Bel Fuse Inc. (BELFB) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to today’s Bel Fuse Second Quarter Results Conference Call. Today’s call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Daniel Bernstein. Please go ahead sir.

Thank you, Catharine. Joining me today on the call is Colin, our VP of Finance; and Frank, our Manager of Finance. Before we begin, I'd like to ask Colin to go over the Safe Harbor statement. Colin?

Good morning, everybody. Thanks Dan. Except for historical information contained in this call, the matters discussed on this call, including the statements regarding strongest sales by Bel Power Solutions in the second half of 2016 and potential growth in the commercial aerospace business 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, 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 proved 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 today. Moving now to the financials, our second quarter net sales were $131.6 million, down 9.6% as compared with the second quarter of 2015. On a product basis, sales of our magnetic solutions products were $41.5 million in the second quarter of 2016, a decrease of 10.4% as compared with the second quarter of 2015. Sales of our Connectivity Solutions products were $44.9 million in the second quarter of 2016, a decrease of 1.6% as compared with the second quarter of 2015. Sales of our power solutions and protection products were $45.3 million in the second quarter of 2016, a decrease of 15.8% as compared with the second quarter of 2015. On a regional basis, sales in North America decreased $9.3 million, or 12%, in the second quarter of 2016, as compared with the second quarter of last year. Sales in Europe were flat and sales in Asia decreased $4.9 million, or 10.1%. Despite the decline in sales, gross profit margin was relatively flat at 19.5% in the second quarter of 2016, as compared with 19.6% in the second quarter of 2015. This was primarily due to the favorable product mix, the impact of lower warranty costs and operational enhancements and cost reduction activities we completed in 2015. Our selling, general and administrative expenses were $18 million, or 13.6% of sales as compared with $20.8 million, or 14.3% in the second quarter of 2015. The decline in SG&A expense was primarily due to the impact of net credit reported for certain value added business tax items of $2.4 million, lower depreciation and amortization expense of $700,000 from the finalization and the valuation of acquired property and equipment in the second quarter of last year and an increase in foreign currency exchange gains of $600,000. Income from operations was $10 million in the second quarter of 2016 as compared with income of $7.5 million in the second quarter of 2015. Interest expense was $1.5 million in the second quarter of 2016 as compared with $2 million in the second quarter of 2015, primarily due to the mandatory payments in voluntary prepayments made on our outstanding debt. Second quarter 2016 income tax benefit was $14.1 million. This compares to an income tax benefit of $600,000 in the second quarter of 2015. The income tax benefit in the second quarter of 2016 was primarily attributable to net benefits related to the settlement of the liability for uncertain tax positions of $10.4 million as well as benefits of $2.3 million related to the impairment of goodwill and other intangible assets, which was finalized in the second quarter of 2015. The mix of earnings and losses in different jurisdictions also contributed to the benefits in the second quarter of 2016. Earnings per share for the Class A common shares was $1.83 per share in the second quarter of 2016 as compared with earnings per share of $0.49 in the second quarter of 2015. Earnings per share for the Class B common shares were $1.93 in the second quarter of 2016, as compared with $0.52 per share in the second quarter of 2015. EPS on a non-GAAP basis, which excludes certain unusual or special items, which as detailed in the supplementary information included with our press release, was $0.43 per Class A share in the second quarter of 2016, as compared with $0.57 per share in the second quarter of 2015. Non-GAAP basis EPS for Class B shares was $0.46 per share on the second quarter of 2016, as compared with $0.60 per share in the second quarter of 2015. Reconciliation of our GAAP to non-GAAP EPS results for the second quarter and the first half of 2016 and the comparable periods for 2015 are included in the supplemental information that accompanied our earnings release today. Now, I would like to cover some balance sheet and cash flow items. Our cash and cash equivalents balance as of June 30 of 2016 was $67 million, a decrease of $18 million from December 31, 2015. During the year, we used cash to reduce our outstanding debt by $27 million. Also during the year, we used $3.7 million of cash for capital expenditures, made dividend payments of $1.5 million and cash interest paid was $2.7 million, income tax payments net of refunds was approximately $750,000. Accounts receivable was $82.6 million at June 30 of 2016, as compared with $86.3 million at December 31, 2015. Days sales outstanding was essentially flat at 59.5 days at June 30, as compared with 59 days at December 31, 2015. Inventories were $99 million at June 30 of 2016, up just slightly from December 31, 2015. Accounts payable was $50.1 million at June 30, 2016, up slightly from December 31, 2015. Bel’s total outstanding debt as of June 30 was $156.5 million, down $27 million from December 31, 2015. This reduction was due to our mandatory payments and voluntary prepayments made during the year. In the second quarter, we made voluntary prepayments of $3 million and mandatory payments of $2.8 million. Book value per share as of December 31, 2015, which is calculated as shareholders' equity divided by our combined A and B classes of common stock outstanding, was $12.80 per share at June 30 of 2016, down from $19.63 per share at December 31, 2015. This decline is mostly due to the impairment charge recognized in the first six months of 2016. Now, I would like to turn the call back to Dan Bernstein.

Thank you, Colin. Catharine, we’d like to open up the call now for some questions please.

Thank you. [Operator Instructions] We’ll take our first question from Sean Hannan with Needham and Company.

Yes, hi, folks. Good morning. Thanks for taking my question.

Good morning, Sean.

First thing I want to see if I can ask for last quarter you folks had called out some tax benefits as well as credits for certain value added items. And just want to see in the aggregate, what was that impact here, there were some metrics, I think, you’re putting out there for us, Colin, a little bit earlier, but I’m not sure if I understand. What was the aggregate number for on an apple to apple basis, those values this quarter versus last quarter?

Frank will pick this up.

Good morning. The amounts that we talked about earlier in the quarter, last quarter, Q1, are approximately the same for Q2. So, we had about $2.4 million of credit that ran through SG&A related to those tax credits. So $2.4 million in the second quarter approximately $5.2 million year-to-date. Those amounts were outlined on the last page of the earnings release. You’ll see the tables that reconcile or include all the amounts that are considered unusual for the quarter and the year-to-date period. So, again, it was $2.4 million in the current period, $5.2 million year-to-date.

Right. So if you’re aggregate that then there were additional tax benefits than as well if we can just kind of...

Point is correct.

That…

Sure, sure. So from a tax portion perspective of those, in the quarter that was $10.4 million, year-to-date $13.0 million.

Okay. That’s great. Thanks very much. Next question, I guess more for Dan. Can we talk a little bit about the environment today, what you’re seeing? Obviously, it seems that there is a general continuance in terms of a challenging environment getting into some of the end markets that you ultimately serve with your customers. Can we talk about where we’re seeing perhaps some pickup, where there might be incremental challenges at least as it pertains to what we were seeing coming out of last quarter? Thanks.

I think, overall from our standpoint, we still see flatness. We don’t see substantial price pressure, but we do see a flat market. However, some of the IC houses have started reported very strong earnings and that might be a good barometer for us. We’re starting to see some of our broad product groups like fuses and single transformers that both have substantially larger customer base than some of product groups. We’re staring to see – we have an increase in fuses and on single transformer. We see that sales a little flat, but compared to some of the other product groups, not as bad. So I think a lot. Now with the elections coming up, I think there’s just a lot of caution out there, but at least it’s nice to know with the IC houses that hopefully that persist to take down to us if they – generally if they start seeing things strong, they tend to sell to the same customer base we sell to that there might be some hope, but we haven’t seen it in our backlog at all yet. The other thing I should note, what our decrease in sales. We got two major hits we feel. We breakdown our product groups into 12 product groups, and in the power group, the Power-One acquisition. I think we took a big hit based on losing 24 month design window because of being removed from some of our key suppliers based on the actions of previous management. So that resulted from quarter-to-quarter to about an $8.2 million decline. And then our ICM product line that’s really geared to the networking and telecommunication market, those sales declined by $5.5 million. So that was a good chunk of our decline in sales. So, again, I would say, I still see things from our standpoint flat, but there are some a little rise in light out there.

Okay. And then in terms of the Power-One business, so you folks, I think, has done a good job in trying to keep us aware of the corrections that you’ve needed to make, hence that we’ve had some of these headwinds where we’ve addressed the quality issues and missed the design window. But I think a lot of the issues or all the issues have been resolved from a quality standpoint and in terms of getting recalled a lot of that’s already occurred and you’ve really been kind of waiting for those next programs to launch. Is there any further update around the expectations for how that could start to pickup and recover for you either here in 2016 or how to think about that?

Again, I’m disappointed and that was the only bump in 2016. We start should seeing some bumps in 2017. And in year 2018, we should have – we can’t have any more excuses. Just to give a reference. Have you looked at Power-One’s top 12 customers when we acquired them; six of them, removed them from the preferred quality list, quality vendor. So to the point when they were removed, to the point we got them back on, we worked out whole design window and that window was anywhere from 12 months to 36 months. By the end of 2014, we started to get reinstated all customers that removed us were now back on the preferred supplier list and we’re looking at opportunities. So even though we looking at opportunities a) our price has to be right and we have their parts that are again approved. I mean, those are – again if you look at someone like Cisco, we have eight new designs were approved on, and those sales over time might result into anywhere from $4 million up to $12 million. However, when they break, when they get into production, when they get into volume, we have very limited visibility on that and that’s what hurts us a lot. We just don’t have any concept when that sample is approved, when those parts go into production.

Okay.

But it is safe to say at a very cautious standpoint, any parts that were approved on today should be in production by 2017.

Okay. And then, how should we gauge the risk of thinking about the opportunity where that ramps and starts to provide a bump in revenues where then concurrently either as a consequence of national price declines or the maturation of other programs that you might be on that as we met out your sales opportunity there, say in 2017 where that growth recovery…

Cannibalizing of existing product we already have.

Correct. And that we have a flattish scenario then again.

I would tell again based on my gut nothing else. I tend that we’ve got so beat up now where our revenue is in power running like a run rate of 150. I’m hoping that that’s our low benchmark. And that we can start growing as I’ve said since day one, this should be our driving engine for the next four, five years. We should be seeing growth of 8% to 10%. Just because the TAM is such a large TAM, and we’re such a small player in that TAM and what we can offer our customers I think we have a real good benefit and probably holding true to it to the end. So again, I always said that we should be able to get back again within [indiscernible] by two years, but this business should definitely be $250 million business. And at that point, I would say our growth we get back to the normal growth of anybody else.

Okay. And then last question here for the moment, so that’s good optimism on a longer-term basis for power and in considering the opportunities in terms of the magnetics. Is there anything out there within the market that would give you incremental anxiety that that could have some more step functions either on a competitive basis impacting your pricing or demand for the products. Again, just trying to…

Again, compared to years past, if you look at six years ago, we had this down market. It definitely be a price war. I think the concern out there from our customers is supply chain that there’s been so much consolidation in the industry over the past three or four years. I don’t think they can afford to lose too many more suppliers because it affects their production. So, again, over the next two or three years, we see minimum maybe 3%, 4% yearly on price reductions. However, most of our products depend on overall market conditions. As you know, the networking market has been taking a pretty good hit. However a lot of that’s been includes of Open Compute and we support Open Compute very well. So, hopefully that’s a wash for us. But overall we are making our focus now as we stated really looking at sales, how to do things better from our marketing standpoint and sales standpoint. So, on our other product lines, there’s no question that ICMs we are the market leader that we control probably a little too much of the market with the acquisitions we made. So, I would say, it’s very difficult for the next two or three years to maintain any type of growth in that business. And some of our other product lines, we’re hoping, which strive always for 5% growth. So again what we realized now that we have to do a lot better job supporting our sales channels and making their job a lot easier, so they could sell. And that’s where we see growth coming from going forward. But the thing that’s really going to move the barometer is definitely power just because of the size of the market and how much we’re a small player in that market.

Okay. Thanks for taking my questions.

Thank you, Sean.

Thank you. And we’ll now go to Harsh Kumar with Stephens.

Hi, thanks for letting me ask questions. Dan, we monitor a lot of the chip companies and you’re right, they have been reporting some pretty exceptional sort of numbers sort of universally well. Why would you not? I almost feel like you’re a little bit hesitant to talk about growth. I would think you would be tight somewhat to that trend and that particular aspect of business. Do you feel there are some other riding factors that might takeaway from growth? I’m just curious what you’re thinking.

I think you know me a long time. So I tend to be very cautious. So, generally, you rather have the numbers speak for themselves instead of me projecting. And I know one thing that if I do come out with projections and if I’m wrong, we get beat up pretty bad on that. And I’d rather – again, it’s been [indiscernible] right or wrong. Generally, we’d rather have our sales numbers and the actual numbers verified what we think internally.

That’s fair. I get that. And then I wanted to quickly ask about gross margins. You guys are finally catching some good stride. And I think margins are very, very close to peak in the last 12 months. How may I think about margin progression through the second half and then potentially even next year?

I think the margins of these sales levels, if we’re not going to see much difference. I think if these sales levels without all the – completion in the integration work that went on and the cost savings that have been made through the acquisitions and just really refining our operations. There’s not that much left to do. So – and without those changes, our margins that these sales levels wouldn’t be there, but they are there because of the cost savings. So, I think, we’re now at the stage that there’s not much more we can really do with the cost savings until we get to the – but we are well positioned any sort of a sales increase. We’re going to do very well.

Okay. So the leverage on the sales growth would be just the one that would drive leverage.

Yes.

Okay and then similar question, very similar question on the OpEx side. I suspect you’ve taken on most of your cost that were easily – that you’ve could easily take out. Can I expect OpEx to stay hover around the $20 million? It jumped up pretty nicely from March, I’m curious what drove that, and then what should I’d be expecting for the back half?

Yes. So from an operating expense or an SG&A perspective, keep in mind that quarter was $17.9 million – $18 million that also included the credit that we recorded on the VHC and other tax items that roll through operations about $2.3 million. So, we’d like to look at it as a percentage of sales when we look at operating expenses and I think that around the 14% to 15% of sales is a good indicator as to where SG&A will be.

Okay. That’s fair. That’s it for me. Thanks guys.

Thanks.

Thank you, Harsh.

Thank you. [Operator Instructions] We will now go to Hendi Susanto with Gabelli and Company.

Good morning Dan and Colin.

Good morning, Hendi.

In Bel Power Solution, how should we think of the next quarter, the future represents the bottom of your sales or there is some possibility that sales may decline further? Can you just give your indication with either…

So this quarter was $33.5 million; third quarter in 2015 was $39 million to $53 million; first quarter was $33 million to $30 million. So I would say that the last two quarters we were running at $33 million. So I would think we’re pretty much should be at $33 million. And that means we’d be down roughly $6 million from the year before.

Okay, so you expect that to stay flat roughly. How about magnetic, Dan?

Magnetics are a little different to judge. But to give you an idea again, we were at $19.5 million in 2015, let me double up, I’m sorry, I apologize. We have two things that make up MagJacks. So we’re at $35 million this year at this point in time. And last time, we were at $40 million. And I would say we should be in around about $35 million again. And last – maybe compared to the previous quarter we maybe close, maybe down a $1 million. I mean that when we look at the – going to our third quarter compared to third quarter next year, it should be the same as the third quarter in 2015.

I see.

Or maybe $0.5 million.

Okay.

And that again is educated guess. I didn’t really dig deep into the backlog.

And then [indiscernible] situation, do you see more potential deals in your M&A screen?

Yes, we see things a little saw, not as many deals as we’ve seen before. Generally a lot of deals always break in December and November, opportunities, books. Again, I would say things have been a little soft, which is you think that these interest rates, you know, it’s a lot easier to buy companies and if you’re going to sell, it might be a good time to sell, because people can borrow pretty easily.

Thank you.

Thank you.

Thank you. Our next question will come from Lenny Dunn with Freedom Investors Corp.

Good morning and we still remain patient investors and then long-term investors. And I know that you’re paying down your debt a little ahead of schedule still. Do you anticipate accelerating that or right about what you’re doing?

I think at this time that we – Colin; I think at this time, if we do have extra cash, the board determine that the best thing is to pay down debt as quick as possible.

Okay, okay. Even though it appears that interest rates are going to remain extraordinary low for at least the next year or so?

Here’s one for you. If Donald Trump gets elected President, what do you think it’s going to happen to our interest rates?

I don’t think that the interest rates of the United States are going to vary too much.

Although when you say you are not going to pay off your debt, and you’re going to refinance your debt, I think that brings a lot of uncertainty throughout the world. So from opposition, our concern is just from an agent standpoint that we think that if he’s elected, definitely going to affect the interest rate.

Well, you’re entitled to your opinion when we buy. And the other thing is that if you’re seems to have relatively stable investor base now, I mean for a while was very viable, but it seems relatively stable. But if we’re looking at this as a private investment even and in a long-term I ask each quarter if you can just bump the dividends slightly I think that would be good for the share price and also makes it a little less paying those to be very patience holders. So…

Yes. And you know what I’d always say, I’m all for it as a large shareholder, but my board still believes that paying off the debt makes a lot more sense for us.

Yes, but $0.01 of a share would be…

You’re talking to the quarter…

Well, just you know a little…

I can’t override it. If it was my decision, I agree with you.

But…

And I assure we propose it to the board every time that you know should we increase the dividend or not.

Even if…

Even by a $0.01 or $0.005. I’ll take anything they want to give.

And thank you for your questions, Sir. We’ll continue on to Anthony Gulu, Private Investor.

Good morning gentleman, thank you very much for taking my call. I have two questions which are somewhat aligned. They have to do with an item. On the income statement that essentially jumps off the page and that’s the benefits provision for income taxes. My question is number one, what would be the genesis, what would be the rationale, and how is that $14 million item derived? My second question has to do with the question of what – if we did not have that benefit, what would be the normal taxes? In another words, if we didn’t have that benefit what would be the normal taxes? And thank you.

So, look, there’s a couple of compliance that go into the tax provision or benefit, actually for the quarter. We took a sizable credit which was outlined in the prepared remarks as well as in the press release. In the quarter related to selling of some uncertain tax liabilities. That was approximately $14 million in the quarter. We also had some items come through the benefits related to the mix of the pre-tax losses in earnings. When you look at a cash provision we – you need to look at it on a regional basis. As you maybe aware, U.S. has one of the highest tax rates in the world, Europe is lower, and Asia is about the lowest. So we have pre-tax losses in certain jurisdictions that have higher rates such as the U.S., as well as earnings in regions that have lower tax rates, which helps bring down the total benefit or provision for the quarter. Having said that, we would probably still be at a benefit position for the quarter, basically due to the mix of the pre-tax earnings in the jurisdictions, the loss is being in the higher tax jurisdictions causing a significant benefit in the quarter.

And Frank going forward, could you give them any clarity of what our tax pictures should like?

Yes, once we – I think at least most of these tax issues relate to something we inherited, these major items that we inherited when we did the recent – the acquisitions a couple of years ago. And we’re trying to get those all – sorted out, and continuing to get those sorted out. But once we get away from those abnormal items, our regular tax rate would be rather about 20% – blended tax rate, pure blended tax rate from current operations would be at 23% to 25% blended rate.

Thank you. [Operator Instructions] There are no additional questions in the queue. I’d like to turn things back over to Mr. Daniel Bernstein for any additional or closing remarks.

Once again we’d like to thank you for joining our call today. And we look forward to you, speaking to you in October. Please have a good day.

Thank you. And ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation.