Bel Fuse Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving markets including networking, telecommunications, computing, military and aerospace. It reports North America, Asia and Europe segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $126.4 million | $128.8 million | $371.7 million | $381.6 million |
| Gross profit | $27.6 million | $26.6 million | $79.9 million | $75.3 million |
| Gross margin | 21.9% | 20.6% | 21.5% | 19.7% |
| Operating income (loss) | $6.5 million | $9.3 million | $15.6 million | $(84.1) million |
| Net income (loss) | $5.0 million | $9.7 million | $8.9 million | $(68.2) million |
| EPS, Class A / Class B | $0.40 / $0.42 | $0.78 / $0.82 | $0.69 / $0.75 | $(5.52) / $(5.78) |
| Operating cash flow | Not separately reported | Not separately reported | $14.2 million | $26.8 million |
Quarterly operating margin was approximately 5.2%, versus 7.2% a year earlier. For the nine-month comparison, 2016 results included a $106.0 million non-cash goodwill and intangible-asset impairment; excluding that charge, 2016 operating income was approximately $21.8 million, above 2017’s $15.6 million.
Q3 sales fell 1.9% year over year and nine-month sales fell 2.6%. In Q3, magnetic solutions sales rose to $44.0 million from $41.4 million and connectivity sales rose to $42.8 million from $41.7 million; power solutions and protection declined to $39.5 million from $45.7 million. North America external-customer sales declined, while Europe grew; Asia grew for the nine-month period but declined in Q3.
Cash, debt and liquidity
- Cash and equivalents were $62.1 million at September 30, 2017, down $11.3 million from year-end 2016. Operating cash flow was $14.2 million; capital expenditures were $3.8 million.
- Debt had a $121.0 million carrying value, including $15.6 million current and $105.5 million long-term. Borrowings comprised a $118.6 million term loan and $4.0 million revolver draw. The weighted-average interest rate was 3.25%.
- Cash less debt carrying value was approximately $(58.9) million. The current ratio was 2.7 to 1. The $50 million revolving facility had $46.0 million unused; the company said it could borrow $29.6 million without violating its leverage covenant.
- Bel reported compliance with its debt covenants. It paid $2.3 million in dividends and repaid $25.2 million of long-term debt during the nine months.
- Foreign subsidiaries held $54.6 million, or 88% of total cash. Management said it intended to permanently reinvest foreign earnings and had no current plans to repatriate them.
Changes, outlook and risks
- Improved gross margin reflected lower material costs as power-product sales declined; labor costs as a percentage of sales rose with greater magnetic-product sales. Quarterly SG&A increased $1.5 million, and nine-month SG&A increased $8.9 million, including ERP consulting, foreign-exchange losses and the absence of prior-year VAT expense reversals.
- Management cited a positive book-to-bill ratio for power and connectivity products, strong connectivity demand in military-aerospace and distribution, and power-product design wins in e-Mobility, industrial and datacenter applications. The new projects were not yet in full production. No quantified revenue or earnings guidance was provided.
- Headcount reductions implemented by the end of Q3 are expected to produce approximately $1.0 million of annualized savings beginning in Q1 2018. Bel expects total ERP implementation costs of $4 million to $5 million, including about $0.5 million per quarter through 2018 and lower costs in 2019; it anticipates approximately $2 million in annual savings after completion.
- Management said current liquidity and expected operating cash flows should fund operations for the next 12 months. Risks discussed include unpredictable customer demand, product mix and input costs, foreign-exchange movements, labor availability and cost in China, and dependence on execution of new product wins. Days sales outstanding rose to 60 from 54 at year-end, partly due to extended credit terms for a large customer; inventory increased $3.3 million.
- Uncertain tax-position liabilities totaled approximately $30.0 million, including an estimated $12.0 million Italian tax matter related to the acquired Power Solutions business; Bel says it is fully indemnified for that matter and records a corresponding asset. A separate German patent-infringement case is stayed pending resolution of a patent-nullity lawsuit; the company said it could not yet assess potential damages.
- Other unusual items: the 2016 impairment materially distorts year-over-year nine-month earnings; Q3 2016 included a $2.1 million gain on property disposal, while Q3 2017 included a $0.5 million gain tied to divestiture of a 49% joint-venture interest and extinguishment of a payable.
Investor verification priorities
- Track whether power-product design wins and positive book-to-bill convert into sustained sales, particularly as the NPS manufacturing-services revenue winds down.
- Monitor cash conversion, receivables, DSO and inventory, along with access to the revolver under the leverage covenant.
- Verify delivery of the projected restructuring and ERP savings against the remaining implementation costs and schedule.
- Follow the Italian tax indemnification and German patent litigation, and assess the implications of cash held overseas and potential repatriation taxes.