Bel Fuse Inc (BELFA) 2004 Q3 法說會逐字稿

Welcome to the Bel Fuse, Inc. third quarter conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, October 27, 2004. I would now like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead sir.

Thank you Marine and we would like to welcome to our conference call to review Bel's third quarter and 9 months year-to-date 2004 results. Before we start, I would like to hand over to Colin Dunn, Bel's Vice President of Finance.

Good morning everybody. Thanks Dan. I would like to start and read a Safe Harbor statement. Except for historical information contained in today's news release and this conference call, the matters discussed are forward-looking statements that involve risks and uncertainties. Among the factors that could cause actual results to differ materially from such statements are the market concerns facing our customers, the continuing viability of sectors that rely on our products, the effect of business and economic conditions, the difficulties inherent in integrating remote businesses that may have followed business practices different from the Company's business practices, capacity supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, uncertainties associated with legal proceedings, the market acceptance of the Company's new products and the 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 assurances that any forward-looking statement will in fact proved to be correct and we undertake no obligations to update or revise any forward-looking statements. Having said that, I would like to now pass on and briefly describe financial results for the third quarter.

End of the quarter on a GAAP basis, with net after-tax earnings $6.894 million or 60 cents per fully diluted share. This is well about the net earnings $3.630 million for the third quarter of 2003 and slightly below the $7.145 billion in the previous second quarter of 2004, when we had the benefit of approximately 12 cents per share, resulting from the settlement of write down of some fixed assets.

In the third quarter of 2004, we had the benefit of earnings from Insilco Passive Components Group acquisition for the full period, but only for 6 months in the comparative numbers for 2003. Sales for the quarter was $49.986 million which was 9 percent above the $45.864 million in the third quarter of 2003. And this was sequentially 3 percent above the $48.309 million of the preceding quarter ended June 2004.

Sales gains were made in MagJack integrated connectors for consumer of electronic applications, those gained in our Power Products Group. I just wish to remind everybody that consistent with Bel's integration of in 2003 of the Insilco integration of the Bel, we do not effectively break out revenues from that group.

After sales, our gross margin for the third quarter was 30 percent compared to a gross margin for the same period in 2003 of 29 percent. This 30 percent was slightly above the 31 percent gross profit margin for the second quarter of 2004. Head count has stabilized and we have now been able to match customer demands with that capacity. SG&A has increased to 62,000 from the same quarter in 2003, reflects additional professional fees, primarily associated with Sarbanes-Oxley compliance and additional commission accruals due to an increase in sales. of SG&A expenses in that sales decreased from 16.6 percent during the third quarter of 2003 to 16 percent during the third quarter of 2004. Taxes for the quarter, taxes were substantially lower due to the elimination of some tax accruals that are no longer required.

Turning to the balance sheet, cash and equivalents, at the end of September, our cash equivalents and securities were 87 million, which is an increase of 11 million for the quarter. Net of Artesyn stock, our cash equivalents and marketable securities increased by 7 million in the quarter, in addition to cash from profits for the quarterly increased inventories, which was primarily finished goods by 3.5 million, and in line of increased sales, we reduced accounts receivable by 1.1 million. It was 16.3 million spent in the acquisition of slightly over 5 percent of Artesyn Technology Stock. This already reflects in the cash equivalents and securities balance of 87 million. We took down 10 million of Term Debt in the USA in March of 2003 in conjunction with the Insilco acquisition. We continued to pay this debt at $500,000 per quarter.

In addition, we continue to pay a quarterly cash dividend that consumes just slightly over $500,000 per quarter. Receivables and payables, receivable net allowances was 33.4 million at September 30, compared to 34.5 million at June 30, 2004. Our accounts payable for the same period is 12.3 million. For this quarter, our payables increased by 1.172 million in line with increased raw material purchases. Inventories for the third, our inventories was 34 million, which is 4 million primarily finished goods about June 30, 2004 balance.

Other balance sheet comments, capital spending for the quarter was 1.8 million. This of course is well below our depreciation and amortization for the 3 months of 2.5 million. Moving forward, we expect some increase in capital spending, as we continue with 2 projects to add additional manufacturing facilities in China plus the addition of a dedicated high-speed licensing facility, primarily, the Power and value-added products. Our book value at September 30, 2004 was approximately $15.6 per share. I will now turn it back to Dan Bernstein.

Dunn, I think, progressing with Section 4 for requirements of Sarbanes-Oxley act. In 2004, we expect to incur 950,000 in charges related to compliance in audit. We have ongoing cost but yet undetermined, however longer annual maintenance is accepted and additional order of fees to maintain compliance. This is quite an open entity cost area because many areas are lower and not fully defined and the order effect and cost are still undetermined. Market remains uncertain and we still have very limited visibility as to further future customer requirements. .

Backlog decreased over the quarter due to increased production capabilities. Regarding Artesyn Technologies, we do not understand Artesyn's Board position that they have made careful consideration of Bel's proposal. When they refuse, still refuse, then meet with us. We are still hopeful that they will change their position, so we can show them in detail the potential benefits to Artesyn shareholders. At this time, I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Todd Cooper, Stephens Inc.

Good morning guys, this is actually Steve calling for Todd. You talked about the gains in your Power Products Group. Can you elaborate on that please?

I don't think our sales in Power has been slight over the past three or four quarters. Our new business and our business opportunity -- and we did see substantial growth in that business. Basically, we showed a million-dollar of growth over the quarter in Power.

Lee Zelster, Needham.

If you can just run through your sales mix by product and then by end market?

The only thing that changed over recently -- geographically there has been no changes in the market allocation. We still got much of the same percentage allocations, which is roughly 35 percent in the United States and 65 percent of our sales for offshore. We haven't seen any significant change either in the allocation between magnetic components and fuses and value added. Of course, the one exception is being the little uptake -- significant uptake when you look at traditional sales in the Power Group. I don't have the exact percentage numbers in front of me, but there has been, as I said, basically no significant change other than the increase in . Also in the MagJack, we do a lot with the MagJack in the consumer electronic industry and because of getting ready for the holidays, we did see an uptake in that product to the people that support the Christmas industry, the toy business to be more exact gaming.

How about a vertical end market. You mentioned, consumer electronics probably being little bit higher, but if you can just give us the mix, slice it that way?

It is somewhat confusing because once again if you take some one like Cisco -- we already got the holidays once again. Cisco was a networking company and Lucent was a telephone company and then you come up and say -- now we know about telephone company but then people looking at wireless are not wireless. Once again a good portion of our business has always been in the telecom people which we do consider Cisco. I would say that's probably using a ballpark figure of about 65 percent. Then, we do a nice business with the PC, network people, peripheral people and then there is just this very small business in the consumer electronic arena.

You mentioned the spark in your power products group. If can you just talk about guidance for that business and maybe your overall -- little bit more detail on your overall business going forward? You mentioned visibility is pretty limited but what are your expectations for Q4?

Okay. I can give you expectations, we probably see a slight downturn in the DC/DC business for us, but I have assurances from our product manager that he is betting his life that is going to hit $10 million next year. If you see a product manager being thrown out of a window in '05, it means it didn't hit the $10 million target.

And what about just for the overall business going forward?

Once again we are getting so many different text messages. If you look at -- just a couple of days ago, Technitrol, who is our major competitor in a majority of our products. After taking 6 to 7 percent growth for next quarter and hopefully they are thinking they are going to hit 8 to 15 percent growth maybe for 2005. Very cautious, but they did say that they do see 6 to 7 percent growth for the fourth quarter. We also do see positive things from Lucent and IBM. On the other hand, for the IT people, we use price as a good parameter of predicting flat quarters going forward. On the same with Cisco, they predict a flat quarter and they are cautiously optimistic for 2005. So once again we are totally confused of what's out there. And once again because of a lot of inventory -- we maintain a lot of stock in internally and also in off-site where they have their own warehousing programs. Our visibility so is very limited at this point in time.

Dan, can you talk about the linearity in the quarter month to month. Was September up from August and how is October trend?

It is really not because a lot of people say September was their strongest month and that wasn't the case with us. We had -- 2 months before that we were a lot stronger for whatever reason for us and September I think was the weakest month. October for the first 2 weeks has done very well, the third week has been about average. But, once again, in October we only have 4 weeks and all the other months were carrying 5 -- 4.5 weeks.

So just arithmetically it will be a little bit weaker than September. What about on a week-to-week basis, as that may be more apt comparison.

Vee, virtually I've looked at every formula and nothing works for me. I mean, once again, our first 2 weeks of October were probably our strongest 2 weeks in the last 4 months. However, our third week was down substantially. I guess, we had a Board meeting yesterday and there I was saying, you guys can't you calculate what you are going to do in the fourth quarter and I came out with 5 different scenarios. Historically we use pinpointing backlog at certain periods of time. Looking at historic data to where we are today and there is no other reason. Every month we have roughly the same backlog within first week of that quarter and however our sales are different by anywhere from 2 to 3 million -- 1 to 3 million. At this point we are just -- it's really wait and see.

Okay, and then just one last question on your acquisition strategy. Is kind of the primary that you are looking for in the power supply market or are you looking at possibly expand externally in some of the other business as well?

I think once again we are looking further at anything else because shareholder value -- we are sitting on a substantial amount of cash, we get no credit, we don't believe our cash. So we are looking at companies that can ask you a basket of products that we can present to our key customers that make their life easier. And we understand the management, the people and how they figure with us, what they do to the bottom line. So, I think we are focused on power a lot but we are still looking at companies -- we spent a lot of time in the past for years looking at fuse companies, looking at connector companies. And I think we fairly are open to anything or any possibilities. Currently today we are looking at two or three or four power companies, one connector company, but we are truly very active on the acquisition hunt.

Craig Irwin, First Albany.

I know tax rates are always very difficult to forecast, but could you comment on what your expected tax rate is for the fourth quarter? And also you did say there was no change in your geographic revenue mix in the quarter, so could you help us understand the underlying factors for the tax rate excluding the accrual benefit?

I think, the tax rate should run between -- roughly between about 18 and 22 percent. It's grown very dramatically from quarter to quarter depending on a number of factors, particularly related to the far east and also -- in the past has also somewhat been affected by European operations, but I think the impact of that is out of it somewhat now. And, so it gets back to a -- you're right but certainly on geographic sales it should be fairly stable. Part of the issues that we're being dealing with, I think, also some of our pears are being dealing with is changes in -- not necessarily in tax rules offshore, but certainly on the application of different tax policies in the far east. And there's has been some new tax cases, one specific tax case in Hong Kong that has changed the scene somewhat as to what is taxable in Hong Kong, what the rate of tax will be in Hong Kong, so that has given us a lot of uncertainty, and we're still trying to deal with that. And obviously, as we go forward further, now with the jobs creation act that the President signed in the war last Friday we are going to have to go back and also review what we do with profits that we have in the far east. We will have to make a decision on that within the next 12 months, and that will be of course another impact on going forward as to what happens. The short answer for guidance, we should be in the, all things being equal, we should be in the 18 to 22 percent with the tax rate for the fourth quarter.

Great. And am I right to calculate that you are closer to the bottom of that range in this quarter?

Correct.

Okay. Excellent. And then another thing, just wondering if you could comment on the percentage of your revenue that comes from power supply companies versus from other electrical equipment OEMs?

We do very little that comes from power side. We're getting some fuse business, but that's about, I would say, not more than $500,000.

$500,000 in sales to power supply companies or -- can you clarify that?

To power supply -- that is just a ballpark number. But nothing that we're -- as we deal with products and we're not going to lose a substantial amount of business to the power supply people.

Great. Thanks a lot guys.

Alan Mitrani, Copper Beach

Hi, thank you. I just want to make sure Colin on your tax rate number. You were talking a quarter, so next quarter I should just use 20 percent of my models as well as next year, or is it annually you expect it to get to 18 to 22 percent?

Without abnormal situations it should be normally in the 18 to 22 percent range.

Okay. Fine. I'll just model them in. Okay and on the gross margins this quarter your sales were up a million plus, margins were down 140 basis points, was it a mix issue, are the raw materials coming in, can you just give us a little explanation on the margin side?

A little bit of it was related to some overheads particularly on depreciation, we revived some assets that added -- which cost us a couple of percentage points particularly in the far east we're taking a little more aggressive policy with tooling, and we've also identified some assets which will have less than normal full lives and we've accelerated our depreciation on those.

So, what should be -- if you're 2.5 million this quarter. Should depreciation be high can you give us a sense of where --?

In the quarter we had -- I think it was just over $200,000 additional depreciation cost that was -- which will not be recurring.

So, for the next quarter $2.5 million is fare or $2.3 million?

$2.3 I would expect. It depends on when we capitalize some new equipment in, but I'm expecting about 2.3.

Okay. So, for next year if there are no as close to $10 million roughly on D&A.

Yes.

And then for CapEx you said you are up at this quarter to a million 8. What kind of numbers do you expect for the fourth quarter?

A similar number depends on where we get on some completion related to -- we have got a new factory that is getting nearer completion and it just depends on when those payments are going to get made to that contractor. It won't be occupied before Chinese New Year, which is mid February but we are starting to get doing the build up because all the loans are up. So it is sort of up in the air but for the moment I would leave it below 2 million anyway.

Okay. And then for next year is the 6 million number CapEx a fair number to use?

Yes.

Okay. Got it. So, what was your cash flow from operations this quarter?

Cash flow from operations was 18.7.

18.7 million?

Yes. Well, cash from net income was 18.7. Net cash provided by operating activities at 23.9.

23.9. All right.

This is the figure you are after.

Yes, exactly. Okay, well that seems so much -- any reason, I am sorry, why was it tripled -- quadrupled roughly net income?

Well, nothing specific. It is just a whole bunch of different factors.

Okay. And then for the fourth quarter, we are looking at a fairly flattish revenues, fairly flattish margins and similar type of quarter. Is that near to what you reported this quarter?

As we said, the outlook is pretty cloudy. But we think it is going to be fairly flat.

Okay. And then with regard to acquisitions. You mentioned in your release regarding Artesyn that you are looking at others. Can you give us a sense of the size of other acquisitions that you would be willing to take on?

Well, I think if we took on Artesyn that is as big as we could get, but most of the companies are trying in the range of anywhere from $18 million in revenue up to about a 100 million.

And is there a next step on the Artesyn?

We are hoping to keep like Copper Beach a pressure on them but now we feel ball is in their court.

(OPERATOR INSTRUCTIONS). Mr. Bernstein, there are no further questions at this time. I will turn the call back over to you for your closing remarks.

Thank you for joining us today, and I thank Colin and we hope we would hear from you in February at year end. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.