Bel Fuse Inc. — Q2 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2012; comparisons are with the same 2011 periods. Bel designs and manufactures electronic components, including interconnect, magnetic, module and circuit-protection products. It reports three geographic segments: North America, Asia and Europe. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $73.2 million | $79.2 million | $138.8 million | $150.6 million |
| Operating income | $2.4 million | $0.2 million | $3.8 million | $4.4 million |
| Net earnings (loss) | $1.5 million | $(0.6) million | $2.3 million | $2.7 million |
| Basic and diluted EPS, Class A / Class B | $0.11 / $0.13 | $(0.05) / $(0.05) | $0.18 / $0.20 | $0.21 / $0.23 |
| Cost of sales as a share of sales | 83.4% | 82.6% | 83.7% | 81.4% |
- Gross margin was approximately 16.6% in Q2 and 16.3% for the first half, versus 17.4% and 18.6%, respectively, in 2011. Operating margin was approximately 3.2% in Q2 and 2.7% for the first half.
- First-half operating cash flow was $0.2 million, down from $16.9 million. Working-capital changes used $7.3 million, chiefly reflecting increases in receivables and inventory. Capital expenditures were $2.3 million; operating cash flow less capital expenditures was approximately negative $2.1 million.
- Cash and equivalents were $81.8 million at June 30, down from $88.2 million at year-end. Marketable securities were $5.5 million and current restricted cash was $13.0 million. The current ratio was 4.8 to 1.
- No borrowings were outstanding under the $30 million unsecured credit facility, which expires June 30, 2014; the full amount was available. Bel reported compliance with its debt covenants. Total liabilities were $57.6 million; the filing does not report funded debt outstanding.
- Total assets were $280.1 million and stockholders’ equity was $222.6 million at June 30, 2012.
Material changes versus prior periods
- Sales fell 7.5% in Q2 and 7.8% in the first half. First-half module sales declined $11.1 million; magnetic sales increased modestly, while interconnect was approximately flat.
- Q2 operating income improved from $0.2 million to $2.4 million and Bel returned to quarterly profitability. Lower legal and professional costs helped reduce SG&A by $0.9 million in Q2 and $2.2 million in the first half.
- First-half operating income and net earnings declined year over year despite lower SG&A. Cost of sales rose as a percentage of sales, principally due to higher labor and overhead costs; lower material costs as a percentage of sales partly offset the increase.
- Asia moved from a Q2 operating loss of $3.0 million in 2011 to income of $0.5 million in 2012, while North American Q2 operating income declined to $2.0 million from $2.6 million. Europe recorded a Q2 operating loss of $0.1 million versus income of $0.6 million.
- Operating cash flow decreased substantially from 2011, when working-capital movements had provided cash. Receivables increased $4.4 million and inventories increased $4.2 million in the first half of 2012.
Outlook, management commentary, risks and unusual items
- Management said its focus for the remainder of 2012 was improving sales volume and profitability through restructuring and acquisitions. The filing provides no specific revenue or EPS guidance.
- The 2012 restructuring program is estimated to cost approximately $4.6 million in total, with about $0.4 million recorded through June 30, and is expected to produce approximately $4.2 million in annualized savings once fully implemented. Estimates may change as further actions are identified.
- Bel plans to close its Vinita, Oklahoma facility by year-end and move operations to McAllen, Texas. The Vinita transition is estimated to account for $4.3 million of program costs and $3.3 million of annualized savings; potential property impairment charges of up to $1.1 million are included in the estimate. A McAllen lease carries an overall commitment of approximately $1.9 million through March 2023.
- Bel acquired GigaCom Interconnect in March for approximately $2.7 million; its post-acquisition results were not material. The purchase-price allocation remained incomplete, including valuation of identified trademark and technology assets. On July 31, after quarter-end, Bel acquired Fibreco for approximately $13.9 million; allocation and related disclosures were not yet complete.
- In July, the board authorized repurchases of up to $10 million of Class B shares. Bel was also pursuing other acquisition candidates, including a potentially larger acquisition.
- One investment, Pulse Electronics common stock, was deemed other-than-temporarily impaired; Bel recorded a $0.5 million charge and reduced its carrying value to $0.5 million. Q2 also included $0.2 million of restructuring charges and a $0.04 million loss on asset disposal.
- Key operating pressures include rising labor costs and labor availability in China, extended lead times for some electrical components, and still-high commodity costs. Renminbi appreciation can raise costs denominated in that currency. Demand variability, product mix and execution of restructuring and acquisitions may affect results.
- Bel is appealing the SynQor verdict and reported no sales of the products at issue in the first half of 2012 after ending their manufacture by year-end 2011. Accrued litigation reserve was $11.6 million. Bel filed a patent-infringement suit against Molex in April 2012. The company also reported approximately $4.0 million of uncertain-tax-position liabilities and a German tax audit covering 2008–2010.
- Management stated that existing cash, operating cash flow after dividends and the available credit line should fund operations for at least 12 months. Approximately $32.6 million of cash was held by foreign subsidiaries, with most intended to remain reinvested abroad; repatriation for U.S. use could incur U.S. taxes.
Important facts for investors to verify
- Whether sales and operating margins recover, particularly in modules, and whether magnetic-product backlog converts to shipments amid labor constraints.
- Whether restructuring costs and projected savings are achieved, including the Vinita closure, transition costs and any impairment.
- Cash conversion and working-capital trends, given sharply lower operating cash flow and higher receivables and inventory.
- Final purchase-price allocations and subsequent contribution from GigaCom and Fibreco, as well as the impact of the $10 million repurchase authorization and further acquisition plans.
- Developments in the SynQor appeal, other litigation and tax matters, and whether related reserves remain adequate.