Bel Fuse Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; dollar amounts below are in millions unless noted. Bel designs, manufactures and sells products that power, protect and connect electronic circuits. Its three geographic segments are North America, Asia and Europe.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $144.2 | $156.3 | $431.8 | $338.4 |
| Gross profit | $27.4 | $27.8 | $82.8 | $59.8 |
| Gross margin | 19.0% | 17.8% | 19.2% | 17.7% |
| Operating income | $7.3 | $4.4 | $23.8 | $11.0 |
| Net earnings | $4.9 | $1.3 | $16.3 | $6.8 |
| Net earnings per share, Class A / Class B | $0.39 / $0.42 | $0.10 / $0.11 | $1.30 / $1.39 | $0.55 / $0.60 |
- Cash flow: Nine-month operating cash flow was $44.7, versus $18.9 in 2014. Investing used $8.3; financing used $37.3. Cash declined $0.8 to $76.3.
- Liquidity: Current assets were $297.2 and current liabilities $120.6; the current ratio was 2.5, versus 2.6 at year-end 2014. The company reported $43.5 of unused credit capacity, with $31.8 available to borrow without breaching its leverage covenant.
- Debt: Credit facility borrowings totaled $197.7, down from $232.6 at December 31, 2014. The weighted-average interest rate was 2.53%. Bel was in compliance with debt covenants.
- Balance sheet: Total assets were $605.9 and stockholders’ equity $232.2 at September 30, 2015. Cash held by foreign subsidiaries was $66.7, or 87% of total cash.
Changes versus prior comparable periods
- Q3 sales fell 7.8% year over year, while nine-month sales rose 27.6%. The year-to-date comparison is materially affected by the 2014 acquisitions of Power Solutions and Connectivity Solutions: 2015 includes their results for the full nine months, while 2014 includes results only from their respective acquisition dates.
- Excluding acquired-company contributions, management said sales declined $6.9 in Q3 and $11.3 for the first nine months. Acquired companies contributed $57.7 of Q3 sales and $175.0 of nine-month sales.
- Q3 operating income and net earnings increased despite lower sales. Nine-month operating income and net earnings also rose. Gross margin improved in both periods, while lower SG&A helped Q3 results.
- Q3 external sales declined in all three geographic segments. For the first nine months, external sales increased in North America and Europe and decreased in Asia.
Outlook, management commentary and notable items
- Management said acquisition integration was substantially complete and facility consolidations were expected to finish by year-end 2015. It anticipated approximately $1.0 of additional restructuring costs in Q4 and annualized savings of $3–$4 beginning in Q4. Management identified sales growth as the main focus after integration.
- Management believed available liquidity and future operating cash flows would fund operations and obligations over the next 12 months. No specific revenue or earnings guidance was provided.
- Q3 and nine-month 2015 results included $4.2 of other income from settlement of a Power Solutions acquisition working-capital item. The filing also reports a $0.5 Molex patent-litigation settlement recognized in net sales.
- Bel sold its Network Power Systems product line for $9.0 cash in January 2015 and used the proceeds to repay debt. It recognized $3.2 of related deferred revenue as sales during the first nine months; a further $1.0 was held in escrow subject to sales targets.
- Key risks and sensitivities include foreign-exchange and interest-rate exposure, variable customer demand, product mix and manufacturing labor/material costs. Lead times for some electrical components remained extended. Foreign earnings are intended to remain permanently reinvested; repatriation could trigger U.S. taxes.
- Uncertain tax-position liabilities were $40.3, in addition to $1.8 included in income taxes payable. A $12.0 Italian tax claim associated with an acquired business was included in uncertain tax liabilities and was covered by an ABB indemnification, with a corresponding indemnification asset recorded.
- Management stated that pending legal matters were not expected to have a material adverse effect. The SynQor appeal remained pending; the Arezzo tax matter and estimates remain subject to resolution. The filing warns that actual results may differ materially from forward-looking statements.
Key facts for investors to verify
- How much of reported growth and margin improvement is attributable to acquisitions, and how legacy-business sales and profitability are trending.
- Whether the $4.2 acquisition working-capital settlement and other unusual items recur or materially affect comparisons.
- Progress on planned restructuring, expected $3–$4 annualized savings, and the timing and amount of related costs.
- Debt repayment, covenant headroom, interest-rate exposure, and the practical availability of credit given the leverage restriction.
- Developments in uncertain tax positions, including the Arezzo claim and related indemnification, and the timing of any potential tax benefits or payments.
- Foreign-cash availability and potential tax costs if funds are repatriated to the United States.