Bel Fuse Inc (BELFB) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bel Fuse, Inc. Fourth Quarter Results Conference Call. (Operator Instructions.) I'd now like to turn the conference over to your host, Mr. Dan Bernstein, President and CEO. Please go ahead.

Thank you, Allie. And we'd like to welcome you to our conference call to review Bel's year-to-date and fourth quarter 2010 results. Before we start, I'd like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

Good morning, everybody. Thanks, Dan. I will start with our regular Safe Harbor statement. Except for historical information contained in today's news release and on this telephone call, the matters discussed, including plans to appeal the Synqor verdict, are 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 the 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 statements 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 start by going through our results. And as we do these results, [the weighted] comparisons, I will pull out the Cinch numbers, so we can see what the Bel standalone would be. After this quarter, we would expect that we will just roll Cinch in because we will have a good comparative basis.

Sales. For the fourth quarter of 2010, our sales were 80.3--$83.7 million, which was a fourth quarter record, up 72% from the $48.7 million that we reported in the fourth quarter of 2009. Excluding [$14.8 million] of Cinch fourth quarter sales, Bel's fourth quarter 2010 net sales increased 42% versus the fourth quarter of 2009. Sales for the fourth quarter of 2010 in all our product groups increased as compared with the fourth quarter of 2009. In comparison with the third quarter of 2010, fourth quarter 2010 sales were down slightly in our magnetics, interconnect, and circuit protection product groups, which were partially offset by higher sales in our modules products segment. Our backlog for modules remains high as we are in--as we moved into the Chinese New Year period.

Cost of sales and net results. On an (inaudible) GAAP basis, Bel ended the fourth quarter of 2010 with income from operations of $115,000 and an after-tax loss of $1 million, which included an $8.1 million charge related to the previously announced verdict in the Synqor patent infringement lawsuit. Bel does plan to appeal this verdict.

Last year, we reported a loss from operations of $808,000 and net income of $2.9 million for the fourth quarter of 2009. You may recall that last year on a pre-tax basis the fourth quarter of 2009 was impacted by gains in the sale of investment securities of 5.4 million as we liquidated our holdings in Power-One stock.

As a percentage of sales, (inaudible) sales decreased from 85.3% of sales in the three months ended December 31, 2009 to 78.5% of sales in the three months ended December 31, 2010. The higher margins in the fourth quarter of 2010 resulted from several factors, including price increases for certain products that went into effect in July 2010, improved productivity in our factories in China, the addition of the relatively high margin Cinch product lines, and a favorable mix of product sales in both the Cinch and legacy Bel businesses. These factors were partially offset by an increase in our reserves for excess and obsolete inventory.

The year over year improvements in margin in Q4 2010 is less pronounced than in Q3 2010 due to an up tick in sales of all (inaudible) module products in the fourth quarter. To state these results on comparable results, non-GAAP income from operations in the fourth quarter of 2010 was $8.2 million, as compared to a non-GAAP loss from operations of $300,000 in the fourth quarter of 2009. Approximately 6% of the $500,000 in the fourth quarter of 2010 non-GAAP income from operations is attributable to Cinch.

Various costs consisting primarily of the Synqor verdict have been excluded from non-GAAP income from operations for the fourth quarter of 2010, while net gains in the sale of investments and various costs consisting primarily of professional fees associated with the Cinch acquisition, have been excluded from the comparable 2009 non-GAAP loss from operations. We did supply a reconciliation of GAAP to non-GAAP measures in our press release.

Looking forward, we do expect some continuing material cost increases specifically for components that have a Bel (inaudible) and increasing pressure on pricing as production lead times have returned to more normal levels.

Turning to SG&A, the percentage relationship of selling, general, and administrative expenses to net sales decreased from 16.4% during the three months ended December 31, 2009 to 11%--11.7% during the three months ended December 31, 2010. The dollar amount of selling, general, and administrative expenses for the three months ended December 31, 2010 increased by $1.8 million compared to the same period in 2009.

The inclusion of Cinch expenses in our consolidated results increased fourth quarter SG&A expenses by $2.3 million while the legacy Bel business experienced lower general and administration salaries and fringe benefits as a result of stock reductions completed in various locations during 2009. 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.

Taxes. Bel recorded a provision for income tax of $1.2 million for the three months ended December 31, 2010, compared to a provision of $1.8 million for the three months ended December 31, 2009. The company's pre-tax results for the three months ended December 31, 2010 are approximately $4.5 million lower than the same period of 2009. The company's effective tax rate, the income tax credit for provision of a percentage of loss of earnings before income taxes, was 586%, which is ridiculous, but that was for the three months ended December 31, 2010, primarily due to the accrual of $8.1 million Synqor verdict, which really had minimal tax benefit to the company. This compares to an effective tax rate of 38.4% for the same period of 2009. The company's effective tax will fluctuate based on the geographic segments in which pre-tax profits are earned.

Of the geographic segments in which Bel operates, the U.S. has the highest tax rates. Europe's tax rates are generally lower than the U.S. tax rates, and Asia has the lowest tax rates. Bel has been advised by the Internal Revenue Service for the U.S. that federal tax returns for 2006, 2008, and 2009 have been selected for examination. Bel is in the process of providing documents requested by the IRS for this examination.

Balance sheet. Cash and equivalents. At the end of December 2010, our cash, cash equivalents, short term investments, and securities were $85.6 million, which was $38.7 million lower than our December 2009 balance of $124.2 million. The decreasing cash resulted primarily from the payment of approximately $40 million for the Cinch acquisition, a payment of $3 million in dividends, and $2.4 million of capital expenditures in 2010. These were partially offset by favorable operating cash flows.

Receivables and payables. Receivables net of allowances was $53.3 million at December 31, 2010, compared to [$38.4 million] at December 31, 2009, an increase of (inaudible) million. Excluding the initial impact of the Cinch acquisition, receivables increased by $12.2 million during 2010. Our accounts payable at December 31, 2010 was $21.2 million, an increase of $4 million from December 31, 2009. Excluding the initial impact of the Cinch acquisition, accounts payable increased by $1.7 million during 2010.

Inventories at the end of December 2010. Our inventories were $57 million, compared to $31.8 million at December 31, 2009, an increase of $25.2 million. Excluding the initial impact of the Cinch acquisition, inventories increased by [$7.86 million] during 2010.

Just a few other comments related to balance sheet. Our capital spending for the year ended December 31, 2010 was approximately $2.4 million, while depreciation and amortization was $8.8 million. Our per share book value at December 31, 2010 was approximately $18.83, including goodwill and intangibles. When we exclude the intangibles and goodwill, our per share value is [$17.50].

Bel remains very active in evaluating various potential acquisitions and we remain optimistic that we will--can continue to grow Bel both internally and through additional acquisitions.

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

Yes, Allie, can we open up the call for any questions?

(Operator Instructions.) Our first question comes from Sean Hannan of Needham and Company. Please go ahead.

Yes. Good morning.

Good morning, Sean.

So thanks for providing a little bit of the color around the directional performance of magnetics and interconnect modules. I was hoping that perhaps we can follow up. When you looked into the quarter perhaps a couple of months back and thought about the general performance of what could materialize out of the segments, can you perhaps characterize a little bit around where did you see more out performance in some of these strengths versus others? Were there some bigger themes, either related to customers or specific programs? And information around that would be helpful.

Yes. Sean (inaudible), so last year overall all product groups, I do think there was [no pent up] demand for all our product groups that were--people started buying again (inaudible) products we saw an upsurge in. Again, we feel looking forward that the module area is going to be probably our strongest growth area. And the other areas are, depending on the pricing pressure we feel, could be somewhat flat or a marginal increase. But overall, if you look at the second--third and fourth quarter, all our products did extremely well--product groups.

Okay, that's helpful. So thanks for mentioning pricing. Can you talk a little bit around the pricing environment? How much pressure are you getting from OEMs? I know that the discussion at least has started to come from them to a degree. Are there any planned actions? Are you seeing anything really at competitors - who is caving and on what components? And some information or color there would be helpful as well.

Again, in our industry, our customers really don't concern themselves with labor going up 12, 14% in China. They really don't concern themselves with material at six or 7% going up. Again, they're getting--if you look at Cisco numbers, I think their earnings are--sales are up, but the earnings are down, so where are they going to get that money from? It's probably from us going forward. So as long as the lead times are down from (inaudible) getting that back to (inaudible) a lot more leverage, again, being it's [overpriced]. However, until we get back from China (inaudible) where we can get a lot better visibility. We know now that we are within our (inaudible) lead times of 12 weeks. If it stays that way there should be price pressure. However, if the lead times do get stretched out then that should ease. And we really don't get a good feel for that till a couple weeks after Chinese New Year and how the labor situation will help some of these companies.

Okay. So when you talk about the eight to 12-week lead times, is that specifically MagJack or is that overall?

That's (inaudible) overall. But again, MagJack was the biggest problem. I think at one point our lead times were roughly about 32 weeks.

Okay. And MagJack is now--.

--It's about eight to 12 weeks.

Okay, so that's also in the group.

Yes.

Okay. And then, what--let me see if I can ask about the Ambient relationship. Has--when you look at the course of 2010, was the Ambient relationship successful in generating revenues perhaps for you guys in the double-digit millions a year? And are you aware of any changes that may--or anything that could actually change that supply relationship between you and the [smart grid node] provider?

Again, everything we hear, again, it was double-digit sales growth last year. We are very positive with our relationship. It's beyond a supplier relationship. We've done a tremendous amount of engineering with them as a joint effort to make their products a lot more cost competitive for their marketplace. One of their key customers is Duke Engineering. Duke Engineer--I mean Duke Power. Duke Power has acquired another company that will bring more stimulus dollars to them. So from where--from all the information we can read or what we hear from Ambient, things look very positive for next year. And we do believe that we should see a lot more growth through Ambient and our relationship.

That's helpful. And then, lastly--then I'll jump back in the queue. Colin, you talked a little bit around the pressures on gross margins. Can you perhaps elaborate on that and what you saw in the quarter, and then what should we expect as we look to the next quarter or perhaps some thoughts around 2011?

Well, obviously, the--anything with silicon went up--the prices have gone up and we're not seeing any relief in that area. And there are still a few spot shortages, particularly in the silicon area and that primarily impacts our DC to DC power business. In the fourth quarter we were a little fortunate in that we had very good productivity out of our labor. The labor force has stabilized and we're getting quite good productivity. And there were not significant price increases in the fourth quarter and we also had a very favorable product mix, which helped our margins in that quarter.

Going into the first quarter, again, it's going to be an issue. January was fine. But after Chinese New Year we're going to have to wait and see what percentage of experienced workers come back, how that impacts our productivity. In the (inaudible) area of China, the authorities have come out and said that there will be an 18% wage increase I think effective mid-March. We'll have to see how that plays out. And as I think we all know, gold and copper continue to be very strong in their pricing and cost. So it is going to be an issue if there's a lot of pressure put on us for any significant price increases.

Okay. Now, just to clarify that--on that, would price increases--do you expect if we were to see that dynamic, does that actually materialize quickly from today through 1Q where the significant pressure could be a significant pressure on your margins?

I don't think we're going to see it today. We're not sure how our competitors are going to respond in the marketplace. I think--.

--It seems like the bigger question is beyond--.

--Labor. We've all got the same material costs. And the issue is, is someone going to go into the dirt and--just to keep their factories busy and I can't answer that.

Okay. It just seems to me like the bigger risk might be beyond the first quarter, and I just wanted to see if that logic was correct.

I think, again, the problem we have beyond (inaudible) is just the visibility of the workforce for us.

Yes.

And for a lot of our competitors. Again, if you go back two to three years ago and the big winter storm in China, it was very difficult to bring back workers. Then all of a sudden your lead times get stretched out. When your lead times get stretched out, then you don't worry about price pressure, you worry about getting parts in the door. Now, if we come back with a full workforce and our lead times (inaudible) for 10 weeks, then you know we're going to see a lot more pressure. So that's why we really don't get good visibility till the beginning of March. And what makes matters all the worse is that a lot of our customers are putting [bumper stock] to Chinese New Year. So we're afraid of we won't get good visibility for them into April or May and that could be a real problem because if we don't get visibility after Chinese New Year, then we (inaudible) bring any workers back, thus we have to (inaudible) workers around the April or May timeframe and that's impossible.

Sure. I follow. That's helpful, Dan. And thanks for taking my questions.

No, anytime, Sean.

Our next question comes from Zach Larkin of Stephens Inc. Please go ahead.

Hey, gentlemen. Congratulations on the quarter.

Thanks, Zach.

And Zach, congratulations making it into work today.

Yes. Well, it does--we do have a little bit of snow down here in Arkansas. Hey, I just wondered if you could get into demand expectations, a little more color around what you're thinking going forward. I mean, obviously, lead times have come down and we've seen this big pent-up demand driving 2010. But what are you thinking going forward over the next couple of quarters demand wise?

Well, the (inaudible) and I think what Dan was alluding to before, is that we've--because of all the bumper stocks that have been put in by both manufacturers and the customers, and also the customers using some distributors to hold some bumper stock over the new year period this year. It's going to be very difficult to really--for us to understand what the true (inaudible) is going to be. But internally from a (inaudible) and I think what we see that's out there generally is that we think it's coming through this year. It's going to be flat to a slight increase. We're not expecting anything particularly [buoyant] but we think it's going to be--I think from where we are now flat to a slight increase would probably sum it up best.

Okay. And then, CapEx going forward into next year, are you assuming that's going to be similar to what we saw this year? What are your expectations on that going forward?

Because we are not expecting from existing business significant ramp up in volumes, we don't think we're going to need much more than what we've got now. We might spend a little bit of money on--we've got some test equipment and on some new products that we're bringing out. But we would expect it to be fairly similar, Zach.

Okay. That makes sense. And then, on the acquisition front, is your sense that it's fairly active? What types of multiples are you seeing out there? Could you give a little more color if you're in active discussions or--?

--I mean, if you look again, if you look at our sweet spot, I would say one of the sweet spots has been in the power arena. If you look at the [lineage deal] with Emerson, we think it was (inaudible), I'm sorry. Going back with (inaudible) it was about 8.5 EBITDA. So again--and we see a couple of other things out there like (inaudible) spinning off their United States group. And I think that was about an 8.5 EBITDA, too. So we think things are pretty reasonable in the eight--maybe in the seven to 10 range depending on how much growth is out there and how mature the customer base. And I think we feel very comfortable in that type of range.

That makes sense. That's kind of what we've been seeing, but it's nice to get that clarity. That does it for me. Thanks, again, and congratulations on the quarter.

Thank you very much.

Our next question comes from Lenny Dunn of Freedom Investors. Please go ahead.

Yes, hi. Good morning. We're relatively new to the stock. We accumulated 100,000 shares over the last few months. And we love the balance sheet and the general business you're in and the integrity that we see here apparently. But I just had one thing I would like to mention. We're long term investors and we would buy more, but we'd like to see you raise the dividend a little. It makes it a little more--.

--Hey, Lenny--.

--Painless to hold on.

Hey, Lenny?

Yes?

To be honest with you, my family would like to see the dividend raised also. This is a topic we have conversations with every board meeting. We spend a lot of time on it. And I think again it all depends on where we are with our acquisitions, how aggressive we want to get. And I think at this stage, we're I think on two--on one company we are the final--one of the final three companies looking at a company. In addition to that, there's a (inaudible) being presented regarding [pulse] engineering, pulse electronics. So I think at this stage, the Board believes that the acquisition should give us the best return. And if we didn't have these acquisitions as far along as we are, I think the Board would seriously consider that meaning a one-time dividend on the (inaudible).

Well, I would rather see a small increase going forward than a one-time spin-off of the cash, because as you said, the cash can be used for acquisitions. But it would seem looking at the cash flows, at least as I read them, that you have room for an increase of the dividend without harming your balance sheet.

And again, when we talk to--at our next Board meeting it's something as I said we discuss and we definitely look at it seriously. And to be honest with you, again, back to my family, we are one of the largest shareholders. So I'm not putting up any roadblocks. So--.

--Okay. All right. I understand. But again--.

--I mean, again, I'm right behind you on this one.

Yes.

You're speaking to the converted. (Inaudible) more than that. So--but we will--it will be discussed, and again, you have my backing on that.

And again, I would encourage an increase in the quarterly as opposed to a one-time--.

--No, we understand that. I think the Board came to that resolution also.

Okay. Well, thank you very much and I appreciate the way you run the business and the conservative balance sheet. So thank you, and I'll let somebody else ask questions.

Thanks, Lenny.

Our next question comes from Zahid Siddique of Gabelli and Company. Please go ahead.

Hi. Good morning. Any updates on where you are (inaudible)?

Again, we are talking to our investment bankers and we are talking to consultants. Again, I think if--we do have a Board that's looking to be elected in the next (inaudible) elections. I think we're determining now that I think at some point in time that we have to put an offer on the table most likely, if we want the Board to get elected. And I think we have made all (inaudible) move forward.

Okay. But in terms of the timeline, would you be able to say how long this process may last?

I would think the timeline--we're following the procedures for the next Board meeting. So I think there's a lot of rules and regulations on (inaudible) when you have to do certain things (inaudible) date and so forth. So we know we have to move pretty quickly.

Okay, thank you.

(Operator Instructions.) We do have a follow up question from Sean Hannan of Needham and Company. Please go ahead.

Yes. Any 10% customers in the quarter?

I think the same one we always have.

Okay. Any other customers close?

Oh, Ambient's knocking on the door I think now.

Interesting. Okay. And then, in terms of backlog, where is it now relative to the end of the year and how much action did you actually take in building the inventory ahead of Chinese New Year? I know you spoke around this a little bit with your competitors. But is there a way you can provide--.

--I mean, just backlog or backlog to open orders?

Open.

No, I think the open backlog is a little soft, but historically it tends to be very soft at the end of the year because everybody is cleaning out their inventory. So I would say the backlog is sound.

Yes. One thing we did--we built a little more inventory than we would have from a regular basis--would have wanted to do, and part of that was in the fourth quarter we were trying to keep the labor. If you drop all the overtime off the labor, they will go--disappear. And we didn't want to get ourselves into early January and then have the labor situation where the customers come back and they urgently want additional parts prior to the Chinese New Year shutdown. So to keep the labor, we were somewhat forced to build more parts than we wanted. So--but we're starting to double those up now.

Okay. And then, your SG&A, nice job in managing that. Can--should we expect similar levels, kind of this 9.8, 10 million level, or is there much of an increase that we should anticipate in coming quarters?

Well, it might need to go up because I'd like us to have more sales and pay more sales commissions. But other than that, we aren't--we've had very strong controls on travel. We'll lighten those up a little bit, but they're not major items. The bigger pieces in the pie are really related to (inaudible) issues in the sales and marketing, the bigger items are in the sale commission, which is tied to sales, of course. We have some internal salaries. And then, on the G&A side, again in salaries. And then, we have--and that's pretty much it. And the other big variable is the legal and professional fees. And if we can ever get out of these lawsuits, we will have a little bit of spend related to the Synqor appeal and with two other lawsuits that we're working. I think we're doing a much better job and we're trying very hard to manage our legal expenses, but at certain times you--commercial reasons you have to go spend some money. So they're the swing items. If we could get these lawsuits out of the way, then we would have probably another $1 million a quarter drop in G&A expenses.

Great, that's helpful. Thank you.

I'm showing no further questions at this time. And I'd like to turn the call back over to Mr. Dan Bernstein for any closing remarks.

Once again, thank you for joining us today and we look forward to speaking to you throughout the year.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect and have a wonderful day.