Bel Fuse Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results; dollar amounts are in millions unless otherwise stated.
Business context and reporting period
Bel designs and manufactures magnetics, modules, circuit-protection devices and interconnect products for networking, telecommunications, computing, military, aerospace and other markets. It reports North America, Asia and Europe segments. The March 2013 acquisition of Transpower’s magnetics business (TRP) materially affected year-over-year comparisons; TRP contributed $22.0 million of sales in both the second quarter and first half.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $94.0 | $73.2 | $157.0 | $138.8 |
| Income from operations | $2.5 | $2.3 | $1.1 | $3.8 |
| Net earnings | $2.4 | $1.4 | $1.9 | $2.3 |
| Basic and diluted EPS, Class A / Class B | $0.20 / $0.22 | $0.11 / $0.12 | $0.15 / $0.17 | $0.18 / $0.20 |
- Sales rose 28.4% in Q2 and 13.1% in the first half. Net earnings rose 68.4% in Q2 but fell 18.5% for the first half.
- Gross margin was 17.0% in Q2 versus 16.6% a year earlier; for the first half it was 16.0% versus 16.3%. Net margin was 2.6% and 1.2% for Q2 and first-half 2013, respectively.
- First-half operating cash flow was negative $3.9 million, versus positive $0.2 million in 2012. Working-capital changes used $11.1 million, including increases in receivables and inventory.
- Cash and cash equivalents declined to $38.6 million from $71.3 million at year-end 2012. Current assets were $193.0 million and current liabilities $63.2 million; the current ratio was 3.1, down from 4.1.
- Debt was limited: $0.3 million of notes payable and no borrowings under the $30 million unsecured credit facility. The facility expires June 30, 2014. Bel was out of compliance with its tangible-net-worth covenant since Q3 2012, but the lender waived the default.
- Capital uses included $20.9 million net cash for acquisitions, $3.1 million for property and equipment, $1.5 million in dividends and $3.4 million to repurchase Class B shares. The 2012 buyback authorization was completed in Q1; no shares were repurchased in Q2.
Changes versus the prior comparable period
- Acquisitions drove much of the reported growth. Excluding contributions from recent acquisitions, first-half revenue decreased $9.6 million, primarily due to reduced module-product orders from one North American customer and lower Cinch shipments during manufacturing transitions.
- Magnetics sales increased to $70.0 million for the first half from $43.8 million, including TRP. Module sales declined to $28.2 million from $35.3 million. Interconnect sales were $53.2 million versus $54.6 million.
- Segment performance diverged: first-half North America operating loss was $3.5 million versus $4.3 million income; Asia generated $4.0 million versus a $1.0 million loss; Europe income was $0.7 million versus $0.5 million.
- First-half SG&A increased $4.1 million to $22.5 million, reflecting acquired-company costs, legal and professional fees, acquisition costs, freight and incentive compensation. Restructuring charges rose to $1.4 million from $0.4 million.
- First-half tax benefit was $0.6 million, compared with a $1.1 million provision in 2012. The 2013 benefit included a $0.4 million research-and-experimentation credit related to 2012.
Outlook, management commentary, risks and unusual items
- Management said the McAllen, Texas manufacturing transition caused $2.8 million of unanticipated first-half costs, including overtime, scrap, purchased materials and expedited freight. Management said the difficulties were largely resolved by quarter-end and expected benefits in the second half. An additional workforce reduction generated $1.3 million of Q2 restructuring charges; Bel anticipated no significant restructuring costs in the foreseeable future.
- Bel expected large year-over-year declines in module products through year-end due to a customer’s lower order volume, which management said had stabilized. Price increases intended to offset rising PRC labor costs were expected to be mostly in effect by Q4 2013. No specific revenue or earnings guidance was provided.
- Management cited rising PRC labor costs and a 19% minimum-wage increase effective May 1, 2013, a strengthening Chinese Renminbi, customer demand variability and extended electrical-component lead times as risks to costs and margins. Lower gold and copper prices partly offset cost pressures.
- TRP purchase accounting remained provisional: acquired inventory, equipment, intangibles, the patent license valuation and working-capital adjustment were not finalized. TRP’s contribution to net earnings was not yet available because management-fee and overhead allocations were still being determined.
- SynQor litigation remains significant. The appeals court affirmed the judgment, rehearing was denied, and defendants were preparing a Supreme Court petition. Bel had posted $13.0 million of restricted cash as a supersedeas bond. A related post-injunction damages trial began July 30, 2013; the company cited a customer indemnification agreement. The balance sheet includes an $11.55 million litigation reserve. Bel also sued Molex over three patents in April 2013.
- Other items: Bel received $0.7 million of Hurricane Sandy insurance proceeds in July, to be recognized in Q3. The company reported approximately $2.7 million of liabilities for uncertain tax positions; $0.6 million could change as a statute of limitations was scheduled to expire in September 2013.
- Management believed cash flow after dividends, its capital base and available credit would fund operations for at least 12 months, while noting that weaker demand, losses, expansion or acquisitions could require additional capital. Results are subject to significant quarterly fluctuations and other risks described in the company’s 2012 Form 10-K.
Most important facts for investors to verify
- How much of reported sales growth and future earnings is attributable to acquisitions, particularly TRP, once its purchase accounting and earnings allocations are finalized.
- Whether McAllen/Cinch operations recover as management expected, and whether pricing actions offset higher labor costs and currency effects.
- Receivables, inventory and operating cash flow trends, including whether TRP’s longer customer payment terms are shortened.
- Status of the credit-covenant waiver and the $30 million facility ahead of its June 2014 expiration.
- Developments, potential exposure and indemnification coverage in the SynQor proceedings, alongside the restricted bond and recorded litigation reserve.
- Whether module-product demand, restructuring expenses and the unusually low first-half tax rate affect second-half comparability.