Bel Fuse Inc. (BELFB) Q1 2013 Earnings Report, Transcript and Summary

Good day and welcome to Bel Fuse First Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Bernstein, Bel's President and Chief Executive Officer. Please go ahead.

Thank you, Latoya. And I would like to welcome, everybody, to our conference call to review Bel's first quarter 2013 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance.

Thank you, Dan. Good morning, everybody. I'll start by reading a Safe Harbor statement. Except for historical information contained in this call, the matters discussed in this call, including the statements regarding the impact of manufacturing efforts on overall operating expenses, future operating expenses, the ability to reduce those expenses, the timing of when restructuring efforts will result in cost savings, the timing of price increases, the ability of Bel to implement additional cost savings in the future, the accretive nature of the TRP acquisition, and the timing of when benefits from that active transaction can be expected to materialize, are forward-looking statements that involve risks and uncertainties. Actual results could differ materially from Bel's projections. Among the factors that could cause actual results to differ materially from such statements are the macro concerns facing our customers, the continuing viability of sectors that rely on our products, the effects of business and economic conditions, difficulties associated with integrating originally acquired companies, capacity to supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment or risks associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitive responses to those new products, and the risk factors detailed from time to time in the company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statements will, in fact, prove to be correct. We undertake no obligation to update or revise any forward-looking statement. Now moving to our comments. First off, I'll start with business acquired during 2012 and 2013. Bel completed the acquisition of Gigacom based in Sweden in March 2012, Fibreco Limited based in the U.K. in July 2012, and Powerbox Italia based in Italy in September 2012. The results of these 3 companies have been included in our consolidated financial statements since their respective acquisition dates. Bel's acquisition of the Transpower Magnetic business from TE Connectivity was completed on March 29, 2013. Note that Transpower's financial results have been included on our consolidated P&L for the first quarter of 2013. However, we have included the book values of the assets and liabilities acquired in our consolidated balance sheet. I will note in my comments any material impacts that these acquisitions have had on our results of operations or financial conditions. Moving to sales, for the first quarter of 2013, we're down -- we're at $63 million, down 3.9% compared to $65.6 million in the first quarter of 2012 and down 12.2% sequentially from the $71.8 million that we reported in the fourth quarter of 2012. First quarter 2013 sales in our 4 major product groups were as follows: magnetics, $21.3 million, up 10.7% over the first quarter of 2012 led by an increase in our integrated connector modules sales; interconnect products, $26.1 million, a decrease of 4.1% from last year's first quarter; server protection, $2.3 million, a decrease of 4.8% from the prior year first quarter; and modules, $13.4 million, which is 20% lower than sales in the first quarter 2012. As we have told you over the past several quarters, the modules product group continues to be affected by the increase in the level of sales activity by a major customer. Of the above amounts, Fibreco contributed $2.0 million in dollars of revenue to the interconnect group and Powerbox contributed to $936,000 of revenue to the modules product group during the first quarter of 2013. Turning to cost of sales and net results. During Q1 2013, our gross margins were heavily impacted by approximately $1.7 million of unanticipated startup costs at our new Cinch facility located in Texas, the majority of which is reflected in cost of goods sold. These costs should be reduced by the end of the second quarter, and we expect the benefits from our restructuring of Cinch to materialize in the third quarter. We still expect our various restructuring actions to reduce overall operating expenses by about $5.6 million on an annualized basis. Bel's core product group were also not profitable in the first quarter as our counter price structure does not reflect recent and pending labor cost increases in China and other manufacturing costs such as the continuing strengthening of the renminbi. Bel is in the process of implementing price increases. The majority of these price increases should be in effect by August 1, 2013. We also continue to look at our overhead structure to identify any additional opportunities for cost savings. On a positive note, Fibreco and Powerbox contributed a total of $900,000 of income from operations through our consolidated results for the first quarter of 2013. SG&A, selling, general and administrative expenses during the 3 months period ended March 2013 increased by $1.5 million, in comparison to the same period of 2012. As a percentage of sales, SG&A was 3 percentage points higher in the first quarter of 2013 over the first quarter of 2012. Contributing to this increase was $360,000 of acquisition-related expenses associated with the 2012 acquisitions, TRP and other ongoing acquisition activities, an increase of approximately $600,000 of SG&A expenses at Fibreco and Powerbox Italia, $180,000 of unfavorable currency fluctuations, $180,000 of bad debt expense, and $200,000 increase in legal, audit and other professional fees, plus $200,000 of selling freight expense related to the startup issues at Cinch and various similar factors. Taxes. Bel reported an income tax benefit of $830,000 for the 3 months ended March 31, 2013, compared to a tax expense of $634,000 for the 3 months ended March 31, 2012. The company's effective tax rate, which is the income tax benefit provision of percentage of cost or earnings before income taxes, was a benefit of 60% for the 3 months ended March 31, 2013, as compared to a provision of 42% for the same period of 2012. Included in the income tax benefit for the first quarter of 2013 was $385,000 for the restoration of R&E tax credit that expired in 2012, but was extended by Congress in 2013. Excluding this adjustment, the company's effective tax rate was a benefit of 32%. The company's effective tax rate fluctuates based on geographic segments in which the pretax profits are earned. Of the geographic segments in which Bel operates, the U.S. has the highest tax rates. Europe's tax rates are generally lower than U.S. tax rates, and Asia has the lowest tax rates. A higher tax effective rate in 2012 was primarily due to a pretax loss in Asia with a minimal tax benefit. On an unordered GAAP basis, Bel reported a loss from operations of $1.4 million and an after-tax net loss of $553,000 for the first quarter of 2012. Last year, we reported income from operations of $1.4 million and after-tax net earnings of $876,000 for the first quarter of 2012. To state these results on a comparable basis, the non-GAAP loss from operations for the first quarter of 2013 was $810,000 compared to non-GAAP income from operations of $1.8 million for the first quarter of 2012. Acquisition costs, restructuring, reorganization and severance charges have been excluded from non-GAAP income from operations for the first quarter of 2013 and from the comparable 2012 non-GAAP income from operations. A reconciliation of GAAP to non-GAAP measures is included in our press release, which was issued earlier this morning. Turning to the balance sheet, cash and equivalents. At the end of March 2013, our cash, cash equivalents and investment securities were $53.3 million, which was $18 million less than our December 2012 balance of $71.3 million. The decrease in cash resulted primarily from the net payment of $14.1 million for the acquisition of Transpower, $1.2 million of capital expenditures, $3.4 million for the repurchase of Bel Class B common stock and $762,000 in dividend payments, primarily offset by favorable operating cash flows. Receivables and payables. Receivables net of allowances were $48.6 million at March 31, 2013, compared to $43.1 million at December 31, 2012, an increase of $5.5 million. Decreases of more than $5 million in Bel receivables more than offset by the addition of a profit of $11.6 million of receivables that were acquired with Transpower. Our accounts payable at March 31, 2013, were $25.1 million, an increase of $6.3 million from December 31, 2012. This increase resulted from the addition of $8.6 million of accounts payable, which we acquired with the Transpower acquisition, partially offset by a decrease of approximately $2 million in Bel's accounts payable. Inventory. At the end of March 2013, our inventories were $16.7 million, up $5.8 million from the December 2012 level. Virtually all of these increase resulted from the inclusion of the inventories of Transpower. The purchase on goodwill and intangible assets, the purchase price allocation for Powerbox Italy has not yet been fully completed. We expect a portion of the $2.7 million preliminary goodwill amount that we booked in Q4 2012 to be reclassified primarily to intangible assets, as well as smaller amounts to intangible assets upon completion of the purchase price allocation for that entity. The acquisition of Transpower coincided with the ending date of Bel's first quarter of 2013. Due to the close proximity of the transaction date to our first quarter reporting date, there were several offer accounting items related to that acquisition as of March 31, 2013. As part of the purchase consideration, Bel granted several licenses to TE. No amount has been reported for these licenses pending recalculation of their fair value. In addition, the purchase consideration includes a working capital adjustments, which must be agreed upon by the buyer and seller. We recorded a liability for the estimated additional consideration payable to TE for this working capital adjustments in the amount of the $7.2 million. The fair value of the purchase consideration will revise when the availability [ph] of these 3 licenses and the working capital adjustment have been finalized. Finally, the allocation of the purchase price to the acquired assets and the liability have not yet been completed. Accordingly, we've made a preliminary allocation of the purchase price to the acquired assets and liabilities at the respected book values as provided by TE Connectivity. These estimated values have been included, together with $8.3 million of preliminary goodwill, at our March 31, 2013, balance sheet. The timing of the closing of acquisition was such that no first quarter sales or expenses of the acquired business have been reflected in our first quarter results. Stock buyback. The Bel Board of Directors had approved the buyback of up to $10 million of Bel Class B stock in the open market. During the first quarter of 2013, 178,643 shares were repurchased for a total of $3.4 million, completing the $10 million buyback program. At this time, the Bel Board of Directors has not approved any additional buyback. Other balance sheet comments, our capital spend for the 3 months ended March 31, 2013, was $1.2 million, while depreciation and amortization was $2.2 million. On a per share book value at March 31, 2013, it was $18.46, and that's including goodwill and intangibles. And when we exclude our intangibles and goodwill, our per share value was $14.75. And now I'll turn it over to Dan.

Latoya, if possible, can we open the call for any questions people might have?

[Operator Instructions] We have a question from Sean Hannan of Needham & Company.

So, Dan and Colin, I was looking to see if you could provide us a little bit of color this morning around the pricing environment, and particularly, if there's any focus you could provide on ICMs?

All right. Currently, our lead times have been stretched out to 18 weeks. And the problem that we're facing is we do have product in that 8-week lead time that have low margins. So our concern now is, it's historic in our industry when lead times stretch out, it's always an ideal time to increase price. And if you're going to build product, you want to build product with good margins. So our hope is that if we can increase price, hopefully we get our lead time back down to 12 weeks. And again if we do increase price that will give us the flexibility that we have to increase our labor price to attract more work as we can do it. So at this point in time, I think our circuit protection product line, our passive connector, our ICMs have longer than standard lead times. And that's in the range of the 17 to 18 weeks.

Okay. And so in the release that you've provided, in being able to see a lot of these increases by August 1, so that's really across your product portfolio?

Yes, on those 3 major products. And then again we focus -- in our industry, we tend to focus more on lead times when it comes to price increasing and almost, I hate to say it, the bill of materials. But historically, again, when lead times are stretched out, it does give you a lot more flexibility with the customer in regarding your pricing structure.

Now would you be able to implement similar types of price increases for the recently acquired Transpower business, number one? And then kind of as a follow-on to that because I believe that is slightly better margin business, and so looking to see if you'd be able to build on that.

Again, if products have good margins, it's not our intention to increase price. Our focus on -- it's really on low-margin product, and that's what we're focusing our attention. In the past, we have done across-the-board 5% price increases. And after '12, we realized that wasn't the best idea. Again we really have to be able to build product that has good margins, and that's what we're focused on. So back to your question, if TRP has products that have good margins and we don't foresee any price increases.

Okay. And then next question. In terms of the modules in the Power business, can you update us on what you're seeing there today? Highlight, perhaps, any notable OEM wins, if any, or new activity underway. Now you have really some more substantial scale, any color on how that's unfolding would be helpful.

Yes, I think -- I really don't like to give names. But for example, in the power business, our sales are up -- hold on 1 second, I'll give you a better idea. Our sales are up for power -- hold on, let me see, is up about $1.2 million. So we're seeing overall sales growth in power. In addition with the AC to DC that we brought into it, that's up $936,000. I think -- I'm sorry, that's up about $700,000. So we are seeing some good benefits from power. The big problem we have on the module side, in more of our CE contract manufacturing side is that the hit we took is pretty big. They're both substantial customers, and it's tough to make up for that. But one thing, we just got an order, our first order from a robotic vacuum cleaning company. That could be $2 million or $3 million. We are looking at other companies in the smart grid area as really good possibility. So I think by the end of this year, I think we will pick up maybe 50% to 60% of those sales we lost, and that's just a ballpark figure. And if those 2 customers can come back, then we'd have larger sales.

[Operator Instructions] We do have a follow-up question from Sean Hannan.

So, Dan, if I could also now just follow-up on the outlook within your Cinch business today, you have the transfer that had disrupted a little bit of the manufacturing there. So just wanted to get an understanding of how some of that business may come back based on kind of what had already been, perhaps, some pushout. And do you recapture some of that demand? And then the general demand outlook, any detail there would also be helpful.

From what everything we hear about the aerospace industry, with India and the Far East and the Middle East, and looking at Airbus and Boeing, we still believe that the commercial aerospace business is very strong. However, you have this tremendous amount of uncertainty with the military business. So however, we -- as you know, we are extremely committed to the future growth of the company is to focus on Cinch and better bringing in products for them. The problem that we did have is because we didn't execute the move as well as we thought we should have. Some of our customers had to bring in product from other competitors. Now we're hoping we get that business back, but we're not positive. But I would be surprised if we don't regain 80%, 90% of pushback orders that we had. So we are very still very bullish. We just have to get through the storm very quickly. Again, we are -- there's no question we are extremely disappointed with our performance on the transfer of this move.

Okay. That's helpful. And then the last question I have here might be a little bit more specific toward Colin. But if I back out the impacts that you had to margins there with the startup costs, I look at, probably, kind of a pro forma 17% gross margin. So wanted to confirm if the thought process is accurate. And then, separately, as we look to the remainder of the year, considering that there is still restructuring benefits by the time that we get to kind of more a full run rate in September, in the September quarter, as well as what should be accretive coming through TRP, is there any reason why we shouldn't be able to see a 20% gross margin quarter, or is it too early to tell?

I don't think I'm going out on a limb in saying, no, there's no reason why we -- into the third quarter we shouldn't have a 20% margin. We've got -- Cinch will come back, and we'll get our margins where they should be. Obviously, in the second quarter, we're going to be impacted by the -- particularly with the -- the business, by the way, we renamed the business. We're now calling it TRP Connector, and that's the business name that it's operating under. So we've got approximately 6 to 8 weeks in this second quarter, whereby, we don't get to book any of the profits because you have to mark up the inventory that they had, and that goes against the purchase price, that's against our P&L. So I think by the end of -- pretty much by the time we get to June, we'll know how we're doing as we go into the third quarter but not -- back to your question, I would feel quite comfortable with the 20%.

And at this time, there are no further questions in the queue. I'd like to turn the call back over for closing remarks.

We appreciate everybody joining us on this call, and we're looking forward to showing better results over the next 2 quarters. Thank you again.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.