Vishay Precision Group, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
VPG designs and manufactures precision foil products, force sensors, and weighing and control systems for industrial, medical, transportation, agricultural, avionics, military, and other applications. The company has operated independently since its July 2010 spin-off from Vishay Intertechnology.
The filing covers the unaudited fiscal quarter ended March 31, 2012, compared with the quarter ended April 2, 2011. VPG reports three segments: Foil Technology Products, Force Sensors, and Weighing and Control Systems.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues | $55.8 million | $59.5 million | Down 6.2% |
| Gross profit | $18.9 million | $21.0 million | Down 10.1% |
| Gross margin | 33.8% | 35.3% | Down 150 basis points |
| Operating income | $2.4 million | $4.7 million | Down 49.5% |
| Operating margin | 4.2% | 7.9% | Down 370 basis points |
| Net earnings attributable to VPG stockholders | $1.6 million | $3.3 million | Down 50.7% |
| Diluted earnings per share | $0.12 | $0.24 | Down $0.12 |
| Cash flow from operations | $4.1 million | $(2.4) million | Improved by $6.5 million |
| Capital expenditures | $2.6 million | $2.9 million | Down $0.3 million |
Cash and cash equivalents were $83.0 million at March 31, 2012, compared with $80.8 million at December 31, 2011. Total debt was $11.5 million, consisting primarily of $10.0 million of exchangeable notes and $1.5 million of Japanese subsidiary debt. Reported net cash was $71.5 million. The current ratio was 5.0 to 1.0.
Management reported positive free cash for the quarter, defined as operating cash flow less capital expenditures plus proceeds from asset sales. Approximately 81% of cash was held by non-U.S. subsidiaries, and repatriation could create additional taxes.
Material changes versus the prior comparable period
- Revenue declined $3.7 million, primarily because of a 5.3% volume decline and a 1.0% adverse foreign-currency effect. Management cited weaker European demand across all segments.
- Foil Technology Products revenue declined 1.3% to $27.8 million, with margin falling to 40.7% from 44.3% because of lower volume, material and labor inefficiencies, and higher manufacturing costs.
- Force Sensors revenue declined 6.4% to $16.6 million, with margin falling to 17.9% from 20.3%, reflecting lower volume, wage increases, and start-up costs at the new India facility.
- Weighing and Control Systems revenue declined 15.9% to $11.4 million, primarily because of lower European on-board weighing revenue. Margin improved to 40.0% from 36.3% due largely to more favorable product mix.
- Gross margin declined because of lower volume and increased manufacturing fixed costs, including wages, utilities, and depreciation.
- SG&A increased slightly to $16.5 million from $16.3 million, rising to 29.6% of revenue from 27.4%.
- The effective tax rate increased to 34.5% from 31.0%, reflecting geographic earnings mix and the inability to recognize deferred tax benefits for losses in certain foreign jurisdictions.
- Operating cash flow improved substantially from an outflow of $2.4 million in Q1 2011, when approximately $4.3 million of tax payments were made.
Guidance, outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management expects current cash, available credit facilities, and projected operating cash flow to satisfy liquidity needs for at least the next 12 months.
- Management stated that European demand had begun to improve and that Foil Technology Products capacity issues had improved during Q1 2012.
- VPG plans to increase research and development spending, pursue strategic acquisitions, automate operations, and shift production toward lower-labor-cost locations including Costa Rica, India, and Israel.
- Additional manufacturing consolidation and expansion in India are expected to generate future restructuring and severance costs. No new restructuring program was initiated and no restructuring expense was recorded in Q1 2012.
- Backlog was $43.3 million, down from $47.1 million in Q1 2011; the book-to-bill ratio was 1.01 and inventory turnover was 2.99. Backlog orders may be canceled or rescheduled without penalty and are not necessarily indicative of future revenue.
- VPG had no borrowings under its $25.0 million U.S. revolving facility or its $15.0 million Israeli revolving facility. The company was in compliance with all debt covenants at March 31, 2012.
- Foreign currency remains a risk. Currency effects reduced revenue by approximately $0.6 million but benefited costs and SG&A by approximately $0.8 million versus the prior-year quarter. Currency collar contracts had a fair value liability of approximately $0.1 million and generated a $0.2 million gain in the quarter.
- Other matters include the March 1, 2012 termination of Vishay Intertechnology’s transition IT services, expected reversal of $0.6 million to $0.8 million of unrecognized tax benefits within 12 months, and ordinary-course tax, pension, foreign-exchange, acquisition-integration, and production-transfer risks.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors or market risks were reported.
Important facts for investors to verify
- Whether the improvement in European demand and Foil Technology capacity is sustained in subsequent quarters.
- Whether India-related start-up costs and planned production transfers improve Force Sensors margins without causing material disruption or additional restructuring costs.
- Revenue trends, backlog conversion, and book-to-bill performance, particularly in Weighing and Control Systems.
- The geographic location and tax implications of the company’s cash balances, including the cost of repatriating foreign cash.
- Compliance with the U.S. and Israeli revolving-facility covenants and the company’s ability to preserve substantial net cash while funding capital expenditures and acquisitions.
- Exposure to foreign exchange movements, including the expiration of the Israeli shekel collar contracts in July 2012.
- The sustainability of operating cash generation after considering tax payments, capital spending, pension obligations, and potential restructuring costs.