Good day, and welcome to the Bel Fuse Inc. Third Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead..

Thank you, James. Joining me on the call today is Craig Brosious, our Vice President of Finance; and Carlos Quintanilla, our Corporate Account Manager. Before we begin the call, I'd like to ask Craig to go over the Safe Harbor statement.

Craig?.

Thanks, Dan. Good morning, everybody. Before we start, I would like to read the following Safe Harbor statement.

Except for historical information contained in this call, the matters discussed on this call, such as statements regarding anticipated cost savings, alignment of cost with anticipated business levels, restructuring efforts in Asia, and long-term sales growth, are forward-looking statements as described under the Private Securities Litigation Reform Act of 1995 that involves 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 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 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'd now like to turn the call back to Dan for a general business update..

Thank you, Craig. Before going through the financials, I would like to provide a brief update on how the business did from an operational standpoint this quarter and what we see going forward.

Overall, our third quarter sales levels continue to reflect the softness in demand from customers and channel partners this year, as they work through high inventory levels.

On a positive note, we have made progress in reducing our own level of inventory, and the material costs running through our P&L are starting to decrease in the levels seen earlier this year. Further, a successful execution of restructuring programs during the first nine months of 2019 led to a $4.6 million of annualized cost savings.

Approximately $2.3 million of these cost savings began to be realized in the third quarter, with the balance expected to be realized beginning in the fourth quarter. As the actions to date have largely impacted our cost of sales, we believe these cost savings will be a contributing factor to gross margin expansion.

To-date, we have identified additional actions in Asia that are anticipated to yield $1.1 million annualized cost savings. These measures are scheduled to be completed in the fourth quarter with savings expected to be realized in beginning of the first quarter of 2020.

As a global cost review continues, we anticipate further initiatives to improve profitability in U.S., Europe, Asia throughout 2020. While third quarter bookings improved slightly from second quarter this year, we anticipate fourth quarter sales to be down from the third quarter level, based on our ship dates.

That said, we are encouraged by projects within military, commercial aerospace applications for harsh environment connectivity products, as well as high-performance computing industry applications for our power products that are expected to take hold by the second quarter of 2020.

In the meantime, our focus will be on streamlining our operations to create more efficiency, foundation upon which we can grow our business on. With that, I'll turn the call over to Craig to run through the financial updates..

Thanks, Dan. To provide a quick recap on sales. Sales during the third quarter were $124.5 million. By geographic segment, North American sales were $65.8 million, a decline of 7% from last year's third quarter. Europe sales were $18.7 million, down 16%; and Asia sales were $40 million, down 25% from last year's third quarter.

By product group, Power Solutions and Protection sales were $40.3 million, down 10% from last year's third quarter; Connectivity Solutions sales were $44.5 million, a decline of 8%; and Magnetic Solutions sales were $39.7 million, down 25% from last year's third quarter.

Gross profit margin declined to 18% in the third quarter of 2019 as compared with 19.9% in the third quarter of 2018 as lower sales in 2019 combined with higher material costs had downward pressure on our gross margins during the third quarter of 2019.

Our selling, general and administrative expenses were $17.9 million or 14.4% of sales as compared with $18.7 million or 12.8% of sales in the third quarter of 2018. This reduction in SG&A primarily related to cost containment measures within the areas of incentive compensation and travel expense, which accounted for $860,000 of the decline.

Legal and professional fees were also $608,000 lower in the third quarter of 2019 as compared to the same quarter of 2018. These favorable variances were partially offset by lower foreign exchange gains on the translation of our foreign balance sheet accounts of $900,000 as compared to last year's third quarter.

On a go-forward basis, we would expect SG&A to run between $18.5 million and $19.5 million per quarter in the near term, barring any significant fluctuations in foreign currencies. Based on our revised economic outlook for each of our reportable operating segments, we completed an interim review of our goodwill during the third quarter.

Based on this analysis, our North America segment goodwill was deemed to be fully impaired. As a result, we recorded a goodwill impairment charge in the amount of $8.9 million during the third quarter of 2019.

These factors resulted in a loss from operations of $4.6 million in the third quarter of 2019 as compared to income from operations of $10.5 million in the third quarter of 2018.

Interest expense was $1.3 million in the third quarter of 2019, down slightly from the same period last year, due to lower interest rate in effect during the 2019 period, coupled with a reduction in the debt balance.

Our provision for income taxes was $590,000 for the third quarter of 2019 compared to a benefit of $2.2 million during last year's third quarter. The benefit during the third quarter of 2018 was the result of favorable measurement period adjustment of $2.6 million related to the transition tax.

Earnings per share for Class A common shares was a loss of $0.51 per share in the third quarter of 2019 as compared with earnings of $0.89 per share in the third quarter of 2018.

Earnings per share for the Class B common shares was a loss of $0.53 per share in the third quarter of 2019 as compared with earnings of $0.94 per share in the third quarter of 2018.

On a non-GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares was $0.19 per share in the third quarter of 2019 as compared with earnings of $0.70 per share in the third quarter of 2018.

On a non-GAAP basis, EPS for Class B shares was $0.20 per share in the third quarter of 2019 as compared with earnings of $0.75 per share in the third quarter of 2018. And now, I'd like to go through some balance sheet and cash flow items.

Our cash and cash equivalents balance at September 30, 2019 was $64.8 million, an increase of $10.9 million from December 31, 2018. During the first nine months of 2019, we made net payments of $2.2 million towards our outstanding debt balance.

We also used cash for capital expenditures of $8.2 million, dividend payments of $2.4 million and interest payments of $3.8 million. Accounts receivable were $79.1 million at September 30, 2019 as compared with $91.9 million at December 31, 2018.

Days sales outstanding declined slightly to 58 days at September 30, 2019 as compared to 59 days at December 31, 2018. The reduction in our accounts receivable balance was largely due to the lower sales volume during the third quarter of 2019 as compared to the fourth quarter of 2018.

Inventories were $110.2 million at September 30, 2019, down $9.9 million from December 31, 2018. The decline was primarily in raw materials as purchases of raw materials have slowed while we work through our inventory on hand.

Accounts payable were $38.9 million at September 30, 2019, down $17.3 million from its level at December 31, 2018, primarily due to lower raw material purchases during the quarter.

Bel's total outstanding debt was reduced by $2.2 million during the first 9 months of 2019, bringing the balance down to $112.3 million as of September 30, 2019, net of deferred financing costs.

Book value per share, which is calculated as stockholder's equity divided by our combined A and B classes of common stock outstanding was $13.09 per share at September 30, 2019 as compared to $14.39 per share at December 31, 2018. One final note on the finance side.

Our research and development expenses have historically been part of our cost of sales and therefore are a factor in arriving at a gross margin. This is still the case in the third quarter of 2019 financials presented in our earnings release today. This classification is different than the majority of our peers.

And investors should keep this in mind when comparing our gross margins to our peers. Our current intention is to reclassify the presentation of this expense, beginning in the fourth quarter of 2019. And with that, I'll turn the call back over to Dan..

Thank you, Craig. James, we would like to open up the call for questions, if we could..

Thank you, Mr. Bernstein. [Operator Instructions] We'll take our first question today from Theodore O'Neill with Litchfield Hills Research..

Thanks very much. Two questions for you today.

When you talk to your distributor partners, what do you hear on the channel with regards to inventory? Are we halfway through, quarter way through this kind of correction -- the correction that we're seeing? And the other -- on Magnetic Solutions being down here in the quarter, is that tied to a customer or a product transition or both?.

Okay. Let me address both questions. From what we hear in the channel from our distributors, also from some of our competitors and other people in the field, everybody is predicting the second half of 2020 that hopefully the inventory will be flushed out completely. And that's I guess an educated guess.

If it goes beyond that, then there is a substantial downturn in the market.

Your second question is?.

Magnetic Solutions..

On Magnetic Solutions breakdown. Yes..

That's based on -- yes. We have -- one of our largest key customers had a large product introduction and they built up too much buffer stock to hit the high demand. And then, once the new product came out, it kind of flattened out, and we're working through inventory with them. And that might end maybe by the end of the first quarter..

We'll take our next question from Jim Ricchiuti with Needham & Company..

Hi. Good morning. I was wondering if you could maybe give us a little bit more color as to what you're saying in the Power Solutions business. The decline was a little bit more pronounced in Q3 versus Q2.

What are you seeing in that portion of the business?.

I think, the big problem we have, generally overall, we weren't hit too bad with tariffs. However, a key customer was for us was Facebook with the data centers, representing about $17 million in sales.

And because of the tariffs and some of our competitors being able to build in Thailand in different areas, they only used us for Europe, hence has become a very price-sensitive product. And that's where a big chunk of the decline came from that large customer..

I think, to add to that Jim, we did have a couple of kind of somewhat one-off projects that we had last year in the....

Bit mining..

Yes, bitcoin mining space that obviously when bitcoin was high, business was good. It's come down since then. People aren't really building out their capacity at this point. So, we had a lot of dollars in the third quarter last year. It didn't happen again this year..

But, I think, also overall, Jim, I think, we're taking a more strategic approach with the power group where I think we focus maybe too heavily on substantially large customers that the revenue looked great but the profitability wasn't too great.

So, a lot sits in that role looking more industrial than real opportunities where the customers might be smaller, but the profitability up substantially greater..

Okay. And maybe on that note, you showed some nice improvement in sequential in gross margins. And it sounds like a lot of that came from some of the restructuring you're doing. At these kinds of revenue levels, which sequentially looks like you are going to be down Q4, which is normally the case seasonally.

But, I'm wondering how we should think about gross margins in this kind of environment where we're probably not going to see a whole lot of improvement, it sounds like, until the second half of next year..

Yes. I mean, that's right, Jim. And I think, we did a little bit better on the gross margin line through the current quarter than we were expecting. And a lot of that had to do with -- we're in a somewhat favorable foreign exchange environment at the moment, particularly in China.

We expect that to continue in the fourth quarter, barring any significant geopolitical events that pop up here.

So, if that kind of stays consistent, we our margins will hold in the fourth quarter comparable to where they are today because the fact that the foreign exchange plus the -- we'll have a little bit more of a cost reduction factored into the third -- into the fourth quarter. So, we think we'll be able to hold those -- the margins where they are..

And on SG&A, you did better than we were expecting in Q3. Was there anything unusual? Because it does sound like you expect that to get back to the levels you, I think, were talking about going into Q3..

Yes. I think, we did see some of our cost reductions hit there as well. The another factor is we're -- in our ERP conversion project, we’re phasing out some of the support services that we were previously paying for in prior periods. So, we'll get a bit of a benefit from that as well.

So, I think, we lowered the range of SG&A going forward by roughly $0.5 million per quarter..

But, you are assuming there’s going to be a little bit of a bump up though in Q4 SG&A, if I heard you correctly..

Yes. I think, we said -- what, $17.5 million to $18.5 million, something like that..

Okay, good. And just the fact that bookings up slightly versus Q2, doesn't sound like that's necessarily meaningful.

But, I'm just wondering, are there any parts of the business where you are beginning to see some signs of maybe improvement beyond just stabilizing?.

I think, we're seeing just a slight uptick on the magnetic side. I mean, part of the issue with the magnetics is a lot of revenue in that product line goes through VMI hubs. And so, the visibility on that is not very long. And, I think, when we compare our backlog today versus where it was last year at this time, lead times were a lot longer last year.

So, we had a lot more dollars in backlog. So, it's difficult to read at this point. We are seeing, like I said, a slight uptick in magnetics, but nothing that we would call a trend there..

And in the restructuring, additional restructuring that you're looking at in Asia, you're anticipating that's going to impact COGS.

Do you see any additional restructuring as you look out over the next couple of quarters as you try to align the business with the current environment?.

I think, if I was -- yes, we are taking a hard look at all the operations. As you know, we have a large amount of our operations in China, and there is certain uncertainty being too dependent on China. So, we are looking at different areas that hopefully could be more cost competitive, more stable. We are looking at Vietnam, Malaysia, the Philippines.

And it's too early to tell. But, I would assume that if we do decide to move out of China, there'd be some costs, substantial costs associated with those moves..

Yes. And obviously, those are longer-term initiatives that we're looking at now. We do have a couple of shorter term items that will be effective beginning in the first quarter of next year. So, another potential $1 million or so annualized going into effect in first quarter next year..

Okay. And the last question for me.

Just in this kind of environment, I'm wondering if you're seeing much activity in the M&A pipeline, just if you're seeing any more attractive valuations, just given this environment?.

I think, again, the biggest problem we see, and I think a majority of the companies we're looking at where we have we think true synergistic value that should help us with the purchase price, and we think we should be the most competitive, we've just been blown away by private equity. And we just think there’s so much cash in private equity.

It's made it extremely difficult to acquire some of these companies that we looked at. Norino, they're looking at maybe 15 times EBITDA and 3 times sales. So, the multiples are really -- mostly in the military aerospace, have really -- are substantially higher than we think. And for us, we are very-cautioned.

If you look at what's going to happen, if a Democrat is going to be elected the next president, what's going to happen to the military aerospace valuations, and you assume that it has to go down, not substantially, but you assume it would go down from 15 times EBITDA to a 10 or 11 times EBITDA.

However, we are looking at other areas that we're still hoping that we can have an acquisition by the end of the year that will add strength. But, again, the valuations, at this point in time, it's driven by private equity funds, not by, I should say, rational behavior. Sorry, Jim. I hope that answered the question..

You did. Thanks a lot..

We'll now hear from Hendi Susanto with G. Research..

Good morning, Dan and Craig. Dan, the press release mentioned recent efforts focusing on targeted areas within military and commercial application and also industrial and high-performance computing.

Would you give us some preview of your product road map or what exciting products we should expect?.

Sure. So, Craig has it. I'll let Craig do it..

Yes. I think, we're working on some active optical transceiver projects. We've got orders on the books for those begin shipping in the fourth quarter, basically avionics type applications. We've got products going into certain missile programs to U.S. DoD.

Again, a lot of these are follow-on awards, projects that we've been on, but also some new projects that we've been successful in winning share. So, yes, we are optimistic on -- at least in the next several quarters, on the military side, based on the projects that we've been awarded..

On the aerospace side, I think, we just signed an agreement, I can say, with Boeing to -- for us to get approval of Boeing, we have to agree to pay them the qualification fees. And, I think, we finally came to terms with them, and this is one of the largest uses of connectors -- aerospace connectors. So, we're working to get that part approved.

Also, as we know, everybody's talking 5G. We have a portfolio of products to support 5G. However, even though everybody is talking 5G, nobody's buying 5G components at this time. But, we're very well situated on those products. As that market breaks loose, we can support them properly.

And then, we are making inroads into the industrial and in rail for power supplies..

So, Dan, how should we think of the first half of 2020? You have some exciting products in military and aerospace. At the same time, we have seen double-digit decline in the last two quarters, and that double-digit decline may presumably continue until inventory build resume in the second half.

While Bel Fuse does not share forward-looking guidance, what are some guideposts we should have in mind?.

Well, I think, on the mil aero side, we are -- as I mentioned, some very good new programs on the military piece, but we are susceptible to the 737 MAX activity. So, as that gets resolved, if they're able to resume production, then, we should see a little bit of an upside there..

Just to give you some more insight on that. From everything we told before what -- the situation happened, they were ramping up from 45 planes a month up to 61 planes a month. And just to give you an idea, we have about 5,000 connectors on every plane that represents about $50,000 of sales. So again, we don't know how that ramp-up is looking now.

We know that they continue to build, but they are rebuilding more in the 41 to 45 range. But, that ramps up, that is a very big opportunity for us..

Yes. And again, I think, -- go ahead, Dan..

No. Go ahead, Craig..

No, I think -- and on the magnetic side, I think, that is really dependent on a couple of things, the inventory overstock situation, when does that clear out. If that happens earlier than the second half of next year, then we should see some good and positive impact to that..

I think, we're all faced with the same concerns with the tariffs and with Brexit. This overhang -- Hong Kong and China, this overhang of uncertainty, I think, everybody out there is batten down the hatches. I don't think anybody's committed to buying new equipment. I think everybody is a wait and see attitude.

Again, if we signed a trade agreement with China tomorrow, I think, the whole world would be a lot more positive..

People there would be more comfortable..

More comfortable. And I think until that -- this cloud that hangs above everybody now, until that's taken care of, it’s really difficult for us to give any visibility..

And then, all things equal, will it be reasonable to assume double-digit decline on the top-line in Q4….

We hope that. Not double digits, we can simply say high single digits..

High single digits, Hendi, I think..

Okay, high single digits. Okay. That's very helpful. And then, last question.

Given the current share price, how much consideration when it comes to share buybacks?.

Tremendous. We did buy back 30 shares..

30,000 shares..

Last quarter. We had an opportunity with one shareholder wanting that. A promise, we do have some covenants with the banks that our hands are kinds of tied. But my philosophy is any time our stock flows below book value, we should be very aggressively buying the stock..

That will conclude today's question-and-answer session. I will now turn the conference over to Dan Bernstein for any additional or closing remarks..

Once again, we do appreciate everybody on the call and looking at Bel. And if you have any other questions, don't hesitate to contact us. And, thank you..

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