Prepared remarks
My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to VPG's First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Steven Cantor, Senior Director of Investor Relations. You may begin.
Thank you, Bella. And good morning, everyone. Welcome to VPG's First Quarter 2026 Earnings Conference Call. Our press release and slides have been posted on our website. 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, including the targets described in our updated operating model, are governed by the safe harbor provisions of the Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements and there can be no assurance that such results, including the targets described in our updated operating model, will be achieved. 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 12/31/2025, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President, and William Clancy, CFO. And now I will turn the call to Ziv for some prepared remarks. Ziv?
Thank you. I will begin with some commentary on our results and trends for the first quarter. Bill will provide financial details and our outlook for 2026. We will also discuss our revised target operating model. Moving to Slide 3. To summarize our Q1 results, we delivered a strong start to the year, with first quarter revenue of $84.4 million, up 18% year over year, reflecting broad-based growth across all three segments. Orders were particularly robust at $102.1 million, up 26% sequentially, driving a book-to-bill of 1.21 — our strongest since 2022. We increased backlog, particularly in the Sensors segment, which positions us for continued growth into the second quarter and for the second half of the year. Gross margin improved from the fourth quarter and the prior year, and we continue to implement additional cost reduction programs. Despite ongoing macroeconomic uncertainty from geopolitical tensions, booking trends remained strong. Demand was driven by precision resistors from semiconductor equipment, and for data center and fiber optics equipment supporting the build-out of AI data centers. Orders in Avionics, Military, and Space markets also improved. In addition, orders generated from our business development initiatives totaled $10 million in the first quarter, putting us on track to meet our 2026 $45 million target. With our new Chief Business and Product Officer and Chief Operating Officer organizations now in place, we are focused on discipline and execution of both our near-term priorities and long-term strategic plans. While there is still work ahead, we are already seeing improved visibility into our sales funnel and stronger alignment across VPG. During the first quarter, we continued to launch new marketing programs and further sharpen our focus on priority markets and key customers, our most important growth drivers. I will now review business performance by segment. Moving to Slide 4. Beginning with our Sensors segment: first quarter revenue was up 10% sequentially and 23% year over year. Compared to the fourth quarter, we had higher sales of precision resistors in the test and measurement and AMS markets, and higher sales of strain gages in the general industrial market. Bookings in Sensors were particularly strong at $45.2 million, up 29% sequentially, and representing the highest level in 15 quarters. This resulted in a healthy book-to-bill ratio of 1.36. The sequential growth in bookings reflected strong broad-based demand driven by the industry-wide ramp up in AI adoption. With Sensors, we saw particularly robust demand related to AI infrastructure. Orders grew for precision resistors used in semiconductor front-end and back-end equipment supporting the manufacturing and testing of AI-related chips and systems, as well as in data centers and fiber optics equipment. Bookings were strong for precision resistors in defense applications. We also continue to see demand for strain gages used in humanoid preproduction prototypes. With Sensors backlog reaching its highest level since 2023, we accelerated hiring and training of additional manufacturing personnel to support our plant production ramps. Turning to humanoid robotics: we shipped approximately $600 thousand of product to humanoid makers in the first quarter. In the second quarter, we expect to more than double that amount. Given our customers' focus on a more significant ramp of production in the second half of the year, we have increased our internal projection for 2026. Nonetheless, the precise timing and scale of production ramps remain unclear. In addition, we began early discussions with a fourth humanoid maker, a startup developing humanoid platforms for defense, home use, and industrial applications. Moving to Slide 5. Turning to our Weighing Solutions segment: first quarter revenue was up 9% from the fourth quarter and 14% from a year ago. The sequential increase was primarily due to higher sales in other markets — medical equipment, precision agriculture equipment, consumer bicycles, and in our transportation market for heavy-use trucks. Weighing Solutions orders were up 17% sequentially to $32.9 million, resulting in a book-to-bill of 1.09. Orders included annual bookings of onboard weighing systems and higher bookings in our industrial weighing and general industrial markets. Moving to Slide 6. Turning to our Measurement Systems segment: revenue trends were mixed in the first quarter, with revenue of $21 million, down 7% sequentially but 14% higher than a year ago. Sales of DTS ruggedized miniature data acquisition modules reached a record high driven by a defense missile test project. This was offset by lower sales to the steel market. First-quarter Measurement Systems orders were $24 million, up 32% from the fourth quarter, and resulted in a book-to-bill of 1.15. The sequential growth reflected higher DTS and PI orders in AMS for the testing of military jet engines and for hypersonic missiles. Demand for measurement systems used in steel rolling mills softened, despite pockets of growth in India and North America. Orders grew for DSI R&D tools used for development of new metal alloys. One of the technology highlights for DTS and Measurement Systems this quarter was the Artemis 2 launch to the moon, which included DTS data loggers on board. DTS data loggers were used to measure extreme forces the astronauts experienced during launch and reentry that cannot be fully replicated on Earth. In addition to NASA projects, DTS modules have been used in similar tests for SpaceX Dragon crew capsule as well as for Blue Origin platforms. Moving to Slide 7. This quarter, we are pleased to introduce our updated target operating model, which reflects a path to faster organic revenue growth, higher profits and cash flow, and significant creation of long-term stockholders' value. Under the new model, we are targeting compounded annual organic growth of 8% to 10% over the next three years, which is higher than our previous model for organic growth. We expect our Sensors and Measurement Systems businesses to grow at or above these rates. Our model targets a gross margin of 46.5%, operating margin of 14.5% to 15.5%, and an EBITDA margin of 18.5% to 20.5%. This model includes $5 million of annual incremental cost related to the new CBPO and COO organizations, and assumes 50% flow-through to EBITDA on each incremental dollar of revenue. Moving to Slide 8. The top line of our model is driven by two factors. First, we are increasingly aligned with attractive secular growth areas where VPG has differentiated high-performance technology. These opportunities are being driven by advancements in industrial automation systems, which rely on accurate, reliable, and highly precise sensing and measurements. That requirement directly aligns with VPG's core strength and our long-term history supporting mission-critical applications. While adoption is still in the early stages, we are already supporting emerging use cases across multiple markets, including advanced robotics, semiconductor equipment used in AI processing, and data center and fiber optics infrastructure. For humanoid robots specifically, our model assumes that revenue will grow approximately 50% annually from 2025 levels. We are building capacity and infrastructure today to support the potential for much higher levels of growth. Second, our sales, marketing, and business development operating model is now being transformed into cross-company processes, IT platforms, and execution discipline, which are expected to support the growth of both cyclical and secular growth markets. In addition, we continue to see durable long-term opportunities in aerospace and defense. While demand can fluctuate quarter-to-quarter, investment trends remain solid. Technical requirements are increasing and these markets continue to align well with VPG's differentiated capabilities. Operating leverage is a core element of our model. Under our COO-led operating structure, we have a clear plan to deliver more than $20 million of cost reductions and efficiency improvements over the next three years. These operational excellence initiatives are targeted at creating a structurally more competitive cost base, not just near-term margin improvements. Our cost programs are focused on manufacturing footprint optimization, increased automation, and procurement efficiencies across our global supply chain. Importantly, these initiatives also support increased market share by improving execution, shortening lead times, and enabling efficient scaling as demand increases. In summary, our operating model reflects faster organic growth and attractive profitability, supported by differentiated technology, durable secular demand drivers, and a more focused and efficient organization. We believe this positions VPG well to create long-term value for our customers and stockholders. I will now turn it over to William Clancy. Bill?
Thank you, Ziv. Referring to Slide 9 and the reconciliation tables in the slide deck, our first quarter 2026 revenues were $84.4 million and gross margin was 39%, which improved sequentially from the fourth quarter. By segment, gross margin for Sensors was 34.8%, increased primarily due to higher volume, favorable product mix, and manufacturing efficiencies, partially offset by unfavorable foreign exchange rates and higher personnel costs. Weighing Solutions gross margin of 34.2% increased from the fourth quarter mainly due to higher volume and favorable foreign exchange rates. Gross margin for Measurement Systems of 52.6% decreased from the fourth quarter primarily due to lower volume and wage increases, partially offset by favorable product mix. Moving to Slide 10. Our first-quarter operating margin was 0.4%. Adjusted for $449 thousand of restructuring costs and $837 thousand of stock-based compensation, adjusted operating margin was 1.9%. The restructuring costs primarily relate to severance from the implementation of our new CBPO and COO organizations, and the adjustment for stock-based compensation reflects our evolving compensation structure due to these recent organizational changes, including the hiring of senior executives and the expansion of equity-based incentive programs to attract and retain key talent. Selling, general, and administrative expense for the first quarter was $32.1 million, or 38% of revenues, which was higher than Q4 reflecting hiring for the new organizational structure, incentive compensation accruals for 2026, and unfavorable foreign exchange. Unfavorable foreign exchange rates impacted adjusted operating margin in the first quarter by $800 thousand compared to the fourth quarter, and $1.3 million from a year ago. GAAP net loss was $319 thousand, or a loss of $0.02 per diluted share. Adjusted net earnings were $907 thousand, or $0.07 per diluted share, adjusted for restructuring costs, stock-based compensation, and the impact of foreign currency exchange rates on our balance sheet. The GAAP tax rate for 2026 was 81.2% and operationally 31.5%. For our forward-looking model for 2026, we are assuming an operational tax rate of 26%. Moving to Slide 11. Adjusted EBITDA was $5.9 million or 7.0% of revenue compared to $6.2 million or 7.8% of revenue in the fourth quarter. CapEx in the first quarter was $3.0 million. For 2026, we are projecting $14 million to $16 million for capital expenditures. Adjusted free cash flow was negative $3.7 million for the first quarter due to the GAAP net loss and the higher working capital required to support higher demand. This compares to positive $1.3 million in the fourth quarter. As of the end of the first quarter, our cash position was $82.5 million and our long-term debt was $20.6 million, resulting in net cash of $62.0 million. The unused portion of our credit facility provides ample liquidity to support our business requirements and to fund M&A. Regarding the outlook for 2026, we expect net revenues to be in the range of $85 million to $90 million, assuming constant first fiscal quarter 2026 exchange rates. In summary, quarterly bookings exceeded $100 million for the first time since 2022, resulting in a book-to-bill ratio of 1.21. We continued our progress with our business development initiatives, including humanoid robotics, and we are excited about the potential of our new organization which is reflected in our new target model. With that, let's open the lines for questions. Thank you.
Questions and answers
At this time, I would like to remind everyone that in order to ask a question, press star 1 on your telephone keypad. Your first question comes from the line of John Edward Franzreb with Sidoti and Company. Your line is now open. Please go ahead.
Good morning, everyone, and congratulations on a good start to the year. I would like to start with the guidance. It's been a while since we have been at that kind of revenue threshold. Can you talk about how we should think about the profit profile at that level of revenue? Should it be in line with historical gross margins, or should we think about it in terms of incremental operating margin contributions like we had in the past?
Good morning, John. Let me start by saying that the guidance is already based on the new model. The new model is setting a new baseline. In respect to the high organic growth in the prior model, in addition to a much more robust and significant cost reduction of $20 million over the next three years, we are also taking into account the new investments in the new CBPO and COO organizations, which increase SG&A by $5 million. The scalable model where we should see incremental operating margin based on higher revenues remains, but the baseline has changed. The historical financials were based on the old model, while the new guidance is based on the new model. The incremental benefit from incremental revenue should lead to more substantial incremental operating margins as we did before, but the baseline assumptions have been updated to reflect the organizational investments and the cost savings plan.
That is great to hear. As you pointed out in your prepared remarks, the bookings profile takes us back to the post-COVID bookings when we had a bunch of quarters of substantial book-to-bills. We're halfway through the second quarter. Do you see that kind of scenario unfolding in the current year — that we will have a sustained bookings profile after, I guess, three years of averaging under 1.0?
Yes. You are correct that the absolute bookings remind us in a way of 2022, but the bookings profile is different. Currently, bookings are strong in demand for test and measurement, semiconductor equipment, data center, fiber optics, and Avionics, Military, and Space, in addition to general industrial. So what we see is very strong demand around AI infrastructure in addition to defense. In 2022, general industrial was much stronger. So the net bookings could be similar, but the profile is different. Regarding your other question, we are optimistic about how the year will look. Despite short visibility, we do see and believe that we will see a continued positive trend moving into Q2.
Got it. One more question and I'll go back in the queue. Revenues came in somewhat better than expected this quarter. When you look back at what your initial expectations were versus the revenue profile for the quarter, where was the biggest upside?
The biggest upside came from shorter lead-time items where we saw higher demand than anticipated. So to that respect, I think it was Avionics, Military, and Space in Measurement Systems where we have shorter cycle times.
Thanks, Ziv. Congratulations again. Thank you. Bye.
Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Josh Nichols with B. Riley. Please go ahead.
Yeah, thanks for taking my questions. Great to see milestone bookings over $100 million for the quarter. I want to dive in a little bit more on the humanoid aspect. One, you mentioned you are in early discussions with a fourth humanoid developer. At a high level, can you characterize the size and tier of that potential customer? And as a follow-up, you mentioned the humanoid assumption growing at about 50% year-over-year through the planning period — can you clarify what that implies from a revenue perspective?
So let me first address the potential fourth humanoid customer. We are speaking about a startup that is in early stages in defense, home use, and industrial applications. We are in very early engineering design discussions with them. As you know, these customers have fairly long cycles, so it's good that we are engaged early. They believe they have strong prospects, and we are there to help solve their sensor challenges. Regarding humanoids broadly: adoption is still fairly low and there is a lot of hype, but we still believe this is a very good market. Among the two customers where we have a more established footprint, we are still in preproduction levels. We recognized revenue of about $600 thousand in Q1, and we believe we could potentially more than double humanoid-related revenues in Q2. We are more optimistic regarding the second half of the year on production volumes. There are discussions around higher production run rates. We have the infrastructure to support much quicker upside from our customers and are setting up the supporting systems to scale. For the model, since we wanted a three-year plan and have limited visibility, we used 2025 as a baseline and assumed 50% year-over-year growth as a reasonable, feasible baseline. It could be much higher, but we chose a conservative baseline for planning.
Thanks for that. It sounds like you are targeting for this year something around $5-plus million for humanoids, growing to low-teens millions on an out-year basis based on your assumption, and those are conservative assumptions. Is that a fair assessment?
The math you calculated sounds reasonable. At this point, that is what we believe could be a reasonable assumption. We hope things accelerate, but we have to put conservative assumptions in place and feel comfortable with them. Anything can happen, of course.
One last question from me. You have made a lot of organizational investments — the CBPO and the COO. Could you give more color on how these new roles have already been impacting go-to-market capabilities and operational excellence initiatives?
Starting with the COO: we have established global procurement, a multiyear manufacturing footprint plan, a streamlining of the manufacturing footprint, and a team dedicated to efficiency and automation. Our model calls for over $20 million of savings in three years, a number that significantly exceeds our historical savings. These are cross-company initiatives that look at the entire company and set projects accordingly. On the CBPO side, we have a unified marketing team and have started using more marketing automation tools. We are moving to a unified CRM and a more unified data system to consolidate data from ERP, CRM, and other systems. We have established a cross-company sales operations team focused on lead time, service level, and demand management. We are moving toward a holistic approach with cross-company dashboards to embed best-practice processes and capabilities.
Appreciate the color. I will hop back in the queue and let someone else take a turn.
Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Jason Smith with Lake Street Capital. Please go ahead.
I wanted to look at the updated three-year target model. At a high level, do you expect the segment mix to be relatively stable compared to how it is today?
If you look at the three-year target model, you will see that the Sensors segment and the Measurement Systems segment are expected to outperform Weighing Solutions. So as those segments grow faster, we should expect a more favorable segment mix from a profitability standpoint. The emerging growth engines are coming from Sensors and Measurement Systems.
That makes sense. Maybe I missed it, but the $45 million in orders that you are targeting for new business development in 2026 — is that still the target, or do you think there is upside given the traction in Q1 and Q2?
As we indicated before, we booked $11 million of business development projects in Q1. At this point, since we are only reporting Q1, $45 million is still the target. It may change as we move ahead, but $45 million was the original target and I believe it is achievable.
Perfect. That is helpful. I will jump back in the queue. Thank you.
Again, if you would like to ask a question, press star 1 on your telephone keypad. Now we will take John Edward Franzreb from Sidoti and Company. Your line is now open.
Thank you. On the three-year targets, what is the slope you expect in achieving those targets? Will progress be linear or back-ended?
Given our visibility today, we assumed a linear progression across the three-year period as a baseline.
In light of some of the investments you are undertaking, how does that change the CapEx budget, starting this year and on a forward-looking basis?
That's a very good question given that the operational excellence initiatives, including footprint streamlining, will require CapEx. At this point, we believe we can meet the range of roughly 4% to 5% of revenue for capital spending and still achieve the targeted operational excellence initiatives.
When you talk about streamlining to lower-cost manufacturing sites, does that mean moving within your existing footprint or adding to it?
We have a very large infrastructure and we believe we can continue to consolidate within our existing manufacturing footprint.
One last question circling back to humanoid robotics. The baseline from memory for 2025 was about $4 million in revenues from humanoid robotics — is that the starting point?
That is correct.
There has been a lot in the press about downward pricing on vendors in humanoid robotics as competition increases. Are you seeing that? Walk us through the pricing model and how that is playing out relative to where you were three to six months ago.
This is a very competitive market. On a high level, if volumes are tens of robots per week, the component content for sensing parts per robot is approximately $400 to $500. If volumes move to many hundreds or more, we would expect the content to move toward roughly $150 to $250 per robot in negotiated scenarios. There are no final agreements at scale yet, but that is the general expectation as volumes increase.
Thank you, Ziv. I appreciate the additional color. Congrats again.
There are no further questions at this time. I will now turn the call back over to Steven Cantor for closing remarks.
Thank you, Bella. Before concluding, I would like to note that we will be participating in the B. Riley Investor Conference this month, and the 3 Part Advisors and Sidoti conferences in June. We look forward to updating you next quarter. Thank you, and have a great day.
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Everyone, have a great day.