Bel Fuse Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results. Bel designs and manufactures products that power, protect, and connect electronic circuits. Results include the Power Solutions and Connectivity Solutions businesses acquired in 2014; comparative periods do not include those businesses for equivalent periods.
Financial performance
Amounts below are in USD millions, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $145.7 | $99.4 | $287.7 | $182.1 |
| Gross profit / margin | $28.6 / 19.6% | $17.9 / 18.1% | $55.4 / 19.2% | $32.0 / 17.6% |
| Operating income / margin | $7.5 / 5.1% | $3.7 / 3.7% | $16.5 / 5.7% | $6.6 / 3.6% |
| Net earnings | $6.1 | $3.1 | $11.4 | $5.6 |
| EPS, Class A / Class B | $0.49 / $0.52 | $0.25 / $0.27 | $0.91 / $0.97 | $0.45 / $0.49 |
| Operating cash flow | Not separately provided | Not separately provided | $23.7 | $12.7 |
- Sales increased 46% in Q2 and 58% in the first half year over year, substantially reflecting acquisitions. Acquired businesses contributed $58.4 million of Q2 and $117.2 million of first-half revenue. Excluding those contributions, revenue declined $5.0 million in Q2 and $4.4 million in the first half.
- Gross margin improved year over year. Management cited product mix and lower material costs in legacy Bel; acquired Power Solutions has lower average margins than legacy Bel, while Connectivity Solutions has higher average margins.
- Interest expense rose to $2.0 million in Q2 and $4.2 million in the first half, versus $0.2 million and $0.3 million, respectively, in 2014, largely reflecting acquisition financing. Q2 income taxes were a $0.6 million benefit versus a $0.5 million provision; the first-half tax provision was $1.4 million versus $0.9 million.
- Six-month operating cash flow was $23.7 million. Investing cash use was $5.7 million, mainly capital expenditure; financing cash use was $28.4 million, including debt repayments and dividends. Cash declined $5.7 million to $71.4 million.
Balance sheet, debt, and liquidity
- At June 30, 2015, cash was $71.4 million, current assets $305.5 million, current liabilities $128.7 million, and total assets $619.8 million. The current ratio was 2.4, down from 2.6 at year-end 2014.
- Debt outstanding was $206.3 million, down from $232.6 million at December 31, 2014. The weighted-average interest rate was 2.94%. The credit facility had $39.0 million of unused capacity, though management said $35.0 million was borrowable without breaching the leverage covenant. Bel reported compliance with debt covenants.
- Foreign subsidiaries held $60.7 million, or 85%, of cash. Management said it intended to permanently reinvest foreign earnings and had no current plans to repatriate them; repatriation for U.S. use could incur U.S. taxes.
Changes, outlook, and risks
- Acquisitions drove reported growth, while legacy-business revenue contracted. North America and Europe external sales rose substantially with the acquisitions; Asia external sales were broadly flat year over year in the first half.
- Bel sold the acquired Network Power Systems product line in January for $9.0 million cash, with an additional $1.0 million held in escrow subject to sales targets. The transaction generated $9.0 million of deferred revenue; Bel recognized $1.1 million in Q2 and $2.1 million in the first half. Net proceeds were used to repay borrowings.
- Management expected restructuring to continue into the second half of 2015, with approximately $1.0 million of additional costs and projected annualized savings of $3 million to $4 million beginning in Q4 2015. It identified top-line sales growth and further efficiencies as priorities. No specific revenue or earnings guidance was provided.
- The Connectivity Solutions acquisition purchase-price valuation remained provisional; the filing cautioned that adjustments, including to depreciation and amortization, could be material. Management stated that the Power Solutions valuation was finalized in Q2.
- Uncertain tax-position liabilities were $41.4 million. These include an approximately $12.0 million Italian tax claim related to the acquired Power Solutions business; Bel reported a corresponding indemnification asset under its agreement with ABB. The matter remains under appeal, and related interest and penalties continue to accrue.
- Other matters include a pending appeal in the SynQor patent litigation, ongoing patent litigation with Molex, and an asbestos lawsuit involving a subsidiary. Management did not expect the legal proceedings, individually or in aggregate, to materially adversely affect results or financial position. Foreign-exchange movements and interest-rate changes remain market risks; the filing reported no material change in market risk during the half year.
Most important facts for investors to verify
- How much of reported growth and margin improvement is sustainable after separating acquisition effects from legacy performance and product mix.
- Whether acquired businesses improve profitability and cash generation, particularly given Power Solutions’ Q2 operating loss contribution and its lower-margin profile.
- Debt reduction, covenant headroom, borrowing capacity, and the effect of interest expense on earnings and liquidity.
- Resolution and potential financial consequences of the $41.4 million uncertain-tax-position balance, including the Italian claim and related indemnification.
- Final purchase accounting for Connectivity Solutions, expected restructuring costs and savings, and progress in achieving management’s sales-growth priorities.