Bel Fuse Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; amounts below are in millions except per-share data and ratios.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $104.0 | $125.4 |
| Gross profit / margin | $25.1 / 24.2% | $30.7 / 24.5% |
| Operating income (loss) | $(3.1) | $3.4 |
| Net income (loss) | $(3.8) | $1.1 |
| Basic and diluted EPS, Class A / Class B | $(0.30) / $(0.31) | $0.08 / $0.09 |
| Operating cash flow | $8.1 | $(6.3) |
| Capital expenditures | $1.8 | $2.4 |
- Revenue fell 17.1% year over year. Sales declined in each product group: Connectivity 11.9%, Power Solutions and Protection 15.6%, and Magnetic Solutions 24.8%.
- Gross margin was 24.2%, versus 24.5%. Material costs increased to 43.6% of revenue from 41.8%; labor costs declined to 8.9% from 11.5%. Management says a manufacturing-cost classification change affected these comparisons and recommends viewing material and labor costs together.
- SG&A rose to $22.1 million from $19.2 million, including a $1.4 million decline in the cash surrender value of company-owned life insurance and $2.0 million of CUI expenses; lower ERP costs partly offset the increase. R&D declined to $6.1 million from $7.2 million.
- Operating cash flow improved to $8.1 million, primarily reflecting working-capital movements, including lower receivables. Cash decreased $3.9 million to $68.4 million, after debt repayments and other financing outflows.
Balance sheet, debt and liquidity
- At March 31, 2020, cash was $68.4 million, current assets $264.9 million, and current liabilities $77.0 million; the reported current ratio was 3.4, compared with 3.1 at year-end 2019.
- Debt principal was $136.8 million, including $104.8 million on the term loan and $32.0 million drawn under a $75 million revolving facility. Balance-sheet debt carrying value, net of deferred financing costs, was $135.1 million. The company voluntarily repaid $8.2 million of term debt in February and amended its credit agreement.
- The company was in covenant compliance at quarter-end. It reported $43.0 million of unused facility capacity, but only $12.5 million could be borrowed without violating the leverage covenant. Leverage was 4.46x against a 5.00x maximum; fixed-charge coverage was 1.03x against a 1.00x minimum.
- Management said liquidity and expected cash flows were sufficient for the next 12 months, while noting that further COVID-19 effects could reduce covenant headroom and borrowing availability.
Material changes and business context
- Bel designs and manufactures products that power, protect and connect electronic circuits, serving markets including military, aerospace, networking, telecommunications, computing, transportation and medical. Its reporting segments are Cinch Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions.
- China factory closures and supply-chain disruption early in the quarter deferred an estimated $14–$17 million of shipments to Q2. The quarter also included $2.2 million of Chinese government COVID-19 relief funding, partly offsetting disruption-related costs.
- The December 2019 CUI power business acquisition contributed $8.2 million of Q1 revenue and $0.9 million of estimated net earnings; management reported $0.865 million of operating income and more than $11 million in Q1 bookings. Purchase-price allocation remained subject to review.
- Backlog was $191.2 million at March 31, up $30.9 million, or 19%, from year-end. The consolidated book-to-bill ratio was 1.3. Management attributed stronger orders partly to channel inventory normalization and replenishment demand.
- Actions implemented in late 2019 and Q1 2020 were expected to produce $4.0 million in annualized savings. Q1 restructuring charges were $0.1 million.
Outlook, risks and unusual items
- Management anticipated Q2 revenue and financial results would improve versus Q1, but said visibility beyond Q2 was limited. It could not quantify the pandemic’s ultimate effect.
- After quarter-end, government mandates reduced Dominican Republic production to 35–50% of normal in March and Reynosa, Mexico production to 20% in April; Reynosa had recovered to 60% by the filing date. The company estimated a $2.4 million unfavorable revenue impact from these two facilities in April. It also cited lower productivity, higher air-freight costs and potential for further facility disruption.
- Management reported no significant COVID-related demand decline to date, but approximately 5% of revenue came from end markets affected by the pandemic, including commercial aerospace. Q1 declines also reflected weaker commercial aerospace and cloud demand, tariffs affecting a cloud customer, and China shutdowns.
- Debt covenants tighten over time: the leverage limit steps down from 5.00x to 4.75x in September 2020, 4.00x in December 2020, 3.25x in March 2021 and 3.00x thereafter; the minimum fixed-charge coverage ratio rises from 1.00x to 1.05x in June 2020 and ultimately 1.25x in March 2021. The small quarter-end cushion is a key risk if operating results weaken.
- The CARES Act generated a Q1 tax benefit associated with carrying back a 2019 tax loss. Uncertain tax-position liabilities totaled $29.1 million; $2.2 million was expected to be resolved through statute expirations during 2020. A $12.0 million Italian tax claim is recorded but is covered by an indemnification asset. A Slovakian tax examination was ongoing.
- No material impairment trigger was identified at quarter-end. The filing states other legal proceedings are not expected to have a material effect.
Key facts for investors to verify
- Whether deferred China shipments were recovered in Q2 and whether the backlog and 1.3 book-to-bill translated into recognized revenue and cash collection.
- Production recovery and costs at the Dominican Republic and Reynosa facilities, and any further pandemic-driven operating or demand impacts.
- Debt-covenant headroom against the scheduled tightening thresholds, including the practical availability of revolver borrowings.
- Whether CUI integration, bookings and expected cost savings support sustained profitability and margins.
- Resolution and cash impact of uncertain tax positions, the Slovakian examination and the indemnified Italian tax claim.