Bel Fuse Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Bel Fuse designs and manufactures magnetics, modules, circuit protection devices and interconnect products for networking, telecom, computing, military, aerospace, transportation and other markets. Its operating segments are North America, Asia and Europe.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $63.0 million | $65.6 million; down 3.9% |
| Gross profit / margin | $9.1 million / 14.4% | $10.4 million / 15.9% |
| Operating income (loss) | $(1.4) million / (2.3)% margin | $1.4 million / 2.2% margin |
| Net income (loss) | $(0.6) million | $0.9 million |
| EPS, Class A / Class B | $(0.05) / $(0.05) | $0.07 / $0.08 |
| Operating cash flow | $1.8 million | $2.5 million |
| Cash and cash equivalents | $53.3 million at March 31 | $71.3 million at December 31, 2012 |
| Current assets / current liabilities | $187.9 million / $61.7 million | Current ratio 3.0x, versus 4.1x at year-end |
| Debt | $0.1 million notes payable; no credit-facility borrowings | $30 million unsecured credit line expires June 30, 2014 |
Cost of sales increased to 85.6% of revenue from 84.1%; SG&A rose to 16.5% from 13.4%. Investing cash outflow was $15.3 million, including $14.1 million net cash paid for the TRP acquisition and $1.2 million of capital expenditures. Financing cash outflow was $4.2 million, including $0.8 million in dividends and $3.4 million to repurchase and retire 178,643 Class B shares.
Material changes versus the prior period
- Revenue fell $2.5 million. Lower North American module sales, particularly reduced orders from one customer, and Cinch manufacturing-transition disruption weighed on results. Management said it did not expect that customer’s volume to increase before 2014.
- Magnetics revenue increased to $21.3 million from $19.2 million, while module revenue declined to $13.4 million from $16.7 million. Interconnect revenue was $26.1 million versus $27.2 million.
- North America operating results moved to a $1.5 million loss from $2.3 million income; Asia’s loss narrowed to $0.7 million from $1.6 million. Europe operating income was $0.7 million versus $0.7 million. Europe benefited from 2012 acquisitions.
- SG&A increased by $1.5 million, reflecting acquired-company expenses, acquisition costs, legal and professional fees, transition-related freight, bad-debt expense and foreign-exchange losses.
- The company recognized an $0.8 million income tax benefit, including a $0.4 million retroactive 2012 research and experimentation credit. Net results shifted from profit to loss.
Outlook, risks and unusual items
- Acquisition: Bel acquired the Transpower magnetics business (operating as TRP) on March 29, 2013. The business had approximately $75 million of 2012 sales, but contributed no Q1 2013 operating results. The company expected TRP to contribute sales beginning in Q2 and to be accretive in the second half of 2013. Purchase accounting remained preliminary; $7.2 million of working-capital-related consideration was accrued and remained subject to final agreement.
- Operations and margins: The McAllen, Texas facility transition caused approximately $1.7 million of overtime, scrap, premium purchased materials, expedited freight and other start-up costs. Some overtime costs were expected to continue into Q2. Management expected transition difficulties to be largely resolved by the end of Q2 and still expected $5.6 million of annual restructuring savings, although Cinch savings might not be visible until Q3.
- Pricing and labor: Bel was implementing price increases, with most expected to take effect by August 1, 2013. A 19% minimum-wage increase in relevant PRC regions was scheduled to take effect May 1, 2013; rising wages, currency movements and labor-intensive product mix were identified as margin risks.
- Liquidity and covenant: Management believed operating cash flow after dividends, existing capital and available credit would fund operations for at least 12 months. However, Bel had not complied with its tangible-net-worth covenant since Q3 2012 following acquisitions; the lender had waived the default. The filing reports no outstanding credit-line borrowings.
- Legal matters: A $13.0 million supersedeas bond related to SynQor is reported as restricted cash. The Federal Circuit affirmed the judgment against Bel on March 13, 2013; Bel and other defendants filed a petition for rehearing en banc on April 12. Bel recorded a litigation reserve of $11.5 million. In a related post-injunction damages case, Bel cited customer indemnification and did not expect material operating-statement impact. Bel also filed a patent-infringement action against Molex in April 2013.
- Other uncertainties include volatile customer demand, manufacturing labor and material costs, acquisition integration and valuation, foreign-currency exposure, and the possibility of additional legal and acquisition-related expenses. Management noted that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the McAllen transition improves production, costs and customer deliveries as management expected, and whether the stated restructuring savings are realized.
- Whether planned price increases offset rising PRC labor costs and other input-cost pressures.
- TRP’s final purchase accounting, working-capital adjustment, integration progress and actual contribution to revenue and earnings.
- The covenant waiver’s terms and status, the credit facility’s availability, and the company’s cash and liquidity after acquisition spending.
- Developments in the SynQor appeal and post-injunction case, the related reserve and restricted cash, and the Molex and asbestos proceedings.
- The basis and sustainability of the Q1 tax benefit, including the uncertain-tax-position balance and expected statute-of-limitations changes.