Bel's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.15.14 | About: Bel Fuse (BELFB)

Bel Fuse Inc. (NASDAQ:BELFB)

Q4 2013 Results Earnings Conference Call

February 13, 2014 11:00 AM ET

Executives

Dan Bernstein - President and CEO

Colin Dunn - Vice President, Finance

Analysts

Sean Hannan - Needham & Company

Mike Hughes - SGF Capital

Operator

Good day. And welcome to the Bel Fuse Fourth Quarter [2014] Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today conference Mr. Dan Bernstein. Please go ahead, sir.

Dan Bernstein

Thank you, Charlotte. I would like to welcome you to our conference call to review Bel's Unaudited Preliminary Fourth Quarter 2013 Results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance. Colin?

Colin Dunn

Thanks Dan. Good morning, everybody. Before we begin, I would like to read the following Safe Harbor statements. Except for historical information discussed in this call the matters discussed in this call including the statements regarding reduce lead times, Bel’s ability to offset the increase in labor -- direct labor cost in China, the impact of Bel’s new R&D center will have on Bel’s product cycle and on Bel’s response time to customers and Bel’s acquisition plans are forward-looking statement 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 statement are the market concerns facing our customers, the continue availability of sectors that rely on products, the effects of business and economic conditions, difficulties associate with integrating recently acquired companies, capacity and supply constraints or difficulties, product development, commercialization of technological difficulties, the regulatory and trade environment, risk associated with foreign currencies, uncertainties associated with legal proceedings, the market acceptance of the company 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. That’s the end of the Safe Harbor statement.

Results of the transformer and magnetic business of TE now known as TRP Connector acquired in late March 2013 and the Array Connector Corporation acquired in August 2013 have been included in our consolidated results since their respective acquisition dates. In my discussion I will attempt to noteworthy inclusion of these acquired companies account for significant variance from prior periods.

First, we will start with sales. Fourth quarter 2013 sales were $91 million, which is the new fourth quarter record for Bell, including $18.8 million of sales of TRP Connector products. Sales were up 26.8%, compared to $71.8 million in the fourth quarter of 2012 and down 10% from $101.2 million that we reported for the third quarter of this year.

Fourth quarter 2013 sales in all four major product groups were as follows, Magnetics, $47.2 million, which is up 75% over the fourth quarter of 2012, primarily due to the addition of sales from TRP Connector products.

Interconnect, $28.5 million, an increase of 8.6% over last year’s fourth quarter. Fourth quarter 2013 interconnect sales included $1.3 million of sales of Array Connector products.

Circuit protection $2.4 million, a decrease of 6.4% from the prior fourth quarter and modules $12.9 million which is 19.2% lower than sales in the fourth quarter of 2012. As we've discussed over the past several quarters, the modules product group continues to be affected by a decrease in the level of sales activity of our major customer.

Turning to cost of sales and net results, in Q4 2013 cost of sales as percentage of sales was 80.3% down from the 84.2% in Q4 of 2012. Several factors contributed to this, the company implemented price increases during the latter half of 2013, which have helped to offset some of the rising labor costs in China. There was favorable shift in the mix of products sold away from higher material cost modules products towards Bel’s other low material cost products.

During the fourth quarter of 2012 the company incurred redundant operating costs since we started the transition since manufacturing from Vinita, Oklahoma to a new factory in McAllen, Texas. This new McAllen plant is now running a pre-transition efficiency levels and lower sales volume overall were doing increase throughput which continue to improve overhead absorption at our factories.

SG&A, selling, general and administrative expenses during the three months period ended December 31, 2013 decreased by $400,000 in comparison with the same period of 2012. SG&A as a percentage of sales for the fourth quarter of 2013 was 11.9%, down from the 15.6% of sales during the fourth quarter last year.

The inclusion of SG&A expenses related to TRP and Array both acquired in 2013 amounted to $1.5 million for the fourth quarter of 2013. This additional cost were more than offset by a reduction in acquisition costs, legal and professional fees and other wage and print related items as compared to the fourth quarter of 2012.

Taxes, Bel recorded income tax benefit of $400,000 for the three months ended December 31, 2013 compared to an income tax benefit of $700,000 with the three months ended December 31, 2012. Included in income tax benefit in Q4, 2013, our credits from our previously announced Solar Project at our Inwood, New York signal manufacturing facility and research and development tax credits related to USA manufacturing.

The company's effective tax rate, which is income tax benefit or provision as a percentage of earnings before income taxes fluctuates based on the geographic segments in which the pretax profits are run. 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 in Asia where we have the largest operations as the lowest tax rates. The very favorable tax -- effective tax rate in 2012 was primarily due to pretax losses in the U.S. and lower earnings in Europe, which resulted in tax benefits combined with strong earnings in Asia, where the tax rates were lowest.

On an unaudited GAAP basis, Bel reported income from operations of $7.1 million and after-tax net income of $7.4 million for the fourth quarter of 2013. Last year, we reported a loss from operations of $3 million and after-tax net loss of $2.4 million for the fourth quarter of 2012.

To state these results on a comparable basis, non-GAAP income from operations for the fourth quarter of 2013 was $7.3 million compared to non-GAAP income from operations of $1.3 million for the fourth quarter of 2012. Acquisition costs, restructuring, reorganization and severance charges, gains and losses on investments, benefits from changes in tax reserves and the storm insurance proceeds have been excluded from non-GAAP income from operations. A reconciliation of GAAP to non-GAAP measures is included in our press release today.

Turning to the balance sheet, cash and equivalents, at the end of December 2013, our cash and cash equivalents were $62.1 million, which was $9.2 million less than December 2012 bonds of $71.3 million. The decrease in cash resulted primarily from the net payment of $21 million with the acquisition of TRP Connector, $10 million for the acquisition of Array, approximately $6.7 million of capital expenditures, $3.4 million for the repurchase of Bel class B common stock and $3.1 million in dividend payments.

This was partially offset by $12 million of borrowing on our bank credit line and positive operating cash flows. Receivables and payables, receivables notable allowances were $63.8 million at December 31, 2013 compared to $42.9 million at December 31, 2012, an increase of $20.9 million.

This increase resulted from the addition of approximately $16.2 million of TRP and Array receivables and an increase of approximately $4.7 million in other trade receivables. Our accounts payable at December 31, 2013 were $29.5 million, an increase of $10.7 million from December 31, 2012. This increase resulted from the addition of approximately $9.2 million of TRP and Array accounts payable and increase of approximately $1.5 million and other trade accounts payable.

Inventories at the end of December 2013, our inventories were $70 million, up $15.1 million from December 2012 levels. Approximately $11 million of this increase resulted from inclusion of the inventories of TRP and Array.

Goodwill and intangible assets, the purchase price allocation for TRP Connector and Array Connector have not yet been finalized. The condensed consolidated balance sheets in the earnings announcement today incorporates our preliminary estimate of those purchase price goodwill allocations.

Our balance sheet comments, our capital spending for the three months ended December 31, 2013 was approximately $1.6 million while depreciation, amortization was $3.7 million. Our per share book value at December 31, 2013 was $19.87 including goodwill and intangibles and excluding intangibles and goodwill after share value was $15.71.

I'll now return the call today to Dan.

Dan Bernstein

Thank you, Colin. Charlotte, can we open up the phone call for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Sean Hannan from Needham & Company. Your line is open.

Sean Hannan - Needham & Company

Yeah. Thanks. Good morning. Can you hear me?

Dan Bernstein

Yes, we can hear you.

Colin Dunn

Yes, we can.

Sean Hannan - Needham & Company

Okay. Great. So congratulations on the good earnings between the quarter. First question, want to see if we can get a little bit more color, in terms of demand environment that you’d seen within the December quarter and into date thus far in March. So in contrast to September, can you go through each of your segments discussed the demand trends that you saw for each of those, and then the extent that those continued to change thus far? Thanks.

Dan Bernstein

I think for us, a good portion of our products now with the TRP acquisition. Roughly, 65% probably are going to networking, telecommunication market segments. As Cisco mentioned yesterday, they projected basically in networking where we supply one of their products in the hardware, that they see a 10% reduction from the next quarter. So, I think that it's too early to tell but we have to expect that we will see softening the same because Cisco is, as we would like to say, the 800-pound gorilla. And we don’t see much different from a lot of the networking companies at this time.

Sean Hannan - Needham & Company

Okay. That's helpful. Dan, I was looking so if I could get as color a little bit more in terms of say, magnetics, interconnect, Circuit Protection in modules and didn’t know if there was additional color you can provide around that.

Dan Bernstein

At this time, I don't -- I think that now it’s just so much because of the TRP acquisition that they control so much. Our aerospace, military business, which is probably roughly around 25%, we still hear very strong things from Boeing, one of the major player on the 737. And they are predicting I think they are going from 36 to 41 planes. Is that right, Colin?

Collin Dunn

Yeah.

Dan Bernstein

So we did baked in. We do see increase. Boeing still predicting increases for next year, so that’s a strong sign. So military, aerospace --

Collin Dunn

Yeah. The Boeing number is scheduled to increase to 42 per month. This is on the 737 program by the second quarter of 2014 and so.

Dan Bernstein

And that should help us. And the military, I think with the budgets and everything, it is so unpredictable what’s going to happened with the military. So, I think if you were to look, those are probably our three largest segments now.

Sean Hannan - Needham & Company

Okay. Now in terms of -- in terms of your acquisition strategy, I mean it really help provide some growth years as well as the additional leverage on the OpEx. Are you folks currently positioned now where you can organically get to double-digit operating income in time, or how much help would be required through additional M&A as you look at your model today?

Dan Bernstein

Collin, I would like you to take that one.

Collin Dunn

We certainly believe -- the way for us going forward is still traditional acquisitions. Lot of the product lines we are in, showing are in areas that are fairly flat and with not a lot of growth. And while we continue to come out with new products and pass the products, we don’t think we are going to get there fast enough. So we really need to continue to add-on products either, things that we are putting in our manufacturing facilities or go to our existing customers. So that's the only way we going to be able to continue to keep up a fairly plus rates. So we are continuing to focus, trying to run the businesses as best we can and milk what we've got. But we certainly do see the only way forward is to continue a fairly aggressive M&A program.

Sean Hannan - Needham & Company

Okay. And on that front, can you elaborate a little bit on the opportunities that you're looking at from an M&A perspective?

Dan Bernstein

I think because of our track record over the past, having five acquisitions over the past two years I think we are getting the opportunity to look at many different companies. Again, I think, we have been really somewhat focused on the connector area because we would like to diversify. We have so much evolved with the networking, telecommunication and we do believe aerospace and military is a market and an industrial market that we want to get involved with.

So, I think we focus a lot on the connector side to support military aerospace. However, we can see products like TRP. If you ask me on a year ago that I want to buy an ICM company that support networking, I will say that would be the last thing on my acquisition list, but in reality it is probably our best acquisitions because of what it did to our core structure and our profitability.

So, again, I think the only thing we really focus on, I don't think we want to go too flat on a box. But I think that makes, I think that’s very good value or even that can support REO connector our, connector, our aerospace, military we look at.

Sean Hannan - Needham & Company

Okay. That's helpful. And then one more question here then I will jump back into the queue. So, rising wages in China have certainly been a challenge for or time for you guys as far as everybody else. You've done a great job in terms of the finding your own efficiencies and offsetting some of this. How should we consider the higher Chinese wage impacts in your model from this point forward? Is there a path toward a gross margin degradation perhaps that you are expecting, or should this continue to be something that you are able to offset? Thanks.

Dan Bernstein

I think we are hoping with our best practices that we are implementing by combining the best practices of TRP and Bel that we should be able to offset any labor increases over the next 12 months to 18 months.

In addition to that we are moving more of the operation to Western China. We have sent people into Vietnam and other local areas to investigate that. We know that, in our business you can’t stand still, so if we can’t automate the processes, we have to look for less expensive labors, so either moving more Western China or other areas outside of China. So I think, we are doing everything we can I guess to freeze labor rate that is it is today either through efficiencies or looking at lower cost areas.

Sean Hannan - Needham & Company

Okay. Thanks very much for the color Dan and Collin.

Dan Bernstein

Collin, do you want to add anything regarding that question?

Collin Dunn

No. I think the other thing to make sure is that we got to be competitive with our competitors. Now, if we are all, if everybody is manufacturing in basically the same geographical area then we should be competitive. But it does remain difficult, but I think we are doing pretty good job at the moment.

Dan Bernstein

And also it should be noted with the acquisition of TRP, I would say in the market segment that we are supporting ICM, we are by and far the largest supplier by 35%, 40% and you would hope that we are so much bigger than our competitors that we should have tremendous economies of scale that should allow us to be the, I would think, most cost competitive of supplier out there. So I think we are so much confident over the ICM business over the next 18 months to two years.

Sean Hannan - Needham & Company

Great. Thanks very much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Mike Hughes from SGF Capital. Your line is open.

Mike Hughes - SGF Capital

Yeah. On the SG&A line, axial items it looks like it was down or little over a $1.5 million sequentially, is the number from the fourth quarter good run rate to model into 2014 at the $10.6 million a quarter?

Collin Dunn

Yes. It is a good run rate. It’s fairly clean. Yes.

Mike Hughes - SGF Capital

Okay. And then CapEx for 2014, do you have rough number?

Collin Dunn

It should continue where we are at the moment. I don’t see it changing materially. Now I just leave it exactly where it is right now.

Mike Hughes - SGF Capital

And what would be a good book tax rate to use for ’14?

Collin Dunn

That’s a billion dollar question. We -- typically we would expect to be in the 13%, 14%, 15% range, percentage range, effective tax rate. But again we have picked up quite a lot of tax credits with different acquisitions particularly relating to North America. So they continue to keep the things like the credits we got now. So but I think the planning purposes, low-teens is a good place to have a number.

Mike Hughes - SGF Capital

Okay. And then one last question for you, TRP was down sequentially in the December quarter? How should we -- I don’t think we have a lot of information on that given you haven’t owned it for that long? How does that typically look into the March quarter from revenue prospective?

Collin Dunn

It will be, we expect it, well, business is little soft as we sort of put in our announcement today. It’s off a little bit and I just explained a few minutes ago. We would expect that TRP business to be in line with that from the fourth quarter.

What we had is, we had a real kick up in the third quarter TRP. It ran much higher than we expected and I think that seems to settle now and I think they are back to the regular run rate. They are -- in the fourth quarter they did run at the rate that we acquired them at so we would expect them to continue at about that level.

Mike Hughes - SGF Capital

Okay.

Dan Bernstein

I think the run rate we project is probably $15 million to $18 million, Collin?

Collin Dunn

Yes, yes.

Mike Hughes - SGF Capital

Okay. And then if I could just sneak one more. So were some of the short term revenue softness you are seeing, just thinking about your operating model, what kind of impact does that have on the gross margin, can you still keep the gross margin at round 19.5% or would there be some degradation?

Collin Dunn

There should not be a lot of degradation. We have still got a little. We still got some efficiencies we are going to pull up. One of the issues we have to deal with is, in the first quarter we always have the Lunar New Year shutdown. So the factories are shutdown. So that usually gives us some additional expense and as we startup again after the Lunar New Year although we did get a very good return rate on labor this year. So we are quite optimistic about that but normally I would expect to, particularly in the first quarter to lose 1.5 to 2 percentage point.

Mike Hughes - SGF Capital

And when you say return rate on labor meaning your existing employees, the percentage coming back this year was higher, so the training cost is lower?

Collin Dunn

Yes. Yes.

Mike Hughes - SGF Capital

Okay. Thank you very much.

Operator

Thank you. (Operator Instructions) We have a question from the line of Sean Hannan from Needham & Company. Your line is open.

Sean Hannan - Needham & Company

Great. Thanks for the follow-up opportunity here. So just trying to get a better sense of the modules business, incrementally from the current levels, do you expect much further degradation or is that kind of ramp down effectively done and perhaps we can see a steady-state sequentially from here. Any color around that and then kind of the follow-up to that. Can you update us on how you’re redeploying some of the capital that you would commit it to that -- to that customer for that business? Thanks.

Dan Bernstein

Sean, we basically went on that group. We went from 55 million to 33 million to 13 million. We might have hopefully will get them very close to rock bottom. We feel very confident. We’re fortunate with TRP had a small modular group also and we thought that we could pick that up and now we add a substantial sales from 5 million to 10 million, probably starting within six months to a year.

And so, I think we’re confident that we’re pretty close to rock bottom. And I would hope going forward that we would get back to you, 10% to 15% growth at least the next three years and get the group up back to -- We expect our groups be about 45 million, 50 million at least. And so basically, now we have the equipment, lot of equipment, we do have -- we use to add our factories for the jobs. So it’s not a complete dedicated operation.

Sean Hannan - Needham & Company

Okay, that's helpful. And then lastly, can we get a little bit of color around the lead times you're looking at presently for ICM's and any additional insight in terms of Europe due to backlog?

Dan Bernstein

I hate to say that the lead times are not profit at all. And that’s again with lead times, they are getting this short than you worry about the pricing pressure because people try to buy business. However, so our lead times, I think, should be very competitive based on our current backlog. And when I mean competitive, we think anywhere within 8 to 12 weeks. And I think what’s really been fortunate with the TRP, the way they manufacture historically as their lead times have been a lot shorter.

So we had situations where customers are coming in and asking for product and because of our long lead times, we've been able to switch the customer over to TRP. And they’ve been able to pick up that business. So I’m pretty confident going forward and that lead time shouldn’t be a corporate problem with the two operations we have.

Sean Hannan - Needham & Company

Okay. All right. Thanks very much for the color.

Dan Bernstein

Thanks Sean. Appreciate your time.

Operator

Thank you. (Operator Instructions) And at this time, I’m not showing any questions.

Dan Bernstein

All right. Thank you, Sean. We appreciate everybody joining us and hopefully everybody can travel. People in New York East Coast area, please travel safely and I wish you a safe drive home. And thanks again for your time. I appreciate it.

Operator

Thank you. Ladies and gentlemen that does conclude today's program and you may all disconnect. Everyone have a wonderful day.

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