Bel Fuse Inc. — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; comparisons are with 2017. Bel designs and manufactures products that power, protect and connect electronic circuits, serving networking, telecommunications, computing, military, aerospace, transportation and other markets. Its three geographic segments are North America, Asia and Europe; 2018 sales were 50%, 34% and 16%, respectively. Product sales were approximately one-third each in connectivity, magnetic, and power solutions and protection.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $548.2 million | $491.6 million |
| Gross profit / margin | $109.8 million / 20.0% | $102.3 million / 20.8% |
| Operating income / margin | $29.6 million / 5.4% | $17.4 million / 3.5% |
| Net earnings (loss) | $20.7 million | $(11.9) million |
| Income tax provision; effective rate | $2.9 million; 12.3% | $21.5 million; 223.4% |
| Cash from operations | $10.1 million | $24.1 million |
| Capital expenditures | $11.6 million | $6.4 million |
Class A and Class B diluted earnings per share were $1.62 and $1.73, respectively, versus losses per share of $0.97 and $0.99 in 2017. The 2017 loss included significant tax expense following U.S. tax reform. The 2018 tax provision also benefited from a $2.6 million reduction in the estimated transition tax.
At year-end, cash and cash equivalents were $53.9 million, total assets $443.5 million, and stockholders’ equity $176.5 million. Current liabilities were $106.0 million and the current ratio was 2.7, down from 3.0 in 2017. Cash fell $15.4 million during 2018; operating cash flow was lower mainly because receivables and inventory increased. Inventory rose $12.3 million on the balance sheet, while the cash-flow statement reflects a $24.7 million inventory cash use, including accounting and other effects.
Debt principal was $116.0 million at a variable rate (4.31% at year-end); reported debt carrying value was reduced by deferred financing costs. The company reported 2.18x leverage under its credit agreement, compliance with covenants, $75.0 million of unused facility capacity and $53.3 million of borrowing capacity without breaching its leverage covenant. A 1 percentage-point rate change would change annual interest expense by about $1.1 million. The current credit agreement matures in December 2022.
Material changes versus 2017
- Sales grew 11.5%, with growth across all major product groups and geographic segments. Magnetic sales benefited from next-generation switching products; connectivity from passive connectors and military programs; and power products from distribution and data-center demand.
- Operating income rose $12.2 million, although gross margin declined about 0.8 percentage point. Material costs increased to 41.9% of sales from 40.2%, and labor costs to 11.5% from 10.8%, reflecting component shortages and price increases, higher PRC wages and product mix.
- SG&A fell $4.7 million, including favorable foreign-exchange remeasurement effects. Interest expense declined to $5.3 million from $6.8 million, primarily as debt balances fell.
- Backlog at December 31 increased 17% to $171.2 million. Separately, backlog at February 28, 2019 was estimated at $174.4 million, versus $168.6 million a year earlier; management expected about 89% of the February 2019 backlog to ship by year-end, while cautioning that backlog can be delayed or canceled.
- Bel adopted ASC 606 in 2018. The transition increased opening retained earnings by $3.4 million; the company reported that 2018 sales were $1.3 million and net earnings $0.5 million higher than they would have been without adoption. Prior-year figures were not restated.
Outlook, commentary, risks and unusual items
Bel gave no formal revenue or earnings guidance. Management described bookings and backlog as encouraging indicators for growth in 2019, but expected elevated material costs in the first half of 2019 as higher-cost inventory is used. It identified labor costs, particularly in the PRC and Mexico, as ongoing challenges; the 2019 Mexico wage increase was expected to add about $0.4 million in labor costs.
- Restructuring costs were $0.2 million in 2018. Completed 2018 initiatives were expected to generate about $1.4 million in annual savings. A 2019 initiative was expected to cost about $0.4 million and yield $1.5 million in annualized savings.
- The first phase of the global ERP implementation was completed in January 2019. Total project costs were estimated at $6.4 million; management anticipated annual savings of about $2 million upon completion, with about $1.3 million of annualized savings from the first phase beginning in the second quarter of 2019.
- BCMZ Precision Engineering was acquired in October 2018 for approximately $2.6 million; it contributed $0.5 million of revenue in 2018. No goodwill impairment was identified in the annual 2018 testing.
- Key exposures include customer concentration (Hon Hai represented 12.3% of 2018 sales), variable-rate debt and covenant requirements, component availability and pricing, wage and foreign-exchange movements, demand volatility and cancellable backlog. The company also cited tariff and trade-policy uncertainty, international operations, ERP execution, cybersecurity, data privacy and regulatory risks.
- Liabilities for uncertain tax positions and related interest and penalties totaled approximately $28.9 million; timing of most potential settlements was not reasonably estimable. A $12.0 million Italian tax matter was included in that liability and was covered by an ABB indemnity, with a corresponding indemnification asset recorded. Macau proposed ending its offshore business regime effective January 1, 2021; Bel was considering alternatives.
- The Supplemental Executive Retirement Plan was unfunded, with an $18.7 million obligation and $13.0 million in designated insurance and trust assets that are not committed funding. Management reported that pending legal matters were not expected to have a material adverse effect; a separate PRC construction-cost dispute was paid and recovered in 2018.
Important facts for investors to verify
- Whether revenue growth and backlog convert into shipments and cash, given customer cancellation rights and component supply constraints.
- Whether margins stabilize as higher material costs and labor expenses persist, and whether forecast restructuring and ERP savings are realized.
- Debt covenant headroom, refinancing and interest-rate exposure, and the company’s ability to fund debt service while maintaining dividends and investment.
- The cash-flow and working-capital trend, especially receivables and inventory, and the practical availability of cash held by foreign subsidiaries.
- Developments in uncertain tax positions, the Macau offshore-law change, and the actual financial effect of U.S. and international tax rules.
- Hon Hai customer concentration and the status of significant programs, alongside the company’s stated expectations and assumptions for 2019.