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(Exact name of registrant as specified in its charter)
iDelaware
i27-0986328
(State
or Other Jurisdiction of Incorporation)
(I.R.S. Employer Identification Number)
i3 Great Valley Parkway, Suite 150
iMalvern,
iPA, i19355
i484-i321-5300
(Address
of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
stock, $0.10 par value
iVPG
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ýiYes¨ No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. ýiYes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
iAccelerated
filer
ý
Non-accelerated filer
¨
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐
Yes ý No
As of August 4, 2020, the registrant had i12,552,439 shares of its common stock and i1,022,887
shares of its Class B convertible common stock outstanding.
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1 – iBasis
of Presentation
Background
Vishay Precision Group, Inc. (“VPG” or the “Company”) is an internationally recognized designer, manufacturer and marketer of sensors, and sensor-based measurement systems, as well as specialty resistors and strain gages based upon the Company's proprietary technology. The Company provides precision products and solutions, many of which are “designed-in” by its customers, specializing in the growing markets of stress, force, weight, pressure, and current measurements.
Interim Financial Statements
These unaudited consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial statements and therefore do not include all information and footnotes necessary for the presentation of financial position, results of operations, and cash flows required by accounting principles generally accepted in the United States for complete financial statements. The information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair summary of the financial position, results of operations, and cash flows for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of December 31, 2019 and 2018 and for each of the three years in the period ended December
31, 2019, included in VPG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 11, 2020. The results of operations for the fiscal quarter ended June 27, 2020 are not necessarily indicative of the results to be expected for the full year. VPG reports interim financial information for 13-week periods beginning on a Sunday and ending on a Saturday, except for the first quarter, which always begins on January 1, and the fourth quarter, which always ends on December 31. iThe
four fiscal quarters in 2020 and 2019 end on the following dates:
2020
2019
Quarter 1
March 28,
March 30,
Quarter 2
June 27,
June 29,
Quarter
3
September 26,
September 28,
Quarter 4
December 31,
December 31,
i
Recently Adopted Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13, and subsequent related amendments to ASU 2016-13, replace the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance for credit losses, the Company
considers historical loss data, customer specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. The Company adopted this ASU, effective January 1, 2020, using the modified retrospective approach, and the effect on the Company's consolidated condensed financial statements and related disclosures was not material.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." This ASU modifies the disclosures on fair value measurements by removing the requirements to disclose the
amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The Company adopted this ASU effective January 1, 2020, and the effect on the Company's disclosures in its consolidated condensed financial statements was not material.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure
Framework - Changes to the Disclosure Requirements for Defined Benefit Plans."This ASU amends Accounting Standards Codification ("ASC") 715 to add, remove and clarify disclosure requirements related to defined benefit and pension and other postretirement plans. The amendments in this ASU are
-12-
Note 1 – Basis of Presentation (continued)
effective for annual periods beginning after December 15, 2020 and early adoption is permitted. The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements.
In
December 2019, the FASB issued ASU No. ASU 2019-12, "Simplifying the Accounting for Income Taxes". This ASU amends Accounting Standards Codification ("ASC") 740 by removing certain exceptions to the general principles, clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements.
i
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current financial statement presentation.
Note 2 – iRevenues
Revenue Recognition
i
The
following table disaggregates net revenue by geographic region from contracts with customers based on net revenues generated by subsidiaries within that geographic location (in thousands):
The
following table disaggregates net revenue from contracts with customers by market sector (in thousands). The Company revised its market sector categories beginning in 2020. Prior year data has been reclassified to reflect the current market sectors.
Contract assets are established when revenues are recognized prior to a contractual payment due from the customer. When a payment becomes due based on the contract terms, the Company will reduce the contract asset and record a receivable. Contract liabilities are deferred revenues that are recorded when cash payments are received or due in advance of our performance obligations. Our payment terms vary by the type and location
of the products offered. The term between invoicing and when payment is due is not significant.
i
The outstanding contract assets and liability accounts were as follows (in thousands):
The
amount of revenue recognized during the six fiscal months ended June 27, 2020 that was included in the contract liability balance at December 31, 2019 was$i3.7 million.
Practical Expedients
The
Company does not disclose the value of unsatisfied performance obligations for contracts that have a duration of one year or less and for contracts that are substantially complete. The Company treats shipping and handling activities as fulfillment costs.
Note 3 – iAcquisitions
Dynamic Systems Inc.
On November 1, 2019, VPG completed the acquisition of New York-based Dynamic Systems Inc. ("DSI"), a provider of specialized dynamic thermal-mechanical test and simulation systems used to develop new metal alloys and optimize production processes, for a purchase price of $i40.3 million, subject to customary adjustments. During the second
quarter of 2020, the Company received $i0.2 million from escrow as a purchase price adjustment, resulting in a reduction of goodwill. Additionally, it was determined that an earn out, which was part of the purchase price, was not achieved. DSI reports into the
Company's Weighing and Control Systems segment. iThe following table summarizes the preliminary fair values assigned to the assets and liabilities of DSI as of November 1, 2019(in thousands):
(a)
Working capital accounts include accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses, and accrued payroll.
The weighted average useful lives for the patents and acquired technology and customer relationships are i16 years, and i15
years, respectively. Most of the goodwill associated with DSI will be deductible for income tax purposes. The Company recorded acquisition costs associated with this transaction of $i0.4 million during the fourth quarter of 2019.
i
Following
is the supplemental consolidated financial results for the Company on an unaudited pro forma basis, as if the DSI acquisition had been consummated on January 1, 2019:
Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective method of applying the new standard at the adoption date. The Company determines if an arrangement is or contains a lease at inception or modification of such agreement. The arrangement
is or contains a lease if the contract conveys the right to control the use of the identified asset for a period in exchange for consideration.
-15-
Note 5 - Leases (continued)
Lease right of use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected term at commencement date. As the implicit rate is not determinable in most of the Company's leases, the Company's incremental borrowing rate is used as the basis to determine
the present value of future lease payments. Refer to Note 7 for discussion of the Company's borrowing rate. The expected lease terms include options to extend or terminate. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. Some of these leases contain variable payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date and are therefore not included in our future minimum lease payments. Variable payments are expensed in the periods incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. Additionally, the Company elected the package of practical expedients permitted
under the transition guidance, which allows the carryforward the historical lease classification. The Company also made an election to exclude from balance sheet reporting leases with initial terms of 12 months or less and to exclude non-lease components from lease right of use assets and corresponding liabilities.
The Company primarily leases office and manufacturing facilities in addition to vehicles, which have remaining terms of less than ione
year to isix years. The Company has no finance leases. One of the Company's indirect wholly-owned subsidiaries entered into a lease agreement as tenant related to a property in Israel. Such lease agreement provides that we will lease a new building containing approximately i121,400
square feet. The facility was made available to the Company during the second quarter of 2020, at which time the Company established an operating right of use asset and operating lease liability, with a lease term of i12.5 years, of $ii14.8/ million,
in accordance with the terms of the lease agreement.
i
Leases recorded on the balance sheet consist of the following (in thousands):
Right
of use assets obtained in exchange for new operating lease liability during 2020 were $i15.3 million. The Company paid $ii1.7/ million
for its operating leases for each of the six fiscal months ended June 27, 2020 and June 29, 2019, which are included in operating cash flows on the consolidated condensed statements of cash flows.
iUndiscounted maturities of operating lease payments as of June 27, 2020 are summarized as follows (in thousands):
VPG calculates the tax provision for interim periods using an estimated annual effective tax rate methodology based on projected full-year pre-tax earnings among the taxing jurisdictions in which we operate with adjustments for discrete items. The effective tax rate for the fiscal quarter ended June 27, 2020 was i28.1% compared to i26.4%
for the fiscal quarter ended June 29, 2019. The effective tax rate for the six fiscal months ended June 27, 2020 was i30.9% compared to i26.9%
for the six fiscal months ended June 29, 2019. The tax rate in the current fiscal quarter is higher than the prior year fiscal quarter, primarily due to changes in the mix of worldwide income.
The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's
tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties.
Note
7 – iLong-Term Debt
i
Long-term debt consists of the following (in thousands):
2015
Credit Agreement - U.S. Closing Date Term Facility
i—
i2,038
2015
Credit Agreement - U.S. Delayed Draw Term Facility
i—
i4,982
2015
Credit Agreement - Canadian Term Facility
i—
i3,476
Other
debt
i85
i149
Deferred
financing costs
(i408)
(i112)
Total
long-term debt
i40,677
i44,533
Less:
current portion
i85
i44,516
Long-term
debt, less current portion
$
i40,592
$
i17
/
2020
Credit Agreement
On March 20, 2020, the Company entered into a Third Amended and Restated Credit Agreement (the “2020 Credit Agreement”) among the Company, the lenders, Citizens Bank, National Association and Wells Fargo Bank, National Association as joint lead arrangers and JPMorgan Chase Bank, National Association as agent for such lenders (the “Agent”), pursuant to which the terms of the Company’s multi-currency, secured credit facility was revised to provide a secured revolving facility (the “2020 Revolving Facility”) in an aggregate principal amount of $i75.0
million, with a sublimit of $i10.0 million which can be used for letters of credit for the account of the Company or its subsidiaries that are parties to the Credit Agreement, the proceeds of which may be used for working capital and general corporate purposes, and a portion of which were used to refinance the
Company’s existing revolving credit facility in the amount of $i34 million and the Company’s existing term loans as follows: (1) the “2015 U.S. Closing Date Term Facility” in an aggregate principal amount of $i2.0
-17-
Note 7 - Long-Term Debt (continued)
million; and (2) the "2015 U.S. Delayed Draw Term Facility" in an aggregate principal amount of $i5.0 million. The aggregate principal amount of the 2020 Revolving Facility may be increased by a maximum of $i25.0
million upon the request of the Company, subject to the terms of the 2020 Credit Agreement. The 2020 Credit Agreement terminates on March 20, 2025.
Interest payable on amounts borrowed under the 2020 Revolving Facility is based upon, at the Company’s option, (1) the greatest of: the Agent’s prime rate, the Federal Funds rate, or a LIBOR floor (the “Base Rate”), or (2) LIBOR or CDOR plus a specified margin. An interest margin of i0.25%
is added to Base Rate loans. Depending upon the Company’s leverage ratio, an interest rate margin ranging from i1.50% to i2.75%
per annum is added to the applicable LIBOR or CDOR rate to determine the interest payable on the Libor or CDOR loans. The Company is required to pay a quarterly fee of i0.25% per annum to i0.40%
per annum on the unused portion of the 2020 Revolving Facility, which is determined based on the Company’s leverage ratio each quarter. Additional customary fees apply with respect to letters of credit.
The obligations of the Company under the 2020 Credit Agreement are secured by pledges of stock in certain domestic and foreign subsidiaries, as well as guarantees by substantially all of the Company’s domestic subsidiaries. The obligations of the
Company and the guarantors under the 2020 Credit Agreement are secured by substantially all the assets (excluding real estate) of the Company and such guarantors. The 2020 Credit Agreement restricts the Company from paying cash dividends and requires the Company to comply with other customary covenants, representations, and warranties, including the maintenance of specific financial ratios. The financial maintenance covenants include interest coverage ratio and a leverage ratio. If the Company is not in compliance with any of these covenant restrictions, the credit facility could be terminated by the lenders, and all amounts
outstanding pursuant to the credit facility could become immediately payable.
Note 8 – iAccumulated Other Comprehensive Income (Loss)
i
The
components of accumulated other comprehensive income (loss), net of tax, consist of the following (in thousands):
Reclassifications
of pension and other postretirement actuarial items out of accumulated other comprehensive income (loss) are included in the computation of net periodic benefit cost (see Note 9).
Note 9 – iPension and Other Postretirement Benefits
Employees of VPG participate in various defined benefit pension and other postretirement
benefit ("OPEB") plans. iThe following table sets forth the components of the net periodic benefit cost for the Company's defined benefit pension and OPEB plans (in thousands):
-18-
Note 9 - Pension and Other Postretirement Benefits ( continued)
The Amended and Restated Vishay Precision Group, Inc. 2010 Stock Incentive Program (as amended and restated, the “Plan”) permits the issuance of up to i1,000,000
shares of common stock. At June 27, 2020, the Company had reserved i371,637 shares of common stock for future grants of equity awards (restricted stock, unrestricted stock, restricted stock units ("RSUs"), or stock options) pursuant to the Plan. If any outstanding awards are forfeited
by the holder or canceled by the Company, the underlying shares would be available for re-grant to others.
On March 5, 2020, VPG’s ithree current executive officers were granted annual equity
awards in the form of RSUs, of which i75% are performance-based. The awards have an aggregate target grant-date fair value of $i1.2
million and were comprised of i44,269 RSUs. iTwenty-five
percent of these awards will vest on January 1, 2023, subject to the executives’ continued employment. The performance-based portion of the RSUs will also vest on January 1, 2023, subject to the executives' continued employment and the satisfaction of certain performance objectives relating to ithree-year cumulative “adjusted free cash flow” and net earnings goals, each weighted equally.
On
March 16, 2020, certain VPG employees were granted annual equity awards in the form of RSUs, of which i75% are performance-based. The awards have an aggregate grant-date fair value of $i0.4
million and were comprised of i18,940 RSUs. iTwenty-five
percent of these awards will vest on January 1, 2023 subject to the employees' continued employment. The performance-based portion of the RSUs will also vest on January 1, 2023, subject to the employees' continued employment and the satisfaction of certain performance objectives relating to ithree-year cumulative earnings and cash flow goals, each weighted equally.
On
May 21, 2020, the Board of Directors approved the issuance of an aggregate of i15,564 RSUs to the independent board members of the Board of Directors and to the non-executive Chairman of the Board of Directors. The awards have an aggregate grant-date fair value of $i0.3 million
and will vest on the earlier of the 2021 Annual Stockholders Meeting or May 21, 2021, subject to the directors' continued service on the Board of Directors.
Vesting of equity awards is subject to acceleration under certain circumstances.
-19-
Note 10 - Share-Based Compensation (continued)
The amount of compensation cost related to share-based payment transactions is measured based on the grant-date fair value of the equity instruments issued. VPG determines compensation cost for RSUs based on the grant-date fair value of the underlying common stock. The
Company recognizes compensation cost for RSUs that are expected to vest and for which performance criteria are expected to be met. iThe following table summarizes share-based compensation expense recognized (in thousands):
VPG reports in ithree product segments: the Foil Technology Products segment, the Force
Sensors segment, and the Weighing and Control Systems segment. The Foil Technology Products reporting segment is comprised of the foil resistor and strain gage operating segments. The Force Sensors reporting segment is comprised of transducers, load cells, and modules. The Weighing and Control Systems reporting segment is comprised of complete systems which include load cells and instrumentation for weighing, force control and force measurement for a variety of uses such as process control on-board weighing applications.
VPG evaluates reporting segment performance based on multiple performance measures including third party net revenues, gross profits and operating income, exclusive of certain items. Management believes that evaluating segment performance, excluding items such as restructuring costs, executive severance costs, and other items is meaningful because it provides insight with respect to the intrinsic operating
results of VPG. iThe following table sets forth reporting segment information (in thousands):
Reconciliation
of segment operating income to consolidated results:
Foil Technology Products
$
i8,070
$
i8,619
$
i13,454
$
i18,925
Force
Sensors
(i1,013)
i2,039
i191
i4,574
Weighing
and Control Systems
i4,019
i5,043
i8,687
i11,618
Unallocated
G&A expenses
(i6,606)
(i6,988)
(i13,088)
(i13,801)
Executive
severance costs
i—
(i611)
i—
(i611)
Restructuring
costs
(i499)
i—
(i629)
i—
Operating
income
$
i3,971
$
i8,102
$
i8,615
$
i20,705
Restructuring
costs:
Foil Technology Products
$
(i341)
$
i—
$
(i443)
$
i—
Force
Sensors
$
(i80)
$
i—
$
(i108)
$
i—
Corporate/Other
(i78)
i—
(i78)
i—
$
(i499)
$
i—
$
(i629)
$
i—
Executive
severance costs:
Corporate/Other
$
i—
$
(i611)
$
i—
$
(i611)
$
i—
$
(i611)
$
i—
$
(i611)
Products
are transferred between segments on a basis intended to reflect, as nearly as practicable, the market value of the products. The table below summarizes intersegment sales (in thousands):
Foil Technology Products to Force Sensors and Weighing and Control Systems
$
i868
$
i1,074
$
i1,592
$
i2,007
Force
Sensors to Foil Technology Products and Weighing and Control Systems
$
i—
$
i184
$
i—
$
i611
Weighing
and Control Systems to Foil Technology Products and Force Sensors
$
i124
$
i146
$
i211
$
i298
-22-
Note
12 – iEarnings Per Share
i
The following table sets forth the computation of basic and diluted earnings per share attributable to VPG stockholders (in
thousands, except earnings per share):
Foreign
currency exchange gains and losses represent the impact of changes in foreign currency exchange rates. For the fiscal quarter and six fiscal months ended June 27, 2020, the change in foreign exchange gains and losses during the period, as compared to the prior year period, is largely due to exposure to currency fluctuations with the Canadian dollar, the Israeli Shekel, and the British pound.
Executive Severance Costs
During the second fiscal quarter of 2019, the Company recorded $i0.6 million
of severance costs associated with the resignation of an executive office of the Company. The severance costs consisted of payments and other benefits as specified in the executive officer's resignation agreement.
Note 14 – iFair Value Measurements
ASC
Topic 820, Fair Value Measurement, establishes a valuation hierarchy of the inputs used to measure fair value. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the
Company’s own assumptions.
An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
i
The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis (in thousands):
The Company maintains non-qualified trusts, referred to as “rabbi” trusts, to fund payments under deferred compensation and non-qualified pension plans. Rabbi trust assets consist primarily of marketable securities, classified as available-for-sale money market funds at June 27, 2020 and December 31, 2019, and company-owned life insurance assets. The marketable securities held in the rabbi trusts are valued using quoted market prices on the last business day of the period. The company-owned life insurance assets are valued in consultation with the
Company’s insurance brokers using the value of underlying assets of the insurance contracts. The fair value measurement of the marketable securities held in the rabbi trust is considered a Level 1 measurement and the measurement of the company-owned life insurance assets is considered a Level 2 measurement within the fair value hierarchy.
The fair value of the long-term debt, excluding capitalized deferred financing costs, at June 27, 2020 and December 31, 2019 approximates its carrying value. The revolving debt and term loans are reset on a quarterly basis based on current market rates, plus a base rate as specified in the corresponding debt agreements. The
fair value of long-term debt is considered a Level 2 measurement within the fair value hierarchy. The Company’s financial instruments include cash and cash equivalents whose carrying amounts reported in the consolidated condensed balance sheets approximate their fair values.
Note 15 – iRestructuring
Costs
Restructuring costs reflect the cost reduction programs implemented by the Company. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements for accrual are met. Because these costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, the Company could be required to either record additional expense in future periods or to reverse part of the previously recorded charges.
The
Company recorded $i0.5 million and $i0.0 million of restructuring costs during the fiscal quarter ended June 27, 2020 and June 29,
2019, respectively, and $i0.6 million and $i0.0 million for the six fiscal months ended June 27, 2020 and June 29,
2019, respectively. Restructuring costs were comprised primarily of employee terminations costs, including severance and statutory retirement allowances, and were incurred in connections with various cost reduction programs.
i
The following table summarizes recent activity related to all restructuring programs. The accrued restructuring liability balance as of June 27, 2020 and December 31, 2019, respectively, is included in Other accrued expenses in the accompanying
consolidated condensed balance sheets (in thousands):
Item
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
VPG is an internationally recognized designer, manufacturer and marketer of sensors, and sensor-based measurement systems, as well as specialty resistors and strain gages based upon our proprietary technology. We provide precision products and solutions, many of which are “designed-in” by our customers, specializing in the growing markets of stress, force, weight, pressure, and current measurements. A significant portion of our products and solutions are primarily based upon our proprietary foil technology and are produced as part of our vertically integrated structure. We believe this strategy results in higher
quality, more cost effective and focused solutions for our customers. Our products are marketed under a variety of brand names that we believe are characterized as having a very high level of precision and quality. Our global operations enable us to produce a wide variety of products in strategically effective geographic locations that also optimize our resources for specific technologies, sensors, assemblies, and systems.
The Company also has a long heritage of innovation in precision foil resistors, foil strain gages, and sensors that convert mechanical inputs into an electronic signal for display, processing, interpretation, or control by our instrumentation and systems products. Our advanced sensor product line continues this heritage by offering high-quality foil strain gages produced in a proprietary, highly automated environment. Precision
sensors are essential to the accurate measurement, resolution and display of force, weight, pressure, torque, tilt, motion, or acceleration, especially in the legal-for-trade, commercial, and industrial marketplaces. This expertise served as a foundation for our expansion into strain gage instrumentation, load cells, transducers, weighing modules, and complete systems for process control and on-board weighing. Although our products are typically used in the industrial market, our advanced sensors have been used in a consumer electronics product and are being evaluated for other non-industrial applications.
The precision sensor market is integral to the development of intelligent products across a wide variety of end markets upon which we focus, including medical, agricultural, transportation, industrial, avionics, military, and space applications. We believe that as original equipment manufacturers (“OEMs”) continue
a drive to make products “smarter,” they will integrate more sensors and related systems into their solutions to link the mechanical/physical world with digital control and/or response. We believe this offers a substantial growth opportunity for our products and expertise.
Impact of COVID-19 on Our Business
As the COVID-19 pandemic began to unfold around the world, the Company took measures to protect its employees and customers. Those measures included suspending business travel, enabling certain employees to work from home, implementing workplace distancing, and adjusting work shifts to minimize employees’ contact with other employees. While the majority of the Company’s operations have been able to operate despite
the impacts from the COVID-19 pandemic, the Company’s Force Sensors manufacturing facility in India operated at partial capacity through the second quarter of 2020 as a result of government-mandated restrictions. These restrictions significantly impacted the Company’s financial results in the second quarter, reducing Force Sensors revenue by approximately $6 million from pre-COVID runrate levels and reducing its operating profit by approximately $2.5 million due to the lower revenue. After the Company received approval from the Indian government to operate its facility without limitation on July 1, 2020, the
Company accelerated the ramp of production. Given the timing of these efforts, for the third quarter the Company expects Force Sensor revenues to be adversely impacted by approximately $3 million to $4 million from pre-COVID runrate levels, and its operating profit to be impacted by approximately $1.0 million to $1.5 million due to the lower revenue.
As of July 1, 2020, all of the Company’s facilities are operating without limitations with some employees working remotely where possible. Nonetheless, given the impacts to date and the ongoing uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic, the ongoing economic disruption may continue to adversely affect the
Company’s business and financial results.
Overview of Financial Results
VPG reports in three product segments: the Foil Technology Products segment, the Force Sensors segment, and the Weighing and Control Systems segment. The Foil Technology Products reporting segment is comprised of the foil resistor and strain gage operating segments. The Force Sensors reporting segment is comprised of transducers, load cells, and modules. The Weighing and Control Systems reporting segment is comprised of complete systems which include load cells and instrumentation for weighing, force control and force measurement for a variety of uses such as process control on-board weighing applications.
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Net
revenues for the fiscal quarter ended June 27, 2020 were $59.1 million versus $70.9 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended June 27, 2020 were $1.8 million, or $0.13 per diluted share, versus $5.6 million, or $0.41 per diluted share, for the comparable prior year period.
Net revenues for the six fiscal months ended June 27, 2020 were $126.8 million versus $147.4 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the six fiscal months ended June 27, 2020 were $5.1 million, or $0.37 per diluted share, versus $13.8 million, or $1.02 per diluted share, for the comparable prior year period.
The
results of operations for the fiscal quarters and six fiscal months ended June 27, 2020 and June 29, 2019 include items affecting comparability as listed in the reconciliations below. The reconciliations below include certain financial measures which are not recognized in accordance with U.S. generally accepted accounting principles ("GAAP"), including adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted net earnings per diluted share. These non-GAAP measures should not be viewed as an alternative to GAAP measures of performance. Non-GAAP measures such as adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted net earnings per diluted share do not have uniform definitions. These measures,
as calculated by VPG, may not be comparable to similarly titled measures used by other companies. Management believes that these non-GAAP measures are useful to investors because each presents what management views as our core operating performance for the relevant period. The adjustments to the applicable GAAP measures relate to occurrences or events that are outside of our core operations, and management believes that the use of these non-GAAP measures provides a consistent basis to evaluate our operating profitability and performance trends across comparable periods. In addition, the Company has historically provided these or similar non-GAAP measures and understands that some investors and financial analysts find this information helpful in analyzing the Company’s performance and in comparing
the Company’s financial performance to that of its peer companies and competitors. Management believes that the Company’s non-GAAP measures are regarded as supplemental to its GAAP financial results.
Less: Tax
effect of reconciling items and discrete tax items
—
—
142
—
0.01
—
As
Adjusted - Non GAAP
$
49,289
$
61,660
$
10,243
$
21,316
$
6,557
$
14,419
$
0.48
$
1.06
As
Adjusted - Non GAAP Margins
38.9
%
41.8
%
8.1
%
14.5
%
(a) Acquisition purchase accounting adjustments in 2020 include fair market value adjustments associated with inventory recorded as a component of costs
of products sold.
(b) COVID-19 impact is the net impact to the Company of costs incurred as a result of the COVID-19 pandemic, net of government subsidies received.
Financial Metrics
We utilize several financial measures and metrics to evaluate performance and assess the future direction of our business. These key financial measures and metrics include net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover.
Gross profit margin is computed as gross profit as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but could also include certain other period costs. Gross profit margin is a function of net revenues, but also
reflects our cost-cutting programs and our ability to contain fixed costs.
End-of-period backlog is one indicator of potential future sales. We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. If demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, backlog is not necessarily indicative of the results expected for future periods.
Another important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period compared with the amount of product shipped during that period. A book-to-bill ratio that is greater than one indicates that revenues may increase in future
periods. Conversely, a book-to-bill ratio that is less than one is an indicator of lower demand and may foretell declining sales. The book-to-bill ratio is also impacted by the timing of orders, particularly from our project-based product lines.
We focus on inventory turnover as a measure of how well we manage our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital.
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The quarter-to-quarter trends in these financial
metrics can also be an important indicator of the likely direction of our business. The following tables show net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover for our business as a whole and by segment during the five quarters beginning with the second quarter of 2019 through the second quarter of 2020 (dollars in thousands):
2nd
Quarter
3rd Quarter
4th Quarter
1st Quarter
2nd Quarter
2019
2019
2019
2020
2020
Net revenues
$
70,870
$
67,421
$
69,142
$
67,696
$
59,146
Gross
profit margin
40.4
%
38.3
%
35.0
%
37.0
%
39.1
%
End-of-period
backlog
$
83,400
$
79,300
$
90,900
$
94,300
$
92,900
Book-to-bill
ratio
0.94
0.96
1.15
1.08
0.95
Inventory
turnover
2.66
2.60
2.72
2.58
2.20
2nd
Quarter
3rd Quarter
4th Quarter
1st Quarter
2nd Quarter
2019
2019
2019
2020
2020
Foil Technology Products
Net
revenues
$
32,999
$
32,119
$
29,636
$
30,477
$
31,785
Gross profit margin
43.6
%
37.3
%
34.9
%
36.7
%
41.8
%
End-of-period
backlog
$
42,100
$
38,900
$
44,600
$
51,700
$
47,500
Book-to-bill ratio
0.93
0.91
1.18
1.25
0.85
Inventory
turnover
2.65
2.79
2.66
2.74
2.58
Force
Sensors
Net revenues
$
16,349
$
16,217
$
15,059
$
14,695
$
8,916
Gross
profit margin
26.9
%
30.4
%
24.2
%
24.3
%
11.6
%
End-of-period backlog
$
16,400
$
15,200
$
17,100
$
16,900
$
22,300
Book-to-bill
ratio
0.95
0.94
1.11
1.02
1.58
Inventory turnover
2.39
2.30
2.43
2.64
2.02
Weighing
and Control Systems
Net revenues
$
21,522
$
19,085
$
24,447
$
22,524
$
18,445
Gross
profit margin
45.6
%
46.6
%
41.6
%
45.7
%
47.6
%
End-of-period backlog
$
24,900
$
25,200
$
29,200
$
25,700
$
23,100
Book-to-bill
ratio
0.95
1.04
1.15
0.90
0.82
Inventory turnover
3.03
2.61
3.10
2.31
1.81
Net
revenues for the second quarter of 2020 decreased 12.6% from the first quarter of 2020 mainly due to decreased volume in the Force Sensors and Weighing and Control Systems segments, partially offset by volume improvement in the Foil Technology Products segment. Net revenues decreased 16.5% from the second quarter of 2019 due to decreased volume in all of the reporting segments.
Net revenues in the Foil Technology Products reporting segment increased 4.3% compared to the first quarter of 2020 and decreased 3.7% from the second quarter of 2019. The sequential increase in revenue was attributable to precision resistor products for OEM customers, primarily in the avionics, military and space market and an increase in the advance sensors product line in our other markets. Compared to the second quarter of 2019, the decrease in revenues was primarily attributable to lower precision resistor sales in the test and measurement
market, which was partially offset by an increase in the avionics,
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military and space market. The decrease was also reflected for distributors and OEM customers in the industrial weighing market, which was mostly offset by an increase in our advance sensors product line in our other markets.
Net revenues in the Force Sensors reporting segment decreased 39.3% from the first quarter of 2020 and decreased 45.5% from the second quarter of 2019. The sequential and year-over-year decrease in revenue was attributable to a significant limitation in production at our India operations during the second quarter of 2020 as a result of COVID-19 mitigation orders by the Indian government.
Net
revenues in the Weighing and Control Systems reporting segment decreased 18.1% from the first quarter of 2020 and decreased 14.3% from the second quarter of 2019. Sequentially, the lower net revenues are primarily attributable to a reduction in sales of onboard weighing products for the transportation market and of Dynamic Systems Inc. ("DSI"), which was partially offset by higher steel-related sales. Compared to the second quarter of 2019, the decrease in revenues are primarily attributable to the onboard weighing product line in the transportation market, which was partially offset with the additional revenues of DSI, acquired in November 2019.
Overall gross profit margin in the second quarter of 2020 increased 2.1% as compared to the first quarter of 2020 and decreased 1.3% from the second quarter of 2019.
Sequentially, the Foil Technology Products segment gross profit
margin increased primarily due to higher volume and manufacturing efficiencies.The Force Sensors segment gross profit margin decreased sequentially due to lower volume due to COVID-19 impacts, which was partially offset by cost controls. In the Weighing and Control Systems segment, the gross profit margin was 47.6% (47.3% excluding the purchasing accounting adjustments related to the DSI acquisition and the impact of COVID-19) compared to 45.7% (48.0% excluding the purchase accounting adjustment of $0.5 million related to the DSI acquisition) in the prior sequential quarter. The decrease in the adjusted gross margin was mainly due to lower volume, which was partially offset by cost controls.
Compared to the second quarter of 2019, the Foil Technology Products reporting segment had a lower gross profit margin primarily due to lower volume and a negative impact from exchange rates,
which was partially offset by cost controls and manufacturing efficiencies. The Force Sensors reporting segment decrease in gross profit margin compared to 2019 was primarily due to lower volume due to the COVID-19 impacts mentioned above, a reduction in export grants, and a negative impact of foreign exchange, which was partially offset by cost controls. In the Weighing and Control Systems segment, the gross profit margin of 47.6% (47.3% excluding the purchasing accounting adjustments related to the DSI acquisition and the impact of COVID-19) increased from the second quarter of 2019 mostly due to favorable product mix and the addition of DSI.
Optimize Core Competence
The Company’s core competency and key value proposition is providing customers with proprietary foil technology products and
precision measurement sensors and sensor-based systems. Our foil technology resistors and strain gages are recognized as global market leading products that provide high precision and high stability over extreme temperature ranges, and long life. Our force sensor products and our weighing and control systems products are also certified to meet some of the highest levels of precision measurements of force, weight, pressure, torque, tilt, motion, and acceleration. We continue to optimize all aspects of our development, manufacturing and sales processes, including by increasing our technical sales efforts; continuing to innovate in product performance and design; and refining our manufacturing processes.
Our foil technology research group developed innovations that enhance the capability and performance of our strain gages, while simultaneously reducing their size and power consumption as part of our advanced sensors product
line. We believe this unique foil technology will create new markets as customers “design in” these next generation products in existing and new applications. Our development engineering team is also responsible for creating new processes to further automate manufacturing, and improve productivity and quality. Our advanced sensors manufacturing technology also offers us the capability to produce high-quality foil strain gages in a highly automated environment, which we believe results in reduced manufacturing and lead times, improved quality and increased margins. As a sign of our commitment to these businesses, we recently signed a long-term lease for a state- of-the-art facility to be constructed in Israel to support our advanced sensors business.
Our design, research, and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We intend to leverage our
insights into customer demand to continually develop and roll out new, innovative products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends in terms of form, fit, and function.
We also seek to achieve significant production cost savings through the transfer, expansion, and construction of manufacturing operations in countries such as India, China, and Israel, where we can benefit from lower labor costs, improved efficiencies, or
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available tax and other government-sponsored incentives. For example, in 2018 we incurred restructuring expense related to closing and downsizing of facilities as part of the manufacturing
transitions of our force sensor products to facilities in India and China, which marked key milestones in our ongoing strategic initiatives to align and consolidate our manufacturing footprint. In 2017, we closed two leased facilities in the United States and moved to more cost effective locations.
Acquisition Strategy
We expect to continue to make strategic acquisitions where opportunities present themselves to grow our segments. Historically, our growth and acquisition strategy has been largely focused on vertical product integration, using our foil strain gages in our force sensor products, and incorporating those products into our weighing and control systems. The acquisitions of Stress-Tek and KELK, each of which employ our foil strain gages to manufacture load cells for their systems, continued this strategy. Additionally, the KELK acquisition resulted in the acquisition of
certain optical sensor technology. The Pacific acquisition significantly broadened our existing data acquisition offerings and opened new markets for us. Our most recent acquisition, of DSI, expands our position in the steel market. Along with our success in MEMS technology for on-board weighing, we expect to expand our expertise, and our acquisition focus, outside our traditional vertical approach to other precision sensor solutions in the fields of measurement of force, weight, pressure, torque, tilt, motion, and acceleration. We believe acquired businesses will benefit from improvements we implement to reduce redundant functions and from our current global manufacturing and distribution footprint.
Research and Development
Research and development will continue to play a key role in our efforts to introduce innovative products to generate new sales and to improve profitability.
We expect to continue to expand our position as a leading supplier of precision foil technology products. We believe our R&D efforts should provide us with a variety of opportunities to leverage technology, products, and our manufacturing base in order to ultimately improve our financial performance.
Cost Management
To be successful, we believe we must seek new strategies for controlling operating costs. Through automation in our plants, we believe we can optimize our capital and labor resources in production, inventory management, quality control, and warehousing. We are in the process of moving some manufacturing to more cost effective locations. This may enable us to become more efficient and cost competitive, and also maintain tighter controls of the operation.
Production transfers, facility consolidations, and other long-term
cost-cutting measures require us to initially incur significant severance and other exit costs. We are realizing the benefits of our restructuring through lower labor costs and other operating expenses, and expect to continue reaping these benefits in future periods. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2020.
We are evaluating plans to further reduce our costs by consolidating additional manufacturing operations. These plans may require us to incur restructuring and severance costs in future periods. While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively
impact our customer service or our ability to further develop products and processes.
Goodwill
We test the goodwill in each of our reporting units for impairment at least annually, and whenever events or changes in circumstances occur indicating that a possible impairment may have been incurred. Determining whether to test goodwill for impairment, and the application of goodwill impairmenttests, require significant managementjudgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigninggoodwillto reporting units, and determining the fair value of each reporting unit. Changes in these estimates could materially affect the determination
of fair value for each reporting unit. A slowdown or deferral of orders for a business, with which we have goodwill associated, could impact our valuation of that goodwill.
Foreign Currency
We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. U.S. GAAP requires that entities identify the “functional currency” of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary’s functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained
within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign
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subsidiary that is a direct and integral component or extension of the parent company’s operations generally would have the parent company’s currency as its functional currency. We have subsidiaries that fall into each of these categories.
Foreign Subsidiaries which use the Local Currency as the Functional Currency
Our operations in Europe, Canada, and certain locations in
Asia primarily generate and expend cash using local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is the functional currency, assets and liabilities in the consolidated condensed balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not impact the results of operations and are reported as a separate component of equity.
For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the period. While the
translation of revenues and expenses into U.S. dollars does not directly impact the consolidated condensed statement of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in those foreign currencies.
Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency
Our operations in Israel and certain locations in Asia primarily generate cash in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional currency,
all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly related to payroll, which are incurred in the local currency.
Effects of Foreign Exchange Rate on Operations
For the fiscal quarter ended June 27, 2020, exchange rates decreased net revenues by $0.7 million, and increased costs of products sold and selling, general, and administrative expenses by $0.1 million, when compared to the comparable prior year period. For the six fiscal months ended
June 27, 2020, exchange rates decreased net revenues by $1.2 million, and increased costs of products sold and selling, general, and administrative expenses by $0.6 million, when compared to the comparable prior year period.
Changes
in net revenues were attributable to the following:
vs. prior year quarter
vs. prior year- to-date
Change attributable to:
Change in volume
(18.7)
%
(17.4)
%
Change
in average selling prices
0.4
%
0.5
%
Foreign currency effects
(0.9)
%
(0.8)
%
Acquisitions
2.7
%
3.8
%
Net
change
(16.5)
%
(13.9)
%
During the fiscal quarter and six fiscal months ended June 27, 2020, net revenues decreased 16.5% and 13.9%, respectively, as compared to the comparable prior year periods, due to decreased volume in all of the reporting segments.
Gross Profit Margin
Gross profit as a percentage of net revenues was as follows:
The
gross profit margin for the fiscal quarter ended June 27, 2020 decreased 1.3% compared to the comparable prior year period, with lower margins in the Foil Technology Products and Force Sensors reporting segments being partially offset by higher margins in the Weighing and Control Systems segment. The gross profit margin for the six fiscal months ended June 27, 2020 decreased 3.8% compared to the comparable prior year period, with all reporting segments contributing to the decline.
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Segments
Analysis of revenues and gross profit margins for each of our reportable segments is
provided below.
Foil Technology Products
Net revenues of the Foil Technology Products segment were as follows (dollars in thousands):
Changes
in Foil Technology Products segment net revenues were attributable to the following:
vs. prior year quarter
vs. prior year- to-date
Change attributable to:
Change in volume
(3.6)
%
(11.3)
%
Change
in average selling prices
0.4
%
0.7
%
Foreign currency effects
(0.5)
%
(0.5)
%
Net change
(3.7)
%
(11.1)
%
Net
revenues decreased 3.7% for the fiscal quarter ended June 27, 2020 as compared to the comparable prior year period. This decrease in revenues was primarily attributable to lower precision resistor sales in the test and measurement market, which was partially offset by an increase in the avionics, military and space market. The decrease was also reflected for distributors and OEM customers in the industrial weighing market, which was mostly offset by an increase in our advance sensors product line in our other markets.
Net revenues decreased 11.1% for the six fiscal months ended June 27, 2020 as compared to the comparable prior year period. Decreases in net revenues in precision resistor products sales in the test and measurement market were partially offset by increases in net revenues in the avionics, military and space
market, and increases in our net revenues from the advance sensors product line in our other markets.
Gross profit as a percentage of net revenues for the Foil Technology Products segment was as follows:
The
gross profit margin decreased 1.8% for the fiscal quarter ended June 27, 2020, and 4.9% for the six fiscal months ended June 28, 2020, when compared to the comparable prior year periods, primarily due to lower volume and a negative impact from exchange rates, which was partially offset by cost controls and manufacturing efficiencies.
Force Sensors
Net revenues of the Force Sensors segment were as follows (dollars in thousands):
Changes
in Force Sensors segment net revenues were attributable to the following:
vs. prior year quarter
vs. prior year- to-date
Change attributable to:
Change in volume
(45.3)
%
(28.4)
%
Change
in average selling prices
0.5
%
0.4
%
Foreign currency effects
(0.7)
%
(0.6)
%
Net change
(45.5)
%
(28.6)
%
Net
revenues decreased 45.5% for the fiscal quarter ended June 27, 2020, as compared to the comparable prior year period. The decrease for the fiscal quarter ended June 27, 2020 was attributable to a significant limitation in production at our India operations during the second quarter of 2020 as a result of COVID-19 mitigation orders by the Indian government. This limitation in our production also contributed to the year to date decline in Force Sensor revenues of 28.6% when compared to the prior year.
Gross profit as a percentage of net revenues for the Force Sensors segment was as follows:
The
gross profit margin for the fiscal quarter ended June 27, 2020 decreased 15.3% compared to the comparable prior year period. This decrease was primarily due to lower volume due to the COVID-19 impacts mentioned above, a reduction in export grants, and a negative impact of foreign exchange, which was partially offset by cost controls. The gross profit margin for the six fiscal months ended June 27, 2020 decreased 9.1% compared to the prior year period. Lower volume due to the COVID-19 impacts was partially offset by cost savings initiatives.
Weighing and Control Systems
Net revenues of the Weighing and Control Systems segment were as follows (dollars in thousands):
Changes
in Weighing and Control Systems segment net revenues were attributable to the following:
vs. prior year quarter
vs. prior year- to-date
Change attributable to:
Change in volume
(21.7)
%
(19.7)
%
Change
in average selling prices
0.3
%
0.1
%
Foreign currency effects
(1.8)
%
(1.4)
%
Acquisitions
8.9
%
13.6
%
Net
change
(14.3)
%
(7.4)
%
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Net revenues decreased 14.3% for the fiscal quarter ended June 27, 2020 and 7.4% for the six fiscal months ended June 27, 2020 , as compared to the comparable prior year periods. The decline in net revenues was attributable to the onboard weighing product line in the transportation market, which was partially offset with the additional revenues of DSI, acquired in November 2019.
Gross
profit as a percentage of net revenues for the Weighing and Control Systems segment were as follows:
The
gross profit margin for the fiscal quarter ended June 27, 2020 of 47.6% (47.3% excluding the purchasing accounting adjustments related to the DSI acquisition and the impact of COVID-19) increased from the second quarter of 2019 mostly due to favorable product mix and the addition of DSI. The gross profit margin for the six fiscal months ended June 27, 2020 of 46.6%, (47.7% excluding the purchase accounting adjustments related to the DSI acquisition and the impact of COVID-19) decreased from the prior year period due to lower volume, an unfavorable product mix and unfavorable exchange rate impacts.
Selling, General, and Administrative Expenses
Selling, general, and administrative (“SG&A”) expenses are summarized as follows (dollars in thousands):
SG&A expenses for the fiscal quarter ended June 27, 2020 decreased compared to the comparable prior year period mainly due to lower travel costs, personnel costs and professional fees, partially offset by SG&A expenses related to DSI. SG&A expenses for the six fiscal months ended June 27,
2020 decreased compared to the comparable prior year period mainly due to lower travel costs, personnel costs, commissions, and professional fees, partially offset by SG&A expenses related to DSI.
Executive Severance Costs
During the second fiscal quarter of 2019, the Company recorded $0.6 million of severance costs associated with the resignation of an executive office of the Company. The severance costs consisted of payments and other benefits as specified in the executive officer's resignation agreement.
Restructuring Costs
Restructuring costs reflect the cost reduction programs implemented by the
Company. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements for accrual are met. Because these costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, the Company could be required to either record additional expense in future periods or to reverse part of the previously recorded charges.
The Company recorded $0.5 million and $0.0 million of restructuring costs during the fiscal quarter ended June 27, 2020
and June 29, 2019, respectively, and $0.6 million and $0.0 million for the six fiscal months ended June 27, 2020 and June 29, 2019, respectively. Restructuring costs were comprised primarily of employee terminations costs, including severance and statutory retirement allowances, and were incurred in connections with various cost reduction programs.
Other Income (Expense)
Interest expense for the fiscal quarter and six fiscal months ended June 27, 2020 was lower compared with interest expense in the comparable prior year periods mainly due to the lower debt balances during 2020 and the favorable borrowing rates negotiated with the 2020 Restated and Amended Revolving Credit Facility in
March 2020.
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The following table analyzes the components of the line “Other” on the consolidated condensed statements of operations (in thousands):
Foreign
currency exchange gains and losses represent the impact of changes in foreign currency exchange rates. For the fiscal quarter and six fiscal months ended June 27, 2020, the change in foreign exchange gains and losses during the period, as compared to the prior year period, is largely due to exposure to currency fluctuations with the Canadian dollar, the Israeli Shekel, and the British pound.
Income Taxes
VPG calculates the tax provision for interim periods using an estimated annual effective tax rate methodology based on projected full-year pre-tax earnings among the taxing jurisdictions in which we operate with adjustments for discrete items. The effective tax rate for the fiscal quarter ended June 27, 2020 was 28.1% compared to 26.4% for the fiscal quarter ended June 29,
2019. The effective tax rate for the six fiscal months ended June 27, 2020 was 30.9% compared to 26.9% for the six fiscal months ended June 29, 2019. The tax rate in the current fiscal quarter is higher than the prior year fiscal quarter primarily due to changes in the mix of worldwide income.
The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the
Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment,
including interest and penalties.
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Financial Condition, Liquidity, and Capital Resources
We believe that our current cash and cash equivalents, credit facilities and projected cash from operations will be sufficient to meet our liquidity needs for at least the next 12 months.
In March, 2020, we entered into a third amended and restated credit agreement. The terms of our credit agreement provide for the following facilities: (1) secured revolving facility of $75.0 million, with a sublimit of $10.0 million which can
be used for letters of credit for the account of the Company or its subsidiaries that are parties to the Credit Agreement, the proceeds of which may be used for working capital and general corporate purposes. The restated credit agreement was used to refinance the Company’s existing revolving credit facility in the amount of $34 million and the Company’s existing term loans as follows: (1) the “2015 U.S. Closing Date Term Facility” in an aggregate principal amount of $2.0 million; (2) the "2015 U.S. Delayed Draw Term Facility" in an aggregate principal amount of $5.0 million. The aggregate principal amount
of the 2020 Revolving Facility may be increased by a maximum of $25.0 million upon the request of the Company, subject to the terms of the 2020 Credit Agreement. The 2020 Credit Agreement terminates on March 20, 2025.
Interest payable on amounts borrowed under the 2020 Revolving Facility is based upon, at the Company’s option, (1) the greatest of: the Agent’s prime rate, the Federal Funds rate, or a LIBOR floor (the “Base Rate”), or (2) LIBOR or CDOR plus a specified margin. An interest margin of 0.25% is added to Base Rate loans. Depending upon the Company’s leverage ratio, an interest rate margin ranging from
1.50% to 2.75% per annum is added to the applicable LIBOR or CDOR rate to determine the interest payable on the Libor or CDOR loans. The Company is required to pay a quarterly fee of 0.25% per annum to 0.40% per annum on the unused portion of the 2020 Revolving Facility, which is determined based on the Company’s leverage ratio each quarter. Additional customary fees apply with respect to letters of credit.
The obligations of the Company under the 2020 Credit Agreement are secured by pledges of stock in certain domestic and foreign subsidiaries, as well as guarantees by substantially
all of the Company’s domestic subsidiaries. The obligations of the Company and the guarantors under the 2020 Credit Agreement are secured by substantially all the assets (excluding real estate) of the Company and such guarantors. The 2020 Credit Agreement restricts the Company from paying cash dividends and requires the Company to comply with other customary covenants, representations, and warranties, including the maintenance of specific financial ratios.
The financial maintenance covenants include interest coverage ratio and a leverage ratio. We were in compliance with these covenants at June 27, 2020. If the Company is not in compliance with any of these covenant restrictions, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility could become immediately payable.
Our other long-term debt is not significant and consists of zero percent interest rate debt held by our Japanese subsidiary of approximately $0.1 million at June 27, 2020 and $0.1 million at December 31, 2019.
Our business has historically generated significant cash flow. For
the six fiscal months ended June 27, 2020, cash provided by operating activities was $16.7 million which was flat compared to the prior year period. Our net cash used in investing activities for the six fiscal months ended June 27, 2020 was higher compared to the prior year period mainly due to increased capital spending. Our net cash used by financing activities for the six fiscal months ended June 27, 2020, reflects the repayment of the Canadian term loans and the conversion of the US term loans to revolver under the 2020 credit facility.
Adjusted free cash flow generated during the six fiscal months ended June 27, 2020, was $6.1 million. We refer to the amount of cash provided by operating activities ($16.7 million) in excess
of our capital expenditures ($11.0 million) and net of proceeds from the sale of assets ($0.4 million) as “adjusted free cash flow.”
Third-party debt, including current and long-term:
Term loans
—
10,496
Revolving
debt
41,000
34,000
Third-party debt held by Japanese subsidiary
85
149
Deferred financing costs
(408)
(112)
Total
third-party debt
40,677
44,533
Net cash
$
46,520
$
42,377
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Measurements such as “adjusted free cash flow” and “net cash" do not have uniform definitions and are
not recognized in accordance with U.S. GAAP. Such measures should not be viewed as alternatives to GAAP measures of performance or liquidity. However, management believes that “adjusted free cash flow” is a meaningful measure of our ability to fund acquisitions, and that an analysis of “net cash” assists investors in understanding aspects of our cash and debt management. These measures, as calculated by us, may not be comparable to similarly titled measures used by other companies.
We
earn a significant amount of our operating income outside the United States, the majority of which is deemed to be indefinitely reinvested in the foreign jurisdictions. As a result, as discussed above, a significant portion of our cash and short-term investments are held by foreign subsidiaries. The Company will continue to evaluate its cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds in excess of what is already planned. The Company will evaluate the possibility of repatriating future cash provided such repatriation can be accomplished in a tax efficient manner. In addition, we expect existing domestic cash, short-term investments, and cash flows from operations
to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities, such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt or equity issuances. These alternatives could result in higher tax expense, increased interest expense, or dilution of our earnings. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of June 27,
2020, to be indefinitely reinvested.
Our financial condition as of June 27, 2020 remains strong, with a current ratio (current assets to current liabilities) of 4.5 to 1.0, as compared to a ratio of 2.4 to 1.0 at December 31, 2019.
Cash paid for property and equipment for the six fiscal months ended June 27, 2020 was $11.0 million compared to $5.8 million in the comparable prior year period.
Contractual Commitments
Our Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 11, 2020, includes a table of contractual commitments.
There were no material changes to these commitments since the filing of our Annual Report on Form 10-K, except that the Company recorded a material lease liability during the second quarter of 2020 in connection with a lease of a new manufacturing facility in Israel. Lease maturities for the Company's operating leases are fully described in Note 5 to the consolidated condensed financial statements.
Safe Harbor Statement
From time to time, information provided by us, including but not limited to statements in this report, or other statements made by or on our behalf, may contain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve
a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated.
Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, or projected. Among the factors that could cause actual results to materially differ include: general business and economic conditions; difficulties or delays in identifying, negotiating and
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completing
acquisitions and integrating acquired companies (including Dynamic Systems, Inc.); the inability to realize anticipated synergies and expansion possibilities; difficulties in new product development; changes in competition and technology in the markets that we serve and the mix of our products required to address these changes; changes in foreign currency exchange rates; political, economic, health (including the COVID-19 "coronavirus") and military instability in the countries in which we operate; difficulties in implementing our cost reduction strategies, such as underutilization of production facilities, labor unrest or legal challenges to our lay-off or termination plans, operation of redundant facilities due to difficulties in transferring production to achieve efficiencies; significant developments from the recent and potential changes in tariffs and trade regulation; our efforts and efforts by governmental authorities to mitigate the COVID-19 pandemic,
such as travel bans, shelter-in-place orders and business closures and the related impact on resource allocations, manufacturing and supply chains; the Company’s status as a “critical”, “essential” or “life-sustaining” business in light of COVID-19 business closure laws, orders and guidance being challenged by a governmental body or other applicable authority; the Company’s ability to execute its business continuity, operational and budget plans in light of the COVID-19 outbreak; and other factors affecting our operations, markets, products, services, and prices that are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
28, 2020. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the market risks previously disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31,
2019, filed with the SEC on March 11, 2020.
Item 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are: (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our CEO and CFO, believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. While the design of any system of controls is to provide reasonable assurance of the effectiveness of disclosure controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such assumptions, while reasonable, may not take into account all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be prevented or detected.
Changes in Internal Control over Financial Reporting
During our last fiscal quarter ended June 27,
2020, there was no change in our internal control over financial reporting that materially affected, or is reasonable likely to materially affect, internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
None.
Item
1A.RISK FACTORS
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 11, 2020, and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 2020, filed with the SEC on May 5, 2020. There have been no material changes in reported risk factors from the information reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 2020.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended June 27, 2020, furnished
in XBRL (eXtensible Business Reporting Language).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
