Vishay Precision Group, Inc. (VPG) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Vishay Precision Group Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Wendy Wilson. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to VPG’s fiscal 2013 third quarter earnings conference call. An audio recording will be made of the conference call today including any questions or comments that participants may contribute. By now you all should have received our third quarter earnings press release and we hope you take the time to read through it, as it does contain important information. You can find it including relevant non-GAAP reconciliations on VPG’s website as www.vishaypg.com. An audio recording will be available on the Internet for a limited time and can be accessed on the VPG website. The content of this conference call is owned by Vishay Precision Group and is protected by U.S. Copyright Law and international law. You may not make any recordings or other copies of this conference call, and you may not reproduce, distribute, adapt, transmit, display or perform the contents of this conference call in whole or in part without our written permission. Today’s remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make today. For a more complete discussion of the risks associated with the operations of Vishay Precision Group, please refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2012 and our other recent SEC filings. And now, it’s my pleasure to introduce the host for today’s call, Ziv Shoshani, CEO and President and Bill Clancy, CFO. Bill?

Thanks Wendy. Good morning, everyone, and thank you for joining us on our call today. I would like to start by reviewing some third quarter highlights and then summarizing the financials. Following that, Ziv will provide his view of the third quarter results. Overall, I would say, this was a challenging quarter as we had some unusual events like our ERP implementation in our Foil Technology Product sector, which resulted in lower revenues, driving lower consolidated margins. We believe this phenomenon will be short lived. Revenues for the nine months of 2013 increased 6.9% compared to the first nine months of 2012. Third quarter revenues increased 4.1% compared to the prior year quarter, primarily due to the inclusion of KELK’s revenue. Our consolidated book-to-bill has grown to 1.01 and market demand is solid in most of our segments. For those reasons we are setting our fourth quarter guidance in a range of 59 million to 64 million. Due to factors that Ziv will review later on the call. For a brief review of the financial results let’s start at the top. For the third quarter we reported revenues of 57.7 million a 4.1% increase, compared to 55.4 million for the prior year period. An updated valuation report for the count acquisition resulted in the company recording fair market value adjustments associated with purchase accounting that include approximately 903,000 of Kelk acquisition purchase accounting adjustments which impact the cost of goods sold 57,000 of acquisition cost and 99,000 of restructuring which effects comparability. For the nine months of 2013 the adjustments include approximately 4.4 million of Kelk acquisition purchase accounting adjustments which impact the cost of products sold, 752,000 of acquisition costs and 487,000 of restructuring cost which affect comparability. The consolidated adjusted gross margin for the third quarter of 2013 increased to 34.9% compared to 33.8% for the third quarter of 2012 due to the impact of Kelk’s results in the third quarter this year. Selling general administrative expenses for the quarter were 18.5 million with 32.6% of revenues compared to 15.7 million or 28.3% for last year’s third quarter. The increase of 2.8 million from the prior year is all due to the inclusion of KELK’s business into ours this year. Looking at operating margin on an adjusted basis, without the fair market valuation and acquisition restructuring cost, you can see that is at 2.9%, down from 5.6% in the third quarter last year and 8.4% sequentially. The operating margin change is a result of lower revenues from our recent ERP implementation in our FTP segment. Included in other income and expense was 184,000 of foreign exchange gains during the quarter compared to 207,000 of foreign exchange losses in the third quarter of 2012. We also recorded interest expense of 276,000 in the third quarter of ‘13 compared to interest expense of 75,000 for the same period last year, again primarily related to debt associated with the KELK acquisition. Our GAAP tax rate year-to-date is a negative 11.9% compared to 29.9% for the first nine months of last year. For the fiscal quarter ending September 28, 2013 the company recorded a net tax benefit associated with changes in statutory tax rates. In July, a new tax law was enacted in Israel which effectively increases the corporate income tax rate on certain types of income earned after January 1, 2014. Accordingly, the company’s deferred tax assets in Israel were increased to reflect the higher tax rate which allowed the recording of a one-time benefit of $1.3 million our expected operational tax rate in 2013 is anticipated to be approximately 26%. GAAP net earnings attributable to VPG stockholders in the third quarter were $1.5 million or $0.11 per diluted share compared to GAAP net earnings attributable to VPG stockholders for the third quarter of 2012 of $1.9 million or $0.14 per diluted share. Adjusted net earnings for the third quarter of 2013 were $1.2 million or $0.09 per diluted share versus net earnings of $1.9 million or $0.14 per diluted share for the comparable prior year. The overall impact of foreign exchange rates for the third quarter of 2013 as compared to the prior year period had a negative impact to pre-tax income of $109,000 or $0.01 per diluted share, and for the nine months of 2013 had a negative impact to pre-tax income of 2.2 million or $0.12 per diluted share. Capital expenditures in the third quarter of 2013 were $2.1 million compared to $1.6 million in the third quarter of 2012. Depreciation and amortization for the third quarter of 2013 was $3 million compared to $2.8 million in the third quarter of 2012. Total long-term debt as of September 28th, 2013 and December 31st, 2012 was $24 million and $11.1 million respectively. The increase being attributable to the debt added for the KELK acquisition. During the third quarter of 2013, 5.9 million of our long-term notes which were due at 2102 were converted into 259,687 shares of VPG common-stock. Cash provided by operations was $2.2 million for the third quarter of 2013 compared to cash provided by operations of $7.3 million for the third quarter of 2012. We referred to amount of cash generating from operations of 2.2 million in excess of our capital expenditure needs of 2.1 million and net of proceeds in the sale of assets as free cash. Total free cash flow for the third quarter of 2013 was $133,000 compared to $5.8 million in the third quarter of 2012. We anticipate, we will generate positive cash flow for the year. On slide five, you can see that despite lower quarterly revenues last year, we were able to maintain our gross margin percentage throughout the year end as a result of our focus on improving operational efficiencies and reducing our costs. Despite our challenging third quarter, we anticipate recovering our previous trend. With that, I would now like to turn the call over to Ziv Shoshani, our CEO and President. Ziv?

Thank you, Bill. Despite the weak start to the year from a macroeconomic perspective we will see continued improvements which were supported by positive industrial production in the U.S. and in Europe. Additionally PMI indicators show that while expansion has continued the pace has slowed. The lower yen is boosting competitiveness in Japan which is a positive sign for expansion of the Japanese economy, in China, as in the U.S. and in Europe the expansion continues but at a slower pace. Looking at the global steel outlook for 2013, the World Steel Association, which is the largest association in the industry, reports that the world crude steel production in September year-to-date indicates an increase of 2.7% from the first nine months of 2012. In September China is up 11% showing some improvements from September 2012. Globally, in the third quarter mill utilization was running at around 79% versus 75% in Q3 of last year, which indicates a modestly positive outlook. Based on the above mentioned indicators, we project the market demand to be stable with a potential upside into 2014. Moving on to operational trends, let’s start by comparing consolidated year-over-year and sequential results. The company’s overall book-to-bill was 1.01 in the third quarter of 2013 compared to 0.92 last year and 0.98 in the second quarter of 2013. Without the effect of the KELK business, the book-to-bill was 1.04 in the quarter, which is consistent with the second quarter. We believe excluding KELK from this ratio is relevant because KELK operates in a project type business model. Total orders were 58.4 million up by 14% from 51.2 million last year and down 5.5% from the second quarter of 2013. The year-over-year increase was driven by strength of the Asia orders up 48% coming from Kelk as well as 8% increase in European orders in the FTP segment. Some details on our reporting segments, the FTP segment had a book-to-bill ratio of 1.1 for the third quarter of 2013 compared to 0.93 for the third quarter of 2012 and 1.05 for the second quarter of 2013, sequentially orders decreased by 900,000 or 3.6% from the second quarter of 2013, reflecting increases in European orders offset by decrease in the Americas and in Asia. The FTP gross margin was 36.7% for Q3, down from 38.9% in Q3 of last year and 38.1% in the second quarter of 2013. The year-over-year decreased in gross margin of 1.9 million was caused by 3.6 million of lower volume resulting from ERP implementation, issues and 500,000 exchange rate affect. The sequential decrease in gross margin of 1.1 million was by merely due to 3.6 million of lower revenues resulting from ERP implementation issues. These lower revenues in turn resulted in a reduction in gross margin of $2 million partially offset by an increase of 1.5 million of revenues in Precision resistors which equates to 800,000 of gross margin. The FTP segment backlog was 3.2 months up from 2.4 months last year and 2.6 months in the prior quarter. Looking at the Force Sensors segment, the book-to-bill ratio was 0.92 for Q3 compared to 0.97 in the third quarter last year and 1.04 for the second quarter of 2013. Sequential orders decreased by 1.6 million or 9.5% compared to Q2 of 2013. This decrease came primarily from Europe, where we received a large order in the second quarter for a new product launch which we shift in the third quarter and was partially offset by an increase in orders from the Americas. The gross margin for the segment was 17.6% in the third quarter of 2013 versus 20.5% in the third quarter of 2012 and 20.2% in the second quarter of 2013. The year-over-year gross margin decrease is primarily due to a reduction of 300,000 of volume and a 150,000 of costs related to new product launch. The sequential decrease in gross margin is mainly due to $300,000 of customer mix, 300,000 of inventory reduction and 150,000 of cost from new product launch in Q3 of 2013. The Force Sensors segment backlog was 2.3 months compared to 2.4 months in the prior year and 2.5 months in Q2. For Weighing and Control Systems segment, orders increased 7.8 million or 73% compared to Q3 of 2012 primarily from Asia. The year-over-year improvement is primarily due to the inclusion of the KELK results in the segment. Sequentially orders decreased 900,000 or 4.7% in Europe due to seasonality offset by strength in other areas. The gross margin for the segment was 47.8% excluding the KELK acquisition purchase accounting in 2013versus 40.9% in the third quarter of 2012 and 50.2% excluding the KELK acquisition purchase accounting in the second quarter of 2013. The year-over-year increase in adjusted gross margin is due to KELK. The sequential adjusted gross margin decrease is due to lower revenues at KELK due to the project nature of the business and the lower revenues in the process weighing business. The book-to-bill ratio was 0.98 for Q3 compared to 0.85 in the third quarter last year and 0.87 for prior quarter. Segment backlog was at 3.9 months compared to 1.4 months in last year third quarter and 3.3 months in the prior quarter, in the prior quarter. We expect net revenues in the range of $59 million to $64 million for the fourth quarter of 2013 due to the normal seasonality improvements and the benefit from the ERP system implementation should begin to be realized. With that, we will open the lines for questions. Thank you

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Franzreb of Sidoti and Company. Please go ahead. John Franzreb – Sidoti and Company: Good morning, everybody.

Good morning, John.

Morning John. John Franzreb – Sidoti and Company: You seem to imply that the benefits from the ERP system will become to materialize in the fourth quarter, of the $3.6 million in call it up to new loss revenue and $2 million of gross profit. How much do you expect to claw back in the fourth quarter?

We expect to regain at least 50% on the volume wise which will of course be translated to at least 50% on the gross margin level. The fact that we are looking at realizing or going back to a normal level, this does not include the full benefit that once this ERP is up and running in a much smoother way and we should expect to gain market share, this would be beyond our normal level of revenues, which has been in this particular product line above the 12 million run rate. As a matter of fact, during Q3 when we switched off and we transition to the new system, the revenues that has been recorded for this specific product line was less than 9 million. So going back to a normalized level is going back to a normal run rate, and this is still without expecting regaining market share. John Franzreb – Sidoti and Company: Great, great. And then the Force Sensors segment, book-to-bill number and the incoming order number was relatively weak. You cited a large order from the second quarter but even on a year-over-year basis, it seemed like it was underperforming. What’s going on at Force Sensors?

You’re absolutely correct. If we look year-over-year from an absolute standpoint, the orders are slightly down by a 5.7%. In this case, we do see a very stable economy, a very solid demand. We, as we mentioned the new product line that has been launched and has been, the bookings were in Q2 where we realized stays in Q3. We’re close to $2 million, the fact is that already in September, we have seen a positive book-to-bill on the Force Sensors side. So, we do expect orders to continue to improve and we do expect to see much better revenues in the fourth quarter. But we had one abrasion due to the new product launch. John Franzreb – Sidoti and Company: Okay. And does that new product launch change. Was it a benefit to the OE mix that’s part of your conversion going on in Force Sensors?

Yes. Yes, it is. This is a new product launch for the consumer market for currency weighing where we booked and we ship the following quarter close to $2 million. And we do expect to see many more orders coming next year. But it should provide us with a positive product mix going forward in this reporting segment. John Franzreb – Sidoti and Company: Okay. Good. I’ll get back to queue. Thank you.

Okay.

[Operator Instructions]. And we have a follow up from John Franzreb from Sidoti. Please go ahead. John Franzreb – Sidoti and Company: And you say you’re limiting me to two questions. Bill, what did you say the tax rate was going to be for Q4?

John, we’re looking at it for the whole year at around 26%. John Franzreb – Sidoti and Company: 26 roughly, I caught the numbers, but wasn’t sure by the time I, Okay. And can you give us an update on M&A activity out there in the sensor market. I know it’s a hot bed of companies looking in that space, can you talk a little bit about what you’re seeing out there as far as pricing?

Well John, like we’ve mentioned in the past I mean we’ve been very inquisitive pricing it varies, acquisition by acquisition or potential. We’re seeing good opportunities at the moment. Obviously there’s nothing we can talk about but the prospects are definitely out there and for some of them pricing is reasonable. John Franzreb – Sidoti and Company: When would you expect to close on the next year? What’s the estimated timeline?

John I can’t give you that information at the moment. I think we’re too growing the process for me to tell you that. John Franzreb – Sidoti and Company: Okay. All right. Fair enough. And could you just talk a little bit about [indiscernible] some enthusiasm of a recovery in the steel market Ziv. Can you just elaborate a little bit about that or maybe I’ve misread it?

The steel market, the mill utilization this year is higher than last year. Last year it was running around 75%. This quarter was around 79% which is similar to prior quarter mill utilization. In this case as we have been, as we have mentioned in the past deal, we don’t see any expansion of steel mills adding more capacity, most of the business is mainly retrofit, cost reduction type of end user market. But the trend is as such that steel prices are going up slowly and we see that some of the steel mills are looking to improve the margin by adding, by buying our systems and retrofitting and realizing the cost savings. Once it cost the 83%, 84% mark from a mill utilization then we should expect to see many more OEM business regarding adding more equipment for expansion of capacity. So the trend is good, but still we deem to reach that point. John Franzreb – Sidoti and Company: Okay. And would you start expect to see any more restructuring charges or actions related to KELK in the fourth quarter?

Not right, if they are, John, they’d be very minimal. John Franzreb – Sidoti and Company: Okay. So the integration is largely done then.

The integration is largely done, exactly. And as we have reported in the past, yes. John Franzreb – Sidoti and Company: I just wanted to make sure.

And we did realize the expected savings. John Franzreb – Sidoti and Company: Excellent. Okay. Thank you very much guys.

Thank you.

Thank you.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Wilson for any closing remarks.

Thank you, operator, and thank you for everyone for dialing in today. We look forward to talking to everyone and seeing you in the near future. Talk to you soon.

The conference is now concluded. Thank you for attending today’s presentation.