News Column

BEL FUSE INC /NJ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 12, 2014

The Company's quarterly and annual operating results are impacted by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results, and stock prices. Furthermore, this document and other documents filed by the Company with the Securities and Exchange Commission (the "SEC") contain certain forward-looking statements under the Private Securities Litigation Reform Act of 1995 ("Forward-Looking Statements") with respect to the business of the Company. These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, which could cause actual results to differ materially from these Forward-Looking Statements. The Company undertakes no obligation to publicly release the results of any revisions to these Forward-Looking Statements which may be necessary to reflect events or circumstances after the date such statements are made or to reflect the occurrence of unanticipated events. An investment in the Company involves various risks, including those which are detailed from time to time in the Company's SEC filings.

Overview Our Company



The Company designs, manufactures and markets a broad array of magnetics, modules, circuit protection devices and interconnect products, as further described below. These products are designed to protect, regulate, connect, isolate or manage the flow of power and data among products primarily used in the networking, telecommunications, computing, military, aerospace, transportation and broadcasting industries. Bel's portfolio of products also finds application in the automotive, medical and consumer electronics markets.

Bel's business is operated through three geographic segments: North America, Asia and Europe. During the three months ended March 31, 2014, 52% of the Company's revenues were derived from Asia, 35% from North America and 13% from its Europe operating segment. Sales of the Company's magnetic products represented approximately 48% of its total net sales during the three months ended March 31, 2014. The remaining revenues related to sales of the Company's interconnect products (36%), module products (13%) and circuit protection products (3%).

The Company's expenses are driven principally by the cost of labor where the factories that Bel uses are located, the cost of the materials that it uses and its ability to effectively and efficiently manage overhead costs. As labor and material costs vary by product line, any significant shift in product mix can have an associated impact on the Company's costs of sales. Costs are recorded as incurred for all products manufactured. Such amounts are determined based upon the estimated stage of production and include labor cost and fringes and related allocations of factory overhead. The Company's products are manufactured at various facilities in: the People's Republic of China ("PRC"); Glen Rock, Pennsylvania; Inwood, New York; McAllen, Texas; Miami, Florida; Haina, Dominican Republic; Reynosa and Cananea, Mexico; Louny, Czech Republic; and Worksop and Great Dunmow, England.

In the PRC, where the Company generally enters into processing arrangements with several independent third-party contractors and also has its own manufacturing facilities, the availability of labor is cyclical and is significantly affected by the migration of workers in relation to the annual Lunar New Year holiday as well as economic conditions in the PRC. In addition, the Company has little visibility into the ordering habits of its customers and can be subjected to large and unpredictable variations in demand for its products. Accordingly, the Company must continually recruit and train new workers to replace those lost to attrition each year and to address peaks in demand that may occur from time to time. These recruiting and training efforts and related inefficiencies, and overtime required in order to meet demand, can add volatility to the costs incurred by the Company for labor in the PRC.

-16-



--------------------------------------------------------------------------------

Trends Affecting our Business

The Company believes the key factors affecting Bel's results for the three months ended March 31, 2014 and/or future results include the following:

Recent Acquisitions - The Company completed its acquisitions of TRP and Array

during late-March and August 2013, respectively. During the three months ended March 31, 2014, these acquisitions contributed a combined $17.9 million of sales and a combined $1.0 million of income from operations. Due to the timing of the acquisition dates, there were no contributions of operating results related to either acquisition during the three months ended March 31, 2013.



Revenues - Excluding the revenue contributions from the 2013 Acquisitions

described above, the Company's revenues for the three months ended March 31, 2014 increased by $1.7 million as compared to the same period of 2013. Bel's magnetic and interconnect product lines had increases in revenue of $1.8 million and $2.4 million, respectively, during the first quarter of 2014 as compared to the first quarter of 2013. These increases were partially offset by a $2.5 million decrease in module sales.



Product Mix - Material and labor costs vary by product line and any

significant shift in product mix between higher- and lower-margin product lines will have a corresponding impact on the Company's gross margin percentage. During the three months ended March 31, 2014, the Company experienced a favorable shift in the mix of products sold as compared to the same period of 2013.



Pricing and Availability of Materials - Pricing and availability of components

that constitute raw materials in our manufacturing processes have been stable for most of the Company's product lines, although lead times on electrical components are still extended. While pricing of electrical components during the first quarter of 2014 was consistent with the same period of 2013, there have been recent pricing pressures in this area which may impact future quarters. With regard to commodity pricing, the cost of certain commodities that are contained in components and other raw materials, such as gold and copper, were lower during the first quarter of 2014 as compared to the first quarter of 2013. Any fluctuations in component prices and other commodity prices associated with Bel's raw materials will have a corresponding impact on Bel's profit margins.



Labor Costs - Labor costs as a percentage of sales increased from 12.6% during

the first quarter of 2013 to 14.2% during the first quarter of 2014. Rising labor costs in the PRC and the strengthening of the Chinese Renminbi continue to impact our overall profit margins. With the addition of TRP, approximately half of Bel's total sales are now generated from labor-intensive magnetic products, which are primarily manufactured in the PRC. In February 2013, the PRC government increased the minimum wage by 19% in regions where the factories that Bel uses are located. This increase was effective May 1, 2013.



Acquisition-Related Costs - Bel continues to pursue additional acquisition

opportunities that could result in additional legal and other professional costs in future periods.



Effective Tax Rate - The Company's effective tax rate will fluctuate based on

the geographic segment in which the pretax profits are earned. Of the geographic segments in which the Company operates, the U.S. has the highest tax rates; Europe's tax rates are generally lower than U.S. tax rates; and Asia has the lowest tax rates of the Company's three geographical segments. The change in the effective tax rate during the three months ended March 31, 2014 compared to the first quarter of 2013 is primarily attributed to a pretax profit in the North America and Asia segments for the three months ended March 31, 2014 compared to a pretax loss in these geographic segments for the same period in 2013. In addition, for the three months ended March 31, 2013, the Company recognized an additional $0.4 million in Research and Experimentation ("R&E") credits related to the year ended December 31, 2012. See Note 7 of the condensed consolidated financial statements.



Bel's continuing strategy to leverage its overhead structure by increasing revenue primarily through acquisitions is generating positive results. The Company added significantly to revenue and earnings through acquisitions in 2013 and additional acquisition opportunities, if consummated, would further expand Bel's business in 2014. In addition to the acquisition strategy, management remains focused on controlling costs, increasing manufacturing efficiency through integration and automation, and the adoption of best practices throughout the organization. Statements regarding future results constitute Forward-Looking Statements and could be materially adversely affected by the risk factors identified by the Company in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

-17-



--------------------------------------------------------------------------------

Summary by Reportable Operating Segment

Net sales to external customers by reportable operating segment for the three months ended March 31, 2014 and 2013 were as follows (dollars in thousands):

Three Months Ended March 31, 2014 2013 North America $ 28,732 35 % $ 26,817 42 % Asia 43,048 52 % 26,415 42 % Europe 10,866 13 % 9,796 16 % $ 82,646 100 % $ 63,028 100 % Net sales and income (loss) from operations by reportable operating segment for the three months ended March 31, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended March 31, 2014 2013 Total segment sales: North America $ 31,454$ 29,222 Asia 49,891 32,725 Europe 10,892 10,125 Total segment sales 92,237 72,072 Reconciling item: Intersegment sales (9,591 ) (9,044 ) Net sales $ 82,646$ 63,028 Income (loss) from operations: North America $ 882$ (1,482 ) Asia 1,673 (666 ) Europe 326 721 $ 2,881$ (1,427 )



During the three months ended March 31, 2014, the acquisition of TRP contributed revenues of $15.6 million and income from operations of $1.4 million to the Company's Asia operating segment and revenues of $0.6 million and income from operations of $0.1 million to the Company's Europe operating segment. The acquisition of Array contributed $1.6 million of sales and a loss from operations of $0.5 million to the Company's North America operating segment. The improvement in income from operations in North America in the first quarter of 2014 as compared to 2013 relates to the Cinch operations. Both sales and income from operations during the first quarter of 2013 were negatively impacted by the relocation of Cinch's manufacturing operations. Manufacturing inefficiencies resulted in reduced production levels and lower overall sales of Cinch products. In addition, various other costs associated with the Cinch reorganization further reduced our income from operations in North America during 2013. These transition issues were resolved by the end of 2013.

Overview of Financial Results

Sales for the three months ended March 31, 2014 increased by 31.1% to $82.6 million from $63.0 million for the same period of 2013. Sales were favorably impacted by the contributions made by the acquisitions of TRP and Array, and the rebounding of Cinch sales after the relocation of its manufacturing operations in early 2013. Pricing to customers was adjusted during the latter half of 2013 to recover some of the higher labor costs in China and other cost increases resulting from the continued strengthening of the Chinese Renminbi. These increased prices are reflected in the first quarter 2014 sales figures above. Selling, general and administrative expense was $0.8 million higher in the first quarter of 2014 as compared to the same period of 2013, primarily due to the inclusion of expenses from the recent acquisitions. These factors led to net earnings of $2.5 million for the first quarter of 2014 as compared to a net loss of $0.6 million for the same period of 2013. Additional details related to these factors affecting the first quarter results are described in the Results of Operations section below.

-18-



--------------------------------------------------------------------------------

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, goodwill, intangible assets, investments, SERP expense, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1 to the Company's Financial Statements, "Basis of Presentation and Accounting Policies," included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth, for the periods presented, the percentage relationship to net sales of certain items included in the Company's condensed consolidated statements of operations.

Percentage of Net Sales Three Months Ended March 31, 2014 2013 Net sales 100.0 % 100.0 % Cost of sales 83.0 85.6 Selling, general and administrative ("SG&A") expenses 13.5 16.5 Restructuring charge - 0.2 Interest income and other, net - 0.1 Earnings (loss) before provision (benefit) for income taxes 3.5 (2.2) Provision (benefit) for income taxes 0.5 (1.3) Net earnings (loss) 3.0 (0.9)



The following table sets forth the year over year percentage increase of certain items included in the Company's condensed consolidated statements of operations.

Increase from Prior Period Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 Net sales 31.1 % Cost of sales 27.2 SG&A expenses 7.6 Net earnings/loss 548.6 -19-



--------------------------------------------------------------------------------

Sales

Net sales increased 31.1% from $63.0 million during the three months ended March 31, 2013 to $82.6 million during the three months ended March 31, 2014. The Company's net sales by major product line for the three months ended March 31, 2014 and 2013 were as follows (dollars in thousands):

Three Months Ended March 31, 2014 2013 Interconnect products $ 30,170 36 % $ 26,112 41 % Magnetic products 39,298 48 % 21,257 34 % Module products 10,850 13 % 13,370 21 % Circuit protection products 2,328 3 % 2,289 4 % $ 82,646 100 % $ 63,028 100 %



Sales of the Company's magnetic products for the first quarter of 2014 include $16.2 million of TRP integrated connector module (ICM) products. As TRP was acquired in late-March 2013, there were no contributions from TRP during the first quarter of 2013. The acquisition of Array in August 2013 contributed $1.6 million of sales to the Company's interconnect product line during the first quarter of 2014. During the first quarter of 2013, the Company experienced a reduction in sales of Cinch's interconnect products due to the relocation of its manufacturing operations.

Cost of Sales

The Company's cost of sales as a percentage of consolidated net sales for the three months ended March 31, 2014 and 2013 was comprised of the following:

Three Months Ended March 31, 2014 2013 Material costs 42.3% 46.3% Labor costs 14.2% 12.6% Research and development expenses 4.1% 4.7% Other expenses 22.4% 22.0% Total cost of sales 83.0% 85.6%



Material costs as a percentage of sales were lower in the first quarter of 2014 as compared to the first quarter of 2013, primarily due to the reduction in sales of module products, which have a higher material content than Bel's other product lines. An increase in sales of Cinch and Array products in 2014 also contributed to the decrease, as these products have lower material content than Bel's other product lines. Material costs during the first quarter of 2013 were also unusually high as the Company experienced operational inefficiencies and other start-up costs related to the relocation of Cinch's U.S. manufacturing operations.

Labor costs during the first quarter of 2014 increased as a percentage of sales as compared to the same period of 2013, primarily due to the addition of TRP and Array in 2013, higher sales of Bel integrated connector module (ICM) and Cinch products, and the shift in product mix away from low-labor content products described above. Government-mandated wage increases in the PRC and the strengthening of the Chinese Renminbi further increased labor costs over the prior year. These increases were partially offset by the non-recurrence of manufacturing inefficiencies associated with the Cinch manufacturing reorganization in early 2013, and the realization of cost savings from that initiative.

Included in cost of sales are research and development (R&D) expenses of $3.4 million and $3.0 million for the three-month periods ended March 31, 2014 and 2013, respectively. The majority of the increase relates to the inclusion of R&D expenses associated with TRP and Array, which have been included in Bel's results since their respective acquisition dates.

Selling, General and Administrative Expenses ("SG&A")

The dollar amount of SG&A expenses was $0.8 million higher during the three months ended March 31, 2014 as compared to the same period of 2013, due almost entirely to the inclusion of SG&A expenses of the 2013 Acquisitions. Other factors included a $0.5 million increase in wages and fringe expense and a $0.4 million reduction in acquisition-related costs during the first quarter of 2014 as compared to the same period of 2013.

-20-



--------------------------------------------------------------------------------

Provision (Benefit) for Income Taxes

The Company's effective tax rate will fluctuate based on the geographic segment in which the pretax profits are earned. Of the geographic segments in which the Company operates, the U.S. has the highest tax rates; Europe's tax rates are generally lower than U.S. tax rates; and Asia has the lowest tax rates of the Company's three geographical segments.

The provision (benefit) for income taxes for the three months ended March 31, 2014 was $0.4 million compared to a benefit of ($0.8) million for the three months ended March 31, 2013. The Company's earnings before income taxes for the three months ended March 31, 2014 are approximately $4.3 million higher than the same period in 2013. The Company's effective tax rate, the income tax provision (benefit) as a percentage of earnings (loss) before provision (benefit) for income taxes, was 13.8% and (59.9%) for the three-month periods ended March 31, 2014 and 2013, respectively. The change in the effective tax rate during the three months ended March 31, 2014 compared to the first quarter of 2013 is primarily attributed to a pretax profit in the North America and Asia segments for the three months ended March 31, 2014 compared to a pretax loss in these geographic segments for the same period in 2013. In addition, for the three months ended March 31, 2013, the Company recognized an additional $0.4 million in R&E credits related to the year ended December 31, 2012. See Note 7 of the condensed consolidated financial statements.

Liquidity and Capital Resources

Historically, the Company has financed its capital expenditures primarily through cash flows from operating activities and has financed acquisitions through cash flows from operating activities, cash reserves, borrowings, and the issuance of Bel Fuse Inc. common stock. Management believes that the cash flow from operations after payments of dividends combined with its existing capital base, cash reserves and the Company's available line of credit will be sufficient to fund its operations for at least the next twelve months. Such statement constitutes a Forward-Looking Statement. Factors which could cause the Company to require additional capital include, among other things, a softening in the demand for the Company's existing products, an inability to respond to customer demand for new products, potential acquisitions (as discussed below) requiring substantial capital, future expansion of the Company's operations and net losses that would result in net cash being used in operating, investing and/or financing activities which result in net decreases in cash and cash equivalents. Net losses may impact availability under our credit facility and preclude the Company from raising debt or equity financing in the capital markets on affordable terms or otherwise.

The Company has an unsecured credit agreement in the amount of $30 million, which expires on October 14, 2016. The borrowings under the line of credit amounted to $4.0 million and $12.0 million at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, the balance available under the credit agreement was $26.0 million and $18.0 million, respectively. Amounts outstanding under this line of credit are collateralized with a first priority security interest in 100% of the issued and outstanding shares of the capital stock of the Company's material domestic subsidiaries and 65% of all the issued and outstanding shares of the capital stock of certain of the foreign subsidiaries of the Company. The credit agreement bears interest at LIBOR plus 1.00% to 1.50% based on certain financial statement ratios maintained by the Company. The interest rate in effect on the borrowings outstanding at March 31, 2014 and December 31, 2013 was 1.4% at each date. The Company incurred interest expense of less than $0.1 million related to the borrowings under the credit agreement during the three months ended March 31, 2014. There was no interest expense related to the line of credit during the three months ended March 31, 2013 as there were no borrowings outstanding during that period. Under the terms of the credit agreement, the Company is required to maintain certain financial ratios and comply with other financial conditions. The Company was in compliance with its debt covenants as of March 31, 2014.

On April 25, 2014, the Company entered into a Stock and Asset Purchase Agreement with ABB Ltd. ("ABB") pursuant to which the Company has agreed to acquire the Power-One Power Solutions business from ABB for approximately $117.0 million in cash. This acquisition is expected to close at the end of the second quarter of 2014 and will be funded through bank borrowings and cash on hand.

Cash Flows

During the three months ended March 31, 2014, the Company's cash and cash equivalents decreased by $8.2 million. This resulted primarily from $8.0 million of repayments under the revolving credit line, $1.2 million paid for the purchase of property, plant and equipment and $0.8 million for payments of dividends, partially offset by $1.8 million provided by operating activities. As compared to the three months ended March 31, 2013, cash provided by operating activities increased by $0.1 million. During the three months ended March 31, 2014, accounts receivable decreased by $6.5 million primarily due to lower sales volume in the first quarter of 2014 as compared to the fourth quarter of 2013. Inventories decreased by $2.1 million during the three months ended March 31, 2014 as, among other factors, production levels during the first quarter of 2014 were lower due to the Chinese New Year holiday.

Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 38.3% and 40.9% of the Company's total assets at March 31, 2014 and December 31, 2013, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 4.0 to 1 and 3.0 to 1 at March 31, 2014 and December 31, 2013, respectively.

-21-



--------------------------------------------------------------------------------


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses