Bel Fuse Inc. — Q1 2016 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2016. Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving networking, telecom, computing, aerospace, transportation and other markets. It reports North America, Asia and Europe segments. Unless noted, dollar amounts below are in millions.
Financial results and liquidity
- Revenue: Net sales were $121.2, down 14.7% from $142.0 in Q1 2015. Sales declined across all three geographic segments. By product, magnetic solutions fell to $35.5 from $40.9; power solutions and protection to $42.2 from $55.5; connectivity solutions to $43.4 from $45.6.
- Profit and margins: Gross profit was $23.1 versus $26.8; gross margin was 19.0% versus 18.9%. Operating loss was $103.4, including a $108.6 non-cash impairment charge, compared with operating income of $9.0. Net loss was $100.7 versus net income of $5.3. Class A and Class B diluted loss per share was $8.15 and $8.55, respectively, versus earnings per share of $0.43 and $0.45.
- Cash flow: Operating cash flow was $8.9, down from $16.2. Capital expenditures were $1.6. Financing outflows were $23.3, including $21.6 of long-term debt repayments and $0.8 of dividends. Cash decreased $16.0 to $69.0.
- Balance sheet and liquidity: Current assets were $259.0 and current liabilities $99.6; the current ratio was 2.6 to 1, versus 2.3 to 1 at year-end. Cash and cash equivalents were $69.0, including $59.0 held by foreign subsidiaries. Inventory was $100.0, broadly flat from year-end.
- Debt: Term-loan borrowings were $165.6 gross, with no revolver borrowings and $50.0 of unused revolver availability. The balance-sheet debt carrying value was about $161.9 after deferred financing costs. The weighted-average interest rate was 2.75%. The company reported covenant compliance; borrowing capacity without violating its leverage covenant was $36.7.
- Other metrics: R&D included in cost of sales was $6.7 versus $7.0. The company paid $0.06 per Class A share and $0.07 per Class B share in dividends, unchanged year over year.
Material changes and unusual items
- Lower sales reflected broad market softness and reduced demand across product lines, including lower Power Solutions sales following prior quality issues and lost design cycles. Management also cited weaker DC/DC, ICM/TRP, transportation and military demand.
- The $108.6 impairment comprised $104.3 of goodwill and $4.3 of trademarks. It followed weaker business performance and reduced projected cash flows; all three reporting units had goodwill impairment. Remaining goodwill was $17.5, down from $121.6 at December 31, 2015. The impairment was preliminary, non-cash, and management expected to finalize its analysis in Q2 2016.
- Excluding the impairment, Q1 operating income was $1.8 in North America, $2.7 in Asia and $0.6 in Europe. The filing cites lower volume in North America, lower sales of low-margin power products in Asia, and nonrecurring foreign-exchange gains in Europe in the prior-year period.
- The income tax benefit was $4.9 versus tax expense of $2.0; the effective tax rate was negative 4.6% versus 26.8%, affected by the impairment and settlement of uncertain tax positions.
- In March 2016, Bel amended its credit agreement, including changes to excess-cash-flow prepayment timing, prepayment application and the maximum leverage ratio through September 2017. It paid $0.7 in financing costs and recorded $0.5 of accelerated financing-cost amortization as interest expense.
Outlook, risks and contingencies
- Management reported continued market weakness but a stable backlog over the prior quarter. It cited new products and recent design wins at larger tier-one customers, expecting stronger Power Solutions sales in the second half of 2016 as design cycles progress. No quantified revenue or earnings guidance was provided.
- Restructuring efforts are expected to continue through 2016, with management anticipating cost savings from facility consolidations and other streamlining actions. Results remain exposed to demand and product mix, labor and material costs, foreign exchange, tax rates, and the timing of customer design cycles. Management cautioned that quarterly results may fluctuate and Q1 is not necessarily indicative of full-year results.
- Uncertain tax-position liabilities were $40.4 at March 31, 2016; approximately $5.1 was expected to be resolved during 2016. A tax matter related to the acquired Power Solutions business carries an estimated $12.0 liability, which Bel says is fully indemnified by ABB with a corresponding indemnification asset. A German patent-infringement lawsuit was filed in January 2016; the company said it lacked sufficient information to assess infringement or potential damages.
- Management stated that current liquidity and expected operating cash flows should fund operations and obligations for the next 12 months. A substantial portion of cash is held abroad, and repatriation for U.S. use could result in U.S. taxes. The company reported disclosure controls were effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the preliminary $108.6 impairment estimate was adjusted when the Q2 2016 analysis was completed, and how it affected goodwill and intangible-asset balances.
- Whether sales, backlog and Power Solutions design wins developed as management expected, particularly in the second half of 2016.
- Debt covenant headroom, cash-flow performance, and the terms and implications of the March 2016 credit amendment.
- Resolution of uncertain tax positions, including the Power Solutions-related exposures, and the outcome or potential exposure from the Setec patent litigation.
- The sustainability of margins and restructuring savings amid lower sales, shifting product mix and foreign-exchange movements.