Bel Fuse Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving markets including military, aerospace, networking, telecommunications, computing and transportation. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $121.2 | $127.4 | $225.1 | $252.8 |
| Gross profit / margin | $31.8 / 26.2% | $26.7 / 21.0% | $56.9 / 25.3% | $57.5 / 22.7% |
| Operating income / margin | $7.5 / 6.2% | $4.5 / 3.5% | $4.4 / 2.0% | $7.9 / 3.1% |
| Net earnings | $5.6 | $3.0 | $1.8 | $4.1 |
| EPS, Class A / Class B | $0.43 / $0.46 | $0.23 / $0.24 | $0.13 / $0.15 | $0.31 / $0.34 |
- Q2 revenue fell 4.9% year over year, while first-half revenue declined 10.9%. Q2 net earnings improved, but first-half net earnings decreased.
- Six-month operating cash flow was $16.8, up from $7.8 in the prior-year period. Capital expenditures were $3.0; cash dividends paid were $1.6; debt repayments were $8.2. Cash increased $3.0 to $75.3.
- At June 30, current assets were $285.4 and current liabilities $88.2; the reported current ratio was 3.2 to 1. Total debt carrying value was $135.2, while principal debt was $136.8. Long-term debt matures December 2022.
- Q2 gross margin increased to 26.2% from 21.0%, reflecting cost reductions, product mix and acquired CUI sales. First-half gross profit was slightly lower despite higher margin.
Drivers and material changes
- Management attributed first-half sales declines to lower demand, especially from commercial aerospace and cloud customers, COVID-related factory interruptions and reduced production efficiency. Management estimated $14–$17 of shipments scheduled for Q1 were deferred to Q2.
- Q2 revenue by segment: Cinch Connectivity Solutions $38.9, Power Solutions and Protection $45.1, and Magnetic Solutions $37.2. For the first half, revenue declined across all three groups: 10.2% for Connectivity, 6.5% for Power and Protection, and 16.6% for Magnetic.
- CUI, acquired in December 2019, contributed $10.6 of Q2 revenue and estimated net earnings of $2.3; first-half contributions were $18.9 revenue and estimated net earnings of $3.1. CUI’s reported gross margins were 39.3% for Q2 and 38.2% for the first half.
- Backlog was $179.6 at June 30, up 12% from year-end. Magnetic backlog rose 63%, Power and Protection rose 15%, and Connectivity backlog fell 14%.
- COVID-19-related temporary closures and disruption affected facilities and supply chains, particularly in China, Mexico and the Dominican Republic. All manufacturing sites were open by the filing date, but certain North American and European sites had reduced workforce and estimated productivity of 60%–85% of normal. China government relief funding of $2.2 partially offset first-quarter costs.
- Restructuring and cost controls continued. The company expects $5.7 of annualized savings from 2019 actions, of which $2.9 had been realized in the first half of 2020. Closure of the Uster, Switzerland Power R&D facility is expected to generate $3.0 in annualized savings beginning in Q4 2020. These are estimates, not guaranteed results.
Liquidity, outlook and risks
- Management said current liquidity and expected operating cash flows should fund operations and obligations over the next 12 months. Cash was $75.3 at June 30 and $78.5 at July 31. The company reported $43.0 of unused credit availability and separately stated it could borrow an additional $44.8 without violating its debt covenants.
- Bel was in compliance with debt covenants at June 30. The leverage ratio was 3.45x against a 5.00x maximum; fixed-charge coverage was 1.50x against a 1.05x minimum. Covenant thresholds become more restrictive from September 2020 through June 2021.
- Management gave no quantified revenue or earnings forecast, citing continued uncertainty about COVID-19 and its effects on Bel, customers and suppliers. It reported limited visibility entering the second half and said approximately 5% of revenue came from end markets affected by COVID-19, including commercial aerospace.
- Risks include renewed facility disruptions, supply-chain delays, reduced demand, lower productivity, higher air-freight costs, foreign-exchange and interest-rate exposure, and the possibility that weaker results could reduce covenant headroom or borrowing availability. Management had additional cash-conservation plans for a material deterioration in liquidity or results.
- The CARES Act tax changes produced a first-half tax benefit; the six-month effective tax rate was negative 24.6%, compared with 10.1% in 2019. Uncertain tax-position liabilities totaled $28.4 at June 30.
- A $12.0 Italian tax claim related to a legacy acquisition remains before the Italian Supreme Court. Bel states it is fully indemnified by ABB and records a corresponding indemnification asset. Management said it was unaware of material impairment triggers at June 30, while noting future adverse assumptions could lead to impairment.
- Management reported disclosure controls were effective and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue, particularly as COVID-19 disruptions and customer demand evolve.
- Whether Q2 margin improvement and announced restructuring savings are sustainable, and how CUI integration affects results and cash generation.
- Future covenant headroom as required leverage and fixed-charge thresholds tighten, including the actual borrowing capacity available under the credit agreement.
- The status and recoverability of the Italian tax indemnification asset, other uncertain tax positions, and the outcome of the Slovakia tax examination.
- The impact of the deferred Q1 shipments, lower factory efficiency, commercial aerospace weakness and cloud-customer demand on second-half performance.