Vishay Precision Group, Inc. — Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision foil technology products, force sensors, and weighing and control systems for industrial, commercial, medical, transportation, aerospace, and other applications. The filing covers the fiscal quarter and six fiscal months ended June 29, 2013, compared with the periods ended June 30, 2012.
VPG completed its acquisition of substantially all assets of George Kelk Corporation (“KELK”) on January 31, 2013, for approximately $49.0 million. KELK’s results are included in the Weighing and Control Systems segment beginning February 1, 2013.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenues | $62.8 million | $55.3 million | $120.3 million | $111.2 million |
| Gross profit | $21.6 million | $19.9 million | $41.5 million | $38.7 million |
| Gross margin | 34.3% | 35.9% | 34.5% | 34.8% |
| Operating income | $2.8 million | $4.1 million | $4.1 million | $6.5 million |
| Operating margin | 4.4% | 7.4% | 3.4% | 5.8% |
| Net earnings attributable to VPG stockholders | $1.3 million | $3.0 million | $1.7 million | $4.6 million |
| Diluted EPS | $0.09 | $0.21 | $0.12 | $0.33 |
- Q2 revenue increased 13.6%, while six-month revenue increased 8.2%. The increase was driven primarily by KELK, partly offset by lower volumes across existing segments and adverse currency effects.
- Reported gross margin declined because KELK purchase-accounting adjustments increased costs of products sold by $2.3 million in the quarter and $3.5 million year to date. Excluding those adjustments, management reported gross margins of 37.9% for Q2 and 37.4% for the six-month period.
- SG&A increased to $18.6 million in Q2 from $15.8 million, primarily due to KELK. SG&A represented 29.5% of revenue versus 28.5% in the prior-year quarter.
- Other expense was $1.2 million in Q2 versus other income of $39 thousand in the prior-year period, including an $803 thousand foreign-exchange loss. Interest expense increased to $298 thousand from $69 thousand due primarily to acquisition-related borrowing.
- The effective tax rate was 18.5% in Q2 and 25.2% for six months, compared with 27.2% and 30.0%, respectively, in the prior-year periods. The change primarily reflected geographic earnings mix and discrete tax items.
Segment performance
| Segment | Q2 2013 revenue | Change versus Q2 2012 | Q2 2013 gross margin |
|---|---|---|---|
| Foil Technology Products | $24.5 million | (7.8%) | 38.1% |
| Force Sensors | $16.1 million | (6.3%) | 20.5% |
| Weighing and Control Systems | $22.2 million | 92.2% | 40.1% |
Weighing and Control Systems benefited substantially from KELK, which contributed $10.5 million of Q2 revenue and $16.0 million for the six-month period, but generated net losses attributable to VPG stockholders of $152 thousand and $956 thousand, respectively.
Cash flow, debt, and liquidity
- Operating cash flow was $4.0 million for the six months, down from $6.2 million in the prior-year period.
- Capital expenditures were $1.8 million, compared with $4.2 million. Management-defined free cash was $2.2 million.
- Cash used for the KELK acquisition was $48.9 million. Financing activities provided $23.0 million, including $25.0 million of term-loan proceeds.
- Cash and cash equivalents declined to $68.2 million from $93.9 million at December 31, 2012. Approximately 91% of cash was held by non-U.S. subsidiaries, and repatriation could create additional taxes.
- Total debt was $34.6 million, versus $11.3 million at year-end 2012. Debt consisted primarily of $23.5 million of term loans and $10.0 million of exchangeable notes. Net cash was $33.6 million versus $82.6 million at year-end.
- The current ratio was 4.2 to 1.0, compared with 5.8 to 1.0 at December 31, 2012. Management believes cash, available credit facilities, and expected operating cash flow will meet liquidity needs for at least the next 12 months.
Material changes, outlook, and risks
- Backlog increased to $59.4 million from $38.9 million at year-end 2012, primarily because of KELK. The Q2 book-to-bill ratio was 0.98, or 1.04 excluding KELK.
- Management expects continued benefits from production transfers, automation, facility consolidation, and lower-cost manufacturing locations, but additional restructuring and severance costs are expected in future periods.
- A $388 thousand restructuring charge was recorded in the first quarter for employee terminations in Japan; the costs were fully paid in Q2. The program responded primarily to declining Japanese business conditions.
- KELK purchase accounting remained preliminary. Additional adjustments could materially affect asset values and future results. Management also stated that KELK’s internal-control impact was still under evaluation.
- The 2013 credit agreement matures in January 2018, restricts cash dividends, and requires compliance with tangible-net-worth, leverage, and fixed-charges coverage covenants. VPG was in compliance at June 29, 2013.
- VPG’s Israeli subsidiary received a waiver for an earlier covenant breach, renegotiated its covenants in Q2, and was compliant at June 29, 2013.
- Key risks include economic and end-market weakness, lower volumes in Japan and Force Sensors, foreign-currency volatility, acquisition integration and synergy execution, purchase-accounting changes, manufacturing transfers, restructuring execution, technology and competitive pressures, and potential covenant noncompliance.
- Management reported no material changes in previously disclosed market risks, no material legal proceedings, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Progress toward integrating KELK, achieving expected synergies, and converting KELK’s backlog into profitable revenue.
- Finalization of KELK’s purchase-price allocation and any resulting changes to goodwill, intangible assets, inventory costs, and earnings.
- Whether revenue weakness in Foil Technology Products and Force Sensors stabilizes, particularly in Japan.
- Gross-margin improvement excluding one-time KELK purchase-accounting adjustments and the sustainability of reported operating margins.
- Operating cash-flow generation after the acquisition and the pace of debt repayment.
- Compliance with the 2013 Credit Agreement and Israeli subsidiary covenants, including the effects of future restructuring or operating weakness.
- Availability and tax implications of cash held outside the United States.