Bel Fuse Inc. (BELFA) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Bel Fuse Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Dan Bernstein, President and CEO. Sir, you may begin.

Thank you, Todd, and welcome to our conference call to review Bel's fourth quarter 2011 and year end 2011 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance. Colin?

Thanks, Dan, good morning, everyone. Before we begin, I'd like to read the following Safe Harbor statement. Except for historical information contained in this telecon call, the matters discussed in this call, including the statements regarding the effects and costs of, and the anticipated savings resulting from Bel's streamlining activities, the time required to implement such streamlining activities and anticipated changes in product offerings, are forward looking statements that involve risks and uncertainties. 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; capacity and supply constraints or difficulties; product development; commercializing 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 recent 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 statements. Now turning to our results. Sales, year-over-year, for the fourth quarter of 2011, our sales were $68.6 million, down 18% from the $83.7 million that we reported in the fourth quarter of 2010. Compared to the third quarter of 2011, sales declined by 9.6%. The decrease is across all major product lines. We continue to experience significant low demand for integrated connector modules in comparison to prior periods. Although integrated connector module backlog has increased compared to the third quarter of 2011, we remain significantly below the highs we saw in 2010. Compared to the third quarter of 2011, the order backlog has decreased across all other product lines. The cost of sales and net results. As noted in the second and third quarters, the significant shifts in the nature of our business away from labor-intensive magnetics products towards more Value Added modules products continue to have an impact on our gross margin during the third and fourth quarter of 2011. The product in our modules group, which includes Power grid, power line and DC-to-DC converter modules have a higher material content, which results into lower-profit modules than our other product lines. Although we have seen somewhat a raise in commodity prices recently, higher cost of commodities including gold, copper and petroleum-based plastics, the government mandates for higher minimum wages and overtime requirements in China, continue to keep manufacturing costs high in comparison to the prior year, and fixed overhead costs representing a higher percentage of sales due to the current low level of magnetics production in Chinese factories. The combination of these factors led to an increase in cost of sales from 78.5% of sales in the 3 months ended December 31, 2010, to 85.1% of sales in the 3 months ended December 31, 2011. On an unaudited GAAP basis, Bel reported income from operations of $1.1 million, an after-tax net income, net earnings of $100,000 for the fourth quarter 2011. Last year, we reported income from operations of $100,000 and an after-tax loss of $1 million for the fourth quarter 2010. To state these results on a comparable basis, non-GAAP income from operations for the fourth quarter of 2011 was $1.3 million compared to non-GAAP income from operations of $8.2 million for the fourth quarter of 2010. Restructuring charges and the gain on disposable property, plant and equipment has been excluded from non-GAAP income from operations for the fourth quarter of 2011, while various amounts consisting primarily of litigation charges have been excluded in comparable 2010 non-GAAP income from operations. The decrease in fourth quarter 2011 versus 2010 non-GAAP operating income was attributable to lower sales revenue and combined with a decrease in gross margins that I described developed. A reconciliation of GAAP to non-GAAP measures is included in our press release today. Turning to selling, general and administrative expenses. On a comparable non-GAAP basis, the dollar amount of selling, general and administration expenses decreased from $10 million during the 3-month period ending December 31, 2010, to $9.2 million for the third -- fourth quarter of 2011. Due to the year-over-year decrease in fourth quarter revenue, which I discussed earlier, SG&A as a percentage of sales for the fourth quarter of 2011 was 13%, up from 11% -- 11.7% of sales through the fourth quarter of last year. Turning to taxes, Bel recorded provision for income taxes of $1.1 million for the 3 months ended December 31, 2011, compared to $1.2 million for the 3 months ended December 31, 2010. This was mainly due to taxable operating profits in the U.S., combined with operating losses recorded in Asia with minimal tax benefits in both years. The company's effective tax rate, which is income tax provision as a percentage of earnings before income taxes, is more than 90% of the 3 months ended December 31, 2011, and exceeded 100% for the same period in 2010. The company's effective tax rate will continue to fluctuate based on the geographic segment in which the pretax profits are earned. From the geographic segments in which Bel operates, the U.S. has the highest tax rates. Europe's tax rates are generally lower than the U.S. tax rate, and Asia has the lowest tax rates. The Internal Revenue Service ordered our fax to send our tax returns for the years 2004 through 2009 is nearing completion, and we do not expect it to have a material impact on our results. Cash and equivalents under the balance sheet. At the end of 2010, our cash, cash equivalents and investment securities were $94 million, which was $8.4 million higher than our December 2010 balance of $85.5 million. The increase in cash resulted primarily from earnings of favorable operating cash flows, partially offset by approaching the total of $13 million in the form of a supersedeas bond to the Court in the Eastern District of Texas, while the previously disclosed SynQor cases are appealed to the United States Court of Appeals, as well as the payment of $3.2 million in dividends and $2.0 million (sic) [$0.2 million] worth of capital expenditures. Receivables and payables. Receivables net of allowances were $39.1 million at December 31, 2011, compared to $53.3 million at December 31, 2010, a decrease of $14.2 million. Our accounts payable at December 31, 2011, were $19 million, a decrease of $2.2 million from December 31, 2010. At the end of December 2011, our inventories were $53.4 million, down $3.6 million from the December 2010 level. Other balance sheet comments. Our capital spending for the 3 months ended December 31, 2011, was approximately $700,000, while depreciation and amortization was $2.2 million. Our per-share book value at December of 2011 was $18.72 when we include goodwill and intangibles. Excluding the intangibles and goodwill, our per-share value was $17.45. On our outlook, as we've proceed into 2010, with shortened lead times, we expect to see continued price pressures. And just some general comments. In addition to streamlining our operations, we have begun to focus our product development efforts on non-commodity products. This major effort will be on the Modular product line in both Power and Value Added products and Mil-AeroSpace products found in our InterConnect product line. Our acquisition strategy is really focused on companies that produce such products because we believe they provide the greatest opportunity for Bel's long-term growth and profitability. Now I'll turn the call back to Dan Bernstein.

Sayid, if possible, can we open up the call for questions at this point?

[Operator Instructions] We have a question from Zach Larkin from Stephens Inc.

First off, Colin, I wonder, do you have the segment revenues for the quarter?

I'll just see what we have. Just 1 minute, Zach.

Zach, just ask me another question while I look.

Okay. While you're looking for that, I wondered if we could get a little bit more color on the restructuring activities. Is there anything specific that you'll be working on, things we should look for, and also the way you can think that it might flow through, expense-wise, as we move through the year?

Colin, do you want...

Yes. It's -- we can't get into a lot of detail because some of these are related and some of the issues are on the side that -- they're sort of in many different segments, if you will, and our plant and facilities, different facilities and plants and so on, and some of them are still subject to some regulatory approval. But most of the expenses will be sort of back-end loaded through the year. So really, not very much in the first quarter, a little bit more in the second quarter, and we really expect the bulk of the expenses to be in the third quarter.

Okay. And are you going to report those as a line item or is that -- are there going to be SG&A or OpEx impacts at all?

They're going to be all over the math, that's one end. The bulk of that, that will be in cost of sales and G&A. But I think probably thinking about it, they'll likely, mostly in G&A, in cost of sales.

Zach, would you like the sales breakdown by quarter or by 12-month period?

By quarter would be fantastic.

Okay. So for the fourth quarter, our Modular is 20.883, magnetics is 21,407, InterConnect is 24,341 and circuit protection is 2011.

2-1-1 for circuit?

2-0-1-1.

0-1-1, okay. That's what I thought. Perfect. And then also just maybe if you could talk a little bit more in magnetics. Obviously, it's continued to be under pressure. You're shifting focus in the more of the module activities. Do you expect the pressure, I mean, any release in sight on magnetics at all or just continued...

No. Again, historically, you see a lot depends on lead times. When you have shorter lead times, you do see a lot more price pressure. However, one of our major customers have allowed us to start up their 18 month agreement, which allows us to look at materials a little bit different and look at stocking differently and running a lot more efficiently. So that should help out a lot. But we do think that historically, we have been a market leader, we have been the single source for many customers and that we are seeing a lot more pressure. So -- and we do think that's going to continue. However, as the lead times do get stretched out for whatever reason, then price pressure should leave.

And then just one final question, if I may. Obviously, cash balances remain robust even in difficult situations. Do you guys have any thoughts or plans for use of the cash?

Oh yes, we really did. [indiscernible] in fact, [indiscernible] dividends, but somehow, it important to everyone [indiscernible] rich. But we really have been selfish on the acquisitions, and we feel the ability of the company -- and we had a conversation with the board yesterday, should we even increase our dividend. And we think that the best return we possibly get is through acquisitions, and that's where we really are focused in the use of funds for.

Our next question comes from Sean Hannan from Needham & Company.

So I was actually looking to see if we could dive back into that streamlining cost actions that you've been taking as well as the plan. So when you look at COGS and SG&A, where is -- can you help us to identify where more of the impact is going to be and how that split will transpire?

I think as I said, Sean, or indicated, it's not all finalized yet. We got some -- we've got some broad parameters of where we're going. Obviously, we'll break out the numbers so we've got a pretty good handle on it. But most of it, the large portion is going to be in COGS. And the back-ends are going to be in COGS also. Just, I would take it out so [indiscernible] overhead people. That's what this plan is to get to the core of the operations.

Great. And so based on the timeline that you've put out there, we should be at a $4.4 million annualized savings run rate in December, in the December quarter. Is that accurate or is there, for some reason, a lag?

That's accurate.

Okay. And then when you consider some of the product development efforts that you have versus M&A, what do you suspect at this point to be more likely to contribute incrementally to your top line when you exit '12?

Well, it has to be through acquisitions. The price pressure we feel when we're dealing with product development, it's probably a slight tradeoff. The growth that we are now in, the growth truly has to come through acquisitions.

Okay. And for most products that you're focusing greater efforts around, what's the degree that you are aiming to improve that margin profile? And could you elaborate on what you mean by Value Added products? Because when I see that, some of that I think of as also similar to -- to the Ambient business, which I believe has a lot of material content, and that's not necessarily margin enhancing.

Well, it's not marginally enhancing. But again, ultimately, again, it is the bottom line, not the margin, and how we -- how much profit we can make for the company. So again, as you know that as we work hard strengthening a big machine again [ph], that the margins are not going to be sort of similar on all the products. And we feel it's a viable business with our old ad structure and our asset-teaching ability. So generally, although our sweet spot is to look at any device where we can control maybe 25%, 30% of raw [ph] material and that the volumes are not all doing great, we get the larger companies like [indiscernible] interested in it. So the Ambient was a perfect example of that, but we have put a lot of value for them and really worked on the redesign of that product. So we feel those are the opportunities. When you talk niche, anywhere, our target [indiscernible] any device would be anything that gives us revenue of $2.5 million to $5 million is probably our sweet spot.

Okay. So a scenario of taking on more contracts manufacturing business is certainly within the realm?

Yes, but not too where we are. We will be pushing a lot more through ourselves and organization. And then possibly, even developing incentive systems to reward our sales people, looking differently, that's a positive [ph] .

Okay. And then in terms of the actual product development efforts, are you funneling more dollar resources into R&D? Should that kick off much in '12 or are your efforts really more you're laser-focused on identified products that perhaps you're already working toward?

I think at this time, given where we're focused that we are, we don't see it increasing R&D. Possibly, something like [indiscernible] but not substantially. I would say probably minus. I think our personality, we spend a tremendous amount of time in the AC/DC area. Many of our customers, they want us to get into AC/DC product line. And I think maybe at a certain point that we can't find a possible acquisition and we might say okay, let's bring in a group of people to work for probably 6 months to a year where we would [ph] add sales, and the group will cost us $1 million as there's other product in that area. But at this point, we are -- heavily more focused on the AC/DC area within acquisition, but that might change by next quarter.

Okay. And then when you think about the balance of strategy in terms of customers, again, when you think about either expanding some of the contract manufacturing services in Value Added in your products, how do you think about the balance strategy for your customers? Is it going after a new base as a larger realm? Or is really this -- a continued complement to sell into your existing base?

I think what we are really going to focus on, Sean, is at the growing of new base. Again, we'll have more when we add niche markets, getting away from the high volume telecom networking people. All our customers there are just so big that with that many products, I think, are suited for us with them. Then they tend to go with a [indiscernible] the best products. I think we're looking for customers, again, looking at Ambient, where I think we also had a unique approach. Besides giving them very good production, we help them from a financing standpoint and we really help them from a production cost standpoint. So I think that's where we -- the more value we could add, I think, is where our sweet spot is. And as I try to get back to what we're looking at, is that $2.5 million to $5 million-type of product we could work in because those are types of products that need, I think, a lot more engineering design, and we'll in that type of products. So again, back to the question, yes, I think we're already at niche markets and industrial markets, and getting away from the high-value networking telecompanies for Value Added products.

[Operator Instructions] Next question comes from John Hudson [ph].

; I really appreciate hearing that you're still continuing your look at acquisition possibilities aggressively. I think with the world economies volatile as they are right now, there's certainly more risk that I think on the other side, there's even more potential. And I wanted to just encourage you and say I appreciate the direction you're going. And I also wanted to comment on Pulse Electronics. It still looks like a good potential candidate to me, and I'm hoping it's part of the mix of the companies you're looking at still. And I think even though the value of Pulse has gone down from where it was 2 years ago to Bel Fuse, it still has a lot of synergies. And I think, of course, it's more potential acquisition at a lower price today. And so short-term, they've got a lot of problems, but long-term, I think it's still a great synergistic opportunity for Bel Fuse. So I'm not sure if you can make any further comments than we already have, but if you can, I appreciate anything.

So I'd say, again, the [indiscernible] between Pulse and Bel has been going on, I think, for 22 years. And I think at this stage, one of the reasons I went out and spoke to the investor community 1.5 years ago, one of the things that we're really trying to stress with the merger of both companies is that we're moving again to a very difficult marketplace and we needed the synergies so we can better prepare ourselves. And in addition to getting in a more difficult marketplace because of the upsurge after recession, we knew that wouldn't last forever, we have to do reality check, and make sure that we were following that. This is important as we were facing a lot more competition but our major product line, which at that time was the MagJack. And now that we do have more actual types that are out there competing against some of this, it kind of lost a lot of the glamor we were looking at with Pulse. And I see a lot of those synergies. I think those synergies were a lot stronger, possibly 2 years ago than they are today as they evolve more into the wireless business. So again, I think we would always like to do a fair, big deal with them and we always look forward to speaking with them, but I think at this point, I think from a shareholder standpoint, that I think there's a lot better opportunity with other companies that would give us a lot more growth potential. And again, I do appreciate the synergies but we want to have with a company that we can grow with and I don't think that's going to be possible.

And our next question comes from Ted Merl Senior[ph].

My questions, Colin, I might address is to you since the question of pricing pressure came up at our investor meeting last call. But at that time, I was under the impression that there was a lessening of pricing pressure. Is there a change in the environment? And I would presume the economies and the competitive pressures, but it may well be that some of the more Value Added products may not be on the market yet. But can you just comment on maybe the magnitude of pricing relative to what it was back last fall?

This is Dan, and I'll take this one on. In our industry, the component industry, and again, as you move more into the Modular business, so these are going to change. It's a competitive business as much as we like to say with certain things. Our customers are always going to demand a 4% price reduction every 6 months. And they don't care that the materials are going up. Again, in the world, they don't care if wage is going up in China. The only amount that they know is there's going to be a 4% price reduction and I don't care how you get it, okay? In reality, however, when the lead times are pretty niched, they know they're not going to get it. And then stock, and at that time we increase price. However, we have a 12-week window of which, I believe, [indiscernible] are down from there at 10 to 12 weeks, that market grows stronger and they have a lot more leverage against this. There's always this constant flow, back-and-forth with this. And I know it sounds crazy because you say, "Hey, don't you do pricing based on bill of materials." All the same. [indiscernible] in reality, I've been in the business over 30 years, and that's the #1 deciding factor in our industry when it comes to pricing is definitely lead times. And at this point in time, the lead time is short, but you don't know what's going to happen in 4 or 5 weeks. If I can just change this just as quick as I can today.

So other than the timing issues, there isn't a material change really in the pricing environment from a competitive standpoint.

So the customer's asking again -- now customers asking for anywhere from 4% to 8% reduction and what we've done with our pricing because of materials and wages situation in China, there should be a 4%, 5% increase. So that's where the economy -- so much stabler, I think, but again, depending on the way of the leads.

Yes. Is the strategy, going forward, are nonetheless to come out of more Value Added products that might not be as commodity-driven, and consequently, maybe a little less on the pricing?

So that's our hope though, is to look at, again, look at products that needed a lot more engineering design centered in it. Because you don't have 3 or 2, a few more competitors you're competing against. But you're looking at 1 or 2 competitors. The last piece that we'll need to talk about, the power industry, and realize our major customers. A lot of power products, you'll have necessarily 3 or 4 competitors again. A lot of it also on, as we're negotiating in the Mil-AeroSpace business, we have deals with the [indiscernible] and the Honeywells and the [indiscernible] of the world. What you're working at, it takes you 2 years to get design between years but once you've designed it, you can get a contract for 5 to 6 years. And basically, what you're selling is, it's quality, and that's the #1 thing they're all looking at. You do face price pressure, but definitely, the conversation always starts with quality first. And that's where we're trying to migrate and focus more of our attention, is again, the Modular group and the Military-AeroSpace group.

Great. One other -- just question on the subject of acquisitions. Is the environment fairly active? Is the pricing reasonable? Are there a lot of opportunities out there or companies maybe having difficulty and providing some opportunity for you? What's the general background environment for the acquisition?

Well, I think now we are, I think, certainly have a better deal from which the cost of 2 acquisitions, [indiscernible] numbers, probably 75% of this should be completed by mid-year this year. The other acquisition, we are -- again, we look at the multiple and we start with fixed income, with EBITDA. We're still maintaining -- we're competing against PD people, so sometimes they go a lot higher, which we can understand. Well, I don't think we'd see multiples beyond 10 or 11. [Audio Gap] So we're going do all again. It's maturing for us just because we have so much cash and we're not getting money on our cash, that we're acting, tend to be a little more aggressive amidst where we are in our sweet spot now. And I think, generally, maybe 1 year and 1.5 year ago, we might kind of have multiples of 6 or 8. We might pay a lot higher and were saying, hey, it might not be accretive for the first 2 quarters, but we own [indiscernible] company and take out, of course, certain [indiscernible], and then it adds value to us. So one of the things that we are really looking at is that with the Cinch acquisition, because there was kind of a bad apple child of Safran. They didn't have much resources behind them. So what you learn, though is what we are trying to do is look at acquisitions that could be nice add-ons to Cinch. Now if you can go back regarding and add on to that [indiscernible] a lot of people and say, "Hey, we are committed to this company. We have done add-on acquisitions. We are looking at new technologies." And hopefully, they can see us a lot better. And again, if I would follow and say again who the [indiscernible] who would I lock out and compete against, it is the Power-One [indiscernible] of the world, or is it Storyhouse [ph] or Radiohouse [ph] against the world, I think I'd rather feel more confident that I could compete against [indiscernible], that is a big connected company down in Europe. Then we get Power people and we'll tell them. Don't you think I'm against people. So again, so the acquisitions -- but I think they are, the key is to be really positive. But again, we are hoping that we'll give a whole new impression of Cinch, and everyone will think Cinch going forward.

Our next question comes from Sean Hannan from Needham & Company.

So one question I wanted to ask was, when you're -- at this point in time looking forward, in your planning process, is there anything that was or is incremental that seems to be on the horizon that could possibly have been part of the catalyst for the cost actions and the streamlining you're now pursuing other than...

[indiscernible] I'm sorry. No, I mean, looking at our sales also because we mentioned that our MagJack sales was down by $30 million. I mean roughly or even was down $5 million, revenue's around $65 million, so altogether $61 million. So I feel that you -- we think currently around $65 million to $70 million business -- minus copper down. In terms of the competition we see out there, that we're currently kind of mature cashed down business. So how do we realign that business to be more efficient? And so that's where we are really where we're focusing a lot of our attention. And then again, as we try to grow Cinch, how can we streamline Cinch, inevitably [ph], to make it more efficient so when we left the business, it will be cost-competitive. So basically, the major initiatives are focusing down on strong [indiscernible]. And let's look at the MagJack group and how did we rightsize it properly. And when we're doing that, and taking those costs down, we look at everything else in the company, and make sure everything is running as properly as it should be.

That's very helpful. And then last quarter, I thought that I heard MagJack lead times were roughly 7 to 10 weeks, and I thought...

I think maybe [indiscernible] 10 to 12 weeks.

Okay. So there was a slight pop, but it really hasn't stemmed the tide for pricing?

We still have 3 weeks. [indiscernible] I think 8 days after Chinese New Year, so the jury is still out. We had a run rate -- a return rate of about 90%, so we're pretty confident. And now our other competitors are doing, and I think more of our competitors slowed down and overnight, our backlog, it really started to increase pretty rapidly.

Okay. And then to the first 5 weeks of the quarter and considering the Chinese New Year impact, how would you say that sales are tracking thus far versus your December quarter?

[indiscernible] for the Chinese New Year kind of botched us up, so we can't really compare apples to apples. So we've got to look where, I think the best time to look at is probably March 1 to get the 2 overlap. Because Chinese New Year came so early this year, so it really screwed up the month of January. And then, well actually, Chinese New Year was in February [indiscernible] in 2 weeks, clean up both those runs, and we think that's a good idea. I think you can see what we're projecting by shooting price for last year.

Okay, that's helpful. And then, did you have a 10% customer in the quarter? And can you characterize the nature of that customer?

We had one customer, I don't think [indiscernible], which had very good numbers yesterday.

And I'm showing no further questions at this time, gentlemen.

All right. Once again, we appreciate everybody joining us, and hopefully -- we look forward to speaking to you again. Thank you for your time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect, and have a wonderful day.