Bel Fuse Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. Unaudited consolidated results. Bel designs and manufactures products that power, protect and connect electronic circuits, serving markets including networking, telecom, computing, aerospace, transportation and consumer electronics. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $125.4 | $118.3 |
| Gross profit / gross margin | $23.6 / 18.8% | $21.1 / 17.9% |
| Income from operations / operating margin | $2.8 / 2.2% | $0.4 / 0.4% |
| Net earnings (loss) | $1.1 | $(1.3) |
| Basic and diluted EPS, Class A / Class B | $0.08 / $0.09 | $(0.11) / $(0.11) |
| Net cash from (used in) operations | $(6.3) | $0.3 |
| Capital expenditures | $2.4 | $2.2 |
- Sales rose 6.0% year over year. Power Solutions and Protection sales increased 15.3% to $42.8 million; Connectivity Solutions rose to $44.4 million; Magnetic Solutions was essentially flat at $38.3 million.
- Gross margin improved despite material costs rising to 41.8% of sales from 40.8% and labor costs rising to 11.5% from 11.3%. Lower other costs and R&D as a share of sales helped offset these pressures.
- SG&A declined $0.9 million to $19.8 million. Restructuring charges were $0.9 million versus $0.004 million in Q1 2018. Interest expense increased to $1.4 million from $1.2 million.
- Cash and equivalents were $43.2 million at March 31, down $10.7 million from year-end. Current assets were $283.3 million and current liabilities $90.7 million; the reported current ratio was 3.1-to-1.
- Term-loan borrowings were $115.2 million; the balance-sheet carrying amount of total debt was approximately $113.6 million, net of financing costs. The $75 million revolver had no balance outstanding at quarter-end. The company reported $47.4 million of borrowing capacity without breaching its leverage covenant and said it was in compliance with covenants.
Material changes and operating developments
- North American external sales increased to $64.6 million, Asian sales declined to $37.3 million, and European sales increased to $23.5 million. Operating income improved in Asia and Europe; North America reported a $0.5 million operating loss.
- Backlog was $166.8 million, down $4.4 million, or 3%, from December 31, 2018. Connectivity backlog rose 11%; Power Solutions and Protection fell 7%; Magnetic Solutions fell 13%.
- Inventory increased $4.7 million to $124.8 million, while DSO rose to 68 days from 59 at year-end. Management attributed inventory growth and weaker bookings to customers drawing down previously accumulated inventory.
- Operating cash use reflected working-capital outflows, including payments on accounts payable and accrued expenses. Cash was also reduced by capital spending, dividends, debt repayments and foreign-exchange effects.
Outlook, risks and unusual items
- Management expected slower customer bookings and inventory reductions to put downward pressure on Q2 sales, while remaining generally optimistic about sales improvement in the second half of 2019. It cited potential demand from commercial aerospace, military programs, datacenter products, hybrid-electric vehicle applications and future 5G products. These are forward-looking expectations, not guarantees.
- Restructuring included the planned transfer of Inwood, New York manufacturing and warehousing to existing facilities in Pennsylvania and the Dominican Republic, expected to be complete by Q3 2019. Management projected $2.1 million in annualized savings beginning in H2 2019. ERP phase one went live in January; total implementation costs were estimated at $6.7 million, with approximately $1.3 million in annualized savings anticipated from Q2 2019.
- Foreign-currency depreciation reduced operating costs by an estimated $1.7 million, while the company reported a $0.6 million foreign-exchange loss on currency revaluation. Higher-cost components purchased during 2018 continued to affect costs; lead times and costs for some components, including MOSFETs, remained elevated.
- Adoption of the new lease standard added $19.0 million of right-of-use assets and $19.3 million of operating lease liabilities at March 31; the company said adoption did not materially affect earnings or cash flows. Lease expense for Q1 was $2.2 million.
- Uncertain tax-position liabilities totaled $29.4 million. An approximately $12.0 million Italian tax claim is included in that amount and is covered by an ABB indemnity, with a corresponding indemnification asset recorded. The company was also under a Slovak tax examination for 2014. Management did not expect other disclosed legal matters to materially affect results or financial position.
- Management stated that available liquidity and expected operating cash flows should fund operations and obligations for the next 12 months. It intended to repatriate an additional $10 million from foreign subsidiaries by Q3 2019 to reduce debt, subject to its review of cash needs and taxes. Approximately 88% of cash was held by foreign subsidiaries at quarter-end.
Key facts for investors to verify
- Whether weaker bookings and customer inventory reductions persist, and whether management’s expected H2 sales recovery materializes.
- Whether the projected restructuring and ERP savings are achieved, and whether facility transition and ERP implementation costs remain within estimates.
- Whether working capital normalizes, particularly inventory, receivables and DSO, and whether cash generation recovers from Q1’s operating outflow.
- Debt covenant headroom, interest-rate exposure and the planned foreign-cash repatriation; verify the distinction between gross borrowings and balance-sheet debt net of financing costs.
- Developments in uncertain tax positions, including the indemnified Italian claim and the Slovak examination, and any material changes to recorded liabilities or indemnification assets.