Bel Fuse Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context and reporting period
Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving markets including networking, telecommunications, computing, military and commercial aerospace, transportation and e-Mobility. Its reportable product groups are Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $177.7 | $147.0 | $485.0 | $396.4 |
| Gross profit | $51.5 | $36.0 | $130.9 | $95.1 |
| Gross margin | 29.0% | 24.5% | 27.0% | 24.0% |
| Income from operations | $22.1 | $8.9 | $46.9 | $20.0 |
| Net earnings | $16.5 | $5.7 | $38.6 | $16.8 |
| EPS, Class A / Class B | $1.27 / $1.34 | $0.44 / $0.47 | $2.95 / $3.12 | $1.29 / $1.37 |
| Cash from operating activities | Not presented quarterly | $24.1 | $(1.7) |
Q3 sales rose 20.9% year over year; nine-month sales rose 22.4%. For the quarter, segment revenue was $50.3 million Connectivity, $76.4 million Power Solutions and Protection, and $51.1 million Magnetic Solutions. Nine-month segment revenue was $140.1 million, $206.2 million and $138.7 million, respectively.
Gross margin improved across the company. In Q3, segment margins were 26.1% Connectivity, 32.4% Power Solutions and Protection, and 30.4% Magnetic Solutions. For the nine months, they were 26.7%, 29.5% and 27.0%, respectively.
- Cash and liquidity: Cash and equivalents were $70.9 million at September 30, 2022, compared with $61.8 million at year-end 2021. Current assets were $377.4 million and current liabilities $137.1 million; the reported current ratio was 2.8:1.
- Cash flow and working capital: Nine-month operating cash flow was $24.1 million. Receivables used $17.9 million and inventory used $32.6 million of cash as those balances increased. Capital expenditures were $5.6 million; dividends paid were $2.5 million.
- Debt: Revolver borrowings were $110.0 million at September 30, down from $112.5 million at December 31, 2021. The $175 million facility had $65.0 million of available capacity at quarter-end; Bel reported covenant compliance. It voluntarily paid down $10.0 million after quarter-end, leaving $100.0 million outstanding at October 31.
- Other balance-sheet items: Inventory was $164.4 million, up from $139.4 million at year-end. Total liabilities were $317.8 million and stockholders’ equity $236.0 million. Long-term uncertain tax-position liabilities were $24.0 million.
Material changes versus the prior comparable period
- Q3 operating income increased to $22.1 million from $8.9 million; nine-month operating income increased to $46.9 million from $20.0 million. Higher sales, improved gross margin and a smaller year-to-date property-sale gain than in 2021 contributed to comparisons.
- Power Solutions and Protection led growth, reflecting higher demand, raw-material surcharge invoicing, e-Mobility and CUI sales, circuit protection products, and the inclusion of EOS, acquired in 2021. Connectivity benefited from recovering commercial aerospace demand and premise-wiring sales. Magnetic Solutions benefited from networking/distribution demand, pricing actions and favorable currency effects.
- Q3 restructuring charges were $4.0 million versus $0.4 million in Q3 2021. Nine-month charges were also $4.0 million versus $0.7 million.
- Other expense was $2.9 million for the first nine months versus $0.5 million of other income in 2021, largely reflecting losses on SERP investments compared with prior-year gains. The nine-month effective tax rate was 7.1%, versus 3.4%; Q3 rates were 20.0% and 20.2%, respectively.
- Nine-month comprehensive income was $28.5 million versus $15.2 million. Foreign currency translation losses drove accumulated other comprehensive loss to $29.0 million from $18.9 million at year-end; gains on interest-rate swaps partly offset those losses.
Outlook, management commentary, risks and unusual items
- Backlog: Orders backlog was $582.8 million at September 30, up $115.0 million, or 25%, from December 31, 2021. Backlog increased 48% in Power and 37% in Connectivity, but declined 22% in Magnetic Solutions, primarily due to the ordering pattern of one large networking customer. Backlog is not a guarantee of future revenue.
- Restructuring plans: Bel plans to consolidate two Magnetic Solutions facilities in China into one new facility by mid-2023. Expected China restructuring costs are approximately $9 million, with about $3 million of additional capital spending over the next 12 months and expected annualized savings of approximately $3 million beginning in Q4 2023. U.S. and U.K. facility consolidations are also planned, with expected costs of approximately $0.6 million and $0.3 million, capital spending of approximately $0.4 million and $1.0 million, and annualized savings of approximately $1.1 million and $0.7 million, respectively. Timing and savings are forward-looking estimates.
- Operating risks: Management cited continued component supply constraints and elevated input costs, inflation, labor and freight costs, unpredictable customer ordering, foreign-exchange fluctuations, and uncertainty around COVID-19 outbreaks and supply-chain disruption. Raw-material availability and pricing showed some stabilization in Q3, but constraints remained. The company said its facilities were operating at normal workforce levels as of the filing date.
- Liquidity outlook: Management believes cash, anticipated operating cash flows and available revolver capacity are sufficient for operations and foreseeable requirements, including over the next twelve months. COVID-related deterioration in results could affect debt-covenant headroom and borrowing availability.
- Unusual items and contingencies: Bel recognized a $1.6 million gain on the July 2022 sale of one Jersey City property; another property remained held for sale at $1.5 million. A patent-infringement suit against Monolithic Power Systems remains pending in Texas. A separate Italian tax matter has an estimated $12 million liability, but Bel states it is fully indemnified by ABB under the acquisition agreement; the Italian Supreme Court had not issued a judgment.
- The filing does not provide formal quarterly or full-year revenue or earnings guidance. Management’s forward-looking restructuring estimates and general liquidity outlook are subject to risks and uncertainties.
Important facts for investors to verify
- Whether sales growth, segment demand and the $582.8 million backlog convert into shipments and cash, especially given the Magnetic Solutions backlog decline.
- Whether inventory and receivables growth is absorbed without weakening operating cash flow or liquidity.
- Actual restructuring costs, capital spending, completion dates and realized savings versus management’s estimates.
- Effects of supply constraints, inflation, pricing actions, customer mix, foreign exchange and commercial aerospace ramp-up on margins.
- Revolver balances, covenant compliance, interest-rate exposure and the impact of the post-quarter $10 million debt repayment.
- Developments in the patent litigation and Italian tax proceeding, including the status and collectability of the stated indemnification.