Bel Fuse Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Bel designs and manufactures products that power, protect and connect electronic circuits, across North America, Asia and Europe.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $131.6 | $131.6 | $245.3 | $252.8 |
| Gross profit | $29.0 | $25.7 | $52.3 | $48.8 |
| Gross margin | 22.1% | 19.5% | 21.3% | 19.3% |
| Operating income (loss) | $7.0 | $10.0 | $9.1 | $(93.4) |
| Net earnings (loss) | $3.1 | $22.8 | $3.9 | $(77.9) |
| Diluted EPS, Class A / Class B | $0.24 / $0.26 | $1.83 / $1.93 | $0.30 / $0.33 | $(6.31) / $(6.61) |
| Cash from operating activities | Not separately reported for the quarter | $(0.4) | $16.3 |
- Q2 sales were essentially flat year over year; first-half sales declined 3.0%. Q2 sales recovery followed seven consecutive quarters of year-over-year declines.
- Gross margin improved, supported by lower material costs as a share of sales and reduced fixed costs. Q2 operating income nevertheless fell year over year, while SG&A rose $3.9 million, including higher VAT expense, unfavorable foreign-exchange effects and ERP consulting costs.
- Q2 net earnings comparisons are affected by the prior-year tax benefit: the 2016 quarter included a $14.1 million income tax benefit, versus a $2.3 million tax provision in 2017. First-half 2016 results also included a $106.0 million non-cash goodwill and intangible-asset impairment charge.
- By product, Q2 magnetic solutions sales increased to $43.5 million from $40.5 million; connectivity declined to $43.8 million from $44.9 million; and power solutions and protection declined to $44.3 million from $46.2 million.
Financial position, debt and liquidity
- At June 30, 2017, cash was $58.7 million, current assets $261.4 million and current liabilities $97.5 million; the reported current ratio was 2.7:1. Cash was down from $73.4 million at year-end 2016.
- Accounts receivable increased to $89.2 million from $74.4 million at year-end; inventory increased to $103.0 million from $98.9 million. Days sales outstanding rose to 62 from 54, attributed to extended terms for a large customer and higher sales mix in Asia.
- Debt carrying value was approximately $130.5 million, versus $141.2 million at year-end. The company had $128.4 million outstanding under its term loan and $4.0 million under its $50 million revolver; weighted-average interest rate was 3.50%. Bel reported compliance with its debt covenants.
- Unused revolver capacity was $46.0 million, although borrowing capacity without breaching the leverage covenant was $41.8 million. Management said available liquidity and expected operating cash flows should fund operations for the next 12 months.
- First-half cash declined $14.7 million. Uses included $15.4 million of long-term debt repayments, $2.2 million of capital expenditures and $1.6 million of dividends; operating activities used $0.4 million.
Business developments, outlook and risks
- Management cited improving market demand, strong backlog and increased demand across product groups. It highlighted ICM product demand, new product programs and a positive second-half aerospace outlook. No formal financial guidance was provided.
- Power Solutions sales remained below the prior year but increased 15.9% from Q1 2017. Management was monitoring the business and anticipated actions that could result in restructuring costs in the second half of 2017.
- ERP implementation is expected to cost $4–$5 million over three years; management anticipated about $0.5 million of quarterly expense through the rest of 2017 and approximately $2 million in annual savings after completion.
- Foreign exchange, variable demand and product mix remain important operating risks. Management also described labor availability and cost volatility in China. Most cash was held by foreign subsidiaries ($49.1 million, or 84% of total cash), with no current plan to repatriate it; taxable U.S. tax may arise if repatriated.
- Uncertain tax-position liabilities totaled $28.4 million. A roughly $12.0 million Italian tax claim related to the acquired Power Solutions business is included in that balance and is stated to be fully indemnified by ABB; the Italian Supreme Court had not ruled. A German patent infringement case was stayed pending a separate patent-validity case; potential damages were not assessable.
- Bel subsequently divested its 49% interest in a Chinese joint venture, extinguishing a $0.5 million payable; it expected to record a $0.5 million gain in Q3 2017.
- The filing says there were no material changes in market-risk exposure. Disclosure controls were considered effective, with no materially affecting change in internal control reported for the quarter.
Important facts for investors to verify
- Whether sales recovery and backlog translate into sustained growth, particularly given first-half revenue declines and continued weakness in Power Solutions and certain connectivity products.
- Whether improved gross margin can be maintained as product mix, material and labor costs, foreign exchange and restructuring actions change.
- Cash conversion and working-capital trends, especially rising receivables, DSO and inventory, alongside planned debt repayments and covenant-limited borrowing capacity.
- The resolution, indemnification coverage and cash or earnings effects of uncertain tax positions and the pending Italian tax matter; separately, the status and potential exposure of the Setec patent litigation.
- Actual ERP implementation costs, expected savings, and any restructuring charges in the second half of 2017.