Bel Fuse Inc (BELFB) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Bel Fuse second quarter 2010 conference call. This call is being recorded. With us today from the Company is Bel Fuse's President and CEO, Mr. Daniel Bernstein; and Vice President of Finance, Mr. Colin Dunn. At this time, I'd like to turn the program over to Mr. Daniel Bernstein. Please go ahead, sir.

Thank you, Jonathan, and I would like to welcome everybody to our conference call to review Bel's second quarter 2010 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance.

Thank you, Dan. And before we start, everybody, I just need to run through our Safe Harbor statement. Except for historical information contained in today's news release and in this conference call, matters discussed including statements regarding the likelihood of robust systems conditions continuing in the future, opportunities for growth resulting from the Cinch Connector acquisition and future performance. Our forward-looking statements would involve risks and uncertainties.

Among the factors that could cause actual results to differ materially from such statements are: the market concern facing our customers, the continuing viability of sectors 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 integrating the Cinch Connectors business into the Company's existing business; 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 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. Having finished with the Safe Harbor statement, let me turn to our results.

On January 29, 2010, we completed the acquisition of Cinch Connectors, which has materially impacted Bel's results of operations during the second quarter of 2010. To aid in comparisons with prior periods, I will discuss our results with and without the impact of Cinch Connector.

First, we'll start with sales. For the second quarter of 2010, our sales were a record $17.7 million, which was up 73% from the $44.9 million that were reported in the second quarter of 2009. Excluding $14.9 million of Cinch's second quarter sales, Bel's second quarter 2010 net sales increased 40% versus the second quarter of 2009. Sales for the second quarter of 2010 in all our product group increased as compared to the second quarter of 2009 and compared also with the first quarter of 2010.

Turning to cost of sales and net results. On an unaudited GAAP basis, Bel ended the second quarter of 2010 with income from operations of $5.7 million and after-tax earnings of $4.7 million. These results were a significant improvement over our loss from operations, $2.9 million and a net loss of $1.3 million for the second quarter of 2009.

As a percentage of sales, cost of sales decreased by more than 10 percentage points from 89.4% of sales in the three months ended June 30, 2009 to 79.3% of sales in the three months ended June 30, 2010. The higher margins in the second quarter of 2010 resulted from improved productivity in our factories in China. The addition of the relatively high-margin Cinch product line and a favorable mix of product sales in both the Cinch and legacy Bel businesses.

To take these results in a comparable basis, non-GAAP income from operations in the second quarter of 2010 was $6.2 million which compared to a non-GAAP loss from operations of $1.2 million for the second quarter of 2009.

[In fact, we've had some run-offs for] the second quarter of 2010 non-GAAP income from operations which contributed $0.05. Severance and other cost associated with the closure of our factory in the Dongguan, China, and professional fees associated with the Cinch acquisition have been excluded from non-GAAP income from operations for the second quarter of 2010, while severance and charges related to the unauthorized issuance of common stock have been excluded from the comparable 2009 non-GAAP loss from operations. A reconciliation of GAAP to non-GAAP measures is included in today's press release.

Turning to SG&A, selling, general and administrative expenses, the percentage relationship with selling, general and administrative expenses to net sales decreased from 16.9% during the three months ended June 30, 2009 to 13.2% during the three months ended June 30, 2010. This decrease resulted primarily from lower general and administrative salaries and fringe benefits as a result of staff reductions completed in various locations during 2009 and the non-recurrence of charges related to the unauthorized issuance of stock. This was partially offset by higher commissions on higher sales and incentive compensation expense recorded in 2010 due to improved results as compared with no incentive compensation in 2009. The dollar amounts of selling, general and administrative expenses for the three months ended June 30, 2010 increased by $2.7 million compared to the same period last year, of which $2.6 million resulted from the inclusion of Cinch expenses in our consolidated results.

Moving now to the balance sheet, cash and equivalents. At the end of June 2010, our cash, cash equivalents, short-term investments and securities was $75.7 million which was $48.5 million lower than our December 2009 [time] of $124.2 million. The decrease in cash resulted primarily from the first quarter payment of approximately $40 million for the Cinch acquisition and working capital changes during the second quarter of 2010. The working capital change is primarily related to an increase in inventory and receivables.

Turning to receivables and payables, receivables net of allowances was $50.1 million at June 30, 2010 compared to $34.8 million at December 31, 2009, an increase of $15.3 million. Excluding the impact of the Cinch acquisition, receivables increased by $9.2 million during the first six months of 2010. Our accounts payable at June, 30, 2010 was $22.8 million, an increase of $5.6 million from December 31, 2009. Excluding the impact of the Cinch acquisition, accounts payable increased by $3.4 million during the first six months of 2010.

Turning now to inventories. At the end of the second quarter of 2010, our inventories was $50.1 million compared to $31.8 million at December 31, 2009, an increase of $18.3 million. Excluding the impact of the Cinch acquisitions, inventories increased by $11.1 million during the first six months of 2010.

And I have a few other comments related to the balance sheet. For the three months ended June 30, 2010, capital spending was approximately $500,000, while depreciation and amortization was $2.3 million as compared to $1 million depreciation and amortization in the first quarter of 2010. Our depreciation expense has increased primarily due to the $7 million step-up of fixed assets to fair market value in accordance with purchase accounting rules. As a result, we anticipate that the run rate of depreciation and amortization will increase by approximately $200,000 per quarter on a go-forward basis. Our per share book value at June 30, 2010 was approximately $18.09 including goodwill and intangibles. If we exclude the intangibles and goodwill, our per-share value was $16.72.

I've just one further comment before I wrap up. Bel remains very active in evaluating various potential acquisitions and we do remain quite optimistic that we can continue to grow Bel both internally and through additional acquisitions in the near term.

With that, I'll turn it back to Dan.

Thank you, Colin. Jonathan, at this time, we'd like to open up the call for any questions.

Certainly. (Operator Instructions). Our first question comes from the line of Sean Hannan from Needham & Company. Your question, please.

Yes, good morning. Congratulations.

Thank you.

Thank you, Sean.

So one thing I was looking to see if I can get some color on is -- what did you see during the quarter in terms of the pulls or demand volatility. Obviously, your revenue line was excellent and much higher than the number that I anticipated that it's unclear to me if there was any disruption that you may have seen and so some -- just a little color around that would be helpful.

I think, the -- as we -- and this is just an estimate, if we could produce everything our customers wanted us to produce, we probably could have had an extra 10% or 15% in sales. However, it looks like now that our customers are scheduling more properly, so we do have orders that are stretched out in the December time frame and January time frame. So I think our customers understand the lead times now and we're not getting as many expedite that we had in the past.

So was that constraint still really much more tied to labor versus raw materials and --?

Financially, our major problem has been labor in Southern China. Very recently, over the last -- over this quarter, we're starting to see a lot more material concerns, especially in our modular group regarding the DC-to-DC converters. The ICs are being pushed out, and we're all very close to being on allocation on certain devices.

I'm sorry.

On certain devices.

Yes. Okay. So then, as we're now pretty much through the month of July, is there a way if you could provide us some commentary around how the current quarter is tracking versus what you saw in June?

I think it's tracking pretty well. I think if we look back, we're going to have another strong month this month. So I think we're pretty positive thing should probably remain mostly consistent, maybe a slight increase, would you say, Colin?

Consistent.

Consistent. All right, consistent onto Chinese New Year.

Okay. So that's through the year, perhaps at these upper 70 million levels.

Yes.

Okay. All right, terrific. So when we look at the MagJack lead times and backlog, can you provide a little bit of information around where that stands specifically?

[Joe], I think at one point, we were at 28 weeks. I think now, we're probably at 19 or 18 weeks. On some of our major customers though, we have allocated certain quantities for them. But we're working right now a 12-week lead time with certain amount of the quantity. Do you understand what I mean by that, Sean?

Yes.

And so again, we see some slight improvement maybe over the next two weeks, because of schools let out in China, we could probably hire more people. But we don't see any drastic -- we don't see ourselves getting down to 12 weeks in the near term and that's what our customers are requesting from us.

Okay, that's helpful. And then, in terms of your Ambient relationship, is there a way if you can provide an update around what you're seeing there and how that's progressing?

Again, they seem very positive also. Colin has been dealing with them. Colin?

Yes, no, I think their business seems to be strong. I think they've got some new models they are also working on. And we're seeing some increased volume from them.

Okay. So some increased volume presently versus what we were seeing, say, when -- in late April when we last spoke.

Yes.

That's right.

No, I had some good increases, yes.

Okay. I actually have some more questions, but I'm going to hop back into the queue for the moment.

Okay. Thanks, Sean.

Thank you.

Thank you. Our next question comes from the line of Zahid Siddique from Gabelli & Company. Your question, please.

Hi, good morning.

Hi, Zahid.

How is the labor inflation situation in China?

We were able to 21% labor increase and we think by increasing our pricing that we should be able to hopefully minimize it substantially. But we do know that now, Southern China has become very [cost-naive] competitor. We are in the process of locating more of our factories away from Southern China, where [the agents are] a lot -- a little bit more beneficial. But definitely in Southern China, we don't see things improving ever again.

And what's the scale of price increases that you are in the process of implementing?

That could be anywhere depending on 3% up to 12% depending on the market and products we're selling to customers. With long lead times, our goal was to try to thin out the crop with non-profitable products. So I think that a very bad margin, now that we have the data substantially increased. So it wasn't hypothetically across the board of 3% to 4% increase and [vary] depending on the margins of those products.

And are they sticking?

For the next couple of weeks, they're sticking but in August those things can change rapidly. But so far, our backlog has been very strong, accounts have been very strong. But we don't think that we've lost business because of the price increases.

Okay. And did you buy back any shares?

No, we didn't buy back any shares. Do you have something you want to sell us?

And what's your plan in terms of share buyback for the year?

I think, our position now that we are looking at, we always felt that acquisitions were a lot better for our shareholders, and we do believe that we do have a couple of acquisitions that will take substantial amount of monies from our fund. So at this point, we don't think it's prudent to buy back stock, and most probably, we will look at -- go through the acquisitions.

Thanks for your time.

Well, thank you.

[Thanks, Zahid].

Thank you. (Operator Instructions). Our next question is a follow-up question from Sean Hannan from Needham & Company. Your question, please.

Great, thanks. So if I look at the reconciliation you guys provided, there is a $477,000 restructuring charge, is that expected to be back at a COGS or the SG&A line? And then if it is SG&A, should we assume perhaps just a slight tickdown from that [98 or] --?

(inaudible) it was manufacturing.

So it was on the COGS side?

Yes. And just a minute, I'm -- yes, that's correct.

Okay. So should we view this 10.3 number as something that's normalized going forward, or how should we think about your SG&A, your OpEx?

Well, I think to me, our SG&A (inaudible) we're not going rest on it, but I think [frankly] to be in this sort of business and be around about 12%, that is quite remarkable. And then, it's going to it is going to vary Sean depending on the mix and on what we pay as far as the sales commissions, which is a big part of that. And it's probably the biggest fact. The other big factor that we have in there, our legal expenses and professional expenses.

Now, professional expenses tend to be fairly fixed from quarter-to-quarter, mainly product fees. But when it gets to the legal expenses, we do as you know have three or four ongoing lawsuits related to intellectual property, that [we] want to go away and depending on where we are with those at anyone time, they can go up or down fairly dramatically quarter-to-quarter. So -- but barring, I'd say the biggest swinger is probably government commissions, which is okay, but as I mentioned is usually amortized to sales but the legal expenses is the one that could swing it around a bit.

Okay. So I mean, it sounds like to me, if we sustain this level of revenue in a general context, and as you continue to -- and I think when you're talking about the other activity is -- in looking at potential M&A. So as long as those two kind of remain in place, this 10 million level should be sustained?

Yes.

Okay. All right, that's helpful. Thanks. And then, I'm sorry, I missed the number that you've provided around what Cinch contributed during the quarter. And then, as a follow-up to that, can we get a little color around what you consider the potential opportunities for from a margin standpoint in that business? What will be incremental when you hopefully drive through some better revenue leverage in that business?

Maybe the problem that we do have with that business is, the projects we work is such a long-term project, so the military products average maybe two to four years to get off the ground, and then the aerospace projects do take a long time. So we don't foresee that we will see substantial increases in sales in the next 12 to 18 months.

Right.

But we have implemented a very strong program reorganizing how they go to sales, how they address different markets, we are looking at adding different people and so forth. So again, we can give you some margins on this, but I think we're more concerned at this point is really getting them re-entrenched at their major customers and expanding our relationships with the key customers we have.

There is a couple of things. One situation [would sense] that we certainly do get a better gross profit margin. However, by the nature of the business, its G&A tends to be high. The administrative functions that you have to put behind that sort of business is higher than our -- we get [with elsewhere] in our business. So you have to bear that fact in mind. The number I put at was, we -- in my comments was that we [say twice, we got] one-fourth of this second quarter 2010 non-GAAP income from operations contributed by Cinch. So basically a little less than 25% of our non-GAAP income was Cinch.

I'm sorry and maybe I missed you again. Did you state a revenue number?

On the revenue, we gave the revenue upfront. The rest -- yes. The revenue --

14.9.

Yes, 14.9.

14.9, okay. Okay. Yes, all right, thanks. Sorry, and I actually I didn't see that. All right. So on the competitive front, is there anything there that you see changing for any of your specific sectors and is there some color you can provide around that as well?

Regarding Cinch or regarding Bel?

The overall business.

The overall business looks strong and again, in the short term, we don't think things are changing in time in terms of Chinese New Year. I think where people have been very cautious about Chinese New Year and I think people most likely will keep their orders on the books until then. We do -- I do believe, my gut feeling there is a pent-up demand that we're seeing that it's going to have to level off a certain point. People didn't buy anything for two years and [they're not] buying everything. So again -- but we don't see that. We think things will be stronger for Chinese New Year.

Perfect. All right. Thank you so much.

Thank you, Sean.

Thank you. Our next question comes from the line of L.J. Goldstein from Santa Monica Partners. Your question, please.

Larry, here. So do you sell anything to [BYD company], the (inaudible) you know Warren Buffet, does he know you?

The answer is no.

No to all of the above.

Yes.

Okay. You're going to make it a point, try to get at least to know [BYD, they do might call us] some of your stuff must somehow rather filter to them.

We have no sales to (inaudible) I don't think at this time.

(inaudible) we do, we do made some comments for our vision into -- in the automotive industry, we have quite a bit into electronic assemblies in --

Heavy equipment.

In heavy equipment.

Okay, well, opportunity is knocking.

Thanks, Larry.

Welcome.

Thank you. (Operator Instructions). There are no further questions in the queue at this time.

All right. Thank you very much, Jonathan. And I'd like to thank everybody for joining us and we look forward to speaking to you next quarter to give you our results. Have a good day.

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.