BEL FUSE INC annual report, FY2020

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Business context and reporting period

Bel Fuse Inc. filed this annual report for the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. Bel designs and manufactures products that power, protect, and connect electronic circuits for networking, telecommunications, computing, military, aerospace, transportation, and other markets. Its three product groups are Power Solutions and Protection, Cinch Connectivity Solutions, and Magnetic Solutions.

The 2019 comparison includes only a short period of CUI power business results following its December 2019 acquisition. CUI contributed $43.1 million of 2020 sales.

Financial performance and liquidity

  • Revenue: $465.8 million, down 5.4% from $492.4 million in 2019.
  • Profitability: Gross profit was $119.7 million, up from $110.0 million; gross margin rose to 25.7% from 22.3%. Operating income was $18.7 million versus an operating loss of $1.6 million. Net earnings were $12.8 million versus a net loss of $8.7 million. Basic and diluted EPS were $0.97 for Class A and $1.05 for Class B, compared with a loss of $0.71 per share for each class in 2019.
  • Segment sales and gross margins: Power Solutions and Protection sales rose 11.0% to $181.5 million, with margin improving to 25.1% from 20.1%. Cinch Connectivity Solutions sales fell 12.5% to $150.7 million, while margin improved to 28.0% from 25.8%. Magnetic Solutions sales fell 14.7% to $133.6 million, while margin improved to 24.8% from 21.9%.
  • Cash flow: Operating cash flow was $46.1 million, up from $24.5 million. Cash and cash equivalents increased by $12.7 million to $84.9 million. Capital expenditures were $5.5 million; dividends paid were $3.4 million.
  • Debt and liquidity: Gross debt outstanding was $116.8 million at year-end, down from $150.0 million in term loans and revolver borrowings at the end of 2019. Bel repaid $28.2 million during 2020. The company reported $63.0 million of unused facility capacity, with $56.6 million available to borrow without breaching its leverage covenant; it was in compliance with covenants. The current ratio was 3.2, versus 3.1 a year earlier.
  • Other financial measures: R&D expense was $23.6 million versus $26.9 million; SG&A was $78.7 million versus $77.4 million. The income tax benefit was $0.7 million, compared with a $1.4 million tax provision in 2019. Dividends declared totaled $3.4 million in each year.

Material changes versus 2019

  • Power Solutions and Protection benefited from the CUI acquisition, increased circuit-protection demand, higher-margin product mix, and cost reductions. CUI generated $43.1 million of 2020 sales and $6.8 million of operating income.
  • Connectivity results were affected by weaker commercial aerospace demand amid low aircraft production and reduced travel; stronger military-product demand partly offset the decline.
  • Magnetic Solutions sales declined following lower demand from a large networking OEM. Bel reported improved bookings in the fourth quarter, up $8.0 million from the year-earlier quarter.
  • Margins improved across all three product groups. Lower material and labor costs as a share of sales and reduced overhead contributed, alongside product-mix changes and restructuring benefits.
  • 2019 results included an $8.9 million goodwill impairment charge; no goodwill impairment was recorded in 2020. The 2020 income improvement also reflects the prior-year operating loss and impairment.
  • Bookings in 2020 were $448.8 million, down 3%. Year-end backlog was $155.0 million, down 3% from 2019. Backlog subsequently stood at an estimated $179.6 million on February 28, 2021, versus $186.3 million a year earlier.

Outlook, commentary, risks, and unusual items

  • Outlook: Bel did not provide formal revenue or earnings guidance in the supplied filing text. Management said visibility into base-business demand remained limited due to COVID-19 and long component lead times. It expected $4.4 million of additional annualized savings to be realized in 2021 from 2020 restructuring actions, and said further streamlining was under consideration. Management estimated 85%–90% of February 2021 backlog would ship by year-end, while cautioning that backlog may not reliably predict sales timing.
  • Supply and operating risks: Extended lead times and higher prices for resistors, capacitors, discrete semiconductors, plastic resin, and copper could pressure margins; management expected these effects to be temporary in the first half of 2021. COVID-19 caused facility closures and inefficiencies, higher freight costs, and delayed shipments. Commercial aerospace weakness affected demand, and one customer, Hon Hai/Foxconn, represented 11.9% of 2020 sales.
  • Debt and other exposures: Debt covenants could constrain borrowing if financial results weaken. Bel disclosed $28.5 million of liabilities for uncertain tax positions, for which settlement timing could not be estimated; approximately $12.0 million relates to an Italian tax dispute for which Bel says it is indemnified. The unfunded SERP obligation was $24.3 million, compared with $15.4 million of designated insurance and trust assets that are not committed funding.
  • Restructuring and other unusual items: Bel recorded $0.6 million of restructuring charges in 2020 and reported $6.0 million of annualized savings from actions announced or implemented that year. Property-sale gains were $1.9 million in 2020, compared with $4.3 million in 2019. Foreign-exchange transaction losses were $2.2 million in 2020. A $4.9 million Chinese government COVID-19 relief payment partly offset pandemic-related costs.
  • Subsequent events: Bel acquired rms Connectors for $8.5 million in cash in January 2021. It also sold a Hong Kong property in January for net proceeds of $6.7 million, with a gain expected in first-quarter 2021. The planned EOS Power acquisition, estimated at approximately $7.0 million, was expected to close by the end of the first quarter of 2021; the filing does not report its completion.
  • Controls and audit: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill and trademark valuations were identified as critical audit matters requiring significant estimates and judgment.

Most important facts for investors to verify

  1. Whether 2021 sales and margins recover in Connectivity and Magnetic Solutions, and whether recent Magnetic bookings translate into shipments.
  2. Whether component availability, pricing, and COVID-related operating constraints affect production, customer deliveries, or gross margins.
  3. Progress on the expected $4.4 million of incremental 2021 restructuring savings and completion and integration of the EOS acquisition.
  4. Debt covenant headroom and the availability of the revolver if earnings or cash flow weaken.
  5. Developments in the $28.5 million uncertain-tax-position liability, the indemnified Italian tax matter, and the unfunded SERP obligation.
  6. Whether reported backlog converts to revenue as estimated; orders may be delayed, accelerated, or canceled.