Bel Fuse (NASDAQ:BELFA) Q1 2020 Earnings Call

0:00 Good day and welcome to the Bell Fuse Inc. First Quarter 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir. Thank you, Sandy. Joining me on the call today is Craig Brocious, our Vice President of Finance, Lynn Hutkin, our Director of Financial Reporting. Before we begin the call, I'd like to ask Lynn to go over the safe harbor statement. Lynn? Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following Safe Harbor Statement. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding positive signs and bills underlying business, the replacement of replenishment orders, and the anticipated improvement in sales and financial results in the second quarter of 2020 as compared to the first quarter of 2020, are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.

1:05 Actual results could differ materially from those 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 impact of public health crises such as the governmental, social, and economic effects of COVID-19, and 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, The impact of changes to U.S. trade and tariff policy and the risk factors detailed from time to time in the company's SEC reports.

2:05 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 statement. We may also discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our release. I would now like to turn the call back to Dan for a general business update. I'd like to thank everybody for joining our call today, and I hope that you and your families are staying safe during this difficult period. Before we begin, I'd like to take a moment to acknowledge our manufacturing associates who are on the front line each day. I would extend a sincere thank you to the associates in each of Bell's factories around the world who continue to come to work each day with courage and dedication to our company and our customers. Turning to our business update, the first quarter was a challenging one as a result of COVID-19.

3:01 As a supplier of electronic components for use in defense, medical, and networking applications, Bell's products are deemed substantial in today's business environment. Our first priority continues to be the safety of our associates around the world as we continue to provide these products for our customers. As of today, we are pleased to report that all manufacturing sites are operating, with the majority of them at near or normal production However, this continues to be a fluid situation. First quarter sales were largely impacted by our factory closures in China for two weeks early in the quarter due to COVID-19. We're estimating that our sales were short by approximately 14 to 17 million due to these closures and a slower return to full production after the extended Chinese New Year. Separately, our sales in the commercial aerospace applications were down 3.5 million compared to the first quarter last year due in part to the grounding of aircraft by one of our aerospace customers.

4:00 These factors are partially offset by 8.2 million of sales during the quarter from the recently acquired CUI business and a 1.7 million increase in sales related to domestic military applications versus the versus last year's first quarter. Further, we started to see a rebound in sales through our catalog distributors during the quarter, which was encouraging. The volume of royalties received in the first quarter was strong at $132.6 million, which includes over $11 million in CUI bookings. Excluding CUI, our first quarter bookings were the same as the first quarter last year and were up 5% compared to the fourth quarter of 2019.

4:46 The increase from the fourth quarter was seen across all our power product lines. Our magnetic solution segment also contributed a noted increase in bookings. These reassuring data points indicate an improvement in sales for the second quarter as compared to the first quarter. We continue to implement a corporate-wide core savings program for all areas for improvement. Once our new ERP system is implemented, It will allow us to further streamline and eliminate redundancies throughout the organization. At this time, we have very limited visibility beyond the second quarter due to the COVID-19 situation. With that, I'd like to turn the call to Craig to go through the financial updates. Thank you, Dan.

5:31 Sales by product segment for the first quarter of 2020 were as follows. Connectivity solution sales were $39.1 million. have declined at 12%. Power Solutions and Protection sales were at $36.1 million, down 16% from last year's first quarter, and Magnetic Solutions sales were $28.8 million, down 25% from last year's first quarter. On a consolidated basis, gross profit margin, excluding R&D expense, declined slightly to 24.2% in the first quarter of 2020, as compared with 24.5% in the first quarter of 2019, as the margin impact of lower sales and operational inefficiencies related to COVID-19 were largely offset by a $2.2 million relief funding received from the Chinese government during the first quarter.

6:28 A portion of the reduction in sales related to anticipated lower demand from certain of our OEM customers as discussed on last quarter's call. We were able to mitigate the impact of these lower revenues by proactively reducing labor and overhead expenses accordingly. Research and development costs were $6.1 million during the first quarter of 2020, a decline of $1.1 million from the first quarter of 2019 as a result of restructuring efforts implemented during the latter part of 2019. Our selling, general, and administrative expenses were $22.1 million or 21.2% of sales as compared with $19.2 million or 15.3% of sales in the first quarter of 2019.

7:18 The $2.9 million increase in SG&A primarily related to a $2 million unfavorable fluctuation in the cash surrender value of our company-owned life insurance policies compared to last year's first quarter. Incremental SG&A costs associated with the inclusion of CUI in the first quarter of 2020 were partially offset by lower ERP costs this year. On a go-forward basis, we would expect SG&A to run between $20.5 and $21.5 million per quarter in the near term. These factors result in a loss from operations of $3.1 million in the first quarter of 2020, as compared to income from operations of $3.4 million in the first quarter of 2019. Other income and expense net was an expense of $88,000 for the first quarter of 2020 as compared to expense of $779,000 during the first quarter of 2019.

8:15 The expense in the first quarter of 2019 largely related to $573,000 in foreign exchange losses. Interest expense was $1.4 million in the first quarter of 2020, down slightly from the same quarter last year due to the lower interest rate in effect during the 2020 quarter, coupled with a reduction in the average debt balance throughout the first quarter of 2020. We had a benefit from income taxes of $772,000 in the first quarter of 2020 compared to a provision of $39,000 during last year's first quarter. The benefit in the first quarter of 2020 reflects a reduction in GILTI tax and tax benefits associated with the CARES Act.

9:10 Earnings per share for Class A common shares was a loss of 30 cents per share in the first quarter of 2020 as compared with earnings of 8 cents per share in the first quarter of 2019. Earnings per share for the Class D common shares was a loss of 31 cents per share in the first quarter of 2020 as compared with earnings of $0.09 per share in the first quarter of 2019. On a non-GAAP basis, which excludes certain unusual and other non-recurring items, ETS for Class A shares was a loss of $0.28 per share in the first quarter of 2020 as compared with earnings of $0.20 per share in the first quarter of 2019. On a non-debt basis, EPS for Class B shares was a loss of 29 cents per share in the first quarter of 2020, as compared with earnings of 22 cents per share in the first quarter of 2019.

10:06 And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at March 31st, 2020 was $68.4 million, a decrease of $3.9 million from December 31st, 2019. During the first quarter of 2020, we generated cash flows from operating activities of $8.2 million. We made net payments of $8.2 million towards our outstanding debt balance and used cash for capital expenditures of $1.8 million, dividend payments of $806,000, and interest payments of $1.3 million. Accounts receivable were $69.1 million at March 31, 2020, as compared with $76.1 million at December 31st, 2019.

10:56 Day sales outstanding decreased slightly to 60 days at March 31st, 2020 as compared to 61 days at December 31st, 2019. The reduction in our accounts receivable balance is largely due to lower sales volume in the first quarter of 2020 as compared to the fourth quarter of 2019. Inventories for $104.3 million at March 31st, 2020 down $3 million from December 31, 2019. The decline was seen in finished goods, partially offset by increases in raw materials and gift balances. The temporary interruption of our manufacturing processes in China earlier in the quarter slowed the rate at which we converted raw materials to finished goods during the quarter.

11:44 Accounts payable were $38.8 million at March 31, 2020, down $5.4 million from its level at December 31st, 2019, primarily due to the payment of CUI past due accounts payable post-acquisition, in addition to lower overhead costs in China during the first quarter related to the temporary facility closures. Bell's total outstanding debt balance was $135.1 million as of March 31st, 2020. Net of deferred financing costs a decrease of $8.6 million since the 2019 year-end balance. This primarily reflects a voluntary prepayment of $8.2 million made during the first quarter of 2020 in connection with an amendment to our credit facility.

12:35 Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $13.19 per share at March 31, 2020, as compared to $13.69 per share at December 31st, 2019. And with that, I'll turn the call back over to Dan. Dan? Thank you, Craig. At this time, Sandy, can we open up the call for questions? Absolutely. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, Christa, I want to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

13:27 The first question comes from Theodore O'Neill at Leachfield Hills Research. Thanks very much. Just a couple questions here. Can you give us some color on customer inventory levels? And you mentioned bookings at the beginning of the prepared remarks. I wonder if you could give us some more color on that as well. All our customers, our current customers, besides the aerospace customer, we think they're in a good situation. We are seeing a lot of bookings come in, reminded every day. And it looks like our bookings are still holding strong. So I'm assuming that if that's the case, our customer needs our parts and they want our parts to come in. Craig, do you want to answer the next question?

14:15 The second part? Yeah, I mean, sure, kind of follow along with that, what Dan said. I think we are not seeing a lot of evidence that, you know, we're seeing that there's a buildup going on. I think it's a, there is true demand in the channel right now. But again, our visibility is somewhat limited, you know, further than our lead times. Okay, that's helpful. Thanks very much. Okay, the only thing I would add to that, you know, currently we see probably if we get 100 calls in, probably 95 are for expediting and maybe only five are for pushbacks.

15:00 So we still see that type of demand out there. Okay, that's great. Thanks. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. The next question comes from Jim Ricciuti at Needham and Company. Hi, thank you. Good morning. I just wanted to follow up on the commentary that you're making about the level of business activity. I'm wondering, if we put aside the commercial aerospace customer and we look at the military, medical, and maybe the networking area, can you give us a little bit more color on which of those verticals you have perhaps more visibility or where you're seeing More order strength.

15:49 So networking is easy because networking works quarter to quarter. And we have seen good orders coming from some key networking customers like a Cisco, like a Nokia. The problem with military is that these programs are 10, 15-year programs. So when the orders come in, you might get an order and you don't see another order because that order holds you for like a year, a year and a half. So that's why we, you know, we don't see anybody push backing. We don't see anybody canceling orders. but we have a lot more visibility with networking because it's a shorter time frame. Now, in addition with medical, you know, there's a big push. You know, we're probably working with five companies all looking to build, you know, ventilators and support medical equipment that you need today.

16:37 So that's, you know, a big rush that I think all companies are faced with. Was that a – how much of a benefit was that – I assume probably a relatively small benefit – Dan, to what you just mentioned in the March quarter. You're seeing the expectation is that it'll be more of a benefit in the June quarter, but I would also imagine that's more of a temporary thing, right? I think now we're seeing a lot of the push is to get product in the second quarter. And still, if you look at what Intel came out with, TI, Maxim, people that are a lot bigger, they all have this concern about what's going to happen in the third quarter. and if they're concerned, I definitely should be concerned. But a lot of this is, you know, hopefully I can get it out in the second quarter.

17:25 Okay. CUI looks like it had a really nice quarter here considering the contribution it made. You know, just because of our experience with that, it's fairly limited. Was there anything unusual about the CUI business? Where is the strength that they're seeing? And is that something we can continue to look for? I think their strength, you know, they really address the second tier, third tier customers very well. They know how to use the catalog distributors very well. So they have a very strong diversified customer base. And I think what happened, you know, at the end of last year, most of the large distributors were working down their inventory. and that's, you know, I think 50% of their sales go through catalog distributors. So a lot of their bookings, a good portion of their bookings came from there. Also, I think they do a lot bigger job with medical companies, the second care, third care medical companies because they have such a broad array of products.

18:23 So they get to see a lot larger market than we probably have. Got it. Now two final questions and I'll jump back in the queue. Looking at the... pulling out CUI. It looks like the Dell standalone margins were pretty healthy, and I'm wondering, was that a mix issue that benefited the margins maybe a little more than we thought considering the environment? Okay, I'll let Craig and then you address that. Yeah, I mean, we got a favorable benefit. I mentioned that we received and some subsidies from the Chinese government that was basically kind of refunds of social security taxes that we had paid earlier in the previous years.

19:18 So that helped to offset a lot of the additional costs that we incurred because of the delays that we talked about in reopening our factories and so on. I think we did have a favorable sales mix. We did, in the power group, there was some business that in the prior year's quarter was margin challenged. That's not there in this current quarter, so that also helped in the overall margin picture. And Craig, that benefit that you saw from the Chinese government, from the relief funding, what did that represent in terms of, did you say, from the standpoint of the margin improvements?

20:04 How many basis points do you think? It was probably, you know, maybe a one and a half percentage point impact to the overall margin for the quarter. Got it. Thank you. I'll jump back in the queue. Just on that note, to add, you know, we are making a concerted effort with our power group We're trying to focus on maybe, again, not the high-value data center customers that we did in the past, where we had substantial sales but very little margin. And I think we're doing a much better job of focusing on the industrial markets, where the margins are substantially better.

20:49 Also, utilizing R&D better and trying to streamline power. It's been a major focus of us since we bought Power One. how to really capitalize on that group. And I think we get to a point now that I think we should start seeing good improvements over the next three or four quarters. Got it. Thank you. The next question comes from Henry Susanto at Gebeli Funds. Good morning, Dan, Frank, and Lynn. Hi, Henry. May I ask about China? What does China market look like and at what production rates are your facilities in China running at?

21:36 Okay, so China really looks very, very strong at this point in time. And for us, they're our driving engine. The only concern that we have is from a logistics standpoint. You know, getting product in and out, you know, shipments, air shipments, you know, a lot of the commercial airlines have cut back substantially. But from a manufacturing standpoint, and a good portion of what we build in China goes in China to the subcontractors like the Foxconn or Jabil. or Flextronics. So we've been very, very fortunate that China was only shut down for two weeks. And then it roughly took them about four weeks to get back to roughly 90, 95% production.

22:24 And hopefully the gap we can make up with overtime. So if I may clarify, so 95%, it means like 95% to run the way prior to COVID-19. I think maybe to qualify that a little bit, Andy, we've got about 90% of our workforce back, or 90 plus if you want. But because of the actions we had to take to facilitate the changes for health and safety and so on related to COVID-19, so our efficiencies aren't back to that prior COVID level.

23:11 Even though we've got 90% of the employees back, we're not quite at 90% in terms of an output efficiency. Got it. And Craig, how should we think about gross margin and OPEX in Q2 and the remainder of the year? I know that for the second half of the year, there are uncertainties, but I'm wondering what kind of flexibility you have one way or another. Yeah, I mean, we can look out to the second quarter. Like Dan said earlier, we don't have a lot of visibility out past that. And this comment is assuming that the factories that are currently operating today will continue to operate.

23:57 That changes, can change on a daily basis. I would think that our margins would be comparable, maybe slightly down. to Q1 because we did have that benefit from the Chinese government to impact our margins in Q1. So I would think for Q2, we should be slightly down. And how about OPEX, Craig? Does Q1 OPEX level represent a good baseline? Yeah, I believe it does. I mean, we did have the The $2 million item that related to our insurance policy, the cash surrender value on the insurance policy, we had that adjustment based on the market values of the underlying securities.

24:51 We don't expect that to be recurring every quarter, so we believe that $20.5 to $21.5 is a good baseline profit. But then I'm interested in hearing more about networking markets. You indicated that orders are good. I'm wondering what kind of end products drive those orders. When you think about networking, I'm wondering whether there's some, let's say, a temporary benefit of higher bandwidth requirement because of remote work and remote school. But I'm wondering whether there's more strength beyond that. You know, again, since all products go into so many different, the same products go into so many different products at Cisco, it's very difficult to determine when the end market is. But if you take, again, looking at Cisco and looking at, yeah, you know, addressing big markets out there, that's all I can say.

25:52 I don't know specifically, you know, how does it affect the person that's working from home? Is that where their business is coming from? Or are you going to Verizon? I don't have that granular detail. Got it. And then any points or symptoms of how self-directionally it may look like in T2, let's say, non-connectivity, magnetic power, and CUI? Any quick antics? Lynn, you want to address that one? Yeah, I'm sorry. Can someone repeat that question for me? It came through muffled. Lynn, I would like to know whether there are some insights into what the expectation for different segments like connectivity, magnetic and power, and also like CUI when it comes to Q2, whether you expect directionally some of them whether they flap up or down?

26:55 Oh, sure, sure. So, you know, I think For magnetics, that's probably the one area that we anticipate seeing some growth in Q2. Our demand orders received throughout 2019 had been low from a particular end customer as they had an over-inventory situation. And that had been worked through and we've been seeing replenishment orders there. So that does look strong. CUI bookings in Q1 were one of their strongest bookings quarters that they've had in their history. They had over 11 million in bookings for Q1, so we do expect them to have a strong Q2 coming up here. On the rest of the power side, it does look a bit challenging.

27:56 There was one customer that we had last year in the cloud space that there were some challenges with the tariffs. And so we do expect some increase this year versus last year related to that customer. And then on the connectivity side, we do see strength in military customers. We continue to see challenges on the commercial aerospace side and also our structured cabling side with our Stewart products. Those are areas of challenges. So we have some offsets within connectivity. But I guess just more broadly, distribution impacts all of our product groups, including the recently acquired CUI. and we do expect that to start picking up.

28:54 We did see some rebounding in catalog distributors in Q1, which is always a good sign. And that does impact all three of our product groups. So we hope to see some growth there. The only thing we would add is circuit protection. The only thing we would add under power, we have our circuit protection group and they almost doubled their backlog. so that's a strong side because circuit protection group does have a diversified customer base. Got it. Thank you, Dan, thank you, Craig, and thank you, Lynn. You're welcome. The next question comes from Jim Ricciuti at Nedham and Company. Thanks. I just had a follow-up with respect to the shipments that had been deferred from...

29:45 I was just wondering, what are the challenges you experienced in the quarter in China? Was there any shift from potentially to competitors that had manufacturing capabilities outside of the affected areas where you might have temporarily lost some share? Or do you feel that all things considered, you're able to hang on to share?

30:36 I think, to be honest, I think the shift came before this. I think it came through tariffs. So we did have one or two key customers, you know, didn't want to be in China because of the tower situation, and we lost them, but not because of COVID-19. More importantly, though, now when the whole world's being affected, if you look at Malaysia, you know, Thailand, the Philippines, We do see opportunities out there where people are coming to us. Again, back to the circuit protection, you know, our competitors are not building in China. They're building outside of China, and they haven't been able to produce parts, you know, in four to six weeks. So we do see some upside now because we're based in China. And that's potential upside that benefits you at least in Q2. We'll see if it helps in the second half.

31:27 Just so you know, Jim, the way we try to do this in all possible, if a customer comes to us and they haven't been to us before and they want us to fill this void, we would sign up. They would have to sign up for either a six-month agreement or they would have to take a price increase. But we won't accept one-off orders. Got it. Okay. Thank you. Thanks. Thanks a lot. Once again, if you would like to ask a question, please press star 1. The next question comes from Lenny Dunn, a mutual trust company of America. Good morning. First of all, Dan, I wanted to compliment you. It's the first time I've ever seen you buy stock, and you've bought a number of times.

32:16 So that does show confidence. Just don't tell my wife. Oh, boy. The other thing is, this is kind of a curiosity question. Obviously, CUI seems to have been bought at the right price, and it's helping you. But I was wondering if you realized that they did have late payments on receivables, because I noticed that you, in your release, and many others have discussed that. And obviously you don't do that, so you paid it. But were you aware of it at the time of the purchase?

33:03 Craig? Yeah, we were aware of that earlier on in the discussions. I think what happened was as we got through to the period prior to closing, I think it got a little worse than what we expected. In our purchase agreement, we did have an adjustment for working capital, so that did not really hurt us at all. Yeah, I figured that out, and also I'm sure going forward it won't be a problem because historically you've been very good about paying your bills. Maybe too good is the problem.

33:52 Well, you know, you have to. you establish a good relationship then people tend to want to service you better I understand because no one really knows what the third quarter will be like but if assuming that this doesn't work out in some disastrous manner and I'm inclined to think it won't but no one knows for sure Would you say that you think that business will be reasonably normal in the third quarter if we don't have some setback on the virus? Greg, do you want to touch that one?

34:42 Yeah, I mean, I think obviously it all depends on how quickly the global economy recovers. We're not anticipating that Shark V recovery that people talked about earlier. We think it's going to be more gradual unless there's a major setback somewhere. We think we're in a pretty strong position in the way our cost structure is set up and our customer base and so on. I think we're in a good position to prosper. I think the other key point, you know, maybe historically we might have been a little overly focused on the top line. And, you know, now we are trying, you know, a major effort that we're hopefully complete.

35:32 You know, it's going to take us maybe because we're moving products around that we really want to look at, you know, the bottom line and focus on, you know, growing our margins and growing our profit. And if that means, you know, we lose some top line growth, I think at this point we're willing to accept that fact. So I think, you know, whenever this ends, I think we'd be a lot stronger company with the moves that we're putting in place now and the actions we're taking today. It looks that way. It looks like this is a totally different picture than you had on the last conference call. So I'm very pleased with that, by the way. But it does look that way, and I hope We did okay with the CUI and the Power One was highly questionable. So I hope that we can kind of just work with what we have and integrate that and make money with it. Is that the plan at the moment?

36:36 I think with CUI, we don't look at it as a synergistic acquisition at all. I think they have a really good model that we like, a diversified customer base. and just overall market. I think what we're trying to do is we don't think we want to combine things and take costs out at all. What we are trying to do is we do have companies that have broader-based products like signal transformer, like the circuit protection, and how can we capitalize on the creativity of CUI and how they go to market and the margins they bring that we don't have. and really have a good model of CUI because they work because they're a marketing company, they have no manufacturing.

37:28 So we think that's a model that can be an important player at Bell. And so again, what we're looking is to grow that business, that model, and look at how do we do maybe more private labeling, more joint ventures with companies. and not be overly focused. If we don't manufacture it, we don't sell it. And look at CUI as a viable model that we can apply to other companies. There are no further questions. I'd like to turn the call back over to Dan Bernstein for now for closing remarks. Once again, we're very appreciative for everybody to be on the call during this difficult time. And we thank you for the attention you give, Val, and hopefully we can deliver going forward. And please be safe.

38:19 This concludes today's call. Thank you for your participation. You may now disconnect.