Bel Fuse Inc (BELFB) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bel Fuse second quarter 2007 release 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 today, Friday, July 27th, 2007.

I would now like to turn the conference over to Mr. Dan Bernstein, President. Please go ahead, sir.

Thank you, Bridget. I would like to welcome you to our conference call to review Bel's second quarter 2007 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance. Colin?

Good morning, everybody. I'll start with the Safe Harbor Statement. Except for historical information contained in 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, capacity and supply constraints or difficulties, product development, commercializing or technological difficulties, the regulatory and trade environment, 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 insurance 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 out of the way, I will now turn to our results, addressing the issues brought up in our press release. Firstly, sales. For the second quarter of 2007, our sales were $61.6 million, which was 7% lower than the $66.5 million in the second quarter of 2006. And the $61.6 million was also just slightly -- that's $200,000 less than the $61.8 million of the preceding quarter ended March 2007. Sales year-over-year increased in the modules product group that includes DC to DC converters and custom modules, with the magnetics and interconnect product groups declining as we walked away from certain low-margin business. Going to profits and cost of sales, Bel ended the quarter on a GAAP basis with net after-tax earnings at $6.158 million. This compares to net earnings of $8.763 million for the second quarter in 2006. Results in both 2006 and 2007 included both above and below the line income from operations line, including credits and charges of a one-time nature or items that we did not have the prior quarter in our results.

In the second quarter of 2006 we had reported $5.240 million pretax and prebonus gains on the sales of the company's shares in Artesyn. After taxes and bonuses, which were included in SG&A, the aftertax gain from Artesyn in 2006 was approximately $2.6 million. For second quarter of 2007, we have pretax income of $880,000 from the sale of property in Hong Kong, and $2.5 million pre-bonus accrual on pretax from the partial sale of our holdings in Toko, Inc. On the expense side, in 2007, we recorded approximately $1.2 million due to a warranty claim that requires to us replace approximately $900,000 of already shipped products, plus a write-off of approximately $300,000 of inventory. This problem was confined to just one supplier who falsified production information and one end-use customer. Our gross margin for this period -- for this quarter includes one-time charges -- including one-time charges was approximately 21%, and below the 24% gross profit margin for the same period of 2006. Our second quarter 2000 -- and our first quarter 2007 gross margin was 23%. The lower gross profit margin would compare to the second quarter 2006 was primarily due to one-time operating charges described above, plus performance bonus accrual reflected -- related to the profit from the sale of Toko stock. As you -- there was a decrease of just over $1 million from the same quarter in 2006. In 2006 it was a special bonus accrual of $1 million related to the sale of Artesyn shares, compared to a special bonus accrual of $286,000 in 2007 related to the sale of Toko stock. In the second quarter of 2006 we also had approximately $450,000 of legal expenses for defense of patent claims against Bel.

Turning to taxes, our average tax rate for the quarter was 25%. This is higher than we would normally expect, but as this quarter we had higher percentage of income in the higher taxable U.S.A. This was primarily, of course, proceeds from the sale of Toko stock. On the balance sheet, cash and equivalents -- at the end of June 2007, our cash equivalents and securities were $104 million, which was $12 million above our December 2006 balance of $92 million. Receivables and payables -- receivables net of allowances was $43 million at June 30th, 2007, compared to $44 million in December 31st, 2006. Our accounts payable remain steady at $15 million. Inventories for the June period -- our inventories were $44 million which is $2 million below our December 31st, 2006 balance. Other balance sheet comments -- for the three months, our capital spending was approximately $1.3 million, while depreciation and amortization was 1.1 -- $1.9 million. During the second quarter of 2007, Bel repurchased approximately 67,000 class A shares at a cash outlay of almost $2.5 million. At a regular meeting of the Bel Board of Directors yesterday, a resolution was passed to increase the quarterly dividends effective with a dividend payable November 1st, 2007. The new quarterly rate for class A shares were increased by $0.02 from $0.04 a quarter to $0.06 a quarter. For class B shares, it would also increase by $0.02, from $0.05 a quarter to $0.07 a quarter. Our book value at June 30th, 2007, was approximately $19.47. I'll now hand the call back to Dan.

As per our previous release regarding Toko, Bel reduced its ownership in Toko to 1.9% of outstanding shares. We continue to rationalize our production and support facilities. In the second quarter, we finally closed on the sales of our original office property in Jersey City and completed a sale of the staff apartment in Hong Kong. As we're required to place a significant portion of the Jersey City sales proceeds into escrow required by the title company, no profit from this sale has been recorded. In the third quarter, we plan to cease manufacturing at our facility in Macau. The remaining production from this will be moved to our existing facility in China. That building will be sold as well as associate staff quarters and a warehouse. In Hong Kong, we will be selling the production floor. At this time, we would like to open up for any questions that you might have.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Todd Cooper of Stephens, Inc. Please proceed.

Colin, what was behind the 170 basis point drop in gross margin sequentially?

Primarily the warranty claim.

Okay. And regarding that, you said -- if it's an issue a supplier, do you have any recourse with that supplier?

It was a Hong Kong-based supplier with a manufacturing facility in Shenzhen, in China. However, he, without permission and without authority -- the manufacturing to another location. We're having a little trouble tracking him down at the moment.

So you hope to regain some of that, but there's no guarantee.

I think our chances are fairly slim.

Dan, what's -- is the strategy all of a sudden to be selling these various assets? Is it just cost reductions?

I think it's a combination of cost reduction. Also, I think we want to tighten our belt and generate as much cash as we can, as we are trying to pursue some acquisitions. And we think where the markets are now, the more cash we have, the stronger we can be in this acquisition [on the bars].

Okay. And are you seeing the most competition in the MagJack product line?

Yes, the MagJack is probably the largest player, we are seeing the most competition there.

And that's -- when you talked about walking away from some business, it was that product category?

The one specific product line that we really -- hit us pretty bad was, we're a major supplier to the Xbox, and we walked away from that business. And that was some very strong revenue. I don't know if you realized, but I guess last week Microsoft took $1 billion write-off on the Xbox for quality problems and rework problems, so I think we probably made the right decision. I think they were using vendors that were -- they were more concerned about price concerns than they were about quality and I think they're paying the price for that now.

And last several quarters, revenues have been basically flat. Is that kind of what your expectations for the second half of the year, or do you see any reason why you could start growing again?

I think what we're hoping to see is maybe flat for next quarter. We're hoping by the fourth quarter that the power products can start increasing substantially with the consolidation that's going on in the industry with the -- (inaudible), the certain customers. We soon believe there could be some very strong upside into power. We're predicting we should have some pretty good growth until we hit about $100 million. I think now we're at $45 million, in that area.

Okay. Cisco, one of your largest customers, has been undergoing a lean inventory initiative. Has that impacted you in your top line?

No, I think it's a flavor of the month. Just in time. Basically once again, they're just trying to figure out ways to put more pressure on the vendors, but a lot of lean manufacturing is very difficult when you're moving materials around the world and so forth. It does have a lot of value. We do have a lean initiative going on in our company. I don't know if you can get within the parameters that our customers are looking for.

Okay. Thanks very much, guys.

Appreciate that, Todd.

Mr. Bernstein, there are no further questions at this time. I will now turn the call back to you. Please continue.

Once again, we'd like to thank everybody for joining us today, and we're looking forward to speaking to you in the future.

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