Bel Fuse Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results; dollar amounts below are in millions unless stated otherwise. Bel designs and manufactures magnetic, connectivity, power and protection products, with geographic segments in North America, Asia and Europe.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $99.4 | $94.0 | $182.1 | $157.0 |
| Gross margin | 18.0% | 16.2% | 17.6% | 15.5% |
| Operating income | $3.7 | $1.7 | $6.6 | $0.2 |
| Net earnings | $3.1 | $1.7 | $5.6 | $1.1 |
| Net margin | 3.1% | 1.8% | 3.1% | 0.7% |
| EPS, Class A / Class B | $0.25 / $0.27 | $0.14 / $0.15 | $0.45 / $0.49 | $0.09 / $0.10 |
- Q2 sales rose 5.8% year over year; first-half sales rose 16.0%. Excluding contributions from the 2013 and 2014 acquisitions, management reported revenue increases of $0.7 million for Q2 and $2.5 million for the first half.
- Q2 operating margin was 3.7% versus 1.8%; first-half operating margin was 3.6% versus 0.1%. Improved margins reflected favorable product mix and fewer Cinch relocation inefficiencies than in 2013. First-half cost of sales declined to 82.4% of sales from 84.5%.
- First-half operating cash flow was $12.7 million, compared with cash used of $3.9 million in 2013. Capital expenditures were $3.0 million. Cash increased $25.6 million to $87.8 million, substantially supported by $145.0 million of term-loan proceeds and offset by acquisition spending.
- At June 30, cash was $87.8 million, current assets $298.9 million and current liabilities $108.9 million; the current ratio was 2.7, down from 3.0 at year-end 2013. Working capital grew alongside the acquired business, including $98.7 million of inventory and $97.5 million of receivables.
- Debt at June 30 was $145.0 million, including $7.25 million current and $137.75 million noncurrent. The new secured facility carried a 3.0% interest rate at quarter-end, matures June 2019 and had $120 million of unused facility capacity; the company reported compliance with its most restrictive leverage covenant.
Changes, acquisitions and unusual items
- Bel acquired Power Solutions on June 19 for $110.0 million net of acquired cash. It contributed $7.2 million in revenue and an approximately $0.8 million net loss through quarter-end; the loss primarily reflected severance. The purchase-price allocation, including acquired inventory, property and intangible valuations and goodwill, remained provisional.
- Power Solutions and the prior TRP and Array acquisitions contributed $26.9 million of sales and $2.7 million of operating income in Q2; first-half contributions were $44.8 million and $3.7 million. Acquisition timing makes reported year-over-year comparisons less directly comparable.
- Bel completed its Emerson Network Power Connectivity Solutions acquisition on July 25, after quarter-end, paying $90.7 million net of acquired cash for the U.S. and U.K. entities; approximately $9 million remained payable for the China closing. Bel borrowed an additional $90 million under its facility to help fund the transaction. June 30 debt therefore excludes this subsequent borrowing.
- Q2 and first-half results included $1.0 million of Power Solutions acquisition-related costs; total first-half costs associated with Power Solutions and the subsequent Connectivity Solutions transaction were reported as $1.4 million. Financing costs of $5.4 million were deferred and will be amortized over the loan term.
- Management’s illustrative pro forma results for the combined acquired businesses showed Q2 net loss of $3.3 million and first-half net earnings of $0.2 million. These figures include specified adjustments and are not forecasts; the 2014 pro forma results exclude $6.9 million after tax of nonrecurring Power Solutions transaction expenses.
Outlook, commentary and risks
- Management said the company’s current annual sales run rate, based on Bel and recently acquired businesses including Connectivity Solutions, was approximately $700 million. It cited factory quality, customer and engineering collaboration, and overhead containment as priorities, and stated that more than $5 million of annual acquisition-related cost savings had been implemented. This is management commentary, not formal earnings guidance.
- Management believed cash flow, reserves and available credit would fund operations for at least 12 months, while noting risks from softer demand, product-development or customer-response challenges, acquisition integration, expansion spending and operating losses. Cost and margin risks include PRC wage increases, Renminbi appreciation, extended electrical-component lead times and recent component-price pressure; commodity prices were lower in the first half.
- Bel paid SynQor $10.9 million in the earlier patent matter and received $2.1 million from a customer under an indemnity. A further $0.7 million post-verdict award was accrued at June 30 and paid in July, subject to customer reimbursement. In Bel’s patent suit against Molex, the court denied Molex’s motion to dismiss; Molex initiated an inter partes review for one patent. Management said other legal claims were not expected to have a material adverse effect.
- The company reported a $3.7 million acquired Power Solutions warranty accrual at June 30. Its estimate depends on actual claims, product failure rates and repair costs. Approximately $0.8 million of uncertain-tax-position liabilities related principally to 2010 tax matters had a statute of limitations scheduled to expire September 15, 2014.
- Bel identified foreign-exchange and interest-rate exposure; it reported no material change in market risk during the first half. Disclosure controls were assessed as effective, with no significant changes in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of reported sales and profit growth reflects acquired businesses versus comparable legacy operations, and whether the stated cost savings are realized.
- Final Power Solutions purchase accounting, goodwill allocation and potential tax deductibility; also the completed purchase-price allocation and integration results for the Connectivity Solutions acquisition.
- Post-acquisition leverage, facility availability and covenant headroom after the additional $90 million borrowing, as well as debt service and financing costs.
- Whether improved margins persist amid PRC labor and currency costs, component pricing and availability, and product-mix changes.
- Resolution and reimbursement of SynQor-related amounts, the Molex patent proceedings, warranty claims and uncertain tax positions.
- Reported versus pro forma earnings: the filing cautions that pro forma results are illustrative and do not include potential cost savings or related integration costs.