Bel Fuse Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context and financial performance
Bel designs, manufactures and markets products that power, protect and connect electronic circuits, serving military, aerospace, networking, telecommunications, computing, transportation, medical and other markets. Its reportable product groups are Cinch Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $138.7 | $121.2 | $249.4 | $225.1 |
| Gross profit / margin | $34.2 / 24.7% | $31.3 / 25.8% | $59.1 / 23.7% | $57.0 / 25.3% |
| Operating income | $6.6 | $6.1 | $11.1 | $4.9 |
| Net earnings | $7.9 | $5.6 | $11.1 | $1.8 |
| EPS, Class A / Class B | $0.61 / $0.64 | $0.43 / $0.46 | $0.85 / $0.91 | $0.13 / $0.15 |
| Operating cash flow | Not separately presented | Not separately presented | $(1.9) | $16.8 |
- Q2 revenue grew 14.5% year over year; first-half revenue grew 10.8%. First-half growth included $8.1 million from the 2021 acquisitions.
- First-half gross margin declined 1.6 percentage points. Material costs rose to 46.0% of revenue from 43.5%, amid higher power-product mix and supply constraints; labor costs fell to 9.4% of revenue from 9.7%.
- First-half operating income included a $6.2 million gain on sale of property. Excluding that item, operating income was approximately $4.9 million, compared with $4.9 million in the prior-year period.
- Q2 segment revenue: Cinch $43.0 million, Power Solutions and Protection $55.4 million, and Magnetic Solutions $40.3 million. Power revenue growth was strongest; Magnetic gross margin weakened year over year, while Power margin improved.
Financial position, liquidity and cash flow
- At June 30, cash was $66.4 million, down from $84.9 million at year-end 2020. Current assets were $299.4 million and current liabilities $105.1 million; the current ratio was 2.8, versus 3.2 at year-end.
- Total debt carrying value was $112.9 million ($8.3 million current and $104.7 million long-term), compared with $115.6 million at December 31, 2020. The credit agreement matures December 11, 2022; the weighted-average rate was 1.88% and borrowings are variable-rate.
- Cash used in first-half operations was $1.9 million, with receivables and inventory increases of $12.6 million and $10.4 million, respectively, among working-capital uses. Investing used $12.5 million, including $16.8 million net cash for acquisitions; financing used $4.6 million. Property-sale proceeds were $6.8 million.
- Bel reported covenant compliance. Of $63.0 million of unused revolving capacity, it said it could borrow approximately $28.8 million without violating its leverage covenant. The filing states management believes liquidity and operating cash flows should fund operations over the next 12 months.
Material changes, outlook and risks
- Bel acquired rms Connectors in January and EOS Power in March for combined consideration of $20.7 million. Together they contributed $8.1 million of revenue and estimated net earnings of $1.4 million through June 30. Purchase-price allocations remained preliminary.
- Backlog reached $313.8 million at June 30, up $158.8 million, or 102%, from year-end. Management cited a strong order backlog and expressed “cautious optimism” about shipping it in the second half; the filing provides no formal revenue or earnings guidance.
- Management cited shortages and higher prices for components including semiconductors, resin and copper, extended lead times, higher freight costs, and labor and foreign-exchange pressures. A 1% rate change on variable-rate debt would change annual interest expense by about $1.1 million.
- COVID-19 measures continued, with reduced workforce and productivity at some sites and factory inefficiencies. Management said operations remained active and demand had not materially declined to date, but the ultimate financial impact could not be quantified. About 5% of revenue related to end markets affected by COVID-19, including commercial aerospace.
- The company is exiting its custom modules product line; a UK design center was expected to close in Q3 2021, with anticipated annual savings of $0.4 million. Prior restructuring actions were expected to yield $4.4 million of annual savings in 2021.
- The second-quarter tax benefit included reversal of uncertain tax positions after statutes of limitation expired. Uncertain tax-position liabilities were $26.9 million at June 30. A roughly $12.0 million Italian tax claim is included in that liability and is indemnified by ABB under the acquisition agreement.
- Bel filed patent-infringement complaints against Monolithic Power Systems in two federal courts in June. The filing does not quantify potential recovery or exposure. Management said other legal matters were not expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether the elevated backlog converts to shipments and cash, and how much is affected by customer timing or cancellation.
- Whether input-cost inflation, component availability, freight, labor and foreign exchange continue to pressure gross margins despite pricing actions.
- Acquisition integration, final purchase-price allocations, and the acquired businesses’ ongoing contribution to revenue, earnings and cash generation.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the difference between nominal revolver availability and covenant-limited borrowing capacity.
- Debt maturity and refinancing plans before December 2022, covenant headroom, and exposure to variable interest rates.
- Developments in uncertain tax positions and the Italian matter, including the continuing validity and collectability of the ABB indemnity.