Bel Fuse Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; amounts below are in U.S. dollars. Bel designs, manufactures and markets magnetics, interconnect, module and circuit-protection products. Its operating segments are North America, Asia and Europe.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $101.2 million | $76.1 million | $258.2 million | $214.8 million |
| Gross profit / gross margin | $20.4 million / 20.2% | $12.6 million / 16.5% | $45.5 million / 17.6% | $35.2 million / 16.4% |
| Operating income / margin | $8.3 million / 8.2% | $0.9 million / 1.2% | $9.4 million / 3.7% | $4.6 million / 2.2% |
| Net earnings | $7.8 million | $2.5 million | $9.7 million | $4.8 million |
| EPS, Class A / Class B | $0.65 / $0.69 | $0.20 / $0.21 | $0.80 / $0.86 | $0.37 / $0.41 |
| Cash from operations | Not separately reported for quarter | Not separately reported for quarter | $6.1 million | $7.8 million |
Q3 sales rose 33.0% year over year and nine-month sales rose 20.2%. Nine-month sales growth was substantially acquisition-driven: management said acquired businesses contributed $56.3 million in sales and $10.1 million in operating income. Excluding recent acquisitions, nine-month revenue declined $12.0 million, mainly due to lower module-product orders from one North American customer. Nine-month net earnings increased 101.7% year over year.
At September 30, cash and cash equivalents were $46.9 million, down from $71.3 million at year-end 2012; restricted cash was $13.0 million. Current assets were $213.5 million and current liabilities were $83.4 million, for a 2.6-to-1 current ratio versus 4.1-to-1 at December 31, 2012. Total assets were $318.4 million and stockholders’ equity was $221.3 million.
The company had $12.0 million outstanding under its $30 million revolving credit facility, with $18.0 million available at quarter-end. Nine-month cash used in investing was $37.4 million, including $30.9 million net acquisition payments and $5.1 million of capital expenditures. Operating cash flow was pressured by working-capital investment, including increases in receivables and inventory.
Material changes and operating drivers
- TRP, acquired in March, and Array, acquired in August, added magnetics and aerospace/mil-spec connector products. The 2013 acquisitions contributed $48.6 million in revenue and $8.7 million in net earnings from their respective acquisition dates through September 30; results did not yet include revised corporate overhead allocations.
- Asia segment operating income increased to $12.4 million for the first nine months from approximately break-even in 2012, with a significant contribution from TRP. North America reported a $3.6 million operating loss for the nine months, compared with $4.1 million of operating income in 2012, reflecting weaker module demand and the Cinch manufacturing transition.
- Gross margin improved year over year. Lower material costs as a share of sales and product mix helped, while the transition of Cinch operations to McAllen, Texas caused start-up costs, scrap, premium part purchases and expedited freight, concentrated in the first half. Management said transition difficulties were largely resolved before Q3 and benefits of restructuring had begun to emerge by quarter-end.
- Bel recorded $1.4 million of restructuring charges in the first nine months of 2013, including workforce reductions initiated in Q2. Management did not anticipate significant further restructuring costs in the foreseeable future.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects year-over-year declines in module-product sales through the end of 2013 due to the lower order volume from one customer, although that customer’s order volume had stabilized. The company implemented selected price increases in Q3 to help offset rising China labor costs and currency-related cost pressures.
- Management stated that operating cash flow after dividends, existing capital and available credit were expected to fund operations for at least the next 12 months. This is forward-looking and depends on demand, acquisition activity, operating performance and access to financing.
- Bel was not in compliance with its tangible-net-worth debt covenant at September 30, following acquisitions and the resulting lower cash balance and increased intangible assets. In November 2013, the credit agreement was amended to revise minimum tangible net worth and maximum leverage calculations and extend the facility to October 14, 2016.
- Acquisition accounting for TRP and Array remained provisional, including valuation of inventory, property and equipment, identifiable intangibles, goodwill and certain consideration. Final purchase-price allocations and tax effects could change.
- SynQor litigation remains a material contingency. The company had recorded a $11.5 million litigation reserve and posted $13.0 million of restricted cash as a supersedeas bond. The Federal Circuit affirmed the underlying judgment; defendants petitioned the Supreme Court for review. A related post-injunction damages trial began in July 2013, and Bel said customer indemnification was expected to limit potential impact. Bel also has a separate patent-infringement suit against Molex.
- Other risks include rising China wages and renminbi strength, manufacturing and labor variability, customer demand fluctuations, foreign-exchange movements, and ongoing legal and acquisition-related costs. Nine-month accounts receivable and inventory increased by $13.0 million and $7.2 million, respectively; management attributed part of the receivables increase to longer acquired TRP customer payment terms and said it intended to align terms during renewals.
- Q3 included a $0.1 million gain on sale of an investment. Nine-month results also reflected the 2012 comparison-period investment impairment, which was $0.8 million for the first nine months of 2012. The unusually low effective tax rates reflected the geographic mix of earnings, particularly increased Asia profits, and prior-period tax-position reversals.
Important facts for investors to verify
- Whether the amended credit covenants resolved the quarter-end breach and how much borrowing capacity remains under the revised terms.
- Final TRP and Array purchase accounting, including goodwill, intangible-asset values and related tax consequences.
- Developments in SynQor appeals and post-injunction damages, the adequacy of the reserve, and the status of the restricted-cash bond and indemnification.
- Whether acquired revenue converts to sustainable organic growth, particularly as module demand and North American performance evolve.
- Whether receivables and inventory growth, longer TRP payment terms and lower operating cash flow normalize.