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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 10, 2021, the registrant had i12,602,755 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, 2020 and 2019 and for each of the three years in the period ended December
31, 2020, included in VPG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021. The results of operations for the fiscal quarter ended July 3, 2021 are not necessarily indicative of the results to be expected for the full year. iiVPG
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. The four fiscal quarters in 2021 and 2020 end on the following dates: /
2021
2020
Quarter 1
April
3,
March 28,
Quarter 2
July 3,
June 27,
Quarter 3
October 2,
September 26,
Quarter 4
December 31,
December 31,
iRecently
Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 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 adopted this standard in the first quarter of 2021. The adoption of this ASU did not impact our financial statements or the related disclosures.
Note
2 – iRevenues
Revenue Recognition
iThe 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):
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.
iThe outstanding contract assets and liability accounts were as follows (in thousands):
The
amount of revenue recognized during the six fiscal months ended July 3, 2021 that was included in the contract liability balance at December 31, 2020 was$i2.4 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 - iAcquisition
On
June 1, 2021, VPG completed the acquisition of California-based Diversified Technical Systems, Inc. (“DTS”), a manufacturer of data acquisition systems and sensors for product safety and testing, for a purchase price of $i47.2 million, subject to customary adjustments. The Company used cash on hand and borrowings under its revolving credit facility to fund the purchase price under the purchase
agreement. DTS reports into the Company's Weighing and Control Systems segment. iThe following table summarizes the provisional fair values assigned to the assets and liabilities of DTS as of June 1, 2021 (in thousands):
The
Company utilizes certain valuations and studies to determine the fair value of the tangible and intangible assets acquired. These valuations and studies are currently being analyzed and have yet to be finalized. Accordingly, the assets and liabilities assumed are subject to adjustment once the detailed analysis is completed. The provisional estimated weighted average useful lives for the acquired technology and customer relationships are ii15/
years. Trade names are treated as indefinite-lived intangible assets. None of the goodwill associated with DTS will be deductible for income tax purposes.
i
The Company recorded acquisition costs associated with this transaction as follows (in thousands):
Included in the results of the operations of the Company, starting on June 1, 2021, are net revenues of $ii3.0/ million
and a net loss of $ii0.2/ million from DTS for the fiscal quarter and six fiscal
months ended July 3, 2021. DTS results include amortization of the inventory step-up of $ii0.9/ million
and amortization of intangible assets of $ii0.1/ million.
i
Following is the supplemental consolidated financial results for the Company on an unaudited pro forma basis, as if the DTS acquisition had been consummated on January 1, 2020:
Pro
forma net earnings attributable to VPG stockholders
$
i1,629
$
i3,658
i6,741
i13,411
Pro
forma basic earnings per share attributable to VPG stockholders
$
i0.12
$
i0.27
$
i0.50
$
i0.99
Pro
forma diluted earnings per share attributable to VPG stockholders
$
i0.12
$
i0.27
$
i0.49
$
i0.98
/
Note
4 – iGoodwill and Other Intangible Assets
The Company tests the goodwill in each of its goodwill reporting units for impairment at least annually, as of the first day of it's fourth quarter, and whenever events or changes in circumstances occur indicating that a possible impairment may have been incurred. Due to updated financial projections, the
Company performed a quantitative impairment test for the instrumentation reporting unit during the second quarter of 2021. In estimating the fair value of our instrumentation reporting unit the Company used the income approach.
The results of the quantitative impairment test for the instrumentation reporting unit's goodwill and indefinite-lived trade name indicated an impairment, and in the second quarter of 2021, the Company recognized a non-cash impairment loss of $i1.1 million
in goodwill and $i0.1 million to the indefinite-lived trade name. The impairment was driven mainly by changes in forecasted projections including a slower growth rate in revenues. After considering the impact of the impairment charges, the carrying amount of goodwill and indefinite-lived trade names as of July 3, 2021 was $i0.0 million
and $i0.3 million, respectively.
i
The change in the carrying amount of goodwill by segment is as follows (in thousands):
The
increase in net intangible assets from December 31, 2020 is due to the acquisition of DTS on June 1, 2021. The Company has preliminarily allocated $i21.3 million of the purchase price to definite-lived intangible assets and $i2.4 million
to indefinite-lived intangible assets.
Amortization expense for the fiscal quarter and six fiscal months ended July 3, 2021 was $i0.7 million and $i1.4 million,
respectively. The DTS intangible assets accounted for $ii0.1/ million
of amortization expense for the fiscal quarter and six fiscal months ended July 3, 2021.
i
Estimated annual amortization expense for the full year of 2021 and each of the next four years, is as follows ( in thousands):
2021
$
i3,280
2022
i3,871
2023
i3,763
2024
i3,728
2025
i3,728
/
Note
5 – iLeases
The Company primarily leases office and manufacturing facilities in addition to vehicles, which have remaining terms of less than ione
year to ieleven years. The Company has no finance leases.
iLeases recorded
on the balance sheet consist of the following (in thousands):
Right
of use assets obtained in exchange for new operating lease liability during 2021 were $i5.9 million. The Company paid $i2.4 million
and $i1.7 million for its operating leases for each of the six fiscal months ended July 3, 2021 and June 27, 2020, which are included in operating cash flows on the consolidated condensed statements of cash flows.
i
Undiscounted
maturities of operating lease payments as of July 3, 2021 are summarized as follows (in thousands):
2021 (excluding the six months ended July 3, 2021)
$
i2,596
2022
i4,500
2023
i3,968
2024
i3,555
2025
i3,083
Thereafter
i12,894
Total
future minimum lease payments
$
i30,596
Less: amount representing interest
(i3,805)
Present
value of future minimum lease payments
$
i26,791
/
Note 6 – iIncome
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 July 3, 2021 was i6.1% compared to i28.1%
for the fiscal quarter ended June 27, 2020, and the effective tax rate for the six fiscal months ended July 3, 2021 was i18.4% compared to i30.9%
for the six fiscal months ended June 27, 2020. The tax rate for both periods presented in 2021 is lower than the prior year periods primarily due to the acquisition of DTS, which enabled the Company to reduce its valuation allowance against deferred tax assets, tax rate changes in certain foreign jurisdictions, and 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
-17-
Note 6 - Income Taxes (continued)
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):
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 July 3, 2021, the Company had reserved i320,654 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 4, 2021 and in accordance with their respective employment agreements, VPG’s ithree
executive officers were granted annual equity awards in the form of RSUs, of which i50% are performance-based. The awards have an aggregate target grant-date fair value of $i1.7
million and were comprised of i52,486 RSUs. iFifty
percent of these awards will vest on January 1, 2024, subject to the executives’ continued employment. The performance-based portion of the RSUs will also vest on January 1, 2024, 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 8, 2021, certain non-executive VPG employees were granted annual equity awards in the form of RSUs. Certain employees received awards, of which i75% are performance-based and certain employees received awards of which i50%
are performance-based. The awards have an aggregate grant-date fair value of $i0.6 million and were comprised of i17,793
RSUs. The non-performance portion of these awards (itwenty-five percent for certain employees and ififty
percent for certain employees) will vest on January 1, 2024 subject to the employees' continued employment. The performance-based portion of the RSUs will also vest on January 1, 2024, 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 27, 2021 and in accordance with the Company's 2017 Non-Employee Director Compensation Plan, the Board of Directors approved the issuance of an aggregate of i9,936 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 2022 Annual Stockholders Meeting or May 27, 2022, 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
$
i7,219
$
i8,070
$
i14,052
$
i13,454
Force
Sensors
i3,474
(i1,013)
i6,977
i191
Weighing
and Control Systems
i4,595
i4,019
i8,419
i8,687
Unallocated
G&A expenses
(i7,943)
(i6,606)
(i15,664)
(i13,088)
Acquisition
costs
(i1,198)
i—
(i1,198)
i—
Impairment
of goodwill and indefinite-lived intangibles
(i1,223)
i—
(i1,223)
i—
Restructuring
costs
i—
(i499)
i—
(i629)
Operating
income
$
i4,924
$
i3,971
$
i11,363
$
i8,615
Acquisition
costs:
Weighing and Control Systems
(i1,198)
i—
(i1,198)
i—
$
(i1,198)
$
i—
$
(i1,198)
$
i—
Impairment
of goodwill and indefinite-lived intangibles:
Foil Technology Products
$
(i1,223)
$
i—
$
(i1,223)
$
i—
$
(i1,223)
$
i—
$
(i1,223)
$
i—
Restructuring
costs:
Foil Technology Products
$
i—
$
(i341)
$
i—
$
(i443)
Force
Sensors
$
i—
$
(i80)
$
i—
$
(i108)
Corporate/Other
i—
(i78)
i—
(i78)
$
i—
$
(i499)
$
i—
$
(i629)
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
$
i959
$
i868
$
i1,920
$
i1,592
Weighing
and Control Systems to Foil Technology Products and Force Sensors
$
i150
$
i124
$
i264
$
i211
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 ended July 3, 2021, 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, Japanese yen, the Israeli shekel and the British pound.
For the six fiscal months ended July 3, 2021, 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, the Japanese yen, the euro and the British pound
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 July 3, 2021 and December 31, 2020, and company-owned life insurance assets. The marketable securities held
-23-
Note 14 - Fair Value Measurements (continued)
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 July 3, 2021 and December 31, 2020 approximates its carrying value as the revolving debt is reset on a monthly basis based on current
market rates, plus a base rate as specified in the debt agreement. 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, accounts receivable, short-term notes payable, and accounts payable. The carrying amounts for these financial instruments 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 $i0.0 million and $i0.5 million of restructuring costs during the fiscal quarter ended July 3, 2021 and June 27,
2020, respectively and $i0.0 million and $i0.6 million of restructuring costs during the six fiscal months ended July 3, 2021 and June 27,
2020, 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 July 3, 2021 and December 31, 2020, 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 of August 10, 2021, all of the Company’s facilities are open and operational. The Company is continuing to maintain COVID-19 best practices it believes are warranted with respect to working conditions. Nonetheless, given the ongoing uncertainty concerning the magnitude and duration of the COVID-19 pandemic around the world, any ongoing economic disruption
may 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. On June 1, 2021, we completed the acquisition
of California-based Diversified Technical Systems, Inc. (“DTS”), a manufacturer of data acquisition systems and sensors for product safety and testing. DTS reports into the Company's Weighing and Control Systems segment.
Net revenues for the fiscal quarter ended July 3, 2021 were $75.3 million versus $59.1 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended July 3, 2021 were $3.9 million, or $0.29 per diluted share, versus $1.8 million, or $0.13 per diluted share, for the comparable prior year period.
Net revenues for the six fiscal months ended July 3, 2021 were $145.9
million versus $126.8 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the six fiscal months ended July 3, 2021 were $8.9 million, or $0.65 per diluted share, versus $5.1 million, or $0.37 per diluted share, for the comparable prior year period.
The results of operations for the fiscal quarter ended July 3, 2021 and June 27, 2020 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, adjusted net earnings
per diluted share, EBITDA and adjusted EBITDA. These non-GAAP measures should not be viewed as an alternative to GAAP measures of
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performance. Non-GAAP measures such as adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted net earnings per diluted share, EBITDA and adjusted EBITDA 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. Beginning in the fourth quarter of 2020, the Company determined to include the impact of foreign currency exchange rates on its assets and liabilities in certain of its non-GAAP measures for its current and comparative periods.
Impairment of goodwill and indefinite-lived intangibles
1,223
—
1,223
—
Acquisition
purchase accounting adjustments (a)
919
41
930
556
Acquisition costs
1,198
—
$
1,198
$
—
Restructuring
costs
—
499
—
629
COVID-19 impact (b)
(242)
443
(685)
443
Start-up
costs (c)
1,159
—
1,288
—
Foreign exchange (gain)/loss (d)
174
1,185
(561)
285
ADJUSTED
EBITDA
$
12,472
$
7,991
$
21,986
$
16,282
ADJUSTED EBITDA MARGIN
16.6
%
13.5
%
15.1
%
12.8
%
(a) Acquisition
purchase accounting adjustments 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.
(c) Start-up costs in 2021 are associated with the ramp up of our new manufacturing facility in Israel.
(d) Impact of foreign currency exchange rates on assets and liabilities. Note that impacts in prior year have been added to this table.
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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.
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 2020 through the second quarter of 2021 (dollars in thousands):
2nd
Quarter
3rd Quarter
4th Quarter
1st Quarter
2nd Quarter
2020
2020
2020
2021
2021
Net revenues
$
59,146
$
67,525
$
75,445
$
70,589
$
75,339
Gross
profit margin
39.1
%
40.5
%
38.1
%
40.5
%
39.6
%
End-of-period
backlog
$
92,900
$
90,800
$
87,600
$
100,700
$
130,900
Book-to-bill
ratio
0.95
0.95
0.93
1.21
1.40
Inventory turnover
2.20
2.38
2.86
2.67
2.64
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2nd
Quarter
3rd Quarter
4th Quarter
1st Quarter
2nd Quarter
2020
2020
2020
2021
2021
Foil Technology Products
Net
revenues
$
31,785
$
32,906
$
36,477
$
32,711
$
33,308
Gross profit margin
41.8
%
41.1
%
38.4
%
39.9
%
38.9
%
End-of-period
backlog
$
47,500
$
48,500
$
43,700
$
48,400
$
60,600
Book-to-bill ratio
0.85
1.01
0.84
1.19
1.37
Inventory
turnover
2.58
2.63
3.05
2.72
2.67
Force Sensors
Net
revenues
$
8,916
$
13,862
$
16,251
$
16,933
$
17,216
Gross profit margin
11.6
%
30.5
%
29.1
%
35.7
%
34.7
%
End-of-period
backlog
$
22,300
$
21,300
$
24,700
$
26,800
$
30,700
Book-to-bill ratio
1.58
0.90
1.18
1.14
1.23
Inventory
turnover
2.02
2.28
2.74
2.72
2.57
Weighing and Control Systems
Net
revenues
$
18,445
$
20,757
$
22,717
$
20,945
$
24,815
Gross profit margin
47.6
%
46.2
%
44.0
%
45.6
%
43.9
%
End-of-period
backlog
$
23,100
$
21,000
$
19,200
$
25,500
$
39,600
Book-to-bill ratio
0.82
0.88
0.88
1.30
1.56
Inventory
turnover
1.81
2.13
2.67
2.54
2.64
Net revenues for the second quarter of 2021 increased 6.7% from the first quarter of 2021 mainly due to increased volume in all of the Company's reporting segments. Net revenues increased 27.4% from the second quarter of 2020 with increased volume primarily from the Force Sensors reporting segment and the Weighing
and Control Systems segment. The increase in the Weighing and Control Systems reporting segment was aided by the addition of revenues from the acquisition of DTS.
Net revenues in the Foil Technology Products reporting segment increased 1.8% compared to the first quarter of 2021 and increased 4.8% from the second quarter of 2020. Sequentially, the increase in revenue was primarily driven by higher sales of precision foil resistors in the test and measurements market, partially offset by lower revenue to the Avionics, Military and Space market. In addition, the sequential increase in revenue in our Pacific Instrument product line in the Avionics, Military and Space market was partially offset by lower revenue of advanced sensors in our other markets. The year-over-year increase in revenue was primarily attributable to an increase in our advanced sensors product line, primarily in our general industrial market and an increase
in our Pacific Instrument product line in the Avionics, Military and Space market.
Net revenues in the Force Sensors reporting segment increased 1.7% from the first quarter of 2021 and increased 93.1% from the second quarter of 2020. The sequential increase was primarily due to higher revenue in our Other markets, mainly in consumer and construction. The year-over-year increase primarily reflected operational limitations in the second fiscal quarter of 2020 from the COVID pandemic at our facility in India.
Net revenues in the Weighing and Control Systems reporting segment increased 18.5% from the first quarter of 2021 and increased 34.5% from the second quarter of 2020. The sequential increase in net revenues was primarily due to the acquisition of DTS and higher revenue of process weighing solutions and KELK products.The year-over-year
increase in revenue was primarily attributable to the addition of revenue for DTS, higher revenue of our onboard weighing products for the transportation market, higher revenue of our process weighing solutions for the industrial market, and higher revenue of our Dynamic Systems, Inc. ("DSI") products for the steel market, which was partially offset by lower revenue of KELK steel-related products.
Overall gross profit margin in the second quarter of 2021 decreased 0.9% as compared to the first quarter of 2021 and increased 0.5% from the second quarter of 2020.
Sequentially, all reporting segments contributed to the decrease in the gross profit margin. The Foil Technology Products reporting segment gross profit margins decreased sequentially due to the impact of charges related to start-up costs in our new advanced sensors facility and the impact of COVID-19, which were partially
offset by manufacturing efficiencies, an increase
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in inventory and higher volume. The Force Sensors reporting segment gross profit margin decreased sequentially due to unfavorable foreign exchange rates, partially offset by increases in inventory and volume. In the Weighing and Control Systems reporting segment, the decrease in gross profit margin compared to the prior sequential quarter was due to the impact of charges related to the purchase accounting adjustment from the DTS acquisition and the impact of COVID-19, which were partially offset by the addition of DTS.
Compared to the second quarter of 2020, the Foil Technology Products reporting segment had a lower gross profit margin. Impacts from charges related
to start-up costs in our new advanced sensors facility and the impact of COVID-19 were partially offset by higher volume and favorable product mix. The Force Sensors reporting segment increase in gross profit margin as compared to 2020 was primarily due to higher revenue and an increase in inventory. In the Weighing and Control Systems segment, the decrease in gross profit margin as compared to the second quarter of 2020 was due to the impact of charges related to purchase accounting adjustments from the DTS acquisition and the impact of COVID-19, along with an unfavorable product mix, which were partially offset by the addition of DTS and favorable exchange rates.
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 signed a long-term lease for a state of the art facility which has been constructed in Israel. Our administrative personnel have moved to the new facility, and we have begun the transition of our advanced sensors business to that facility and we expect to complete the transition to the new facility in the third quarter of 2021.
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 available tax and other government-sponsored incentives. For example in 2019, 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.
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 employs our foil strain gages to manufacture load cells for its systems, continued this strategy. Additionally, the KELK acquisition resulted in the acquisition of certain optical sensor technology. The Pacific Instruments acquisition significantly broadened our existing data acquisition
offerings and opened new markets for us. The acquisition of DSI expanded our position in the steel market. On June 1, 2021, we completed the acquisition of California-based Diversified Technical Systems, Inc., a manufacturer of data acquisition systems and sensors for product safety and testing, DTS is an established niched-market leader with a strong brand in automotive, avionics, military and defense markets. DTS adds complementary technology to our platform and brings unique engineering capabilities, centered on miniaturized data acquisition and systems integration with sensor technology for critical testing applications. We expect to expand our expertise, and our acquisition focus, outside our traditional vertical approach to other precision sensor solutions in the fields of
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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 on March 11, 2021.
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 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.
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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 and significant lease assets and liabilities.
Effects of Foreign Exchange Rate on Operations
For the fiscal quarter ended July 3,
2021, exchange rates increased net revenues by $2.8 million, and increased costs of products sold and selling, general, and administrative expenses by $3.5 million, when compared to the comparable prior year period.
For the six fiscal months ended July 3, 2021, exchange rates increased net revenues by $4.9 million, and increased costs of products sold and selling, general, and administrative expenses by $5.8 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
16.8
%
8.5
%
Change
in average selling prices
(0.1)
%
(0.1)
%
Foreign currency effects
5.6
%
4.2
%
Acquisitions
5.1
%
2.4
%
Net
change
27.4
%
15.0
%
During the fiscal quarter ended July 3, 2021, net revenues increased 27.4% as compared to the comparable prior year period, with increased volume primarily from the Force Sensors reporting segment and the Weighing and Control Systems segment. The increase in the Weighing and Control Systems reporting segment was aided by the addition of revenues from the acquisition of DTS.
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During six fiscal months ended July 3,
2021, net revenues increased 15.0%, as compared to the comparable prior year period, mainly due to increased volume in the Foil Technology and Force Sensors reporting segment, and the addition of revenues from the acquisition of DTS on June 1, 2021.
Gross Profit Margin
Gross profit as a percentage of net revenues was as follows:
The
gross profit margin for the fiscal quarter ended July 3, 2021 increased 0.5% as compared to the comparable prior year period with higher gross profit margins in the Force Sensors reporting segment being offset by lower margin in the Foil Technology and Weighing and Controls Systems reporting segments.
The gross profit margin for the six fiscal months ended July 3, 2021 increased 2% as compared to the comparable prior year period, mainly from higher gross profit margins in the Force Sensors reporting segment.
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
1.8
%
3.3
%
Change
in average selling prices
0.6
%
0.5
%
Foreign currency effects
2.4
%
2.2
%
Net change
4.8
%
6.0
%
Net
revenues increased 4.8% for the fiscal quarter ended July 3, 2021, as compared to the comparable prior year period. The year-over-year increase in revenue was primarily attributable to an increase in our advanced sensors product line, primarily in our general industrial market and an increase in our Pacific Instrument product line in the Avionics, Military and Space market.
Net revenues increased 6.0% for the six fiscal months ended July 3, 2021, as compared to the comparable prior year period. Increases in net revenues are primarily attributable to our advanced sensors product line in other markets, test and measurement markets, and general industrial markets.
Gross profit as a percentage of net revenues for the Foil Technology Products segment was as follows:
The
gross profit margin decreased 2.9% for the fiscal quarter ended July 3, 2021, when compared to the comparable prior year period. Impacts from charges related to start-up costs in our new advanced sensors facility and the impact of COVID-19 were partially offset by higher volume and favorable product mix.
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The gross profit margin increased 0.1% for the six fiscal months ended July 3, 2021 as compared to the comparable prior year period. Impacts from charges related to start-up costs in our new advanced sensors facility and the impact COVIID-19 completely offset the higher volume and favorable product mix.
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
88.5
%
41.9
%
Change
in average selling prices
(1.7)
%
(1.5)
%
Foreign currency effects
6.3
%
4.2
%
Net change
93.1
%
44.6
%
Net
revenues increased 93.1% for the fiscal quarter ended July 3, 2021, and 44.6% for the six fiscal months ended July 3, 2021 as compared to the comparable prior year periods. The year-over-year increase primarily reflected operational limitations in the second fiscal quarter of 2020 from the COVID pandemic at our facility in India.
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 July 3, 2021 increased 23.1% as compared to the comparable prior year period primarily due to higher revenue and an increase in inventory.
The gross profit margin for the six fiscal months ended July 3, 2021 increased 15.7% as compared to the prior year period primarily due to higher revenue and an increase in inventory.
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
7.9
%
(1.8)
%
Change
in average selling prices
0.6
%
0.3
%
Foreign currency effects
9.7
%
6.6
%
Acquisitions
16.3
%
6.6
%
Net
change
34.5
%
11.7
%
Net revenues increased 34.5% for the fiscal quarter ended July 3, 2021 as compared to the comparable prior year period. The year-over-year increase in revenue was primarily attributable to the addition of revenue for DTS, higher revenue of our onboard weighing products for the transportation market, higher revenue of our process weighing solutions for the industrial market, and higher revenue of our Dynamic Systems, Inc. ("DSI") products for the steel market, which was partially offset by lower revenue of KELK steel-related products.
Net revenues increased 11.7% for the
six fiscal months ended July 3, 2021 as compared to the comparable prior year period primarily due to the addition of revenue for DTS and favorable foreign currency effects.
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 July 3, 2021 of 43.9% decreased from the second quarter of 2020 due to the impacts of charges related to purchase accounting adjustments from the DTS acquisitions and the impact of COVID-19, along with an unfavorable product mix, which were partially offset by the addition of DTS and favorable exchange rates.
The gross profit margin for the six fiscal months ended July 3, 2021 of 44.6%, decreased from the prior year period due to the impacts of charges related to purchase accounting adjustments from the DTS acquisitions, lower volume and unfavorable product mix, which were partially offset by the addition of DTS and favorable 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 and six fiscal months ended July 3, 2021 increased compared to the comparable prior year periods with additional SG&A expenses related to personnel costs and foreign currency impacts and SG&A expenses from the acquisition of DTS.
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Impairment
of Goodwill and Indefinite-lived Intangible Assets
For the fiscal quarter and six fiscal months ended July 3, 2021, as a result of our interim impairment test, we recorded a $1.2 million pre-tax, non-cash impairment charge which reduced the carrying value of our goodwill and indefinite-lived intangible assets. See Note 4 for further discussion.
Acquisition Costs
Acquisition costs associated with the acquisition of DTS were as follows (in thousands):
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 $0.0 million and $0.5 million of restructuring costs during the fiscal quarter ended July 3, 2021 and June 27, 2020,
respectively, and $0.0 million and $0.6 million of restructuring costs during the six fiscal months ended July 3, 2021 and June 27, 2020, 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 ended July 3, 2021 was flat when compared with interest expense in the comparable prior year period. The impact of increased borrowings on the Company's revolving credit facility in conjunction with the acquisition of DTS were offset
by more favorable borrowing rates in 2021. Interest expense for the six fiscal months ended July 3, 2021 was lower when compared with the comparable prior year period mainly due to more favorable borrowing rates in 2021.
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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 ended July 3, 2021, 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, Japanese yen, the Israeli shekel and the British pound.
For the six fiscal months ended July 3, 2021, 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, the Japanese yen, the euro 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 July 3, 2021 was 6.1% compared to 28.1% for the fiscal quarter ended June 27, 2020 and the effective tax rate for the six fiscal months ended July 3, 2021 was 18.4% compared to 30.9% for the six fiscal months ended June 27, 2020. The tax rate for both periods presented in 2021 is lower than the prior year periods primarily due to the acquisition of DTS, which enabled the Company to reduce its valuation allowance against deferred tax assets, tax rate
changes in certain foreign jurisdictions, and 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 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 July 3, 2021. 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 business has historically generated significant cash flow. For the six fiscal months ended July 3, 2021, cash provided by operating activities was $12.4 million compared to $16.7 million in the comparable prior year period. Our net cash used in investing activities for the six fiscal months ended July 3, 2021 was
higher compared to the prior year period mainly due to the acquisition of DTS. Our net cash provided by financing activities for the six fiscal months ended July 3, 2021 was higher compared to prior year mainly due to the borrowings on the 2020 credit facility for the acquisition of DTS.
Adjusted free cash flow generated during the six fiscal months ended July 3, 2021, was $4.1 million. We refer to the amount of cash provided by operating activities ($12.4 million) in excess of our capital expenditures ($8.3 million) and net of proceeds from the sale of assets ($0.0 million) as “adjusted free cash flow.”
Third-party
debt, including current and long-term:
Revolving debt
61,000
41,000
Third-party debt held by Japanese subsidiary
—
18
Deferred
financing costs
(330)
(374)
Total third-party debt
60,670
40,644
Net cash
$
12,786
$
57,794
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 July 3,
2021, to be indefinitely reinvested.
Our financial condition as of July 3, 2021 remains strong, with a current ratio (current assets to current liabilities) of 4.2 to 1.0, as compared to a ratio of 4.7 to 1.0 at December 31, 2020.
Cash paid for property and equipment for the six fiscal months ended July 3, 2021 was $8.3 million compared to $11.0 million in the comparable prior year period.
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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 completing acquisitions and integrating acquired companies; 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 pandemic) 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 pandemic; 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, 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, 2020, filed with the
SEC on March 11, 2021.
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 July 3, 2021, 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, 2020, filed with the SEC on March 11, 2021. 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, 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 July 3, 2021, 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.
