BEL FUSE INC annual report, FY2013

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Business context and reporting period

Bel Fuse Inc. designs and manufactures magnetics, power modules, circuit protection and interconnect products used in networking, telecommunications, computing, aerospace, military, transportation and other markets. This Form 10-K covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Amounts below are in U.S. dollars unless noted.

Bel reports three geographic segments: North America, Asia and Europe. In 2013, Asia generated 56% of sales, North America 33% and Europe 11%. The year included the acquisitions of TRP Connector (March) and Array Connector (August), following three acquisitions in 2012.

Financial performance and liquidity

  • Revenue: $349.2 million, up 21.8% from $286.6 million in 2012. The 2013 acquisitions contributed materially; excluding acquired-company revenue, sales declined $13.5 million year over year.
  • Profitability: Gross profit was $62.2 million, with gross margin of 17.8% versus 16.2% in 2012. Operating income was $15.0 million versus $1.7 million, and net earnings were $15.9 million versus $2.4 million. Net margin was 4.6% versus 0.8%. EPS was $1.32 for Class A and $1.41 for Class B, compared with $0.17 and $0.21, respectively.
  • Cash flow: Operating cash flow was $10.6 million, down from $11.6 million. Cash and cash equivalents fell $9.1 million to $62.1 million. Cash uses included $31.0 million for acquisitions, $6.9 million for capital expenditures, $3.1 million in dividends and $3.4 million for share repurchases.
  • Liquidity: Working capital was $137.3 million versus $144.5 million; the current ratio declined to 3.1 from 4.1. Accounts receivable rose to $63.8 million from $42.9 million, and inventory to $70.0 million from $54.9 million. DSO increased to 63 days from 53.
  • Debt: Bel had $12.0 million outstanding on its $30 million revolving facility, leaving $18.0 million available. The borrowing rate was 1.4% at year-end. The facility was amended and extended through October 14, 2016; Bel reported compliance with covenants at December 31, 2013.
  • Capital returns: 2013 dividends totaled $3.1 million; quarterly dividends were $0.06 per Class A share and $0.07 per Class B share. The company completed its $10 million Class B repurchase program during 2013.

Material changes versus the prior comparable period

  • Magnetics sales rose to $170.2 million, or 49% of revenue, from $100.5 million, or 35%, principally reflecting TRP. Modules declined to $56.0 million from $66.7 million, primarily because of lower orders from a North American customer. Interconnect sales were $111.7 million versus $109.2 million; circuit protection sales were $11.4 million versus $10.2 million.
  • TRP contributed $66.5 million in sales and $10.9 million in operating income in 2013. Array added $2.1 million in sales and recorded a $0.9 million operating loss. Acquisition contributions and periods included differ by business; the filing reports $68.6 million of revenue and $9.2 million of net earnings from the 2013 acquired companies.
  • North America operating results shifted to a $1.6 million loss from $1.3 million of income, reflecting lower module demand and Cinch transition inefficiencies. Asia reported $15.4 million of operating income versus a small loss in 2012, driven largely by TRP. Europe operating income was $1.3 million versus $0.4 million.
  • Restructuring charges fell to $1.4 million from $5.2 million. However, the McAllen facility transition caused $3.2 million of unanticipated costs in 2013, including overtime, scrap, premium material purchases and expedited freight.
  • Fourth-quarter 2013 sales were $91.0 million and net earnings were $7.4 million, compared with sales of $71.8 million and a net loss of $2.4 million in fourth-quarter 2012. The 2012 quarter included $3.1 million of restructuring charges.

Outlook, commentary, risks and unusual items

  • Management said it could not predict 2014 sales with certainty because customer requirements have limited visibility. It expected operating cash flow, existing capital and available credit to fund operations for at least the next 12 months, and anticipated no significant restructuring costs in 2014. Management also anticipated continuing quarterly dividends.
  • Backlog was approximately $87.7 million at February 28, 2014, versus $80.4 million a year earlier. Management expected substantially all of it to ship by year-end 2014, but warned that cancellations, demand changes and supply issues make backlog an uncertain sales indicator.
  • Customer concentration is significant: Hon Hai represented 19.2% of 2013 revenue and Flextronics 10.4%. Magnetics accounted for 49% of sales, increasing exposure to that product line. Other stated risks include pricing pressure, PRC labor and wage costs, material availability, foreign exchange, acquisition integration, and international operating conditions.
  • Bel paid SynQor $10.9 million in November 2013 after the Supreme Court declined review of the SynQor I case; it later received $2.1 million from a customer under an indemnification agreement and reimbursement of legal fees, and recovered $2.1 million of escrow. A related SynQor II damages case had been tried, with no decision reported; Bel did not expect material impact because of customer indemnification. A separate patent suit against Molex remained pending. Bel also has an 8% royalty obligation on certain products under a Halo license through August 10, 2015.
  • Goodwill and intangible-asset impairment tests found no impairment. Europe goodwill was only 14% above the reporting unit’s carrying value, making projected revenue and integration benefits important assumptions. The 2013 acquisition accounting remained preliminary. Management’s internal-control assessment excluded the acquired companies, representing 21% of assets and 20% of 2013 sales; the auditor’s opinion on controls likewise excluded them.
  • Approximately $109 million of foreign earnings was treated as permanently reinvested; the estimated U.S. federal tax liability on those earnings, net of foreign tax credits, was $26 million. Foreign cash was $38.1 million at year-end.

Important facts for investors to verify

  1. Separate reported growth from acquired revenue and assess whether legacy-business trends and acquisition profitability are sustainable.
  2. Track module demand, magnetics concentration, the two major customers, backlog conversion and changes in DSO and inventory.
  3. Review acquisition purchase-accounting adjustments, integration progress, and the sensitivity of Europe goodwill to revenue and cost assumptions.
  4. Confirm credit-facility covenant headroom, availability and terms, and the practical accessibility of foreign-held cash.
  5. Monitor the SynQor II outcome, the Molex litigation, Halo royalty costs and any other material legal or tax developments.