Vishay Precision Group, Inc. — Q3 2013 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, transportation, medical, agricultural, aerospace, and other applications. The filing covers the fiscal quarter and nine fiscal months ended September 28, 2013, compared with September 29, 2012.
VPG operates through Foil Technology Products, Force Sensors, and Weighing and Control Systems. Results include the acquired George Kelk Corporation (“KELK”) beginning February 1, 2013. KELK designs electronic measurement and control equipment for metals rolling mills and mining applications.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenues | $57.7 million | $55.4 million | $178.0 million | $166.6 million |
| Gross profit | $19.2 million | $18.7 million | $60.8 million | $57.5 million |
| Gross margin | 33.3% | 33.8% | 34.1% | 34.5% |
| Operating income | $0.6 million | $3.1 million | $4.7 million | $9.5 million |
| Net earnings attributable to VPG | $1.5 million | $1.9 million | $3.2 million | $6.5 million |
| Diluted earnings per share | $0.11 | $0.14 | $0.23 | $0.47 |
| Operating margin | 1.0% | 5.6% | 2.6% | 5.7% |
Revenue increased 4.1% in the quarter and 6.9% year to date, primarily because of KELK. Excluding acquisition effects, volume declines occurred across the reportable segments. SG&A rose to 32.0% of quarterly revenue from 28.2% and to 30.8% year to date from 28.8%, largely reflecting KELK-related expenses.
- Foil Technology Products revenue declined 14.7% in the quarter and 11.6% year to date; quarterly gross margin was 36.7% versus 38.9%.
- Force Sensors revenue declined 0.7% in the quarter and 2.8% year to date; quarterly gross margin fell to 17.6% from 20.2%.
- Weighing and Control Systems revenue increased 49.8% in the quarter and 62.4% year to date, primarily from KELK; quarterly gross margin was 43.0% versus 40.9%.
Cash flow, debt, and liquidity
| Metric | September 28, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $68.3 million | $93.9 million |
| Total third-party debt | $27.9 million | $11.3 million |
| Net cash | $40.3 million | $82.6 million |
| Current ratio | 4.3 to 1.0 | 5.8 to 1.0 |
- Operating cash flow for the nine months was $6.2 million, down from $13.5 million in the prior-year period.
- Capital expenditures were $3.9 million, producing management-defined free cash of $2.3 million.
- Investing cash use was $52.8 million, including the $48.9 million KELK purchase.
- Financing cash provided was $22.2 million, including $25.0 million of term-loan borrowings.
- The company stated that cash, available credit facilities, and projected operating cash flow should meet liquidity needs for at least the next 12 months.
Debt at September 28, 2013 included $22.8 million of term loans, $4.1 million of exchangeable notes, and $1.1 million of Japanese subsidiary debt. No revolving-facility balances were outstanding. The company was in compliance with its credit covenants, including a maximum 2.5-to-1 leverage ratio and minimum 1.5-to-1 fixed-charge coverage ratio. The credit agreement restricts cash dividends and is secured by substantially all assets of the company and certain subsidiaries.
Material changes versus the prior comparable period
- KELK added $8.2 million of Q3 revenue and $24.2 million of nine-month revenue, but contributed a nine-month net loss attributable to VPG of $0.7 million after purchase accounting, acquisition, restructuring, and intercompany interest effects.
- KELK purchase accounting increased costs of products sold by $0.9 million in Q3 and $4.4 million for the nine-month period. The purchase price allocation remained preliminary and included $19.0 million of goodwill and $19.3 million of identifiable intangible assets.
- The company incurred $57,000 of acquisition costs in Q3 and $752,000 year to date, plus $99,000 and $487,000 of restructuring costs, respectively.
- A new ERP implementation caused shipment delays and manufacturing inefficiencies at three Foil Technology Products facilities, reducing Q3 revenue and margins. Management expected to continue addressing the issues in Q4.
- Quarterly backlog increased to $60.9 million from $38.9 million in Q4 2012, mainly because of KELK. Q3 book-to-bill was 1.01 versus 0.92 in Q3 2012.
- An exchangeable-note holder converted approximately $5.9 million of principal into 259,687 common shares, leaving approximately $4.1 million of notes outstanding.
- Foreign-currency translation reduced other comprehensive income by $5.1 million year to date, compared with a $1.6 million gain in the prior-year period.
Outlook, commentary, risks, and unusual items
The filing does not provide formal revenue or earnings guidance. Management described continued focus on product innovation, cost reduction, manufacturing transfers to lower-cost locations, ERP remediation, and potential strategic acquisitions. It also reported recovery in Japanese business during Q3 and expected further benefits from restructuring and production optimization.
- Key risks include economic conditions, lower demand and unfavorable product mix, foreign-exchange movements, ERP implementation difficulties, acquisition integration and realization of synergies, new-product execution, competition, and production transfers.
- VPG expects additional restructuring and severance costs as it consolidates manufacturing operations and expands in India.
- The Q3 effective tax rate was negative 171.5%, compared with 29.8% in the prior year, and the nine-month rate was negative 11.9%, compared with 29.9%. A $1.3 million one-time benefit resulted from an Israeli tax-law change that increased the recorded value of Israeli deferred tax assets.
- Approximately 84% of cash was held by non-U.S. subsidiaries and could incur additional taxes if repatriated.
- Goodwill and indefinite-lived intangible assets were scheduled for annual impairment testing in the fourth quarter. The KELK purchase accounting remained subject to further adjustments that could materially affect results.
- Management concluded that disclosure controls were effective, and the filing reported no material changes in internal control over financial reporting or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether ERP-related shipment and manufacturing issues were resolved and whether Foil Technology Products revenue and margins recovered.
- The final KELK purchase-price allocation, goodwill and intangible-asset valuations, and the acquisition’s sustainable earnings contribution.
- Progress on backlog conversion, book-to-bill trends, and demand in Japan and other major markets.
- Operating cash-flow conversion, capital expenditures, term-loan amortization, and continued compliance with debt covenants.
- The sustainability of the unusually favorable Q3 tax benefit and the company’s future effective tax rate.
- Execution and total cost of planned manufacturing transfers, consolidations, and additional restructuring programs.