Bel Fuse Inc. — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Bel designs and manufactures products that power, protect and connect electronic circuits. It reports North America, Asia and Europe segments. Unless otherwise stated, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $113.7 | $121.2 |
| Gross profit / gross margin | $23.3 / 20.5% | $23.1 / 19.0% |
| Operating income (loss) | $2.1 | $(103.4) |
| Net earnings (loss) | $0.7 | $(100.7) |
| Basic and diluted EPS, Class A / Class B | $0.05 / $0.06 | $(8.15) / $(8.55) |
| Cash from operations | $(0.7) | $8.9 |
| Capital expenditures | $1.0 | $1.6 |
Sales fell 6.2% year over year. Gross margin improved as material costs and fixed costs declined as a share of sales; the lower material-cost ratio was partly associated with weaker sales in higher-material-content power products. SG&A rose to $21.2 million from $17.7 million, including a prior-year benefit from tax-related items and current-quarter ERP consulting costs.
The Q1 2016 operating loss included a $108.6 million non-cash goodwill and intangible-asset impairment. The filing says this charge did not affect cash expenditures, liquidity, ongoing business performance or debt-covenant compliance. Q1 2017 included no impairment charge.
Balance sheet, debt and liquidity
- At March 31, 2017, cash was $72.3 million, current assets $257.2 million and current liabilities $89.4 million; the reported current ratio was 2.9:1.
- Inventory was $101.7 million, up from $98.9 million at year-end 2016. Management attributed the increase to preparation for expected second-half sales growth.
- Debt carrying value was approximately $143.0 million, net of deferred financing costs. Outstanding borrowings comprised a $141.3 million term loan and $4.0 million under the $50 million revolver. The weighted-average interest rate was 3.25%.
- The company was in compliance with debt covenants. Of $46.0 million of unused revolver capacity, management said $43.4 million could be borrowed without violating the leverage covenant, based on then-current EBITDA.
- Cash declined $1.1 million during the quarter. The company used $0.7 million in operating activities and paid $0.8 million in dividends; financing activities provided $0.5 million, including net revolver borrowings.
- Foreign subsidiaries held $64.2 million, or 89% of total cash. Management said it intended to permanently reinvest foreign earnings and had no current plans to repatriate them; repatriation could require U.S. taxes.
Changes versus the prior comparable period
- Power Solutions sales declined $6.9 million, accounting for most of the overall revenue decrease. Management cited the continued downturn in that business, project timing and the transition of a product line off a manufacturing-services agreement.
- By product group, magnetic solutions sales were $35.7 million versus $35.5 million; power solutions and protection sales were $36.2 million versus $42.2 million; connectivity solutions sales were $41.8 million versus $43.4 million.
- North America external sales fell to $60.4 million from $66.3 million; Asia was essentially flat at $35.8 million; Europe declined to $17.4 million from $19.1 million.
- Management also noted lower distribution sales and industrial-market weakness, particularly oil and gas. Connectivity declines included lower demand for plugs and structured cabling; management expected about half of that decline to be permanent.
Outlook, risks and unusual items
- Management said bookings improved during Q1 across product lines despite lower sales year over year and sequentially. It expected growth in power products in the second half of 2017 as certain projects entered production, and said eMobility project wins could benefit sales beginning in 2018. These are forward-looking expectations, not guarantees.
- Management did not expect significant restructuring charges for the remainder of 2017, but said it continued to assess operations and costs. ERP implementation was expected to cost $4–$5 million over three years, including about $0.5 million per quarter for the rest of 2017; management estimated eventual annual savings of about $2 million.
- Risks include variable customer demand and product mix, labor and material costs, foreign exchange, and interest-rate exposure. Management reported no material change in market risk during the quarter.
- Uncertain tax-position liabilities totaled approximately $28.2 million. A $12.0 million Italian tax matter related to the acquired Power Solutions business was included in those liabilities and, according to the filing, was fully indemnified by ABB with a corresponding asset recorded. The matter was pending before Italy’s Supreme Court.
- A German patent-infringement case was stayed pending resolution of a related patent-nullity lawsuit. The company said it lacked sufficient information to assess infringement or potential damages. Management did not expect other legal matters to materially affect financial position or results.
- The company paid dividends of $0.06 per Class A share and $0.07 per Class B share in Q1. The filing cautions that interim results are not necessarily indicative of full-year results and gives no formal earnings or revenue guidance.
Most important facts for investors to verify
- Whether improving bookings translate into revenue, especially the expected second-half power-project ramp and the timing of eMobility sales.
- Whether sales weakness in Power Solutions and connectivity persists, and how product mix affects gross margin and profitability.
- Cash generation, inventory growth, overseas cash availability and covenant-limited borrowing capacity relative to debt service and planned investment.
- Developments in the Italian tax appeal and German patent-nullity litigation, including the continued validity and collectability of the ABB indemnification.
- ERP implementation costs, execution progress and whether anticipated savings are achieved.