Bel Fuse Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited consolidated results. Bel designs, manufactures, and markets products that power, protect, and connect electronic circuits. Its reportable segments are North America, Asia, and Europe.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $128.8 | $144.2 | $381.6 | $431.8 |
| Gross profit / margin | $26.6 / 20.6% | $27.4 / 19.0% | $75.3 / 19.7% | $82.8 / 19.2% |
| Operating income (loss) | $9.3 | $7.3 | $(84.1) | $23.8 |
| Net earnings (loss) | $9.7 | $4.9 | $(68.2) | $16.3 |
| Basic and diluted EPS, Class A / Class B | $0.78 / $0.82 | $0.39 / $0.42 | $(5.52) / $(5.78) | $1.30 / $1.39 |
| Operating cash flow | Not presented separately | Not presented separately | $26.8 | $44.7 |
| Capital expenditures | Not presented separately | Not presented separately | $5.6 | $8.3 |
Balance sheet and liquidity at September 30, 2016
- Cash and cash equivalents were $67.0, down from $85.0 at December 31, 2015; current assets were $258.9 and current liabilities $98.1. The current ratio was 2.6, versus 2.3 at year-end 2015.
- Debt was $146.7, down from $187.2 at year-end 2015, after $37.6 of repayments. The $50.0 revolving facility had no borrowings; the company said $39.8 was borrowable without violating its leverage covenant.
- Cash flow from operations of $26.8 was more than offset by debt repayments, capital spending, dividends, and other items; cash declined $18.0 over the nine-month period. Foreign subsidiaries held $58.5, or 87% of cash.
Changes and drivers
- Q3 sales fell 10.6% year over year; nine-month sales fell 11.6%. Management cited missed Power Solutions design cycles, market softness, and weaker distributor sales after five quarters of inventory growth.
- Q3 gross margin improved to 20.6% from 19.0%, reflecting lower material costs as sales of higher-material-content power products declined, along with lower fixed costs. The reported Q3 operating result included a $2.1 gain on sale of Hong Kong property.
- Nine-month results included a $106.0 non-cash impairment charge: $101.7 for goodwill and $4.3 for trademarks. The charge drove the reported operating loss and reduced goodwill from $121.6 at year-end 2015 to $19.2. Excluding impairment, nine-month operating income was $21.8, compared with $23.8 in 2015.
- Q3 net earnings increased despite lower sales, while pretax earnings were lower. The comparison was affected by $4.2 of acquisition-related other income recognized in Q3 2015; Q3 2016 interest income and other, net, was $0.2.
- Nine-month income tax benefit was $20.7, including effects of impairment and settlements of uncertain tax positions. Debt interest expense declined to $5.2 from $6.0 for the nine-month period, primarily because borrowings were lower.
Outlook, risks, and unusual items
- Management said market weakness continued, but cited growth in selected connectivity products. It anticipated some Power Solutions growth in 2017 as new design cycles progress, and identified customer datacenter and cloud-computing opportunities.
- In October 2016, Bel announced closure of its Shanghai manufacturing facility and transfer of operations to other facilities. Estimated pretax restructuring charges are about $1.2, mostly expected in Q4 2016; anticipated annual savings are approximately $2 once fully implemented.
- Bel planned its annual goodwill and intangible-asset impairment testing for Q4 2016. It reported no further impairment indicators as of September 30. The impairment charge was non-cash and, per management, did not affect liquidity, ongoing operating performance, or debt-covenant compliance.
- At September 30, Bel reported compliance with debt covenants, including its leverage covenant. The credit agreement includes acceleration remedies upon default. Foreign exchange and interest rates are identified market risks; management said the British pound’s depreciation had no material effect on results for the period.
- Uncertain tax-position liabilities were $27.7, and about $2.3 was expected to be resolved within twelve months. A German tax audit concluded with an immaterial incremental expense. A patent-infringement suit brought by Setec in Germany remained pending; Bel said it lacked sufficient information to assess infringement or potential damages. Management considered other legal matters not expected to have a material adverse effect.
- Management stated that current liquidity and expected operating cash flows should fund operations and obligations over the next twelve months. Results are subject to demand, product mix, foreign exchange, labor and material costs, tax outcomes, and other risks; interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales stabilize and Power Solutions design wins translate into the anticipated 2017 growth.
- Results and assumptions from the Q4 impairment review, particularly given the substantial 2016 write-down and weaker operating outlook used in the interim test.
- Execution, timing, charges, and realized savings from the Shanghai closure and other restructuring initiatives.
- Debt-covenant headroom, borrowing capacity, and the effect of future operating performance on leverage.
- Resolution of uncertain tax positions and the Setec patent litigation, including any eventual cash or earnings impact.