Bel Fuse Inc (BELFB) 2014 Q1 法說會逐字稿

Good day and welcome to the Bel Fuse first-quarter 2014 results conference call. (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, Nicole. And we would like to welcome everybody to our conference call to review Bel's preliminary first-quarter 2014 results. Before we start I would like to hand it over to Colin Dunn, our VP of Finance. Colin?

Thanks, Dan, good morning, everybody. Before we begin I'd like to read the following Safe Harbor statement.

Except for historical information contained in this call those matters discussed in this call, including the statements regarding the anticipated accretive impact of the pending Power Solutions transaction and the growth opportunities that may result from that transaction are forward-looking statements that involve risks and uncertainties. Actual results could differ materially from Bel's projections.

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.

Moving now to regular comments -- on April 28, 2014 Bel announced that it entered into a definitive agreement to acquire the Power-One Power Solutions business of ABB Ltd. for approximately $117 million in cash.

At this time the transaction is subject to regulatory approvals and other customary closing conditions and specific details remain confidential. As such we will not provide any specific information regarding the potential acquisition on this call. We anticipate the transaction will close during the second quarter ending June 30, 2014.

The results of the Transpower Magnetics business of TE, now known as [TRP Connector], acquired in late March 2013 and Array Connector Corporation acquired in August 2013 have been included in our consolidated results since the respective acquisition dates and account for significant variances from prior periods. In my discussion I will attempt to identify any material portion of each variant that is due to the inclusion of these acquired companies.

Sales, first-quarter 2014 sales were $82.6 million, including $17.9 million of sales of TRP and Array products. Sales were up 31.1% compared to $63.0 million (sic -- see press release) in the first quarter of 2013. In the first quarter, it includes the Lunar New Year holiday, sales were down 9.2% from the $91 million we reported for the fourth quarter of 2013.

First-quarter 2014 sales in our four major product groups were as follows.

Magnetics, $39.3 million, up 85% over the first quarter of 2013, primarily due to the addition of sales from TRP products. On a comparable basis, excluding TRP, our magnetic sales increased by 8.5% over the prior year.

Interconnect, $13.2 million, an increase of 15.5% over last year's first quarter including Array products. On a comparable basis excluding Array, first-quarter 2014 interconnect sales were up 9.3% over 2013.

Circuit protection, $2.3 million, an increase of 1.7% over the prior year's first quarter.

And modules, $10.8 million, which is 18.8% lower than the first -- than sales in the first quarter of 2013.

Moving to cost of sales and net results. In Q1 2014 cost of sales as a percentage of sales was 83%, down from the 85.6% in Q1 of 2013. Several factors contributed to this. There was a favorable shift in the mix of products sold away from higher material cost modules products towards Bel's other lower material cost products.

The TRP product line was included in our results in Q1 2014 but not in the prior 2013 year quarter. Higher costs were incurred during the first quarter of 2013 as we were in the midst of reorganization of (inaudible) manufacturing footprint in North America. Those costs are behind us and we now are realizing cost savings from that reorganization.

The Company implemented selective price increases during the latter half of 2013 which helped to offset some of the rising labor-related costs in China. And higher sales volume overall led to increased throughput which contributed to improved overhead absorption in our factories compared to last year's first quarter.

Selling, general and administrative expenses, SG&A for the first quarter of 2014 were 13.5% of sales, down from the 16.5% of sales during the first quarter last year, primarily as a function of higher sales revenue in 2014. During the three months period ended March 31, 2014, SG&A increased in dollar terms by approximately $800,000 in comparison to the same period of 2013, almost entirely due to the inclusion of TRP and Array in our 2014 results.

Taxes, Bel recorded income tax expense of $400,000 for the three months ended March 31, 2014 for an effective tax rate of 14% compared to an income tax benefit of $800,000 for the three months ended March 31, 2013 which amounted to an effective tax rate of [60%].

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 were earned. In 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 our largest operations, has the lowest tax rates.

The change in the effective tax rate from year to year was primarily due to pretax profits in our North American and Asian segments in Q1 2014 compared to the prior first year quarter when we had pretax losses in those segments and recognized additional R&D tax credits.

On and [on order] to GAAP basis Bel reported income from operations of $2.9 million and after-tax net income of $2.5 million for the first quarter of 2014. Last year we reported a loss from operations of $1.4 million and an after-tax net loss of $600,000 for the first quarter of 2013.

To see these results on a comparable basis, non-GAAP income from operations for the first quarter of 2014 was $2.9 million compared to non-GAAP loss from operations of $800,000 for the first quarter of 2013.

Acquisition costs and restructuring, reorganization and severance charges 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 March 2014 our cash and cash equivalents were $53.9 million which was $8.2 million less than our December 2013 balance of $62.1 million. The decrease in cash resulted primarily from the repayment of borrowings on our bank credit line, capital spending and dividend payments were offset by operating cash flows.

Receivables and payables, receivables net of allowances were $57.4 million at March 31, 2014 compared to $63.8 million at December 31, 2013, a decrease of $6.4 million. This decrease resulted primarily from the seasonal reduction in Q1 sales compared to Q4 as described above.

Our accounts payable at March 31, 2014 were $23.2 million, a decrease of $6.3 million from December 31, 2013. As with receivables, the decrease in payables was due to the seasonally lower level of spending activity in Q1 as compared to Q4.

Inventories, at the end of March 2014 our inventories were $68 million, down $2 million from the December 2013 level.

And other balance sheet comments, our capital spending for the three months ended March 31, 2014 was approximately $1.2 million while depreciation and amortization was $3.4 million. Our per share book value at March 31, 2014 was $20.09 including goodwill and intangibles. And when we exclude intangibles and goodwill our per share value was $15.95.

That's the end of my comments. I will pass it back to Dan.

Thank you, Colin. At this time we would like to open up the call for any questions anybody might have. Nicole, can you open up for questions, please?

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

So first, obviously I think there is going to be a lot of questions around the acquisition, and congratulations on getting a big deal -- well, at least working through a big deal here.

Is there a way, if you can discuss maybe a little bit, to provide us some better insight for how to think about this in context? I realize you're not going to give detailed financials, but just to think about from a modeling perspective when during the quarter do you folks expect this to close?

And then in terms of the revenues that they would bring, any type of seasonality within their business? Can we get maybe a little bit of color around customer overlap or new customers? And any exposure if there is a general breakdown that you might have in your minds for vertical markets, communications, computing? Any context there would be helpful. Thanks.

Okay, I think if you look at previously their market segments they released when they were Power-One and they were just acquired a year ago so there is some information that is public record. Again, they do roughly around $250 million in sales, $75 million of those sales are roughly in the industrial European market, which Bel does not participate in, which we feel is a market that we have tried over the last 6 to 9 months to penetrate.

Automation equipment, rail market, overall industrial markets is something that really excites us. A good portion of that business is the markets that we do participate in, the networking, communication and telecom, that's a majority of their sales. And they do a small portion, I think $28 million to $35 million, with the backup power that they supply to some of the big companies out there, what they call I think the network power group.

Okay, that is helpful. And then in terms of operating margins, if I recall correctly, they generally -- I'm sorry, roughly gross margins, I think that they carry typically slightly better than your average. I want to see if that would still be the case today. And then when we think about getting to that operating margin line when we are a year out are there any leverage factors that we would expect either through combined SG&A or even as a function of perhaps some purchasing leverage that could flow through?

I think there is definitely manufacturing opportunities. Again, what we learned with the TE acquisition from an automation, best practices and manufacturing there's always opportunities there. From the purchase materials, we think being -- both companies working together there is opportunities there. So we do -- again, we do hope that going forward that the costs will go down on both companies.

And even prior to --.

I'm sorry, regarding closing, I think we are being very aggressive when we do say the second quarter, the end of the second quarter because we have a lot of regulations. So that's our goal, to hit the second quarter. But would I be shocked if we roll into the third quarter? Probably not.

Okay. And then last question here for the moment. In terms of the mix that you saw in the quarter, you were impacted a little bit in terms of some inventory work downs at some of your customers, particularly within networking. Can you talk about your mix during the quarter, how it may have affected your gross margin profile say versus December and then if we have seen any change or uptick so far in conditions, any color around that would also be helpful. Thanks.

I mean again, people [read very carefully] what's going on with the three or four big guys in the San Jose area and we do get affected by that. However, just recently we have seen an uptick regarding one of the major players out there. So from that standpoint things are looking a little bit better than they did last quarter, not substantially better but a little bit better. So we would hope (multiple speakers).

And then how did mix (multiple speakers)?

Mix stays pretty consistent throughout all our product groups. Colin?

Yes actually as I made in the comments there, there was a favorable shift in the mix of products sold somewhat away from the higher material cost module products towards our other products. So --.

And that is more from a margin standpoint that you really see that, as you know, comes from that one large customer we have in the modular group which is Ambient.

Great, thanks so much.

(Operator Instructions). Hendi Susanto, Gabelli & Company.

Congratulation on the transaction. Do you know what your acquisition pipeline looks like and what is your financing capability for making other acquisitions after this one?

We've been working with KeyBanc very closely and I think they've assured us that we do have add-on financing and that we will have the capabilities to look at other companies going forward.

And we are always, you know, there's always deals in the pipeline. So, some are big and some are small. The hit rate is not always that high.

But I think the major point is, no, this is not the last deal we're going to be doing and we still see other deals out there that we would pursue. And KeyBanc has assured us that they will work with us on these type of deals.

Okay. And then for acquisition of Power Solutions, the press release indicated that it will be immediately accretive. I'm wondering whether that is factoring the synergies or before making some synergies.

Before synergies.

Got it. Thank you.

Sean Hannan, Needham & Company.

Didn't think I was going to get (multiple speakers) back in here so quickly. Wanted to see if I could get your perspective on how the return of labor has been post Chinese New Year and any efficiency pick up you've gotten as a result of that.

I think, again, overall it was very good. I think our problem is that we have a high rate of return. But because of our backlog and again our backlog on the Bel ICM product line has stretched out, it has been difficult to increase our labor. So I think overall we're pleased with the return, but then to hire additional people we are having some concerns.

Okay. So then on that backlog comment, can you talk about backlog and where it stands today? And then following that if you can talk a little bit about the pricing environment.

I think the -- I'll let Colin dig up the backlog. But from a pricing standpoint I think we haven't seen substantial pressure or pricing at this time. I think, as you can see, for the purchase price we paid for the TRP Group, the purchase price of this group, that these businesses are run not overly profitable and I think that's why they have been sold for I would assume a discount price.

So I think the major players out there know that it's very difficult to push people when they're already at the wall. So again, but you never know, but we don't see substantial price reduction, they always want price reduction. But not as bad as we saw two years ago in the midst of the recession. And again, we do hear from some of our suppliers that they are stretching out lead time and when lead times are stretched out historically pricing remains firm or does go up.

Okay, so the conversation for pricing certainly has been there, but in reality what's effectively coming through, we're not seeing a massive impact on you today? And it sounds like that's continuing into the June quarter now?

Yes.

Yes. And I think we'd be a little wary, we are wary because there are some pressures in the marketplace from some of our vendors for material increases, cost increases. And so, and in some regions of China we have seen some fairly substantial annual labor increases again. So we have to be very, very careful and we're watching this very closely.

Okay, great. And then, Colin, I think you were digging up some information on the backlog?

Yes, the backlog is fairly solid. Actually in our single transformer group it went up a little bit. On our passive connectors it's been stable for the last three quarters. Our modules group is (multiple speakers).

I think everything looks very strong, the only -- I shouldn't say strong but relatively the same for the past three quarters. The only area that is of concern is the group we bought from TE, that backed down substantially.

However, they just got in new orders a couple weeks ago, so we think that should change and be a little more positive. But it won't be back to its peak. We felt that once when we were acquiring TRP there was a mad rush to putting orders in so people could lock in their -- get their orders in before any transition occurred.

Okay, great. Thank you.

[Mike Hughes], [SGF Capital].

Yes, a couple questions for you. Just on the cash, did you say how much of that is held overseas?

I guess that question is how much is held in foreign corporations. You can have cash -- you can have foreign corporation [owned] cash sitting in the US, which we often do. It is about 50-50.

Okay. Can you just, as far as financing the pending acquisition, is it possible to use any of the cash sitting in the outside of the foreign subsidiaries without it being taxed or how might that work?

Yes it is, yes. Some of the operations we are buying are international. And so, the cash that we have that sits in international companies can be available for those to help with the acquisition.

Okay. And how much cash do you need to run the Company on a day-to-day basis?

Like just -- I would feel comfortable -- one of the things that happens is the numbers when we publish them at month end they always seem pretty good but during the month there's quite a pull, a drawdown of those balances and they sort of come back up after the month end. It's just typically the way the cycle works in Asia with receivables and payables. So we usually need about $10 million -- $10 million to $12 million to run the Company during a month.

Okay. I'm just trying to think about what portion of the cash you could use for the acquisition.

No, I understand.

Drawing on the -- can you comment on that at all at this point?

Not really, no.

Okay. And then I think on the last call your thought was that even with the step down in revenue into the March quarter you could hold the gross margins a little more level. So was there a negative surprise in the month of March? Just thinking about the gross margins on a go-forward basis, do we get a step back up with revenue growth hopefully into the June quarter?

We expect to step back up revenue growth in the quarter, yes.

And gross margins as well?

Yes.

Okay. And then it looks like historically the June quarter from March has grown by 11% to 12% sequentially. Is there any reason to think that that would not happen this year?

We think it should be fairly solid. The exact figures we never know until the last day of the quarter because of push ins and pull outs. But as Dan said a minute or two ago, we are seeing a little bit of strength building. So we are cautiously optimistic.

Okay. Thank you very much.

Lenny Dunn, Freedom Investors.

This is a very large acquisition, which I know you've been interested in for at least five years. So you finally brought in the big fish. But it would appear from the sales that they are doing that this almost could pay for itself over the next couple of years just from the profits that will be derived from it. Am I misreading that?

We wouldn't say a couple years, but we definitely look for a five-year payback -- four- or five-year payback. Hopefully if we do things properly that would be our intention. We don't see it -- if it goes beyond six or seven I think we'd be a little upset.

Okay. And that's still a very good return on capital, particularly in a very low interest rate environment that we're in now.

We understand that.

Then the other thing is, I understand that accretive acquisitions are always very good. But there is only so much management focus and time and this is a very large acquisition. So wouldn't it make sense that unless a very -- some small bolt-on acquisition came along over the next six months to digest this?

I'm sorry, can you repeat that again?

Well, --.

I think --.

My concern would be that this is a very large acquisition that will certainly take a lot of time and attention from senior management. And that if you took a small bolt-on acquisition on at this point wouldn't make a lot of difference. But another large acquisition, no matter how much it would appear opportunistic, could add a little risk.

I think again, just for the record, and we have done I guess 12 acquisitions. The larger the acquisition we do is a substantially easier acquisition. The biggest problems we ever had is a $5 million or less acquisition.

In addition, I think we should tell you though that we do really have two management teams at Bel. One is focused on the interconnect group. So if you look at the purchases we made from Array, GigaCom, Fibreco, that was one team that was handling that. The other team's focuses are more on the Bel traditional products and that is TRP and (inaudible) Power-One.

So first thing, we do have two different teams that work on these deals. In addition to that, just to give you an understanding, in fact the TRP deal we bought, we acquired a Company with no indirect structure. Basically we got sales and we've got a manufacturing site. We didn't get any salespeople, we didn't get a purchasing people, we didn't get any customer service people.

And I think we completed that and we got done with our transition agreements within six or seven months. And now it runs pretty much as a standalone.

With the Power-One group we get a depth of management, a very well depth of management from all areas from computing it to network technology, accounting, sales. So it really strengthens us.

So I think again, I think it would be a lot easier to do a deal once we have Power-One because we added so much more strength to our Company. So I tend to -- in summary, I think I tend to disagree with you.

No, I understand, you are explaining it so that I understand it. Okay. Well, thank you, and looking forward to the addition somewhere in the third quarter. Okay, and it looks very positive, it looks like a great acquisition and (multiple speakers).

Thank you so much.

I know you've been looking at this for five or six years. So I would --.

I would say 10 years to be honest with you. But --.

Okay. Well, you got it done.

Thank you. (Operator Instructions). And I am showing no further questions at this time.

Okay. We'd like to thank you for joining our call. We do believe that Power-One is probably the biggest event in our history. We're extremely positive about it and we will do everything possible to make it a success to our shareholders. And we look forward to proving that it was a great acquisition for all parties. And thank you for your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.