Bel Fuse Inc (BELFB) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Bel Fuse first-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 be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded.

I would now like to introduce Mr. Daniel Bernstein, President and CEO. You may begin.

Thank you, Mary. I would like to welcome you to our conference call to review Bel's first-quarter 2011 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance.

Thank you, Dan. Good morning, everybody. Before we begin, I would like to read the following rather lengthy statements.

Except for historical information contained in this first-quarter 2011 financial results call, the matters discussed in this call, including our solicitation of proxies to elect our two director nominees to the Board of Directors of Pulse Electronics Corporation, 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 effects of business and economic conditions, capacity 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 these 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.

This communication does not constitute an offer to buy or a solicitation of any offer to sell any securities. No tender offer for the shares of Pulse Electronics Corporation has commenced at this time.

In connection with the Company's proposal to acquire Pulse, the Company may file offer documents with the US Securities and Exchange Commission. Any definitive tender offer documents will be mailed to shareholders of Pulse.

Investors and security holders of Pulse are urged to read these and other documents filed with the SEC carefully in their entirety when they become available because they will contain important information about the proposed transaction.

Investors and security holders will be able to obtain true copies of these documents, if and when available, and other documents filed with the SEC by the Company through the website maintained by the SEC at www.sec.gov.

Now to move on to talk about our performance, I will start with sales. For the first quarter of 2011, our sales were $71.4 million, which was a first-quarter record, up 27% from the $56.1 million that we reported in the first quarter of 2010.

Last year's first-quarter sales included only two months of sales attributable to Cinch, which was acquired on January 29, 2010. Cinch sales during the first quarter of 2011 amounted to $16.7 million, while Cinch contributed $9.9 million in sales for the period from its acquisition to the end of the first quarter of 2010.

On a comparable basis, including January 2010 Cinch activity, our Q1 2011 sales would have been up $15.3 million or 26% over the same period last year.

In our modules product group, sales for the first quarter of 2011 increased by 68%, while the interconnect product group, primarily through an increase in sales by Cinch, increased 38%. Sales in the magnetic group were flat, and circuit protection declined by approximately -- by about 8%.

In comparison to the fourth quarter of 2010, sales in the modules product group increased by just under 4%. Interconnect sales were flat, and sales were down 6% in the circuit protection product group.

Our magnetics product group experienced a 38% decrease in sales during Q1 2011 as compared to Q4 2010, mainly in the integrated connector modules product line. Part of this decrease was seasonal due to the Chinese New Year shutdown during Q1. However, due to various factors, including high levels -- inventory levels at our customers, we are experiencing significantly lower demand for IC integrated connector modules in comparison to prior periods.

Our backlog for modules remains at historically high levels, but is down from December of 2010, while orders for interconnect and circuit protection increased slightly, and magnetics backlog is flat with the prior year end.

Turning to cost of sales and net results, on an unaudited GAAP basis, Bel entered the first quarter of 2011 with income from operations of $4.2 million and after-tax earnings of $3.2 million. Last year, we reported a loss from operations of $277,000 and an after-tax loss of $120,000 for the first quarter of 2010.

As pertaining to sales, cost of sales decreased from 84.1% of sales in the three months ended March 31, 2010, to 80.8% of sales in the three months ended March 31, 2011. Last year's cost of sales included inventory-related purchase accounting adjustments resulting from the Cinch acquisition.

Excluding the effects of these adjustments, cost of sales [or pertaining to] sales decreased from 82.8% in Q1 2010 to 80.8% in 2011. The higher margins in the first quarter of 2011 resulted from several factors, primarily improved productivities in China and the addition of the relatively high-margin Cinch product lines. These factors were partly offset by an [operatable] mix of product sales in the Bel legacy business.

To take these results on a comparable basis, non-GAAP income from operations for the first quarter of 2011 was $4.3 million, including approximately $1.8 million of non-GAAP income from operations attributable to Cinch. This is compared to non-GAAP income from operations of $1.4 million for the first quarter of 2010, which included approximately $565,000 attributable to Cinch.

Severance costs, which have been excluded from the non-GAAP income from operations for the first quarter of 2011, while severance costs, acquisition-related purchase accounting adjustments, and expenses consisting primarily of professional fees associated with the Cinch acquisition, have been excluded from the comparable 2010 non-GAAP income from operations.

A reconciliation of GAAP to non-GAAP measures is included in our financial press release that was put out earlier today.

Going forward, we expect continuing material cost increases and particularly for components that have metals and petroleum-based products content, the increasing pressure on pricing associated with relatively short production lead times.

SG&A -- the percentage relationship of selling, general and administration expenses to net sales declined from 16.4% during the three months ended March 31, 2010, to 14.1% during the three months ended March 31, 2010.

The dollar amount of selling, general and administration expenses through the three months ended March 31, 2010, increased by $0.9 million -- that's $900,000 -- compared to the same period last year, primarily due to the inclusion of three months of Cinch's expenses in our consolidated results in Q1 2011 versus only two months in Q1 2010. Higher general and administrative salaries due to wage increases effective the first of the year, higher legal fees due to patent litigation activity related to the Halo case, and incentive composition expense recorded in 2011 due to improved results compared to no incentive compensation in the first quarter of 2010.

These factors were partially offset by currency transaction gains in Q1 2011 as compared to losses in Q1 2010 and lower acquisition-related costs in Q1 2011 versus the same period in 2010.

Taxes, Bel recorded a provision for income taxes of $1 million for the three months ended March 31, 2011, compared to a benefit $35,000 for the three months ended March 31, 2010. The Company's pretax results for the three months ended March 31, 2011, are approximately $4.4 million higher than for the same period of 2010.

The Company's effective tax rate, the income from -- or [provisions for surge] of loss or earnings before income taxes was 24% for the three months ended March 31, 2011. This compares to an effective tax rate of 23% for the same period of 2010.

The Company's effective tax rate [were partially] based on the geographic segments in which the pretax profits are earned. Of the geographic segments in which Bel operates, the US has the highest tax rates. Europe's tax rates are generally lower than US tax rates, and the Asia has the lowest tax rates.

There is an Internal Revenue Service audit of our federal tax returns for years 2004 through 2009 ongoing. And Bel is in the process of providing documentation requests by the IRS for this examination.

The balance sheet -- cash and equivalents, at the end of March 2011, our cash, cash equivalents and securities were $94.7 million, which was $9.1 million higher than our December 2010 balance of $85.6 million. The increase in cash resulted primarily from earnings of total operating cash flows, partially offset by the payment of $800,000 of dividends and $600,000 of capital expenditure.

Receivables and payables -- receivables net of allowances were $34.6 million at March 31, 2011, compared to $53.3 million at December 31, 2010, a decrease of $8.7 million.

Our accounts payable at March 31, 2011, were $17.7 million, decrease of $3.3 million from December 31, 2010.

Inventories at the end of March 2010, our inventories were $57 million, which were up slightly from the December 2010 level.

Other balance sheet comments -- our capital spending for the three months ended March 31, 2011, was approximately $600,000, while depreciation and amortization was $2.1 million. Our per-share book value at March 31, 2011, was $19.14, including goodwill and intangibles. Excluding goodwill and intangibles, our per-share value was $17.80.

I will now turn it back to Dan.

Thank you, Colin. Five years ago, representatives from Bel and Pulse began discussing a framework for a potential business combination that we believe made strong strategic sense and had the potential to create more value than either company could achieve on its own.

Since 2007, Bel has repeatedly attempted to meet with Pulse's Board to engage in serious discussions regarding a transaction, but each time, we were asked to wait. Until recently, we honored Pulse's requests repeatedly to divert discussions.

However, due to the rapidly changing dynamics of our industry, we felt we could no longer remain passive. As a result, we are soliciting proxies to elect two direct nominees to Pulse's Board of Directors at Pulse's 2011 Annual Meeting of Shareholders scheduled for May 18, 20111. These highly qualified direct nominees have no past affiliation with Bel, were selected by an independent third party based on their qualifications and are solely concerned with pursuing the best interest of Pulse shareholders.

At this time, we would like to open it up for questions.

(Operator Instructions). Zach Larkin, Stephens Inc.

Congratulations on the quarter. Just wondered first off if you could talk maybe a little bit about your supply chains and if there's any potential impact on component sourcing due to the recent disaster in Japan. And I was just wondering if this is a risk for you guys.

In the past two weeks, we had sent our Head of Purchasing to the Far East to work with our team over there. At this time, we haven't seen any problems whatsoever, but we're still very cautious about how we move forward.

Okay. And then also, just wondering if you could expand a little bit more on pricing pressures. Colin mentioned that briefly. Last quarter, you noted that that could be an issue going forward. I just wondered if you give us an update on the environment and also maybe provide little bit of color into order trends, what you're seeing going into 2Q, what your expectations are there.

Basically, after the recession, there was pent-up demand that really took off last year. That demand was met. And I think people who were concerned are [in a whole] majority situation now. So leadtimes have come down substantially.

In our industry, the component industry, when leadtimes come down, then you face a lot more price pressure. And that is a battle we are facing today, where our customers know the situation in China. Labor is up maybe 15% to 20%. The lines keep getting stronger, and materials -- gold, silver, petroleum -- is moving up substantially.

However, they're asking for a 10% to 12% price reduction. And that is where the battleground is set. And that is what we are trying to determine over the next eight to 12 weeks. However, I think it would be very difficult to give any type of 10% to 12% price reductions. But we don't see any price increases coming in the near future.

Okay, all right. Got that. And then also wondered if you could talk a little bit about the inventory situation. Last quarter, you mentioned that distributors were holding excess inventory going into Chinese New Year. You mentioned that there was some inventory as well being held this quarter. What is the situation there, and how do you see that playing out?

We think it is pretty much the -- it's still status quo. We've responded to some of our customers' requirements and requests to maintain some what's called vendor-managed inventory, VMI. So, we have some inventory on our books that we don't mind having quite so much because we know it's got a home at the end of the day.

But we still see, as we look out, basically the channels seem to be quite full, from our view. And we expect that to continue I think for a little while.

Okay. Thanks for the color there. Congratulations again on the quarter.

Needham & Company.

So, looking to see if I could just actually get leadtimes -- I'm not sure if I heard you comment on what those came down to in the quarter.

I think the worst last year, right after Chinese New Year, where we were up 35, 38 weeks. And now we are back to our normal level, which is anywhere from eight to 12 weeks.

Okay, so unchanged from December, then?

Yes.

Okay, that's helpful.

And we managed labor to accommodate that. So after Chinese New Year, we weren't as aggressive as hiring back many people because we knew our leadtimes were coming down.

Okay, great. And then in terms of 10% customers, did you have only one in the quarter? Did another emerge?

We had none in the quarter.

None in the quarter. Okay. And then the relationship that you have with Ambient, is there any indication that you've gotten from them around either an uptick or a downtick in orders that you could see perhaps in the near term, and if you could provide little bit of color around how that relationship is developing?

I think we don't see any downturn. We are seeing some slight uptick. We do believe that, from our understanding for them, it tell us that it should be some increases from quarter to quarter going forward. And they still feel very positive about that product line and how it's being received in the marketplace. So we are still very positive with that.

Okay, that's helpful. And then in terms of the nominations you have with Pulse, arguably, if they are not accepted, and you've talked in the past -- I think you've actually put it in some of the -- you've put it in print that the $6 a share offer is flexible. Are you at a point where you've been able to exercise incremental or additional diligence around some aspects of their business, or would you have to -- are you waiting really to see what happens with those nominations in order to move forward with that level of diligence and revisit perhaps a higher offer?

Again, I think the market speaks for itself regarding Pulse. They believe the stock today is -- I think over the last couple of weeks, it's $5.75. So I don't think it makes sense for us to start bidding over ourselves. However, again, we have requested repeatedly that if -- this offer is not an offer in stone. If we sat down and had further negotiations and we could see true greater synergies than projected, that that should be reflected in the price we offer.

Okay. And then just to follow up on the diligence piece, I believe that some of what has been put out by you folks in print is that there has been some initial but not necessarily deep due diligence. Has there been anything that has changed there?

No. I just think, again, what we are concerned about is the market is getting a lot more aggressive for both of us. I think for both companies, one of the driving products we have is the integrated connected modular, where we are both leaders in that marketplace. I think we will see more competition from Tyco and Molex. And I think that we are both going to be affected by that. And it's how we act -- again, I think that's one of the strong points that would push a combination of both our companies, to give us greater critical mass to compete against the big boys.

Okay, that's helpful. Thank you.

Mike [Neary, Neary] Asset Management.

On the face of it, the deal with Pulse looks dilutive to us. And I'm just wondering why we're working so hard on it, given that it looks like it's a dilutive deal.

Dilutive to Bel shareholders or for Pulse shareholders?

To Bel Fuse. On every metric in your presentation --

And we -- and that's why when we talk -- and that's why we don't want to budge off the offer. I believe one of the key things, if you looked at our balance sheet and our statement, and that's why we hold very strong that we won't go above the 52% join together going forward if we do an all-stock deal.

However, we do believe that there's not a better company for Bel to merge with, and there's not a greater company that can give us the synergies we need to move forward. I know, as you look at our multiple, yes, I agree with you 100%. And that is why we are going to keep asking for a higher price. We can't really see it, to be honest with you.

I'm not sure I can get to our existing offer in terms of -- for what we would give us versus what we get --

From a cash or a stock point of view?

On a stock standpoint, EV to EBITDA, EV to sales -- I mean, we're talking about, if we pay $260 million for their equity, $230 million of that is going to be goodwill. They only have $30 million remaining tangible book. They've turned over most of their Company to their creditors and their suppliers already.

I think if you look, there was a presentation we filed -- I think it was filed again late yesterday -- which lays out the basis of what the valuations are. And I think, Mike, I would refer you back to go back and look at that.

Okay. Let me ask this. Historically, we have needed about $0.23 of working capital for every $1 of sales we've done. Pulse currently has about $0.03 of working capital. They have only $15 million of working capital supporting $400 million -- $430 million in sales.

So they're getting financed by their suppliers right now off-balance sheet. And we pay -- say we pay $260 million for the company plus $60 million for their debt and minority interests. Well, to bring their working capital ratios up to ours and to bring their supply chain back to health, looks to me like it's going to cost us another $80 million. And I'm just trying to think if I'm thinking about this correctly in terms of additional costs we're going to have right off the bat if we were to buy them.

Additional costs?

Yes. Their working capital right now is completely insufficient to support their level of sales, apart from the fact that the suppliers are financing them. And if we are talking about trying to bring their margins up to ours, we are going to have to change that -- I would think would put them on the terms we have for existing suppliers. And I'm just trying to make sure I'm looking at this correctly, if that is something you guys are taking into account or have taken into account.

Yes, we have. One of the issues, of course, is that you're not going to need twice the -- you've got twice the number of sales. You don't need twice the number of inventory. You don't need -- and the rest of it. So, the working capital needs would [strike] significantly and would factor that in, some of those issues into our internal analysis.

Okay. All right. Well --

No, again, just so you know, Mike, for what it's worth, my family is still one of the largest shareholders. And we really look at this and, again, if you understand the market, our big problem is -- it's always been price, price, price. And we've got to get that cost savings from somewhere to help our profit and give decreases to our customer.

And there's just not that many opportunities for us to get that where we have to go. And again, we know we have a lot of people that work for us from Pulse. We know we're in the same -- very close in different areas of the country and the world. And we feel very confident with a minimum of $15 million, and I would say that is an extremely conservative number of synergies that we would see.

Okay. And, look, you guys have always done a good job with these deals in the past. And it's just the size of it, I just hope we don't get carried away, given how big it is and the potential and lose track on what we are paying. So, thank you very much.

No, we understand that completely. And I appreciate -- and I think you made some valid points. And I appreciate it.

(Operator Instructions). Lenny Dunn, Freedom Investors.

A good quarter, considering it includes the Chinese New Year. My concern, it's a little bit different than the previous caller. But I have some concerns with the Pulse acquisition based on the fact that there's only so much time management can devote to anything. And these guys at Pulse seem to be just self-serving, frankly. Obviously, you have to be careful what you say, but I don't. And they want to continue milking the cow.

So I'm not sure that -- you know, this could take a very long time for you to do what should be done, because Pulse is not going to act in the best interest of Pulse shareholders. They're going to act in the best interest of Pulse management. And I certainly understand what you are doing, and I agree with the concept. But my concern is with the time and money that's going to be devoted to this, and it could end up being a Pyrrhic victory if you do win.

To be honest, when we looked at this, we looked at all possibilities, again, looking at a tender offer and so forth. And one of the reasons that our investors recommended this way to do it, it's probably one of the most -- least expensive ways to do it. And we are not -- trust me, we are not spending substantial dollars to do this.

However, and if we had -- at the time, when we were looking at other acquisitions, and some of the acquisitions fell in the crack, so we do have management time to look at this. And again, this is something we've been looking at for five years. And we just feel that at this point, and the markets we are going into, that we have to let the Pulse shareholders know what's going to happen. And if we do come back in a year later or two years later, again, hopefully they will realize that Bel and Pulse together are obviously the best company.

Just for everybody on the call, if you don't mind, I would like to read you something that Jim Papada said to me in July of 2006 -- May 24, 2006, that explains the situation a lot better than I possibly could do. And once again, he was Pulse's Chairman and CEO.

"One thing rings with absolute clarity in my mind. The combination of Bel and our ECS would be not just a company-altering, but more importantly, industry-altering. For those shareholders who choose to stay with the company, it could be a very, very lucrative deal over the next decade and one which neither of us can provide by ourselves, at least not in the midterm and probably not in the long term. The economies of this deal are just so compelling, we owe it to our respective shareholders to do what we can to explore it carefully and, if possible, make it happen."

The ECS Group is now 100% of Pulse because they spun off all the other groups. So, again, that is Jim saying how important this deal was when it only represented 50% of Pulse at the time. And that is the way we kind of look at it for us to be together. We should've been together five years ago, and as a matter of fact, we looked at them in -- I think 1994 is the first time we made an offer to buy them.

I'm not questioning the synergies and how much sense it makes. What I'm asking you is if it's not going to -- it's like trying to date a girl you really want to date, and you know she's good for you, but she just doesn't want you. And these guys --

Trust me, I had to knock on the door eight times for my wife. So, again, you're worried about, is management going to lose their focus? I don't think so. Again, if this doesn't happen by May 17, we are back to regular Bel business. So I don't think we are going to lose the focus. And I think we are committed to grow the Company the best way possible. And if we see another acquisition that offers better value to Bel, we definitely will look in that direction.

Okay. There's no question about the value here. The question is if these guys are just going to keep acting in their own best interest and not the shareholders' best interest.

And I think that's why it's so important that these two independent directors get elected so if we can get one or two elected, I think they could really have a drastic effect on the Board of Directors at Pulse, and look at all options that make sense to what is best for Pulse shareholders.

Okay. Well, I certainly hope this all works out properly. And as long as you're not going to devote attention for the next few years on it --

Trust me, that's not going to happen.

Okay. Well, you've answered my questions, and again, I appreciate the way you've answered this. And I appreciate the fact that you've always been very conservative in the past. So I am counting on you guys not to overpay here if the business [is starting to sleep].

All right. Thank you for your call.

(Operator Instructions). And I am not showing any other questions at this time.

Once again, I would like to thank everybody for joining us today, and we look forward to speaking to you at the next quarter. Goodbye.

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