Bel Fuse Inc. — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; quarterly figures below include fourth-quarter results. Bel designs and manufactures electronic components for power, protection and connectivity. It reports North America, Asia and Europe segments. Results include acquisitions completed in 2013 and 2014, notably Power Solutions and Connectivity Solutions. Unless noted, amounts are in U.S. dollars.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $567.1 million | $487.1 million |
| Gross profit / gross margin | $108.8 million / 19.2% | $87.4 million / 17.9% |
| Operating income / operating margin | $28.6 million / 5.0% | $13.5 million / 2.8% |
| Net earnings | $19.2 million | $8.6 million |
| Class A / Class B diluted EPS | $1.53 / $1.64 | $0.69 / $0.75 |
| EBITDA, non-GAAP | $56.3 million | $34.1 million |
| Cash from operations | $65.8 million | $22.5 million |
Sales rose 16.4% year over year, while net earnings more than doubled. Fourth-quarter sales were $135.2 million, down from $148.7 million in fourth-quarter 2014; quarterly net earnings were $2.9 million versus $1.8 million.
Cost of sales was 80.8% of revenue, yielding a 19.2% gross margin. The year-over-year margin improvement reflected lower warranty costs in Power Solutions, a full year of Connectivity Solutions sales, and lower labor costs as a share of sales. R&D expense was $27.7 million, up from $21.5 million.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $85.0 million; working capital was $163.4 million and the current ratio was 2.3, down from 2.6 in 2014.
- Total debt was $187.2 million, down from $232.6 million. The company reported a 2.98x leverage ratio under its credit agreement and compliance with debt covenants at year-end.
- The credit facility had $50.0 million of unused availability; management said $17.2 million could be borrowed without violating the leverage covenant based on existing EBITDA. The facility’s stated maturity is June 2019.
- Operating cash flow of $65.8 million supported $9.9 million of capital spending, $22.4 million of long-term debt repayments, net revolver repayments of $23.0 million and $3.2 million of dividends. Cash increased $7.9 million during the year.
- About 80% of year-end cash was held by foreign subsidiaries; management intends to keep most foreign earnings invested abroad.
Changes versus the prior year
- Growth was substantially acquisition-led: the 2013 and 2014 acquired businesses contributed $309.0 million of 2015 sales. Excluding those contributions, sales fell to $258.1 million from $277.3 million in 2014, mainly on weaker demand for DC-DC converters, ICMs and passive connectors.
- By product group, power solutions and protection sales increased to $214.8 million, connectivity sales to $181.7 million, and magnetic solutions sales declined to $170.6 million.
- Operating income improved in North America to $11.0 million from a $4.5 million loss and in Europe to $9.4 million from $4.9 million. Asia operating income fell to $8.2 million from $13.1 million.
- Interest expense rose to $7.6 million from $4.0 million, reflecting acquisition-related borrowings. The effective tax rate increased to 25.4% from 11.9%.
Outlook, risks and unusual items
- Management gave no formal revenue or earnings guidance. It said 2016 profitability efforts would focus on sales growth and monitoring the cost structure.
- Restructuring charges were $2.1 million in 2015. Management projected an additional $3–$4 million of annualized savings beginning in 2016, while noting further restructuring charges may occur.
- Backlog was approximately $126.1 million at February 29, 2016, down from $150.4 million a year earlier. Management expected substantially all of it to ship by year-end, but cautioned that orders can be delayed, accelerated or canceled.
- Hon Hai Precision Industry represented 13.2% of 2015 sales ($74.8 million); management warned that losing this customer could materially affect results. The company also cited competitive pricing, volatile demand, supply and labor constraints, international and currency exposure, and acquisition-integration risks.
- Interest income and other, net, was $4.7 million, including a $4.2 million acquisition-related working-capital settlement and foreign-exchange gains. The company recorded $5.1 million of net currency gains in SG&A, primarily related to a euro-denominated intercompany loan that was settled by year-end.
- Uncertain tax-position liabilities totaled $42.2 million, including an approximately $12.0 million Italian tax claim acquired with Power Solutions; Bel says it is indemnified by ABB for that claim. The SynQor appeal and related claims were settled in early 2016 with no further payment required from Bel.
- Annual goodwill testing found no impairment, though estimated fair value exceeded carrying value by 11.4% in North America, the narrowest margin among reporting units. Auditors issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Separate acquisition-driven sales growth from the decline in legacy-business revenue and assess the sustainability of acquired-company profitability.
- Review fourth-quarter sales weakness, lower backlog and the outlook for major products and the Hon Hai customer relationship.
- Check debt repayment requirements, covenant headroom, interest-rate exposure and the availability of cash held overseas.
- Assess the assumptions underpinning goodwill valuations, particularly North America’s relatively limited fair-value cushion.
- Track resolution of uncertain tax positions, including the Italy matter and related indemnification, and confirm the expected realization of restructuring savings.