Bel Fuse Inc. — 2019 Form 10-K Summary
Business context and reporting period. Bel designs and manufactures electronic products for power conversion, circuit protection, connectivity and magnetic applications. This filing covers the fiscal year ended December 31, 2019; comparisons are with 2018. Bel reorganized its reporting segments in October 2019 into Cinch Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions. The company acquired most of CUI Inc.’s power supply business on December 3, 2019, for approximately $29.2 million, plus assumed liabilities.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $492.4 million | $548.2 million |
| Gross profit / margin | $110.7 million / 22.5% | $139.3 million / 25.4% |
| Operating income | $0.5 million | $26.9 million |
| Net income (loss) | $(8.7) million | $20.7 million |
| Operating cash flow | $24.5 million | $10.1 million |
| Cash and cash equivalents at year-end | $72.3 million | $53.9 million |
| Debt principal at year-end | $145.0 million | $116.0 million |
| Current ratio | 3.1 | 2.7 |
- Sales fell 10.2%. Segment sales were $172.3 million for connectivity, $163.5 million for power and protection, and $156.5 million for magnetic products.
- Gross margin declined in all three product groups: connectivity 25.8% (29.5% in 2018), power and protection 20.1% (22.7%), and magnetic 21.9% (25.1%). Company-wide material costs rose to 44.7% of sales from 41.9%; labor costs fell to 10.3% from 11.5%.
- Operating results included an $8.9 million goodwill impairment charge, $2.6 million of restructuring costs, and a $4.3 million gain on sale of property. Other expense included a $2.1 million loss on liquidation of foreign subsidiaries. The tax provision was $1.4 million despite a pretax loss, reflecting the geographic mix and other tax items; the reported effective tax rate was (19.7%).
- Operating cash flow increased by $14.4 million, primarily reflecting lower year-end receivables and inventory. Investing cash outflow was $33.1 million, including $29.0 million net for the CUI acquisition and $9.9 million of capital expenditures. Financing cash inflow was $25.2 million, including net revolving-credit borrowings.
- At year-end, debt was variable-rate, with an interest rate of 3.31%; the company reported covenant compliance and $43.0 million of unused facility capacity, though covenant-based borrowing availability was $19.9 million. Leverage was 3.14x adjusted EBITDA under the credit agreement. In February 2020, Bel prepaid $8.2 million of term debt and amended its credit agreement.
Changes, outlook and material risks
- Management attributed weaker 2019 sales to tariffs on China-made products, customer and distributor inventory reductions after order acceleration in 2018, and lower demand. Magnetic sales were particularly affected by a customer working through inventory built for a 2018 product launch. At year-end, backlog was $160.2 million, down 6% from 2018; management cautioned that orders can be delayed or canceled. A separate February 2020 backlog estimate was $186.3 million, with approximately 89% expected to ship by year-end 2020.
- The December 2019 CUI acquisition contributed $2.2 million of 2019 sales and a $0.4 million operating loss. Bel described the business as having a higher gross-margin profile and lower manufacturing risk; purchase accounting remained under review at filing.
- Restructuring cost $2.6 million in 2019. Management reported $5.7 million in expected annualized savings, of which $1.7 million was realized in 2019 and the remaining $4.0 million was expected in 2020. Management also anticipated lower material costs as higher-cost inventory was worked through; these are forward-looking expectations, not guaranteed outcomes.
- Bel reported limited visibility entering 2020. COVID-19 disrupted its four largest China manufacturing facilities; worker return was approximately 85% by March 9, and lead times had extended about four weeks. Management said the financial impact could not yet be estimated. A grounding affecting a major commercial aerospace customer was expected to reduce first-half 2020 sales by $5–$7 million and earnings by approximately $2.5–$3.0 million, with further impact possible while the grounding continued.
- Other material exposures include customer concentration (Hon Hai/Foxconn represented 10.2% of 2019 sales), debt service and leverage covenants, competition and pricing pressure, raw-material availability and cost, labor availability and wage increases, foreign exchange, international trade and tax matters, and potential further impairment. The company reported $29.1 million of uncertain tax position liabilities; the timing of most potential cash settlement was not estimable.
- Bel declared quarterly dividends of $0.06 per Class A share and $0.07 per Class B share during 2019. Future dividends were subject to business conditions, including the effects of COVID-19. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether sales, orders and backlog recover from the 2019 decline, and how much reported backlog converts to shipments.
- The realized impact of COVID-19 on Bel’s China operations, supplier capacity, customer demand and margins.
- The duration and financial effect of the aircraft grounding, and whether the estimated sales and earnings impacts change.
- Debt reduction, covenant headroom and refinancing or interest-rate exposure following the February 2020 credit amendment.
- Whether CUI integration delivers the anticipated margin and risk benefits, and whether its purchase-price allocation changes.
- Whether restructuring savings and lower material costs are achieved, and whether further goodwill or other asset impairment is required.