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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 
June 30, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-34679
VISHAY PRECISION GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
      
27-0986328
 
 
(State or Other Jurisdiction of Incorporation)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
3 Great Valley Parkway, Suite 150
 
 
 
 
Malvern, PA 19355
 
484-321-5300
 
 
(Address of Principal Executive Offices) (Zip Code)
 
(Registrant’s Telephone Number, including area code)
 
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. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files. ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check one):
Large accelerated filer ¨
Accelerated filer ý
Non-accelerated filer ¨ (Do not check if smaller reporting company)       
Smaller reporting company ¨
 
Emerging growth company ¨
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). ¨ Yes ý No
As of August 7, 2018, the registrant had 12,449,253 shares of its common stock and 1,025,158 shares of its Class B convertible common stock outstanding.

 



VISHAY PRECISION GROUP, INC.
FORM 10-Q
June 30, 2018
CONTENTS
 
 
Page
Number
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Condensed Balance Sheets
– June 30, 2018 (Unaudited) and December 31, 2017
 
 
 
 
Consolidated Condensed Statements of Operations
(Unaudited) – Fiscal Quarters Ended June 30, 2018 and July 1, 2017
 
 
 
 
Consolidated Condensed Statements of Operations
(Unaudited) – Six Fiscal Months Ended June 30, 2018 and July 1, 2017
6
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited) – Fiscal Quarters Ended June 30, 2018 and July 1, 2017
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited) – Six Fiscal Months Ended June 30, 2018 and July 1, 2017
8
 
 
 
 
Consolidated Condensed Statements of Cash Flows
(Unaudited) – Six Fiscal Months Ended June 30, 2018 and July 1, 2017
 
 
 
 
Consolidated Condensed Statement of Equity (Unaudited)
 
 
 
 
Notes to Unaudited Consolidated Condensed Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
 
SIGNATURES

-2-



PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VISHAY PRECISION GROUP, INC.
Consolidated Condensed Balance Sheets
(In thousands)

June 30, 2018

December 31, 2017

(Unaudited)

 
Assets
 

 
Current assets:
 

 
Cash and cash equivalents
$
74,713


$
74,292

Accounts receivable, net
52,103


46,789

Inventories:
 

 
Raw materials
19,502


16,601

Work in process
23,936


23,160

Finished goods
21,984


20,174

Inventories, net
65,422


59,935


 

 
Prepaid expenses and other current assets
11,660


10,299

Total current assets
203,898


191,315


 

 
Property and equipment, at cost:
 

 
Land
3,412


3,434

Buildings and improvements
50,376


50,276

Machinery and equipment
97,772


95,158

Software
8,160


7,955

Construction in progress
2,172


2,252

Accumulated depreciation
(107,399
)

(103,401
)
Property and equipment, net
54,493


55,674

 
 

 
Goodwill
18,799


19,181

 
 

 
Intangible assets, net
18,966


20,475

 
 

 
Other assets
18,743


19,906

Total assets
$
314,899

 
$
306,551

 
 
 
 

Continues on the following page.
-3-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Balance Sheets (continued)
(In thousands)

June 30, 2018

December 31, 2017

(Unaudited)

 
Liabilities and equity
 

 
Current liabilities:
 

 
Trade accounts payable
$
11,049


$
13,678

Payroll and related expenses
14,932


15,892

Other accrued expenses
16,758


15,952

Income taxes
2,888


2,515

Current portion of long-term debt
4,088


3,878

Total current liabilities
49,715


51,915

 
 

 
Long-term debt, less current portion
26,690


28,477

Deferred income taxes
2,300


2,300

Other liabilities
13,781


14,131

Accrued pension and other postretirement costs
16,115


16,424

Total liabilities
108,601


113,247

 
 

 
Commitments and contingencies



 
 

 
Equity:
 

 
Common stock
1,307


1,288

Class B convertible common stock
103


103

Treasury stock
(8,765
)
 
(8,765
)
Capital in excess of par value
195,668


192,904

Retained earnings
55,604


43,076

Accumulated other comprehensive loss
(37,598
)

(35,450
)
Total Vishay Precision Group, Inc. stockholders' equity
206,319


193,156

Noncontrolling interests
(21
)

148

Total equity
206,298


193,304

Total liabilities and equity
$
314,899


$
306,551



See accompanying notes.
-4-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Operations
(Unaudited - In thousands, except per share amounts)
 
Fiscal quarter ended
 
June 30, 2018
 
July 1, 2017
Net revenues
$
74,231

 
$
62,319

Costs of products sold
42,865

 
37,560

Gross profit
31,366

 
24,759

 
 
 
 
Selling, general, and administrative expenses
19,990

 
18,591

Restructuring costs
61

 
315

Operating income
11,315

 
5,853

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(478
)
 
(468
)
Other
(272
)
 
(571
)
Other income (expense) - net
(750
)
 
(1,039
)
 
 
 
 
Income before taxes
10,565

 
4,814

 
 
 
 
Income tax expense
2,882

 
1,198

 
 
 
 
Net earnings
7,683

 
3,616

Less: net loss attributable to noncontrolling interests
(10
)
 
(3
)
Net earnings attributable to VPG stockholders
$
7,693

 
$
3,619

 
 
 
 
Basic earnings per share attributable to VPG stockholders
$
0.57

 
$
0.27

Diluted earnings per share attributable to VPG stockholders
$
0.57

 
$
0.27

 
 
 
 
Weighted average shares outstanding - basic
13,464

 
13,257

Weighted average shares outstanding - diluted
13,513

 
13,446


















See accompanying notes.
-5-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Operations
(Unaudited - In thousands, except per share amounts)
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
Net revenues
$
147,322

 
$
122,106

Costs of products sold
87,451

 
74,830

Gross profit
59,871

 
47,276

 
 
 
 
Selling, general, and administrative expenses
40,309

 
36,609

Restructuring costs
61

 
869

Operating income
19,501

 
9,798

Other income (expense):
 
 
 
Interest expense
(920
)
 
(920
)
Other
(921
)
 
(1,100
)
Other income (expense) - net
(1,841
)
 
(2,020
)
 
 
 
 
Income before taxes
17,660

 
7,778

 
 
 
 
Income tax expense
5,019

 
2,159

 
 
 
 
Net earnings
12,641

 
5,619

Less: net (loss) earnings attributable to noncontrolling interests
(40
)
 
5

Net earnings attributable to VPG stockholders
$
12,681

 
$
5,614

 
 
 
 
Basic earnings per share attributable to VPG stockholders
$
0.95

 
$
0.42

Diluted earnings per share attributable to VPG stockholders
$
0.94

 
$
0.42

 
 
 
 
Weighted average shares outstanding - basic
13,409

 
13,233

Weighted average shares outstanding - diluted
13,511

 
13,442



See accompanying notes.
-6-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited - In thousands)
 
Fiscal quarter ended
 
June 30, 2018
 
July 1, 2017
Net earnings
$
7,683

 
$
3,616

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(3,934
)
 
2,345

Pension and other postretirement actuarial items, net of tax
275

 
(67
)
Other comprehensive income
(3,659
)
 
2,278

 
 
 
 
Total comprehensive income
4,024

 
5,894

 
 
 
 
Less: comprehensive loss attributable to noncontrolling interests
(10
)
 
(3
)
 
 
 
 
Comprehensive income attributable to VPG stockholders
$
4,034

 
$
5,897





































See accompanying notes.
-7-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited - In thousands)
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
Net earnings
$
12,641

 
$
5,619

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(2,517
)
 
3,834

Pension and other postretirement actuarial items, net of tax
369

 
(31
)
Other comprehensive (loss) income
(2,148
)
 
3,803

 
 
 
 
Comprehensive income
10,493

 
9,422

 
 
 
 
Less: comprehensive (loss) income attributable to noncontrolling interests
(40
)
 
5

 
 
 
 
Comprehensive income attributable to VPG stockholders
$
10,533

 
$
9,417



See accompanying notes.
-8-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited - In thousands)
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
Operating activities
 
 
 
Net earnings
$
12,641

 
$
5,619

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,332

 
5,318

Gain on disposal of property and equipment
(83
)
 
(141
)
Share-based compensation expense
801

 
492

Inventory write-offs for obsolescence
1,158

 
982

Deferred income taxes
1,086

 
(104
)
Other
455

 
(445
)
Net changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(6,141
)
 
(6,928
)
Inventories, net
(7,304
)
 
(761
)
Prepaid expenses and other current assets
(1,724
)
 
(1,397
)
Trade accounts payable
(390
)
 
1,020

Other current liabilities
1,536

 
3,676

Net cash provided by operating activities
7,367

 
7,331

 
 
 
 
Investing activities
 
 
 
Capital expenditures
(6,134
)
 
(3,146
)
Proceeds from sale of property and equipment
106

 
326

Net cash used in investing activities
(6,028
)
 
(2,820
)
 
 
 
 
Financing activities
 
 
 
Principal payments on long-term debt and capital leases
(3,847
)
 
(1,314
)
Proceeds from revolving facility
11,000

 
16,000

Payments on revolving facility
(6,000
)
 
(16,000
)
Distributions to noncontrolling interests
(129
)
 
(46
)
Payments of employee taxes on certain share-based arrangements
(801
)
 
(303
)
Net cash provided by (used in) financing activities
223

 
(1,663
)
Effect of exchange rate changes on cash and cash equivalents
(1,141
)
 
1,858

Increase in cash and cash equivalents
421

 
4,706

 
 
 
 
Cash and cash equivalents at beginning of period
74,292

 
58,452

Cash and cash equivalents at end of period
$
74,713

 
$
63,158

 
 
 
 
Supplemental disclosure of non-cash investing transactions:
 
 
 
Capital expenditures purchased
$
(3,988
)
 
$
(3,146
)
Supplemental disclosure of non-cash financing transactions:
 
 
 
Conversion of exchangeable notes to common stock
$
(2,794
)
 
$
(1,303
)

See accompanying notes.
-9-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statement of Equity
(Unaudited - In thousands, except share amounts)
 
Common
Stock
 
Class B
Convertible
Common Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total VPG, Inc.
Stockholders'
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2017
$
1,288

 
$
103

 
$
(8,765
)
 
$
192,904

 
$
43,076

 
$
(35,450
)
 
$
193,156

 
$
148

 
$
193,304

Net earnings

 

 

 

 
12,681

 

 
12,681

 
(40
)
 
12,641

Other comprehensive income

 

 

 

 

 
(2,148
)
 
(2,148
)
 

 
(2,148
)
Share-based compensation expense

 

 

 
801

 

 

 
801

 

 
801

Restricted stock issuances (59,038 shares)
7

 

 

 
(819
)
 

 

 
(812
)
 

 
(812
)
Common stock issuance from conversion of exchangeable notes (123,808 shares)
12

 

 

 
2,782

 

 

 
2,794

 

 
2,794

Cumulative effect adjustment for adoption of ASU 2016-16

 

 

 

 
(153
)
 

 
(153
)
 

 
(153
)
Distributions to noncontrolling interests

 

 

 

 

 

 

 
(129
)
 
(129
)
Balance at June 30, 2018
$
1,307

 
$
103

 
$
(8,765
)
 
$
195,668

 
$
55,604

 
$
(37,598
)
 
$
206,319

 
$
(21
)
 
$
206,298



See accompanying notes.
-10-



Vishay Precision Group, Inc.
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1 – Basis 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, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, included in VPG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 15, 2018. The results of operations for the fiscal quarter ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year. VPG reports interim financial information for 13-week periods beginning on a Sunday and ending on a Saturday, except for the first quarter, which always begins on January 1, and the fourth quarter, which always ends on December 31. The four fiscal quarters in 2018 and 2017 end on the following dates: 
 
2018
 
2017
Quarter 1
March 31,
 
April 1,
Quarter 2
June 30,
 
July 1,
Quarter 3
September 29,
 
September 30,
Quarter 4
December 31,
 
December 31,
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers,” and modified the standard thereafter. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that will supersede most current revenue recognition guidance.  The basis of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The Company adopted this standard as of January 1, 2018 using the modified retrospective method. See Note 2 for additional details.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This ASU is intended to clarify the presentation of certain cash receipts and payments within the statement of cash flows.  The Company adopted this standard effective January 1, 2018 and it did not have a material impact on the consolidated condensed financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  The income tax consequences from the sale of inventory from one member of the consolidated entity to another will continue to be deferred until the inventory is sold to a third party.  The Company’s adoption of this standard on January 1, 2018 resulted in a $0.2 million cumulative effect adjustment to the 2018 beginning retained earnings.

In January 2017, the FASB issued ASU No. 2017‑01, “Clarifying the Definition of a Business.” This ASU provides a more robust framework to determine when a set of assets and activities constitutes a business.  The Company adopted this standard effective January 1, 2018 and it did not have a material impact on the consolidated condensed financial statements.

-11-

Note 1 – Basis of Presentation (continued)

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs. All other components of the net periodic benefit cost are presented outside of operating income. The Company adopted the new standard as of January 1, 2018 and recorded the non-service cost component of $0.2 million and $0.5 million to Other income (expense) - other for the fiscal quarter and six fiscal months ended June 30, 2018, respectively. Additionally, the non-service cost component of $0.2 million and $0.4 million was reclassified from Operating income to Other income (expense) - other for the fiscal quarter and six fiscal months ended July 1, 2017, respectively.

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting." This ASU clarifies which changes to the terms or conditions of a share-based payment award will require modification accounting. The Company adopted this standard effective January 1, 2018 and it did not have a material impact on the consolidated condensed financial statements.
Recent Accounting Pronouncements
In January 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act ("2017 Tax Act") related to items in accumulated other comprehensive income ("AOCI") that the FASB refers to as having been stranded in AOCI.  The new guidance may be applied retrospectively to each period in which the effect of the 2017 Tax Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period during which the 2017 Tax Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the 2017 Tax Act that are stranded in AOCI. The Company is evaluating the new standard to determine the impact on the consolidated condensed financial statements.

In January 2017, the FASB issued ASU No. 2017‑04, “Simplifying the Test for Goodwill Impairment.” This ASU eliminates the requirement to calculate the implied fair value of goodwill (second step) to measure a goodwill impairment charge. Under the guidance, an impairment charge will be measured based on the excess of the reporting unit’s carrying amount over its fair value (first step). The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases.  The core principle of this ASU will require lessees to present the assets and liabilities that arise from leases on their balance sheets.  The ASU is effective for public companies for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.  The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements.
Note 2 – Revenues
Adoption of ASC 606

On January 1, 2018 the Company adopted Accounting Standards Codification ("ASC") 606 using the modified retrospective method. All of our contracts outstanding at December 31, 2017 were considered substantially complete as of January 1, 2018 and therefore resulted in no cumulative effect adjustments. The Company has determined that the impact of adoption of ASC 606 will not have a material impact on the timing or amount of revenue that we recognize based on our business activities existing at the date of adoption.

Revenue Recognition

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied, which generally occurs with the transfer of control of our products. For certain contracts with post-shipment obligations, revenue is recognized when the post-shipment obligation is satisfied. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing post-shipment obligations. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Given the specialized nature of the Company's products, it generally does not allow product returns. Shipping and handling costs are recorded to Costs of product sold when control of the product has transferred

-12-

Note 2 – Revenues (continued)


to the customer. The Company offers standard product warranties. Warranty related costs continue to be recognized as expense when the products are sold.

The following table disaggregates net revenue by geographic region from contracts with customers based on net revenues generated by subsidiaries within that geographic location (in thousands):

 
Three Months Ended June 30, 2018
 
Three Months Ended July 1, 2017
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
United States
$
14,933

 
$
10,997

 
$
5,868

 
$
31,798

 
$
13,856

 
$
7,709

 
$
4,829

 
$
26,394

United Kingdom
965

 
2,689

 
3,677

 
7,331

 
706

 
3,144

 
2,736

 
6,586

Other Europe
7,703

 
2,960

 
4,527

 
15,190

 
6,041

 
2,094

 
3,823

 
11,958

Israel
2,471

 
144

 

 
2,615

 
1,497

 
172

 

 
1,669

Asia
8,130

 
2,568

 
2,716

 
13,414

 
7,206

 
2,537

 
1,530

 
11,273

Canada

 

 
3,883

 
3,883

 

 

 
4,439

 
4,439

Total
$
34,202

 
$
19,358

 
$
20,671

 
$
74,231

 
$
29,306

 
$
15,656

 
$
17,357

 
$
62,319


 
Six Fiscal Months Ended June 30, 2018
 
Six Fiscal Months Ended July 1, 2017
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
United States
$
28,852

 
$
21,022

 
$
11,401

 
$
61,275

 
$
25,839

 
$
15,979

 
$
9,516

 
$
51,334

United Kingdom
1,913

 
6,052

 
7,270

 
15,235

 
1,512

 
6,068

 
5,428

 
13,008

Other Europe
15,475

 
6,000

 
9,900

 
31,375

 
12,579

 
4,166

 
7,858

 
24,603

Israel
4,841

 
286

 

 
5,127

 
2,710

 
316

 

 
3,026

Asia
17,275

 
5,226

 
3,832

 
26,333

 
14,430

 
4,595

 
2,987

 
22,012

Canada

 

 
7,977

 
7,977

 

 

 
8,123

 
8,123


$
68,356

 
$
38,586

 
$
40,380

 
$
147,322

 
$
57,070

 
$
31,124

 
$
33,912

 
$
122,106


The following table disaggregates net revenue from contracts with customers by market sector (in thousands):
 
Fiscal quarter ended
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
June 30, 2018
 
July 1, 2017
Test & Measurement
$
19,117

 
$
16,039

$
38,377

 
$
32,022

Avionics, Military & Space
5,875

 
6,358

11,566

 
11,408

Medical
2,295

 
2,159

4,974

 
4,266

Precision Weighing
23,825

 
19,452

47,648

 
38,537

Force Measurement
16,973

 
12,430

34,265

 
24,805

Steel
6,146

 
5,881

10,492

 
11,068

Total
$
74,231

 
$
62,319

$
147,322

 
$
122,106


Arrangements with Multiple Performance Obligations

Contracts with our customers can include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price which is determined based on the prices charged to customers when sold on a standalone basis.



-13-

Note 2 – Revenues (continued)



Contract Assets & Liabilities

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.

The outstanding contract assets and liability accounts were as follows (in thousands):
 
Contract Asset
 
Contract Liability
 
Unbilled Revenue
 
Accrued Customer Advances
Balance at December 31, 2017
$
824

 
$
3,229

Balance at June 30, 2018
995

 
4,893

Increase
$
171

 
$
1,664


The amount of revenue recognized during the six fiscal months ended June 30, 2018 that was included in the contract liability balance at December 31, 2017 was $2.4 million. Of the $3.8 million of contract liability balance at March 31, 2018, the Company recognized $1.5 million as revenue during the second quarter of 2018.

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 – Goodwill
The change in the carrying amount of goodwill by segment is as follows (in thousands):
 
Total
 
Weighing and Control Systems Segment
 
Foil Technology Products Segment
 
 
 
KELK Acquisition
 
Stress-Tek Acquisition
 
Pacific Acquisition
Balance at December 31, 2017
$
19,181

 
$
6,828

 
$
6,311

 
$
6,042

Foreign currency translation adjustment
(382
)
 
(382
)
 

 

Balance at June 30, 2018
$
18,799

 
$
6,446

 
$
6,311

 
$
6,042


Note 4 – Restructuring Costs
Restructuring costs represent cost reduction programs initiated 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 restructuring costs during the fiscal quarter and six fiscal months ended June 30, 2018 of $0.1 million, which consisted mainly of employee termination costs in connection with cost reduction programs in Asia.
During the fiscal quarter and six fiscal months ended July 1, 2017, the Company recorded aggregate restructuring costs of $0.3 million and $0.9 million, respectively, which consisted mainly of employee termination costs and facility closure costs incurred in connection with various cost reduction programs in Europe, the United States and Canada.
The following table summarizes recent activity related to all restructuring programs. The accrued restructuring liability balance as of June 30, 2018 and December 31, 2017, respectively, is included in Other accrued expenses in the accompanying consolidated condensed balance sheets (in thousands):

-14-

Note 4 – Restructuring Costs (continued)


Balance at December 31, 2017
$
254

Restructuring costs in 2018
61

Cash payments
(160
)
Foreign currency translation

Balance at June 30, 2018
$
155

Note 5 – Income Taxes
On December 22, 2017, the 2017 Tax Act was enacted. The 2017 Tax Act significantly changed U.S. tax law by, among other things, lowering the corporate tax rate, implementing a partial territorial tax system, and imposing a one-time transition tax on post 1986 undistributed foreign earnings as of December 31, 2017. The 2017 Tax Act permanently reduced the U.S. corporate tax rate from a maximum of 35% to a flat 21%, effective January 1, 2018.
 
On December 22, 2017 the SEC staff issued Staff Accounting Bulletin ("SAB") 118 to address the application of U.S. GAAP in situations when a registrant does not have all the necessary information available to prepare and analyze the accounting treatment for the proper recognition of the tax impact of the 2017 Tax Act. In accordance with SAB 118 guidance, the Company has recorded the provisional tax impacts related to the deemed distribution of foreign earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The final impact may differ from the provisional amount recognized. In accordance with SAB 118, the financial reporting impact of the 2017 Tax Act will be completed in the fourth quarter of 2018.

As of June 30, 2018, the Company has not completed the analysis of all the tax effects of the 2017 Tax Act and has not recorded any additional adjustments to the provisional amounts recorded at December 31, 2017 year-end. The Company will continue to make and refine its calculations as additional analysis is completed. These estimates may also be affected as the Company gains a more thorough understanding of the 2017 Tax Act. These changes could be material to income tax expense.

The 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. As of June 30, 2018, because the Company is still evaluating the GILTI provisions and its analysis of future taxable income that is subject to GILTI, it has included GILTI related to current-year operations only in its Estimated Annual Effective Tax Rate and has not provided additional GILTI on deferred items.
VPG calculates the tax provision for interim periods using an estimated annual effective tax rate methodology based on projected full-year pre-tax earnings among the taxing jurisdictions in which we operate with adjustments for discrete items. The effective tax rate for the fiscal quarter ended June 30, 2018 was 27.3% compared to 24.9% for the fiscal quarter ended July 1, 2017. The effective tax rate for the six fiscal months ended June 30, 2018 was 28.4% compared to 27.8% for the six fiscal months ended July 1, 2017. The tax rate in the current fiscal quarter is higher than the prior year fiscal quarter because of the impact in the current quarter of certain discrete tax items, primarily having to do with foreign exchange gains and losses on the Israeli shekel. The current six fiscal month tax rate is higher than the prior year six fiscal month tax rate as a result of tax rate change benefits and foreign exchange losses recognized in the prior year fiscal period, while foreign exchange gains were recognized in the current fiscal period.
The Company and its subsidiaries are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining the provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. VPG establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when VPG believes that certain positions might be challenged despite its belief that the tax return positions are supportable. VPG adjusts these reserves in light of changing facts and circumstances and the provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Penalties and tax-related interest expense are reported as a component of income tax expense.

-15-


Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
2015 Credit Agreement - Revolving Facility
$
14,000

 
$
9,000

2015 Credit Agreement - U.S. Closing Date Term Facility
3,315

 
3,664

2015 Credit Agreement - U.S. Delayed Draw Term Facility
8,105

 
8,956

2015 Credit Agreement - Canadian Term Facility
5,294

 
7,880

Exchangeable Unsecured Notes, due 2102

 
2,794

Other debt
343

 
401

Deferred financing costs
(279
)
 
(340
)
Total long-term debt
30,778

 
32,355

Less: current portion
4,088

 
3,878

Long-term debt, less current portion
$
26,690

 
$
28,477


Exchangeable Unsecured Notes, due 2102
Effective February 26, 2018, the holder of the Company's exchangeable notes exercised its option to exchange the remaining $2.8 million principal amount of the notes for 123,808 shares of VPG common stock at the contractual put/call rate of $22.57 per share. Following this transaction, all exchangeable notes have been canceled and VPG has no further obligations pursuant to such notes.
Note 7 – Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, consist of the following (in thousands):
 
Foreign Currency Translation Adjustment
 
Pension
and Other
Postretirement
Actuarial Items
 
Total
Balance at January 1, 2018
$
(27,390
)
 
$
(8,060
)
 
$
(35,450
)
Other comprehensive income before reclassifications
(2,517
)
 

 
(2,517
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
369

 
369

Balance at June 30, 2018
$
(29,907
)
 
$
(7,691
)
 
$
(37,598
)
 
Foreign Currency Translation Adjustment
 
Pension
and Other
Postretirement
Actuarial Items
 
Total
Balance at January 1, 2017
$
(33,192
)
 
$
(7,145
)
 
$
(40,337
)
Other comprehensive loss before reclassifications
3,834

 

 
3,834

Amounts reclassified from accumulated other comprehensive income (loss)

 
(31
)
 
(31
)
Balance at July 1, 2017
$
(29,358
)
 
$
(7,176
)
 
$
(36,534
)
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 8).
Note 8 – Pension and Other Postretirement Benefits
Employees of VPG participate in various defined benefit pension and other postretirement benefit ("OPEB") plans. The following table sets forth the components of the net periodic benefit cost for the Company's defined benefit pension and OPEB plans (in thousands):

-16-

Note 9 – Pension and Other Postretirement Benefits (continued)


 
Fiscal quarter ended 
 June 30, 2018
 
Fiscal quarter ended 
 July 1, 2017
 
Pension
Plans
 
OPEB
Plans
 
Pension
Plans
 
OPEB
Plans
Net service cost
$
137

 
$
27

 
$
119

 
$
28

Interest cost
174

 
38

 
165

 
35

Expected return on plan assets
(141
)
 

 
(132
)
 

Amortization of actuarial losses
130

 
44

 
113

 
28

Net periodic benefit cost
$
300

 
$
109

 
$
265

 
$
91


 
Six fiscal months ended June 30, 2018
 
Six fiscal months ended July 1, 2017
 
Pension
Plans
 
OPEB
Plans
 
Pension
Plans
 
OPEB
Plans
Net service cost
$
275

 
$
54

 
$
236

 
$
56

Interest cost
350

 
76

 
328

 
70

Expected return on plan assets
(283
)
 

 
(262
)
 

Amortization of actuarial losses
261

 
88

 
224

 
56

Net periodic benefit cost
$
603

 
$
218

 
$
526

 
$
182


Note 9 – Share-Based Compensation
The Amended and Restated Vishay Precision Group, Inc. Stock Incentive Program (as amended and restated, the “Plan”) permits the issuance of up to 1,000,000 shares of common stock. At June 30, 2018, the Company had reserved 182,055 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 February 16, 2018, VPG’s three current executive officers were granted annual equity awards in the form of RSUs, of which 75% are performance-based. The awards have an aggregate target grant-date fair value of $1.3 million and were comprised of 52,166 RSUs. Twenty-five percent of these awards will vest on January 1, 2021, subject to the executives’ continued employment. The performance-based portion of the RSUs will also vest on January 1, 2021, subject to the executives' continued employment and the satisfaction of certain performance objectives relating to three-year cumulative “free cash” and adjusted net earnings goals, each weighted equally.
On March 21, 2018, certain VPG employees were granted annual equity awards in the form of RSUs, of which 75% are performance-based. The awards have an aggregate grant-date fair value of $0.4 million and were comprised of 13,215 RSUs. Twenty-five percent of these awards will vest on January 1, 2021 subject to the employees' continued employment. The performance-based portion of the RSUs will also vest on January 1, 2021, subject to the satisfaction of certain performance objectives relating to three-year cumulative earnings and cash flow goals, and the employees' continued employment.

On May 17, 2018, the Board of Directors approved the issuance of an aggregate of 9,294 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 $0.3 million and will vest on the earlier of VPG's next Annual Stockholders Meeting or May 17, 2019, subject to the directors' continued service on the Board of Directors.

-17-



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. The following table summarizes share-based compensation expense recognized (in thousands):
 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Restricted stock units
$
428

 
$
248

 
$
801

 
$
492

Note 10 – Segment Information
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 and on-board weighing applications.
VPG evaluates reporting segment performance based on multiple performance measures including revenues, gross profits and operating income, exclusive of certain items. Management believes that evaluating segment performance, excluding items such as restructuring costs, acquisition costs, and other items is meaningful because it provides insight with respect to the intrinsic operating results of VPG. The following table sets forth reporting segment information (in thousands):

-18-

Note 10 – Segment Information (continued)


 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Net third-party revenues:
 
 
 
 
 
 
 
Foil Technology Products
$
34,202

 
$
29,306

 
$
68,356

 
$
57,070

Force Sensors
19,358

 
15,656

 
38,586

 
31,124

Weighing and Control Systems
20,671

 
17,357

 
40,380

 
33,912

Total
$
74,231

 
$
62,319

 
$
147,322

 
$
122,106

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Foil Technology Products
$
15,753

 
$
12,275

 
$
30,357

 
$
23,774

Force Sensors
5,690

 
4,527

 
10,930

 
8,218

Weighing and Control Systems
9,923

 
7,957

 
18,584

 
15,284

Total
$
31,366

 
$
24,759

 
$
59,871

 
$
47,276

 
 
 
 
 
 
 
 
Reconciliation of segment operating income to consolidated results:
 
 
 
 
 
 
 
Foil Technology Products
$
9,976

 
$
6,854

 
$
18,769

 
$
12,917

Force Sensors
3,385

 
2,297

 
5,960

 
3,678

Weighing and Control Systems
4,956

 
3,617

 
8,834

 
6,699

Unallocated G&A expenses
(6,941
)
 
(6,600
)
 
(14,001
)
 
(12,627
)
Restructuring costs
(61
)
 
(315
)
 
(61
)
 
(869
)
Consolidated condensed operating income
$
11,315

 
$
5,853

 
$
19,501

 
$
9,798

 
 
 
 
 
 
 
 
Restructuring costs:
 
 
 
 
 
 
 
Foil Technology Products
$

 
$
(12
)
 
$

 
$
(138
)
Force Sensors
(61
)
 
(85
)
 
(61
)
 
(262
)
Weighing and Control Systems

 
(39
)
 

 
(287
)
Corporate/Other

 
(179
)
 

 
(182
)
 
$
(61
)
 
$
(315
)
 
$
(61
)
 
$
(869
)
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):
 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Foil Technology Products to Force Sensors and Weighing and Control Systems
1,139

 
677

 
2,157

 
1,355

Force Sensors to Foil Technology Products and Weighing and Control Systems
405

 
347

 
716

 
766

Weighing and Control Systems to Foil Technology Products and Force Sensors
133

 
164

 
295

 
328


Note 11 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to VPG stockholders (in thousands, except earnings per share):

Fiscal quarter ended

Six fiscal months ended

June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Numerator:
 
 
 

 
 
 
Numerator for basic earnings per share:
 
 
 

 
 
 
Net earnings attributable to VPG stockholders
$
7,693

 
$
3,619


$
12,681

 
$
5,614


 
 
 

 
 
 
Adjustment to the numerator for net earnings:
 
 
 

 
 
 
Interest savings assuming conversion of dilutive exchangeable notes, net of tax

 
5


5

 
12


 
 
 

 
 
 
Numerator for diluted earnings per share:
 
 
 

 
 
 
Net earnings attributable to VPG stockholders
$
7,693

 
$
3,624


$
12,686

 
$
5,626

 
 
 
 

 
 
 
Denominator:
 
 
 

 
 
 
Denominator for basic earnings per share:
 
 
 

 
 
 
Weighted average shares
13,464

 
13,257


13,409

 
13,233

 
 
 
 

 
 
 
Effect of dilutive securities:
 
 
 

 
 
 
Exchangeable notes

 
149


45

 
165

Restricted stock units
49

 
40


57

 
44

Dilutive potential common shares
49

 
189


102

 
209

 
 
 
 

 
 
 
Denominator for diluted earnings per share:
 
 
 

 
 
 
Adjusted weighted average shares
13,513

 
13,446


13,511

 
13,442

 
 
 
 

 
 
 
Basic earnings per share attributable to VPG stockholders
$
0.57

 
$
0.27


$
0.95

 
$
0.42

 
 
 
 

 
 
 
Diluted earnings per share attributable to VPG stockholders
$
0.57

 
$
0.27


$
0.94

 
$
0.42



-19-



Note 12 – Additional Financial Statement Information
The caption “Other” on the consolidated condensed statements of operations consists of the following (in thousands):
 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Foreign exchange gain (loss)
$
75

 
$
(258
)
 
$
(450
)
 
$
(632
)
Interest income
137

 
18

 
234

 
56

Other
(484
)
 
(331
)
 
(705
)
 
(524
)
 
$
(272
)
 
$
(571
)
 
$
(921
)
 
$
(1,100
)
Note 13 – Fair Value Measurements
Accounting Standards Codification (“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.
The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis (in thousands):

 

 
Fair value measurements at reporting date using:

 
Total
Fair Value
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
June 30, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Assets held in rabbi trusts
 
$
4,850

 
$
116

 
$
4,734

 
$


 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Assets held in rabbi trusts
 
$
4,988

 
$
364

 
$
4,624

 
$

The Company maintains non-qualified trusts, referred to as “rabbi” trusts, to fund payments under deferred compensation and non-qualified pension plans. Rabbi trust assets consist primarily of marketable securities, classified as available-for-sale money market funds at June 30, 2018 and December 31, 2017, and company-owned life insurance assets. The marketable securities held in the rabbi trusts are valued using quoted market prices on the last business day of the period. The company-owned life insurance assets are valued in consultation with the Company’s insurance brokers using the value of underlying assets of the insurance contracts. The fair value measurement of the marketable securities held in the rabbi trust is considered a Level 1 measurement and the measurement of the company-owned life insurance assets is considered a Level 2 measurement within the fair value hierarchy.
The fair value of the long-term debt, excluding capitalized deferred financing costs, at June 30, 2018 and December 31, 2017 is approximately $30.8 million and $33.4 million, respectively, compared to its carrying value, excluding capitalized deferred financing costs, of $30.8 million and $32.4 million, respectively. The Company estimates the fair value of its long-term debt using a combination of quoted market prices for similar financing arrangements and expected future payments discounted at risk-adjusted rates. The fair value of long-term debt is considered a Level 2 measurement within the fair value hierarchy. The Company’s financial instruments include cash and cash equivalents whose carrying amounts reported in the consolidated condensed balance sheets approximate their fair values.

-20-



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.
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 and on-board weighing applications.
Net revenues for the fiscal quarter ended June 30, 2018 were $74.2 million versus $62.3 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended June 30, 2018 were $7.7 million, or $0.57 per diluted share, versus $3.6 million, or $0.27 per diluted share, for the comparable prior year period.
Net revenues for the six fiscal months ended June 30, 2018 were $147.3 million versus $122.1 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the six fiscal months ended June 30, 2018 were $12.7 million, or $0.94 per diluted share, versus $5.6 million, or $0.42 per diluted share, for the comparable prior year period.
The results of operations for the fiscal quarters ended June 30, 2018 and July 1, 2017 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 profit, adjusted gross profit margin, adjusted operating income, adjusted operating income margin, adjusted net earnings and adjusted net earnings per diluted share. These non-GAAP measures should not be viewed as an alternative to GAAP measures of performance. Such non-GAAP measures 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 measures are meaningful because they provide insight with respect to intrinsic operating results. The reconciling items presented below represent significant charges or credits which are important to understanding our intrinsic operations.




-21-





The items affecting comparability are (in thousands, except per share amounts):
 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Gross profit
$
31,366

 
$
24,759

 
$
59,871

 
$
47,276

Gross profit margin
42.3
%
 
39.7
%
 
40.6
%
 
38.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted gross profit
$
31,366

 
$
24,759

 
$
59,871

 
$
47,276

 Adjusted gross profit margin
42.3
%
 
39.7
%
 
40.6
%
 
38.7
%

 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Operating income
$
11,315

 
$
5,853

 
$
19,501

 
$
9,798

Operating margin
15.2
%
 
9.4
%
 
13.2
%
 
8.0
%

 
 
 
 
 
 
 
Reconciling items affecting operating margin
 
 
 
 
 
 
 
Restructuring costs
61

 
315

 
61

 
869



 

 

 

Adjusted operating income
$
11,376

 
$
6,168

 
$
19,562

 
$
10,667

 Adjusted operating margin
15.3
%
 
9.9
%
 
13.3
%
 
8.7
%

 
Fiscal quarter ended
 
Six fiscal months ended
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Net earnings attributable to VPG stockholders
$
7,693

 
$
3,619

 
$
12,681

 
$
5,614

 
 
 
 
 
 
 
 
Reconciling items affecting operating margin
 
 
 
 
 
 
 
Restructuring costs
61

 
315

 
61

 
869

Less reconciling items affecting income tax expense
 
 
 
 
 
 
 
Tax effect of reconciling items
9

 
13

 
9

 
56

Adjusted net earnings attributable to VPG stockholders
$
7,745

 
$
3,921

 
$
12,733

 
$
6,427

 
 
 
 
 
 
 
 
Adjusted net earnings per diluted share
$
0.57

 
$
0.29

 
$
0.94

 
$
0.48

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
13,513

 
13,446

 
13,511

 
13,442





-22-




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.
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 2017 through the second quarter of 2018 (dollars in thousands):
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
1st Quarter
 
2nd Quarter
 
2017
 
2017
 
2017
 
2018
 
2018
Net revenues
$
62,319

 
$
62,805

 
$
69,439

 
$
73,091

 
$
74,231

 
 
 
 
 
 
 
 
 
 
Gross profit margin
39.7
%
 
38.6
%
 
38.5
%
 
39.0
%
 
42.3
%
 
 
 
 
 
 
 
 
 
 
End-of-period backlog
$
67,500

 
$
76,200

 
$
88,900

 
$
93,900

 
$
101,000

 
 
 
 
 
 
 
 
 
 
Book-to-bill ratio
1.08

 
1.12

 
1.18

 
1.05

 
1.13

 
 
 
 
 
 
 
 
 
 
Inventory turnover
2.64

 
2.64

 
2.85

 
2.93

 
2.71



-23-



 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
1st Quarter
 
2nd Quarter
 
2017
 
2017
 
2017
 
2018
 
2018
Foil Technology Products
 
 
 
 
 
 
 
 
 
Net revenues
$
29,306

 
$
29,315

 
$
29,888

 
$
34,154

 
$
34,202

Gross profit margin
41.9
%
 
41.7
%
 
39.3
%
 
42.8
%
 
46.1
%
End-of-period backlog
$
34,300

 
$
35,500

 
$
46,600

 
$
47,900

 
$
54,900

Book-to-bill ratio
1.09

 
1.03

 
1.36

 
1.01

 
1.24

Inventory turnover
2.90

 
2.88

 
2.98

 
3.18

 
2.81

 
 
 
 
 
 
 
 
 
 
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