Bel Fuse Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Bel designs, manufactures and markets products that power, protect and connect electronic circuits. Its reportable product groups are Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions. Products serve networking, telecommunications, computing, military, commercial aerospace, transportation, e-Mobility and other markets.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $170.6 | $138.7 | $307.3 | $249.4 |
| Gross profit | $45.5 | $34.2 | $79.4 | $59.1 |
| Gross margin | 26.6% | 24.7% | 25.8% | 23.7% |
| Income from operations | $16.8 | $6.6 | $24.9 | $11.1 |
| Net earnings | $17.0 | $7.9 | $22.1 | $11.1 |
| EPS, Class A / Class B | $1.30 / $1.37 | $0.61 / $0.64 | $1.68 / $1.78 | $0.85 / $0.91 |
- Cash flow: First-half operating cash flow was $11.1 million, compared with a $1.9 million use in 2021. Capital expenditures were $3.5 million; dividends paid were $1.6 million. Cash increased $4.1 million to $65.8 million.
- Balance sheet and liquidity: At June 30, cash was $65.8 million, current assets $361.1 million and current liabilities $128.8 million; current ratio was 2.8. Long-term debt was $112.5 million, unchanged from year-end 2021. The $175 million revolving facility had $62.5 million of additional borrowing capacity under the leverage covenant. The company reported compliance with its debt covenants.
- Working capital: Inventories rose $21.2 million from year-end to $160.6 million; first-half cash flow reflected a $25.3 million inventory build. Accounts receivable was $98.8 million. Management cited higher order levels and work in progress built to support demand.
- Segment results: Q2 revenue increased in all three groups year over year: Connectivity $46.1 million, Power Solutions and Protection $71.0 million, and Magnetic Solutions $53.5 million. Q2 gross margins were 27.6%, 28.2% and 28.2%, respectively.
Material changes versus prior comparable periods
- Q2 sales grew about 23% year over year; first-half sales rose 23.2%. First-half net earnings approximately doubled.
- First-half gross margin improved to 25.8% from 23.7%. Management attributed improvement to pricing, sales volume, product mix and lower labor costs as a percentage of sales, partly offset by higher materials and overhead costs.
- Power Solutions and Protection had the largest first-half sales increase, up $30.8 million. Drivers included purchase-price-variance invoicing, the EOS acquisition, circuit protection and CUI sales, and e-Mobility demand. Magnetic Solutions revenue rose $18.4 million, supported by networking and distribution demand. Connectivity revenue rose $8.7 million, including a recovery in commercial aerospace, while its margin declined to 27.1% from 28.1% for the half, partly due to ramp-up costs and inefficiencies.
- First-half operating cash flow improved from a use of cash to a source of cash, although receivables and inventory absorbed substantial working capital.
Outlook, risks, contingencies and unusual items
- Outlook: No quantitative earnings or revenue guidance was provided. Management cited confidence in near- and long-term prospects, strategic initiatives, current backlog and focus on higher-margin revenue and operational efficiency. Backlog was $580.5 million at June 30, up $112.7 million, or 24%, from year-end 2021.
- Operating risks: Management highlighted component shortages and extended lead times, inflation in materials and wages, supply-chain disruption, unpredictable customer ordering, foreign-exchange movements, and COVID-19-related shutdown risk. Two China facilities closed for about one week in March 2022; they were operating at normal workforce levels by the filing date. The Russia-Ukraine conflict and global inflation were also identified as factors affecting results.
- Unusual earnings items: Q2 and first-half other expense included SERP investment losses of $1.5 million and $2.2 million, respectively; the comparable 2021 periods included gains. Income tax benefits were $2.7 million for Q2 and $1.2 million for the first half. The first-half effective tax benefit rate was 5.7%; management said tax rates vary with the geographic source of earnings and cited uncertain-tax-position reversals among the factors.
- Legal and tax matters: Bel Power Solutions is pursuing a patent infringement lawsuit against Monolithic Power Systems; the court denied the defendant’s dismissal and venue motions in May 2022. An Italian tax claim relating to a pre-acquisition period has an estimated $12.0 million liability, recorded among uncertain tax positions, with a corresponding indemnification asset from ABB. The filing says the company is fully indemnified for that matter.
- Subsequent event: On July 21, 2022, Bel sold one Jersey City building for $1.8 million and anticipated a $1.6 million gain in Q3; another property remained held for sale.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue, and whether demand remains strong across the three product groups.
- Whether pricing offsets persistent materials, labor and overhead inflation, particularly as product mix and commercial aerospace production ramp-up affect margins.
- Whether working-capital investment—especially the inventory build—supports deliveries without weakening operating cash generation.
- Debt covenant headroom and the availability of the reported $62.5 million in revolver capacity if operating results or liquidity deteriorate.
- Developments in China-related supply continuity, foreign exchange, the patent litigation and the Italian tax matter; also assess the timing and proceeds from the remaining held-for-sale property.