Bel Fuse Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results; amounts below are in millions of dollars except per-share data. Bel designs and manufactures products that power, protect and connect electronic circuits, across North America, Asia and Europe.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $131.6 | $145.7 | $252.8 | $287.7 |
| Gross profit | $25.7 | $28.6 | $48.8 | $55.4 |
| Gross margin | 19.5% | 19.6% | 19.3% | 19.2% |
| Operating income (loss) | $10.0 | $7.5 | $(93.4) | $16.5 |
| Net earnings (loss) | $22.8 | $6.1 | $(77.9) | $11.4 |
| Operating cash flow | Not separately provided | Not separately provided | $16.3 | $23.7 |
- Q2 basic and diluted EPS were $1.83 for Class A and $1.93 for Class B, versus $0.49 and $0.52, respectively, a year earlier. First-half EPS were losses of $6.31 for Class A and $6.61 for Class B.
- Q2 sales declined 9.6% year over year, but rose 8.6% sequentially from Q1. First-half sales fell 12.1%.
- First-half operating results include a $106.0 million noncash impairment charge for goodwill and trademarks. Excluding the charge, first-half operating income was approximately $12.6 million. Q2 includes a $2.6 million reduction of the provisional impairment charge.
- Q2 net earnings were substantially affected by a $14.1 million income-tax benefit, principally associated with settlements of uncertain tax positions and, to a lesser extent, final impairment accounting. The filing reports a Q2 effective tax rate of (163.5%).
Financial position and liquidity
- At June 30, cash and cash equivalents were $67.5 million, current assets $261.7 million and current liabilities $101.3 million; the reported current ratio was 2.6:1.
- Debt borrowings under the term loan were $159.8 million, with no revolver borrowings. Balance-sheet debt carrying value was approximately $156.5 million, net of deferred financing costs. The weighted-average interest rate was 2.75%.
- Bel repaid $27.4 million of long-term debt in the first half. Cash declined $17.6 million from year-end 2015. The $50 million revolver was undrawn; the company said $39.8 million could be borrowed without violating its leverage covenant based on existing EBITDA.
- Bel reported compliance with debt covenants at quarter-end. Management said current liquidity and expected operating cash flows should fund operations and obligations over the next 12 months. Foreign subsidiaries held $52.5 million, or 78%, of total cash; management intends to permanently reinvest those earnings.
Changes, outlook and risks
- Sales weakness reflected general market softness and lower Power Solutions sales, including the loss of a design cycle during the period when post-acquisition quality issues were addressed. Power Solutions and Protection first-half sales fell $21.8 million; Magnetic Solutions sales fell $10.2 million. Connectivity sales were also lower, with weaker transportation and military demand partly offset by distribution growth.
- North America external sales declined to $67.3 million in Q2 from $76.5 million; Asia fell to $43.7 million from $48.6 million; Europe was nearly flat at $20.5 million.
- Management cited recovering distribution sales in Q2, continued commercial aerospace growth, and expected new product introductions and design wins to support improved Power Solutions sales in late 2016 and through 2017. These are expectations, not formal quantified guidance; management cautioned that industry weakness persists.
- Restructuring charges were $0.6 million in the first half. Bel said restructuring over the prior two years had removed $15 million of annual fixed costs and indicated further cost-containment actions, and possible charges, may follow.
- A March 2016 amendment to the credit agreement changed prepayment terms and raised the permitted maximum leverage ratio through September 2017. Bel paid $0.7 million in amendment fees.
- Tax uncertainties remain: uncertain-tax-position liabilities were reported at $27.6 million, with about $1.7 million expected to be resolved within 12 months. A German tax audit concluded with immaterial incremental expense. In an Italian tax matter related to the Power Solutions acquisition, an estimated $12.0 million liability is recorded and Bel says ABB indemnifies it.
- Bel faces a German patent-infringement lawsuit brought by Setec; the company said it lacked enough information to assess infringement or potential damages. Management said other legal matters were not expected to have a material adverse effect.
- After quarter-end, Bel sold a Hong Kong property for $2.1 million and expected to recognize an approximately $2.0 million gain in Q3 2016.
- Risks include volatile demand and customer ordering, product mix and manufacturing costs, foreign-exchange movements, tax exposures, and assumptions underlying goodwill and intangible-asset valuations. The filing says the impairment did not affect cash, ongoing operating performance or covenant compliance. Disclosure controls were reported effective.
Key facts for investors to verify
- Whether sales stabilize and the expected late-2016/2017 Power Solutions recovery materializes.
- Underlying operating profitability and cash generation, apart from the large noncash impairment and tax-related benefit.
- Debt-covenant headroom, future debt repayments and the availability of revolver capacity as EBITDA changes.
- Resolution, timing and cash impact of uncertain tax positions, including the Italian matter and the stated ABB indemnification.
- Outcome and potential exposure from the Setec patent litigation, and whether subsequent-event property-sale proceeds and gain are realized as expected.