q3 and 10.7% year to date, primarily because of weaker volumes and unfavorable currency effects. Its Q3 gross margin fell to 21.0% from 22.8%.
- Weighing and Control Systems revenue declined 16.3% in Q3 and 13.8% year to date, reflecting currency effects, lower volume, unfavorable mix, and weakness in the steel industry, particularly in China. Its Q3 gross margin was 45.4%, versus 45.9%.
- Foil Technology Products revenue was broadly stable in Q3, down 1.2%, while its gross margin improved to 42.0% from 40.8%.
- The company recorded a $4.9 million non-cash impairment charge, including approximately $4.7 million for goodwill and $0.2 million for indefinite-lived trade names, related to the Weighing and Control Systems reporting unit.
- Restructuring costs increased to $0.5 million in Q3 and $0.8 million year to date, versus $0.1 million and $0.5 million, respectively, in the prior-year periods.
- Foreign exchange losses increased to $0.4 million in Q3 and $1.7 million year to date. Accumulated other comprehensive loss increased to $31.3 million, principally due to currency translation.
- Cash flow from operations fell to $5.3 million year to date. Capital expenditures were $7.5 million, debt repayments were $3.8 million, and share repurchases totaled $8.7 million for 617,667 shares.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that current cash, credit facilities, and projected operating cash flow should be sufficient to meet liquidity needs for at least the next 12 months. Management also expected to generate free cash during the remaining three months of 2015, although the company did not generate free cash year to date.
Backlog declined to $52.2 million from $60.2 million a year earlier, and the Q3 company-wide book-to-bill ratio was 0.97. Management cautioned that backlog may be canceled or rescheduled and is not necessarily indicative of future revenue.
The steel industry slowdown and excess capacity, particularly in China, contributed to the impairment charge and weaker Weighing and Control Systems results. Management plans continued cost reduction, manufacturing transfers, automation, product development, and possible strategic acquisitions, but these initiatives may require additional restructuring and severance costs.
In October 2015, the credit agreement was amended to add a minimum liquidity covenant as an alternative to the fixed charges coverage ratio, effective September 26, 2015. VPG reported compliance with its amended covenants at quarter-end. October restructuring charges totaled approximately $0.5 million and were expected to be paid in Q4 2015.
Material risks include foreign currency volatility, economic and industry weakness, steel-sector conditions, customer cancellations or order delays, acquisition integration, product development, ERP implementation, cost-reduction execution, labor and legal issues, and potential covenant noncompliance. Management concluded that disclosure controls were not effective because two material weaknesses in internal control over financial reporting remained unresolved: goodwill impairment review controls and foreign-currency accounting controls at an Indian subsidiary. Remediation was expected in Q4 2015 but had not been completed at the filing date.
Important facts for investors to verify
- Completion of the goodwill impairment measurement and whether the estimated $4.7 million charge was subsequently adjusted.
- Progress and testing of remediation for the two identified material weaknesses in internal control.
- Compliance with the amended credit agreement covenants and minimum liquidity requirements.
- Trend in steel-industry demand, China exposure, backlog, and book-to-bill performance.
- Whether operating cash flow and free cash generation improved after Q3 while capital expenditures and restructuring spending continued.
- Effects of foreign exchange rates and the tax cost of repatriating foreign-held cash.
- Continuation, scale, and valuation impact of the share repurchase program.