Bel Fuse Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in U.S. dollars. Unless stated otherwise, figures are in millions.
Business context
Bel designs and sells electronic components, including interconnect, magnetic, module and circuit-protection products. It reports North America, Asia and Europe segments. The period includes results from three 2012 acquisitions: GigaCom, Fibreco and Powerbox Italy.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $76.1 | $75.9 | $214.8 | $226.5 |
| Gross margin | 16.6% | 15.9% | 16.4% | 17.7% |
| Operating income | $1.0 | $1.9 | $4.8 | $6.3 |
| Net earnings | $2.6 | $1.0 | $4.9 | $3.7 |
| Net margin | 3.4% | 1.3% | 2.3% | 1.6% |
| Basic and diluted EPS, Class A / Class B | $0.20 / $0.22 | $0.08 / $0.09 | $0.38 / $0.42 | $0.29 / $0.32 |
- Q3 sales were nearly flat year over year, while nine-month sales fell 5.1%. Nine-month module revenue declined $18.9 million, mainly due to changed ordering patterns from two major customers. Magnetic-product revenue rose, including stronger MagJack sales; interconnect revenue was roughly flat.
- Q3 operating income declined despite slightly higher sales, reflecting $1.8 million of restructuring charges and a $0.3 million investment impairment. Net earnings benefited from a $1.8 million income-tax benefit. The nine-month tax benefit was $0.7 million; net reversals of uncertain-tax-position liabilities were a key factor.
- Labor costs rose as a share of sales, particularly in Asia, while lower material costs as a share of sales partly offset that pressure. Nine-month gross margin contracted 1.3 percentage points.
- Operating cash flow was $7.8 million for the first nine months, down from $21.7 million. Cash and cash equivalents declined $18.7 million to $69.5 million. Investing used $22.5 million, including $19.2 million net cash for acquisitions; financing used $4.1 million, including dividends and $1.7 million of share repurchases.
- At September 30, current assets were $199.2 million and current liabilities $49.6 million; the current ratio was 4.0, versus 4.9 at year-end 2011. The company had $69.5 million cash and $5.2 million marketable securities. Total liabilities were $61.8 million.
- No credit-facility borrowings were outstanding. However, Bel was out of compliance with the tangible-net-worth covenant on its $30 million credit line; it would need a lender waiver to borrow. The line expires June 30, 2014.
Material changes and notable items
- Bel acquired GigaCom in March, Fibreco in July and Powerbox Italy in September. Combined consideration was preliminarily valued at $22.2 million, including $18.0 million goodwill. Purchase-price allocations remained incomplete. The acquired businesses contributed $1.0 million revenue and an estimated $0.1 million net earnings through September 30.
- Bel recorded $2.2 million of restructuring charges year to date. Its program includes closing the Vinita, Oklahoma facility and moving operations to McAllen, Texas, plus Asian cost reductions. Management estimated total program costs of $5.1 million and annualized savings of $5.5 million once fully implemented; $2.9 million of costs remained expected. Savings and timing are uncertain.
- The board authorized up to $10 million in Class B share repurchases. Bel repurchased and retired 89,991 shares for $1.7 million during Q3.
- The company recorded $0.8 million of impairment charges on its Pulse Electronics investment year to date, including $0.3 million in Q3.
Outlook, risks and contingencies
- Management said operating cash flow, existing capital and the credit line should fund operations for at least 12 months, but the covenant breach limits access to the line without a waiver. A substantial portion of cash is held by foreign subsidiaries and is intended to remain abroad.
- Management was considering another acquisition with annual sales exceeding $60 million. Further acquisition spending, integration challenges and potential goodwill or intangible-asset impairment are risks.
- Management cited rising PRC labor costs, extended lead times for some electrical components, elevated commodity prices, variable customer demand and product-mix changes as factors affecting margins and results.
- Bel is appealing the SynQor verdict; appellate argument occurred October 2, 2012, with a ruling expected by year-end. The company had stopped making the products at issue and reported no sales of them in the first nine months. Bel also brought a patent-infringement suit against Molex and was named in an asbestos action. Accrued litigation reserves were $11.5 million.
- Hurricane Sandy damaged and disrupted the Jersey City headquarters and Inwood, New York operations in late October. The full impact was not yet estimable; the company said its deductible could be up to $0.5 million before any insurance recovery.
- Management reported disclosure controls were effective and no significant quarterly changes to internal controls over financial reporting.
Important facts for investors to verify
- Whether Bel obtained a lender waiver or otherwise restored compliance with the tangible-net-worth covenant, and the resulting availability of the $30 million credit line.
- Actual restructuring costs, completion timing and realized savings versus the $5.5 million annual target.
- Acquisition integration, finalized purchase accounting and goodwill allocation, including performance relative to management’s expectations.
- The outcome of the SynQor appeal and developments in other litigation, including potential exposure relative to the $11.5 million reserve.
- The eventual operational and financial effects of Hurricane Sandy, net of insurance recoveries.
- Whether module demand, labor and material costs, and cash generation improve or continue to pressure margins and liquidity.