Good day and welcome to the Bel Fuse Incorporated Second Quarter 2020 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, Steve. Joining me on the call today is 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 and matters discussed on this call such as statements regarding our efforts to improve profitability, the impact of the closure of our Power R&D facility in Uster, Switzerland, anticipated cost savings resulting from restructuring and the continuing impact of Bel’s efforts to reevaluate its customer base and product portfolio, 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 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 U.S.

trade and tariff policies; the risk factors detailed from time to time and 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 may also 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. And thank you for joining our call today. I hope that you and your families are staying safe during these difficult times. Our first priority throughout this past quarter continues to be the safety of our associates around the world. We continue to provide these essential products to our customers.

As of today, we are pleased to report that all our manufacturing sites are operating, with the majority of them at or near normal production rate. However, the situation remains fluid. Our production managers around the world have done an excellent job in ensuring ongoing compliance with local regulations related to COVID-19.

I would once again like to take a moment to acknowledge our manufacturing associates in each of Bel’s factories for their dedication to our company and our customers during this period.

Turning to our results, we were pleased that our efforts related to cost reductions and containment measures over the past year have translated into meaningful gross margin improvement as reflected in our second quarter 2020 financial results.

Many of the factors that drove this improvement are expected to provide a sustained benefit to our margins for the foreseeable future.

Those factors include lower overhead cost from restructuring efforts, a reduction of material prices related to components, lower direct labor cost due to the favorable foreign exchange rates in effect during 2020 and inclusion of higher margin CUI sales.

Further, we made a concerted effort to exit customers and product lines that have lower margins in order to better utilize our manufacturing resources. As the result of these and other factors, Bel’s adjusted EBITDA, as outlined in our release, more than doubled compared to last year second quarter, despite the lower sales volume.

Sales were down $6.2 million or 4.9% from last year second quarter. Acquisition of CUI in late 2019 contributed to $10.6 million for sales during the second quarter and a gross margin of over 39%, driven by sales of adopted use-in-home workplace.

Excluding CUI sales in the second quarter, we were down $16.9 million from last year second quarter with declines seen across all product groups. Sales of front-end power products were down $7.3 million from last year second quarter, largely due to reduction in sales to low-margin customers.

The weakness in commercial aerospace end markets accounted for $5.6 million of this decline and sales to our distribution partners remain lower than prior year quarter by $2.9 million. We enter the second half of the year with very limited visibility as our second quarter bookings were soft.

However, there are areas of strength as we enter the third quarter. Recent awards for our connectivity products on key defense programs and munitions, military avionics platforms, mobile communication programs, resulted in improvement in military sales of over 40% in second quarter versus last year second quarter.

Booking in this area has also remained healthy, providing an opportunity for continued strength in shipments throughout the second half of the year.

Our Magnetic Solutions Group continues to see strong demand for product going into communication hardware and next-generation network infrastructure as our associates need to accommodate increased bandwidth requirements due to a large number of people working from home.

Within the Power Solution Protection Group, Bel was awarded a design win for a power supply for cost-effective ventilator. This non-cancelable, non-return award totaled $1.6 million and is expected to start shipping in the third quarter. We also continued to see year-over-year growth related to the CUI acquisition to the remainder of the year.

In addition, our Circuit Protection Group had a 14% increase for the quarter due to a competitor not being able to ship. The closure of our facility in Uster, Switzerland, will bring our annual fixed costs down by $3 million, with those savings taking place by the fourth quarter of this year.

The Bel management team remain focused on bottom line growth and continue to focus on which customer products and Bel facilities best align with the goal of improving profitability. Before I turn back the call to Craig, I would like again to acknowledge and thank our global team.

Their ethics enabled Bel to be flexible in responding to this rapidly changing environment. Our ability to generate results, they deserve as much of the credit, while front-line associates were making it happen under these difficult circumstances. And with that, I will turn the call over to Craig to run through the financial update.

Craig?.

Thanks, Dan. Sales by product segment for the second quarter of 2020 were as follows. Power Solutions and Protection sales were $45.1 million, up 2% from last year’s second quarter. Connectivity Solutions sales were $38.9 million, a decline of 9% and Magnetic Solutions sales were $37.2 million, also down 9% from last year’s second quarter.

On a consolidated basis, gross profit margin, excluding R&D expenses, increased to 26.2% in the second quarter of 2020, as compared with 21% in the second quarter of 2019, as a result of a combination of factors.

Overhead and indirect labor costs were $4.7 million lower during the second quarter of 2020, primarily due to restructuring measures implemented during late 2019 and a reduction in the cost structure for Cinch Connectivity Solutions segment, to align the current sales volumes within that segment.

A portion of the margin improvement in the second quarter of 2020 related to lower material costs as stocks of high cost components that had previously been built up in our supply chain have now been worked through, resulting in significantly lower material costs in the P&L as compared to the same quarter last year.

The favorable shift in product mix and lower direct labor costs, resulting from favorable fluctuation in foreign exchange rates were also factors contributing to the margin improvement in the second quarter of 2020, as compared to the same period 2019.

Research and development costs were $6.1 million during the second quarter of 2020, a decline of over $700,000 from the second quarter of 2019, as a result of restructuring efforts implemented during the latter part of 2019.

Our selling, general and administrative expenses were $18.1 million or 15.9% of sales as compared with $19.2 million or 15.1% of sales in the second quarter of 2019.

Lower travel expenses of $682,000, a reduction of ERP costs of $391,000 and savings from other cost containments efforts outweighed the $1.9 million of incremental SG&A expenses associated with the newly acquired CUI business.

SG&A expense also included a gain on the cash surrender value of COLI policies of $1 million in the second quarter of 2020 compared to a gain on these policies of $159,000 in the second quarter of 2019.

On a go-forward basis, we would expect SG&A to run between $19 million and $20 million per quarter in the near term as we expect our travel and entertainment spend will be lower than normal for the remainder of the year.

These factors resulted in an income from operations of $7.5 million in the second quarter of 2020 as compared to income from operations of $4.5 million in the second quarter of 2019. Other income and expense net was an expense of $302,000 for the second quarter of 2020 as compared to income of $267,000 during the second quarter of 2019.

The fluctuations from last year’s second quarter, was largely related to a foreign exchange loss of $103,000 in the second quarter of 2020 as compared to a foreign exchange gain of $450,000 in the second quarter of 2019.

Interest expense was $1.3 million in the second quarter of 2020, down slightly from the same quarter last year due to the lower interest rate in effect during the 2020 quarter.

We expect interest expense to be lower by approximately $600,000 to $700,000 in the second half of the year as compared to the first half of 2020, related to the decreases in both LIBOR and in the company’s spread on its credit facility.

We have a provision for income taxes for $423,000 in the second quarter of 2020, compared to a provision of $421,000 during last year’s second quarter, the impact of primarily differences on U.S. tax exempt activities, less a slightly higher effective tax rate in the second quarter of 2020 as compared to the second quarter of 2019.

Earnings per share for the Class A common shares was earnings of $0.43 per share in the second quarter of 2020 as compared with earnings of $0.23 per share in the second quarter of 2019.

Earnings per share for the Class B common shares with earnings of $0.46 per share in the second quarter of 2020 as compared with earnings of $0.24 per share in the second quarter of 2019.

On a non-GAAP basis, which excludes certain unusual and other non-recurring items EPS for Class A shares with earnings of $0.43 per share in the second quarter of 2020 as compared with earnings of $0.03 per share in the second quarter of 2019.

On a non-GAAP basis, EPS for Class B shares was $0.46 per share in the second quarter of 2020, as compared with earnings of $0.03 per share in the second quarter of 2019. And now, I would like to go through some balance sheet and cash flow items.

Our cash and cash equivalence balance at June 30, 2020, was $75.3 million, a decrease of $3 million from December 31, 2019. Our cash balance grew by $6.9 million sequentially from the March 31 balance. During the first half of 2020, we generated cash flow from operating activities of $16.8 million.

We made net payments of $8.2 million towards our outstanding debt balance and used cash for capital expenditures of $3 million, dividend payments of $1.6 million and interest payments of $2.3 million. Accounts receivable were $78.3 million at June 30, 2020 as compared with $76.1 million at December 31, 2019.

Day sales outstanding decreased slightly to 59 days at June 30, 2020, as compared to 60 days at December 31, 2019. The increase on our accounts receivable balance was largely due to higher sales volume in the second quarter of 2020, as compared to the fourth quarter of 2019.

Inventories were $104.7 million at June 30, 2020, down $2.6 million from December 31, 2019 level. The decline was seen in finished goods, partially offset by increases and work in process. The reduction in inventory results, are partially due to the write-down of excess stocks related to projects that ended.

Accounts payable were $44.8 million at June 30, 2020, up $657,000 from its level at December 31, 2019 primarily due to the implementation of new supplier payment guidelines to better manage our cash reserves.

Total outstanding debt balance was $135.2 million as of June 30, 2020, net of deferred financing costs, a decrease of $8.5 million since the 2019 year-end balance. This primarily reflects a voluntary prepayment of $8.2 million made during the first quarter of 2020, in connection with an amendment to our credit agreement.

Book value per share, which is calculated at stockholders’ equity devalued by our combined A and B classes of common stock outstanding, was $13.57 per share at June 30, 2020 as compared to $13.69 per share at December 31, 2019. And with that, I will turn the call back over to Dan.

Dan?.

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

Thank you, sir. [Operator Instructions] We will take our first question from Mr. Theodore O'Neill with Litchfield Hills Research. Please go ahead..

Thank you. Congratulations on the good quarter earnings wise..

Thank you..

Thank you..

Yes. Just one question here, you talk in the press release about rationalizing the customer base and the product portfolio. And I was wondering if you could give us a little more color on that and which vertical was impacted the most by that.

And if there were opportunities where you could sort of X out a customer that also took care of the product as well, or was it two separate analyses going on? Thanks..

Okay. We had one major, building a product for one of the big data storage people that it was an Internet company that had their own data storage and it was a power supply that we do have the capability to work with second-Tier, third-Tier companies, which we think we can do a better job.

If you are looking at the Amazons, the Google’s, the Facebook’s, they tend to be overly price-sensitive and the volumes just – the cost just can’t – we can’t compete in that market any longer. So that was one situation. The other major situation that we are getting out of, which represents about $12 million to $13 million is a modular product.

We built a custom-built product where we do the manufacturing for a company and private label it, and the margins were just too low. But we are working with other companies and doing ODM work where we act as the design and the manufacturing.

And in those opportunities where we can offer more value, I think we can be competitive in those type of products. But again, just being very sensitive at this time; I think historically we were always looking at top-line growth and took product in that maybe we shouldn’t have just to have that growth.

I think at this point in time we really want to focus on bringing cash into the company and working off our debt..

Great. Thanks very much..

[Operator Instructions] We will take our next question from Jim Ricchiuti with Needham & Company. Please go ahead. .

Hi, good morning. Maybe just to follow-on Theo’s question, just is there a way to aggregate all of this in terms of total revenue impact? I mean, you gave us some of it in pieces. And I am just wondering if there is a way to think about it in totality, because there are some offsets of it as well, I guess..

I think the two big pieces, I think both one customer we walked away from, again, and that was the data center company customer, and I think that sales were going anywhere from $12 million to $15 million annually. Going forward, starting in the fourth quarter that would probably be another $10 million to $13 million..

Okay..

Those are major hits. There are other customers, but the volumes are not that substantial..

Got it..

I think we are also looking at individual products in certain customer portfolios where they may not meet the margin standards that we are setting. And so it wouldn’t necessarily be everything we sell to a customer, but the products within that portfolio might not be suitable anymore..

Understood. You called out some of the impact that you experienced in the commercial aerospace market.

And if I got the number right, it’s about $5.6 million in the quarter?.

That’s correct..

That’s correct..

Yes. I don’t recall. What was the number in Q1? Do you guys have that at your ready? If not, we can discuss it offline. What I am trying to do is, I am trying to – I mean, it doesn’t look like we are going to see a recovery any time soon in the commercial aerospace market or maybe it is some aftermarket that you are going to get.

But I am wondering if we should think about this as kind of a $20 million or more headwind that you have that you are going to probably have to deal with over the next year or so..

I think, Jim, I think we have dealt with it. We realigned our manufacturing. I think that’s why that we did so well this quarter on the aerospace is that we did lose those sales.

If you looked at yesterday’s Wall Street Journal where a major – Boeing had statements that they are going to – they won’t hit – they were initially going to hit 31 planes in 2021, they pushed that back by a year and they get no visibility of how well they are going to do.

So, again, based on that, it’s going to be sough sledding for the next 18 months in the aerospace business, but I think we are aligned. There is no more alignment we have to do to address this. We know what it is and we have taken the steps already to transfer new sales volume and we are going to have it with these customers..

To answer your question....

And just looking at the margins, too – Lynn, go ahead..

Just to answer your question, Jim, initially in the first quarter, our commercial aerospace sales were down $3.4 million versus last year’s first quarter. And then in the second quarter, we saw a year-over-year decline of the $5.6 million that we had mentioned, so overall about $9 million down versus the first 6 months of 2019..

Got it. And to your point, Dan, I think it sounds like you have already aligned the cost structure, not only here, but in other parts of the company. And I guess that’s the other question. I mean, there are a lot of puts and takes here, a lot of moving parts to gross margins.

And I am wondering how we might think about gross margins given some of the things you are doing, areas you are deemphasizing, areas where you have got some opportunities. It sounds like there’s still some nice pipeline on the defense side of the business and just generally, given the overall macro environment.

Is there any way to think about gross margins in this, on that scenario?.

I will let Craig attempt that one..

Yes. I mean, in the quarter, Jim, we did – there was some favorability that we would kind of look at like more of a one-time impact. But I think looking forward, and, obviously, we can’t look too far forward, but we would think probably our more normalized margin might be in that maybe 23%, 25% range, taking out the one-time influences that we had..

That’s helpful..

So there would be I think an incremental improvement over last year, at least the third quarter. So but maybe not quite as good as we saw this quarter..

That’s helpful. And then final question from me is, I mean, it sounds like a lot of the focus here is on paying down debt, strengthening the balance sheet, and that’s all good stuff.

I am just wondering, is M&A, at least for the time-being, off the table? Or are you just still looking at the various potential assets that might be out there? What’s your point of view in terms of near term on that? Are you taking more of a kind of wait-and-see?.

No. I think we are still very active in the M&A area. However, as you know, there’s not much activity going on. We do have a smaller – we are talking to 2 or 3 potential companies out there that we are looking at, however, they tend to be on the smaller side, more of strategic fits.

However, if something comes across our table that makes sense, we definitely would look at a possibility of acquiring another company, yes. And we are still being as active as we can..

Got it. That’s it for me. I will back in queue. Thanks a lot..

Thanks, Jim..

Thanks, Jim..

We will take our next question from Lenny Dunn with Mutual Trust Co of America. Please go ahead..

Hi. Dan, I am very pleased to hear that you are likely only going to do small acquisitions and that you are finally addressing getting the balance sheet stronger and working on gross margins. Those are all things that are music to my ears. So I just wanted to express that to you..

Lenny, if we do see a big acquisition though, I might have to take a look at it. So I am sorry to tell you that..

Well, that I understand. But at least you are not aggressively doing just for top-line growth, because those things have been disappointments over the last few years. So anyhow, it sounds to me that you are pointed in the right direction.

And I guess if you see something that makes sense, but it has to make a lot of sense to strengthen the balance sheet..

Yes, Lenny, you are correct about that..

And things look good. I mean, I thought the numbers were better than I expected, and I expected a fairly good quarter. But appreciate what you have done in what I would consider very adverse conditions..

Thank you..

It appears there are no further questions at this time. Mr. Bernstein, I would like to turn the conference back over to you for any additional or closing remarks..

Thank you, Steve. Again, we appreciate everybody joining the call today during these difficult times and we just wish you and your family the best and looking forward to speaking to you again next quarter. Thank you..

This concludes today’s call. Thank you for your participation. You may now disconnect..