Vishay Precision Group, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview VPG is a global, diversified company focused on precision measurement and sensing technologies that help power the future by bridging the physical world with the digital one. Many of our specialized sensors, weighing solutions, and measurement systems are “designed-in” by our customers, and address growing applications across a diverse array of industries and markets. Our products are marketed under brand names that we believe are characterized as having a very high level of precision and quality, and we employ an operationally diversified structure to manage our businesses. Driven by the continued proliferation of data generated by the expanding use of sensors across a widening array of industrial and non-industrial applications, precision measurement and sensing technologies help ensure and deliver required levels of quality of mission-critical or high-value data. VPG’s products are often at the first stage of a data value chain (i.e., the process of converting the physical world into a digital format that can be used for a specific purpose) and as such impact the effectiveness of vast number of critical, high-value downstream processes. Over the past few years, we have seen a broadening of precision sensing applications in both our traditional industrial markets and new markets, due to the development of higher functionality in our customers' end products. Our precision measurement solutions are used across a wide variety of end markets upon which we focus, including industrial, test and measurement, transportation, steel, medical, agriculture, avionics, military and space, and consumer product applications. The Company has a long heritage of innovation in sensor technologies that provide accuracy, reliability and repeatability that make our customers' products safer, smarter, and more productive. As the functionality of customers' products continues to increase, and they integrate more precision measurement sensors and related systems into their solutions, we believe this will offer substantial growth opportunities for our products and expertise. Overview of Financial Results VPG reports in three product segments: the Sensors segment, the Weighing Solutions segment, and the Measurement Systems segment. The Sensors reporting segment is comprised of the foil resistor and strain gage operating segments. The Weighing Solutions segment is comprised of specialized modules and systems used to precisely measure weight, force torque, and pressure. The Measurement Systems reporting segment is comprised of highly specialized systems for steel production, materials development, and safety testing. Net revenues for the fiscal quarter ended July 1, 2023 were $90.8 million versus $88.6 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended July 1, 2023 were $8.2 million, or $0.60 per diluted share, versus $10.8 million, or $0.79 per diluted share, for the comparable prior year period. Net revenues for the six fiscal months ended July 1, 2023 were $179.7 million versus $176.3 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the six fiscal months ended July 1, 2023 were $15.2 million, or $1.11 per diluted share, versus $17.1 million, or $1.25 per diluted share, for the comparable prior year period. The results of operations for the fiscal quarters ended July 1, 2023 and July 2, 2022 include items affecting comparability as listed in the reconciliations below. The reconciliations below include certain financial measures which are not recognized in accordance with U.S. generally accepted accounting principles ("GAAP"), including adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted net earnings per diluted share, EBITDA, and adjusted EBITDA. These non-GAAP measures should not be viewed as an alternative to GAAP measures of performance. Non-GAAP measures such as adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted net earnings per diluted share, EBITDA, and adjusted EBITDA do not have uniform definitions. These measures, as calculated by VPG, may not be comparable to similarly titled measures used by other companies. Management believes that these non-GAAP measures are useful to investors because each presents what management views as our core operating results for the relevant period. The adjustments to the applicable GAAP measures relate to occurrences or events that are outside of our core operations, and management believes that the use of these non-GAAP measures provides a consistent basis to evaluate our operating profitability and performance trends across comparable periods. In addition, the Company has historically provided these or similar non-GAAP measures and understands that some investors and financial analysts find this information helpful in analyzing the Company’s performance and in comparing the Company’s financial performance to that of its peer companies and competitors. Management believes that the Company’s non-GAAP measures are regarded as supplemental to its GAAP financial results. -23- Gross Profit Operating Income Net Earnings Attributable to VPG Stockholders Diluted Earnings Per share Three months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 As reported - GAAP $ 38,712 $ 37,334 $ 11,795 $ 10,551 $ 8,236 $ 10,755 $ 0.60 $ 0.79 As reported - GAAP Margins 42.6 % 42.1 % 13.0 % 11.9 % Acquisition purchase accounting adjustments (a) 41 679 41 679 41 679 — 0.05 Restructuring costs — — 162 904 162 904 0.01 0.07 Foreign currency exchange (gain)/loss (d) — — — — (794) (3,380) (0.05) (0.25) Less: Tax effect of reconciling items and discrete tax items — — — — (312) (377) (0.02) (0.02) As Adjusted - Non GAAP $ 38,753 $ 38,013 $ 11,998 $ 12,134 $ 7,957 $ 9,335 $ 0.58 $ 0.68 As Adjusted - Non GAAP Margins 42.7 % 42.9 % 13.2 % 13.7 % Gross Profit Operating Income Net Earnings Attributable to VPG Stockholders Diluted Earnings Per share Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 As reported - GAAP 75,911 72,584 21,719 18,866 $ 15,200 $ 17,111 $ 1.11 $ 1.25 As reported - GAAP Margins 42.3 % 41.2 % 12.1 % 10.7 % Acquisition purchase accounting adjustments (a) 90 1,050 90 1,050 90 1,050 0.01 0.08 COVID-19 impact (b) — 138 — 138 — 138 — 0.01 Start-up costs (c) — 150 — 150 — 150 — 0.01 Restructuring costs — — 278 1,165 278 1,165 0.02 0.09 Foreign currency exchange (gain)/loss (d) — — — — (856) (3,934) (0.06) (0.29) Less: Tax effect of reconciling items and discrete tax items — — — — (280) (302) (0.02) (0.02) As Adjusted - Non GAAP $ 76,001 $ 73,922 $ 22,087 $ 21,369 $ 14,992 $ 15,982 $ 1.10 $ 1.17 As Adjusted - Non GAAP Margins 42.3 % 41.9 % 12.3 % 12.1 % -24- Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net earnings attributable to VPG stockholders $ 8,236 $ 10,755 $ 15,200 $ 17,111 Interest Expense 1,079 428 2,076 757 Income tax expense 3,384 2,587 5,604 4,328 Depreciation 2,933 2,832 5,852 5,685 Amortization 934 967 1,873 1,937 EBITDA 16,566 $ 17,569 30,605 $ 29,818 EBITDA MARGIN 18.2 % 19.8 % 17.0 % 16.9 % Acquisition purchase accounting adjustments (a) 41 679 90 1,050 Restructuring costs 162 904 278 1,165 COVID-19 impact (b) — — — 138 Start-up costs (c) — — — 150 Foreign currency exchange (gain)/loss (d) (794) (3,380) (856) (3,934) ADJUSTED EBITDA $ 15,975 $ 15,772 $ 30,117 $ 28,387 ADJUSTED EBITDA MARGIN 17.6 % 17.8 % 16.8 % 16.1 % (a) Acquisition purchase accounting adjustments include fair market value adjustments associated with inventory recorded as a component of costs of products sold. (b) COVID-19 impact in 2022 is the net impact to the Company of costs incurred as a result of the COVID-19 pandemic, net of government subsidies received. (c) Start-up costs in 2022 are associated with the ramp up of our new manufacturing facility in Israel. (d) Impact of foreign currency exchange rates on assets and liabilities. Financial Metrics We utilize several financial measures and metrics to evaluate performance and assess the future direction of our business. These key financial measures and metrics include net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover. Gross profit margin is computed as gross profit as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but could also include certain other period costs. Gross profit margin is a function of net revenues, but also reflects our cost-cutting programs and our ability to contain fixed costs. End-of-period backlog is one indicator of potential future sales. We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. If demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, backlog is not necessarily indicative of the results expected for future periods. Another important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period compared with the amount of product shipped during that period. A book-to-bill ratio that is greater than one indicates that revenues may increase in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of lower demand and may foretell declining sales. The book-to-bill ratio is also impacted by the timing of orders, particularly from our project-based product lines. We focus on inventory turnover as a measure of how well we manage our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital. -25- 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 2022 through the second quarter of 2023. As part of our quarter-end review of backlog in connection with the preparation of our Form 10-Q for the fiscal quarter ended July 1, 2023, we discovered historical backlog inaccuracy relating to certain orders, which we have corrected. As a result of the correction of historical inaccuracy, we made a one-time adjustment of $3.6 million to prior periods end of period backlog of our consolidated and sensors segments data. 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter (dollars in thousands) 2022 2022 2022 2023 2023 Net revenues $ 88,618 $ 90,057 $ 96,240 $ 88,864 $ 90,802 Gross profit margin 42.1 % 41.4 % 41.2 % 41.9 % 42.6 % End-of-period backlog $ 167,800 $ 168,100 $ 151,400 $ 146,800 $ 139,700 Book-to-bill ratio 1.08 1.08 0.76 0.94 0.94 Inventory turnover 2.52 2.47 2.63 2.39 2.34 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter (dollars in thousands) 2022 2022 2022 2023 2023 Sensors Net revenues $ 40,280 $ 37,879 $ 36,312 $ 36,726 $ 36,266 Gross profit margin 44.3 % 40.5 % 37.6 % 41.2 % 40.1 % End-of-period backlog $ 80,600 $ 77,000 $ 72,300 $ 66,200 $ 58,900 Book-to-bill ratio 1.17 0.99 0.76 0.82 0.84 Inventory turnover 3.20 3.04 2.91 2.62 2.55 Weighing Solutions Net revenues $ 28,459 $ 31,399 $ 33,089 $ 31,859 $ 31,261 Gross profit margin 33.7 % 33.3 % 33.4 % 34.9 % 38.7 % End-of-period backlog $ 43,000 $ 43,000 $ 38,300 $ 35,400 $ 34,300 Book-to-bill ratio 1.03 1.05 0.82 0.90 0.97 Inventory turnover 2.33 2.48 2.72 2.63 2.41 Measurement Systems Net revenues $ 19,879 $ 20,779 $ 26,839 $ 20,279 $ 23,275 Gross profit margin 49.9 % 55.5 % 55.9 % 53.9 % 51.8 % End-of-period backlog $ 44,200 $ 48,100 $ 40,800 $ 45,200 $ 46,500 Book-to-bill ratio 0.98 1.27 0.70 1.21 1.06 Inventory turnover 1.90 1.68 2.11 1.70 1.94 Net revenues for the second fiscal quarter of 2023 increased 2.2% from the first fiscal quarter of 2023 mainly due to increased revenues in the Measurement Systems reporting segment. Net revenues increased 2.5% from the second fiscal quarter of 2022 with increased volume, primarily from the Weighing Solutions and Measurement Systems reporting segments, partially offset by lower net revenues in the Sensors reporting segments. Net revenues in the Sensors reporting segment decreased 1.3% compared to the first fiscal quarter of 2023 and decreased 10.0% from the second fiscal quarter of 2022. Sequentially, the decrease primarily reflected lower revenue of precision resistors and -26- advanced sensors in the AMS markets partially offset by higher advanced sensors revenue in our Other markets (mainly for consumer applications). The year-over-year decrease in revenues was primarily attributable to lower sales of advanced sensors products primarily in our Other markets (mainly for consumer applications) and lower sales of precision resistors in the Test and Measurement market, partially offset by increases in precision resistor sales in the Avionics, Military and Space (AMS) market. Net revenues in the Weighing Solutions reporting segment decreased 1.9% from the first fiscal quarter of 2023 and increased 9.8% from the second fiscal quarter of 2022. Sequentially, the decrease in revenues was attributable to lower sales in our Other markets for precision agriculture and construction applications, partially offset by an increase in revenues in the Industrial Weighing market. The year-over-year increase in revenues was mainly attributable to higher sales of load cells in our Other markets for precision agriculture, consumer, and construction applications. Net revenues in the Measurement Systems reporting segment increased 14.8% from the first fiscal quarter of 2023 and increased 17.1% from the second fiscal quarter of 2022. Sequentially, the increase in revenue was primarily due to the higher revenue of products in the Steel market, partially offset by lower sales of Diversified Technical Systems Inc. ("DTS") products in the AMS market. The year-over-year increase was primarily attributable to increased revenue in the Steel market. Overall gross profit margin in the second fiscal quarter of 2023 increased 0.7% as compared to the first fiscal quarter of 2023 and increased 0.5% from the second fiscal quarter of 2022. Sequentially, the increase in the gross profit margin in the Weighing Solutions reporting segment was partially offset by a decrease in the gross profit margin in the Sensors and Measurement Systems reporting segments. In the Sensors reporting segment, the gross profit margins decreased sequentially due to lower volume, partially offset by favorable foreign currency exchange rates. In the Weighing Solutions reporting segment, the sequential increase in gross profit margins was primarily due to favorable product mix, increased selling prices and cost reduction programs. The sequential decrease in the gross profit margins in the Measurement Systems reporting segment was a result of higher volume with an unfavorable product mix. Compared to the second fiscal quarter of 2022, the Weighing Solutions and Measurement Systems reporting segments had higher gross profit margins, while the Sensors reporting segment gross profit margin was lower. The Sensors reporting segment had a lower gross profit margin due to lower volume and temporary labor inefficiencies, partially offset by favorable foreign currency exchange rates and cost reduction programs. The Weighing Solutions reporting segment increase in gross profit margin as compared to 2022 was primarily due to higher volume, selling price increases, lower freight costs, and cost reduction programs, partially offset by higher materials costs. In the Measurement Systems reporting segment, the gross profit margin was higher as compared to the second fiscal quarter of 2022 primarily due to higher volume and higher selling prices and lower purchase accounting adjustments, partially offset by unfavorable foreign exchange rates and higher wages and materials costs. Optimize Core Competence The Company’s core competencies include our innovative deep technical and applications-specific expertise to add value to our customers' products, our strong brands and customer relationships, our focus on operational excellence, our ability to select and develop our management teams, and our proven M&A strategy. We continue to optimize all aspects of our development, manufacturing and sales processes, including by increasing our technical sales efforts; continuing to innovate in product performance and design; and refining our manufacturing processes. Our Sensors segment research group developed innovations that enhance the capability and performance of our strain gages, while simultaneously reducing their size and power consumption as part of our advanced sensors product line. We believe this unique foil technology will create new markets as customers “design in” these next generation products in existing and new applications. Our development engineering team is also responsible for creating new processes to further automate manufacturing, and improve productivity and quality. Our advanced sensors manufacturing technology also offers us the capability to produce high-quality foil strain gages in a highly automated environment, which we believe results in reduced manufacturing and lead times, improved quality and increased margins. As a sign of our commitment to these businesses, we signed a long-term lease for a state-of-the-art facility that has been constructed in Israel. We fully transitioned to this facility in the third quarter of fiscal 2021. Our design, research, and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We intend to leverage our insights into customer demand to continually develop and roll out new, innovative products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends in terms of form, fit, and function. -27- We also seek to achieve significant production cost savings through the transfer, expansion, and construction of manufacturing operations in countries such as India, Japan, and Israel, where we can benefit from improved efficiencies or available tax and other government-sponsored incentives. In the past several years, we incurred restructuring expense related to closing and downsizing of facilities as part of the manufacturing transitions of our load cell products to facilities in India and China, which marked key milestones in our ongoing strategic initiatives to align and consolidate our manufacturing footprint. Acquisition Strategy We expect to continue to make strategic acquisitions where opportunities present themselves to grow and expand our segments. Historically, our growth and acquisition strategy had been largely focused on vertical product integration, using our foil strain gages in our load cell products, and incorporating those products into our weighing solutions. In recent years, we widened our acquisition strategy to include a broader set of precision measurement systems and product companies. We expect to expand our expertise, and our acquisition focus, outside our traditional vertical approach to other precision measurement solutions, including in the fields of measurement of force, weight, pressure, torque, tilt, motion, and acceleration. We believe acquired businesses will benefit from improvements we implement to reduce redundant functions and from our current global manufacturing and distribution footprint. Research and Development Research and development will continue to play a key role in our efforts to introduce innovative products to generate new sales and to improve profitability. We expect to continue to expand our position as a leading supplier of precision foil technology products. We believe our R&D efforts should provide us with a variety of opportunities to leverage technology, products, and our manufacturing base in order to ultimately improve our financial performance. Cost Management To be successful, we believe we must seek new strategies for controlling operating costs. Through automation in our plants, we believe we can optimize our capital and labor resources in production, inventory management, quality control, and warehousing. We are in the process of moving some manufacturing to more cost effective locations. This may enable us to become more efficient and cost competitive, and also maintain tighter controls of the operation. Production transfers, facility consolidations, and other long-term cost-cutting measures require us to initially incur significant severance and other exit costs. We are realizing the benefits of our restructuring through lower labor costs and other operating expenses, and expect to continue reaping these benefits in future periods. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 1, 2023. We are evaluating plans to further reduce our costs by consolidating additional manufacturing operations. These plans may require us to incur restructuring and severance costs in future periods. While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively impact our customer service or our ability to further develop products and processes. Goodwill We test the goodwill in each of our reporting units for impairment at least annually, as of the first day of our fourth quarter, and whenever events or changes in circumstances occur indicating that a possible impairment may have been incurred. Determining whether to test goodwill for impairment, and the application of goodwill impairment tests, require significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Changes in these estimates could materially affect the determination of fair value for each reporting unit. A slowdown or deferral of orders for a business, with which we have goodwill associated, could impact our valuation of that goodwill. Foreign Currency We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. U.S. GAAP requires that entities identify the “functional currency” of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary’s functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign subsidiary that is a direct and integral component or extension of the parent company’s operations generally would have the parent company’s currency as its functional currency. We have subsidiaries that fall into each of these categories. -28- Foreign Subsidiaries which use the Local Currency as the Functional Currency Our operations in Europe, Canada, and certain locations in Asia primarily generate and expend cash using local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is the functional currency, assets and liabilities in the consolidated condensed balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not impact the results of operations and are reported as a separate component of equity. For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the period. While the translation of revenues and expenses into U.S. dollars does not directly impact the consolidated condensed statement of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in those foreign currencies. Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency Our operations in Israel and certain locations in Asia primarily generate cash in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly related to payroll, which are incurred in the local currency and significant lease assets and liabilities. Effects of Foreign Currency Exchange Rate on Operations For the fiscal quarter ended July 1, 2023, exchange rates decreased net revenues by $0.7 million, and decreased costs of products sold and selling, general, and administrative expenses by $2.4 million, when compared to the comparable prior year period. For the six fiscal months ended July 1, 2023, exchange rates decreased net revenues by $3.1 million, and increased costs of products sold and selling, general, and administrative expenses by $6.0 million, when compared to the comparable prior year period. -29- Results of Operations Statement of operations’ captions as a percentage of net revenues and the effective tax rates were as follows: Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Costs of products sold 57.4 % 57.9 % 57.7 % 58.8 % Gross profit 42.6 % 42.1 % 42.3 % 41.2 % Selling, general, and administrative expenses 29.5 % 29.2 % 30.0 % 29.8 % Operating income 13.0 % 11.9 % 12.1 % 10.7 % Income before taxes 12.9 % 15.2 % 11.7 % 12.4 % Net earnings 9.2 % 12.3 % 8.5 % 10.0 % Net earnings attributable to VPG stockholders 9.1 % 12.1 % 8.5 % 9.7 % Effective tax rate 28.8 % 19.2 % 26.8 % 19.8 % Net Revenues Net revenues were as follows (dollars in thousands) : Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net revenues $ 90,802 $ 88,618 $ 179,666 $ 176,283 Change versus comparable prior year period $ 2,184 $ 3,383 Percentage change versus prior year period 2.5 % 1.9 % Changes in net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 1.2 % 2.0 % Change in average selling prices 2.1 % 1.6 % Foreign currency effects (0.8) % (1.7) % Net change 2.5 % 1.9 % During the fiscal quarter and six fiscal months ended July 1, 2023, net revenues increased 2.5% and 1.9%, respectively, as compared to the comparable prior year periods, with increased volume, primarily from the Weighing Solutions and Measurement Systems reporting segments, partially offset by lower net revenues in the Sensors reporting segments. Gross Profit Margin Gross profit as a percentage of net revenues was as follows: Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Gross profit margin 42.6 % 42.1 % 42.3 % 41.2 % The gross profit margin for the fiscal quarter and six fiscal months ended July 1, 2023 increased 0.5% and 1.1% as compared to the comparable prior year periods. For the fiscal quarter and six fiscal month periods, the Weighing Solutions and Measurement Systems reporting segments had higher gross profit margins, while the Sensors reporting segment gross profit margin was lower. -30- Segments Analysis of revenues and gross profit margins for each of our reportable segments is provided below. Sensors Net revenues of the Sensors segment were as follows (dollars in thousands) : Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net revenues $ 36,266 $ 40,280 $ 72,992 $ 78,030 Change versus comparable prior year period $ (4,014) $ (5,038) Percentage change versus prior year period (10.0) % (6.5) % Changes in Sensors segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume (10.4) % (5.6) % Change in average selling prices 1.0 % 1.0 % Foreign currency effects (0.6) % (1.9) % Net change (10.0) % (6.5) % Net revenues decreased 10.0% and 6.5% for the fiscal quarter and six fiscal months ended July 1, 2023, respectively, as compared to the comparable prior year periods. The decrease in revenues was primarily attributable to lower sales of advanced sensors products primarily in our Other markets (mainly for consumer applications) and lower sales of precision resistors in the Test and Measurement market, partially offset by increases in precision resistor sales in the Avionics, Military and Space (AMS) market. Net revenues were also impacted by unfavorable foreign currency exchange rate impacts. Gross profit as a percentage of net revenues for the Sensors segment was as follows: Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Gross profit margin 40.1 % 44.3 % 40.7 % 41.2 % The gross profit margin decreased 4.2% and 0.5% for the fiscal quarter and six fiscal months ended July 1, 2023, respectively, when compared to the comparable prior year periods due to lower volume and temporary labor inefficiencies, partially offset by favorable foreign currency exchange rates and cost reduction programs. Weighing Solutions Net revenues of the Weighing Solutions segment were as follows (dollars in thousands) : Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net revenues $ 31,261 $ 28,459 $ 63,120 $ 61,227 Change versus comparable prior year period $ 2,802 $ 1,893 Percentage change versus prior year period 9.8 % 3.1 % -31- Changes in Weighing Solutions segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 6.2 % 1.9 % Change in average selling prices 3.6 % 2.3 % Foreign currency effects 0.0 % (1.1) % Net change 9.8 % 3.1 % Net revenues increased 9.8% for the fiscal quarter ended July 1, 2023, as compared to the comparable prior year period. The increase in revenues was mainly attributable to higher sales of load cells in our Other markets for precision agriculture, consumer, and construction applications. Net revenues increased 3.1% for the six fiscal months ended July 1, 2023 as compared to the comparable prior year period. The increase in net revenues was primarily attributable to increased sales of load sales in our Other markets for precision agriculture and construction applications, partially offset by lower sales of our load cell products in our Industrial weighing market, as well as negative foreign currency exchange rate effects. Gross profit as a percentage of net revenues for the Weighing Solutions segment was as follows: Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Gross profit margin 38.7 % 33.7 % 36.8 % 35.4 % The gross profit margin for the fiscal quarter and six fiscal months ended July 1, 2023 increased 5.0% and 1.4%, respectively, as compared to the comparable prior year periods primarily due to higher volume, selling price increases, lower freight costs, and cost reduction programs, partially offset by higher materials costs. Measurement Systems Net revenues of the Measurement Systems segment were as follows (dollars in thousands) : Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net revenues $ 23,275 $ 19,879 $ 43,554 $ 37,026 Change versus comparable prior year period $ 3,396 $ 6,528 Percentage change versus prior year period 17.1 % 17.6 % Changes in Measurement Systems segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 17.5 % 18.5 % Change in average selling prices 1.7 % 1.8 % Foreign currency effects (2.1) % (2.7) % Net change 17.1 % 17.6 % -32- Net revenues increased 17.1% for the fiscal quarter ended July 1, 2023 as compared to the comparable prior year period and increased 17.6% for the six fiscal months ended July 1, 2023 as compared to the comparable prior year period. The increase was primarily attributable to increased revenue in the Steel market. Gross profit as a percentage of net revenues for the Measurement Systems segment were as follows: Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Gross profit margin 51.8 % 49.9 % 52.8 % 50.8 % The gross profit margin for the fiscal quarter and six fiscal month ended July 1, 2023 increased by 1.9% and 2.0%, respectively, compared to the comparable prior year periods primarily due to higher volume and higher selling prices and lower purchase accounting adjustments, partially offset by unfavorable foreign exchange rates and higher wages and materials costs. Selling, General, and Administrative Expenses Selling, general, and administrative (“SG&A”) expenses are summarized as follows (dollars in thousands) : Fiscal quarter ended Six fiscal months ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Total SG&A expenses $ 26,755 $ 25,879 $ 53,914 $ 52,553 As a percentage of net revenues 29.5 % 29.2 % 30.0 % 29.8 % SG&A expenses for the fiscal quarter and six fiscal months ended July 1, 2023 increased $0.9 million and $1.4 million, respectively, compared to the comparable prior year periods due to increases in wages, travel costs, commissions and other fees, partially offset by favorable foreign currency exchange rate impacts. Restructuring Costs Restructuring costs reflect the cost reduction programs implemented by the Company. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements for accrual are met. Because these costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, the Company could be required either to record additional expense in future periods or to reverse part of the previously recorded charges. The Company recorded $0.2 million and $0.9 million of restructuring costs during the fiscal quarter ended July 1, 2023 and July 2, 2022, respectively, and $0.3 million and $1.2 million of restructuring costs during the six fiscal months ended July 1, 2023 and July 2, 2022, respectively. Restructuring costs were comprised primarily of employee termination costs, including severance and statutory retirement allowances, in connection with various cost reduction programs. Other Income (Expense) Interest expense for the fiscal quarter and six fiscal months ended July 1, 2023 was higher when compared with the comparable prior year periods mainly due to higher borrowing rates in 2023. -33- The following table analyzes the components of the line “Other” on the consolidated condensed statements of operations (in thousands) : Fiscal quarter ended July 1, 2023 July 2, 2022 Change Foreign currency exchange gain $ 793 $ 3,380 $ (2,587) Interest income 356 80 276 Pension expense (71) (104) 33 Other (59) (12) (47) $ 1,019 $ 3,344 $ (2,325) Six fiscal months ended July 1, 2023 July 2, 2022 Change Foreign currency exchange gain $ 855 $ 3,934 $ (3,079) Interest income 722 144 578 Pension expense (145) (180) 35 Other (138) (115) (23) $ 1,294 $ 3,783 $ (2,489) Foreign currency exchange gains represent the impact of changes in foreign currency exchange rates. For the fiscal quarter and six fiscal months ended July 1, 2023, the change in foreign currency exchange gains and losses during the periods, as compared to the prior year periods, is largely due to exposure to currency fluctuations with the Israeli shekel, the Canadian dollar, and the British pound. For the fiscal quarter and six fiscal months ended July 2, 2022, the change in foreign exchange gains and losses during the periods, as compared to the prior year periods, is largely due to exposure to currency fluctuations with the Israeli shekel, the Japanese yen and the British pound. The change in the dollar-shekel exchange rate resulted in a favorable foreign exchange impact primarily related to the shekel-denominated lease liability for the Sensors facility in Israel. Included in Other for the fiscal quarter and six fiscal months ended July 2, 2022 was a $0.2 million loss on the liquidation of two of the Company's European subsidiaries. Income Taxes VPG calculates the tax provision for interim periods using an estimated annual effective tax rate methodology based on projected full-year pre-tax earnings among the taxing jurisdictions in which we operate with adjustments for discrete items. The effective tax rate for the fiscal quarter ended July 1, 2023 was 28.8% compared to 19.2% for the fiscal quarter ended July 2, 2022. The effective tax rate for the fiscal quarter ended July 1, 2023 was higher than the prior year period primarily due to changes in the mix of worldwide income and an increase in our valuation allowance on deferred tax assets. The effective tax rate for the six fiscal months ended July 1, 2023 was 26.8% compared to 19.8% for the six fiscal months ended July 2, 2022. The effective tax rate for the six fiscal months ended July 1, 2023 was higher than the prior year period primarily due to changes in the mix of worldwide income and an increase in our valuation allowance on deferred tax assets. The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties. -34- Financial Condition, Liquidity, and Capital Resources We believe that our current cash and cash equivalents, credit facilities and projected cash from operations will be sufficient to meet our liquidity needs for at least the next 12 months. On March 20, 2020, the Company entered into a Third Amended and Restated Credit Agreement (the “2020 Credit Agreement”) among the Company, the lenders named therein, Citizens Bank, National Association and Wells Fargo Bank, National Association as joint lead arrangers and JPMorgan Chase Bank, National Association as agent for such lenders (the “Agent”), pursuant to which the terms of the Company’s multi-currency, secured credit facility were revised to provide a secured revolving facility (the “2020 Revolving Facility”) in an aggregate principal amount of $75.0 million, with a sublimit of $10.0 million which can be used for letters of credit for the account of the Company or its subsidiaries that are parties to the Credit Agreement. The proceeds of the 2020 Revolving Facility may be used on an ongoing basis for working capital and general corporate purposes. The aggregate principal amount of the 2020 Revolving Facility may be increased by a maximum of $25.0 million upon the request of the Company, subject to the terms of the 2020 Credit Agreement. The 2020 Credit Agreement terminates on March 20, 2025. On May 5, 2023, the Company entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (the “Credit Agreement Amendment”), by and among the Company, the lenders named therein, Citizens Bank, National Association and Wells Fargo Bank, National Association as joint lead arrangers and the Agent, as agent for such lenders. The Credit Agreement Amendment amended the 2020 Credit Agreement. The primary purpose of the changes made in the Credit Agreement Amendment were to update the interest rate provisions to replace LIBOR with SOFR for U.S. dollar denominated loans as well as update the other applicable reference borrowing rates for foreign currency loans which took effect on June 15, 2023. Interest payable on amounts borrowed under the 2020 Revolving Facility is based upon the following: (a) for revolving credit loans denominated in US Dollars, the SOFR rate plus applicable credit spread; and (b) for revolving credit loans denominated in foreign currencies, at other applicable local reference rates plus an interest margin. Depending upon the Company’s leverage ratio, an interest rate margin ranging from 1.50% to 2.75% per annum is added to the applicable SOFR rate to determine the interest payable on the SOFR loans. The Company is required to pay a quarterly fee of 0.25% per annum to 0.40% per annum on the unused portion of the 2020 Revolving Facility, which is determined based on the Company’s leverage ratio each quarter. Additional customary fees apply with respect to letters of credit. The obligations of the Company under the 2020 Credit Agreement are secured by pledges of stock in certain domestic and foreign subsidiaries, as well as guarantees by substantially all of the Company’s domestic subsidiaries. The obligations of the Company and the guarantors under the 2020 Credit Agreement are secured by substantially all the assets (excluding real estate) of the Company and such guarantors. The 2020 Credit Agreement restricts the Company from paying cash dividends and requires the Company to comply with other customary covenants, representations, and warranties, including the maintenance of specific financial ratios. The financial maintenance covenants include an interest coverage ratio and a leverage ratio. The Company was in compliance with its financial maintenance covenants at July 1, 2023. If the Company is not in compliance with any of these covenant restrictions, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility could become immediately payable. Our business has historically generated significant cash flow. For the six fiscal months ended July 1, 2023, cash provided by operating activities was $18.2 million compared to $8.8 million in the comparable prior year period. Our net cash used in investing activities for the six fiscal months ended July 1, 2023 was lower compared to the prior year period mainly due to lower capital spending. Our net cash used in financing activities for the six fiscal months ended July 1, 2023 was slightly higher when compared with the prior year period due to the stock repurchases made during the period. Approximately 91% and 83% of our cash and cash equivalents balance at July 1, 2023 and December 31, 2022, respectively, was held by our non-U.S. subsidiaries. See the following table for the percentage of cash and cash equivalents, by region, at July 1, 2023 and December 31, 2022: -35- July 1, 2023 December 31, 2022 Israel 37 % 28 % Asia 21 % 27 % Europe 17 % 13 % United States 9 % 17 % United Kingdom 10 % 10 % Canada 6 % 5 % 100 % 100 % We earn a significant amount of our operating income outside the United States, the majority of which is deemed to be indefinitely reinvested in foreign jurisdictions. As a result, as discussed above, a significant portion of our cash and short-term investments are held by foreign subsidiaries. The Company will continue to evaluate its cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds in excess of what is already planned. The Company will evaluate the possibility of repatriating future cash provided such repatriation can be accomplished in a tax efficient manner. In addition, we expect existing domestic cash, short-term investments, and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities, such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt or equity issuances. These alternatives could result in higher tax expense, increased interest expense, or dilution of our earnings. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of July 1, 2023, to be indefinitely reinvested. Adjusted free cash flow generated during the six fiscal months ended July 1, 2023, was $11.4 million. We refer to the amount of cash provided by operating activities ($18.2 million) in excess of our capital expenditures ($6.9 million) and net of proceeds from the sale of assets ($0.1 million) as “adjusted free cash flow.” The following table summarizes the components of net cash at July 1, 2023 and December 31, 2022 (in thousands) : July 1, 2023 December 31, 2022 Cash and cash equivalents $ 98,521 $ 88,562 Third-party debt, including current and long-term: Revolving debt 61,000 61,000 Deferred financing costs (201) (201) Total third-party debt 60,799 60,799 Net cash $ 37,722 $ 27,763 Measurements such as “adjusted free cash flow” and “net cash" do not have uniform definitions and are not recognized in accordance with U.S. GAAP. Such measures should not be viewed as alternatives to GAAP measures of performance or liquidity. However, management believes that “adjusted free cash flow” is a meaningful measure of our ability to fund acquisitions, and that an analysis of “net cash” assists investors in understanding aspects of our cash and debt management. These measures, as calculated by us, may not be comparable to similarly titled measures used by other companies. Our financial condition as of July 1, 2023 remains strong, with a current ratio (current assets to current liabilities) of 4.3 to 1.0, as compared to a ratio of 3.9 to 1.0 at December 31, 2022. Cash paid for property and equipment for the six fiscal months ended July 1, 2023 was $6.9 million compared to $8.8 million in the comparable prior year period. As of July 1, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements. -36- Safe Harbor Statement From time to time, information provided by us, including, but not limited to, statements in this report, or other statements made by or on our behalf, may contain or constitute "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, or projected. Among the factors that could cause actual results to materially differ include: general business and economic conditions; impact of inflation; potential issues respecting the United States federal government debt ceiling; global labor and supply chain challenges; difficulties or delays in identifying, negotiating and completing acquisitions and integrating acquired companies; the inability to realize anticipated synergies and expansion possibilities; difficulties in new product development; changes in competition and technology in the markets that we serve and the mix of our products required to address these changes; changes in foreign currency exchange rates; political, economic, health (including the COVID-19 pandemic) and military instability in the countries in which we operate; difficulties in implementing our cost reduction strategies, such as underutilization of production facilities, labor unrest or legal challenges to our lay-off or termination plans, operation of redundant facilities due to difficulties in transferring production to achieve efficiencies; compliance issues under applicable laws, such as export control laws, including the outcome of our voluntary self-disclosure of export control non-compliance ; significant developments from the recent and potential changes in tariffs and trade regulation; our efforts and efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, shelter-in-place orders and business closures and the related impact on resource allocations, manufacturing and supply chains; our status as a “critical”, “essential” or “life-sustaining” business in light of COVID-19 business closure laws, orders and guidance being challenged by a governmental body or other applicable authority; our ability to execute our new corporate strategy and business continuity, operational and budget plans; and other factors affecting our operations, markets, products, services, and prices that are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report or as of the dates otherwise indicated in such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. -37- Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the market risks previously disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 1, 2023.