Bel Fuse Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Unless stated otherwise, amounts are in U.S. dollars. Bel designs and sells electronic components for powering, protecting and connecting circuits, operating through North America, Asia and Europe.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $140.7m | $131.6m | $259.0m | $245.3m |
| Gross profit | $29.0m | $29.1m | $50.1m | $52.5m |
| Gross margin | 20.6% | 22.1% | 19.4% | 21.4% |
| Operating income | $10.7m | $7.3m | $11.1m | $9.6m |
| Net earnings | $6.6m | $3.1m | $5.3m | $3.9m |
| EPS, Class A / Class B | $0.52 / $0.56 | $0.24 / $0.26 | $0.41 / $0.45 | $0.30 / $0.33 |
Second-quarter sales rose 6.9% year over year; first-half sales rose 5.6%, despite a $3.7m sales decline associated with the NPS divestiture. First-half operating income improved, but gross profit declined as materials and labor costs rose. Operating income benefited from lower SG&A, including favorable foreign-currency remeasurement effects. Q2 and first-half effective tax rates were 26.6% and 33.8%, respectively, versus 42.4% and 37.0% in 2017.
By product group, first-half sales were $91.8m in Connectivity Solutions, $83.8m in Magnetic Solutions and $83.3m in Power Solutions and Protection. North America and Europe external sales grew in Q2; Asia sales were slightly lower. Backlog was $176.9m at June 30, up $30.3m, or 21%, from year-end.
Cash flow, liquidity and debt
- First-half operating cash flow was $1.2m, compared with cash use of $0.4m in 2017. Capital expenditures were $5.9m, making operating cash flow less capital expenditures negative $4.6m.
- Cash declined $13.6m to $55.7m. The principal uses included $7.5m of debt repayments, $5.9m of capital expenditures and $1.6m of dividends.
- At June 30, current assets were $279.1m and current liabilities $96.2m; the reported current ratio was 2.9. Receivables were $89.0m, inventories $106.4m and unbilled receivables $15.6m.
- Debt carrying value was $115.5m, including $2.5m current and $113.0m long-term; term-loan borrowings were $117.5m before deferred financing costs. The $75m revolving facility was undrawn. The company reported $30.4m of borrowing capacity without violating its leverage covenant and compliance with its covenants.
- Cash held by foreign subsidiaries was $46.0m. Management intended to repatriate about $12m, including $3m to reduce debt and $9m to pay intercompany balances.
Material changes, outlook and risks
- Costs and margins: First-half material costs rose to 41.4% of sales from 40.4%; labor costs rose to 11.4% from 10.2%. Management cited component supply constraints, higher purchase prices, Renminbi appreciation, PRC wage increases and labor-intensive product mix. Foreign-currency appreciation increased operating costs by an estimated $3.2m in the first half.
- Tariffs: U.S. tariffs on covered imports from China took effect July 6, 2018. Bel said it was applying surcharges and pricing adjustments to offset expedited-material costs and duties, and expected similar action if further tariffs were imposed.
- Initiatives: Restructuring and a product-line transfer to a PRC Bel facility were expected to finish by year-end 2018, with about $1.4m in annual savings once implemented. ERP implementation was expected to cost $4.5m–$5.5m in total; $4.1m had been incurred, and management anticipated approximately $2m in annual savings after completion. No formal earnings or revenue guidance was provided.
- Accounting change: ASC 606 adoption increased opening retained earnings by $3.4m. For Q2 it increased reported sales by $1.9m and net earnings by $0.5m versus the prior accounting method; for the first half, the respective effects were $1.1m and $0.6m. It also created $15.6m of unbilled receivables at June 30.
- Contingencies: Uncertain tax-position liabilities totaled $29.8m, including an approximately $12m Italian tax matter that Bel says is indemnified by ABB. A PRC construction-cost judgment of about $3.2m was paid from a subsidiary’s accounts; Bel recorded an indemnification asset and reported a favorable recovery order. Bel settled a German patent dispute for €75,000 in exchange for a perpetual, worldwide royalty-free license. A contract suit against Unipower sought damages exceeding $1m.
- Management stated existing liquidity and expected operating cash flows should fund operations for the next twelve months. Risks include variable customer demand, supply availability and pricing, labor and currency costs, tariff developments, tax matters and execution of restructuring and ERP plans. Management noted interim results may not indicate full-year results.
Key facts for investors to verify
- Whether backlog converts into sales and whether pricing actions offset tariffs, material inflation and labor costs without weakening demand or margins.
- Receivables, inventory and unbilled-receivable collection trends, given working-capital use and the ASC 606 timing change.
- Debt repayment, covenant headroom and the intended foreign-cash repatriation.
- Resolution and recoverability of the Italian tax indemnity, PRC indemnification asset and other disclosed legal matters.
- Delivery and realized savings from the restructuring and ERP programs; compare management’s expected savings with actual costs and results.