Bel Fuse Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Bel designs and manufactures products that power, protect and connect electronic circuits, serving industrial, networking, aerospace, military, transportation and other markets. Its three operating segments are Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $168.8 | $170.6 | $341.1 | $307.3 |
| Gross profit / margin | $55.5 / 32.9% | $45.5 / 26.6% | $109.2 / 32.0% | $79.4 / 25.8% |
| Operating income | $27.4 | $16.8 | $47.0 | $24.9 |
| Net earnings | $27.8 | $17.0 | $42.3 | $22.1 |
| EPS, Class A / Class B | $2.08 / $2.19 | $1.30 / $1.37 | $3.17 / $3.34 | $1.68 / $1.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $40.7 | $11.1 |
- Q2 sales declined about 1% year over year, while first-half sales increased 11%. First-half growth was led by Power Solutions and Protection (+31%) and Connectivity Solutions (+21%); Magnetic Solutions sales fell 29%.
- Q2 segment revenue and gross margin: Connectivity $54.8 million and 37.4%; Power Solutions and Protection $87.1 million and 35.7%; Magnetic Solutions $26.8 million and 24.6%.
- First-half operating cash flow was $40.7 million. Capital expenditures were $7.1 million. Cash declined $5.2 million to $65.1 million, following $35.0 million in net revolver repayments, $10.0 million invested in innolectric, and $1.7 million of dividends, partly offset by operating cash and asset-sale proceeds.
- At June 30, cash was $65.1 million, current assets $354.3 million, and current liabilities $126.9 million; the reported current ratio was 2.8. Inventory was $157.3 million, down from $172.5 million at year-end 2022.
- Revolver debt was $60.0 million, down from $95.0 million at year-end. The $175 million facility had $115.0 million available to borrow without violating the leverage covenant, and Bel was in compliance with its debt covenants. Effective borrowing interest rate, including swaps, was 2.47% at quarter-end.
Material changes and unusual items
- Q2 profit benefited from a $3.7 million gain on sale of the former Jersey City headquarters and a $1.1 million gain on the sale of Bel Stewart s.r.o. The sale of the Czech subsidiary closed June 1 for $5.2 million and generated the recorded gain.
- First-half restructuring charges were $4.2 million. The company is consolidating manufacturing sites in China and moving operations at U.S. and U.K. facilities; $9.1 million of restructuring costs remained accrued at June 30.
- Net earnings also reflect unusually favorable income-tax effects: Q2 had a $0.5 million tax benefit, while the first half had a $3.7 million tax provision. The first-half effective tax rate was 8.0%, compared with a tax benefit and negative 5.7% rate in the prior-year period.
- First-half SG&A rose to $50.4 million from $45.0 million, including $2.8 million of MPS litigation costs. R&D increased to $11.2 million from $9.5 million.
- Bel acquired a one-third equity-method interest in German company innolectric in February for €8.0 million, plus $1.3 million of transaction costs. The strategic investment targets EV onboard power electronics and fast charging; Bel also lent innolectric approximately $2.0 million at 5% interest. The investment recorded a $0.4 million loss in Q2.
Outlook, management commentary and risks
- No specific revenue or earnings guidance is provided. Management expects approximately $5.0 million in annual restructuring savings, with full realization anticipated by Q1 2024; execution is ongoing and additional restructuring costs may occur.
- Backlog was $449.9 million at June 30, down 20% from December 31, 2022. Management cited lower order volumes and customers working through inventory. Backlog declined 41% in Magnetics, 20% in Power Solutions and Protection, and 6% in Connectivity.
- Management said raw-material supply constraints, including capacitors, discrete semiconductors and copper, remained a challenge and were expected to continue through the rest of 2023. Pricing actions, product mix and lower labor costs as a percentage of sales helped margins; inflation, wages, materials, freight, utilities and foreign exchange remain risks.
- COVID-related disruptions had eased; PRC factory attendance was normal at June 30, and management said pandemic-related impacts had not materially affected first-half results. The company noted ongoing uncertainty from customer demand, customer concentration, economic conditions, supply and labor constraints, international operations, China exposure, currency and interest rates, trade policy, product acceptance, and acquisition integration.
- On July 27, 2023, after quarter-end, a Texas court granted MPS summary judgment of non-infringement in Bel Power Solutions’ patent case. Bel was evaluating appeal options; the court’s opinion was forthcoming. The filing states other legal matters are not expected to have a material adverse effect. A separate Italian tax claim of approximately $12 million is recorded as an uncertain tax liability and is fully indemnified by ABB; a customs claim related to EOS has no accrued estimate, and Bel is indemnified for that matter.
Important facts for investors to verify
- Whether declining backlog and customer inventory digestion—especially in Magnetics—translate into further revenue pressure.
- How durable the margin improvement is once pricing, mix, exchange-rate benefits and lower labor-cost ratios change.
- Progress, remaining charges and realized savings from site consolidations, including the expected $5.0 million annual savings.
- Cash generation and borrowing capacity after investment spending, restructuring payments, dividends and any changes in demand or covenant headroom.
- Developments in the MPS patent case and the status of tax and customs contingencies, including the related indemnifications.
- Performance and any potential further funding or acquisition obligation associated with innolectric’s profitability-based put/call arrangement.