Bel Fuse Inc (BELFA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Bel Fuse Inc. third-quarter 2011 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 follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Dan Bernstein, President and CEO. Sir, you may begin.

Thank you, Chuck, and welcome to our conference call to review Bel's third-quarter 2011 results. Before we start, I would like to hand over to Colin Dunn, our Vice President of Finance.

Thanks, Dan and good morning, everybody. Before we start, I would like to read the following Safe Harbor statement. Except for historical new information contained in this third-quarter 2011 financial results call, the matters discussed in this call 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 segments 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 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 I'll move on to discuss our results and balance sheet. First, I will start with sales. Year-over-year for the third quarter of 2011, our sales were $75.9 million, down 10.7% from the $85 million that we reported in the third quarter of 2010. Quarter-over-quarter, there was a decrease of 4.1% with the main decreases being in the integrated connected module productline.

We continue to experience significant (inaudible) with the integrated connector modules in comparison to prior periods. Integrated connector modules' backlog remains flat with the prior year-end. Compared to the second quarter of 2011, order backlog decreased widely across all of our productlines.

Cost of sales to net results, as noted in the second quarter, the significant shift in nature of our business away from labor-intensive magnetic products towards more value-added module products continue to have an impact on our gross margin during the third quarter of 2011. The products in our modules group, which includes Smart Grid, powerline and DC to DC converter modules, have a higher material content, which results in lower profit margins than our other productlines.

Although we have seen some moderation in commodity prices recently, higher cost for commodities, including gold, copper and petroleum-based plastics and government mandates for higher minimum wage and overtime requirements in China, continue to keep manufacturing costs high in comparison to the prior year. And fixed overhead costs represent a higher percentage of our sales due to the current lower level of magnetics production in our China factories.

The combination of these factors led to an increase in cost of sales from 76.2% of sales in the three months ended September 30, 2010 to 84.1% of sales in the three months ended September 30, 2011.

On an unaudited GAAP basis, Bel reported income from operations of $1.9 million and after-tax net earnings of $1 million for the third quarter of 2011. Last year, we reported income from operations of $9.5 million and after-tax earnings of $10 million for the third quarter 2010.

To state these results on a comparable basis, non-GAAP income from operations for the third quarter of 2011 was $2.2 million compared to non-GAAP income from operations of $9.1 million for the third quarter of 2010.

Litigation charges have been excluded from our non-GAAP income from operations for the third quarter of 2011 while severance and plant closure costs and a gain on sale of property plant and equipment have been excluded from the profitable 2010 non-GAAP income from operations.

Virtually all of the decrease in third quarter 2011 versus 2010 non-GAAP operating income was attributable to the decrease in gross margins, which we described above. A reconciliation of GAAP to non-GAAP measures is included in our press release from today.

Looking forward, we expect increasing pressure on pricing as it is hugely associated with relatively short production lead times on a continuation of the current proportion of module sales in our product mix.

Turning to selling, general and administrative expenses, on a comparable non-GAAP basis, the dollar amount of selling, general and administrative expenses decreased from $11 million during the three months ended September 30, 2010 to $9.9 million for the third quarter of 2011. SG&A as a percentage of sales for the third quarter of 2011 was 13%, down slightly from the 13.1% of sales during the third quarter of last year.

Although we are fearing the SynQor legal decision, the money we are spending on legal costs has decreased significantly and we expect it to remain at lower levels.

Taxes, Bel reported a provision for income tax of $1 million for the three months ended September 30, 2011 compared to a tax benefit of $500,000 for the three months ended September 30, 2010. This is mainly due to taxable operating profits in the US combined with operating losses recorded in Asia with minimal tax benefit. The Company's effective tax rate which is the income tax provision and the percentage of earnings before income taxes was more than 50% for the three months ended September 30, 2011 compared to an effective tax rate of negative 5% for the same period in 2010.

In addition, in the third quarter of 2010, we had recorded a tax benefit from expiration of statutes of limitations, which did not recur in 2011. The Company's effective tax will fluctuate based on the geographical segment in which the pretax profits are earned. Of the geographical segments in which Bel operates, the US has the highest tax rates. Europe's tax rates are generally lower than US tax rates and Asia had the lowest tax rates.

The Internal Revenue Service audited our federal tax returns for the years 2004 through 2009 and it is ongoing. To date, Bel has provided all documents requested by the IRS for this examination.

Outlook. Because of the preceding results and the current market outlook, we expect business conditions to remain challenging and we are therefore realigning our organization to further reduce costs and improve operations. We expect to finalize and publicly announce our plan, including our anticipated costs and savings associated with it as part of Bel's fourth-quarter earnings report, which will be in February, 2012.

Turning to the balance sheet, cash and equivalents. At the end of September 11, our cash, cash equivalents and investment securities were $102.2 million, which was $16.7 million higher than the December of 2010 balance of $85.5 million. The increases in cash resulted primarily from earnings and favorable operating cash flows, partially offset by the payment of $2.3 million in dividends and $2.2 million of capital expenditures. As of the balance sheet date, the litigation charge is relative to the SynQor case, which will reflect in accrued expenses, has not resulted in cash outflows.

On July 11, 2011, the court awarded supplemental damages of $2.5 million against Bel in the previously disclosed SynQor litigation. Of this amount, $1.9 million is covered for an indemnification agreement with one of Bel's customers and the remaining $600,000 was recorded during the second quarter as an expense by the Company.

During the third quarter of 2011, Bel recorded costs and interest associated with this lawsuit of $200,000. Bel is in the process of appealing the verdict and the outcome and as we advised, the full amount of the damage awards plus costs and interest must be posted as they supersede the years (inaudible) upon filing of the notice of appeal.

In October, and we only have a couple of days to go, Bel will post a total of $13 million in a form of bond to the court in the Eastern District of Texas while the case is on appeal in the United States Court of Appeals.

Receivables and payables. Receivables net of allowances was $45.6 million at September 30, 2011 compared to $53.3 million at December 31, 2010, a decrease of $7.7 million. Our accounts payable at September 30, 2011 was $18.7 million, a decrease of $2.4 million from December 31, 2010. Inventories at the end of December 2011, our inventories were $54.2 million, down $2.8 million from the December 2010 levels.

Just a couple of other minor comments. Our capital spending for the three quarters (sic) ended September 2011 was approximately $800,000. Our depreciation and amortization was $2.2 million. Our per-share book value at September 30, 2011 was $18.84, including goodwill on intangibles, and when we exclude intangibles and goodwill, our per-share value was $17.54.

That's the end of my financial comments and I'll now turn the call back to Dan Bernstein.

Yes, Chuck, at this time, we would like to open up the call for any questions, please.

(Operator Instructions). Zach Larkin, Stephens Inc.

Colin, I wondered, first off, could you give us the product revenues by segment real quick for the quarter?

Don't think we can do that. We don't have it handy quickly.

I don't have it in front of me, Zach. It's --

It's in the back of the packet.

We will have to provide that later.

All right, thank you. Thanks, that's great. Maybe moving on to margins. I mean obviously we are seeing a lot of pressures from commodities mix and lower overall volumes. Do you expect the margin levels that you guys saw this quarter to kind of persist for the next several quarters? What are your thoughts on that front?

In the immediate future, we don't see any improvement. The big improvement is going to come from a change in mix and if the integrated connected module segment comes back, that should help that because that's the one that takes all the -- most of the labor. The hand labor is in that and that has the impact on overhead absorption. And we still are under pressure on margins, particularly on selling prices. There is surplus capacity in the industry. So we have to wait and see how that goes.

We are getting little improvements here and there. Some of the [ICs] are down a little bit. Certainly (inaudible) ICs are down. We are getting just a little bit of benefit from gold, but generally we are not seeing any significant improvement in our cost structure. As I said, the big one will be volume and hopefully volume comes back and wherever that happens, that's where we are going to see the improvement in margins.

Right, and I know last call, you mentioned visibility has been very limited. Has there been any improvement on that on any fronts or is it still pretty limited?

I think everybody has moved from (inaudible) to very pessimistic. And again, I don't know how (inaudible) Asian affects our market [here]. But again, just again, a tremendous amount of uncertainty in companies. Even though many companies have strong cash positions, we don't see them buying equipment and being aggressive. But still we are being very -- we are looking at it very pessimistic for the next couple of quarters.

I think, Zachary, one of the issues is what's going to happen going into Chinese New Year for us and our competitors. Last year -- typically around November, December, we see a bit of a pickup as companies in effect put material aside and make sure they've got a short supply during the China shutdown. This year, the shutdown it is a little earlier. It was in late -- starts in late January. Every year until last year, we'd seen a bit of a push. Last year, we didn't see a push because there was so much material in the channels. We don't think there is a huge amount of material in the channels this year, but we're going to have to -- I think, as we get to late November, early December, I think we'll have a much better feel as to what is really out there. But we don't have that information at this time.

Okay, no, thanks. That's helpful. And then just finally on the tax kind of bill going forward, do you have any sense for how we should think about tax rates and/or just kind of a quarterly expense for the next couple of quarters?

We expect our tax rates to come back much better in the fourth quarter. Again, it's going to depend. One of the things -- it was a good news/bad news sort of a situation. Our Cinch acquisition, which happened in January 2010, has been operating quite well. And it's been actually making good profits and those profits are all in North America or primarily in North America. There's a little bit in Europe.

So with that profitability out of that operation, it's really been skewing the amount of money that's having to go to taxes as a percentage of our total tax bill. We do expect somewhat of an improvement. One of the issues we had this quarter particularly was we had to book quite a lot of -- again, quite a lot of expense from the SynQor lawsuit and also another lawsuit. And most of that had to be picked up in Asia and the expense got picked up in Asia, but there was no tax benefit from that because -- minimal tax benefit because the tax rates are quite low in Asia.

Understood. And so if I were to try to put maybe a finer point on that, maybe somewhere kind of mid-30%s versus what we saw this quarter, is that may be a reasonable --?

I would like to think more in the mid 20%s.

Okay, okay. So kind of getting back to historic levels. All right, thank you very much, guys.

Zach, while we still have you on the phone, let us give you some sales figures from the third quarter. Modulars were about $23 million, magnetics were about $23 million, interconnects $27 million and circuit protection $2.5 million.

Dan, thank you very much. That's very helpful and thanks for the color, guys.

Sean Hannan, Needham & Company.

Was looking to see now that we are almost done with four weeks in the quarter, is there a way if you can perhaps provide a little bit of color around how has performance been thus far either versus last quarter or perhaps the year-ago quarter or how much or what is the magnitude of how much we might be down?

I think we're looking -- we're definitely going to be down. To what extent, we don't know exactly. I think we are going to be down probably from a quarter basis from the previous quarter and definitely from last year's quarter.

Okay. From a pricing and a leadtime standpoint, can you provide a little color around MagJack today?

From all our products, basically we are seeing, as always, price pressure. Customers are looking for a 2% per quarter pricedown. I don't think they're getting it from anybody. But we do think that probably the average for the year is probably around 3% to 4% for all products. And at this point, excluding the Japanese situation and possibly what's going on out of Thailand with the floods, if you're not affected with those two areas, leadtimes are probably back to normal levels of anywhere from 7 to 10 weeks.

Okay. And then in terms of 10% customers, how many did you have in the quarter?

I don't think -- the problem we have with the CMs, I would probably say possibly three, three to four.

Okay, thanks very much.

Lenny Dunn, Freedom Investors.

Two things. One, can we expect clean, easy-to-read quarters going forward, including the one you are going to report (multiple speakers)?

I hate to say it; I think it's going to get dirtier. And that's one of our concerns. Again, in the old days before Sarbanes-Oxley, you could set up a reserve and you could very pinpoint it going forward. But now you can't take the reserves until they happen in the quarter. What we are going to try to do is we are going through a whole process now of streamlining the organization. We'd like to present in the next quarter this is where the cost savings are going to be, the reserves we are going to take and lay out for the next three to four quarters by I think only three quarters when these reserves will come and what the amount will be. But it's -- a lot of it, I hate to say, is the new regulations that make it a lot more difficult to report and get a clear picture of how the Company is doing.

I can figure it out, but it's just a lot harder to.

No, I agree with you.

We do the same thing internally.

Again, if you're locked in, you can (inaudible) you know you are closing down an operation, you can set all the reserve in one quarter and everybody knows where it is. But again, it makes it a bit more difficult with the new regs that are out there. But we definitely empathize with your concern.

(inaudible) empathizing as long suffering shareholders here, we certainly would appreciate a dividend increase while we're waiting.

It's something that we talk about and it's something that we are giving serious consideration about. And very active with our -- it is one of the -- we spent a good part of our Board meeting yesterday, it's one of the major topics that we have discussed.

Because it's easier to be patient if we are getting paid a little better while we're waiting.

I'm a large shareholder. So again, not going to put up a fight with me on that one.

Okay, just we certainly have what I would consider more than an adequate amount of cash around and to take a dime on the cash flow of $0.77 each quarter I don't think is going to jeopardize your ability to function.

I think the Board tends to agree. I think the only concern the Board has is that we do have one or two major acquisitions. And I think by the next quarter, we have a lot better clarity on those acquisitions.

But still, I'm not -- it seems like there is adequate future cash flow to cover the dividends. And anyhow, you understand what I'm saying, but I would appreciate --.

I agree, Lenny. I am 100% behind you on this one. And my wife is also.

Well, tell your wife to nudge the Board a little here.

All right, thank you. Any other questions we can help you with?

No, I mean the clarity and the dividends. The rest of it I understand. I like the long-term story, I like the discount for book value, I like the future of the Company and I think it's generally pretty well run. But just what I asked you is all I need now.

Okay, great then. Hopefully our next quarter, we can address that a lot better for you.

Well, we will see a dividend increase announcement shortly.

I'm working for you. That's all I can tell you. At the next Board meeting, your comments will be definitely presented to the Board.

Thank you.

But don't expect the next dividend. There is one more (inaudible) that the dividend will be announced very soon.

No, I understand the dividends have already been declared. I'm not talking about that one.

But it's something, yes, we clearly understand your position.

Okay.

[Nick Morrow], Sidoti & Company.

I just have one question. Most of mine have been answered already. But in terms of the customers that you got from the Cinch acquisition, do you see any further penetration to them? Specifically say like Boeing getting into more of the more popular aircrafts?

No, we are definitely (inaudible) military and aerospace was a home (inaudible) for us. And it's a space that we kind of like, to be honest with you. You have long-term commitments with Boeing, maybe take three or four years to get a product approved, but once it's approved, it's approved for 10 or 12 years or even longer. We are spending a tremendous amount of time looking at possible acquisitions to strengthen Cinch's entree into these customers so they can tend to get a better presentation.

One of the concerns that we have had with Cinch, they were kind of the (inaudible). They really didn't get enough funding to look at some new products and so forth. So one of the things -- we are committed to spending a tremendous amount of time. We just appointed a new rep organization for Cinch in Seattle where the rep has badges where they can come in and out of Boeing very easily. They also have a desk at Boeing, they also have similar products that we sell to Boeing. So hopefully, we can piggyback that and look at new commitments.

In addition to that, we are looking at (inaudible), setting up our own sales office to support Airbus. So, yes, we are committed and we are looking at every way possible to penetrate the aerospace companies a lot better than we have been in the past.

Okay. And how long do you think the litigation costs will go on for, how much longer?

Happy to say that we are pretty much 95% -- 96% done with the costs. And hopefully there's no lawsuits out there. But we're pretty much -- the only thing we have to pay left is the appeal process and that's a lot more reasonable.

Okay, all right. Thank you, guys.

At this time, I am showing no further questions. I'd like to turn the call back over to Mr. Bernstein for closing remarks.

Once again, I would like to thank everybody for joining us today and hopefully we're on the road to -- we clearly understand the concerns out there and we are trying to address the concerns as quick as possible and bring the Company back to better profitability. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the program. You may now disconnect. Have a great day.