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 everyone to our conference call to review Bel's preliminary first quarter 2014 results. Before we start, I'd 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 the historical information contained in this call, there's 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. .

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, 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.

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In light of the risk 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 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, Array Connector's corporation acquired in August 2013, have been included in our consolidated results since their respective acquisition dates and account for significant variances from prior periods.

In my discussion, I will attempt to identify any material portion of each variance 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 in the first quarter of 2013. In the first quarter, which 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 4 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 Magnetics sales increased by 8.5% over the prior year..

Interconnect, $30.2 million, an increase of 15.5% over the 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, the net results. In Q1 2014, cost of sales or 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 a 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 2013 as we were in the midst of reorganization of Cinch's 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 increase throughput, which contributed to improved overhead absorption in our factories compared to the 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 3 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. Our recorded income tax expense of $400,000 for the 3 months ended March 31, 2014 were an effective tax rate of 14% compared to an income tax benefit of $800,000 for the 3 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, much of rates are based on the geographic segment in which the pretax profits is earned. .

In the geographic segments in which Bel operates, U.S. has the highest tax rates. Europe's tax rates are generally lower than U.S. tax rates. And Asia, where we're having 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 reorganized additional R&D -- and recognized additional R&D tax credits. .

On an non-diluted 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. On other balance sheet comments. Our capital spending for the 3 months ended March 31, 2014, was approximately $1.2 million, while depreciation and amortization were $3.4 million.

Our 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. .

Now that's the end of my comments, I'll 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] Our first question comes from the line of Sean Hannan of Needham & Company. .

So first, obviously, I think, there's going to be a lot of questions around the acquisition, and congratulations on getting a big deal or 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.

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Okay. I think if you look at the -- previously, their market segments they released when they were Power-One. And they were just acquired 2 years -- 1 year ago, so there's 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, it's something that really excites us.

A good portion of their business is the -- in the market 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 of the backup power that they supply to some of the big companies out there. They call it, I think, the network power group. .

Okay, that's 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, 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're a year out, are there any leverage factors that we would expect, either through on a combined SG&A, or even as a function of perhaps some purchasing leverage that could flow through?.

I think there's definitely manufacturing opportunities. Again, what we've learned with the TE acquisition from an automation and best practices of manufacturing, there's always opportunities there. From the purchased materials, we think being -- both companies working together, there's opportunities there.

So we do -- again, we do hope that, going forward, that the cost would go down on both companies. I'm sorry, regarding closing, I think we're 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 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've seen any change or uptick so far in conditions? Any color around that would also be helpful.

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I mean, again, the people read very fast to the -- what's going on with the 3 or 4 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 better than they did last quarter, not substantially better, but a little bit better. So we would hope this would improve the process. .

Okay. And then how did mix... .

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 materials cost in modular products towards our other products. So... .

And that's more from a margin standpoint that you really see that. And as you know, it comes from that 1 large customer we had in the modular group, which is Ambient. .

[Operator Instructions] Our next question comes from the line of Hendi Susanto of Gabelli & Company. .

May I know what your acquisition pipeline looks like and what's 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're always -- there's always deals in the pipeline. So some are big and some are small, and the hit rate is not always that high but... .

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 in these types of deals. .

Okay. And then for the 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. .

Our next question comes from the line of Sean Hannan of Needham & Company. .

Wanted to see if I could get your perspective on how the return of labor has been post-Chinese New Year, and any efficiency pickup you've gotten as a result of that. .

I think, again, overall, it's 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 pick up the backlog. But from a pricing standpoint, I think, we haven't seen substantial pressure on pricing at this time. I think, as you can see, 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've been selling 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 so -- but not as bad as we saw 2 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 it 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 on 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 are watching this very closely. .

Okay, great.

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

The backlog is fairly solid. We've -- it's actually in our Signal Transformer group, it went up a little bit. On our passive connectors, it's been stable for the last 3 quarters. Our modules group is... .

I think everything looks very strong. The only -- I mean, I shouldn't say strong, but relatively the same for the past 3 quarters. The only area that is of a concern is the group we bought in from TE. That backed down substantially. However, they just got in new orders a couple of weeks ago, so we think that should change and be a little more positive.

But it won't to be back to its peak. We felt that once we -- when we were acquiring TRP, there was a mad rush to put orders in, so people could lock in their -- get their orders in before any transition occurred. .

Our next question comes from the line of with Mike Hughes of SGF Capital. .

A couple of questions for you.

Just on the cash, could you say how much of that is held overseas?.

The -- I guess that question is how much is held in foreign corporations as you can have cash -- you can foreign corporation on cash sitting in the U.S., which we often do. It's about 50-50. .

Okay.

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

Yes, it is. Yes. Some of the operations we are buying are international. And so, 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 -- we -- I wouldn't feel comfortable.

We -- 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 at the month end, 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 the 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 KeyBanc, can you comment at all at this point or... .

Not really, no. .

Okay. And then I think in the last call, your thought was that even with the step-down of revenue into the March quarter, you could hold the gross margins a little borne level.

So was there a negative surprise in the month of March? Or 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 in 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% or 12% sequentially.

Is there any reason to think that, that would not happen this year?.

We think it should be fairly, fairly solid. The exact thing is we never know until the last day of the quarter because of push-ins and pullouts. But, as Dan said a minute or 2 ago, we are seeing a little bit of strength building, so we're cautiously optimistic. .

Our next question comes from the line of Lenny Dunn of Freedom Investors. .

This is a very large acquisition, which I know you've been interested in for at least 5 years, so you finally brought in the big fish. But it would appear from the sales that they're 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 of years, but we definitely look for a 5-year payback, 4- to 5-year payback hopefully, if we do things properly, that would be our intention. We don't see it -- if it goes beyond 6 or 7, I think we'd be a little upset. .

Okay. And well, 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's 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 6 months to digest this?.

I'm sorry, can you repeat that again? I think it... .

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've 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 really do have 2 management teams at Bel, one is focused of the InterConnect group. If you look at the purchases we made from Array, Gigacom, Fibreco, that was one team that was handling that. The other team focuses more on the Bel traditional products, and that is TRP and Power-One.

So first thing, we do have 2 different teams at 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 any purchasing people, we didn't get any customer service people. And I think, we completed that and we've got done with all our transition agreements within 6 or 7 months, and now it runs pretty much as a stand-alone.

With the Power-One group, we get a depth of management, a very well depth of management, from all areas in the -- from computing it, to that -- so technology, accounting, sales, so it really strengthens us. So I think, again, I think it'd be a lot easier to do it the -- once we have Power-One, because we added so much strength to our company.

So I tend to -- in summary, I think I tend to disagree with you. .

No, I understand, you're explaining it, so that I understand it. Looking forward to the addition somewhere in the third quarter. Okay. And it looks very positive. Looks like a great acquisition. .

Thank you so much. .

And I know you've been looking at these for 5 to 6 years, so it's not... .

I would say 10 years to be honest with you, but... .

[Operator Instructions] And I'm 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 are 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's 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..