Bel Fuse Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day and welcome to the Bel Fuse Incorporated First Quarter Results Conference Call. [Operator Instructions] Today’s conference is being record. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.

[Daniel Bernstein:]

Thank you, James. Joining me on the call today is Colin our VP of Finance; and Frank our Manager of Finance. Before we begin the call I’d like to ask Colin to go over the Harbor statement. Colin?

[Colin Dunn:]

Thank you, Dan, and good morning, everybody. Except for the historical information contained in this call, the matters discussed on this call including the statements regarding stronger sales for Bel Power Solutions in the second half of 2016 and potential growth in the Commercial Aerospace business are 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

[Daniel Bernstein:]

Thank you, Colin. At this time we would like to open up the call for any questions that you might have.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Sean Hannan with Needham & Company.

[Sean Hannan:]

Yes. Good morning folks.

[Daniel Bernstein:]

Good morning, Sean.

[Sean Hannan:]

So I have some questions for you just to make sure that I understand the results accurately. That $2.8 million benefit to SG&A what we are seeing that specifically reflected as a reduction within that SG&A line. Is that correct?

[Daniel Bernstein:]

Yes. That's correct.

[Sean Hannan:]

Okay. So otherwise that would have been about $20.5 million. So is that something that in some manner is recurring or do we go back to a more normalized SG&A spend say moving forward in kind of that $20 million or maybe a hair above type of range.

[Colin Dunn:]

Sean, so let me just elaborate on that. So those credits represent certain value added in business tax items that we are getting a benefit from because we have settled some negotiation with taxing authorities. So we're still in negotiation with certain taxing authorities and we anticipate that we will have additional benefits in Q2 and possibly further on during the year.

[Sean Hannan:]

Okay. Anyway to give us some type of sizing around those benefits and any color in terms of why that's not pulled out of your adjusted results?

[Colin Dunn:]

So the first part, we can’t provide an estimate at this point as we are still in negotiations. The second part is we have the expense or some portion of that expense in the prior year numbers which we did not head back and take a benefit for in the adjusted numbers.

[Sean Hannan:]

Okay. That's fully understood. All right. And then in terms of going to the actual – the income tax benefit that we had, we're looking at a different scenario there correct where we had at least – when you come down to the adjusted net income your say adjusted tax benefit would be about $2.7 million correct?

[Colin Dunn:]

That should be the amount that was included on the non-GAAP tables.

[Sean Hannan:]

Yes, okay.

[Colin Dunn:]

There is a portion of the benefit that was related to unrecognized or excuse me uncertain tax position that we settled on, which is kind of the scenario that we have in SG&A. There are two items that are tied together, one is the SG&A, one is the provision.

[Sean Hannan:]

Okay. So would you similarly expect that we would have tax benefits next quarter and it's the third quarter?

[Colin Dunn:]

Yes.

[Sean Hannan:]

Okay. But no sense of being able to size that?

[Colin Dunn:]

Not at the moment, no.

[Sean Hannan:]

Okay. So you guys typically have a normalized at least if I think of last year's 25-ish type of tax rate, right now it seems like that would be extremely unclear for what that would end up to be this year. Is that accurate, is that fair?

[Colin Dunn:]

I think the 25-ish is good from an operating point of view, but how it's going to get modified it will certainly bring it down.

[Sean Hannan:]

Okay. All right. Thank you for all that. Now, if we think more from a demand standpoint and Dan this might be a little bit more for you, obviously the first quarter we have Chinese New Year so that can be a little disruptive, but can you talk about how demand generally did through the quarter. And then how did we exit the quarter trend wise to where we are now? Thanks.

[Daniel Bernstein:]

Okay. Again, we don't hear too many positive things out there, still a wait and see [indiscernible] market as we see that seems very strong to us that might pull us along is the Open Compute, the Amazon’s and Google’s, the Facebook’s, the data storage to cloud is the only area that we see growth. Traditional companies like the HP, the Universe, the Cisco’s we see probably negative sales going with them. For the first quarter we think we’re pretty confident based on historic data that our second quarter will be better than the first quarter. However, compared to last year I think it will be less than last year’s quarter. And at that point, I think hopefully we should be pretty close with the previous third quarter after that.

[Sean Hannan:]

Okay. So up sequentially the next two quarters, but still down on a year-over-year basis in June and perhaps at par in September?

[Daniel Bernstein:]

Yes, I think that’s our gut feeling at this time.

[Sean Hannan:]

Okay. That’s helpful. And then last question here, then I’ll jump back in the queue. So you gave an indication within your release you are stepping up efforts around commercial aerospace. So just want to get a little bit more color around that. Is that a specific push within sales or you making investments and actively seeking maybe M&A targets in order to push that up? How do we think about that effort from your end and what should we expect? Thanks.

[Daniel Bernstein:]

Okay. Boeing is one of our biggest customer – the biggest customer in aerospace. We have a licensing agreement on radio part that [indiscernible] we spend a couple of million dollars to get that in development. We are now pushing that in seeing if we can became a second source to radio and that’s been a lot of our commercial aerospace push forward is. Again in the connecting area using the radio design and being a second source for a lot of people either to Boeing and the people that support Boeing. But again from an acquisition standpoint I don’t think we’re overly aggressive. However, it something does come across our desk, that make sense. We definitely will look at it, but with the debt situation now we are being somewhat cautious.

[Sean Hannan:]

Okay. Thanks for the color. I’ll hop back in the queue. Thank you.

[Daniel Bernstein:]

All right. Thanks Sean. Talk to you later.

[Operator:]

Next we’ll hear from Harsh Kumar with Stephens.

[Harsh Kumar:]

Hi, guys I wanted to ask a couple of questions on your business. I think Dan you started talk about this earlier in terms of end markets. I am curious why you are seeing some of the traditional electronics manufactures act and be so negative or maybe you could talk about why your business is – why you don’t sound too excited about business with them I get the cloud part, but I was more curious about is there something going on in the industry or the marketplace was making so negative on the Cisco promo?

[Daniel Bernstein:]

No I’m not only negative, yes hopefully a little bit more realistic to negative, but I think one problem we had is I think if you look at everybody and most CEOs in America today I think they’re more concerned about buying back stock, they’re reinvesting in the company. So I think that’s affected a lot of the equipment that people would be buying from Cisco and another company, large investments in automating things and so forth. And then I think there is no question that the Cisco’s and Universe the major players out there, the HP’s and even Oracle have been affected by these major companies building their own hardware. But now they're trying – as you know Oracle is making a major play into storage themselves and how they address I think and maybe a storage supplier and they can – that we can attain that marketplace. So again I think at this point there is a lot of transition going on in the industry and how the big guys – again eight, five years ago or six years ago everybody bought all their equipment from the major networking telecom companies and now this big push of people building their own equipment and how that's going to fall out or not and how these other major companies going to adjust for it. So I think and when we talk about the big days in the networking industry I just think at this point there's a transition and we don't know how that transition is going to end up.

[Harsh Kumar:]

Hey, Dan let me follow that up but something else you said you are expecting business to pick up in the back half a little bit from here. What's giving you confidence if that’s the case and then again is in the end market or something specific to you guys?

[Daniel Bernstein:]

I think the back half of last year we got beat up so bad, so I don’t think we can get beat up any more. So it’s not relating to the market size. And we keep open and open then sooner or later all the good stuff we did in power that that might turn our way. But again I think the [driving factor] why we said we’ll bottom out in the second half of this year, because we bottom out in the second half of last year.

[Harsh Kumar:]

Fair enough. And may last question is we cover a couple of defense type place and they’re all pretty optimistic about what's going on just between geopolitical stuff and also just what they're seeing specifically. You’ve got some defense exposure, you touched upon their briefly. I’m curious how you feel about that business and let’s say six months to two years out?

[Daniel Bernstein:]

Okay. Again if you look at Cinch Connectivity Solutions or Cinch Group, their sales only declined 4%, well in the Bel product – and that supports network and we were down 18% to 24%. So again, we think that and that’s why we are very fortunate with our recent acquisitions of the MSM Group and the Cinch Group that we can support The Raytheon, the Boeing. The banker uses all the people that support the aerospace industry and we are on a lot of [indiscernible]. We do think that market does seems strong over the next three or four years with the political climate that we face with.

[Harsh Kumar:]

Fair enough, guys. That’s it from me. Thanks, Dan.

[Daniel Bernstein:]

Thanks. Appreciate the time.

[Operator:]

We’ll now hear from Hendi Susanto with Gabelli & Company.

[Hendi Susanto:]

Hello. Hi, Dan and Colin.

[Colin Dunn:]

Hi, Hendi.

[Hendi Susanto:]

First question, Dan I'm wondering how much exposure you have to automotive market?

[Daniel Bernstein:]

Very, very small. I would say less than probably 1%. No we don’t think whatever at this time besides [indiscernible], we are looking at some smart grid devices. Power One, the company we acquired, major effort into high efficiency vehicles. They work very closely with a couple of companies and we can have put that on the back burner. We just thought there was a lot of effort there that we could use in other – for our key customers. We think there's so much still we can do with power and the customers we service today then look for new opportunities in automobile and other opportunities. So again automobile has not been and we think our businesses are tough. However, we think the automobile business because you already have three or five major players there. There’s a lot more tremendous price pressure in that marketplace in what we participate in.

[Hendi Susanto:]

And then given the weaknesses in your end market, any insight into inventories at your customers or channel partners whether it’s high, whether it’s lean?

[Daniel Bernstein:]

I think in distribution in the first quarter they had – stocks are at pretty high level and I think they have been working of those stocks over the last couple of months. And I think now – again people are very cautious before they order. Again however, even in a down market I like to make this clear – even in the down market, we think with the power group only that we should be able to grow that business because it’s such a huge marketplace for us, the customers want to deal with us, they think we have a lot to offer. When we talk about the magnetic area mostly with our ICM Group, we don't think we can grow that market much further and if there's a downturn we can't do anything about it. Even in the connector space we've penetrated it very well. However, we do think in the power business we can buck the trends, because it’s such a larger diversified market and we haven't even scratched the surface yet.

[Hendi Susanto:]

Okay. And then last question for me for Colin. Colin in terms of gross margin despite of weaker revenue gross margin is relatively stable at 19%. So how should we expect the trajectory of gross margin going forward if there's any additional revenue can we expect that gross margin would increase accordingly.

[Colin Dunn:]

Yes. That’s yes.

[Hendi Susanto:]

Thank you.

[Operator:]

Our next question comes from Lenny Dunn with Freedom Investors Corporation.

[Lenny Dunn:]

Good morning. In some ways I am glad to see you took this write-off, because it certainly makes the book value hard. My question is what was the depreciation on the assets that you wrote off that we were using on a quarterly basis?

[Colin Dunn:]

So the goodwill impairment resulted in an impairment of goodwill and trademarks and both of those intangible assets are not amortized, because they are indefinite-lived intangible assets, so there is no associated depreciation or amortization with those assets.

[Lenny Dunn:]

Okay. And I Just wanted to understand and trying to breakdown the cash flows, they don't look that bad. I guess that's kind of a kissing your sister remark, but they don't look that bad.

[Daniel Bernstein:]

I will say good, Lenny.

[Lenny Dunn:]

Okay. And you anticipate now that we're into the more normal quarters because you don't have the Chinese New Year, better cash flows?

[Colin Dunn:]

I think we're looking for fairly solid continued cash flow. If business ramped up dramatically, obviously the cash flow might slow a little bit in the interim as we start to put the money back into working capital, but to financing the ramp ups, but this company is a pretty lean company. And we've got a history of decades of in good and bad time drawing cash and that certainly is not going to change.

[Lenny Dunn:]

And I noticed that you paid voluntary payments on the debt which is good. Do you anticipate doing that during in assuming quarters or you just going to at least stick to the schedule?

[Colin Dunn:]

No, we will continue with that policy.

[Lenny Dunn:]

Okay. That's all I had I believe there is some good understanding.

[Daniel Bernstein:]

Okay. Thank you.

[Colin Dunn:]

Thanks, Lenny.

[Operator:]

[Operator Instructions] We will now hear from Sean Hannan with Needham & Company.

[Sean Hannan:]

Yes. Thanks for taking the follow-up here just administratively, I'm sorry, can you repeat the segment revenues?

[Daniel Bernstein:]

Yes, Magnetic Solutions product sales were 35.5, Interconnect sales were 43.4 and Power Solutions and Protection were 42.2.

[Sean Hannan:]

Okay. All right, thanks very much.

[Operator:]

Our next question comes from Anthony Gulu.

[Unidentified Analyst:]

Good morning, gentlemen. My question has to do with provision for income tax. What were the provision for income tax be assuming we did not take this major write-off?

[Colin Dunn:]

So we had a benefit in the quarter of $4.2 million, the impact on tax is related to the impairment was a benefit of $2.1 million, so the benefit would have been down by $2.1 million.

[Unidentified Analyst:]

So we would have to pay taxes of what on our income assuming we didn't take the write-off?

[Colin Dunn:]

It was a benefit, so there is no tax payable on the benefit. It wasn't a provision for the quarter. We settled some tax items as well as the mix of the earnings globally pushed our provision to a benefit for the quarter.

[Unidentified Analyst:]

I have couple of other questions referenced to the write-off per se. When you write-off a major asset like this, what is the overriding criteria? Is it return on investment? Is it what you can sell that particular division in the marketplace? How is that – what is the overwhelming criteria, because this is a significant write-off on the balance sheet?

[Frank Scognamiglio:]

I’ll take that one. So what I can say first about goodwill impairment process, it’s very complex process involves third-party expert’s as well internal support and documentation. And at this stage of the process, we recorded an appropriate and supportable amount, and more directly to your question when you are in the process of performing the impairment analysis I think the main focus is the projected revenues and results on a discount basis that are used in the financial models in order to perform the valuation.

[Unidentified Analyst:]

So return on investment where does that fit in?

[Frank Scognamiglio:]

It’s part of the process. However, there is a multi layered process and we could spend honestly maybe a half an hour discussing with the process and tell or maybe we should take that offline into call.

[Daniel Bernstein:]

Yes, Anthony if you want to give us a call Frank and I would be happy to chat through it, this is quite complex.

[Unidentified Analyst:]

Okay, thank you. End of Q&A

[Operator:]

[Operator Instructions] There are no further questions. So I will turn the conference over to you for any additional or closing comments.

[Daniel Bernstein:]

Just want to thank everybody again for joining us and I’ll speak to you in July. Have a good weekend.

[Operator:]

That does conclude today’s conference. Thank you for your participation. You may now disconnect.