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Bel Fuse Inc. (NASDAQ:BELFB)

Q3 2008 Earnings Call Transcript

October 29, 2008, 11:00 am ET

Executives

Dan Bernstein – President and CEO

Colin Dunn – VP, Finance

Analysts

Johnny Brown – Stephens Inc

Sean Hannan – Needham

Operator

Welcome to the Bel Fuse Third Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions)

As a reminder, this conference is being recorded Wednesday, October 29, 2008. I would now like to turn the conference over to Mr. Dan Bernstein. Please go ahead, sir.

Dan Bernstein

Thank you, James. And I would like to welcome everybody to our conference call to review of Bel’s Third Quarter 2008 results. Before we start, I would like to hand it over to Collin Dunn, our Vice President of Finance, Collin?

Colin Dunn

Good morning everybody. Thanks for attending. I would like to start off by reading the Safe Harbor Statement.

Except for historical information contained in today's conference call, the matters discussed including statements regarding the impact of price increases, cost reductions, and acquisition possibilities 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 the sectors that rely on our products, the effect of business and economic conditions, capacity and supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, risk associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the Company's new products and competitive responses to those new products, and the risk factors detailed from time to time in the Company's SEC reports.

In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

With that said, I will now move on and discuss our performance. First, I’ll start with sales. For the third quarter of 2008, our sales were $66,964,000, which was 1% higher than the $66,379,000 in the third quarter of 2007. The $66,964,000 was 7% lower than the $72,454,000 of the preceding quarter ended June 2008.

Sales for the third quarter was higher in the Modules product group that includes DC to DC converters and custom modules. In the Magnetics product group, it includes integrated connected Modules and in the Interconnect product group, while the Circuit Protection was down slightly.

Profits and cost of sales going out of the quarter on a GAAP basis with net after-tax earnings of $1,946,000 after non-cash pre-tax charge of $1.4 million primarily for the other-than-temporary impairment of Bel's holdings in Toko Inc. and an initial $329,000 restructuring charge at Westborough, Massachusetts. ,

In addition, the Company’s income tax provision for this year's third quarter was reduced by the reversal of an accrual for uncertain tax positions resulting from the expiration of certain statutes of limitations and the finalization of a tax audit, partially offset by changes in estimates for prior years' taxes upon finalization of 2007 tax returns.

The earnings were below the net earnings of $5,914,000 for the third quarter of 2007, which included $1.2 million from the sale of a property in Macau and Hong Kong but similar to the $1.8 million in the previous, that’s the second quarter of 2008.

Our gross margin for the third quarter was approximately 15.4%, and is of course is below the 21.2% gross margin same period in 2007. And this third quarter margin was also below the 18.1% gross profit margin for the second quarter of 2008.

Below margin when compared to third quarter of 2007, which primarily due to increases internal labor cost. When we say internal labor cost, we are talking about base wages, we are talking about foreign exchange because of the strengthening of the (inaudible) and also one-time costs. In addition materials that had not been passed through to customers’. Some customers’ have increased prices during the second and third quarters and these increases are not taking effect.

Turning to SG&A. The percentage relationship with selling, general and administration expects a net sales increase from 13.1% during the three months ended September 2007 to 13.3% during the three months ended September 30, 2008. The increase in the dollar amount of selling, general and administration expenses to the three months ended September 2008 compared to the three months ended September 2007 was approximately $300,000 and was the result of the following factors.

The Company’s legal and professional fees increased by $400,000 from the third quarter of 2007, primarily due to the increased activity associated with the closure of Bel’s Westborough, Massachusetts manufacturing facility and a related law suit against former stockholders’ and key employees of Galaxy and also additional audit fees.

As a result of the strengthening of the US dollars versus certain European currencies during the three months ended September 30, 2008, the Company’s currency exchange losses increased by $200,000 as certain of the Company’s purchases are denominated in US dollars and some sales are carried out in local European currencies.

And the third item was $300,000 reserve of payments for Baghdad’s line of payment for several customers’ of (inaudible).

Interest income; interest income earned on cash and cash equivalents decreased by approximately $600,000 during three months ended September 30, 2008 as compared to the comparable third in 2007. The decrease is due primarily to significantly lower interest rates on invested balances during third.

Taxes; income taxes for the three months ended September 2008 was $1.5 million compared to $1.3 million [ph] for the three months ended September 2007. The Company’s earnings before incomes taxes for the three months ended September 2008 are approximately $6.4 million lower than the same period in 2007.

The Company’s effective rate, the income tax rate or benefit provision is percentage of earnings before provision for income taxes plus a favorable 293% in 2008 at a cost of 13.1% for the three months ended 2007.

The Company’s effective tax rate will fluctuate based on the geographic segment the pre-tax profits are earned in. Of the geographic segments in which the Company operates, US has the highest tax rates. Europe’s tax rates are generally over than US tax rates and Asia has the lowest tax rates.

The decrease is principally related to the tax benefits in the US of $2.3 million resulting from the expiration of certain statutes of limitations of recognized liability for uncertain tax positions. This was offset for high US and European taxable income from operations, the total pre-tax income for the three months ended September 30, 2008 compared with September 30, 2007.

Starting with balance sheet; at the end of September 30, 2008, our cash, cash equivalents, short-term investments and securities including restricted cash and long-term investment was $98.3 million, which was $9.4 million below December 31, 2007 stock of $107.7 million.

In the third quarter of 2008, we repurchased 325,396 Class A shares at a cost of just over $10 million. For the nine months year to date, we have repurchased 350,892 Class A shares at a total cost of $10.785 million.

Receivables and payables, receivables and payables allowances was $47.2 million at September 30, compared to $52.2 million at December 31, 2007. This is a reduction of $5 million.

Our accounts payable for the same period is $19.2 million. During the extent of financial crisis particularly in Asia, we are seeing many events that’s attempting to shorten its established credit payment terms or eliminate credit completely.

Inventories; for the third quarter of 2008, our inventories was $49.1 million, which is $10.1 million above December 2007. Impacting inventory dollar levels were higher raw material prices and costs, and the rapid – programs in addition to preparations for the 2009 production shutdown.

Our balance sheet comments for the three months capital spending was approximately $2.2 million, while the depreciation and amortization was $1.9 million. Our per share book value at September 30, 2008 was approximately $20.54, including goodwill and intangibles.

That’s the end of my comments and I’ll turn it back over to Dan.

Dan Bernstein

James, we would like to open up the call now for questions if we could.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from the line of Johnny Brown from Stephens Inc. Please proceed with your question.

Johnny Brown – Stephens Inc

Thank you. Hi, Dan. Hi, Colin. I was wondering about just in terms of the general economic slowdown. It seems like it could be two sides of the same coin here. Obviously, on one side, you don’ want your revenues to come down or the growth revenues to slow down too much. But at the same time, it seems like it could free up some complicity and lower your pressure to pay so much overtime. Wonder if you could talk about how you see that impacting your margins going forward?

Dan Bernstein

I think Colin can go through the margins. But I think psychologically for us going forward from this point, if we do schedule overtime because of the new laws and regulation, it went from 1.5 to 2x. So, we believe that we have passed over the overtime to the customer. What we are also trying to do is look at areas where the overtime, you don’t have to pay an overtime rate. So, hopefully, I don’t think when it get there in the next quarter or two but hopefully within six months. If we have to increase our production, we can do without overtime. Colin, from the margin standpoint?

Colin Dunn

Yes, we had been spending in premium labor costs. I do – we’ll be back up. First, we have to work some overtime. If you are not working some overtime, you are not going to have any workers’ to start with. So, part of the balancing act we have to go through is to try and turn, which I think we got now is what’s the minimum amount of overtime we can work and keep the workers’ particularly in the areas where our factories are right now. And that’s more important also in areas where the workers’ are housed in dormitories, the migrant workers’ and they don’t have to go home. So, one other things we are trying to look at going forward is to try and find input production to areas where more in local villages where the non-migrant workers’ – instead the workers’ aren’t housed in dormitories where they do go home and may be they live in small farms also. So, they are more keen to go home. So, we won’t have this issue with basically mandatory overtime to keep the workers’ – mandatory overtime will have fun not the workers’. So, the total what has been costing us was fairly close to $0.20 a quarter in labor premiums over the last few quarters. Now, we don’t, we don’t – that’s not going to go away completely. But we hope we without reductions to overtime which basically came into play affective late in the third quarter, where we are now only working half a day on Saturday for example. That we might be able to get that in, that premium down in half going forward.

Johnny Brown – Stephens Inc

Okay. What about the slowdown in China in terms of your ability to retain workers’? I mean are you seeing any more loyalty there?

Colin Dunn

I think that the problem here that we know the Governor [ph] for a long time. The past year, we’ve really tried to move people and move that factory down to southern China to northern China. On the recession we know now the government is concerned regarding the toy industry and the textile industry, how to keep the workforce hired. I think we do have the Chinese New Year. You really can’t get a reason for how things are looking. I think another problem now is because we are so close to Chinese New Year, very easy to maintain your workforce, and then coming back after Chinese New Year, the workers’ look for what’s the best possible deal, and how aggressive they –want to look for jobs. So, there is a downturn as we hear in China, and we think that the workforce should be more stable.

Johnny Brown – Stephens Inc

Okay. And with respect to margins, with commodity costs coming down, Colin, what is your inventory make up look like, how long before you see those cost savings impacting margins significantly?

Colin Dunn

This is – we haven’t got a lot of – the bigger issues are a big wavier for us over weight [ph]. And while we’ve got copper and steel and petroleum based products n there, we are not seeing any – so far although on the world markets, it surprises it came down. That hasn’t started to come through on our pricing decreases yet, and I don’t think it will for a little while. So, it’s going to be quite a while, we think – I would say and to burn off the inventory we got. We are probably looking at up to six months I think before we are likely to see any thing. If we see a lot come through on those products coming down in pricing significantly.

Johnny Brown – Stephens Inc

Okay. And just overall demand, your backlog I think last few quarters has been about $57 million to $60 million. Is it looking like that still in the current quarter?

Colin Dunn

Just your estimate – in the $52 million, $53 million range now.

Johnny Brown – Stephens Inc

Okay

Colin Dunn

And again we are heading to the fourth quarter that tends to drop when people try to clean up the inventories for year end. So, that’s not unusual for us.

Johnny Brown – Stephens Inc

Right. Okay.

Colin Dunn

And perhaps seeing up close $40 million I think we would be panicking but $52 million has been like this since the beginning of September. So, it’s been pretty stable.

Johnny Brown – Stephens Inc

And is it consistent with the third quarter, lower proportion of Circuit Protection and higher proportion of Modules and Magnetics?

Colin Dunn

Yes, it’s been pretty consistent that way, yes.

Johnny Brown – Stephens Inc

Okay. Thanks a lot guys.

Colin Dunn

Thanks a lot, Johnny.

Operator

(Operator instructions) Our next question comes from the line of Sean Hannan from Needham. Please proceed.

Sean Hannan – Needham

Yes. Thank you. Good morning.

Dan Bernstein

Good morning.

Colin Dunn

Good morning, Sean.

Sean Hannan – Needham

So, I suppose – first if I can just dive into pricing for a moment, you have some of these increases were implemented at the end of the quarter. There is a – I think one of your competitors also had looked entering the September to increase some of its prices. I think they had a second period where they actually implemented another round of increases. Is it something that’s perhaps on the table for you and can you perhaps elaborate on that a little bit?

Colin Dunn

We have had one – we have basically two rounds of pricing. I think those – I think a lot depends on where we stand on the recession and labor situations in southern China. And once again if you had asked me that question about five weeks ago, I would say that there is high probability would have another price increase. But the way that the raw materials and oil is going down and the uncertainty that the labor might be flattening out a little bit in China. I think we will hold off on it for now.

Sean Hannan – Needham

Okay. So, what degree – what has been your general feedback from your customers’ on these price increases?

Colin Dunn

They go wild. They jump up and down.

Sean Hannan – Needham

The question is has this led to any lost business?

Colin Dunn

I think it’s difficult to say. It depends on the product where we stand, whether the product is single source or second source, the customers’ are staying with us. And if it’s a commodity like a fuse, Circuit Protection device where there is more than two or three competitors or is going to put price pressure as much as possible. We have seen companies in the past go to quarterly tight reviews. Just recently we heard that Dell Computer is planning to go through a year contract. We know that customers’ are positively looking at that. It’s just reduced to tremendous amount of uncertainty out there. But once again, any time you give a customer price increase, they are going to do everything possible evaluating you and who the other vendors are to see what the true story is. That doesn’t give good taste in anybody’ mouth, that’s for sure.

Sean Hannan – Needham

Sure. I understand. That’s helpful. You discussed some of the performance for your different product groups. And I think that the comparison with year over year, is it possible if we can get some color in terms of the performance versus the June quarter?

Colin Dunn

I think it’s leading – I think overall we always say, if you look at the three groups, the mature groups are above, the Circuit Protection, the Interconnect and the Magnetics. We always talk in the range of 3% to 6% growth. We hear the big driver for us going forward is going to be the Module group, and this got hit a little bit in the last quarter because we have a major project with IBM on a Blue Jean computer. And so, we had a big run up last year and that not been a – and IBM is not going to sell too many Blue Jean’s anymore. So, we are reducing going forward. We are hoping 2% to 5% in the mature product line and we are hoping to get back 10% to 15% in the Power group.

Sean Hannan – Needham

Okay.

Colin Dunn

Other group I should say, Sean.

Sean Hannan – Needham

Sure. That’s helpful. And then perhaps could you provide a little bit of color around lead times where you are today –?

Colin Dunn

Okay, lead time –

Sean Hannan – Needham

– for the firm?

Colin Dunn

Sure. Lead time when we are having our problems four or five months ago, our lead times stretched out to 18 weeks to 20 weeks and currently our lead times are about 10 weeks and may be dropping a little bit before next month or so. But I think at this point because of the uncertainty, we are definitely keeping our lead times where once again when we are more concerned at this point with our margins and cutting down lead times, and that’s why we eliminated the overtime. So, I think at this point we are thinking that 10 weeks is a good point to be at until we get a little more clarity on what’s going to happen with the world.

Sean Hannan – Needham

Okay. And that 10 weeks is just specific to MagJack?

Colin Dunn

I would say MagJack’s modules, Circuit Protection and generally the Interconnect products, those two groups anywhere from stocks six, seven weeks. Material content is not that difficult. When we look at the other groups, we are doing a lot more with longer stretched out lead times in different – the components are almost stretched out.

Sean Hannan – Needham

Okay. And then lastly, if I could perhaps get a little bit of color, did you have a 10% customer again in the quarter?

Colin Dunn

Yes. I think we might have more than one.

Sean Hannan – Needham

Would it be possible to check this 10% customer at least an indication in terms of what that end market is that that customer is in?

Colin Dunn

I think everybody knows the customer is Cisco (inaudible) Sean?

Sean Hannan – Needham

Cisco being the number one and –

Colin Dunn

Yes.

Sean Hannan – Needham

And the number two being the –?

Colin Dunn

I don’t know. I’m not going to tell that. Come on Sean.

Sean Hannan – Needham

Just a way to get a sense of the market which – are we talking about computer storage?

Colin Dunn

It’s computer, computer peripheral and telecommunication. Now the problem that we have again is losing the – of a networking companies or the telecommunication companies or the same companies. The actual product is that networking, telecommunication type of companies.

Sean Hannan – Needham

Okay. That’s very helpful. Thank you.

Colin Dunn

Thank you, Sean.

Operator

There are no further questions at this time.

Colin Dunn

All right. Once again we appreciate everybody for calling us up and thank you for joining us and looking forward to speaking to you next quarter.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you very much for your participation and we ask that you please disconnect your lines.

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