Vishay Precision Group, Inc. — Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision sensors, resistive foil products, weighing modules, and control systems for industrial, medical, agricultural, transportation, avionics, military, and other applications. The company reports two segments: Foil Technology Products and Weighing Modules and Control Systems. This unaudited report covers the fiscal quarter and nine fiscal months ended October 1, 2011, compared with October 2, 2010. VPG became an independent public company following its July 6, 2010 spin-off from Vishay Intertechnology, which affects comparability with prior-period carve-out results.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenues | $60.0 million | $51.6 million | $181.7 million | $152.7 million |
| Gross profit | $21.2 million | $19.1 million | $64.3 million | $56.2 million |
| Gross margin | 35.3% | 37.1% | 35.4% | 36.8% |
| Operating income | $4.7 million | $4.8 million | $14.4 million | $14.8 million |
| Operating margin | 7.8% | 9.3% | 7.9% | 9.7% |
| Net earnings attributable to VPG stockholders | $3.3 million | $2.6 million | $9.6 million | $8.4 million |
| Diluted EPS | $0.24 | $0.19 | $0.69 | $0.61 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $9.7 million | $20.0 million |
Q3 revenue increased 16.3%, while nine-month revenue increased 19.0%. Revenue growth was driven primarily by higher volume in both segments, with foreign currency effects also contributing. The effective tax rate declined to 16.5% from 39.2% in Q3 and to 28.9% from 39.5% for the nine-month period, benefiting from geographic earnings mix and discrete tax benefits.
At October 1, 2011, cash and cash equivalents were $83.3 million, total debt was $13.0 million, and management-defined net cash was $70.3 million. The company had no borrowings under its $25.0 million revolving credit facility. Current assets were $185.1 million versus current liabilities of $39.8 million, producing a current ratio of approximately 4.7 to 1.0.
Material changes versus the prior comparable period
- Foil Technology Products revenue increased 11.2% in Q3 and 14.1% year to date; Weighing Modules and Control Systems revenue increased 21.4% and 23.7%, respectively.
- Gross margin declined because of higher variable and fixed manufacturing costs, manufacturing inefficiencies, and unfavorable product mix. Foil segment Q3 margin declined to 43.1% from 45.2%; Weighing segment margin declined to 28.3% from 29.2%.
- Operating income was broadly unchanged despite revenue growth because SG&A increased to $16.5 million from $14.4 million in Q3 and to $49.9 million from $41.4 million for the nine-month period.
- SG&A reflected higher personnel, travel, commissions, foreign-exchange impacts, and costs associated with operating as an independent public company, including approximately $4.6 million of such costs during the first nine months.
- Operating cash flow fell to $9.7 million from $20.0 million, primarily due to approximately $6.4 million of tax payments, bonus and profit-sharing payments, and working-capital changes.
- Capital expenditures increased to $10.3 million from $5.5 million, resulting in negative management-defined “free cash” for the nine-month period.
- Backlog at quarter-end was $45.9 million, down from $48.5 million at June 30, 2011. The overall book-to-bill ratio was 0.97, compared with 1.02 in the second quarter of 2011.
Guidance, outlook, commentary, risks, and unusual items
- Management reported steady demand growth during the first nine months of 2011 but noted the normal European seasonal slowdown in the third quarter.
- Management expects available cash, the credit facility, and projected operating cash flow to meet liquidity needs for at least the next 12 months.
- Capital spending supports a new India manufacturing facility, a new Foil Technology Products production line, and business-system and facility maintenance. The India facility was expected to be completed by year-end 2011, with production beginning in the first quarter of 2012.
- VPG expects increased research and development spending and continues to pursue acquisitions, particularly in Weighing Modules and Control Systems. Acquisition execution and integration risks remain material.
- The company plans additional manufacturing consolidation and expansion in India, which will require future restructuring and severance costs. No new restructuring program was initiated during the quarter or nine-month period.
- Foreign-exchange exposure remains significant. Q3 included a $0.7 million foreign-exchange loss and a $0.5 million loss on Israeli shekel collar derivatives. Approximately 87% of cash was held by non-U.S. subsidiaries and could incur additional taxes if repatriated.
- The secured credit facility includes leverage and fixed-charge coverage covenants. VPG was compliant at October 1, 2011, with leverage of 0.4 to 1.0 and fixed-charge coverage of 25.5 to 1.0, versus limits of 2.5 to 1.0 and 2.5 to 1.0, respectively.
- The credit agreement restricts cash dividends and permits acceleration if covenant requirements are not met. The exchangeable notes carry approximately $10.0 million principal and may be put in exchange for 441,176 common shares.
- Management identified no material changes to previously disclosed market risks or risk factors. Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Investor verification points
- Verify whether manufacturing inefficiencies and unfavorable product mix improve as the India facility ramps production.
- Monitor backlog, book-to-bill ratios, and segment margins for evidence that demand growth is translating into profitable shipments.
- Assess whether operating cash flow recovers after unusually high tax, bonus, and working-capital outflows, and whether capital spending remains within plan.
- Review the effect of public-company costs, increased R&D spending, and planned restructuring on future SG&A and operating margins.
- Evaluate foreign-currency losses, derivative exposures, and the tax consequences of cash held overseas.
- Review acquisition plans, integration execution, and compliance with credit-facility covenants.