Bel Fuse Inc (BELFB) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bel Fuse Inc. Third Quarter 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 program is being recorded. I would now like to introduce your host for today's program, Mr. Daniel Bernstein, President and CEO. Please, go ahead, sir.

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

Good morning everybody. Thanks, Dan. I'll start with the Safe Harbor statement.

Except for historical information contained in today's news release and on this conference call as matters discussed as forward-looking statements that involve risk and uncertainty.

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 to 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 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 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 moving on to our results. First I just want to preface what I'm going to talk about today with the statement that on January 29, 2010 Bel completed the acquisition of Cinch Connectors. This has materially impacted Bel's results of operations during 2010. While in comparison to prior periods, I will discuss our results with and without the impact of Cinch Connectors.

Turning to sales, for the first quarter of 2010, our sales were [regularly] $85 million which was up 88% from $45.3 million which we reported in the third quarter of 2009. Excluding $15.5 million of Cinch's third quarter sales, our third quarter 2010 net sales increased 54% versus the third quarter of 2009. Sales for the third quarter of 2010 in all our product groups increased as compared with the third quarter of 2009 and compared with the second quarter of 2010. We have solid demand for all our product groups and with the increased factory headcount of a more stable workforce that is providing greater productivity, we were able to deliver much more in line with customers' requirements. We do, however, continue to experience component shortages in our module's product segment that continues to hinder our ability to deliver DC to DC product.

Turning to cost of sales and net results, on a non-GAAP basis, Bel entered the third quarter of 2010 with income from operations of $9.4 million and after tax earnings of $9.9 million. These results were a significant improvement from our loss from operations of $15.9 million and a net loss of $10.8 million for the third quarter of 2009. You may recall that last year on a pretax basis the third quarter of 2009 was impacted by one time charges of $12.9 million for impairment of goodwill, a $2 million license fee paid in connection with the settlement of a lawsuit. These were partially offset by a GAAP gain of $500,000 on the sale of investment securities.

As a percentage of sales, [component] sales decreased by another 10% from 91.7% of sales in the three months ended September 30, 2009 to 76.3% of sales in the three months ended September 30, 2010. For higher margins in the third quarter of 2010 results from several factors including price increases for certain products that went into effect on July 1, 2010 to improved productivity in our factories in China, the revision of the relatively high margin Cinch product lines and a favorable mix of product, [lowered] sales in total for Cinch and legacy Bel businesses.

Let's take these results on a comparable basis. Non-GAAP income from operations for the third quarter of 2010 was $9.1 million as compared to a non-GAAP basis from operations of $800,000 for the third quarter of 2009. Slightly more than 20% or approximately $1.9 million of the third quarter 2010 non-GAAP income from operations was contributed by Cinch. Severance and other costs associated with the closure of our factory in China, professional fees associated with the Cinch acquisition, and a net gain on the sale of property, plant and equipment have been excluded from non-GAAP income from operations for the third quarter of 2010. While due to an impairment and license fee mentioned above, 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 our press release today.

Moving forward, we do expect some continuing material cost increases particularly to components that have a gold content. Selling, general, and administrative expenses, the relationship of selling, general, and administrative to net sales decreased from 15% during the three months ended September 2009 to 14.2% during the three months ended September 2010. This takes previous results primarily from lower general administration salaries and fringe benefits as a result of staff reductions completed in various locations during 2009. This was partially offset by higher commissions on higher sales and the same compensation expense recorded in 2010 due to improved results as compared with no incentive compensation in 2009. The dollar amount of selling, general, and administrative expenses for the three months ended September 2010 increased by $4.4 million compared to the same period last year of which $2.2 million resulted from the inclusion of fixed expenses in our consolidated results.

Taxes, Bel recorded a benefit of $500,000 from income taxes from the period ended September 2010 compared to a benefit of $4.4 million for the three months ended September 2009. The Company's pretax results to for three months ended September 2010 are approximately $25 million higher than the same period as 2009. The Company's effected tax rate, the income tax benefit revision as a percentage of loss of earnings from lower income taxes was a negative 5.1% for the three months ended September 30, 2010 versus 29.2% for the same period of 2009.

We [come to] an effective tax rate we've partially based on the geographic segment in which the pretax profits were earned. Of the geographic segments in which Bel operates, the US is the highest tax rate. Europe's tax rate is generally lower than US tax rates and Asia has the lowest tax rates. The income tax provisions for both the 2010 and 2009 third quarters were effected by changes in accruals for uncertain tax divisions, principally related to the expiration of certain tax statues and limitations. These changes are now a net gain of $1.2 million in Q3 2010, but our net gain was $3 million in the same period in 2009. Last year's tax provision was also effected by the Company's settlement of a lawsuit during the quarter ended September 2009 which resulted in a tax [standard] of $800,000 offsetting partially our losses in Asia principally related to the impairment of (inaudible) but had minimal tax benefit.

On September 23, 2010 Bel received a letter from the Internal Revenue Service advising that the Federal tax return for 2006 to 2008 had been selected for examination. Bel [certainly] got the document request by the IRS for this examination.

Balance sheet, cash and equivalents, at the end of September 2010 our cash, cash equivalents, short-term investments, and securities were $77.9 million which was $46.3 million lower than the September 2009 balance of $124.2 million. The decrease in cash resulted primarily from the first quarter payment of approximately $40 million from the cash acquisition and working capital changes during the second and third quarters of 2010 mainly as inventories and receivables increased.

Turning to receivables and payables, receivables net of allowances were $55.3 million on September 30, 2010 compared to $34.8 million on September 30, 2009, an increase of $20 million--$20.5 million. Excluding the initial impact of the Cinch acquisition, receivables have increased by $30.9 million during the first nine months of 2010. Our accounts payable at September 30, 2010 was $23.2 million, an increase of $6 million from December 31, 2009. Excluding the initial impact of the Cinch acquisition, accounts payable have increased by $3.7 million during the first nine months of 2010.

Inventories, at the end of the third quarter 2010, our inventories were $57.3 million compared with $31.9 million--$31.8 million at December 31, 2009, an increase of $25.5 million. Excluding the initial impact of the Cinch acquisition, inventories increased by [$17.8 million] during the first nine months of 2010.

Now, to all the balance sheet comments. For the three months ended September 30, 2010, capital spending was approximately $400,000 although depreciation and amortization was $2.3 million. Capital per share as of September 30, 2010 was approximately $19.04 including goodwill and intangibles. Excluding the intangibles and goodwill, the share value was $17.67.

Bel remains very active in evaluating various potential acquisitions and we still remain optimistic that we will continue to grow both internally and through additional acquisitions. That's the end of my comments for now and I'll turn it back to Dan.

Thank you, Colin. Jonathan, is it possible to open up the call for any questions that are out there?

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

Yes. Good morning and congratulations.

Thank you very much, Sean.

Dan and Colin, I was hoping to see if you might be able to provide a little bit of color but can you really provide a breakdown of what you saw in each segment during the quarter? So, effectively, what were some of the order trends in the quarter? Perhaps was there any kind of a fall off of some of those longer lead times, started reducing as the older orders became filled?

No. Again, all I've got is we saw substantial growth. There's not one product group. Again, all product groups had substantial growth. We see the fourth quarter to be a fairly good quarter for us. And as you know and we read, we see a great amount of churn as we head into next year and that's our major concern going forward. So, again, all our products saw very strong growth and roughly $28 million to $32 million to growth and next quarter we'll see it too. And then going forward I think people will be adjusting 2011.

Okay. That's helpful. So, if you were to look at the first 3.5 weeks now of 4Q you are seeing that strong growth? Are those order trends effectively in line with what you saw in the third quarter?

Exactly. What we saw in our backlog at the second week of the third quarter is the same as our backlog today. Pretty roughly the same time, the same situation; however, historically on major product lines, we've been (inaudible) 20 weeks. Now in the last three to four weeks we've gone done to 12 weeks. So, we should see a greater fall off I think in our backlog.

Okay. So, MagJack effectively at 12 weeks?

[On one hand] now we should be at 12 weeks, yes.

Okay. Alright. Let me see if I can hop to another topic for a moment. Has the level of business or outlook changed much in your relationship with Ambient over the last one or two months? I saw that Duke was pretty vocal around his commitment to the Ambient solution. So I wanted to get a sense of whether there had been any change in expectations there?

No. I think our relationship is a lot stronger with Ambient. We've committed I think to almost doubling our production program and they've committed to us to helping us increase our production to meet their demands. But I think we're locked up very tight over the next couple of years.

That's helpful. And then lastly before I'll jump back in the queue, you've had a lot of price increases that have been implemented in the course of the last number of quarters and year. Can you comment around how long you think you can hold on to some of these increases? When you think about your--?

(inaudible) as we speak to you.

I'm sorry?

I'm (inaudible) on my (inaudible) right now. So, we think as the lead times get shorter in our industry, there's going to be a lot more price pressure. We don't know if that's going to be (inaudible) said are the increases of materials and labor we see; however, we do project for next year that there will be price decreases and I doubt that we'll see any price increases going forward.

Okay. That's helpful. I guess where I was going is do you expect we would get back to kind of a natural rate of decline or do you expect that there might be a little bit of volatility when we enter 2011?

I think there's so much churn going into 2011 I don't think we're going to get a clear picture in the component industry until probably maybe three or four weeks after Chinese New Year and then after that I think people are going to going to get very good visibility of what everybody's lead times are going to be and how competitive a marketplace we're going to be in.

Terrific. I'll jump back in the queue. Thank you so much.

Thank you. Our next question comes from the line of [Zach Larkin] from Stephen's Inc. Your question, please.

Hi, gentlemen. Congratulations on the quarter again.

Thank you.

I just wanted a quick clarification on one of the last questions. Did you say that lead times had gone to 12 weeks from 20 weeks? Just wanted to make sure I got that number correct.

One of our major driving products is what we call the MagJack, the integrated RJ45 with putting it together with magnetics. It's a very labor intensive product and basically we went from 4,000 workers up to 10,000 workers.

Got you. Then just a quick question on the margin front with gross margins hitting record levels. Should we expect those to be maintained now that you're getting operations in China, the workforce levels that you're looking for? Should we see a little bit of pressure in those going forward? How should we think about that?

Yes. The margins, we used to be much higher than these margins but over the last couple years the margins came down. We actually got to a state that was really untenable for any continuing business. We do expect some pressure on the margins and we also, [bottom material] will be impacted by not only the selling price but also the productivity from our factories. If the volumes stay up our margins are going to be relatively good and if we can also pick the efficiency in the factories, it will be good. One of the issues we run into is if we have a high turnover of labor which particularly happens earlier on in the year after Chinese New Year when labor comes in and starts out with 35% productivity. And it takes upwards of three months before that labor gets up to say 80% or 90% productivity. Although we're not getting paid 100% of the wages, when they're at full productivity there's still 75%, 80%. So, we really get quite a hit when the labor is inexperience. What we have right now in our factory is that the labor's--turnover in the labor has slowed down. So, we're getting very good productivity for the factory and very good absorption on a net balance basis. So, that's helping margins dramatically.

Another thing that could impact us is what happens next year with the labor increases in China. There have been some non-official statements that labor may go up another 20%. That could impact us. The value of the yuan, the renminbi can have an impact, will bring a slight change in that region. We'll see what happens with that. We don't have enormous expenses in the Chinese currency. The major expense is the labor and most of our other expenses are in US dollars and that's primarily what we also sell in and the other thing we're having a little bit of trouble with is particularly the gold prices and we're going to see what happens in gold. We know we've got some pending increases to gold right now with our suppliers and that's going to impact our costs.

Having said all that, it's in a state of flux. Do I think our margins will stay where they are going into 2011? Yes.

Thank you very much. That's helpful. One last question is on the topic of acquisition. What sort of multiples are you guys seeing out there in the market? I wondered if you could give a little more color on the opportunities that you're seeing?

Again, for us, we don't care--again, where people are buying at what multiples, again, we have to see what's comfortable for us. Historically I think we'd get multiples, again, within the range of six, seven, ten, and if we can see substantial synergies we might go higher. We definitely don't know how the private equity people are getting somewhat a little bit more aggressive and again, how do you face sales on this year when you faced them last year? There's a lot more factors than just looking at the [dollar]. We're hoping things can move along a lot more flexibly then.

Thank you very much. Congratulations again on the quarter.

Thank you, Zach.

Thank you. (Operator Instructions) Our next question is a follow-up question from the line of Sean Hannan from Needham and Company.

Yes. Thank you. Just wanted to see if I could ask if there is any specific segment. I realize many of your segments are exhibiting some pretty healthy growth and have been. But are there any segments that are specifically trending right now in terms of significant builds to backlog? And then separately can you also provide some commentary around the state of your power business?

Again, I think going forward we do believe that the modular business which includes the DC to DC converter business is where we should see the most growth going forward. We've been restrained because of a material situation but we think we probably could've had maybe 20% greater growth over the past quarter because we could get all the materials that we need.

So, that scenario that we do expect growth. In the MagJack area where we have been the market leader for substantially a long time, we do see that things are going to get more competitive as we go forward in that product group. And then interconnect and the circuit protection group I think should be pretty stable. Again, we strive for going forward 4% or 5% growth.

That's helpful. And lastly did you have a 10% customer in the quarter? A major networking OEM?

Just the normal. Nothing changed.

Okay. Terrific. Thanks so much and congratulations again.

Thank you.

Thank you. (Operator Instructions) I'm not showing any further questions in the queue at this time.

Thank you very much. We appreciate everybody joining our call. We're looking forward to speaking with you at the next meeting.

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