Dan Bernstein - President and Chief Executive Officer Craig Brosious - Vice President Finance Lynn Hutkin - Director of Financial Reporting.
Hendi Susanto - Gabelli & Company.
Good day, everyone. And welcome to the Bel Fuse Incorporated First quarter 2018 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 very much. Joining on the call today is Craig Brosious, our Vice President Finance; Lynn Hutkin, our Director of Financial Reporting. And before we begin, I'd like to ask Lynn to go over the Safe Harbor statement.
Lynn?.
the market concerns facing our customers; the continuing viability of sectors that rely on our products; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulty; 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; our ongoing evaluation of the consequences of the U.S.
Tax Cuts and Jobs Act; 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. Before going through the financials, I would like to provide a brief update on how the businesses did from an operational standpoint this quarter, and what we see going forward.
Overall, we are being encouraged by the continued growth of our backlog, which reached $178.3 million as of March 31, 2018, representing a 29% increase from March 31, 2017, level. We believe our top line has finally turned around as gain in our backlog is now translating into sales.
Following 9 consecutive quarters of year-over-year decline, this marks the second consecutive quarter with year-over-year sales growth. Sales during the first quarter were $118.3 million, up 4% from the first quarter of 2017, led by sales growth within our Magnetic Solutions group of $3.3 million and our Connectivity Solutions group of $1.2 million.
Sales of Power Solutions and Protection products were the same as of first quarter 2017 levels. Despite a $1.6 million decline in sales related to the previously divested NPS business. When the sales have increased during the first quarter of last year, our margin and bottom line were unfavorably impacted by several factors.
The continuing weakening of the U.S. dollar, we're up to local currencies where we manufacture our products created a downward pressure on our margins during the quarter. In addition, minimum wage increases in the PRC and supply constraints related to certain of our purchase components were also factors, leading to higher costs.
Also, our Power Solutions business continues to have a negative impact on our bottom line. Our major focus has been to bring this group back to profitability, and we're doing everything possible to accomplish this goal.
This restructuring effort initiated in late 2017, equated to $1.2 million of our annualized cost savings, and we begin to realize this benefit from these efforts in the second quarter.
Our Connectivity Solutions group finished the quarter with 3% increase in sales over the last year's first quarter, with record bookings resulting in book-to-bill ratio, 1.3% for the first quarter.
This was led by increased bookings from Military segment for our Cinch Active Optical products with use of encrypted and communication applications for our Microminiature copper connectivity products in relation to key defense programs.
Our Stewart Connector business has also rebound nicely from the depressed sales levels in 2017 with a 7% increase in the first quarter sales compared to the same period last year. Across the full Connectivity Solutions group, there was also a healthy flow of orders from our distribution -- from our distributors, driving quarter-over-quarter growth.
We've also pleased with the significant increase in overall number of new customers buying our products with distribution. Our NPA -- NPI over the last several quarters have resulted in over 300 new Connectivity Solutions customers buying in Q1.
Overall, the backlog of orders for our Connectivity Products grew by $15.8 million, or a 33% increase since year-end. Our Magnetic Solutions group had sales growth of 9% from last year's first quarter and strong bookings resulted in a book-to-bill ratio of 1:1 for the first quarter 2018.
This group consists primarily of our integrated connector modules, ICMs and our Signal Transformer products. Demand for ICM products have increased during the quarter within the enterprise switching, industrial Ethernet and several markets were led to sales growth of 9.7% over last year's first quarter.
ICM product line also finished the quarter with a 20% -- 27% increase in backlog compared to its year-end level. Sales of our Signal Transformer products increased by 8.2% during the first quarter of 2018 as compared to the same period last year, and our backlog of orders at March 31, 2018, grew by 22% since year-end.
The increased demand for Signal Products was driven by new programs and recent wins for industrial applications. During the first quarter, backlog of our orders for all Magnetic products grew by $8.6 million or 25% since year-end. We're expecting continued year-over-year growth in this group.
Sales within our Power Solutions protection group were flat compared to the same period of 2017 despite a $1.6 million decline related to our NPS divestitures.
With increased demand for our customer module products probably for a small lighting application and higher AC-DC converter sales in marine applications, sales of our circuit protection products had year-over-year increase for 8 consecutive quarters with recent growth drive driven by successful utilization of our distribution channels.
Within the Power Solutions business, our front-end power supplies continue to have lower sales value as we wait for new design wins to move into production. We have improved our penetration to eMobility and data center markets.
During the first quarter of 2018, we had 12 new design wins in the area of eMobility and now sales -- and those sales more than doubled to $1.6 million during the quarter.
The growth was driven by increased demand for our products used in commercial vehicles, such as electric fire trucks, and garbage trucks, electric buses, driverless cars and heavy earth-moving equipment. We expect this to be an area for continued growth for our power product lines.
We have also recently broadening our scope of our data center customer base, which now includes two blockchain customers, which generated over $1 million of sales in the first quarter of 2018.
Demand for our Power Products within the rail industrial applications was also strong in the first quarter, growing by $1.1 million, or 17% compared to first quarter of last year.
Our Power Solutions protection group finished the first quarter with book-to-bill ratio of 1.2 and entering the second quarter with a healthy backlog, which is up by $7.4 million or 12% from year-end. We continue to monitor the status of the recent tariffs' proposals and what effect it might have on our products.
At this point in time, it's too early to make a determination. And with that, I would like to turn the call over to Craig to go through the financial updates.
Craig?.
Thanks, Dan. To provide a quick recap on sales, sales during the first quarter were $118.3 million. By geographic segment, North American sales were $59.5 million, Asian sales were $38.6 million and European sales were $20.2 million.
By product group, Connectivity Solutions sales were $42.9 million, Magnetic Solutions sales were $38.2 million, and Power Solutions and Protection sales were $37.1 million. Gross profit margins declined to 17.9% in the first quarter of 2018 as compared with 20.6% in the first quarter of 2017.
This was largely due to unfavorable exchange rate fluctuations related to the Chinese renminbi and the Mexican peso, which essentially increase the operating cost at our factories in those countries by approximately 8% over the last year's first quarter.
We also had government mandated minimum wage increases take effect at one of our factories in China at the beginning of February.
With regards to material costs, we've seen upward price pressures in the first quarter due to the continued supply constraints on certain purchase components, such as resistors, capacitors as well as increased pricing on certain commodities including copper.
Our selling, general and administrative expenses were $20.7 million, or 17.5% of sales as compared with $21 million, or 18.5% of sales in the first quarter of 2017.
This decline related to lower legal and professional fees of $900,000 and a decrease in depreciation and amortization expense of $200,000, largely offset by higher foreign exchange losses of $500,000 and increased salaries and fringe benefit costs of $300,000 compared to the 2017 period.
On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term, barring any significant fluctuations in foreign currency. As a result of these factors, we generated income from operations of $437,000 in the first quarter of 2018 as compared to $2.4 million in the first quarter of 2017.
Interest expense was $1.2 million in the first quarter of 2018, down $247,000 from the same period last year as lower debt balance mitigated the effect of higher interest rates in 2018. Our provision for income tax was $325,000 for the first quarter of 2018 compared to a benefit of $23,000 during last year's first quarter.
The change in the tax provision primarily relates to a lower benefit arising from losses in North America segment due to reduction in the U.S. tax rate of 35% in 2017 to 21% in 2018. Additionally, there was an increase in the liability for uncertain tax positions in the 2018 period.
Based on the 2-year average of where our profits have historically been earned, we're estimating that a global effective tax rate for 2018 will be in the range of 17% to 19%.
Earnings per share for the Class A common shares was a loss of $0.11 per share in the first quarter of 2018 as compared with earnings of $0.05 per share in the first quarter of 2017.
Earnings per share for the Class B common shares was a loss of $0.11 per share in the first quarter of 2018 as compared with earnings of $0.06 per share in the first quarter of 2017.
On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was a loss of $0.09 per share in the first quarter of 2018 as compared with earnings of $0.07 per share in the first quarter of 2017.
On a non-GAAP basis, EPS for class B shares was a loss of $0.09 per share for the first quarter of 2018 as compared with earnings of $0.09 per share in the first quarter of 2017. And now I'd like to go through some balance sheet and cash flow items.
Our cash and cash equivalents balance at March 31, 2018, was $66.9 million, a decrease of $2.5 million from December 31, 2017. During the first quarter of 2018, we made net payments of $800,000 towards our outstanding debt balance.
We also used cash for capital expenditures of $2.2 million, dividend payments of $800,000 and interest payments of $1.1 million. Accounts receivables were $76.8 million at March 31, 2018 as compared with $78.8 million at December 31, 2017. Day sales outstanding were 58 days at March 31, 2018 compared to 60 days at December 31, 2017.
The decrease in our accounts receivable balance is largely due to the lower sales volume in the first quarter of 2018 as compared to the fourth quarter of 2017, and the timing of payments from a few large customers in our Asia segment. Inventories were $102.7 million at March 31, 2018, down $5 million from December 31, 2017.
Inventories were $10 million lower due to the adoption of the new revenue net recognition standard effective January 1, 2018. The adoption of the standard impacted the timing of revenue recognition and the corresponding release of finished goods from our inventory balance, related to product sales at customer control hubs.
Excluding the effects of this adjustment, our inventory balance would've increased by $4.9 million from December 31, 2017, primarily in raw materials and work in progress in response to the increase in backlog during the first quarter of 2018.
Accounts payable were $48.2 million at March 31, 2018, up from $47.9 million at December 31, 2017, due to the increase in raw material purchases. Bel's total outstanding debt as of March 31, 2018, was $124.2 million, excluding deferred financing cost. This represents a net decrease of $800,000 from our 2017 year-end debt level.
Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $13.66 per share at March 31, 2018, as compared to $13.13 per share at December 31, 2017. And now, I'd like to turn the call back to Dan and open the call for questions.
Dan?.
Thank you.
Can we open up the call for any questions people might have, please?.
[Operator Instructions] We'll go first to Hendi Susanto with Gabelli & Company..
Dan, I have a question.
How much exposure to raw materials that may potentially affect -- be affected by the tariff proposals?.
To be honest, we've been listening to all the calls from our competitors and people out in the field. And at this point, nobody has been making any comments. They are all in a wait and see, so it's impossible for us to make a determination of how the tariffs are going to affect us.
I think people are more concerned now with the long lead times of some capacitors and resistors and some semiconductors that have stretched out toour lead times of over 52 weeks. And then they had some very big price increases..
Also price increases have already taken places in the capacitors and resistors that you mentioned?.
Yes, anything that has -- anything that stretch out long lead times, prices are going up, yes..
And then, theoretically, if there are increases of raw material costs, how fast can you pass them onto your customers?.
Not as fast as I would like. In our distribution channel, it's substantially easier for our major OEM customers we have annual contracts, so we have to review it during our contract period. But it's something that we have had some price increases over the past couple of months.
And when the opportunity comes, we are evaluating the cost of what the market allows..
And then, with regard to the strength in Magnetics, should we expect that to continue?.
On the Power Supply group?.
Magnetics….
I think we had very good growth. I don't think we can maintain that growth for the balance of the year, but not to that higher level..
And then, I think you seem enthusiastic again with regard to finding acquisition targets.
How is the pipeline now?.
The pipeline we have, I would think, we're looking at -- we have six NDAs signed and anywhere from $50 million of revenue up to $1 billion of revenue. So again, we are looking at all different types of companies..
[Operator Instructions] And we have no further questions at this time. I'll turn things back over to you for any additional or closing remarks..
I would have to say that's the easiest conference call I've had in my life. So thank you very much. And hopefully, we can improve the bottom line next quarter and also the top line. So thank you for your time..
And that will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect..