Bel Fuse Inc. — FY 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone quarterly filing; fourth-quarter figures are noted separately. Bel designs and manufactures products that power, protect and connect electronic circuits, serving networking, telecommunications, computing, military, aerospace, transportation and other markets. Sales are reported across North America, Asia and Europe.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $491.6 million | $500.2 million |
| Gross profit / gross margin | $102.0 million / 20.8% | $99.9 million / 20.0% |
| Operating income (loss) | $16.3 million | $(76.5) million |
| Net income (loss) | $(11.9) million | $(64.8) million |
| Diluted EPS, Class A / Class B | $(0.97) / $(0.99) | $(5.25) / $(5.48) |
| Cash from operating activities | $24.1 million | $38.6 million |
| Capital expenditures | $6.4 million | $8.2 million |
Gross margin percentages are calculated from reported sales and gross profit. FY 2017 operating margin was approximately 3.3%; net margin was approximately negative 2.4%. The 2016 operating loss included $106.0 million of goodwill and intangible-asset impairment charges.
- FY 2017 adjusted EBITDA is not reported as such; reported non-GAAP EBITDA was $37.2 million, versus $(54.1) million in 2016. The company reported a 2.46x credit-agreement leverage ratio.
- At year-end, cash was $69.4 million, working capital $178.8 million, and the current ratio 3.0:1. Approximately 73% of cash was held by foreign subsidiaries.
- Borrowings were $125.0 million at variable rates; the year-end rate was 3.38%. Balance-sheet debt was $122.7 million net of deferred financing costs. The company reported $75.0 million of unused revolver capacity, but estimated only $34.1 million could be drawn without breaching its leverage covenant based on then-current EBITDA. It was in covenant compliance.
- Operating cash flow declined $14.5 million year over year, which management attributed mainly to higher year-end inventory and receivables. Cash and cash equivalents decreased $4.1 million during 2017.
- Dividends declared totaled $3.3 million: $0.06 per Class A share and $0.07 per Class B share. Management said it currently anticipated quarterly dividends, subject to applicable conditions.
Material changes and business drivers
- Sales declined 1.7% year over year, chiefly because of $10.1 million of lower sales associated with the previously divested NPS product line. Higher military connectivity sales and demand for integrated connector modules partly offset the decline.
- By product group, connectivity sales rose to $170.3 million from $168.8 million; magnetic solutions increased to $161.0 million from $155.2 million; power solutions and protection fell to $160.3 million from $176.1 million.
- By external-customer geography, North America sales were $245.8 million, Asia $167.7 million and Europe $78.1 million. North America and Asia declined year over year; Europe increased.
- SG&A rose $14.1 million to $85.1 million. Drivers included a $5.9 million unfavorable swing in foreign-exchange results, $2.2 million of additional ERP consulting costs, and the absence of a $5.2 million tax-item reversal that benefited 2016.
- Foreign-exchange losses were $2.8 million in 2017, compared with gains of $3.1 million in 2016. R&D expense increased to $28.8 million from $26.7 million.
Outlook, risks and unusual items
- Management identified top-line growth as its priority for 2018. Backlog was $146.5 million at December 31, 2017, up 29% year over year; a separate February 28, 2018 estimate was $168.6 million, with about 89% expected to ship by year-end. Bel cautioned backlog may be delayed, accelerated or canceled and is not a reliable predictor of sales.
- Management expected temporary component supply constraints and higher prices, particularly for resistors, capacitors and discrete semiconductors, to affect the first half of 2018. A PRC minimum-wage increase at one factory was expected to add approximately $1.0–$1.4 million in annual labor costs.
- Bel planned further power-group R&D realignment and a BCM product-line manufacturing transition, targeted for completion by the end of Q3 2018. It expected approximately $1.4 million of annual savings once fully implemented. The multi-year ERP rollout was expected to cost $4–$5 million in total; $2.6 million was incurred in 2017, and management anticipated roughly $2 million in annual savings after completion.
- The December 2017 Tax Act produced an estimated $18.1 million of incremental tax expense, including approximately $16.0 million of transition tax after credits and $2.1 million from revaluing deferred taxes. The transition-tax estimate was provisional; Bel intended to pay it over eight years. The resulting 2017 tax provision was $21.5 million and the effective tax rate 223.4%, contributing to the net loss despite positive pretax income.
- Debt, interest-rate and covenant risks remain material: a 1% change in assumed rates would change annual interest expense by about $1.2 million. Scheduled principal payments include $106.3 million in 2022. The company’s liquidity depends partly on subsidiary cash flows and foreign-held cash may incur taxes if repatriated.
- Other key risks include customer concentration (Hon Hai Precision Industry represented 11.7% of 2017 sales), pricing and product-mix pressure, raw-material availability, PRC labor conditions, international and currency exposure, acquisition integration and potential further impairment, ERP implementation, cybersecurity, and environmental, privacy and government-contract compliance.
- Uncertain tax-position liabilities were $27.9 million on the balance sheet; management could not reasonably estimate the timing of most settlements. A roughly $12.0 million Italian tax claim remains before the Supreme Court, but Bel stated it is indemnified by ABB under the acquisition agreement. A German patent-infringement case was stayed pending resolution of a related patent-validity case; Bel said it could not yet assess potential damages. Management did not expect other legal matters to have a material adverse effect.
- Goodwill impairment testing in 2017 found no impairment, but reported goodwill was only $20.2 million following the substantial 2016 write-down. Future adverse operating or market changes could trigger further impairment.
For Q4 2017, sales were $119.9 million, gross profit $22.1 million and net loss $20.8 million. The quarter’s loss included approximately $18 million of Tax Act-related expense.
Important facts for investors to verify
- Whether sales and backlog growth translate into 2018 revenue, particularly given backlog cancellation risk and the dependence on key customers.
- Progress on component availability, PRC wage increases, manufacturing transitions and whether projected savings are realized.
- Debt covenant headroom, repayment and refinancing capacity, variable-rate exposure, and the extent to which foreign cash is available to fund U.S. needs.
- Final Tax Act calculations, cash payment schedule, and potential changes to uncertain tax-position liabilities.
- ERP implementation costs, schedule and expected savings, along with any implementation or control issues.
- Developments in the Italian tax claim and German patent litigation, and any change in goodwill impairment assumptions or outlook.