Bel Fuse Inc. — Q3 2020 Form 10-Q Summary
Business context and period. Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving markets including military, aerospace, networking, telecommunications, computing and transportation. This unaudited filing covers the three and nine months ended September 30, 2020; comparisons are with the same 2019 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Q3 revenue was $124.5 million, essentially flat year over year. Nine-month revenue was $349.6 million, down 7.3% from $377.3 million.
- Profitability: Q3 gross profit was $33.5 million and gross margin was 26.9%, versus $28.6 million and 23.0%. Operating income was $8.8 million versus an operating loss of $5.2 million; net earnings were $7.5 million versus a net loss of $6.5 million. Nine-month gross profit was $90.4 million, with a 25.9% margin versus 22.8%; operating income was $13.2 million versus $2.7 million, and net earnings were $9.2 million versus a net loss of $2.4 million.
- Earnings per share: Q3 basic and diluted EPS was $0.57 for Class A and $0.61 for Class B, compared with losses of $0.51 and $0.53. Nine-month EPS was $0.70 and $0.76, respectively, compared with losses of $0.20 and $0.19.
- Segments: Q3 revenue was $38.5 million for Cinch Connectivity Solutions, $47.8 million for Power Solutions and Protection, and $38.2 million for Magnetic Solutions. Their gross margins were 29.1%, 24.2%, and 28.3%, respectively. Power Solutions and Protection benefited from the CUI acquisition and restructuring; connectivity and magnetic sales were lower.
- Cash flow: Nine-month operating cash flow was $34.8 million, up from $18.9 million. Capital expenditures were $4.5 million. Cash increased by $8.8 million to $81.1 million after $2.4 million of dividends and debt repayments, including $8.2 million of term-loan repayments and $10.0 million on the revolver.
- Liquidity and debt: Current assets were $284.7 million and current liabilities $89.7 million; the current ratio was 3.2:1. Debt’s carrying amount was $125.4 million, versus $143.7 million at year-end 2019; principal debt was $126.8 million. The company reported $53.0 million of revolver availability at September 30 and covenant compliance. It made an additional $10.0 million revolver payment in October.
Material changes and management commentary
- Nine-month revenue fell $27.6 million year over year despite $29.8 million of CUI sales. Excluding CUI, sales were down $57.4 million, primarily reflecting weaker commercial aerospace and cloud demand, COVID-related disruptions, and lower factory efficiency. Q3 revenue was nearly unchanged.
- COVID-related facility closures and supply-chain disruption shifted an estimated $14–$17 million of shipments from Q1 into Q2. All manufacturing sites were operating by the filing date, although some North American and European sites had reduced productivity. Bel received $4.1 million of Chinese government relief funding during the first nine months.
- Backlog was $138.9 million at September 30, down $21.4 million, or 13%, from year-end 2019. Power Solutions and Protection backlog increased 4%; Magnetic Solutions backlog declined 13%, and Connectivity Solutions declined 29%.
- Management cited restructuring, product mix, lower material costs and favorable currency effects as contributors to improved margins. Restructuring and other savings were expected to continue; the company estimated $1.1 million of savings in Q4 2020 and $3.0 million in 2021 from specified actions.
- Management expected Q4 sales to be similar to Q4 2019 and gross-margin comparisons to improve, citing cost reductions and favorable product mix. It reported very limited visibility into 2021. No specific numerical Q4 guidance was provided.
Risks, contingencies and unusual items
- COVID-19 remains an uncertain risk to manufacturing, productivity, supply chains and end-market demand. About 5% of revenue was associated with end markets affected by COVID-19, including commercial aerospace. Management said the eventual financial impact could not be quantified.
- Debt covenants become more restrictive over time. The company reported a 2.99x leverage ratio against a 4.75x maximum and a 1.96x fixed-charge coverage ratio against a 1.10x minimum at September 30; subsequent covenant thresholds step down for leverage and step up for fixed-charge coverage.
- Uncertain tax position liabilities totaled $27.7 million at September 30. Bel was also under examination in Slovakia for 2014 and had accrued tax based on preliminary findings. A separate Italian tax claim of approximately $12.0 million is recorded, but Bel stated it is fully indemnified by ABB.
- The company recognized tax benefits related to CARES Act provisions and final GILTI high-tax regulations. It reported no interim impairment-triggering events through September 30, while noting future impairment could result from unfavorable changes in cash-flow or market assumptions.
- The CUI acquisition purchase-price allocation remained under review. CUI contributed $10.9 million of Q3 revenue and estimated net earnings of $1.4 million; its nine-month contributions were $29.8 million and $4.6 million.
Most important facts for investors to verify
- Whether demand, backlog and production efficiency recover, especially in commercial aerospace, cloud and data communications markets.
- Whether margin gains and announced restructuring savings are sustained, and how much is attributable to CUI, mix, foreign exchange, subsidies or temporary cost actions.
- Debt covenant headroom as thresholds tighten, including the effect of any further operating weakness and the October revolver repayment.
- Resolution and potential cash or earnings effects of uncertain tax positions, the Slovakia examination, and the indemnified Italian tax claim.
- The final CUI purchase-price allocation and whether management’s Q4 outlook is achieved; the filing provides limited visibility beyond Q4.