Bel Fuse Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Bel designs and manufactures products that power, protect and connect electronic circuits, reporting through North America, Asia and Europe segments.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $124.5 | $146.5 | $377.3 | $405.5 |
| Gross profit / gross margin | $22.5 / 18.0% | $29.2 / 19.9% | $65.9 / 17.5% | $79.4 / 19.6% |
| Operating income (loss) | $(4.6) | $10.5 | $3.1 | $21.6 |
| Net income (loss) | $(6.5) | $11.4 | $(2.4) | $16.7 |
| EPS, Class A / Class B | $(0.51) / $(0.53) | $0.89 / $0.94 | $(0.20) / $(0.19) | $1.31 / $1.40 |
- Q3 sales declined 15.0% year over year; nine-month sales declined 6.9%. Sales fell in all three product groups and geographic segments.
- Q3 operating results included an $8.9 million non-cash goodwill impairment charge. Nine-month results also included a $4.3 million pretax gain on sale of the Inwood, New York property. Restructuring charges were $0.3 million in Q3 and $1.7 million for the nine months.
- Operating cash flow was $18.9 million for the first nine months, compared with $4.2 million a year earlier. Capital expenditures were $8.2 million; cash increased $10.9 million to $64.8 million.
- At September 30, current assets were $278.1 million and current liabilities $86.5 million; the reported current ratio was 3.2 to 1. Total debt carrying value was approximately $112.3 million, including $4.7 million current and $107.6 million long-term. The $75 million revolver had no borrowings outstanding, with $40.6 million available without breaching the leverage covenant. The company reported compliance with debt covenants.
- Stockholders’ equity was $170.6 million. Cash held by foreign subsidiaries was $25.2 million, down from $46.3 million at year-end; the company repatriated $29.3 million during the nine-month period.
Material changes and management commentary
- Management attributed lower demand mainly to customers and distributors reducing inventories accumulated in 2018 ahead of product launches and tariffs. Backlog was $143.3 million, down 16% from December 31, 2018. Connectivity backlog rose 9%, while Power Solutions and Protection fell 26% and Magnetic Solutions fell 33%.
- Material costs rose to 44.1% of sales for the first nine months, from 42.0% a year earlier, as higher-cost components purchased during 2018 continued to flow through production. Labor costs declined to 10.4% of sales from 11.5%, helped by currency movements.
- Management expected the remainder of 2019 to remain challenging for sales and margins. Cost-saving actions implemented in the first nine months were expected to yield $4.6 million in annualized savings; additional Asia restructuring was expected to add $1.1 million of annualized savings beginning in Q1 2020. These are forward-looking estimates, not guarantees.
- The company transitioned manufacturing and warehousing from Inwood to existing facilities in Pennsylvania and the Dominican Republic. It also continued a global ERP implementation, estimated at $7.0 million total cost, with $6.8 million incurred to date; phase one was completed and was expected to produce approximately $1.3 million in annualized savings.
Outlook, risks and contingencies
- On November 11, 2019, Bel agreed to acquire most of CUI Global’s power supply products business for $32.0 million, subject to working-capital adjustments and customary closing conditions. Closing was expected in Q4 2019, funded with cash and potentially revolver borrowings. CUI Power had approximately $37.0 million in trailing-twelve-month sales through September 30, 2019.
- Key risks include uncertain customer ordering patterns, inventory digestion, lower volume and margin pressure, component availability and elevated material costs, foreign-currency exposure, and interest-rate exposure on variable-rate debt. The filing cautions that interim results are not necessarily indicative of full-year results.
- Bel was involved in an Italian tax dispute related to the Power Solutions acquisition. The estimated $12.0 million liability was recorded among uncertain tax positions and was fully indemnified under the acquisition agreement; a corresponding indemnification asset was recorded. The Supreme Court had not yet ruled. Management said other legal matters were not expected to have a material adverse effect.
- Liabilities for uncertain tax positions totaled $28.6 million at September 30, 2019. The company was under examination in Slovakia for tax year 2014; approximately $2.1 million of uncertain-tax-position liabilities were expected to be resolved during 2019 through statute-of-limitations expirations.
Important facts for investors to verify
- Whether customer and distributor inventory reductions reverse, and how backlog and orders develop across product groups.
- Whether gross margins recover as higher-cost component inventories work through production, and whether announced cost savings are achieved.
- The assumptions and sensitivity behind the North America goodwill impairment; the remaining $10.8 million of goodwill relates to Europe.
- Completion, financing and integration of the CUI Power acquisition, including its actual results and working-capital needs.
- Debt covenant headroom, cash availability and potential tax costs if additional overseas cash is repatriated.
- Resolution of the Italian tax case and other uncertain tax positions, including the Slovakia examination.