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BELFA > SEC Filings for BELFA > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for BEL FUSE INC /NJ

Form 10-K for BEL FUSE INC /NJ


13-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to imply any conclusion that such results, causes or trends will necessarily continue in the future.

Overview

Our Company

The Company designs, manufactures and markets a broad array of magnetics, modules, circuit protection devices and interconnect products. Bel's products are 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 2013, 56% of the Company's revenues were derived from Asia, 33% from North America and 11% from its Europe operating segment. Sales of the Company's magnetics products represented approximately 49% of our total net sales during 2013. The remaining revenues related to sales of the Company's interconnect products (32%), module products (16%) 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 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.

Trends Affecting our Business

The Company believes the key factors affecting Bel's 2013 and/or future results include the following:

· Recent Acquisitions - The Company has completed five acquisitions since the first quarter of 2012. During the years ended December 31, 2013 and 2012, the acquired companies have contributed a combined $79.4 million and $3.2 million of sales, respectively, and a combined $10.9 million in income from operations and a $0.1 million loss from operations, respectively.

· Revenues - Excluding the revenue contributions from recent acquisitions as described above, the Company's revenues for the year ended December 31, 2013 decreased by $13.5 million as compared to 2012. Sales of custom modules decreased by $19.8 million from 2012, primarily due to a steady reduction in orders from one customer in North America since early 2012. The order volume related to this customer has been relatively flat since the second quarter of 2013. There were also revenue reductions of $3.3 million resulting from manufacturing inefficiencies associated with the restructuring of Cinch operations. These reductions in sales were partially offset by increased sales of Bel's DC-DC products of $7.0 million and magnetic products of $3.1 million. In addition, during the latter part of 2013, Bel implemented price increases for certain products as our pricing structure did not reflect the rising labor costs in the PRC as discussed below.

· 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 year ended December 31, 2013, the Company experienced a favorable shift in the mix of products sold as compared to 2012, which partially mitigated the effects of reduced sales and operational inefficiencies at our Texas facility.

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· 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. We are anticipating some price decreases on these component through the first half of 2014. 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 year ended December 31, 2013 as compared to 2012. 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.

· Restructuring - The Company substantially completed the physical transition of the operations of its Cinch manufacturing facility in Vinita, Oklahoma to its Reynosa, Mexico facility and a new facility in McAllen, Texas by the end of 2012. The Company continued its efforts into 2013 to bring the new facility in McAllen, Texas up to full operating capacity. The Company faced certain challenges with the transition, resulting in $3.2 million of unanticipated costs during 2013, primarily during the first half of the year. These costs included additional overtime, scrap, a higher volume of purchased materials, expedited freight charges and other costs. During the second quarter of 2013, the Company initiated restructuring actions in additional Bel and Cinch locations which resulted in $1.3 million of severance and other charges in the second quarter. The Company does not anticipate any significant costs related to restructuring programs during 2014.

· Labor Costs - Labor costs as a percentage of sales during the year ended December 31, 2013 were slightly lower as compared to 2012. Following the 2012 Lunar New Year holiday, additional recruiting, training and overtime charges were incurred in the PRC; this trend did not recur in 2013. We are continuing to relocate work within the PRC to a lower-cost manufacturing facility that we operate in Pingguo. However, rising labor costs in the PRC and the strengthening of the Chinese Renminbi continued to impact our overall profit margins in 2013. 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 - The acquisitions of TRP and Array in 2013, the valuations of the 2012 Acquired Companies, and other ongoing activities related to potential acquisitions gave rise to acquisition-related costs of $0.9 million during the year ended December 31, 2013. Bel's continuing strategy to actively consider potential acquisitions 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 year ended December 31, 2013 is primarily attributable to a significant increase in the pretax income earned in the Asia segment, with minimal tax effect, coupled with pretax losses in North America. This was partially offset by significantly lower net reversal of liabilities for uncertain tax positions during 2013 compared to 2012.

With the completion of five acquisitions over the past two years, Bel was able to expand its product portfolio, while further securing its position as a market leader for ICMs. These efforts, coupled with the recent cost containment measures, have positioned Bel for further growth and profitability in 2014. 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 this Annual Report.

Summary by Operating Segment

Net sales to external customers by reportable operating segment for the years
ended December 31, 2013, 2012 and 2011 were as follows (dollars in thousands):

                                  2013                2012                2011
             North America   $ 116,548    33 %   $ 126,469    44 %   $ 134,804    46 %
             Asia              193,647    56 %     128,319    45 %     126,941    43 %
             Europe             38,994    11 %      31,806    11 %      33,376    11 %
                             $ 349,189   100 %   $ 286,594   100 %   $ 295,121   100 %

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Net sales and income (loss) from operations by operating segment for the years ended December 31, 2013, 2012 and 2011 were as follows (dollars in thousands):

                                             2013          2012          2011
          Total segment sales:
             North America                 $ 128,472     $ 138,966     $ 149,114
             Asia                            225,151       167,756       177,815
             Europe                           40,742        33,329        34,597
          Total segment sales                394,365       340,051       361,526
          Reconciling item:
             Intersegment sales              (45,176 )     (53,457 )     (66,405 )
          Net sales                        $ 349,189     $ 286,594     $ 295,121
          Income (loss) from operations:
            North America                  $  (1,560 )   $   1,336     $   9,026
            Asia                              15,356           (42 )      (3,480 )
            Europe                             1,251           369         1,850
                                           $  15,047     $   1,663     $   7,396

During 2013, the recent acquisition of TRP contributed $66.5 million in sales and $10.9 million of income from operations to the Company's Asia operating segment. Sales in the Company's Europe operating segment were favorably impacted by the acquisitions of Fibreco and Bel Power Europe which occurred in the second half of 2012. During 2013 and 2012, Fibreco and Bel Power Europe contributed combined revenues of $10.7 million and $3.1 million, respectively, and combined operating income of $1.7 million and $0.3 million, respectively, to the Company's Europe operating segment. The decrease in sales in North America primarily related to reduced demand in 2013 for Bel's module products which are manufactured in China. Thus, the decrease in North American sales caused a corresponding decrease in intersegment sales of module products from Asia to North America. North America sales and income from operations were also impacted by the transition of the operations of Cinch's manufacturing facility in Vinita, Oklahoma to Reynosa, Mexico and a new manufacturing facility in McAllen, Texas. 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. The decreases noted in North America sales were partially offset by $2.1 million of new sales volume related to the acquisition of Array in late August 2013.

See Note 12 of the notes to consolidated financial statements contained in this Annual Report on Form 10-K for additional segment disclosures.

Our 2013 Results

Sales for 2013 increased by 21.8% to a record $349.2 million from $286.6 million for 2012. Bel's operating profit for 2013 was $15.0 million as compared to $1.7 million reported for 2012. This increase was primarily due to the results of the recent acquisitions and increased demand for legacy-Bel ICMs, which lead to higher efficiency and absorption of fixed costs at the manufacturing facilities in the PRC. These were partially offset by restructuring charges of $1.4 million. Net earnings were $15.9 million for 2013 as compared to $2.4 million for 2012. Additional details related to these factors affecting the 2013 results are described in the Results of Operations section below.

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Results of Operations

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

                                                  Percentage of Net Sales
                                                 Years Ended December 31,
                                            2013            2012           2011

 Net sales                                    100.0   %       100.0   %       100.0 %
 Cost of sales                                 82.2            83.8            82.9
 Selling, general and administrative
 expenses                                      13.1            13.7            13.3
 Litigation charges                               -               -             1.2
 Restructuring charges                          0.4             1.8             0.1
 Loss (gain) on disposal of property,
 plant and equipment                              -             0.1               -
 Impairment of investment                         -             0.3               -
 Interest income and other, net                 0.1             0.1             0.1
 Earnings before (benefit) provision
 for income taxes                               4.3             0.3             2.7
 Income tax (benefit) provision                (0.2)           (0.5)            1.4
 Net earnings                                   4.6             0.8             1.3

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

                                                      Increase (Decrease) from
                                                            Prior Period
                                                  2013 compared        2012 compared
                                                    with 2012            with 2011

 Net sales                                                 21.8  %             (2.9)  %
 Cost of sales                                             19.5                (1.9)
 Selling, general and administrative expenses              16.4                  0.2
 Net earnings                                             570.7               (36.2)

Sales

Net sales increased 21.8% from $286.6 million during 2012 to $349.2 million
during 2013. The Company's net sales by major product line for the years ended
December 31, 2013, 2012 and 2011 were as follows (dollars in thousands):

                                                        Years Ended
                                                       December 31,
                                   2013                    2012                    2011
       Magnetics            $ 170,166        49 %   $ 100,529        35 %   $  87,104        30 %
       Interconnect           111,653        32 %     109,245        38 %     107,346        36 %
       Modules                 55,967        16 %      66,663        23 %      90,475        31 %
       Circuit protection      11,403         3 %      10,157         4 %      10,196         3 %
                            $ 349,189       100 %   $ 286,594       100 %   $ 295,121       100 %

2013 as Compared to 2012

The Company's magnetic product line, which includes Bel's MagJack and the newly-acquired TRP integrated connector module (ICM) products, had strong sales in 2013. The acquisition of TRP in March 2013 accounted for $66.5 million of the increase from 2012. The acquisition of Array in late August 2013 contributed $2.1 million of sales to the Company's interconnect product line during 2013. Fibreco, acquired in July 2012, contributed sales of $7.5 million and $2.1 million to the Company's interconnect product line during 2013 and 2012, respectively. The increased sales volume from the Array and Fibreco acquisitions was offset by lower sales of Cinch's interconnect products early in 2013 due to the transition of Cinch's manufacturing operations. Sales of Cinch's products rebounded by the fourth quarter of 2013. Sales in the Company's module product line were lower in 2013 due to reduced order volume of one customer, partially offset by higher sales of DC-DC and AC-DC module products. Automation of certain fuse manufacturing processes increased capacity and output of fuse products and improved delivery lead times, contributing to the increase in circuit protection sales.

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2012 as Compared to 2011

Revenue in Bel's interconnect product line in 2012 was essentially flat with the prior year, as growth in Cinch's commercial aerospace business in North America in addition to new sales volume from Fibreco were fully offset by decreases in passive connectors. Sales of magnetic products, which include Bel's MagJack® products, increased in 2012 subsequent to the 2012 Lunar New Year holiday. Module sales were down in 2012 compared to 2011 due to a change in the ordering patterns of two major customers.

The Company continues to have limited visibility as to future customer requirements and, as such, the Company cannot predict with any degree of certainty sales revenues for 2014. The Company cannot quantify the extent of sales growth arising from unit sales mix and/or price changes. Product demand and sales volume will affect how we price our products. Through the Company's engineering and research effort, the Company has been successful in adding additional value to existing product lines, which tends to increase sales prices initially until that generation of products becomes mature and sales prices experience degradation. In general, as products become mature, average selling prices decrease.

Cost of Sales

The Company's cost of sales as a percentage of consolidated net sales for the
years ended December 31, 2013, 2012 and 2011 consisted of the following:

                                                 Years Ended
                                                December 31,
                                            2013    2012    2011
                   Material                 42.5%   45.9%   50.4%
                   Labor                    14.5%   14.9%   10.9%
                   Research and development  4.0%    4.3%    4.1%
                   Other expenses           21.2%   18.7%   17.5%
                     Total cost of sales    82.2%   83.8%   82.9%

2013 as Compared to 2012

Material costs as a percentage of sales were lower in 2013 as compared to 2012, primarily due to the shift in product mix noted in "Sales" above. The reduction in sales of higher-material module products, and increase in sales of lower-material ICM and power products contributed to the decrease in material costs as a percentage of sales. These factors were partially offset by operational inefficiencies and other start-up costs at the new manufacturing facility in Texas during the first half of 2013, which resulted in high material costs at the Texas facility related to third-party purchases of machined parts at premium prices, and high volumes of scrap, rejected materials and expedited freight costs.

Labor costs as a percentage of sales were slightly lower during 2013 as compared to 2012, as the Company incurred excessive recruiting, training and overtime costs following the 2012 Lunar New Year holiday in Asia, which did not recur in 2013. The new sales volume from TRP products also contributed to the reduction in labor costs as a percentage of sales in 2013, as TRP products have a lower labor cost structure than Bel's ICM products. These factors were partially offset by mandatory wage increases in the PRC, which went into effect in May 2013.

The increase in other expenses as a percentage of sales for 2013 as compared to 2012 primarily related to the inclusion of support labor and fringe costs of the recent acquisitions, and duplication of some indirect labor costs and travel costs during the transition of Cinch manufacturing operations in early 2013. There was also an increase in incentive compensation for support labor in 2013. These factors were partially offset by a reduction in support labor and fringe costs associated with the restructuring actions that took place in 2012 and 2013.

2012 as Compared to 2011

The most significant factor contributing to the increase in cost of sales as a percentage of sales relates to higher labor costs in Asia during 2012. The increase in other expenses noted in the table above primarily relates to reorganization costs at certain of the manufacturing facilities, offset by savings associated with cost reduction measures in Asia during 2012. These increases in cost of sales as a percentage of sales were partially offset by a reduction in material costs as a percentage of sales. As the Company's module product line has high material content, the reduction in module sales during 2012 resulted in a lower percentage of material costs as compared to 2011.

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Included in cost of sales are research and development ("R&D") expenses of $14.1 million, $12.4 million and $12.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. The majority of the increase over the past two years relates to the inclusion of R&D expenses of the 2012 and 2013 Acquired Companies, which have been included in Bel's results since their respective acquisition dates. The Company also incurred expenses during the first quarter of 2012 related to the relocation of Bel's European R&D headquarters for integrated modules to a new high-technology center in Maidstone, England.

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

For the year ended December 31, 2013, the dollar amount of SG&A expense was $6.5 million higher as compared to 2012. Of this increase, $4.8 million related to the inclusion of SG&A expenses of the 2012 and 2013 acquisitions. Other contributing factors included a $2.9 million increase in incentive compensation, unfavorable fluctuations in foreign currency exchange rates of $0.7 million, and an increase in freight charges primarily due to the Cinch transition of $0.8, partially offset by $0.8 million of insurance proceeds related to Hurricane Sandy, $0.4 million of lower acquisition-related costs and a $0.7 million reduction in wage and fringe-related items, among other factors.

SG&A expense was essentially flat in 2012 as compared to 2011 in both overall dollar amount and as a percentage of sales; however, there were several offsetting fluctuations within SG&A. Increases in 2012 related to salaries and fringes ($0.3 million), office expenses ($0.2 million) and acquisition-related costs ($1.0 million) were due to the additional staffing, offices and costs associated with the addition of the 2012 Acquired Companies. The anticipated acquisition of the Transpower magnetics business of TE also contributed to the increased acquisition-related costs in 2012. There was less legal activity in 2012 related to the SynQor case compared to 2011, resulting in a $1.0 million reduction in legal fees in 2012. There were also favorable fluctuations in foreign currencies of $0.6 million during 2012, primarily related to the British Pound.

Litigation Charges

The Company did not incur material litigation charges during 2013 or 2012. During 2011, the Company recorded litigation charges totaling $3.5 million related to the SynQor and Halo lawsuits. Both of these lawsuits are further described in Note 16 to the accompanying consolidated financial statements.

Restructuring Charges

The Company recorded restructuring charges of $1.4 million and $5.2 million during the years ended December 31, 2013 and 2012, respectively, in connection with its restructuring programs, as further described in Note 3 of the notes to our consolidated financial statements. Included in the restructuring charges for 2012 was a $1.0 million write-off of the building and land located in Vinita, Oklahoma, as Bel donated this property to a local university in December 2012. The Company recorded $0.3 million of restructuring charges in 2011 related to the realignment of its Cinch U.K. operations. These charges were primarily associated with severance costs.

Loss (Gain) on Disposal of Property, Plant and Equipment

During the year ended December 31, 2012, the Company recorded net losses of $0.2 million related to property, plant and equipment. This was comprised of losses of $0.4 million, primarily due to damage caused by Hurricane Sandy, offset by a $0.2 million gain recorded in connection with a sale of a building in Macao. The Company recorded net gains of $0.1 million during the year ended December 31, 2011, primarily related to a $0.2 million gain on insurance proceeds associated with snow damage to the manufacturing facility in Vinita, Oklahoma. This gain was partially offset by losses recorded in connection with the disposal of various equipment.

Gain (Loss/Impairment) on Investment

During the year ended December 31, 2013, the Company realized a $0.1 million gain related to the sale of a portion of its investments that are earmarked for the SERP plan. During the year ended December 31, 2012, the Company recorded $0.8 million in other-than-temporary impairment charges and a $0.1 million loss on sale related to its investment in Pulse Electronics Corporation ("Pulse") common stock. During the year ended December 31, 2011, the Company realized a $0.1 million gain on the partial sale of its investment in Pulse common stock.

(Benefit) Provision 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.

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