Bel Fuse Inc (BELFB) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Bel Fuse Incorporated, Third Quarter Results 2009 Conference Call. As a reminder, today's call is being recorded. At this time it is my pleasure to turn the call over to Mr. Daniel Bernstein, President and CEO. Please go ahead sir.

Thank you. We would like to welcome everybody to our conference call to review Bel's third quarter and year-to-date 2009 results. Before we start, I would like to hand it over to Colin Dunn, our Vice President--Finance. Colin?

Thank you, Dan. Good morning, everybody. Before we start, I'd like to read our safe-harbor statement.

Except for historical information contained in today's news release and in this conference call, the matters discussed, including statements regarding positive economic signs and improved business conditions 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, 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 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 prove to be correct. We undertake no obligation to update or revise our forward-looking statements.

Now, moving on to our results. Firstly, I'll deal with sales. For the third quarter of 2009, our sales were $45.3 million, which was 32% lower than the $67 million reported in the third quarter of 2008, but up slightly from the $44.9 million reported in the preceding quarter ended June 30, 2009. Sales for the third quarter of 2009 in all product groups were lower than the same period in 2008.

Cost of sales and net results. Bel ended the quarter on an unaudited GAAP basis with a net after-tax loss of $10.8 million.

On a pre-tax basis, the quarter was impacted by one-time charges of $12.9 million for impairment of goodwill and a $2 million license fee paid in connection with a pending settlement of the lawsuit, which was partially offset by a GAAP gain of $0.5 million on the sales of Power-One stock.

These results were lower than our net earnings of $1.9 million for the third quarter of 2008, which reflected a pre-tax labor severance charge of $300,000 related to the closure of our manufacturing operations in Westborough, Massachusetts and a pre-tax impairment charge of $1.4 million related to investments in Toko's stock.

Excluding one-time charges, gross margin, as a percentage of sales during the third quarter of 2009 was lower than the same period last year. However, primarily due to the more favorable mix of products sales, the gross margin percentage during Q3 2009 was slightly higher than the preceding quarter ended June 30, 2009. Low sales volume, labor inefficiencies and moving expenses related to the consolidation of Bel's manufacturing operations in China continued to slightly depress margins during Q3, 2009.

The goodwill impairment. Bel performed an interim impairment test to goodwill during the third quarter of 2009. Lower than expected 2009 sales and earnings together with the revised longer estimates of the duration of the current economic downturn as well as future cash flows in comparison to our previous estimates. We determined that the goodwill associated with our Asia segment was impaired and recorded a $12.9 million non-cash charge in the quarter ended September 2009. Because this goodwill was in Asia, there was no income tax benefit associated with the impairment charge.

Selling, general and administrative expenses. The percentage relationship of selling, general and administrative expenses to net sales increased from 13.3% during the three months ended September 30, 2008 to 15% during the three months ended September 2009. The dollar amount of selling, general and administrative expenses for three months ended September 2009, decreased by $2.1 million, compared to the same period a year ago. This decrease was the result of several factors including but not limited to our continued focus on cost containment, particularly travel costs, decreased sales commissions due to 2009 lower sales volume, lower general and administrative salaries and fringe benefits as a result of staff reductions in various locations and the fact that we did not accrue any bonuses for our staff in 2009.

Interest income. Interest income earned on cash and cash equivalents decreased by approximately $400,000 during the three months ended September 30, 2009 as compared to the comparable period in 2008. The decrease is due primarily to significant lower interest rates on investment balances during the three months.

Taxes. Bel recorded a benefit of $4.4 million from income taxes for the three months ended September 30, 2009 compared to a benefit of $1.5 million for the same period in 2008. The Company's pre-tax results for the three months ended September 30, 2009 are approximately $15.7 million lower than the same period of 2008. The income tax provisions for both 2009 and 2008 third quarters were affected by the reversal of accruals for uncertain tax provisions.

The tax benefit for the three months ended September 30, 2009 is principally attributed to the expiration of certain statutes of limitations, which resulted in the reversal of our previously recognized liability for uncertain tax positions in the amount of $3.9 million. This was in turn offset in part by an increase in the liability for uncertain tax positions in the amount of $900,000 during the quarter ended September 30, 2009.

Additionally, the Company's settlement of lawsuit during the quarter ended September 30 of 2009, which resulted in a tax benefit of $800,000. These items were offset in part by losses in the Far East, principally related to the impairment of goodwill, which has, as we discussed before, minimal tax benefit. Through the quarter ended September 30 of 2008 certain statutes of limitations expired which resulted in a reversal of a previously recognized liability for uncertain tax positions in the amount of $2.3 million. And that was offset by certain changes in estimates for prior year taxes arising from the resolution of the State Tax Audits and finalization of 2007 tax returns.

On the balance sheet, cash and equivalents; at the end of September 2009, our cash, cash equivalents, short-term investments and securities were $126.8 million, which was $34.1 million higher than our December 2008 balance of $92.7 million and up $12 million since June 30 of 2009. From fewer operations excluding inventory, accounts receivable and special one-time adjustments, we again achieved slightly positive monthly cash flow during the third quarter. Our immediate goal during the current economic downturn has been to be cash neutral from fewer operations.

In the third quarter of 2009, we did not repurchase any Bel Class A shares or Class B shares.

Receivables and payables. Receivables net of allowances was $30.4 million at September 30, 2009 compared to $46 million at December 31, 2008. This is a reduction of $15.6 million. During the third quarter, receivables decreased slightly by $1.9 million. Our accounts payable at September 30 of 2009 was $14 million, an increase of $3.2 million from June 30 and $300,000 from the prior year-end.

Inventories. At the end of this quarter in 2009, our inventories were $29.8 million, which was down $1.8 million from June 30, 2009 and down $16.7 million from December 30, 2008. The recent decrease is due to increased customer demand, where we are building product for immediate delivery and very little is transitioning through finished goods inventory.

Other balance sheet comments. For the third quarter ended September 2009, capital spending was approximately $300,000, while depreciation and amortization was $1.6 million. While we'll still spend capital where we see high and quick payback periods, in the near-term, we will continue to curtail most capital spending. Our per share book value at September 30, 2009 was approximately $18.22 including goodwill and intangibles. When we exclude intangibles and goodwill, our per share value is $17.88. That's the end of the financial comments. Now I'll turn it back to Dan Bernstein.

At this time, we'd like to open up the phone call for any questions anybody might have.

Thank you Mr. Bernstein. (Operator Instructions). We'll take our first question from Steve Ferranti with Stephens Incorporated.

Hi, thanks. Good morning, guys.

Hi, Steven.

Can you help us think about, what your backlog looks like these days, I mean it sounds like obviously there's been some strengthening there and demand seems to be pretty good. Any sort of I guess quantitative numbers you can give us around that?

All right, our backlog is up substantially. In our ICM area we did not see integrated connector modules. The problem that we have with the increase in backlog -- the substantial increase in backlog is that it shuts down our lead times currently from 12 weeks to about 24 to 25 weeks, and in addition to that, to get down to 12 weeks we have to try to hire 4500 workers before Chinese New Year. So we don't know how -- even though backlog is great, we just don't know how much we can get out the door because this product is so labor intensive and so that's why we can't put dollars to the backlog at this point in time. Again, if we saw this type of backlog occurring after Chinese New Year, when we know we could maintain a stable reoccurring labor force, it'll be a lot easier for us to do it. But at this time as we face Chinese New Year, it's a lot more difficult to attract workers and a lot more difficult to keep workers.

Understand. And do you have visibility in terms of, maybe what end-markets are driving that demand?

Generally the networking is a major driving -- computer, computer peripherals type of people.

Okay, and I guess Colin, maybe you can help us think about, as you bring these workers on board, sort of what the impact to the income statement might be over the next couple of quarters, where can we expect to see expenses rising in accordance with the new workers coming on board?

Hopefully the major impact will be positive. We're putting these folks on to get our sales up. We've been running at pretty much a breakeven from operations recently. So to get additional volume and retain the same overhead is going to be positive for the Company because we'll get contribution. The issue is that, as we put these folks on, the training period is three to four to five months, to get them up to reasonable productivity. Most folks will come on at about a 30%-35% productivity basis, and it takes us quite a while to get decent productivity out of them. The other issue that we're going to be running into is, not only are we increasing our headcount here, we also have the expense for additional overtime. We did get new overtime regulations over a year ago in China that substantially increased our costs of doing business and through this period right now, we're -- once we start to get back into heavy weekend overtime again in addition to our normal Monday through Friday overtime, that does ramp up our costs. So we're nervous. We're trying to manage this labor increase, but I think, things being the way they should be, the additional overtime, the additional sales volume will take care of the additional cost.

We're going back to our customers again and requesting different types of charges to accommodate the overtime and what we see that, we've to meet their delivery requirement. So either through a price increase or some type of allocation agreement that we have, we have gone back to customers and requested that if they want to try to attempt to meet this upsurge in demand that somehow they have to be responsible for these extra charges that we're being faced with.

Okay, so I guess --

I think Steve the problem is, everything is so rapidly changing for us.

Right.

That we just don't know how successful a) we are going to be from an efficiency standpoint and then b) how much we can demand more on pricing or allocation from our customers.

Right.

And that we're hoping, that we can -- probably (inaudible) even after Chinese New Year, we really don't get good visibility to have the Chinese New Year, when we can maintain a steady workforce.

Right. Okay. So there's a bit of a lag effect, you bring these workers on, there's a bit of lag effect until they become fully productive. Does that imply -- I mean it seems like there's a pending surge in revenues here, potentially at least given the backlog. It seems like there'll be a little bit of a lag period before things go right that we actually see that start to play out on in your financials.

I think we should see the topline grow, starting now --

Yeah.

Consistently over the next -- keep growing and then maybe find out in maybe eight or ten weeks. The problem that we don't understand and we're deeply concerned is, with all this overtime, do we have the efficiencies and how we are going to make money or we are going to lose more money because of the increase we have in the overtime. And this is what we are trying to determine and it's very difficult. And that's why we all are going back to our customers and asking them to help us add these extra hours that we didn't agree to.

Yeah. I understand. Last one for me. Do you think that, I guess this output constraint issue is fairly widespread in the industry or, I know it's hard for you to speak for competitors, but I mean, do you get the sense based on your conversation with customers that this is a more widespread issue than -- (multiple speakers)

I think it's widespread in specific product lines.

Yeah.

We're very familiar with Digi-Key and basically they've seen this valley, again where it high peaked and then a drop to the bottom and then now this high surge. We see it with certain IC companies. So we definitely -- it depends on, for example, there's lot of ways for fab companies that close down houses and they can't -- really moth-balled inaudible) operations that they can't get up and running again. So we're seeing maybe, I would say at this time 25%-30% of our vendors sending lead times and we don't know if that's going to go throughout the whole industry but we know that there are certain products that things are very extended out there.

Certainly it's been a whipsaw over the last 12 months, hasn't it?

And for us, this is the first time I think in -- I've been involved in the business for 28 years, and generally you see these cycles maybe every three or four years, and this is the first time we saw a cycle like that, like this gravity within a 14 to 15 month period.

Yeah. Understand. Okay, I'll jump out guys and maybe I will get back in with a few more questions later.

Thanks a lot Steve.

Thanks.

And now we'll open up the phone up to Sean Hannan with Needham & Company.

Hi, Sean.

Good morning, thank you. So just getting back to the impact to revenue, is there a way to perhaps quantify what this labor restraint ended up having as an impact to the September topline?

Well, let's set the plane right first, I think the issue is -- we had the right labor going into the period, the problem was that the customers didn't have their orders then and what we're struggling to deal with is customers who are, notwithstanding the fact they didn't have orders in, who have raised their demand on product they want from us, in many cases three times what they were running at and that's where the -- where we're struggling with.

But if you look through the quarter hypothetically, right, if we had 10,000 workers instead of 4500 workers. We probably could have picked up an extra $10 million for the quarter but then again we -- it's so hard with the backlog again and what we're trying to figure out is there double orders in the backlog and how do you flush out the backlog? But based on what we have on both base on what the customers are telling us is this is what they want. And again even today when we go to our customers they want these steep demands for November and December that we really can't meet and then we ask for visibility going further out and they're not going to sign up for further products. So, for example, we have a customer that says hypothetically I want 20,000 widgets in November and December, but in January, February, March I only want 1000 and how does that come together we don't' know. And so that's our -- again it's a concern of feast or famine and where and what is the normal process Bel should be out.

That's helpful. Now, the majority of this all ties to your MagJack line, correct?

Most I would say, at this point in time, I would say it's probably 70% MagJack and now it's just drawing effects to our power group and also our fuse group.

Okay. So --

And again that might be more affected because of the raw materials we need to build those products. While our MagJack is more affected because of the labor situation we have.

Okay. So the 24 to 25 week lead times and that's really what you're talking to in terms of MagJacks correct and -- ?

Yeah.

So what are you looking at in terms of the remainder of your business?

Again, we do see an increase backlog in power, we do see increased backlog in fuses, we do see increased backlog in the value-added modules. Again, can we ship it out or doubles orders out there, I mean, I think we all agree that we hit rock bottom and we should start to see substantial growth going forward. How long that lasts, the only thing we think pretty positive is that it should be strong for the fourth quarter and the first quarter, then after the Chinese New Year, everybody wakes up again and says, oh my God, we've too many boughts or we don't. But now everybody just -- you know everything we get from our customers, ship as much as you can into Chinese New Year.

But I suppose what were you looking at entering the quarter for lead times and what did that move to --?

Within the last three to four months, our lead-time at MagJack went from 12 to 24 weeks.

Right. I'm sorry, for the remainder of your business?

For the remainder -- again -- the problem we have again is that's product specific. So, when you talk power, most of our products we're seeing t] 12 weeks, but there are certain products where we are having long lead-time items but we're not getting the product for 14 or 15 weeks, so we [couldn't get the] raw material in sooner, we have to stretch it out to 18 and 19 weeks. That's where we are having concern with those products and that's basically in the power group. In the fuse group, we do have a labor problem also and our lead-time probably went from 8 weeks to probably 14 weeks.

Okay. That's actually very helpful. So when we look at your gross margin profile and I think that some of the earlier questions were getting at this as well. What should we be expecting in terms of how we progress through December and then into 2010? You did about [12.6] on the gross margin line and it appears that with some of the inefficiencies that may come into play with the hiring of new labor, overtime et cetera, there should be some downward pressures here. Do we get into single-digits at all or how should we think about gross margins?

Our gross margins are -- we're gradually getting there. We bottomed out in Q4 of '08. And it's -- we had a reasonably good first quarter, second quarter we were down a bit, but third quarter we are back up to where we were in the first quarter and we think we are going to be -- probably going to be okay and we expect to improve. Volume is just a great thing for margin. And --

One thing -- let me put a little footnote there for you Sean, volume without overtime is a great thing.

Yeah.

And that's what we just don't haven't really, and that's where we are spending a tremendous amount of time right now is looking at the OT and then make up by the efficiencies. And that's where we are trying to determine now. And how much is our customer flow in a day for the OT.

Do the negotiations with your OEMs allow you to continue to improve your gross margins, because I know that that's already enough effort underway or is it really more a matter of sustaining at more recent levels?

Our gross margins right now are unacceptable. To be running a business this size and from operations to be breaking even is just not -- which we've been for basically almost a year now is just not an acceptable situation and that doesn't -- we cannot continue to operate in that manner. So margins have to go up and if costs aren't going to go down dramatically, the only way that's going to happen is through higher prices.

Okay. That's helpful. You've made some comments earlier around your power business. What is the run rate of that business today and then can you provide any color around expectations for the Blue Jean project. I think that there was some thought that perhaps some of that business could return at the end of the year or early 2010?

Colin, do you want to discuss the Blue Jean and then --

I'm not quite up to date on the Blue Jean -- (multiple speakers)

(inaudible) basically, so anyway that's the way we look at that business per se.

If there's an order, there's an order. You might get one a quarter, you might get one every six months. And it's, we just have to wait and see how the orders come in.

Regarding the DC-to-DC converter business, hypothetic I would say around -- from the August time frame, we're only running roughly about $3 million a month is kind of like our target. Again, we thought by now for sure it would be a $50 million (inaudible) business, we're hoping we can [ride down], when the downturn pops up, we can ride it and get it for us, again we need to make that a $50 million business very quickly and we need to strive to get it to a $100 million, either through acquisition, but we didn't get involved with power to be a $36 million business.

Okay, that's helpful. I am going to jump back into the queue.

Thank you.

Now I'll open up the line to [John Hudman].

Hello folks.

Good morning.

Good morning.

I've got a couple of questions on labor and one on potential acquisitions, but first I just like to comment that during this incredibly difficult economic time, not only difficult from an economic perspective but from a projection perspective, I think you guys are doing an amazing job with flexibility and making changes quickly and that sort of thing. So I wanted to compliment you on that.

You haven't talked to our customers, have you?

Okay. On the employment thing, first question there is, the 4500 that you're looking at trying to add, what base is that being added to?

It's being added in Mainland China and it's mostly for -- I would say probably 90% of it is what we call our MagJack group doing a winding (multiple speakers)?

What employment base, how many people are you working with now that you are adding 4500 to on that?

Roughly it's about -- we have about 5000 now.

Okay, great. And second question on the labor, can you give us a rough estimate of how much a premium the overtime is costing in the total labor cost, I am not that familiar with -- (multiple speakers)?

Okay. Generally with the new rules and regulations, for overtime any time over 40 hours is 1.5 and then any time on weekends or the sixth or seventh day, once again we change those weekends because you can have flexible weeks, it should be 2X and then for holidays it's 3X. And now once again that's in Southern China. In certain areas we do use some subcontractor to do some winding and they in certain backward areas the government is more relaxed when it comes to this type of overtime.

Got you. Okay and then my last question is just, are you continuing to look at some potential acquisition opportunities?

I've been looking for five years.

I know.

So, I am very confident. You ready for this one? I am very confident that the next time we have a meeting that we will be discussing an acquisition.

Great. That's enough.

I think at this point, again, for us, we waited five years sitting on $100 million and I think hopefully we can show our shareholders that that wait was well worth it with the type of valuations we are getting in the marketplace to acquire companies.

Yeah. I'm glad you sat on it right now. Okay, thank you very much and I appreciate the job you're doing.

Thank you.

Thanks, John.

(Operator Instructions). We'll take a follow up from Sean Hannan.

Yeah, thank you. So, is there a way if you can update us a little bit on your partnership with Ambient and how we can expect this perhaps materialize exiting '09 and into 2010?

Sean, you should call me up in about five hours, we are meeting with the President of Ambient this afternoon. We just -- once again, we do believe that the long-term agreement, that is our intention to be there, long-term manufacture their products and hopefully the more we can strengthen Ambient and move forward with their products hopefully the more customers they can attract. So we hope it's a win-win for both our companies.

Is there anything that's been discussed, obviously the DOE came out with their announcements on the grants the other day. Ambient's got a relationship with Duke. I think they got well in excess of $200 million. Is there anything that they have -- Ambient has communicated back to you based on those relationships and catalysts through the funding?

No, no, no. I think we got the orders when the press release went out. I think Ambient gave it to us within five seconds. So, they are very attuned with Duke. Duke is their largest customer from my understanding and they do have orders, substantial orders on the books with Duke.

That's helpful. Okay, and then just a quick accounting question, if we were to look at a normalized tax rate for this September quarter, what should we be thinking about? Should we be thinking about the traditional, kind of 15% range or -- (multiple speakers) would be helpful?

It might be that high, we are still, just the way we are structured, until we can get reasonable margin. I think we're probably more 18% to 20% for the moment Sean.

Okay, thank you.

And now we'll take a follow up from Steve Ferranti.

Hey, Dan you opened the door to this one so I have to ask --

Never mind. I know, that's why Colin keeps me quiet in the background.

What is an acquisition target, a generic acquisition target look like for you guys in terms of -- maybe you can give us some sense of (multiple speakers)-- ?

We we're hoping for Power-One at $500 million, or (inaudible) for $500 million. So I guess we think of those two companies. So once again we hope it's accretive -- we hope it adds value at this time with the way the borrowing is out there and so forth. So I think the image of Bel buying a $500 million audits in Power-One, I don't think that's in our realm going forward until the banks open up or to our stock price appreciates. So we can use our stock for a deal. So I think at this time, we're looking more in the -- anywhere from -- we're hoping above $50 million and try understanding the banking structure out there today, probably invest in $150 million to $200 million and then possibly could be three deals at $50 million that get us to $150 million.

Fair enough, and accretive acquisitions are clearly what you guys are --?

I would hope so -- we think with the interest rates at 1% and 2%, that boy we should be able to jump over that wall with at least an inch to spare.

There you go, very good. Colin, can you give us the segment breakout for revenues for the quarter?

Just a minute, this is -- I don't have the exact numbers that we'll be putting our -- just bare with me, in the modules it was about pretty close to 30% the modules group. And the circuit protection was about 6%, the passive side of the business premise wiring and that group was about 20% and the balance was -- is the magnetics.

Okay, very helpful. Thanks guys good luck going forward.

Thank you so much.

Thank you.

And there are no further questions. However, I would like to give everyone one final opportunity, (Operator Instructions).

Once again, I'd like to thank everybody for joining us today. Operator, I think we can close the meeting.

Yes, sir. That does conclude our conference for today. Again, thank you for your participation.