Vishay Precision Group, Inc. Q3 FY2025 Earnings Call

Hello, everyone, and thank you for joining the VPG Third Quarter 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. I will now hand over to Steve Cantor from VPG to begin. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to VPG's Third Quarter 2025 Earnings Conference Call. Our Q3 press release and accompanying slides have been posted on our website at vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and can also be accessed on the VPG website. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements. For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2024, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. I'll now turn the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation.

Thank you, Steve. I will begin with some commentary on our results and trends for the third quarter. Bill will then provide financial details about the quarter and our outlook for the fourth quarter of 2025. Moving to Slide 3. Beginning with revenue, third quarter revenue of $79.7 million grew 6.1% from the second quarter and was up 5.3% from the prior year. Total bookings of $79.7 million were at similar levels with the second quarter, reflecting mixed but stable global trends. Strong double-digit growth in Sensors offset lower orders for Weighing Solutions and Measurement Systems sequentially. Our consolidated book-to-bill was 1.0, marking the fourth sequential quarter with a book-to-bill of 1.0 or higher. Our Sensors and Measurement Systems segment reported a book-to-bill of 1.07 and 1.04, respectively. Our adjusted gross margin of 40.5% reflected improvements in the Sensors segment and another record quarter for the Weighing Solutions segment. However, consolidated gross margin included a significant impact from unfavorable foreign exchange and product mix, which offset the effect of the higher sequential revenue. We achieved an adjusted operating margin of 6.2%, which improved compared to both Q2 and the prior year. We continue to make progress with our long-term business development and cost optimization initiatives. This translated into solid cash generation with $9.2 million in adjusted EBITDA and $7.4 million in adjusted free cash flow. We successfully mitigated the impact of tariff costs with price adjustments to our customers and do not believe tariffs impacted demand. Moving to Slide 4. Beginning with our Sensors segment, third quarter revenue increased 19.1% sequentially, reflecting higher sales of precision resistors in the Test and Measurement and AMS markets, as well as higher sales of strain gauges in the General Industrial market. Sensor bookings rose 13.5% sequentially, reaching the highest level in 12 quarters, resulting in a book-to-bill of 1.07. The bookings growth was driven by demand from precision resistors for semiconductor test and AMS applications. We expect this momentum to continue in the fourth quarter as some distributors replenish inventories for AMS applications. Regarding humanoid robots, we are optimistic about the long-term potential for VPG in the emerging markets. While the humanoid robots market is still in its infancy and initial real-world deployments of this robot are expected in 2026, we believe we are in a good position in high-performance niches for our sensor technology. We received $1.8 million in orders from July to October related to our two current humanoid developer customers. This included prototype orders of approximately $600,000 from our second humanoid customer in October, bringing the total orders year-to-date to approximately $3.6 million related to humanoid projects. We are also in initial discussions with additional developers of humanoids. Moving to Slide 5, sales in our Weighing Solutions segment decreased 6.4% from the second quarter. The decline reflected lower sales in the transportation market as well as in the construction and precision agricultural equipment markets. Weighing Solutions orders of $24.5 million were about 10% lower compared to the second quarter, resulting in a book-to-bill of 0.89. Order trends for Weighing Solutions softened but were at stable levels. Moving to Slide 6. Turning to our Measurement Systems segment, revenue in the third quarter of $20.6 million increased 7.3% sequentially. The increase reflected higher sales to the steel market of our KELK and DSI products. Third quarter Measurement Systems orders of $21.4 million decreased 6.9% sequentially and resulted in a book-to-bill of 1.04. The lower sequential bookings reflected ongoing softness in DTS due to delays related to defense and space government projects. We expect delays in some of these defense projects to continue into the fourth quarter due to the U.S. government shutdown. We were pleased to receive an order from Stoney Brook University for the beta of our new UHTC system. This is the second university to order the system. This system is designed to perform band testing on nonconductive materials such as ceramics used in critical high-performance applications such as hypersonic missiles in aerospace, avionics, energy, and industrial applications. Moving to Slide 7, I'll now provide an update on our strategic priorities for 2025. First, we generated approximately $26 million in business development orders through the first nine months of this year, which puts us on track to achieve our $30 million goal for 2025. Second, regarding our cost efficiency goals for 2025, we expect to realize $5 million of annualized cost reductions by the end of this year. We also continue to execute our ongoing operational efficiency plans with the sale of a building in July. Third, we continue to look for attractive M&A opportunities. Our strategic priorities are designed to increase growth and profitability. They reflect several years of focused investments and have built a strong foundation to reach our long-term financial goals, even with lower revenue than we originally expected. As VPG enters this next phase, we are expanding our senior leadership team with two new C-suite roles. We have appointed Yair Alcobi to the new position of Chief Business and Product Officer, responsible for overseeing sales, marketing, product strategy, and business development. Yair brings considerable experience in accelerating growth and profitability from his previous executive roles at leading industrial tech companies, including in the semiconductor test market for KLA-Tencor, among others. We have also appointed Rafi Ouzan to the newly created role of Chief Operating Officer to lead VPG's manufacturing and operational excellence initiatives. Rafi has more than 30 years of experience in key executive and operational roles for VPG and Vishay Intertechnology, including as Senior Vice President and Head of our Weighing Solutions segment. I want to welcome these two executives to our senior team and look forward to their contributions to delivering business excellence and execution, which are prime strategic trusts for VPG. Yair and Rafi will help drive our focused mainstream global trends, increase the speed of innovation and R&D, and leverage our strong brands. I believe these new positions will enhance and accelerate value for our customers and stockholders and will also allow me to focus on continuing to build a dynamic culture supporting future growth and a scalable M&A strategy. In summary, we are pleased with the solid quarter. We see a stable, moderately improved business environment. We are making organizational changes that align our reporting segments to accelerate top-line growth and strengthen our operational excellence. We are continuing to make progress with our business development initiatives, including supporting our humanoid customers. I will now turn it over to Bill Clancy. Bill?

Thank you, Steve. Referring to Slide 8 and the reconciliation tables of the slide deck, our third quarter 2025 revenues were $79.7 million. Adjusted gross margin was 40.5% in the third quarter. Compared to 41% in the second quarter, the third quarter's gross margin was impacted by $600,000 of unfavorable foreign exchange and $800,000 from an unfavorable product mix, which offset higher volume and tariff-related net price adjustments. Sequentially by segment, the adjusted gross margin for the Sensors was 33.7%, which increased primarily from volume and tariff-related net price adjustments, partially offset by a decrease in inventories and unfavorable foreign exchange rates. The adjusted gross margin for Weighing Solutions was 40.3%, which increased slightly from the second quarter and reached an all-time record, primarily reflecting tariff-related net price adjustments and cost reductions, partially offset by lower volume. The gross margin for the Measurement Systems of 51.1% declined from the second quarter due primarily to an unfavorable product mix. Moving to Slide 9, our adjusted operating margin was 6.2%, which excluded start-up costs, restructuring costs, and purchase accounting adjustments amounting to $362,000 and the gain on the sale of a building of $5.5 million. This improved from 4.8% in the second quarter of 2025. Selling, general, and administrative expenses for the third quarter were $27.2 million or 34.2% of revenues, which decreased from $27.7 million or 36.9% of revenues for the second quarter of 2025. The operational tax rate in the third quarter was 26%. For the full year of 2025, we are forecasting an operational tax rate of approximately 28%. We reported net earnings of $7.8 million or $0.58 per diluted share. Adjusted net earnings for the third quarter were $3.5 million or $0.26 per diluted share, compared to $2.3 million or $0.17 per diluted share in the second quarter of 2025. Moving to Slide 10, adjusted EBITDA was $9.2 million or 11.5% of revenue, compared to $7.9 million or 10.5% of revenue in the second quarter. Capital expenditures in the third quarter were $2.2 million. For the full year of 2025, we are forecasting $10 million for capital expenditures. We increased our adjusted free cash flow to $7.4 million for the third quarter from $4.7 million in the second quarter. As of the end of the third quarter, our cash position was $86.3 million, and our long-term debt was $20.5 million, giving us a net cash position of $65.8 million. This reflects the debt paydown of $11 million from the proceeds of the sale of a building in July. Regarding the outlook for the fourth fiscal quarter of 2025 at constant third fiscal quarter 2025 exchange rates, we expect net revenues to be in the range of $75 million to $81 million. In summary, we grew sales quarter-to-quarter and year-to-date. We continue to improve our operating margin, which reflects our cost reduction and efficiency programs. And we remain excited about the potential of our business development initiatives, particularly in humanoid robotics. With that, let's open the lines for questions. Thank you.

Ziv, I guess I'm kind of curious, firstly, about maybe the disconnect that we're seeing in the Weighing Solutions business. And by that, I mean, the book-to-bill has been below 1 for a couple of quarters, but the revenues kind of held up relatively well. Is that becoming a shorter cycle business? Or maybe you could provide some color there?

Sure, absolutely. Regarding Weighing Solutions. The Weighing Solutions business relies on a few pillars. First, we have the OEM business, which encompasses precision agriculture and construction. Those large companies, given the interest rates and the environment, do see a significant slowdown. On the other hand, the general industrial weighing business is very much linked to the industrial sector, which is also fairly stable. Regarding the on-board weighing, the main driver there is the European economy, which is improving, but we have, to an extent, the seasonal effect for Q3. Regarding the overall bookings for this segment, we see a fairly stable environment, but still the larger companies do not see a significant upside from demand. What we mainly see is the replenishment of the pipeline in the queue.

And the record gross margin of 40.3%, is that a sustainable number on an annualized basis? I get there should be some seasonality in Q4. But how should we think about that going forward into 2026?

There are significant cost reduction initiatives in this segment as we continue to streamline our manufacturing from other parts of the world to India. Given the continuous operational excellence, I would say this gross margin is sustainable at a similar revenue level.

That's excellent to hear. And just sticking on the cost savings topic, you expect $5 million to be realized by the end of the year, and I assume that's on an annualized basis. But what's the year-to-date, how much of that $5 million has been realized?

We do expect to meet the $5 million by the end of the year, and you are correct, this is an annualized number. And by now, we have already reached $4 million.

And you touched on the humanoid robotics topic, you mentioned that you expect more shipments in 2026. Can you give us a sense of what kind of ramp that you expect to see? And will you need to add any manufacturing square footage to meet that demand?

Absolutely. As I indicated, year-to-date, we have received $3.6 million of orders from two humanoid customers. One, we are ahead with the design and the other, we are at the prototype levels. Already now, there are some discussions regarding higher volume production, and there are discussions between us and our customers regarding VPG's capability to support higher volume manufacturing. At this point in time, I cannot get to specifics, but there are discussions. We don't know what the ramp-up time will be and how quickly they will ramp up, but they are preparing for a higher volume application. We will continue to have this conversation and be prepared to support our customers.

Good to see the orders from the two humanoid customers. You mentioned briefly on the call that you're in discussions with other potential customers as well. Do you think there's opportunities to bring at least one new customer into the fold over the next couple of quarters? Or where are you in those early additional customer discussions today?

We are in the engineering dialogue providing or discussing a certain sensing solution to their humanoid robotics. I would say that we don't have such visibility to know exactly when they would approve the design, even with some of the earlier discussions. Our customers have continued to change the design. They haven't finalized it yet. It’s challenging to determine the exact timeline. But I think that the main thing is that our customers see and believe that VPG can provide value-added solutions when it comes to those sensing applications. This is why they approach us, and this is why they are eager to work with us for their applications. Those are definitely good signs, but it's very hard to know exactly where we are in the design stage given their proprietary processes.

Fair enough. And again, for these new business development initiatives, $26 million for the first 9 months on track to hit $30 million. Does that imply some additional expected humanoid orders in the fourth quarter? Or is that coming from other new areas of the business like ceramics overall?

The $26 million is coming from various applications; humanoid is part of them. As you indicated, there are ceramics and also some designs for semiconductor back-end testing, fiber optics. It comes from many different new applications across the complete company, across all the divisions.

And then last question for me. I think you mentioned there was a little bit of softness related specifically to defense associated with the U.S. government shutdown, and that's likely to continue into Q4. Any way you could quantify the impact to Q3 or what type of impact do you expect that to have on Q4 based on the guidance that you laid out?

Sure, absolutely. We believe that, given the U.S. government shutdown, the effect is going to be mainly on our Measurement Systems division, more specifically on the DTS product line. We know that there is a challenge in having discussions or placing orders or shipping. I would be a little bit more cautious to put a number, but it will definitely be in the range of hundreds of thousands of dollars, if not more. But that's the ballpark.

We currently have no further questions. I will now hand back to Steve Cantor for closing remarks.

Before we conclude, I want to note that VPG will be presenting at the Three Part Advisors IDEAS Conference later this month, as well as the Sidoti Virtual Conference in December. You can contact me for more details. With that, we thank you for joining our call, and we look forward to updating you next quarter.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.