Bel Fuse Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparative results are for 2010. The filing also reports fourth-quarter results. Bel designs and manufactures electronic components and modules for networking, telecom, computing, military/aerospace, transportation and other markets, with North America, Asia and Europe operating segments. Cinch was included for a full year in 2011, versus 11 months in 2010.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $295.1 million | $302.5 million |
| Gross profit / gross margin | $50.4 million / 17.1% | $63.4 million / 20.9% |
| Operating income / margin | $7.4 million / 2.5% | $15.2 million / 5.0% |
| Net earnings | $3.8 million | $13.6 million |
| EPS, Class A / Class B | $0.28 / $0.33 | $1.10 / $1.18 |
| Cash from operations | $30.3 million | $7.6 million |
- Sales fell 2.5%, while cost of sales increased 2.3%; cost of sales rose to 82.9% of revenue from 79.1%.
- Product mix shifted: modules grew to 31% of sales from 20%, while magnetics declined to 30% from 43%. Management cited lower-margin module content and reduced higher-margin MagJack sales as key pressures.
- Fourth-quarter sales were $68.6 million versus $83.7 million a year earlier. Net earnings were $82,000, compared with a $1.0 million loss; quarterly EPS was $0.00 for Class A and $0.01 for Class B.
- R&D expense was $12.0 million, up from $11.4 million. Capital expenditures were $2.9 million. Dividends paid totaled $3.2 million, or $0.24 per Class A share and $0.28 per Class B share.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $88.2 million; marketable securities were $5.7 million. An additional $13.0 million was classified as restricted cash, primarily for the SynQor appeal bond.
- Working capital was $165.3 million and the current ratio was 4.9, compared with 4.4 at year-end 2010. Accounts receivable declined to $39.1 million from $53.3 million; inventory was $53.4 million versus $57.0 million.
- No borrowings were outstanding under the $30 million revolving credit facility, which expires June 30, 2014; the full amount was available. Bel reported compliance with its debt covenants.
- Total liabilities were $55.8 million and stockholders’ equity was $221.1 million. The SERP obligation was $9.3 million and is unfunded, although $10.5 million of life-insurance and rabbi-trust assets are intended to help fund it.
- Operating cash flow improved substantially, reflecting working-capital movements, including lower receivables and no repeat of the prior-year inventory build. Management said cash, operating cash flow and available credit should cover needs for at least 12 months.
Material changes and outlook
- North America revenue rose to $134.8 million from $111.9 million, while Asia revenue declined to $126.9 million from $156.6 million; Europe revenue was $33.4 million versus $34.0 million. Management attributed the shift partly to a module product shipped from China to a North American customer and a decline in magnetic sales.
- Operating income declined in Asia to a $3.5 million loss from $9.4 million income. North America operating income improved to $9.0 million from $4.2 million; Europe operating income was $1.9 million versus $1.6 million.
- Management expected challenging conditions and very modest overall growth in 2012, with continued customer pricing pressure. It said future revenue was difficult to predict because visibility into customer requirements was limited.
- Bel expected approximately $5.4 million of 2012 restructuring and streamlining costs, primarily in the first three quarters, and projected $4.4 million of annual savings once implemented. These are forward-looking estimates.
- Backlog at February 29, 2012 was approximately $83.4 million, down from $100.4 million a year earlier. Management expected virtually all of it to ship by year-end, but cautioned that cancellations, demand changes and supply issues make backlog an uncertain sales indicator.
- On March 9, 2012, after year-end, Bel acquired GigaCom Interconnect AB for approximately $2.7 million in cash to expand Cinch’s fiber-optic aerospace and military offerings.
Risks, contingencies and unusual items
- Customer and mix concentration: two customers accounted for 22.3% of 2011 sales—Hon Hai Precision Industry, 11.4%, and Ambient Corporation, 10.9%. Loss of either could materially affect results.
- SynQor litigation: Bel recorded $3.5 million of total litigation charges in 2011 across the SynQor and Halo matters. The SynQor judgment included $8.1 million in damages and $2.5 million in supplemental damages; Bel appealed and posted a $13.0 million supersedeas bond. The filing warns an unsuccessful appeal could affect sales of certain products. A separate post-injunction damages claim remained pending; Bel cited customer indemnification for that matter.
- Halo settlement: Bel recorded a $2.6 million liability for past sales and agreed to pay an 8% royalty on specified products’ worldwide sales through August 10, 2015. In a separate patent dispute, Halo agreed to pay Bel a 10% royalty on its integrated connector module sales under a license.
- Cost and operating risks include customer pricing pressure, higher commodity and PRC labor costs, volatile demand and capacity utilization, raw-material availability, foreign exchange, international political and regulatory conditions, and potential inventory obsolescence.
- The effective tax rate rose to 52.2% from 12.4%, largely reflecting a geographic shift in pretax earnings and losses in Asia without a tax benefit. Approximately $93.4 million of foreign earnings were treated as permanently reinvested; estimated U.S. tax on repatriation was $21.2 million.
- Management and Deloitte reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Review whether the product-mix shift, MagJack weakness and pricing and labor pressures persisted, and whether projected 2012 savings were realized against restructuring costs.
- Track SynQor appeal and related proceedings, restricted cash, indemnification coverage and ongoing Halo royalty obligations.
- Assess the durability and collection risk of sales to the two customers representing 22.3% of revenue, and the quality of the declining backlog.
- Verify operating cash generation and liquidity after dividends, capital spending, any acquisitions and cash trapped or held overseas.
- Monitor the high effective tax rate, uncertain tax positions and potential cash-tax consequences if foreign earnings are repatriated.