Bel Fuse Inc. (BELFB) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Bel Fuse Incorporated Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder this conference call maybe recorded. I would now like to turn the conference over to Daniel Bernstein, President and CEO of Bel Fuse Inc. Sir you may begin.

Thank you, Sonia. I would like to welcome everybody to Bel Fuse second quarter results. Before we begin, I’d like Colin Dunn, our VP of Finance to read the Safe Harbor statement.

Good morning everybody. Thank you, Dan. Except for the historical information contained in this call, the matters discussed on this call including the statements regarding potential growth opportunities to reduce costs and enhance efficiency in the future are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 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 market 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 recently acquired companies and achieving cost synergies; capacity and supply constraints or difficulties; product development, commercialization or technological difficulties; the regulatory and trade environment; 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 statement will in fact prove to be correct. We undertake no obligation to update or revise any forward looking statements. We also may discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. Throughout this call I will refer to Power, that with the end of the I’d say Harbor statement, just moving on now. Throughout this call I will refer to Power Solutions business, which was acquired in June 2014 as BPS and the Connectivity Solutions business, which was acquired in July and August of 2014 as CCS. Collectively these will be referred to as the 2014 acquisitions. Second quarter 2015 sales were up $145.7 million up 46% compared to $99.4 million in the second quarter 2014. Including in 2015 was an incremental $51.2 million of sales from a 2014 acquisitions. Excluding these sales, sales declined $4.9 million due to lower sales volume in Bel's interconnect products and DC/DC products. Our regional basis including the sales from the 2014 acquisition, sales in North America increased $41.4 million in the second quarter of 2015 as compared with last year. Sales in Europe increased $7.4 million and sales in Asia decreased $2.6 million. On a product basis, including the sales from the 2014, acquisitions we had, like any solutions products sales were $46.2 million in the second quarter of 2015, which increased 3.4% as compared with second quarter last year, reflecting higher sales volumes of our ICM products. Switch Connectivity Solutions' product sales were $45.6 million in the second quarter of 2015 which is an increase of 41.7% over second quarter last year, primarily due to the incremental impact of the acquisition of CCS and partially offset by lower sales volumes and our passive connector -- product lines. Power Solutions' product sales were $53.8 million in the second quarter of 2015 which is an increase of over 100% from the second quarter of last year, primarily due to the incremental impact of the acquisition of Bel Power Solutions, partially offset by lower sales volume of our DC/DC products. Turning to gross profit. In the second quarter of 2015 reported gross profit was $28.6 million as compared with $17.9 million, an increase of $10.7 million. This increase was principally due to the incremental impact from the 2014 acquisitions. SG&A, selling, general and administrative expenses in the second quarter of 2015 was $20.8 million or 14.3% of sales as compared with the $13.2 million or 13.3% of net sales. These increases reflect the incremental impact of $9.8 million of SG&A from 2014 acquisitions. Excluding these incremental expenses, SG&A expenses decline $2.3 million from lower acquisition related costs and professional fee in the second quarter of 2015. Income from operations was $7.5 million in the second quarter of 2015, as compared with $3.7 million in the second quarter of 2014 reflecting the incremental impact from the 2014 acquisitions as well as lower SG&A expenses and cost synergies realize. Interest expense was $2.4 million in the second quarter of 2015, as compared with $200,000 in the second quarter of 2014, primarily due to the interest on borrowings use to fund with 2014 acquisitions. Taxes, in the second quarter of 2015, we report an income tax benefit of $587,000, this compares to an income tax provision of $473,000 in the second quarter of 2014. The income tax benefit in the second quarter of 2015 was primarily due to mix of pre-tax earnings and losses in certain jurisdictions. The company’s effective tax rate, which is the income tax benefit or provision as a percentage of earnings before income taxes fluctuates based on the geographic segment on which the pre-tax 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 typically has the lowest tax rates. And now I’d like to cover some cash flow and balance sheet items. Cash and cash equivalents at June 30, 2015 was $71.4 million, which decreased $5.7 million from December 31, 2014. Our cash flow from operations included net proceeds of $9 million from the sale of the Network Power Solutions systems and related transactions in January, which we use as a portion of our total debt repayments of $26.4 million during the year. Capital expenditure were $5.7 million as well as dividend payments of $1.5 million. Cash taxes paid were $2.7 million and cash interest paid was $3.4 million. From a working capital perspective, accounts receivable was $8.5 million at June 30, 2015, compared with $99.6 million at December 31, 2014. Day sales outstanding remained 62 days at June 30, 2015 as compared with December 31, 2014. Inventories were $111.2 million, down $2.4 million from December 31, 2014. Inventory returns declined to 4.2 times per year at June 30, 2015 from 4.3 times a year at December 31, 2014. Accounts payable was $64.8 million which increased $2.9 million from December 31, 2014 just reflecting the timing of payments. The changes in accounts receivables, inventories and accounts payable during the first six months of 2015 reflects the seasonality of the business during the first half of the year. Debt during the first half of 2015, we made mandatory principle payments of $26.3 million including the net proceeds received from the MPS transaction. We incurred $4.2 million of interest expense during the first half of 2015. Book value per share as of June 30, 2015 which is calculated at the shareholders equity divided by our combined A and B classes of common stock outstanding was $19.29 for this year. Now, I'll hand it back to Dan.

Thank you, Colin. At this time, we'd like to open it up for questions. Saniya?

Thank you. [Operator Instructions] Our first question comes from Sean Hannan from Needham. Your line is now open.

I'm not sure if I missed the color during the prepared remarks. Did you provide the explicit segment contributions in terms of power connectivity, so if there's a way [indiscernible] that have been provided somehow I missed it and then [indiscernible] follow up for your perspective within the power business and there has been an area of optimism we expect to start growing in the fourth around again during the quarters, I want to see if we can get any updated views around that. Thanks.

We don’t breakout the product groups or the product segments by profit margins at this time and we don’t see probably doing it going forward. There are just too many instructions that break out to give us a good number. Currently…

Yes Dan, I was looking for [indiscernible] revenue contributions there. Thanks.

Magnetic solutions was 46.2, connectivity group was 45.6 and the power solution to protection was 55.8.

Okay and then the power business, that's been an area of optimism I think in terms of getting some incremental revenues that will start layering in this December quarter, some of which is consequence of new business that's been one additional contributions I think coming from requalification of some programs in -- customers after having quality related issues, addressed and being able to move forward there. So we get an update on that power business expectations for the fourth quarter in general and moving forward.

Okay. So again we do think that the Power group will be the driving engine for organic growth going forward. As I said we do hope by the fourth quarter that we do see 5% to 10% growth. However, when we did acquire the company, the backlog was about 45 to 47, our backlog now running from 35 to 37. So we still have not seen the bookings grew. We get out a good booking week last week. However, we would like to see our open bookings back to 45 and give us that comfort level. So again we are now at a run rate close anywhere from $165 million to $175 million and we feel a lot more comfortable when we get that run rate above $200 million. But all sides are still very positive. Again one of the things that we did in fact here, when we discussed at solar products that we did acquire the power business with very low margin items that we had to walk away from, we were building a product for a company called, everybody knows Electrolux and year ago that product was running at $60 million this year it's probably running at $6 million and next year running about $2 million. So it's time to pick up those $60 million in sales. However, we think from a profit standpoint we should be able to pick up the profit standpoint because it was attached to low margin items. So again I think to put the point again is, yes we are making the future of the company -- for growth. Again the other segments, we feel very profitable segments. We are market leaders in those segments. But when you could drove the big part of the market-share it's difficult to grow the top-line. One power where we are the fourth or fifth player, we see tremendous opportunities to go to topline.

Okay. And Dan just to clarify, in terms of that bookings comment, if our bookings still need to be picking up by about $10 million, in terms of the point in time today to support your expectations of the revenue pickup in December, when do we need to see that bookings number would drop to your expectations, I mean…?

We would hopefully see in September, October.

Okay. So from a timing standpoint and we’re still, just to, for us to keep the record for respective runs and from a timing standpoint, it is nothing that to be standing out flat, we still have a few moments than we would expect those bookings to materialize at that point?

Yes. I am hoping.

Okay. Fair enough all right, and then in terms of the connectivity business, you add some commentary within the press release for some wins that you have acquired there and expecting incremental bookings in revenues in September quarter, just trying to get what perspective allowance that with this in some general that was to think about incremental growth factors within connectivity or is this simply an offset to whatever natural headwinds maybe its material lost period in the subareas of connectivity we anticipate and at least thinking of that segment as being able to probably still have a lower growth profile or we’re maintaining revenues, how we’ll think about that in the perspective of…?

I think you are, when we bought since Connectivity Solution, sales were dropping by about 5% to 8%. Although going forward is again is get to 0% to 5% growth, if we can get 5% growth I will be extremely pleased with the group. I mean that's our goal, and if it’s below 0% I won’t be too happy. So that's the benchmark, we put for them. So again but from a profit standpoint because so much of their sales it go distribution also it go a lot through the military aerospace, where price is not as important factor as in the networking community and telecommunication. We still expect good profits from those groups.

Okay. So it sounds the worst factor is that the wins that were cited allowed us to still pursue with that?

Hopefully it turns the tie from negative to positive. But after 8% or 10%.

Right, okay that's helpful. Last question here in terms of cost savings, you also in the press release referenced 3 million to 4 million savings opportunity and as I think about some of commentary we got from you on the last call, there was a reference point to potential being able to realize about 10 million in savings through cost controls integration synergies from some of the recent deals et cetera, is the 3 million to 4 million?

These are additional.

Okay. So if this in addition, where are we in the whole grand scheme of than the aggregate 13 million to 14 million. How much has been realized and when do you expect for the achievement than affect for run-rate?

How much we knocked out so far?

So we realized I would say 4 million last year.

I think again we're pretty much there. Again, it was our goal my goal I stated numerous times that I hopefully could get anything cleaned up by this quarter and that's why I put out that the additional $1 million are going to be needed. Again it's just -- you see opportunities and it's tough to pass up opportunities when you get a payback within a year or six months you have to pull the plug on it. We're very pleased of our GAAP and non-GAAP, we are so close to get this quarter only a $0.03 difference probably next quarter you're going to see a $0.10 difference but I think we still have --down the road I don’t think anything more than $1 million so again just things happen and we act on it quickly so I don’t think that answers your question or did it Sean?

Let me try it, I really angled it little bit differently.

I think the 40 million we projected right? I think we're about 95% there.

Okay. I think that addresses the question that and I would expect the remaining 5% is completed then this quarter.

We are seeing that because of a -- we have a lot more constraints now with reporting regarding when you can take write-offs in the old days when you made the announcement you could take the whole write-off at one time. [indiscernible] so that's why we're kind of -- we can't make it as black and white as we could in the past.

Thank you. Our next question comes from Harish Kumar from Stephens. Your line is now open.

Hey Dan and Collin, good quarter. You guys are now a global company selling into different geographies, different products. We hear a lot of stuff about Asia. I was curious if I could pick your brains on what you're seeing in the Asian market? Do you feel all the contention there short term in nature or do you think this business can bounce back in a meaningful way once we get past the short term timeframe?

So even though we're a worldwide company and we do have Chinese customers, the majority of customers we have in China are subcontractors building from multi-national American companies. So again even though Foxconn Hon Hai, the Taiwan East company that private largest employee in China, most of the lot of the price that we build for them are for the Cisco’s to Junipers, the HPs around the world. So we really not addressing, we do a little bit of [indiscernible] and some of the Chinese companies like UTStarcom. So we really don’t get a good field but again any time the stock market takes a dip anywhere in the world, it’s not a good sign for business. So that does concern us.

And then on the last call Dan, I think you went through some detail about perhaps what was wrong with Power One, some of the things that you have done in terms of factory outage to get your customers back. But I think those maybe one, maybe two that you have to still additional work on to get them back in a meaningful. I’m curious where that stands anything that…

I think that we’re extremely pleased one of our top three customers or in our facility for four days, 8 hours a day and once the work was done gave us the highest grade of our competitors from a factory standpoint. So I think we may tremendous strive and I think our factory is now can compete with anybody in the world. We could not say that before we bought the company. The only thing we do have a very big factory in Europe that manufactures our products. Now our attentions focused on them, see if we can get them to the same level we have in China. But I think from a production standpoint, of course standpoint we’re hitting on all sales now, our focus really going forward is how we penetrate our sales organization and put a lot more heat on our sales people throughout the company. Saying that hey guys you bit about our factory, you bit about our price all these things, now we have all things in placed no more excuses we need to drove the top-line and we can hold you’re accountable for growing the top-line. So I think going forward from an operation standpoint, we are there, from a sales standpoint is where we’re going to focus our attention over the next year.

Got it. I think you may have touched upon the next question and I’m asking most of the integration looks like it’s complete. You touched upon the sales I expect that you want to drive some of the newer products that you acquired. Is there any other glaring area that you feel that needs to be rest before you feel like the integration is fully complete?

No, no. I think from a core standpoint, I think from every standpoint where there are just all in making the right relationships at a decision making of these companies are we’re dealing with the engineers properly or a pricing or we given than the proper pricing so I think again we have no excuses.

Thank you. [Operator Instructions]. Our next question comes from Anthony [indiscernible] of independent. Your line is now open.

Good morning gentlemen. Thank you very much for very nice quarter. I just have a couple of quick questions. In terms of goodwill 213 million, how is that actually derived in, are you comfortable with that? Do you feel that is a conservative? Also, in terms of quality control, your global company, how do you continue to monitor your quality given the situation with language differences in different standards and then terms of the product itself, do you just to take your cue from the standards from the end user or do you actually innovate and design your own connectors and equipment? And thank you so much.

From a goodwill standpoint I’d like Colin to address that.

All right, our goodwill, goodwill is a function obviously the purchase price and what doesn’t get allocated to fixed assets and employment contracts and the rest of it. We informally analyzed our goodwill every quarter, which will require to do and make sure that it in affect the goodwill can be supported by the profitability of the businesses on a geographical basis and then every year annually, we have an independent outside firm come and do a much more detailed analysis to make sure that the goodwill on the books can be supported by our operations. So, it’s the same as every company does, it's a very formalized process that's in place. If this goodwill can’t be supported on a geographical basis by the profitability then we have to write like our goodwill down but unless that happens, there is no basis for us to write-down the goodwill, we are not allow to do it, it has to sit on the books.

From a quality standpoint, I think we take a different approach and maybe some people for example when we acquire Power One, they had a very big quality group based at San Jose, however in San Jose they had no production, no factory, although what we did as we actually estimated that group of maybe 8 or 9 people and write down to one person or two people and we took those dollars and move them into the factory and we are very big believer that the factory has to be responsible for quality. And quality just can be a group of people in the backroom looking at data all day. Quality has to go from everybody in the organization and it has to be a team approach from the general manager down and that we have really done a very good job throughout all our organizations that we have a hands on approach to quality where management are spend a lot of time on the floor working with people to solve problems improve quality and so forth. From a language barrier, I have to say most of our people in our company worldwide do speak English so that never tends to be a problem. And of course you do have quality problems pop-up and we try to manage in the best you can. Regarding product development, we’ve done those organically and what we preach to everybody, our success is always been knocked out think the market or the customers. We fairly really will come up with the widget and say hey guys, this is the best widget and they will come by. What we do a tremendous job throughout our lifetime at Bel is work very closely with engineers, see what problems they have work with them closely come up with the solution and hopefully when we do come up with that solution we could do a lot faster than our competitors. And we can come up with product quicker than our competitors than we’ll okay from a price standpoint. And so we make a major push for our engineers to deal with the customer engineers as much as possible and build up those strong relationships. And that’s how we develop a lot of our new products.

Thank you. [Operator Instructions] I am showing no further questions at this time. I would like to…

I would like to thanks everybody for joining our call today and we look forward to speaking to you in October. Have a good day.

Ladies and gentlemen, thank you for participating in today’s conference. This conclude today’s program. You may all disconnect. Everyone have a great day.