Bel Fuse Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited; dollar amounts below are in millions unless stated otherwise. Bel designs and manufactures electronic components, including interconnect, module, magnetic and circuit-protection products, for networking, telecom, computing, military, aerospace and other markets.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $75.9 | $85.0 | $226.5 | $218.8 |
| Gross margin | 15.9% | 23.8% | 17.7% | 20.7% |
| Operating income | $1.9 | $9.5 | $6.3 | $15.0 |
| Net earnings | $1.0 | $10.0 | $3.7 | $14.7 |
| Net margin | 1.3% | 11.8% | 1.6% | 6.7% |
| EPS, Class A / Class B | $0.08 / $0.09 | $0.82 / $0.86 | $0.29 / $0.32 | $1.19 / $1.27 |
- Cash flow: Nine-month operating cash flow was $21.7, versus cash used of $1.3 in 2010. Investing used $6.7, principally for $5.1 of marketable securities and $2.2 of capital expenditures; dividends used $2.3. Cash increased $12.7 to $96.5.
- Balance sheet: At September 30, cash was $96.5, marketable securities $5.7, current assets $210.7, and current liabilities $44.2. The current ratio was 4.8, up from 4.4 at year-end 2010. Total liabilities were $56.5 and equity $222.6.
- Debt: No borrowings were outstanding. The unsecured $30 million credit facility, expiring June 2014, was fully available; Bel reported covenant compliance.
- Dividends: Nine-month dividends paid per share were $0.18 for Class A and $0.21 for Class B.
Material changes and drivers
- Q3 sales fell 10.7% year over year, while nine-month sales rose 3.5%. Management said the late-2010 shipment and backlog surge did not continue and was not expected to recur in Q4 2011.
- Product mix weakened margins: Q3 module sales rose to 31% of revenue from 18% a year earlier; modules carry higher material content and lower margins. For the first nine months, module revenue increased to $69.6 from $41.9, while magnetic revenue declined to $65.7 from $92.3.
- Cost of sales rose to 84.1% of Q3 revenue from 76.2%, and to 82.3% for the first nine months from 79.3%. Higher material costs, including gold and copper, and the product mix shift outweighed improved labor efficiency. SG&A declined 11.9% in Q3 and 1.0% for the nine months.
- Nine-month results included $3.5 of litigation charges. Q3 operating income also reflected $0.2 of SynQor-related costs and interest. The effective tax rate was 50.8% for Q3 and 45.1% for the nine months, affected by the geographic distribution of earnings and litigation losses without a tax benefit.
- Comparability is affected by the January 2010 Cinch acquisition: 2010 results include Cinch only from January 29. Bel attributed $5.5 of the nine-month sales increase to the additional month of Cinch results in 2011.
Outlook, risks and unusual items
- Management expected challenging conditions into 2012 and very modest overall growth, with continued customer pricing pressure. It said module products were expected to continue growing, while noting their lower margin profile.
- Management was realigning the organization to reduce overhead and expected to announce a plan, including anticipated costs and savings, with Q4 2011 earnings. No specific savings or earnings guidance was provided in this filing.
- Supply risks include module-component shortages, commodity-price volatility and possible effects from Thailand floods; Bel was seeking alternative sources. Higher mandated wages in certain Chinese facilities were expected to pressure future margins.
- SynQor litigation: A jury award of $8.1 was recorded in Q4 2010; supplemental damages were $2.5, of which $1.9 was covered by customer indemnification and $0.6 expensed in Q2 2011. Bel appealed and posted a $13.0 supersedeas bond in November 2011. A separate post-injunction damages claim also sought enhanced damages; Bel had customer indemnification and said it did not expect a material income-statement impact from potential post-injunction damages.
- Halo litigation and licenses: Bel recorded a $2.6 liability for past sales and agreed to pay an 8% royalty on specified product sales through August 10, 2015. In a separate case, Halo agreed to pay Bel a 10% royalty on its integrated connector module sales under a settlement.
- Bel stated that operating cash flow after dividends, its cash resources and available credit were expected to fund operations for at least 12 months. Risks to that assessment include weaker demand, product-development or acquisition needs, and operating losses.
- The company reported effective disclosure controls and no significant quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and margins stabilize, particularly as module products grow and magnetic-product demand changes.
- Actual costs and savings from the planned overhead-reduction program, and whether it affects productivity.
- Progress and financial exposure in the SynQor appeal and post-injunction case; confirm the bond, indemnification coverage and any later rulings.
- Cash conversion and working-capital trends, including whether the strong 2011 operating cash flow is sustained.
- Effects of material availability, commodity prices, Chinese labor costs and any Thailand-related supply disruptions.
- Tax-audit developments: the filing disclosed an IRS audit for 2004–2009 and approximately $4.1 of uncertain tax-position liabilities at September 30, 2011.