Q1 2020 Earnings Call

[music].

The Jay I welcome to the Belfield Inc. first 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.

Thank you snazzy joining me on the call today, it's Greg brokers or Vice President Finance.

I cannot director of financial reporting.

Well he's in the call I like dazzling to go over the Safe Harbor statement when.

Thank you Dan Good morning, everybody before we start I'd like to read the following safe Harbor statement.

For historical information contained on this call the matters discussed on this call such as statements regarding positive signs Intel's underlying business.

A replay the placement not replenishment orders.

And the anticipated improvement in sales and financial results and the second quarter of 2020 as compared to the first quarter of 2020 are forward looking statements as described under the private Securities Litigation Reform Act at 1995 that involve risks and uncertainties actual results could differ materially from bells projection among.

Factors that could cause actual results to differ materially from such statements are.

Market concerns facing our customers.

The continuing viability of sectors that rely on our products the impact of public health crazy such as the governmental social and economic effects of cobot 19, the effects of business and economic conditions.

Difficulties associated with integrating recently acquired company.

Pasadena supply constraints or difficulty.

Product development commercialization or technological difficulties.

The regulatory and trade environment.

Risks associated with foreign currency.

Uncertainties associated with legal proceedings markets acceptance of the company's new products and competitive responses to those new products.

Impact of changes to U.S. trade and tariff policy.

And the risk factors detailed from time to time and the company's if we see very close.

In light of the risks and uncertainties certainly no assurance that any forward looking statement will impact proved 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 that Dan for General business update.

I'd like to thank everybody for joining our call today, how are you in their families or stage paid during this difficult period.

Before we begin and all I can take a moment through his knowledge, our manufacturing associates, who on a follow on each day and I would say I mean, I wouldn't be piano sincerest gratitude to do so when she's in each of those factories around the world continue to come to work in two cards and dedicated to our company and our customers.

Turning to our business often before the first quarter was a challenge you on as we go to call their 19.

As a supplier electronic components to uses the fast medical networking applications.

<unk> products are doing consensual todays business model.

First party continues to be the safety of associates around the world as we continue to pause for volumes pottage for all customers as of today. We are pleased to report that all manufacturing sites operating with a majority of them at near normal production rates. However is continues to be a fluid situation first quarter sales.

For the laundry is basketball factory closures in China for two weeks early in the quarter do Kobe 19, estimating that I'll show for sure very approximately 14 to 17 million due to these closures and much lower returns gold production after extensive Chinese region.

Separately ourselves in the commercial aerospace applications were down 3.5 million compared to the first quarter last year do go onto the grounding of aircraft or one of our aerospace customers.

These factors were partially offset by 8.2 million of sales during the quarter for the region, we acquired she UART business.

No 1.7 million increase in sales related to domestic military.

Applications.

This is.

Versus last quarter last year first quarter.

Further we started to see a rebound in sales through our catalog distributors during the quarter, which was encouraging.

The volume who already has received the first quarter was strong at 132.6 million, which includes over 11 million see you I bookings. Excluding see you are a first quarter bookings are the same as a first quarter last year and were up 5% compared to the fourth quarter of 2019 <unk>.

The increase from the fourth quarter was seen across all our power product line.

You know solution segment also computer and no did increase in bookings these reassuring data points.

Indicating a proven sales with certain quoted as compared to the first quarter.

We continue to implement a corporate wide cost savings program. There was it all areas for improvement once our new ERP system is implemented.

He will allow us a furnace creemore nimbly eliminate redundancies throughout the organization.

At this time it has very limited visibility beyond the second quarter due to the crude cobank 19 situation.

With that I like to turn the call over to Greg go through the financial updates.

Thank you Dan.

Sales by product segment for the first quarter of 2020 were as follows.

Their TV solution sales were 39.1 billion.

The decline at 12% power solutions are protection sales were 36.1 million down 16% from last years first quarter.

And I get it solution sales were 28.8 million down 25% from last year's first quarter.

On a consolidated basis gross profit margin, excluding R&D expense.

Declined slightly to 24.2% in the first quarter or 2020 as compared with 24.5% in the first quarter of 20 like team at the margin impact of lower sales and operational inefficiencies related to cope with my team were largely offset by a 2.2 million dollar.

The funding received from the Chinese government during the first quarter.

A portion of the reduction in sales related to anticipated lower demand from certain over OEM customers as discussed on last quarter's call.

We were able to mitigate the impact with these lower revenues by proactively reducing labor and overhead expenses accordingly.

Research and development costs were $6.1 million during the first quarter 2020, a decline of 1.1 million from the first quarter 2019 as result of restructuring efforts implemented during the latter part of 20 Nat King.

Our selling general and administrative expenses were $22.1 million or 21.2% of sales as compared with $19.2 million or 15.3% of sales in the first quarter 2019.

The 2.9 million dollar increase in West, Virginia, primarily related to a 2 million dollar unfavorable fluctuation.

Cash surrender value over company owned life insurance policies compared to last years first quarter.

Incremental sta costs associated with the inclusion notes are key why in the first quarter 2020 were partially offset by lower ERP costs. This year.

On a go forward basis, we would expect that's unique to run between 20.5 and $21.5 million per quarter in the near term.

These factors resulted in a loss from operations at $3.1 million in the first quarter 2020, as compared to income from operations of $3.4 million in the first quarter of 22.

Other income and expense that was an expense of $88000 for the first quarter 2028, that's compared to expense of $779000. During the first quarter of 2018.

The expense in the first quarter 2019, largely related to $573000 and foreign exchange losses.

Interest expense was $1.4 million in the first quarter of 2020 down slightly from the same quarter last year at two to lower interest rate in effect during the 2020 quarter, coupled with a reduction the average debt balance throughout the first quarter 2020.

We had a benefit from income taxes of $772000 in the first quarter of 2020 compared to a provision of $39000 during last years first quarter.

The benefit in the first quarter 2022 flux reduction in guilty attacks and tax benefits associated with that payers Act.

Earnings per share for class a common shares was a loss of 30 cents per share in the first quarter of 2020 as compared with earnings of eight cents per share in the first quarter of 21 team.

Earnings per share called class B common shares was a loss of 31 cents per share in the first quarter 2020, as compared with earnings of nine cents per share in the first quarter 29 team.

On a non-GAAP basis, which excludes certain unusual and other nonrecurring items you'd see us for class a shares was a loss of 28 cents per share in the first quarter of 2020 as compared with earnings of 20 cents per share in the first quarter of 2019.

On a non-GAAP basis EPS for class B shares was a loss of 29 cents per share in the first quarter of 2020.

As compared with earnings of 22 cents per share in the first quarter or 29 team.

And now I'd like to go through some balance sheet and cash flow items.

Our cash and cash equivalents balance at March 31st 2020 was $68.4 million a decrease of $3.9 million from December 31st 29 team.

During the first quarter 2020, we generated cash flows from operating activities of $8.2 million.

We've made net payments of $8.2 million towards are outstanding debt balance and use cash capital expenditures of 1.8 million dividends dividend payments of $806000 and interest payments of $1.3 million.

So accounts receivable were $69.1 million at March 31st 2020.

As compared with $76.1 million at December 30, Onest 2019.

Days sales outstanding decreased slightly to 60 days at March 31st 2020, as compared to 61 days at December 31st 29 team.

The reduction in our accounts receivable balances largely due to lower sales volume in the first quarter 2020, some period of the fourth quarter 20 like team.

Inventories were $104.3 million at March 31st 2020.

Down $3 million from December 31st 29 team.

The decline was sitting in finished goods, partially offset by increases in raw materials and with the balances.

The temporary interruption of our manufacturing processes in China earlier in the quarter slowed the rate at which we can brilliant raw materials to finished goods during the quarter.

Accounts payable over $38.8 million at March 31st 2020 down 5.4 million from its level at December 31st 2019, primarily due to the payment of see you are past due accounts payable.

Post acquisition.

In addition to lower overhead costs in China during the first quarter.

Related to the temporary facility closures.

Well total outstanding debt balance was $135.1 million as of March 31st 2020.

Net of deferred financing costs, that's an increase of $8.6 million since the 29 keen yearend balance.

This primarily reflects a voluntary prepayment of $8.2 million made during the first quarter for 20 or 28 in connection with an amendment to our credit facility.

Book value per share, which is calculated to stockholders equity divided or fire combined a and b classes as common stock outstanding was $13 or 19 cents per share at March 31st 2020.

Compared to $13.69 per share at December 31st 2019.

And with that I'll turn the call back over to Dan Dan.

Thank you Craig at this time see any could be open up the call for questions.

Absolutely.

I would like to ask a question. Please take note by pressing star one on your telephone keypad drinking is speakerphone. Please make sure you me attrition is turned off to a larger signal to reach on equipment again, Presque I want ask a question, we'll pause for just a moment to other everyone and opportunity to signal for questions.

The Swiss questions comps from Theodore O'neill, I, just feel to feel free six.

Thanks, very much I'm just a couple of questions here can you give us some color on customer inventory levels.

You mentioned booking at the beginning of the prepared remarks, I Wonder if you could come to some more color on that as well.

How all new customer you know all our cost me on current customers. Besides the aerospace customer Oh, how we think they're very good situation, where we are seeing a lot of bookings.

I mean, we mined and every day.

And it looks like our bookings are still holding holding strong. So we I am assuming that if that's the case.

Customer needs, our parts and they want to come in.

Craig you want to answer the next question.

The second part.

Yeah, I mean should follow along with with that.

But to answer that.

Sure.

We are doxey.

Lot of evidence that yeah, we're saying that there's a build up going on like gets a.

There is there is true demand.

In the in the channel right now.

But again, our visibility is somewhat limited.

Further down the or or or lead times.

Okay. That's helpful. Thank you very much.

Okay, very I would add to that currently we see very if we get 100 calls and I, probably 95, or fracs, but I'd and they only five or for push backs.

So we still see that pekka demand out there.

Okay, that's great. Thanks.

If you find that your question hatching asset could you maybe use yourself from the Q pressing Stockton.

Your next question comes from chain for study at Needham and company.

Alright. Thank you good morning, I just wanted to follow up on the the commentary that you are making her about the the level of business activity I'm wondering if we put aside the commercial aerospace customer we look at the military medical and maybe the networking area can you give us a little bit more color on on which of those vertical.

As you have perhaps more visibility or where you're seeing more order strength.

You know a show networking is easy because networking works quarter to quarter and we have seen you know good orders coming from you know some team networking customers like assess go right to Nokia the problem with military is that come in you know they these programs are 10 15 year program.

So when they are the orders come in you might get an audit and you'll see another ought to be because that auto algea for like a year year and a half. So that's why we you know we don't see anybody pushed back in we don't see like canceling orders probably have a lot more visibility the networking because in a short time for now and in addition, with medical you know there's a big piece.

<unk>, Yeah, we're probably working with five companies.

I'm all looking to build that you know ventilators and support medical equipment continues today, so that no big rush, but I think all companies are faced with.

What was that a or how much of a benefit was that a I assume probably is relatively small benefit or Dan could you just mentioned in late in the March quarter, you're saying the expectation is that will be more of a benefit in the June quarter, but I wouldn't call. So that's more of a temporary thing right now I think I think I was.

A lot or the push you know is to get bogged down in the second quarter and still.

If you look away in sales came out with T. IMAX or people that are a lot bigger wheel hubs is concerned about you know what's going to happen in the third quarter.

And at their concern I definitely should be concerned.

But on a lot as you know hopefully you get it out in the second quarter.

Okay.

Hi, I'm looks like it had a a really nice quarter here and then considering the contribution made with you know just because of our experiences that is fairly limited, but is there anything unusual adeptus you I business, there, where where's the strength that they're saying it is that something that we can continue to look for.

I didn't get a strange you know they really address the second tier third kept their customers very well they know how to use the catalog distributors very well so they have a very strong diversified customer base.

And I think what happens you know they're going to last year. Most of the large distributors were working down the inventory and that's you know I think 50% of their sales go through catalog distributors. So a lot of their book is a good portion that bookings came from there also I think they do a lot bigger jobs with medical companies the second to get their care America companies.

Because they have such a broad away array of products.

So they get to see a lot larger market than we you know we probably have.

Got it now to two final questions I'll jump back in the Q It looking at at the.

Pulling out or see why lifted the bell standalone margins, we're pretty healthy and I'm wondering was that a a mix.

Issues that benefited the margins or maybe a little more than we thought considering the environment.

Okay, all right, Craig and many skus that.

Yeah, Yeah, as we got a favorable benefit as mentioned that we that we received a some.

Some subsidies from the from the Chinese government that is basically kinda refunds of.

So security taxes that we get paid earlier in the yield.

Previous years, so that helped to offset a lot of the a a lot of any additional cost that we that we incurred going you know because of the delays that we talked about in you know.

Opening our factories and so on.

I think we did have a favorable world sales mix you know we did you know they live in the power group. There were several some business that you know in the prior years quarter was what was March unchallenged Ah that's not there in this current quarter. So that also helped in the overall margin picture.

And Craig said that benefit that you saw from the Chinese government Trevor really funny. It really does represent because it did you say from the standpoint at the margin improvement every basis point too.

[noise] ER.

It was probably you know maybe a one and a half percentage point impact do you have to them. It was all margin for the cool.

Got it.

Thank you all I'll jump back in the curious I can't give my bad now to add you know we are making a concerted effort with our power group.

I'm really trying to focus our navy again, that's a high volume data set of customers everything at the past when we had no substantial salix had very little margin and I think we're doing a a much better job focusing on the industrial markets.

And where it's at the margins up substantially better ortho utilizing our.

Our R&D better and trying to streamline power now it's been a major focus of us since we bought power. One however to capitalize on that on that group and I think we'll get to a point now that ideally should such a good improvements over the next three or four corners.

Got it thank you.

Your next question comes from Hendi Susanto at Gabelli sense.

Good morning, Bad right and then.

Hi, Andy.

Step up.

Hey, I have about China, what that China market look like and at what production rates are your facilities in China running has.

Okay, just ah so terribly it looks very very strong at this point in time for US there are driving then Jim I'm. The only concern that we have a summer logistics standpoint.

I'm getting product in and out no shipments as shipments here a lot of the commercial airlines have cutback substantially.

But from a manufacturing standpoint, and a good portion of what we go than China goes in China.

To their subcontractors like the Fox.

Or Ajay Rome, or flextronics. So we've been very very fortunate. That's you know China was only shut down for two or two weeks and then a roughly took them about four weeks to get back to you know roughly 90, 95% production.

And hopefully the gap, we can make up that overtime.

So if I if I went to if I may clarify, so 95%, but it does take 95% to run rate prior to August 19.

Well I think they need to get qualify that a little bit handy you know we've got.

We've got about 90% of the or workforce back her 90, plus if you want to go but because of the.

The actually we had a tree to to facilitate the changes a poor pelican safety and so on related to cope with my team. So our efficiencies arc back to that prior coated level. So.

Even though we've got 90% of the employees that were not quite at 90% in terms of they run out good efficiency.

Got it.

And at Craig Hallum Stupid thing about close by again and Opex in Q2, and the remainder of the year I know that for the second half of the year. There are unprecedented but I'm wondering are kind of like kind of flexibility you have one better numbers.

Yeah, I mean, I mean, we've been weaken looked out to the second quarter like Dan said earlier, we don't have a lot of visibility out that that.

And you know this comment as it is assuming that you know.

The factories that are currently operating today, we'll continue to operate goods that that changes can change on a daily basis.

I would think that our margins would be a comparable maybe slightly down since Q1, because we did have yeah. We did have that benefit from the Chinese government impact our margins in Q1. So are there other thing for Q2.

Should be flat to slightly down.

And then how about Opex quite.

Okay, that's too warm opex level would it be vandergrift baseline.

Yeah, I believe it doesn't mean, we didn't have.

The the 2 million dollar items that are related to our.

Insurance policy to evaluate the cash surrender value on the insurance policy, we have that.

Adjustment based on the market values of the underlying securities or we don't expect that to be recurring every quarter. So we believe that you know that 20 million after 21 and a half as it is a good response 12 Bucks.

Okay.

And again I'm interested in getting more about networking market you indicated that our soldiers are good I'm wondering like what kind of end products drive those all the nurse.

And the thing about that looking I'm wondering whether there's something like let's say like a temporary benefit off.

Like higher bandwidth required them because of the mark with ambient at school, but I'm. One of these are the desktop that data more strength beyond that.

You know I get you know again, you know assist our product sell into so many different does the same price is going to so many different products and Cisco, it's very difficult to determine when the end Mark is that he takes a linear again looking at Cisco and looking at enough yeah.

Hi, guys, saying, you know big markets out there.

So I can say I don't know Pacific They know how does it affect the person that's working from home is that where that business is coming from or is it going to Verizon I don't have that granular detail.

Got it and then.

Any any point persons them all powered felt directionally with me.

Look like in Q2, other fair amount connected to be mechanistic, our and new eyes.

And it puts and takes.

When you want to address that one.

Yeah, sorry, Keith can someone you repeat that question Anthony.

Keep in mind.

I I would like to know whether they are insight into what's the expectation for different beckman by connected to do back a bit and power and also if I can you I. When it comes to Q2 that you expect directionally or some of them.

Like flat up or down.

Oh sure sure. So you know I think.

For Magnetics, that's probably the vonnie area that the anticipate seeing some growth in Q2.

Our demand orders received throughout 2019 had been low they're not the ticket or end customer as they had and I hope or inventory situation and that had to embark trailing only been seen replenishment orders there.

So that does not strong.

See you why booking in Q1, where.

As it went up there they're strong gets to add bookings quarters that they had in the and their history a they had over 11 million in bookings for Q1. So we did expect.

Them to have a strong Q2 coming up here.

On the rest of the power side it it does but.

I bet challenging they're bites one customer that we had last year in the in the cloud space. That's out there at some point challenges with a tear ups and tight. So you can expect some presets here I personally last year related to that customer.

And then on that connectivity side, Oh, we do see strength in and military the we continue to see challenges on the commercial aerospace side and also our structure can't blame inside that our stay where products are those are our area.

Challenges that we have some some offset a live in connectivity.

I guess, just more broadly distribution impacts all of our product groups, including the recently acquired Eli and we do expect that to start picking up a they get paid some rebounding in catalog distributors in Q1, which is always at that time.

And that doesn't impact all three of our product groups. So we hope to see some growth there.

You know anything we would it is our circuit protection funding, we would add onto a power we have our circuit protection group and they almost doubled their backlog. So that's a strong side because our circus actually good does have a diversified customer base.

Yes.

Got it. Thank you Dan Thank you quick and thanking them.

Welcome.

The next question comes from Jim Ricchiuti at Needham and company.

Thanks, I just had a follow up with respect to the shipments that had been deferred Uh huh.

Q2 that that 14 to 17 million do you anticipate that all shipping in Q2.

I think there or what I hope so yes, we should be able to ship all those products out.

Got it and but again just scared that.

No they perhaps.

I just wondering.

Yeah challenges you experienced a.

In the quarter in China.

What was there any of.

A shift from potentially two competitors that had manufacturing capabilities outside of the affected areas, where you might have temporarily lost some share or do you feel that.

All things considered you were able to hang onto share.

I just got together I think the shift can before this I think it came through tariffs.

Well they don't have wanted to keep customers.

Yeah, I didn't want to be in China, because of the tower situation and we lost them, but not because the call that 90 more importantly, though now when the whole loans being affected if you look at Malaysia, Thailand, the Philippines, we do see opportunities out there where people coming to us again back to the circuit protection or.

Our competitors are not building in China that doesn't outside of China, and they have a better because these policy no four to six weeks or reducing some upside now because there are based in China.

Got it that's potential upside that benefits you do a at least in Q2, we'll see if it helps the second half Okay. I'll, just say no Jim the way, we try to do it all possible if a customer concerns there haven't been do us before.

And they want us to fill that void or we would sign up there would have to sign up for you there a six month agreement.

While there would have to take a price increase.

Probably just why yeah, we want except one off or others.

Got it okay. Thank you. Thanks, Thanks a lot.

Once again, if he would like to ask a question. Please press star offline.

The next question comes from Lenny Dunn and mutual Trust Company of America.

Good morning.

First of all are there and I wonder complementary was for first time I've ever seen your.

Correct.

In a number of times.

Or show Cracker them.

Just one [laughter] just don't tell my wife.

[laughter].

[laughter] worker.

Yeah. The other thing is that this is kind of.

Curiosity question.

Yeah, obviously see you are you seems to have been for three right price.

And.

Your troubling you.

Right.

I was wondering you realize that they really out.

Repayments on receivables because I know there too in your release discussion.

I went out here for you don't do that.

Greater work or what are you aware of it at the time of the purchase.

Correct.

Yeah. We were we were aware of that earlier wrong in the discussions okay. Let's take what happened was as we as we got through.

To the period prior to closing I think you've got a little a little worse than what we expected but.

In our purchase agreement, we did have a or an adjustment for for working capital. So so that that did not really hurt us at all when they took yeah I go to pull that out in the offshore I'm sure going forward.

I'll be a problem bigger for sure, but you've been very good about paying their bills.

Right. Okay, just maybe maybe to good use the problem [laughter] well here, though you have.

Ah you establish a good relationship or then people or go to work service.

Correct.

Okay.

I understand because no one really knows what the third quarter will be like right here.

Sure me here.

Okay doesn't work out some disastrous manner.

I'm in quite a free world, but good you never know whenever for sure or.

Would you say that you think good business will be are reasonably even one.

Third quarter.

You here for you'll hear from truck.

Regardless.

Ah regular I tell one.

Yeah, I mean, I think if we don't draw obviously it all depends on how quickly you know the global economy recovers a you know either you know we're not we're not anticipating l. babs that short the recovery that you know when people talk about earlier, yeah, we think it's going to be okay.

More gradual Oh, let's say the major set back somewhere so.

Yeah, We think we're now we're in a pretty strong position yeah.

The way our cost structure is set up and you know there or are customer base and so I think we're in a position due to prosper.

I think the other keep going you know maybe historically, we might have been were overly focused on the topline.

You know now no. We are trying on may drafting every hole we complete.

Yes, I take as maybe because we're moving products around that we really want to look at you know the bottomline and focus on growing our margins in growing our profit.

And if that means you know well lose some top line growth I think at this point, we're willing to accept that fact.

So I think there you know you know whenever they said and I think we'd be a lot stronger company.

The moves that we're putting in place now and the actions were taken today.

No the UK works that way, where it looks like this is totally different picture and you have in the last conference call.

I'm very pleased with that put away.

Chris.

Right.

Okay, That's what February Andrew.

I really hope.

We're going to we did okay. So you are.

Oh or what was probably questionable.

I hope that we can kind of just work with a week ago.

Great.

Or make money with us or because they have to plan at the moment.

I do I think we should see why are we don't look at is actually cusick synergistic acquisition at all I.

I think you know they have a really good now a model that we like a diversified customer base.

Hey, guys to our overall market I think what we're trying to do it how do we know we don't think we want to combine things can take costs out at all what we are trying to do is we do have a you know companies that have broader based god products like signal transformer like the circuit protection and how can we capitalize on.

The creativity and see you are and how they go to market and the margins. They bring that we don't have and really have a good no model of see you I.

Have you know because they work because they have no yes.

Marketing company they have no manufacturing. So we think that allow that to be an important player bell as there are so again, we're we're looking to grow that business had model.

I look at it here, how do we do maybe more private labeling.

More joint ventures with companies.

And not be overly focused if we don't manufacturer we don't salad.

And you know look at you know look and see you Ais a viable model that we can apply to other companies.

Yeah, no further questions I'd like to turn to call back over to gantry schemes for now.

Additionally, Max.

Hi, once again, we're very appreciative for everybody to be on the call. During this difficult time over Thanksgiving attention media, Dallas and hopefully we can deliver going forward.

And please be safe.

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

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