Bel Fuse Inc /Nj Q1 FY2021 Earnings Call

Good day, and welcome to the Bel Fuse Inc. First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead.

Thank you, Jennifer. Joining me on the call today is Farouq Tuweiq, our CFO; Craig Brosious, our Vice President of Finance; and 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 the anticipated impact of the acquired EOS Power business on our results, anticipated higher sales for our Magnetic Solutions group during the second and third quarters as a result of strong bookings in the first quarter, expectations regarding our scheduled backlog as an indicator of stronger sales in the second and third quarters, expected contributions to net earnings from our rms and EOS acquisition, and cost savings from restructuring efforts, and our efforts to continue to optimize our cost structure are all forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 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 impact of public health crises, such as the governmental, social and economic effects of COVID-19; 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 US trade and tariff policies; 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. We also may 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.

Thank you, Lynn, and thanks everybody for joining us on the call today. I hope that you and your families continue to stay safe during these difficult times. First, I'd like to provide an update on COVID-19 and how it has impacted our facilities. Overall, I'm pleased to report that all manufacturing sites globally continue to be operational throughout the first quarter. Our most recent acquisition, EOS, is based in Mumbai, India where they're going through a very difficult time. The factory continues to be operational as they manufacture essential products and protective measures have been put in place to prioritize the safety of our new associates. We would like to thank these new associates who are working each day under these difficult conditions. Before getting to our results, while Bel does not normally comment on market activity, we realized there was a substantial amount of trading in Bel's stock on Friday, and the company does not know the reason for this increased trading activity. Turning to our results, we saw a 6% improvement in sales as compared to last year's first quarter. Demand in each of our markets was strong with the exception of commercial aerospace. Both eMobility and Circuit Protection had exceptional quarters and demand from our distribution partners was strong, which is a good indicator of general market demand to their broad customer base. Sales within the Power Solutions and Protection group were up $7.5 million or 21% from the first quarter of 2020. CUI turned in another strong performance this quarter with a $2.1 million increase in sales over last year's first quarter. Our products sold into eMobility applications were up $1.5 million, a 100% increase from the 2020 first quarter and fuse sales were up $1.6 million, an increase of 60% from last year's first quarter. The areas of growth were partially offset by elimination of low margin products within the group. Within our Connectivity segment, sales were down $1 million or 3% in the first quarter of 2021 versus the same quarter in 2020. While we continue to be impacted by year-over-year comparisons related to the commercial aerospace market, we saw a partial rebound in the end market versus the fourth quarter of 2020. Looking at that trend from the fourth quarter of 2020 to the first quarter of 2021, commercial aerospace increased by $1.2 million or 57% and payoffs through distribution by $3 million or 30%. Sales within the Magnetic Solutions business were fairly consistent as compared to the first quarter of 2020. We have strong bookings in this segment over the past two quarters and our production team is working through some challenges regarding material and labor availability in order to accommodate these increases in demand. Overall, our margins were down in the first quarter of 2021, primarily driven by the industry-wide material shortages resulting in higher material costs. Labor costs also continue to rise as labor availability in China has been impacted by the lack of traditional workers migrating during Chinese New Year holidays as a result of the pandemic this year. Our cost-saving initiatives from prior years have mitigated higher costs to a certain extent and the remaining impact has significantly been addressed through price increases to all our customers. We anticipate the majority of these price increases to go into effect during the second and third quarters of 2021. On the acquisition front, our first quarter acquisitions of rms and EOS have both run smoothly and integration has been proceeding as planned. It is encouraging to see that rms was accretive to Bel's results in the first quarter of 2021 and we anticipate EOS to be immediately accretive to our results in the second quarter. Our backlog of orders was $234 million as of March 31 and we reached $264 million by the end of April, which is a strong indicator of top-line growth for the balance of the year here. Our ability to fulfill orders in the backlog will be dependent on both the availability of materials and labor. We will keep a close eye on costs and availability of raw materials and labor in order to service our customers as timely as possible. I would like to now turn over to Craig to go over the financial update. Craig?

Thanks, Dan. Sales by product segment for the first quarter of 2021 were as follows; Power Solutions and Protection sales were $43.6 million, up 20.6% from last year's first quarter; Connectivity Solutions sales were $38.1 million, a decline of 2.7%; and Magnetic Solutions sales were $28.9 million, largely the same as last year's first quarter. Preliminary gross margin by product segment for the first quarter of 2021 was as follows: Power Solutions and Protection had a gross margin of 24.7% in the first quarter of 2021, up slightly from 24.3% in last year's first quarter; Connectivity Solutions gross margin was 25.7%, down from 28.6% in the 2020 quarter; and Magnetic Solutions gross margin was 13.7%, down from 21.2% in last year's first quarter. On a consolidated basis, gross profit margin decreased to 21.9% in the first quarter of 2021 as compared with 24.8% in the first quarter of 2020. Gross margin during the first quarter of 2021 was impacted by industry-wide increases on raw material pricing and higher labor costs driven by wage increases and unfavorable foreign exchange fluctuations. Bel implemented price increases to its customers and distribution partners to offset these higher input costs, with many of those price increases taking effect in the second quarter. The margin comparisons were also affected by $2.2 million in COVID-related subsidies received in last year's first quarter that did not repeat. Research and development costs were $5 million during the first quarter of 2021, a decline of $1.1 million from the first quarter of 2020, primarily due to the closure of our Switzerland R&D facility in mid-2020. Our selling, general and administrative expenses were $21 million or 19% of sales, up slightly from a dollar perspective from the first quarter last year. SG&A salaries and fringe benefits were $1.4 million higher as compared to the first quarter of 2020. These costs were partially offset by a reduction in commissions and other selling costs of $632,000 and lower travel expenses of $416,000. During the first quarter of 2021, we closed on the sale of a property in Hong Kong. This transaction resulted in a gain of $6.2 million, which is included in our first quarter results. These factors resulted in income from operations of $4.5 million in the first quarter of 2021 as compared to a loss from operations of $1.1 million in the first quarter of 2020. Other income and expense net was an income of $546,000 for the first quarter of 2021 as compared to an expense of $2.1 million during the first quarter of 2020. The expense in the first quarter of 2020 largely related to a $2 million loss on the company's SERP investments, which are included in this line item. Interest expense was $800,000 in the first quarter of 2021, down from $1.4 million in the same quarter last year, as a result of decreases in both LIBOR, the company's spread on its credit facility driven by EBITDA improvements and the overall reduction in our outstanding debt balance. We had a provision for income taxes of $1 million in the first quarter of 2021 compared to a benefit of $772,000 during last year's first quarter. The benefit in the first quarter of 2020 reflected a reduction in GILTI tax and tax benefits associated with the CARES Act. Earnings per share for Class A common shares was earnings of $0.24 per share in the first quarter of 2021 as compared with a loss of $0.30 per share in the first quarter of 2020. Earnings per share for the Class B common shares was earnings of $0.26 per share in the first quarter of 2021 as compared with a loss of $0.31 per share in the first quarter of 2020. On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was a loss of $0.23 per share in the first quarter of 2021 as compared with a loss of $0.28 per share in the first quarter of 2020. On a non-GAAP basis, EPS for Class B shares was a loss of $0.23 per share in the first quarter of 2021 as compared with a loss of $0.29 per share in the first quarter of 2020. And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at March 31, 2021 was $74 million, a decrease of $10.9 million from December 31, 2020. During the first quarter of 2021, we made net payments of $16 million in connection with the acquisitions of rms and EOS, $1.5 million toward our outstanding debt balance and used cash for capital additions of $1.2 million, dividend payments of $815,000 and interest payments of $627,000. These items were partially offset by cash flows generated from operating activities of $3 million and $6.7 million in proceeds received from the sale of property. Accounts receivable were $74.1 million at March 31, 2020 as compared with $71.4 million at December 31, 2020. The primary driver of the increase related to the 2021 acquisitions of rms and EOS, which added $3.1 million to our receivable balance. Days sales outstanding increased to 60 days at March 31, 2021 as compared to 57 days at December 31, 2020. Inventories were $106.7 million at March 31, 2021, up $6.6 million from December 31, 2020. The increase we've seen in raw materials and work in progress was largely due to the inclusion of $5.3 million from the 2021 acquired companies. Accounts payable were $42.5 million at March 31, 2021, up $2.7 million from its level at December 31, 2020. The 2021 acquired companies accounted for $2.2 million of this increase from the year-end level. The outstanding debt balance was $114.3 million as of March 31, 2021, net of deferred financing costs, a decrease of $1.3 million since the 2020 year-end balance. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $15.09 per share at March 31, 2021 as compared to $15.04 per share at December 31, 2020. And with that, I'll turn the call back over to Dan.

Thank you, Craig. Jennifer, we'd like to open up the call for questions now, if possible.

And we'll go first to Theodore O'Neill with Litchfield Hills Research.

My first question is about the eMobility market, which is getting an awful lot of discussion this quarter. Could you give us an idea about, is it scooters, is it bikes, is it both? Do you see any regional differences in the market? And how big do you think the opportunity could be?

I think at this time, it's too early to measure the opportunity. What our niche is we're not really focused on the automotive market overall. We do have some good business from a circuit protection perspective. But the growth that we got from eMobility, we're focusing on now, comes from our Power group, and what we're looking at are niche markets. Specifically, post office, school buses, sanitation, mining equipment. These are very specific niche markets where they're moving to electric vehicles. Again, we believe the opportunity should see substantial growth, at least in the next five to six years. And that’s where we’re specifically focusing, particularly in niche markets and also charging markets.

It's not scooters and e-bikes?

No, absolutely not. But Theo, if I can add, we did work with a company called StreetScooter that was building mailbox deliveries in Europe. So more of a government-specific requirement type of situation, but nothing that’s mass market.

You've mentioned in the prepared remarks that you've seen an uptick in commercial aviation business. I mean, I guess that was probably pretty low. But how much more headroom do you have on the commercial aviation business, if we get back to something looking close to normal?

I mean, what is normal? Again, I think if you look at the recent orders, you see Airbus receiving a big order last week from Delta. I can't mention anyone else. So we do see opportunities. But again, my hands are tied because of agreements. Basically, it can't get much lower at this point. We do see consistent improvement in aerospace for the next three to four years until we get back to normal based on all the research we've read.

I like that answer.

If you want, Dan, I can certainly comment on the broader commercial aerospace end market.

Go ahead, Lynn.

So as we see in the fourth quarter, our total commercial aerospace sales, and this is direct, not through distribution, were around $2.1 million. In the first quarter, we saw that go up to $3.3 million. So definitely some recovery here. But to put it in perspective, last year's first quarter, we were at $5.1 million. So it's definitely a partial recovery at this point, and we anticipate it being along runway, no pun intended, in getting back to that normal we had.

And also, you should know that we are benefiting from our new acquisition, rms, which is dedicated to the aerospace industry as well.

We'll go next to Jim Ricchiuti with Needham & Company.

I just wanted to pursue the increase in backlog. So I think you guys reported in your K, you had a backlog at the end of February of around $180 million. So this is a big increase. And I'm just wondering if you could maybe talk a little bit about which areas, which segments? I mean, you alluded to the demand in eMobility. But I wonder if you could talk a little bit more broadly about where you're seeing business recover so strongly and how does this compare with some other cycles?

Every cycle is kind of unique, but this is truly broad-based if we take out commercial aerospace. Each one of our product groups is seeing some good substantial increases, dependent on where the lead times are. Currently, our Power group has the longest lead times for any products because they do use semiconductors. These lead times have gone from 12 to 14 weeks up to 32 weeks. So we've seen that stretched out, which has really helped increase the backlog. Our concern at this point is historically whether double ordering is taking place because of the long lead times and material shortages, and that's what we have to monitor. But if we look at our customers and the different types of products, our fuse product line is not our biggest product line by any means, but it does have the broadest customer base because it goes into so many different markets, which is a great sign. We see strength in our distribution business across industrial, commercial, networking, computing, security, and medical markets. Again, our only concern is that double booking occurring due to long lead times and other suppliers.

Yes, I mean you’re anticipating my next question. And how do you monitor, you've gone through so many of these periods like this? Is there any better way to monitor it than, say, in the past, when sometimes you guys are caught off guard?

Historically, you try to establish non-cancelable orders, meaning if you want the parts, you need to pay upfront. These are the type of things you watch based on your contract agreements. So again, you just try to assess if someone really wants the parts, will they pay a premium for delivery and how much do they want to pay upfront to guarantee delivery? So those are the methods we consider and also non-cancelable orders, which can help as well.

Are you guys seeing any signs that the component constraints are potentially a risk factor just for some of your customers due to their own supply chain challenges, which might lead to some disruption?

No, we see some slight indications of that where we’re not getting all the parts needed to build a finished product, which can push us off. However, the challenge with that is due to high demand from our other customers. If a customer tries to reschedule their order, we can send it to another customer instead. So if you're an aggressive customer, you're going to take the parts in and wait the extra four to six weeks for the other parts to come in, or you might lose your parts altogether. Does that make sense?

I'll jump back in to ask if the SG&A was a bit higher than indicated in the last call, which was around $19 million to $20 million. Is this the level you expect to see going forward, and will it likely trend up with the anticipated growth in sales?

Craig, can you answer that?

Yes, I think you're correct, Jim. I think it will trend up a little bit due to the increased activity related to travel and such in upcoming quarters. We'll also have some incremental expenses coming from EOS that basically joined Bel right at the end of the quarter. So we'll see a little bit of an uptick there.

We'll go next to Hendi Susanto with Gabelli Funds.

First question, Dan, I saw you talk about price increases that will take place in Q2 and Q3. Would you be able to pass on 100% of the price increase, or is there some sharing component in your discussions with your customers?

There’s always a sharing aspect with our customers. However, our goal, which is consistent across the industry, is to assess each customer along with what our competitors are doing. Overall, we plan to implement a price increase of 5% to 12% depending on the product's position in the market. For a newly introduced product, we might aim for a 5% increase, while for a mature product, we’d expect an increase closer to 8% to 10% to enhance margins. As you know, we have previously chosen to walk away from products with low margins when customers do not accept our price increases.

And then in terms of gross margin expectations for this year. Last year, you did improve gross margin quite significantly. With raw material cost increases and price increases, what are the puts and takes on your gross margin for 2021?

Craig, I think that's a good question for Farouq. What do you say, Craig?

Yes, I agree. That's a good question.

So from a gross margin perspective, obviously, we saw the dip, but as alluded to in the opening commentary, last year's gross margin was aided by a bit of one-off government subsidies. So when we look at an organic or adjusted basis, the delta is not as wide. With that being said, we are laser-focused on our gross margin. To Dan's comments, we are seeing changes due to price increases and raw material increases. We are monitoring that situation closely as we aim to prevent significant drops in gross margin in addition to our other, call it, organic focus on it. Does that answer your question, Hendi?

And then, Dan, last question. Do you have insight into IT hardware? Many companies talk about substantial recovery in the second half of 2021, and I’m wondering what your insights are regarding data centers or IT hardware markets.

Regarding hardware, we still haven't seen much impact; that's the only area where our backlog is very strong for those products. However, we haven't seen positive movement from major companies like Cisco, Siemens, and others. Data has remained strong for us, and I don't think data farms have cut back at all. We have opportunities that we're addressing in certain countries. Again, we're looking at niche markets, not the Facebooks, Amazons, and Microsofts of the world, but rather second-tier customers, where we believe we can offer benefits with our technology and service.

And at this time, we have no further questions, and that will terminate this conference call. Thank you for participating.

Thank you for joining us today.