Bel Fuse Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; results are unaudited. Unless noted otherwise, amounts below are in millions of dollars. Comparisons are with the corresponding 2020 period, or with December 31, 2020 for balance-sheet items.
Business context
Bel designs, manufactures and markets products that power, protect and connect electronic circuits. Its three operating segments are Cinch Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions. Products serve military, aerospace, networking, telecommunications, computing, transportation, medical and other markets.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $147.0 | $124.5 | $396.4 | $349.6 |
| Gross profit | $36.0 | $33.3 | $95.1 | $90.4 |
| Gross margin | 24.5% | 26.8% | 24.0% | 25.8% |
| Operating income | $8.9 | $8.1 | $20.0 | $13.0 |
| Net earnings | $5.7 | $7.5 | $16.8 | $9.2 |
| Class A / Class B diluted EPS | $0.44 / $0.47 | $0.57 / $0.61 | $1.29 / $1.37 | $0.70 / $0.76 |
- Revenue increased 18.1% in Q3 and 13.4% year to date. Q3 net earnings declined 23.3%, while nine-month net earnings rose 81.9%.
- Q3 gross margin fell 2.3 percentage points; year-to-date margin fell 1.8 points. Higher material costs, product mix and foreign-exchange effects pressured margins. Nine-month results also included a $6.6 million gain on sale of property, increasing reported operating income.
- By segment, Q3 revenue was $40.3 million for Connectivity, $60.3 million for Power and Protection, and $46.3 million for Magnetic. Q3 gross margins were 24.8%, 26.1% and 23.1%, respectively. Power and Protection drove the largest revenue increase; its higher volume and favorable mix helped its margin.
- For the first nine months, material costs were 46.6% of sales versus 43.0% a year earlier. Management attributed cost pressure to shortages and higher prices for components including semiconductors and plastic resin. Foreign-currency appreciation increased labor and overhead costs by $4.4 million year to date.
Cash flow, liquidity and debt
- Cash and cash equivalents were $62.0 million at September 30, down from $84.9 million at year-end 2020. Current assets were $315.5 million and current liabilities $106.2 million; the current ratio was 3.0, compared with 3.2 at year-end.
- Operating cash flow was negative $1.7 million for the first nine months, versus positive $34.8 million in 2020. Working-capital outflows included $22.8 million for inventory, $14.0 million for unbilled receivables and $11.9 million for accounts receivable.
- Investing cash outflow was $13.7 million, including $16.8 million net cash paid for acquisitions and $4.2 million of capital expenditures; property-sale proceeds were $7.2 million. Financing cash outflow was $7.5 million, including debt repayments and $2.4 million of dividends.
- Bel entered a new $175 million, five-year secured revolving credit facility in September, replacing its prior term loan and revolver. Facility borrowings were $112.5 million at September 30; the weighted-average interest rate was 1.58%. The filing reports $62.5 million of unused facility capacity, but estimates only $43.9 million could be borrowed without breaching the leverage covenant. The company reported covenant compliance.
- Management said current liquidity and expected operating cash flows should fund operations and obligations over the next twelve months and longer term. It also noted that $44.8 million, or 72%, of cash was held by foreign subsidiaries.
Material changes and unusual items
- Bel acquired rms Connectors and EOS Power in 2021 for total consideration of $20.7 million, funded with cash on hand. From their respective acquisition dates through September 30, they contributed $12.4 million of revenue and estimated net earnings of $1.6 million. Purchase-price allocations remained preliminary.
- Backlog reached $390.4 million at September 30, up $235.4 million, or 152%, from year-end 2020. Management cited stronger orders across the product groups.
- Operating cash flow weakened substantially as working capital increased alongside higher sales and inventory build. Inventory rose to $128.2 million from $100.1 million at year-end, largely to support increased orders.
- The company exited its custom modules power product line and consolidated DC/DC power manufacturing. Year-to-date restructuring charges were $0.7 million, with expected annualized savings of $0.5 million; closure of the modules design center was expected to save a further $0.4 million annually. The filing also cites $4.4 million of expected 2021 annualized savings from 2020 restructuring actions.
- Q3 tax expense was $1.4 million versus a $1.1 million tax benefit in Q3 2020. The nine-month effective tax rate was 3.4%, compared with a tax benefit rate of 18.3% in 2020; Bel cautioned that its interim tax provision was not measured using the annual effective tax rate method.
Outlook, risks and contingencies
- The filing provides no formal numerical revenue or earnings guidance. Management said it remained optimistic but reported that material shortages and global logistics constraints were estimated to have reduced Q3 net sales by approximately $10 million. It cited nearly $750 million of orders received in the preceding 12 months.
- Management reported port congestion, intermittent supplier shutdowns and delays, higher costs to expedite critical parts, and reduced productivity at some North American and European sites. It also warned of PRC electricity rationing and potential disruptions to Bel’s or suppliers’ manufacturing. These issues could affect sales, costs and margins.
- COVID-19 continued to affect operations and workforce availability; management said approximately 5% of revenue related to end markets affected by the pandemic, including commercial aerospace. It could not quantify the pandemic’s ultimate effect on future results.
- Variable-rate debt exposes Bel to interest-rate risk: a one-percentage-point rate change would affect annual interest expense by approximately $1.1 million. Foreign-exchange movements also affect costs; Bel had entered into currency forwards, including a post-quarter-end contract to purchase CNY 119.8 million for $18.6 million through November 2022.
- Uncertain tax-position liabilities were $27.6 million at September 30. A separate Italian tax matter concerning 2004–2006 has an estimated $12.0 million liability recorded, with a corresponding indemnification asset from ABB under the acquisition agreement; the related appeal remained pending.
- Bel filed patent-infringement complaints against Monolithic Power Systems in two federal courts. The filing does not state a potential financial exposure. Management said other legal proceedings were not expected to materially affect financial condition or results.
Most important facts for investors to verify
- Whether backlog converts into recognized sales, particularly given the disclosed supply, logistics and workforce constraints.
- Whether gross margins recover as material costs, product mix and foreign-exchange effects change.
- Whether working-capital investment—especially inventory and unbilled receivables—reverses and operating cash flow improves.
- Available borrowing capacity under the leverage covenant, covenant headroom and the effect of variable interest rates.
- Final acquisition valuations and whether the acquisitions deliver the anticipated strategic and operating benefits.
- Developments in uncertain tax positions and the Italian tax appeal, including the continued recoverability of the related indemnification asset.