Bel Fuse Inc (BELFB) 2013 Q4 法說會逐字稿

Good day, and welcome to the Bel Fuse fourth-quarter 2014 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).

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Bernstein. Please go ahead, sir.

Thank you, Charlotte. We would like to welcome you to our conference call to review Bel's unaudited preliminary fourth-quarter 2013 results.

Before we start I would like to hand over to Colin Dunn, our Vice President of Finance. Colin?

Thanks, again. Good morning, everybody.

Before we begin I would like to read the following Safe Harbor statement. Except for historical information discussed in this call, the matters discussed in this call including the statements regarding reduced lead times, Bel's ability to offset the increase in direct labor costs in China, the impact that Bel's new R&D center will have on Bel's product development cycle and on Bel's response time to customers, and Bel's acquisitions plans are forward-looking statements that involve risks and uncertainties.

Actual results could differ materially from Bel's projected. 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, difficulties associated with integrating recently acquired companies, capacity and supply constraints or difficulties, product development, commercialization 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 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. That's the end of the Safe Harbor statement.

The results of the Transpower Magnetics business of TE, now known as TRP Connector, acquired in late March, 2013, and the Array Connector Corporation, acquired in August 2013, have been included in our consolidated results since their respective acquisition dates. In my discussion I will attempt to note where the inclusion of these acquired companies accounts for a significant variance from prior periods.

First we will start with sales. Fourth-quarter 2013 sales were $91 million, which is a new fourth-quarter record for Bel, including $18.8 million of sales of TRP Connector products. Sales were up 26.8% compared to $71.8 million in the fourth quarter of 2012 and down 10% from the $101.2 million that we reported for the third quarter of this year.

Fourth-quarter 2013 sales in all four major product groups were as follows. Magnetics $47.2 million, which is up 75% over the fourth quarter of 2012 primarily due to the addition of sales from TRP Connector products.

Interconnect, $28.5 million, an increase of 8.6% over last year's fourth quarter. Fourth-quarter 2013 interconnect sales included $1.3 million of sales of Array Connector products.

Circuit protection, $2.4 million a decrease of 6.4% from the prior fourth quarter. And modules, $12.9 million, which is 19.2% lower than sales in the fourth quarter of 2012. As we have discussed over the past several quarters, the modules product group continues to be affected by a decrease in the level of sales activity of a major customer.

Turning to cost of sales and net results, in Q4 2013 cost of sales as a percentage of sales was 80.3%, down from 84.2% in Q4 of 2012. Several factors contributed to this.

The Company implemented price increases during the latter half of 2013 which have helped to offset some of the rising labor costs in China. There was a favorable shift in the mix of products sold away from higher material cost modules projects towards Bel's other lower material cost products.

During the fourth quarter of 2012 the Company incurred redundant operating costs as we started to transition cinch manufacturing from Vinita, Oklahoma to a new factory in McAllen, Texas. This new McAllen plant is now running at pre-transition efficiency levels and lower sales volume overall led to increased throughput which continued to improve overhead absorption at our factories.

SG&A, selling, general and administrative expenses, during the three months period ended December 31, 2013, decreased by $400,000 in comparison to the same period of 2012. SG&A as a percentage of sales for the fourth quarter of 2013 was 11.9%, down from the 15.6% of sales during the fourth quarter last year.

The inclusion of SG&A expenses related to TRP and Array, both acquired in 2013, amounted to $1.5 million for the fourth quarter of 2013. These additional costs were more than offset by a reduction in acquisition costs, legal and professional fees and other wage and fringe-related items as compared to the fourth quarter of 2012.

Taxes, Bel recorded income tax benefit of $400,000 for the three months ended December 31, 2013, compared to an income tax benefit of $700,000 for the three months ended December 31, 2012. Included in the income tax benefit in Q4 2013 our credits from our previously announced solo project at our Inwood, New York signal manufacturing facility and research and development tax credits related to USA manufacturing.

The Company's effective tax rate, which is the income tax benefit or provision as a percentage of earnings before income taxes, fluctuates based on the geographic segment 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 Asia, where we have the largest operations, has the lowest tax rates.

The very favorable tax -- effective tax rate in 2012 -- was primarily due to pretax losses in the US and lower earnings in Europe, which resulted in tax benefits combined with stronger earnings in Asia where the tax rates were lowest. On an unaudited GAAP basis, Bel reported income from operations of $7.1 million and an after-tax net income of $7.4 million for the fourth quarter of 2013. Last year we reported a loss from operations of $3 million, an after-tax net loss of $2.4 million for the fourth quarter of 2012.

To state the results on a comparable basis, non-GAAP income from operations for the fourth quarter of 2013 was $7.3 million compared to non-GAAP income from operations of $1.3 million for the fourth quarter of 2012. Acquisition costs, restructuring, reorganization and severance charges, gains and losses on investments, benefits from changes in tax reserves and the storm insurance proceeds have been excluded from non-GAAP income from operations. A reconciliation of GAAP to non-GAAP measures is included in our press release today.

Turning to the balance sheet, cash and equivalents, at the end of December 2013 our cash and cash equivalents were $62.1 million, which was $9.2 million less than our December 2012 balance of $71.3 million. The decrease in cash resulted primarily from the net payment of $21 million for the acquisition of TRP Connector, $10 million for the acquisition of Array, approximately $6.7 million of capital expenditures, $3.4 million for the repurchase of Bel Class B common stock and $3.1 million in dividend payments. This was partially offset by $12 million of borrowing on our bank credit line and positive operating cash flows.

Receivables and payables. Receivables net of allowances were $63.8 million at December 31, 2013, compared to $42.9 million at December 31, 2012, an increase of $20.9 million. This increase resulted from the addition of approximately $16.2 million of TRP and Array receivables and an increase of approximately $4.7 million in other trade receivables.

Our accounts payable at December 31, 2013, were $29.5 million, an increase of $10.7 million from December 31, 2012. This increase resulted from the addition of approximately $9.2 million of TRP and Array accounts payable, an increase of approximately $1.5 billion and other trade accounts payable.

Inventories. At the end of December 2013 our inventories were $70 million, up $15.1 million from the December 2012 levels. Approximately $11 million of this increase resulted from the inclusion of the inventories of TRP and Array.

Goodwill and intangible assets. The purchase price allocation for TRP Connector and Array Connector have not yet been finalized. The condensed consolidated balance sheets in the earnings announcement today incorporates our perimeter estimate of those purchase price goodwill allocations.

Other balance sheet comments, our capital spending for the three months ended December 31, 2013, was approximately $1.6 million while depreciation and amortization was $3.7 million. Our per share book value at December 31, 2013, was $19.87 including goodwill and intangibles and excluding intangibles and goodwill our per share value was $15.71. I will now return the call to Dan.

Thank you, Colin. Charlotte, can we open up the phone call for questions, please?

Certainly. (Operator Instructions). Sean Hannan, Needham & Co.

Yes, thanks. So congratulations on the good earnings within the quarter.

First question, I want to see if we can get a little bit more color in terms of demand environment that you had seen within the December quarter and to date thus far in March. So in contrast to September, can you go through each of your segments, discuss the demand trends that you saw for each of those and then the extent that those continue or change thus far? Thanks.

I think for us a good portion of our products now with the TRP acquisition, roughly 65% probably, are going to the network and telecommunication market segments. And as Cisco mentioned yesterday they projected basically networking where we supply a lot of their products in the hardware, that they see a 10% reduction for the next quarter.

So I think that it's too early to tell but we have to expect that we will see softening the same because Cisco, as we like to say, the 800 pound gorilla. And we don't see much different from a lot of the networking companies at this time.

Okay. That's helpful, Dan. Was looking though if I could get as color a little bit more in terms of magnetics, interconnect, circuit protection and modules and didn't know if there was additional color you could provide around that?

At this time I think that now is just so much because of the TRP acquisition, that they control so much. Our aerospace/military business, which is probably roughly around 25%, we still hear very strong things from Boeing. We're a major player on the 737 and they are predicting I think they're going from 36 to 41 planes.

Is that right, Colin? We do see increased -- Boeing is still predicting increases for next year, so that's a strong sign. So military aerospace --

Actually, the Boeing number is scheduled to increase to 42 per month, this is on the 737 program, by the second quarter of 2014.

That should help us. And the military, I think with the budgets and everything, it's so unpredictable what is going to happen with the military. So I think if you look those are probably our three largest segments now.

Okay. Now in terms of your acquisition strategy, it's really helped provide some growth here as well as the additional leverage on the OpEx. Are you folks currently positioned now where you can organically get to double-digit operating income in time, or how much help would be required through additional M&A as you look at your model today?

Colin, I will let you take that one.

We certainly believe the way for us going forward is still additional acquisitions. A lot of the product lines we are in show in areas that are fairly flat and with not a lot of growth. And while we continue to come out with new products and faster products, we're not going to get there fast enough.

So we really need to continue to add on products either things that will fit in our manufacturing facilities or will go to our existing customers. So that's the only way we are going to be able to continue to keep up a fairly fast rate.

We are continuing to focus, trying to run the business as best we can and milk what we've got. But we certainly do see that the only way forward for us is to continue a fairly aggressive M&A program.

Okay. And on that front can you elaborate a little bit on the opportunities that you are looking at from M&A perspective?

I think because of our track record over the past, having five acquisitions over the past two years, I think we are getting the opportunity to look at many different companies. Again, I think we have been really somewhat focused on the connector area because we would like to diversify.

We have so much involved with the networking telecommunication and we do believe aerospace and military is a market, and an industrial market that we want to get involved with. So I think we've focused a lot on the connector side, support military and aerospace; however, if we can see products like TRP, if you asked me a year ago would I want to buy an ICM company to support networking, I would've said that would be the last thing on my acquisition list.

But in reality it is probably one of our best acquisitions because of what it did to our cost structure and our profitability. So again I think the only thing we really are focused on -- I don't think we want to go too far outside of our box but anything that makes -- anything that is very good value or anything that can support our connector, our aerospace military, we look at.

Okay. That's helpful. And then one more question here and I will jump back into the queue.

So rising wages in China have certainly been a challenge for a time for you guys as well as everybody else, you have done a great job in terms of finding your own deficiencies and offsetting some of this. How should we consider the higher Chinese wage impacts in your model from this point forward?

Is there a path toward a gross margin degradation perhaps that you are expecting, or should this continue to be something that you are able to offset? Thanks.

I think we are hoping with our best practices that we are implementing by combining the best practices of TRP and Bel, that we should be able to offset any labor increases over the next 12 months to 18 months. In addition to that we are moving more of the operation to Western China.

We have sent people into Vietnam and other low-cost areas to investigate that. We know that in our business you can't stand still so if we can't automate the processes we have to look for a less expensive labor, either moving more Western China or other areas outside of China. We are doing everything we can to freeze labor rate that it is today either through deficiencies or looking at lower-cost areas.

Okay. Thanks for a much for the color, Dan and Colin.

Colin, do you want to add anything regarding that question?

No, I think the other thing that Sean is that, we've got to be competitive with our competitors. Now if we are all -- if everybody's manufacturing in basically the same geographical area then we should be competitive, but it does remain difficult. But I think we are doing a pretty good job at the moment.

And also it should be noted with the acquisition of TRP, I would say in the market segments that we support in ICM, we are by and far the largest supplier by 35, 40%. And you would hope that we are so much bigger than our competitors that we should have tremendous economies of scale that should allow us to be, I would think, the most cost competitive supplier out there. So I think we are somewhat confident over the ICM business over the next 18 months to two years.

Great. Thanks very much.

(Operator Instructions). Mike Hughes, SGF Capital.

Yes, on the SG&A line ex-ing out items it looks like it was down a little over $1.5 million sequentially. Is the number from the fourth quarter a good run rate to model into 2014 at the $10.6 million a quarter?

Yes, it is a good run rate. It's fairly clean. Yes.

Okay. And then CapEx for 2014, do you have a rough number?

It should continue where we are at the moment. I don't see it changing materially. No, I would just leave it exactly where it is right now.

And what would be a good book tax rate to use for 2014?

That's the $1 million question. Typically we would expect to be in the 13%, 14%, 15% range, effective tax rate.

But again we have picked up quite a lot of tax credits with different acquisitions particularly relating to North America. So they continue to give us things like the credits we got now, but I think for planning purposes the low teens is a good place to have a number.

Okay. And then one last question for you, TRP was down sequentially in the December quarter. How should we, I don't think we have a lot of information on that given you haven't owned it for that long, how does that typically look into the March quarter from a revenue perspective?

It will be, we expect -- well, business is a little soft as we put in our announcement today, it's off a little bit and as Dan just explained a view minutes ago, we would expect that TRP business to be in line with that from the fourth quarter. What we had is we had a real kick up in the third quarter at TRP.

It ran much higher than we expected and I think that seems to have settled down now and I think they are back to their regular run rate. They are in the fourth quarter they did run at the rate that we acquired them at, so we would expect them to continue at about that level.

I think the run rate we projected is probably $15 million to $18 million, Colin?

Yes, yes.

Okay, and then if I could just sneak one more in. So with some of this short-term revenue softness you are seeing just thinking about your operating model, what kind of impact does that have on the gross margin? Can you still keep the gross margin at around the 19.5% level, or would there be some degradation?

There should not be a lot of degradation. We've still got some efficiencies we are going to pull out.

One of the issues we have to deal with is that in the first quarter we always have the lunar new year shutdown, so the factories are shut down, so that usually gives us some additional expense. And as we start up again after the lunar new year, although we did get a very good return rate on labor this year, so we are quite optimistic about that. But no, normally I would expect particularly in the first quarter to lose 1.5 to 2.0 percentage points.

And when you say return rate on labor meaning your existing employees, the percentage coming back this year was higher, so the training cost was lower?

Yes.

Okay. Thank you very much.

(Operator Instructions). Sean Hannan, Needham & Co.

Great, thanks for the follow-up opportunity here. So just trying to get a better sense of the modules business.

Incrementally from the current levels do you expect much further degradation, or is that kind of ramp down effectively done and perhaps we can see a steady-state sequentially from here? Any color around that, and then kind of the follow-up to that, can you update us on how you are redeploying some of the capital that you had committed to that customer for that business? Thanks.

So, Sean, we've basically went on the group we went from $55 million to $33 million, to $13 million. We might have hopefully we are getting very close to rock bottom. We feel very confident.

We were fortunate with TRP had a strong modular group also and we feel that we could pick that up and that would add substantial sales from $5 million to $10 million probably starting within six months to a year. So I think we are confident that we are pretty close to rock bottom and I would hope going forward that we would get back to 10% to 15% growth at least for the next three years and get the group of back to -- we expect all groups to be about $45 million, $50 million at least.

And so basically we have the equipment. A lot of the equipment we do have we use throughout our factories for other jobs, so it's not a completely dedicated operation.

Okay. That's helpful. And then lastly, can we get a little bit of color around the lead times you are looking at presently for ICMs and any additional insight in terms of your backlog?

I hate to say it but the lead times are not a problem all. Again when lead times are getting this short then you worry about the pricing pressure because people try to buy business. However, our lead times I think should be very competitive based on our current backlog.

And when I mean competitive, we think anywhere within 8 to 12 weeks. And I think what has really been fortunate with the TRP the way they manufacture, historically they have lead times that have been a lot shorter.

So we have situations where customers are coming to us for product and because of our long lead times we've been able to switch the customer over to TRP and they have been able to pick up that business. So I'm pretty confident going forward on that lead time shouldn't be a corporate problem with the two operations we have.

Okay. All right, thanks very much for the color.

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

All right, thank you, Charlotte. We appreciate everybody joining us and hopefully everybody that can travel, people in the New York East Coast area, please travel safely and I wish you a safe drive home and thanks again for your time. I appreciate it.

Thank you. Ladies and gentlemen, that does conclude today's program and you may all disconnect. Everyone have a wonderful day.