Bel Fuse Inc. (BELFA) Q1 2012 Earnings Report, Transcript and Summary

Good day everyone, and welcome to the Bel Fuse First Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce the host for today's conference Mr. Dan Bernstein.

Thank you, Carolina, and I would like to welcome everybody to our conference call to review Bel's first quarter 2012 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance.

Thank you. Dan, will I start off with the Safe Harbor statement?

Go ahead Colin.

Yes, thank you, Dan. Good morning everybody and sorry about the glitch. I would like to read the following Safe Harbor statement. Except for historical information contained in this conference call, the matters discussed, 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, Cinch's place in the aerospace market, anticipated changes in product offerings and the company's ability to support those more effectively, its growing international customer base, 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 concern facing our customers; the continuing volatility of the 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 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 statements. Now moving on to comments related to our results. First of all, I'll review our sales. Year-over-year for the first quarter of 2012, our sales were $65.6 million, down 8.2% from the $71.4 million that were reported in the first quarter of 2011. Compared to the fourth quarter of 2012, sales declined by 4.5%, as double-digit growth in Interconnect and Circuit Protection product groups were more than offset with decreases in our modules and Integrated Connector Module product groups. Although Integrated Connector Module backlog has increased compared to the fourth quarter of 2012, it remains significantly below the highs we saw in the past. Compared to the fourth quarter of 2012, order backlog coming out of the Lunar New Year has increased from DC-DC, passive connector and transformer products and is flat to slightly down across all other major product lines. Cost of sales and net results, as noted in the previous quarters, although we have seen some moderation in commodity prices recently, higher costs for commodities including gold, copper and petroleum-based plastics and government mandates for higher minimum wage and overtime requirements in China, continued to keep manufacturing costs high in comparison to the prior year. A shift in our business away from labor-intensive magnetic products towards higher material content modules products result in lower profit margins in our other product lines. And fixed overhead costs represent a higher percentage of sales due to the continuing low end of magnetic production in the China factory. The combination of these factors more than offset the strong first-quarter performance in our Cinch Connector business and led to an increase in cost of sales from 80% of sales in the 3 months ended March 31, 2011, to 84.5% of sales in the 3 months ended March 31, 2012. On an unaudited GAAP basis, Bel reported income from operations to $1.4 million and after-tax net earnings at $900,000 for the first quarter of 2012. Last year we reported an income from operations of $4.2 million and after-tax net earnings of $3.2 million for the first quarter of 2011. To state these results on a comparable basis, non-GAAP income from operations for the first quarter of 2012 was $1.8 million compared to non-GAAP income from operations of $4.3 million for the first quarter of 2011. Restructuring and severance charges, acquisition-related costs and a loss on disposal of property, plant and equipment, have been excluded from non-GAAP income from operations for the first quarter of 2012, while severance charges have been excluded from the comparable 2011 non-GAAP income from operations. The decrease in first-quarter 2012 versus 2011 non-GAAP operating income is attributed to lower sales revenue and combined with a decrease in gross margin as described above. A reconciliation of GAAP to non-GAAP measures is included in our press release today. Selling, general and administrative expenses. On a comparable non-GAAP basis, the dollar amount of selling, general and administrative expenses decreased from $9.9 million during the 3 month period ended March 31, 2011 to $8.7 million for the first quarter of 2012. SG&A as a percentage of sales for the first quarter of 2012 was 13.3%, down slightly from the 13.9% of sales during the first quarter of last year. Taxes. Bel recorded a provision for income taxes of $600,000 for the 3 months ended March 31, 2012, compared to $1 million the 3 months ended March 31, 2011, mainly due to tax from operating profits in the U.S. and Europe, combined with operating losses recorded in Asia with no tangible tax benefit, the company's effective tax rate, which is the income tax provision's percentage of earnings before income taxes, was 42% for the 3 months ended March 31, 2012, compared to 24% for the same period of 2011. The company's effective tax rate fluctuates based on the geographic segment in 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 has the lowest tax rates. The Inland Revenue Service audit of our federal 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. Balance sheet, cash and equivalents. At the end of March 2012, our cash, cash equivalents and investment securities were $91.9 million, which was $2.1 million and less than our December 2011 balance of $94 million. The decrease in cash resulted primarily from the payment of $2.7 million for the acquisition of GigaCom Interconnect, and $1.1 million of capital expenditure and $800,000 in dividends, primarily offset by earnings and favorable operating cash flows. Receivables and payables. Receivables net of allowances were $37.5 [ph] million at March 31, 2012 compared to $39.1 million at December 31, 2011, a decrease of $1.6 million. Our accounts payable at March 31, 2012 were $20.3 million, an increase of $1.8 million from December 31, 2011. And turning to inventories, at the end of March 2012, our inventories were $56.8 million, up $3.5 million from the December 2011 level. Other balance sheet comments. Our capital spending for the 3 months ended March 31, 2012 was $1.1 million, while depreciation and amortization was $2.1 million. Our per share book value at March 31, 2012 was $18.82. That's including goodwill and intangibles. And excluding intangibles and goodwill, our per share value was $17.31. Just a little word about our outlook as we proceed into 2012. With relatively short lead time for our products and those of our competitors, we have a tight labor supply and no significant release for commodity prices and as we expect to see continued price pressure on those products which we manufacture in Asia. On March 8, 2012, we completed the acquisition of 100% of the capital stock of GigaCom Interconnect, located in Gothenburg, Sweden from GigaCom Holdings, for $2.7 million. In addition to streamlining our operations, we have begun to focus our product development efforts on non-commodity products. This major effort will be in the Module Product line in both power and value-added products and the Mil-Aerospace products found in the Interconnect product line. Our acquisition strategy remains focused on companies that produce such products because we believe they can give us the greatest opportunity for Bel's long-term growth and profitability. Now, I'll hand it back over to Dan.

Just so you know, Colin's in Singapore during this call. Just one point, I think, we should clarify. Regarding our outlook for ICM, which is one of our major product lines, we are seeing lead times being stretched out at the end of the fourth quarter. They were running about 8 to 10 weeks, and now they are in the 18-week range. So that product line, because it is a very labor-intensive, we do see lead times being stretched out. At this point, I would like to open up the call for any questions people might have.

[Operator Instructions] And we have a question from the line of Zach Larkin with Stephens.

This is Chris Godby in for Zach Larkin at Stephens. First question for you, will the restructuring cost that you mentioned on your press release, will those be fairly evenly spread across the next 3 quarters? Can you give us maybe some color as to how those costs would be spread out, and also do you anticipate further costs in '13?

They are not going to be evenly spread because of the rules and regulations we are dealing with and when we make an announcement regarding the labor situation. So they will fluctuate somewhat. Colin, do you want to add some more flavor to that?

They are going to be back-end loaded, Chris. Certainly are going to be more in the third and fourth quarter timeframe. We do expect them all, the expenses, to take place this year. That's our current belief, but there is some possibility it might stretch into next year, but the amount we've announced is the total amount for what we have in mind.

That answers your question?

No, that's great. And then, so it sounds like that you anticipate that the program will be fully implemented as of the end of this year. So then for 2013, is that when you expect to have the full $4.2 million cost savings run rate in place?

That is our goal and we are doing everything possible to make sure we meet that goal, yes.

Okay great, and can you give us any color as to what cost savings we might want to expect in 2012? Are you able to give any color there at all?

I think our projection, again, is to get to savings around 4, 4.4, in that range, you know, and then this would pay for itself within a year. I don't think we really will see cost savings probably until the fourth quarter because there is going to be some redundancies in the third and fourth quarter as we train people and shift production around. So we're building up inventories and also, we're building up a double labor force. So as we wind down one, we build up the other one. So I don't see any of the cost savings -- We did have some early retirements and layoffs in the past quarter, but going forward, I don't see anything that'd be one-for-one, there'd be that transition period of probably 60 to 90 days.

And then a bit of a housekeeping question. Can you break out the segment revenues for the quarter?

Colin, you want to do that or I can do it for you, okay. So if you look at Modulars, it's $16.7 million; Magnetics, $19.2 million; Interconnect, $27.2 million; Fuses, $2.4 million. Okay, that should give you roughly about $65,561,000.

And then, one last question for you, just looking at magnetic, how would you describe the pricing situation right now? Are you seeing any improvement there, are you anticipating that kind of pressured pricing will continue over the last...?

No, I think what we're seeing now, what we're trying to do because our lead times are stretching out. We are making, we are in the process now of making a concerted effort to focus on products that have high margins. Where products that have good margins, we're trying to keep those lead times within 12 weeks, product with poor margin we hopefully can let that stretch out to 16 weeks. So we don't know. Again, we are not -- I doubt we'll see anymore price decreases and we should be looking at price increases as lead times stretch out.

Okay, great. So kind of thinking about margins a little bit, I know quarter-over-quarter we did see some pick-up there. For the remainder of the year, are we likely to see margins kind of similar to what we saw in the first quarter?

Colin, I'll let you address that one.

Yes, well, we did have a, quarter-over-quarter, we did have a 1.1 point improvement in margin. A lot of it's going to depend on where we are with the labor. We hopefully, as volumes pick up a little bit too, which we also think will happen, that'll help us with our overheads and get some of our cost out, particularly our factory overheads. There is very little we can do now with our SG&A, we're fairly bottomed out on that. So yes, we think there might be a little bit of margin. The big kicker is really going to be related to mix, at the end of the day. We've been very fortunate with the mix we've had just recently. Cinch has been doing a little, somewhat better than the rest the business, as we said. And while their margins tend to be higher, obviously, their taxes tend to be higher too. So from a gross profit point of view, our margins, I think are showing fairly good gains.

But, I think again -- no, not to mislead everybody, we are committed to grow the Modular business and the Modular business does affect our overall margins, because their build materials are so high. And this past quarter, for certain reasons, the Modular sales in one of our major customers was down, so I think that's again, if that picks back up, you know it does affect our margins.

And our next question is from the line of Sean Hannan with Needham & Company.

Just a follow-up on some of the comments you started on for the Modular business. Can you elaborate on the business levels and the demand flowing through there? I think your main customer is more of a smart grid customer that's working through business that's a bit more project-oriented, are we seeing any change or upcoming...?

Yes, I think we see things pretty stable going forward, until we get a new, some new business. And we know that last year was stronger than this year, but we're still waiting to see again, how well Duke does, and other customers he has, really affects us. But again, if you looked at the quarter, I think he, he looks like he was down 266,000 to last year, from quarter-to-quarter. And then if you look at -– I'm sorry, from quarter-to-quarter, I apologize, that's from last year quarter one last year to this year, he's down 266. But from the fourth quarter to this quarter, he's down 1.6. So hopefully that gives you some better idea.

Sure, that's helpful. So and then in general...

[indiscernible] that guy is only 25% of our modules.

And that is, are there not -- Let me see if I can ask a different way. I understood him to be one of the largest piece of your, pieces of your Module business, though?

Yes, but he represents, again, he represents 21% of it.

Right, and so the remainder is fairly distributed amongst many customers or what's the concentration there?

Well, the DC you know, with the DC-DC business, we have one customer that probably accounts for 30%, 40%. And then we have another major customer in the Modular group that accounts for about 9%. So if you look at, I would say maybe, probably 50% is with 3 customers, maybe.

Okay, that's actually extremely helpful. So on the interconnect side, it sounds like the way you've talked about your focus on better margin products versus lower margin products and the lead times associated with them, historically that has led to better pricing. Doesn't sound like in actual...

Well, not better pricing [indiscernible]

[indiscernible] your portfolio, right? Okay, that will be managed this?

Let's just go back, for whatever reason, we put the interconnect, the MagJack, under magnetics. So even though the term Interconnect Modular or ICM or MagJack, falls under magnetics. Under that product, within the last 8 weeks, our backlog went from $14 million to about last, from last quarter to this quarter, it went from $14 million to $24 million. So again, it has grown pretty rapidly, and then again, as that happens, our lead times are getting stretched out as labor gets more difficult to hire, as we get farther away from Chinese New Year. So again, while we are trying to do -- before we can implement any pricing, because a lot of our pricing is based on contracts, is at least on the lead times, make sure that products that have long lead times or products that have bad margin and if get products out the door, maintain the 12-week lead time for products with greater margins.

So on a blended basis as you look at that portfolio of products, you are able to effectively to mix up?

Yes, we are hoping to, and we're in the process of trying to accomplish that goal.

And then, so on the M&A front, the area of interest that you've spoken to in the past, can we see some activity in the near term that might be larger than GigaCom, whether [indiscernible]?

I'm the boy that cried 'wolf', Sean. Again, if you looked at it, my dream was Power-One, my dream was Pulse, my dream was Artesyn. So again, I think, at this time -- any, at every moment we have, 4 acquisitions. And it's really been surprising that maybe 20 acquisitions that we get on our table, that I would say that, of that 20, 18 of them are less than $25 million. And it looks like we're not getting many opportunities above $25 million. So I think, again, our sweet spot would be to have an acquisition to get critical mass of $75 million to $100 million into the company. But we haven't come across any of those opportunities.

Okay. So how many are you active on today?

Today, we are active, I would say, 4 companies; 2 we're down to the final bid and 1, we're the only bid doing final due diligence. And those 3 companies are under $15 million, and we are looking at another company with sales around $70 million, 7-0. And that process has just begun. Again, the biggest problem we have is, I would say 90% of the companies that come across our desk now are below $25 million.

[Operator Instructions] And we have a question from the line of Mike Cikos with Sidoti & Co.

Just wanted to ask you, and I apologize, I am newer to the company, but the sales decline that we are seeing currently, is it in relation to the markets, the replacement cycle or what's driving that decline?

I think the big thing is, a lot of our businesses is the networking, telecommunication, so you have people like HP, Cisco, Alcatel. And even though Cisco is very profitable, we are seeing that things are levering off the first quarter. So our decline has come, has really come from the Bel standard product. Across all our product groups, we have seen slight decreases in sales and the biggest decrease was in the MagJack, the Magnetic group.

Okay, and can you delve into the streamlining operations that you're going to be going through, just provide some more color on what exactly you are going to be doing?

I wish I could, but because of the new laws and how we make announcements to people, I really can't say anything until the announcement's made. You understand what I'm saying regarding that matter?

Right, I follow.

Before we, again, we need to make the announcement to the people first and at that point we can lay out exactly where it's coming from in the operations and so forth. So our hands are kind of -- in the old days, we could take the reserve, and when you made the announcement, but now it's a little bit more difficult. Colin, you want to add some more on that?

No, I think that's it. We just can't say at this time, but we are hopeful that we'll be able to, within a quarter anyway, be able to get out there. And when we do make the announcement, that everybody will be on the page at the same time.

And our next question is from the line of Ted Moreau with Knight Capital Group.

Colin, and maybe for Dan, just, kind of getting back to an earlier question that was raised about the product cycles and product introductions and other initiatives that might be forthcoming here, that could conceivably benefit margins as we go ahead, in addition to the cost increases. What might be the sort of roadmap or timing of something like that? I know it's going to be sort of a migration, but just want to get an idea. I mean, are we out to 2013 when we might see some impact there?

I think, our goal, I think is try to clean up the company as much as we can this year. Again, the big point was trying to re-focus, looking at where do we want to be going forward, and we believe very strongly that whatever we do, we have to be a little bit more customer-orientated. We have to have a better idea that our products won't be commoditized very quickly. So that's why we're spending more time focusing on the new aerospace business than we have ever before. And the companies we are looking at are companies that can offer that. Also in the Modular group, focusing on AC to DC companies. That would be a perfect fit for our DC companies. So, and buying the GigaCom allows us to get into fiber that we can present to our military customers and to our aerospace customers. So the only problem that we do have is, when we do talk about aerospace and military, is that the gestation period there is 2 to 3 years, generally, for new products. While at Cisco, that's generally 6 to 9 months. And that's why it's somewhat difficult to say how long this road would take us, but we are confident that we are planting the proper seed and doing the right things. Regarding the network, you know the big thing is when's 10 gigabit going to take off and now we are starting to see a lot more interest in it, but we just don't know when the big boys are really going to use it or not. And I think that, from a networking standpoint, that's going to be our big next push. And generally, it's not a big push from a sales standpoint, but a greater push from profitability. Anytime a new technology's introduced, then you have a lot better chance for greater margins.

I assume this will be sort of an evolution and a gradual migration rather than some major tradeshow coming up where there'd be some major product introduction or technology initiative in the industry?

Well, what we've tried to do, for the last -- Since my father founded the company, I think our greatest strength is really to work with engineers in key product groups and focus on what their needs are and try to get them product faster than anybody else. And we've done, I think, if you go back through our history, from RCA to IBM to Deck [ph] to 3Com, today to Cisco, and winning the awards, we've won at Cisco, we do have a great history of accomplishing that goal. Now the question is can we apply that type of responsiveness to Cinch, and to Boeing and to Airbus and to the customers that support that industry. And I think if we can do that, then we are going to have a hopefully long term success.

Are there any major tradeshows that come up? Sometimes there's international ones every couple of years?

We participate in a lot -- we always participate in Electronica, but for the military and aerospaces, I think there is 3 or 4 aerospace shows. We went to the one in India, we attended the one in India, we attended the one in China. So we are looking at not just Europe and United States, but really also understanding very clearly that the future growth is going to be in India and going to be in China and we're really trying to position ourselves. While we do a good job in networking, in consumer electronics, but how do we position ourselves for aerospace in those growing companies.

And I am showing no other questions at this time. I'd like to return the call back to management for any closing comments.

I appreciate everybody coming today. We are sorry for the confusion. I assure you that Colin will be sitting next to me on our next conference call. And thank you for your support. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program and you may now disconnect. Thank you and have a wonderful day.