Bel Fuse Inc. (BELFA) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Bel Fuse Fourth 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. Please go ahead, sir.

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

Thanks, Dan. Good morning, everybody. Before I start, I have a rather lengthy Safe Harbor statement, so bear with me if you would. Except for historical information in this conference call, the matters discussed, including any statements regarding the future impact of restructuring charges taken in June 2012, the timing of the closing of the acquisition of the Transpower magnetics business of TE Connectivity and the parties' abilities to satisfy all conditions of closing with respect to that acquisition, the impact of that acquisition on Bel's ICM business and sales, on Bel's cost structure and on Bel's competitive position. The expected accretive nature of that acquisition, the impacts of the Powerbox acquisition on the future growth of Bel's AC-DC power transformer business, the future revenue of Bel's AC-DC power transformer business and potential contribution of fiber optic products to Bel's future operating results, the potential growth in the Bel sales in the aerospace markets, the anticipated effects of the 3 aspects of Bel's growth plan on Bel's ability to achieve near-term improvements in profitability, on Bel's competitive position in the high-volume commodity product components, on Bel's technology base and on Bel's ability to expand its portfolio of non-commodity technologically advanced components and the potential for non-commodity technological events components to become the primary driver of Bel's future sales and earnings are forward-looking statements that involve risks and uncertainties. Actual results could differ materially from Bel's projections. Among the factors that could cause actual results to differ materially from such statements are: the market concerns facing our customers; the continuing viability of sectors who rely on our products; the effects of business and economic conditions; difficulties arising -- difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development; commercializing or technological difficulties; the regulatory and the trade environment; risks associated with foreign currencies; uncertainties associated with legal proceedings; the market's acceptance of the company's new products and competitor 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, we can make 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. Now with that out of the way, I'd like to move on. First of all, the businesses acquired during 2012. Bel completed the acquisition of Gigacom based in Sweden in March 2012; Fibreco Limited, based in the U.K., in July 2012; and Powerbox Italia, based in Italy, in September 2012. The results of these 3 companies have been included in our consolidated financial statements since their respective acquisition dates. I will note in my comment any material impact that they have had on our results. Sales for the fourth quarter of 2012 were $71.8 million, up 4.5% compared to the $68.6 million in the fourth quarter of 2011, but down 5.7% sequentially from the $76.1 million that we reported for the third quarter of 2012. Fourth quarter 2012 sales in all 4 major product groups were as follows: magnetics, $27 million, up 26% over the fourth quarter of 2011; InterConnect, $26.2 million, an increase of 7.7% over last year's fourth quarter; circuit protection, $2.6 million, an increase of 29% over the prior 4-period quarter; and modules, $16 million, which is 23% lower than sales in the fourth quarter of 2011. As we told you in Q3, the modules product group continues to be affected by a change in the ordering pattern of 2 major customers. Of the above amounts, Fibreco contributed $1.3 million of revenue in the InterConnect group and Powerbox contributed $900,000 to the modules product group during the fourth quarter of 2012. These are the 2 acquired companies that are accretive to earnings in Q4 and for the year 2012. Cost of sales and net results. During Q4 2012, our gross margins improved slightly in comparison to Q4 of last year, mainly due to an improved product mix, including our larger proportion of sales in magnetics and Interconnect products. This was partially offset by some manufacturing inefficiencies and other temporary production costs associated with the previously announced Cinch restructuring program. The closure of our manufacturing facility in Vinita, Oklahoma and relocation of a major portion of its operations to a new facility in McAllen, Texas was essentially complete by the end of the year. Although we had planned ahead with additional buffer stock for our customers, in the middle of the move, demand increased significantly. Similar costs have continued in the first quarter of 2013. We expect this productivity, additional buffer times and related costs to be largely resolved by the end of Q1 in 2013. The combined Asian and North American restructuring programs are expected to reduce operating costs by approximately $5.6 million annually, beginning in 2013. Selling, general and administrative expenses. Selling, general and administrative expenses during the 3-month period ended December 31, 2012, increased by $2.2 million compared to the same period of 2011. Contributing to this increase were $525,000 of acquisition-related expenses associated with Fibreco, Powerbox and other ongoing acquisition activities, $341,000 of damages from Hurricane Sandy, the inclusion of approximately $600,000 of SG&A expenses at Fibreco and Powerbox in Italy and various other factors. Taxes. Bel recorded an income tax benefit of $688,000 for the 3 months ended December 31, 2012, compared to a tax expense of $1.1 million for the 3 months ended December 31, 2011. The company's effective tax rate, which is the income tax provision as a percentage of earnings before income taxes, was 21% for the 3 months ended December 31, 2012, down from 93% 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.A. has the highest tax rates. Europe's tax rates are generally lower than U.S. tax rates, and Asia has the lowest effective tax rates. The favorable effective tax rate in 2012 was primarily due to a pre-tax loss in the U.S., which resulted in a tax benefit. In 2011, we earned pre-tax profits in the U.S. and Europe, while litigation charges and other factors resulted in losses in Asia with minimal tax benefit. On an unordered GAAP basis, Bel reported a loss from operations of $3.1 million and an after-tax net loss of $2.5 million for the fourth quarter of 2012. Last year, we reported income from net operations of $1.1 million and after-tax earnings of $82,000 for the fourth quarter of 2011. To state these results on a comparable basis, non-GAAP income from operations for the fourth quarter of 2012 was $928,000 compared to non-GAAP income from operations of $1.3 million for the fourth quarter of 2011. Acquisition costs, restructuring, reorganization, severance charges and various other amounts are being excluded from non-GAAP income from operations for the fourth quarter of 2012, while restructuring, reorganization and severance charges have been excluded from the comparable 2011 non-GAAP income from operations. A reconciliation of GAAP to non-GAAP measures is included in today's press release. Turning to the balance sheet, cash and equivalents. At the end of December 2012, our cash, cash equivalents and investment securities were $71.3 million, which was $22.7 million less than the December 2011 balance sheet of $94 million. The decrease in cash resulted primarily from the combined net payment of $90.4 million with the acquisition of Gigacom InterConnect in Q1 and Fibreco and Powerbox Italy in Q3 where we had $4.7 million of capital expenditures, $6.6 million in 2012 for the repurchase of Bel's Class B common stock and $3.2 million for dividend payments. These were partially offset by earnings, sales of investment securities and favorable operating cash flows. Receivables and payables. Receivables net of allowances were $43.1 million at December 31, 2012, compared with $39.1 million at December 31, 2011, an increase of $4 million. Approximately $3.5 million of this increase resulted from the inclusion of the accounts receivable of acquired businesses. Our accounts payable at December 31, 2012, were $18.9 million, an increase of $400,000 from December 31, 2011. Inventories. At the end of December 2012, our inventories were $54.9 million, up $1.5 million from the December 2011 level. Approximately $1.2 million of this increase results from the inclusion of the inventories of acquired businesses. Goodwill and intangible assets. The allocation of the purchase prices of Gigacom and Fibreco was completed during Q4 2012. Accordingly, $10.4 million of combined identifiable intangible assets were reclassified from goodwill. After this and various other purchase accounting adjustments, a total of $7 million remains as a combined goodwill for these 2 businesses. The allocation for Powerbox Italy has not yet been completed, therefore, $2.7 million has been reported as goodwill for Powerbox. We expect the portion of this amount to be reclassified primarily to intangible assets, as well as small amounts to intangible assets upon -- to tangible upon completion of the purchase price allocation exercise. Stock buyback. The Bel Board of Directors had approved the buyback of up to $10 million of Bel's Class B stock in the open market. During the year ended December 31, 2012, Bel repurchased 368,723 shares at a total cost of $6.6 million. The balance of this $10 million buyback was completed in the first quarter of 2013. A total of 547,366 shares was repurchased. At this time, the Board of Directors has not issued a further buyback. Other balance sheet comments. Our capital spending for the 3 months ended December 31, 2012, was $1.4 million, while depreciation and amortization was $2.6 million. As a result of the completion of the purchase accounting for Gigacom and Fibreco, we began recording additional depreciation and amortization expense on the adjusted fair values of the acquired assets during the fourth quarter of 2012. Going forward, the additional depreciation and amortization of these assets will be approximately $200,000 quarterly and $775,000 annually. Our per book share value at December 31, 2012, was $18.69, that's including goodwill and intangibles. And when we exclude intangibles and goodwill, our per share value was $15.64. On the outlook side, as we announced in November, 2012, Bel has agreed to acquire TE Connectivity's Transpower magnetics business, and we expect this transaction to close late in the first quarter of 2013. That's all the operating comments I have. I'm just going to turn the call now back to Dan Bernstein.

And I'm going to turn it to Sharon to open up questions for us.

[Operator Instructions] Our first question is from the Zach Larkin of Stephens.

This is Chris Godby in for Zach. I guess first of all, on Transpower, how should we think about the revenue impact of that business in 2013. I know that they had about $75 million in 2012. Is that a fair number to think about for 2013? How should we think about that?

We're hoping $75 million is a good number, yes. However, what we don't understand that we are buying a competitor, how some of the customers might react. And so far, we have got pretty strong feedback that they're pleased with the consolidation in the industry. But again, we are targeting that $75 million and hopefully, we shouldn't lose too many customers. And the customers we would lose are customers that only have us and Transpower as the source and they might feel that they have to pick up another source to replace one of us.

Understood. That's good color there. And then also, how should we think of the margin profile of Transpower relative to Bel?

That one, up to Colin.

Thank you. Now we're -- from the diligence -- due diligence we've done and obviously, the numbers we pulled together, we expect their numbers to be somewhat similar to our numbers. For that business, their business is primarily integrated connectors and we're all in this business together. We've got the same labor costs, we've that the same material costs, and although we, at this time, don't know specific selling prices in the aggregate, we've got -- we understand what the numbers are, so we would expect that we're going to have very similar numbers where we hope to. You want to protect us?

No. I think, again, looking at the purchase price, we bought the company for the revenue that's there. I think it's safe to assume it's definitely not a home-run business and it's more of a single and a double. What we're hoping to do, within 6 months, with certain synergies and purchasing power using manufacturing efficiencies, looking at of the overhead structures of both companies, we're hoping to make it a good profitable business for the next 2 to 3 years. But I think at this point, it's -- the only thing we can say now, it's only accretive, but I think initially, it should take it 4 to 6 months until really find out how it's going to add to the bottom line. The only thing that we can say very profitably with our business is a lot stronger, substantially stronger with the Transpower that it was without Transpower.

Great. And then so I guess thinking about that, and so should we assume that the business should be accretive for the full year FY '13 but maybe slightly dilutive during the first half, is that maybe a fair way?

No, I think our goal is it should be accretive since day 1.

Since day 1.

Yes, but basically, I'm sure you're thinking in your mind about modeling purposes. We -- basically, from day 1 of Q2, it should kick in. The purchase price is really not going to be much goodwill. So it's going to be a -- you're not going to have that to worry about. So basically, the total purchase price is for assets we're buying.

[Operator Instructions] Our next question comes from Sean Hannan of Needham & Company.

So just to follow up on the Transpower acquisition and you had some comments earlier about your -- about the customer base and sourcing arrangements. Just want to get some clarity, how much of your ICM customer base today is actually exposed to only you and Transpower as that sourcing arrangement?

I would probably say, again, probably only maybe 10%, 15%. And I think maybe that's a pretty aggressive number. It could possibly be less than 10%. The problem you have, Sean, is -- what we can't really define very clearly is what part numbers are we -- well, I don't think there's many customers where it's just us and Transpower. But there might be certain part numbers where it's us and Transpower, and that's where the confusion might come in with the customer.

Okay. And did you still plan on perhaps going down the road where there could be a separation of your products and parts versus Transpower, so some further disruption is -- doesn't materialize on customers?

No, our I think our goal initially is to have separate -- 2 separate companies. It's our understanding from our customers if we can maintain the 2 different manufacturing companies, the 2 different part numbers that then they will not look for another source. So our intention is really to focus on bringing each company out from a manufacturing efficiency standpoint and then how best to use our vendors and we think there should be a substantial opportunity from cost savings there, that we don't have to combine both operations. Now again, within 6 months or a year, we find out that our customers are looking for a third source or second source, then we have to reevaluate it. But initially, our intention is to have 2 manufacturing companies with 2 separate part numbers and 2 -- and 2 different company names.

Okay. And then if you can just comment on what the lead times are within that ICM product category today.

Sean, you're such a character, aren't you? Today, it could be changing very rapidly because of the Chinese New Year, so there's no question before Chinese New Year that you do lose both companies. Anybody in China loses work for us, so historically, before Chinese New Year, lead times do stretch out from anywhere from your standard lead time from 8 to 12 weeks. Now because of Chinese New Year, from 12 to 16 weeks. And the key would be on the first 3 or 4 weeks back, how much of the workforce can you bring back and can you bring back more. So we really won't get the visibility on the lead times until 3 weeks after Chinese New Year. However, now we are hoping that we do spend a lot of time with our customers in September and October, telling them that it should be wise that during this time, they develop buffer stock and that they protect themselves and hopefully, time comes, they might listen to us.

Sure, Dan it's helpful. Actually where I was going with that I was looking to see if I can compare where these times are, these lead times are today versus kind of similar period last year as we were about to enter Chinese New Year.

I think it's probably -- just roughly about the same time. I think it's just, again, when you lose 500 people 2 weeks before Chinese New Year and then you jive back, fill it with overtime, it does get a little confusing. So we're looking at our backlog chart, it's about the same as last year for ICMs so our lead times are going to be the same.

AC-DC is up a bit.

Okay. And then last question here. So you certainly have been building some scale around your Cinch business adding to that. You put some comments around your press release in looking to really grow the exposure to Military and Aerospace. So I was looking to see if we can get a little bit more clarification there if you can help us walk through what the exposure of Military Aerospace is today. And then to what degree are you involved in program qualifications? Are you seeing a lot of activity today? How do we think about that? And then -- the visibility in terms of growing that into -- through to your business over the next 5 years?

Okay, I think the first thing is again, what are we doing about the business today to be competitive? And I think that we will adjust that with how we've streamlined the organization over the past 12 to 18 months and what we're going to finish up with in the first quarter. So we think that we do have a pretty low cost model and that we took out as much fat as we can. Then we adjust ICMs, the integrated connector modules, a major product over the past 5 years has faced tremendous price pressure over the past 2 years and the sales have come down. And with the sales coming down the profits have come down. So we think again, with the addition of Transpower, that should be come back to a substantially more profitable business than it has been over the past year and that should remain profitable for the next 2 to 3 years, we hope. In addition to that, I think the thing that you jumped over, Sean, and I'll be remiss not to mention it is the Powerbox acquisition where again that we took DC-DC converters. And within the 6-, 7-year period, we made into a $50 million business. Now we feel that we have the customer base well established, that we're well respected in the DC power industry that they'll be more willing to look at our AC-DC portfolio. So then again, the second or third year, we're looking at starting getting substantial sales there and hopefully, by the third or fourth year, hit $30 million to $40 million. So now we get to aerospace military where again, I think we just at the infancy stage for us. We're in the process now to reorganize our whole sales force, add Cinch to address the Military Aerospace market and I think again knowing how every country budget is throughout the world, I think we're really going to be focused more on the aerospace business. So what we've done is first thing we did is set an office, make sure we have the proper sales structure outside Seattle to address Airbus and their subcontractors. We did that last year. In, addition to that, we set up sales office into Lourdes France to support Airbus and their subcontractors. And then again, seeing where the technology is going to take us and again, from what our people tell us that over a period of time and again, time, we mean 3 to 5 years, that they're going to move more and more to fiber. We were very fortunate to acquire Gigacom, which is basically a technology company with some very extremely bright people that are involved with all the standing committees regarding fiber for aerospace. And that because of this now, Cinch is now viewed as a technology leader on products that like Boeing and Airbus and other people looking at in flight entertainment and so forth. So we're addressing that and the Fibreco allows us to have connector that can use this type of fiber. However, now we're planting the seeds and again, the planting the seeds are basically going to every Chinese -- be at every -- be beefing up our shows, airshows, beefing up to committee meetings and we're talking could be anywhere from 15 to 20 shows a year or committee meetings that we'll be attending to support the Aerobase business. And then China work with other connector companies because we do believe that we do have the best fiber insert in the industry and how we can align ourselves maybe with one of the leading connector companies so we can do joint sales together. So I just think at this stage, to predict, like 3 or 5 years, is going to be, could be tough. The only thing we're putting out there is yes, aerospace is a major target of Bel, we're committed to it and we're going to spend money on it. Possibly, we might lose money for 2 years, we don't think so and we're confident we should be making money but we definitely are going to support it and look at it in a whole different light. And I'm hoping within 2 or 2.5 years, I can say "Hey, we are on platforms that we do see that make sense." That's a long-winded answer from me, right, Sean?

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Bernstein for closing remarks.

No one has any further questions, we do appreciate you joining the call. And I think from our standpoint, I think this is the most positive we've been at Bel in a long time. Generally, when we look at the game plan, historically, our game plan has been 3 or 4 months, but I think we feel very comfortable that we have a plan that can really support Bel for the next 5 years on top line and bottom line growth. So I think we're, hopefully, knocking on wood, that we can deliver on these acquisitions and hopefully, we can have some additional ones that can support this even further. So again, I think we're kind of pleased with ourselves that the future does look pretty bright for us. So hopefully, again, I appreciate your call and lending us an opportunity to speak to you. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.