Bel Fuse Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Bel designs, manufactures and sells magnetic, power, protection and connectivity products across North America, Asia and Europe. Results include recent acquisitions only from their respective closing dates.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $156.3m | $101.2m | $338.4m | $258.2m |
| Income from operations | $4.7m | $7.7m | $11.3m | $8.0m |
| Net earnings | $1.5m | $7.4m | $7.1m | $8.5m |
| EPS, Class A / Class B | $0.12 / $0.13 | $0.62 / $0.65 | $0.57 / $0.62 | $0.70 / $0.76 |
| Operating margin | 3.0% | 7.6% | 3.3% | 3.1% |
| Net margin | 1.0% | 7.3% | 2.1% | 3.3% |
Operating cash flow for the nine months was $18.9m, versus $6.1m a year earlier. Capital expenditures were $5.2m. Cash and cash equivalents were $83.1m at September 30, up from $62.1m at year-end 2013.
Current assets were $317.9m and current liabilities $124.5m, giving a 2.6 current ratio (3.0 at December 31, 2013). Long-term debt totaled $235.3m, including $12.1m current maturities; $27.0m of credit capacity remained available. The company reported compliance with its most restrictive leverage covenant. Total assets were $643.5m and stockholders’ equity $229.3m.
Material changes and drivers
- Sales rose 54.5% in Q3 and 31.1% year to date, with substantial contributions from the 2013 and 2014 acquisitions and recovery in Cinch sales following its 2013 manufacturing relocation.
- Despite higher sales, Q3 operating income fell 39.6% and net earnings fell 79.6%. Cost of sales was 82.0% of sales versus 80.2% in Q3 2013; SG&A increased 87.9%, reflecting acquired businesses and acquisition costs. Q3 also included $4.6m of acquisition inventory step-up expense. Interest expense rose to $1.9m from $0.1m, and the effective tax rate was 46.7% versus 5.9%.
- For the first nine months, operating income increased 41.5%, but net earnings declined 16.9%. The effective tax rate was 23.6%, compared with a tax benefit in the prior-year period.
- The Power Solutions and Connectivity Solutions acquisitions closed in June, July and August 2014. Combined, the 2014 acquired businesses contributed $70.3m of revenue and a $1.6m net loss in the nine-month period; Q3 contribution was $63.1m revenue and a $0.8m net loss. Preliminary purchase accounting recorded $112.0m of goodwill, and valuations remained incomplete.
- Operating cash flow improved year over year, while investing cash use was $211.7m, primarily due to $206.5m net cash paid for acquisitions. Financing provided $214.7m, including $215.0m of long-term debt proceeds.
Outlook, risks and unusual items
- Management described the business as operating at an approximately $650m annual sales run rate based on Q3 results and acquired businesses; this is not formal financial guidance. Management said more than $5m of annual acquisition-related cost savings had been implemented, with further opportunities identified.
- Management expects cash from operations, existing cash and available credit to fund operations for at least the next 12 months. It cited risks including weaker demand, inability to meet customer demand or integrate acquisitions, expansion needs and operating losses.
- Other stated pressures and uncertainties include product mix, material and labor costs, extended component lead times, Chinese labor availability and Renminbi strength, foreign exchange and interest rates, and geographic variation in taxes. Additional acquisition valuation and professional costs were expected.
- Uncertain tax-position liabilities were $38.4m, largely increased by the Power Solutions acquisition; the company recorded an estimated $35.9m liability related to that acquisition, including interest and penalties. A separate Italian tax claim was estimated at $12.0m and was recorded with an offsetting indemnification asset under the ABB purchase agreement.
- The company reported that an additional $0.7m SynQor post-verdict award had been paid and reimbursed by a customer under an indemnity; an appeal remained pending. Management said other legal matters were not expected to have a material adverse effect.
- The filing’s cover page checks “No” for having filed all required reports during the preceding 12 months. The filing does not explain the reason; investors should verify the status and context.
Important facts for investors to verify
- Whether acquisition integration, preliminary purchase accounting and the $4.6m inventory step-up materially affect subsequent margins and earnings.
- Debt repayment capacity, covenant headroom, borrowing costs and the $27.0m remaining availability under the secured facility.
- Final acquisition fair values, including goodwill, intangible assets, tax liabilities and potential tax deductibility.
- Exposure and indemnification coverage for the uncertain tax positions and the Italian tax matter, and the status of the SynQor appeal.
- The reason for the “No” response regarding timely filing of required reports, and whether any filing-compliance issue remains outstanding.