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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 
September 29, 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 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. 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 ¨        
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 November 6, 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
September 29, 2018
CONTENTS
 
 
Page
Number
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Condensed Balance Sheets
– September 29, 2018 (Unaudited) and December 31, 2017
 
 
 
 
Consolidated Condensed Statements of Operations
(Unaudited) – Fiscal Quarters Ended September 29, 2018 and September 30, 2017
 
 
 
 
Consolidated Condensed Statements of Operations
(Unaudited) – Nine Fiscal Months Ended September 29, 2018 and September 30, 2017
6
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited) – Fiscal Quarters Ended September 29, 2018 and September 30, 2017
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited) – Nine Fiscal Months Ended September 29, 2018 and September 30, 2017
8
 
 
 
 
Consolidated Condensed Statements of Cash Flows
(Unaudited) – Nine Fiscal Months Ended September 29, 2018 and September 30, 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)

September 29, 2018

December 31, 2017

(Unaudited)

 
Assets
 

 
Current assets:
 

 
Cash and cash equivalents
$
78,628


$
74,292

Accounts receivable, net
54,003


46,789

Inventories:
 

 
Raw materials
18,479


16,601

Work in process
24,490


23,160

Finished goods
21,694


20,174

Inventories, net
64,663


59,935


 

 
Prepaid expenses and other current assets
12,487


10,299

Total current assets
209,781


191,315


 

 
Property and equipment, at cost:
 

 
Land
3,409


3,434

Buildings and improvements
50,536


50,276

Machinery and equipment
100,868


95,158

Software
8,308


7,955

Construction in progress
2,089


2,252

Accumulated depreciation
(109,342
)

(103,401
)
Property and equipment, net
55,868


55,674

 
 

 
Goodwill
18,923


19,181

 
 

 
Intangible assets, net
18,759


20,475

 
 

 
Other assets
18,407


19,906

Total assets
$
321,738

 
$
306,551

 
 
 
 

Continues on the following page.
-3-



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

September 29, 2018

December 31, 2017

(Unaudited)

 
Liabilities and equity
 

 
Current liabilities:
 

 
Trade accounts payable
$
9,842


$
13,678

Payroll and related expenses
16,176


15,892

Other accrued expenses
17,989


15,952

Income taxes
2,914


2,515

Current portion of long-term debt
4,367


3,878

Total current liabilities
51,288


51,915

 
 

 
Long-term debt, less current portion
23,550


28,477

Deferred income taxes
2,331


2,300

Other liabilities
13,981


14,131

Accrued pension and other postretirement costs
16,025


16,424

Total liabilities
107,175


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
196,039


192,904

Retained earnings
63,151


43,076

Accumulated other comprehensive loss
(37,299
)

(35,450
)
Total Vishay Precision Group, Inc. stockholders' equity
214,536


193,156

Noncontrolling interests
27


148

Total equity
214,563


193,304

Total liabilities and equity
$
321,738


$
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
 
September 29, 2018
 
September 30, 2017
Net revenues
$
75,490

 
$
62,805

Costs of products sold
44,910

 
38,538

Gross profit
30,580

 
24,267

 
 
 
 
Selling, general, and administrative expenses
19,721

 
18,314

Restructuring costs
228

 
423

Operating income
10,631

 
5,530

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(413
)
 
(472
)
Other
(172
)
 
1,506

Other income (expense) - net
(585
)
 
1,034

 
 
 
 
Income before taxes
10,046

 
6,564

 
 
 
 
Income tax expense
2,479

 
2,239

 
 
 
 
Net earnings
7,567

 
4,325

Less: net earnings attributable to noncontrolling interests
20

 
70

Net earnings attributable to VPG stockholders
$
7,547

 
$
4,255

 
 
 
 
Basic earnings per share attributable to VPG stockholders
$
0.56

 
$
0.32

Diluted earnings per share attributable to VPG stockholders
$
0.56

 
$
0.32

 
 
 
 
Weighted average shares outstanding - basic
13,474

 
13,291

Weighted average shares outstanding - diluted
13,534

 
13,470


















See accompanying notes.
-5-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Operations
(Unaudited - In thousands, except per share amounts)
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
Net revenues
$
222,812

 
$
184,911

Costs of products sold
132,361

 
113,368

Gross profit
90,451

 
71,543

 
 
 
 
Selling, general, and administrative expenses
60,030

 
54,923

Restructuring costs
289

 
1,292

Operating income
30,132

 
15,328

Other income (expense):
 
 
 
Interest expense
(1,333
)
 
(1,392
)
Other
(1,093
)
 
406

Other income (expense) - net
(2,426
)
 
(986
)
 
 
 
 
Income before taxes
27,706

 
14,342

 
 
 
 
Income tax expense
7,498

 
4,398

 
 
 
 
Net earnings
20,208

 
9,944

Less: net earnings (loss) attributable to noncontrolling interests
(20
)
 
75

Net earnings attributable to VPG stockholders
$
20,228

 
$
9,869

 
 
 
 
Basic earnings per share attributable to VPG stockholders
$
1.51

 
$
0.74

Diluted earnings per share attributable to VPG stockholders
$
1.50

 
$
0.73

 
 
 
 
Weighted average shares outstanding - basic
13,431

 
13,253

Weighted average shares outstanding - diluted
13,519

 
13,452



See accompanying notes.
-6-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited - In thousands)
 
Fiscal quarter ended
 
September 29, 2018
 
September 30, 2017
Net earnings
$
7,567

 
$
4,325

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
124

 
2,285

Pension and other postretirement actuarial items, net of tax
175

 
(29
)
Other comprehensive income
299

 
2,256

 
 
 
 
Total comprehensive income
7,866

 
6,581

 
 
 
 
Less: comprehensive income (loss) attributable to noncontrolling interests
20

 
70

 
 
 
 
Comprehensive income attributable to VPG stockholders
$
7,846

 
$
6,511





































See accompanying notes.
-7-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited - In thousands)
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
Net earnings
$
20,208

 
$
9,944

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(2,393
)
 
6,119

Pension and other postretirement actuarial items, net of tax
544

 
(60
)
Other comprehensive (loss) income
(1,849
)
 
6,059

 
 
 
 
Comprehensive income
18,359

 
16,003

 
 
 
 
Less: comprehensive income (loss) attributable to noncontrolling interests
(20
)
 
75

 
 
 
 
Comprehensive income attributable to VPG stockholders
$
18,379

 
$
15,928



See accompanying notes.
-8-



VISHAY PRECISION GROUP, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited - In thousands)
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
Operating activities
 
 
 
Net earnings
$
20,208

 
$
9,944

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,939

 
7,977

Gain on disposal of property and equipment
(146
)
 
(193
)
Share-based compensation expense
1,172

 
959

Inventory write-offs for obsolescence
1,633

 
1,662

Deferred income taxes
1,584

 
264

Other
536

 
(907
)
Net changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(8,128
)
 
(7,030
)
Inventories, net
(6,935
)
 
(3,280
)
Prepaid expenses and other current assets
(2,600
)
 
(2,937
)
Trade accounts payable
(1,342
)
 
1,176

Other current liabilities
4,031

 
7,166

Net cash provided by operating activities
17,952

 
14,801

 
 
 
 
Investing activities
 
 
 
Capital expenditures
(9,966
)
 
(4,366
)
Proceeds from sale of property and equipment
169

 
442

Net cash used in investing activities
(9,797
)
 
(3,924
)
 
 
 
 
Financing activities
 
 
 
Principal payments on long-term debt and capital leases
(4,728
)
 
(1,971
)
Proceeds from revolving facility
22,000

 
27,000

Payments on revolving facility
(19,000
)
 
(27,000
)
Distributions to noncontrolling interests
(101
)
 
(60
)
Payments of employee taxes on certain share-based arrangements
(801
)
 
(303
)
Net cash (used in) financing activities
(2,630
)
 
(2,334
)
Effect of exchange rate changes on cash and cash equivalents
(1,189
)
 
2,896

Increase in cash and cash equivalents
4,336

 
11,439

 
 
 
 
Cash and cash equivalents at beginning of period
74,292

 
58,452

Cash and cash equivalents at end of period
$
78,628

 
$
69,891

 
 
 
 
Supplemental disclosure of non-cash investing transactions:
 
 
 
Capital expenditures purchased
$
(7,559
)
 
$
(4,366
)
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

 

 

 

 
20,228

 

 
20,228

 
(20
)
 
20,208

Other comprehensive income

 

 

 

 

 
(1,849
)
 
(1,849
)
 

 
(1,849
)
Share-based compensation expense

 

 

 
1,172

 

 

 
1,172

 

 
1,172

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

 

 

 

 

 

 

 
(101
)
 
(101
)
Balance at September 29, 2018
$
1,307

 
$
103

 
$
(8,765
)
 
$
196,039

 
$
63,151

 
$
(37,299
)
 
$
214,536

 
$
27

 
$
214,563



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 September 29, 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 $0.7 million to Other income (expense) - other for the fiscal quarter and nine fiscal months ended September 29, 2018, respectively. Additionally, the non-service cost component of $0.2 million and $0.6 million was reclassified from Operating income to Other income (expense) - other for the fiscal quarter and nine fiscal months ended September 30, 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 August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU amends Accounting Standards Codification ("ASC") 715 to add, remove and clarify disclosure requirements related to defined benefit and pension and other postretirement plans. The amendments in this ASU are effective for annual periods beginning after December 15, 2020 and early adoption is permitted. The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurements (Topic 820)." This ASU modifies the disclosures on fair value measurements by removing the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The 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 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." This ASU 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 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. In July 2018, the FASB issued ASU No. 2018-11 "Leases (Topic 842), Targeted Improvements," which provides additional implementation guidance on the previously issued ASU. The Company is evaluating the standard to determine the impact on the consolidated condensed financial statements, however believes that the most notable impact to the consolidated condensed financial statements upon the adoption of this ASU will be the recognition of a right-of-use asset and a lease liability.


-12-


Note 2 – Revenues
Adoption of ASC 606

On January 1, 2018, the Company adopted 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 does 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, the Company generally does not allow product returns. Shipping and handling costs are recorded to Costs of product sold when control of the product has transferred 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):

 
Fiscal quarter ended 
 September 29, 2018
 
Fiscal quarter ended 
 September 30, 2017
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
United States
$
16,011

 
$
9,842

 
$
6,289

 
$
32,142

 
$
13,157

 
$
8,324

 
$
4,766

 
$
26,247

United Kingdom
905

 
2,995

 
3,738

 
7,638

 
813

 
3,016

 
3,026

 
6,855

Other Europe
8,224

 
2,248

 
4,261

 
14,733

 
7,057

 
2,533

 
3,820

 
13,410

Israel
2,951

 
116

 

 
3,067

 
1,888

 
173

 

 
2,061

Asia
7,821

 
2,401

 
1,053

 
11,275

 
6,400

 
2,550

 
1,776

 
10,726

Canada

 

 
6,635

 
6,635

 

 

 
3,506

 
3,506

Total
$
35,912

 
$
17,602

 
$
21,976

 
$
75,490

 
$
29,315

 
$
16,596

 
$
16,894

 
$
62,805


 
Nine Fiscal Months Ended September 29, 2018
 
Nine Fiscal Months Ended September 30, 2017
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
 
Foil Technology
Products
 
Force
Sensors
 
Weighing and
Control Systems
 
Total
United States
$
44,863

 
$
30,864

 
$
17,690

 
$
93,417

 
$
38,996

 
$
24,303

 
$
14,282

 
$
77,581

United Kingdom
2,818

 
9,047

 
11,008

 
22,873

 
2,325

 
9,084

 
8,454

 
19,863

Other Europe
23,699

 
8,248

 
14,161

 
46,108

 
19,636

 
6,699

 
11,678

 
38,013

Israel
7,792

 
402

 

 
8,194

 
4,598

 
489

 

 
5,087

Asia
25,096

 
7,627

 
4,885

 
37,608

 
20,830

 
7,145

 
4,763

 
32,738

Canada

 

 
14,612

 
14,612

 

 

 
11,629

 
11,629


$
104,268

 
$
56,188

 
$
62,356

 
$
222,812

 
$
86,385

 
$
47,720

 
$
50,806

 
$
184,911


The following table disaggregates net revenue from contracts with customers by market sector (in thousands):

-13-

Note 2 – Revenues (continued)


 
Fiscal quarter ended
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
September 29, 2018
 
September 30, 2017
Test & Measurement
$
18,969

 
$
16,404

$
57,346

 
$
48,426

Avionics, Military & Space
7,354

 
5,519

18,920

 
16,927

Medical
2,719

 
2,078

7,693

 
6,344

Precision Weighing
23,151

 
21,037

70,799

 
59,574

Force Measurement
16,170

 
13,234

50,435

 
38,039

Steel
7,127

 
4,533

17,619

 
15,601

Total
$
75,490

 
$
62,805

$
222,812

 
$
184,911


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.

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 September 29, 2018
1,123

 
4,993

Increase
$
299

 
$
1,764


The amount of revenue recognized during the nine fiscal months ended September 29, 2018 that was included in the contract liability balance at December 31, 2017 was $2.6 million. Of the $4.9 million of contract liability balance at June 30, 2018, the Company recognized $2.2 million as revenue during the third 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):

-14-

Note 3 – Goodwill and Other Intangible Assets (continued)


 
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
(258
)
 
(258
)
 

 

Balance at September 29, 2018
$
18,923

 
$
6,570

 
$
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 nine fiscal months ended September 29, 2018 of $0.2 million and $0.3 million respectively, which consisted mainly of employee termination costs in connection with cost reduction programs in Asia.
During the fiscal quarter and nine fiscal months ended September 30, 2017, the Company recorded aggregate restructuring costs of $0.4 million and $1.3 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 September 29, 2018 and December 31, 2017, respectively, is included in Other accrued expenses in the accompanying consolidated condensed balance sheets (in thousands):
Balance at December 31, 2017
$
254

Restructuring costs in 2018
289

Cash payments
(218
)
Foreign currency translation

Balance at September 29, 2018
$
325

Note 5 – Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act ("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 September 29, 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.


-15-

Note 5 – Income Taxes (continued)


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 September 29, 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 September 29, 2018 was 24.7% compared to 34.1% for the fiscal quarter ended September 30, 2017. The effective tax rate for the nine fiscal months ended September 29, 2018 was 27.1% compared to 30.7% for the nine fiscal months ended September 30, 2017. The tax rate in the current fiscal quarter is lower than the prior year fiscal quarter primarily due to changes in the mix of worldwide income and fewer loss entities for which no benefit was recognized. The current nine fiscal month tax rate is lower than the prior year nine fiscal month tax rate primarily due to changes in the mix of worldwide income and certain discrete items such as fewer loss entities for which no benefit was recognized, partially offset by foreign exchange gains and losses on the Israeli shekel.
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.
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands):
 
September 29, 2018
 
December 31, 2017
2015 Credit Agreement - Revolving Facility
$
12,000

 
$
9,000

2015 Credit Agreement - U.S. Closing Date Term Facility
3,141

 
3,664

2015 Credit Agreement - U.S. Delayed Draw Term Facility
7,679

 
8,956

2015 Credit Agreement - Canadian Term Facility
5,047

 
7,880

Exchangeable Unsecured Notes, due 2102

 
2,794

Other debt
303

 
401

Deferred financing costs
(253
)
 
(340
)
Total long-term debt
27,917

 
32,355

Less: current portion
4,367

 
3,878

Long-term debt, less current portion
$
23,550

 
$
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.

-16-


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
(2,393
)
 

 
(2,393
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
544

 
544

Balance at September 29, 2018
$
(29,783
)
 
$
(7,516
)
 
$
(37,299
)
 
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
6,119

 

 
6,119

Amounts reclassified from accumulated other comprehensive income (loss)

 
(60
)
 
(60
)
Balance at September 30, 2017
$
(27,073
)
 
$
(7,205
)
 
$
(34,278
)
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):

-17-

Note 8 – Pension and Other Postretirement Benefits (continued)


 
Fiscal quarter ended 
 September 29, 2018
 
Fiscal quarter ended 
 September 30, 2017
 
Pension
Plans
 
OPEB
Plans
 
Pension
Plans
 
OPEB
Plans
Net service cost
$
135

 
$
27

 
$
119

 
$
28

Interest cost
171

 
38

 
167

 
35

Expected return on plan assets
(138
)
 

 
(133
)
 

Amortization of actuarial losses
128

 
44

 
114

 
28

Net periodic benefit cost
$
296

 
$
109

 
$
267

 
$
91


 
Nine fiscal months ended September 29, 2018
 
Nine fiscal months ended September 30, 2017
 
Pension
Plans
 
OPEB
Plans
 
Pension
Plans
 
OPEB
Plans
Net service cost
$
410

 
$
81

 
$
355

 
$
84

Interest cost
521

 
114

 
495

 
105

Expected return on plan assets
(421
)
 

 
(395
)
 

Amortization of actuarial losses
389

 
132

 
338

 
84

Net periodic benefit cost
$
899

 
$
327

 
$
793

 
$
273


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 September 29, 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.

-18-

Note 9 – 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. The following table summarizes share-based compensation expense recognized (in thousands):
 
Fiscal quarter ended
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Restricted stock units
$
371

 
$
467

 
$
1,172

 
$
959

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):

-19-

Note 10 – Segment Information (continued)


 
Fiscal quarter ended
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net third-party revenues:
 
 
 
 
 
 
 
Foil Technology Products
$
35,912

 
$
29,315

 
$
104,268

 
$
86,385

Force Sensors
17,602

 
16,596

 
56,188

 
47,720

Weighing and Control Systems
21,976

 
16,894

 
62,356

 
50,806

Total
$
75,490

 
$
62,805

 
$
222,812

 
$
184,911

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Foil Technology Products
$
15,779

 
$
12,235

 
$
46,136

 
$
36,009

Force Sensors
4,557

 
4,746

 
15,487

 
12,964

Weighing and Control Systems
10,244

 
7,286

 
28,828

 
22,570

Total
$
30,580

 
$
24,267

 
$
90,451

 
$
71,543

 
 
 
 
 
 
 
 
Reconciliation of segment operating income to consolidated results:
 
 
 
 
 
 
 
Foil Technology Products
$
10,304

 
$
6,894

 
$
29,073

 
$
19,811

Force Sensors
2,214

 
2,564

 
8,174

 
6,242

Weighing and Control Systems
5,589

 
2,992

 
14,423

 
9,691

Unallocated G&A expenses
(7,248
)
 
(6,497
)
 
(21,249
)
 
(19,124
)
Restructuring costs
(228
)
 
(423
)
 
(289
)
 
(1,292
)
Consolidated condensed operating income
$
10,631

 
$
5,530

 
$
30,132

 
$
15,328

 
 
 
 
 
 
 
 
Restructuring costs:
 
 
 
 
 
 
 
Foil Technology Products
$

 
$
53

 
$

 
$
(85
)
Force Sensors
(228
)
 
(142
)
 
(289
)
 
(404
)
Weighing and Control Systems

 
(79
)
 

 
(366
)
Corporate/Other

 
(255
)
 

 
(437
)
 
$
(228
)
 
$
(423
)
 
$
(289
)
 
$
(1,292
)
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
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Foil Technology Products to Force Sensors and Weighing and Control Systems
$
819

 
$
656

 
$
2,976

 
$
2,011

Force Sensors to Foil Technology Products and Weighing and Control Systems
$
332

 
$
282

 
$
1,048

 
$
1,048

Weighing and Control Systems to Foil Technology Products and Force Sensors
$
128

 
$
350

 
$
423

 
$
678



-20-



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

Nine fiscal months ended

September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Numerator:
 
 
 

 
 
 
Numerator for basic earnings per share:
 
 
 

 
 
 
Net earnings attributable to VPG stockholders
$
7,547

 
$
4,255


$
20,228

 
$
9,869


 
 
 

 
 
 
Adjustment to the numerator for net earnings:
 
 
 

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

 
6


5

 
18


 
 
 

 
 
 
Numerator for diluted earnings per share:
 
 
 

 
 
 
Net earnings attributable to VPG stockholders
$
7,547

 
$
4,261


$
20,233

 
$
9,887

 
 
 
 

 
 
 
Denominator:
 
 
 

 
 
 
Denominator for basic earnings per share:
 
 
 

 
 
 
Weighted average shares
13,474

 
13,291


13,431

 
13,253

 
 
 
 

 
 
 
Effect of dilutive securities:
 
 
 

 
 
 
Exchangeable notes

 
124


30

 
152

Restricted stock units
60

 
55


58

 
47

Dilutive potential common shares
60

 
179


88

 
199

 
 
 
 

 
 
 
Denominator for diluted earnings per share:
 
 
 

 
 
 
Adjusted weighted average shares
13,534

 
13,470


13,519

 
13,452

 
 
 
 

 
 
 
Basic earnings per share attributable to VPG stockholders
$
0.56

 
$
0.32


$
1.51

 
$
0.74

 
 
 
 

 
 
 
Diluted earnings per share attributable to VPG stockholders
$
0.56

 
$
0.32


$
1.50

 
$
0.73



-21-



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
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Foreign exchange gain (loss)
$
19

 
$
169

 
$
(431
)
 
$
(463
)
Interest income
120

 
47

 
354

 
103

Other
(311
)
 
1,290

 
(1,016
)
 
766

 
$
(172
)
 
$
1,506

 
$
(1,093
)
 
$
406


Included in Other, for the fiscal quarter and nine fiscal months ended September 30, 2017 were net proceeds of $1.5 million related to a lease termination payment at the Tianjin, People's Republic of China location.
Note 13 – Fair 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.
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
September 29, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Assets held in rabbi trusts
 
$
4,945

 
$
101

 
$
4,844

 
$


 
 
 
 
 
 
 
 
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 September 29, 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 September 29, 2018 and December 31, 2017 is approximately $27.9 million and $33.4 million, respectively, compared to its carrying value, excluding capitalized deferred financing costs, of $27.9 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

-22-

Note 13 – Fair Value Measurements (continued)



financial instruments include cash and cash equivalents whose carrying amounts reported in the consolidated condensed balance sheets approximate their fair values.

-23-



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 September 29, 2018 were $75.5 million versus $62.8 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended September 29, 2018 were $7.5 million, or $0.56 per diluted share, versus $4.3 million, or $0.32 per diluted share, for the comparable prior year period.
Net revenues for the nine fiscal months ended September 29, 2018 were $222.8 million versus $184.9 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the nine fiscal months ended September 29, 2018 were $20.2 million, or $1.50 per diluted share, versus $9.9 million, or $0.73 per diluted share, for the comparable prior year period.
The results of operations for the fiscal quarters ended September 29, 2018 and September 30, 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.




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The items affecting comparability are (in thousands, except per share amounts):
 
Fiscal quarter ended
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Gross profit
$
30,580

 
$
24,267

 
$
90,451

 
$
71,543

Gross profit margin
40.5
%
 
38.6
%
 
40.6
%
 
38.7
%
 
 
 
 
 
 
 
 
Reconciling items affecting gross profit margin
 
 
 
 
 
 
 
Acquisition purchase accounting adjustments (a)

 
42

 

 
42

 
 
 
 
 
 
 
 
Adjusted gross profit
$
30,580

 
$
24,309

 
$
90,451

 
$
71,585

 Adjusted gross profit margin
40.5
%
 
38.7
%
 
40.6
%
 
38.7
%

 
Fiscal quarter ended
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Operating income
$
10,631

 
$
5,530

 
$
30,132

 
$
15,328

Operating margin
14.1
%
 
8.8
%
 
13.5
%
 
8.3
%

 
 
 
 
 
 
 
Reconciling items affecting operating margin
 
 
 
 
 
 
 
Acquisition purchase accounting adjustments (a)

 
42

 

 
42

Restructuring costs
228

 
423

 
289

 
1,292



 

 

 

Adjusted operating income
$
10,859

 
$
5,995

 
$
30,421

 
$
16,662

 Adjusted operating margin
14.4
%
 
9.5
%
 
13.7
%
 
9.0
%


-25-



 
Fiscal quarter ended
 
Nine fiscal months ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net earnings attributable to VPG stockholders
$
7,547

 
$
4,255

 
$
20,228

 
$
9,869

 
 
 
 
 
 
 
 
Reconciling items affecting operating margin
 
 
 
 
 
 
 
Acquisition purchase accounting adjustments (a)

 
42

 

 
42

Restructuring costs
228

 
423

 
289

 
1,292

Reconciling items affecting other income/expense







Net proceeds from lease termination (b)


(1,544
)



(1,544
)
Less reconciling items affecting income tax expense
 
 
 
 
 
 
 
Tax effect of reconciling items
35

 
(394
)
 
44

 
(339
)
Adjusted net earnings attributable to VPG stockholders
$
7,740

 
$
3,570

 
$
20,473

 
$
9,998

 
 
 
 
 
 
 
 
Adjusted net earnings per diluted share
$
0.57

 
$
0.27

 
$
1.51

 
$
0.74

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
13,534

 
13,470

 
13,519

 
13,452

(a) Acquisition purchase accounting adjustments recorded in connection with the acquisition of Pacific Instruments include fair market value adjustments associated with inventory.
(b)
Net proceeds related to a lease termination payment at the Company's Tianjin, Peoples' Republic of China location.

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.

-26-



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 third quarter of 2017 through the third quarter of 2018 (dollars in thousands):
 
3rd Quarter
 
4th Quarter
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
2017
 
2017
 
2018
 
2018
 
2018
Net revenues
$
62,805

 
$
69,439

 
$
73,091

 
$
74,231

 
$
75,490

 
 
 
 
 
 
 
 
 
 
Gross profit margin
38.6
%
 
38.5
%
 
39.0
%
 
42.3
%
 
40.5
%
 
 
 
 
 
 
 
 
 
 
End-of-period backlog
$
76,200

 
$
88,900

 
$
93,900

 
$
101,000

 
$
99,400

 
 
 
 
 
 
 
 
 
 
Book-to-bill ratio
1.12

 
1.18

 
1.05

 
1.13

 
0.98

 
 
 
 
 
 
 
 
 
 
Inventory turnover
2.64

 
2.85

 
2.93

 
2.71

 
2.74


 
3rd Quarter
 
4th Quarter
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
2017
 
2017
 
2018
 
2018
 
2018
Foil Technology Products