Bel Fuse Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Bel designs and sells electronic products that power, protect and connect circuits, across connectivity, magnetic, and power solutions and protection product groups. Its reporting segments are North America, Asia and Europe. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $118.3 million | $113.7 million |
| Gross profit / gross margin | $21.1 million / 17.9% | $23.4 million / 20.6% |
| Operating income / margin | $0.4 million / 0.4% | $2.4 million / 2.1% |
| Interest expense | $1.2 million | $1.4 million |
| Pre-tax loss (income) | $(1.0) million | $0.7 million |
| Income tax provision (benefit) | $0.3 million | $(0.02) million |
| Net loss (earnings) | $(1.3) million | $0.7 million |
| Diluted loss (earnings) per share | Class A and B: $(0.11) | Class A: $0.05; Class B: $0.06 |
| Operating cash flow | $0.3 million | $(0.7) million |
| Capital expenditures | $2.2 million | $1.0 million |
Balance sheet and liquidity: At March 31, 2018, cash was $66.9 million, current assets $270.0 million, current liabilities $85.9 million, and total assets $435.4 million. The company reported a 3.1-to-1 current ratio. Cash declined $2.5 million during the quarter; $52.3 million was held by foreign subsidiaries. Inventory was $102.7 million, and accounts receivable was $76.8 million.
Debt: The term loan had $124.2 million outstanding; the $75 million revolving facility had no borrowings. Balance-sheet debt, net of financing costs, was approximately $122.0 million. The facility matures December 11, 2022, and its weighted-average interest rate was 3.69%. Bel reported compliance with debt covenants and $25.7 million of additional borrowing capacity without violating its leverage covenant, against $75 million of total unused revolver capacity.
Dividends: Q1 dividends were $0.06 per Class A share and $0.07 per Class B share; cash dividends paid totaled $0.8 million.
Changes versus the prior comparable period
- Sales increased $4.6 million, or 4.0%, despite a $1.6 million sales decline associated with the NPS divestiture. Magnetic solutions sales rose $3.3 million; connectivity sales rose $1.2 million; power solutions and protection sales were broadly flat.
- Gross margin fell about 2.7 percentage points, as cost of sales increased to 82.1% of revenue from 79.4%. Material costs rose to 40.8% of sales from 40.1%; labor costs rose to 11.3% from 10.2%.
- Operating income decreased $1.9 million, and results shifted from earnings to a net loss. North America and Asia reported operating losses of $0.3 million and $0.1 million, respectively; Europe operating income increased to $0.8 million.
- Operating cash flow improved by $1.0 million, from a $0.7 million use to $0.3 million provided. Cash at quarter-end was $66.9 million versus $72.3 million a year earlier.
Outlook, management commentary and risks
- Management said it was optimistic about revenue in 2018 but expected cost challenges. Backlog was $178.3 million at March 31, up $31.8 million, or 22%, from year-end. The filing provides no formal revenue or earnings guidance.
- Management cited constrained component supplies and higher prices, foreign-currency appreciation, PRC minimum-wage increases, and labor-intensive product mix as pressures on margins. It estimated currency appreciation increased operating costs by $1.8 million in Q1; foreign-currency translation losses were $1.0 million, with an additional estimated $1.8 million of transactional FX losses discussed in MD&A.
- Bel expects to continue restructuring in 2018, including realigning power-group R&D and moving a product line from a third-party Malaysian factory to a Bel facility in China. It anticipates completing these initiatives by the end of Q3 2018, with approximately $1.4 million in annual savings once fully implemented.
- The Power Solutions business was described as weighing on profitability at current sales levels; management said it would continue assessing how to restore profitability. Proposed U.S. import tariffs could also affect the business, and Bel was monitoring developments.
- The global ERP implementation is expected to run through 2019, with total costs estimated at $4–$5 million; $3.3 million had been incurred to date. Bel anticipates about $2 million of annual savings after implementation.
- Bel adopted ASC 606 on January 1, 2018 using the modified retrospective method. The main change concerns consignment inventory at customer-controlled hubs, producing $13.6 million of unbilled receivables at quarter-end. Adoption increased opening retained earnings by $3.4 million. For Q1, reported sales were $0.8 million lower and operating income $0.2 million higher than they would have been without adoption; management characterized the ongoing impact as immaterial.
- Tax reform reduced the U.S. federal corporate rate to 21%. Bel had recorded a provisional $18.1 million tax expense in 2017 for the law’s effects and continued refining its estimates in Q1 2018. The Q1 tax provision was $0.3 million despite a pre-tax loss; the filing cites the geographic mix of losses and increased uncertain-tax-position liabilities.
- Contingencies: An Italian tax dispute has an estimated $12.0 million liability, recorded as an uncertain tax position, with a corresponding indemnification asset under the acquisition agreement. A Chinese construction-cost judgment of approximately $3.2 million was issued in April 2018; Bel’s potential share was not estimable and no liability was recorded at March 31. A German patent case remained pending, and Bel said it could not yet assess infringement or potential damages. Management said other legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales growth and the reported $178.3 million backlog convert into profitable revenue, particularly in power solutions and protection.
- Whether component availability, input prices, wage inflation and foreign-exchange movements continue to pressure gross margins and operating results.
- Progress and realized savings from restructuring and the ERP program, compared with expected timelines, costs and savings.
- Debt-covenant headroom, the term loan’s floating interest rate, and the company’s plans for foreign-held cash and potential debt repayment.
- Developments in the Chinese construction-cost judgment, Italian tax dispute, German patent litigation and uncertain tax positions.
- The effects of ASC 606 on revenue timing, unbilled receivables and inventory; Q1 results are not necessarily indicative of full-year results.