Bel Fuse Inc.

Thank you, Charlotte. I would like to welcome everybody to our conference call to review Bel's second quarter 2013 results.

Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance.

Thanks, Dan. Good morning, everybody.

Before we begin, I would like to read the following Safe Harbor statement.

the market concerns facing our customers; the continuing volatility of sectors that rely on our products; the effects of business and economic conditions; difficulties arising -- or difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development, commercializing 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; and the risk factors detailed from time to time in the Company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statements will in fact prove to be correct.

We undertake no obligation to update or revise any forward-looking statements.

Now getting to the numbers. First of all, we believe that Bel has turned the corner.

Our restructuring program is essentially complete including the transition of Bel Connector's operations to the new facility in Texas, and we have successfully integrated our recent acquisition of TE Connectivity into our operations.

magnetics $40.8 million, up nearly 100% over the second quarter of 2012, in addition to the TE acquisition, which is now known as TRP Connector, the traditional Bel magnetics business also had an increase of 3.5%; interconnect, $27.1 million, a decrease of 1% from last year's second quarter; circuit protection, $3.3 million, an increase of 24.1% from the prior second year quarter; and modules $14.8 million, which is 20.5% lower than sales in the second quarter of 2012.

As we've discussed over the past several quarters, the modules product group continues to be affected by a decrease in the level of sales activity of a major customer. Of the above amounts, TRP Connector contributed $22 million of revenue to the magnetics group.

Fibreco contributed $2 million of revenue to the interconnect group and Bel Power Europe contributed $750,000 of revenue to the margins product group during the second quarter of 2013.

Cost of sales to net results. During Q2 2013, our gross margins continued to be impacted by start up costs related to the transition of Cinch Connector's operations to our new facility located in Texas.

These costs amounted to $1.1 million, the majority of which is reflected in cost of goods sold. These start up costs are now essentially complete and we expect the benefit from our restructuring of Cinch to materialize starting in the third quarter.

With the exception of the costs of modules issued noted above, Bel's core product group turned profitable in the second quarter as our previously contracted price increases began to take effect. These price increases, all of which are expected to be fully in place by the fourth quarter, reflected labor cost increases in China and other manufacturing costs such as the continued strengthening of the renminbi.

During the second quarter, our corporate streamlining program resulted in $1.3 million of restructuring and severance costs, which were in addition to the Cinch start up cost noted above and is now substantially complete.

Selling, general and administration expenses during the 3-month period ended June 30, 2013, increased by $2.6 million in comparison to the same period of 2012. SG&A as a percentage of sales in the second quarter of 2013 was 12.9%, down slightly from the 13.1% of sales during the second quarter last year.

Contributing to the dollar increase were the inclusion of approximately $1.6 million of SG&A expenses at TRP, Fibreco and Bel Power Europe, $200,000 acquisition-related expenses associated with the 2012 acquisitions of TRP and other ongoing acquisition activities. A $400,000 increase in legal, audit and other professional fees, an increase of $350,000 in incentive compensation based on Q2 results and several other factors.

Taxes. Bel reported an income tax provision of $187,000 for the 3 months ended June 30, 2013, compared to a tax provision of $491,000 for the 3 months ended June 30, 2012.

The company's effective tax rate, which is the income tax provision as a percentage of earnings before income taxes were 7% for the 3 months ended June 30, 2013, as compared to 25% for the same period of 2012. The company's effective tax rate fluctuates based on the geographic segment in which the pretax profits are owned.

Of the geographic segments in which Bel operates, the U.S. has the highest tax rates, Europe's tax rates are generally lower than the U.S.

tax rates and Asia has the lowest tax rates. The lower effective rate in 2013 was primarily due to pretax losses in North America and an increase in pretax income in Asia.

On an unaudited GAAP basis, Bel reported income from operations of $2.5 million and an after-tax net income of $2.4 million for the second quarter of 2013. Last year, we reported income from operations of $2.3 million and after-tax net earnings of $1.4 million for the second quarter of 2012.

To state these results on a comparable basis, net GAAP income from operations for the second quarter of 2013 was $4.1 million, compared to non-GAAP income from operations of $2.6 million for the second quarter of 2012. Acquisition charge, restructuring reorganizations and severance charges have been excluded from non-GAAP income from operations for the second quarter of 2013 and from the comparable 2012 non-GAAP income from operations numbers.

A reconciliation of GAAP to non-GAAP measures is included in our press release today.

Businesses acquired during 2012, 2013. Bel completed the acquisition of Gigacom, based in Sweden, in March 2012.

Fibreco Limited, based in the U.K., in July 2012. Powerbox Italia, based in Italy, in September 2012.

And Transpower Magnetics business of TE, now known as TRP Connector, in March 2013. Powerbox Italia has been renamed Bel Power Europe.

The results of these companies has been included in our consolidated financial statements since their respective acquisition dates.

Balance sheet, cash and equivalents. At the end of June 2013, our cash, cash equivalents and investment securities were $38.6 million, which was $32.7 million less than our December 2012 balance of $71.3 million.

The decrease in cash resulted primarily from the net payment of $29.2 million, which includes working capital adjustments for the acquisition of TRP Connector. Approximately $3.2 million of capital expenditures, $3.4 million for the repurchase of BEL B -- Class B common stock and $1.5 million in dividend payments plus the offset by favorable operating cash flows.

Receivables and payables. Receivables net of allowances were $62.2 million at June 30, 2013, compared to $43.1 million at December 31, 2012, an increase of $19.1 million.

The addition of approximately $19.7 million of TRP receivables was partially offset by a small decrease in Bel receivables.

Our accounts payable at June 30, 2013, were $29.9 million, an increase of $11.1 million from December 31, 2012. This increase resulted from the addition of $8.7 million of TRP accounts payable, together with an increase of approximately $2.4 million in Bel's accounts payable.

Inventories. At the end of June 2013, our inventories were $66.6 million, up $11.7 million from the December 2012 level.

Approximately $7.2 million of this increase resulted from the inclusion of the inventories of TRP Connector.

Goodwill and intangible assets. The purchase price allocation for Bel Power Europe has not yet been completed.

We expect a portion of the $2.7 million preliminary goodwill amount that we booked in 2012 to be reclassified primarily to intangible assets, as well as smaller amounts to intangible assets upon completion of the purchase price allocation exercise later this year.

There are several remaining open accounting items related to the TRP acquisition as of June 30, 2013. As part of the purchase consideration, Bel granted several licenses to TE, and the purchase consideration includes a working capital adjustment, which must be agreed upon by the buyer and seller.

The fair value of the purchase consideration will be revised when the value of the pre-licenses and the working capital adjustment are finalized. We expect a portion of the $8.3 million preliminary goodwill account to be booked in Q1 2013 -- which we booked in 2013 to be reclassified primarily to intangible assets, as well as lower amounts to tangible assets upon completion of the purchase price allocation exercised later this year.

Other balance sheet comments. Our capital spending through the 3 months ended June 30, 2013, was approximately $2 million, while depreciation and amortization was $2.7 million.

Our per share book value at June 30, 2013, was $18.58, that's including goodwill and intangibles. And when we exclude goodwill and intangibles, our per share value was $14.91.

That's the end of my opening comments, and I'll now hand it over back to Dan Bernstein.

Thank you, Colin. Charlotte, can we open up the call for any questions, please?

The first thing I wanted to just bring up and it's just probably related to rounding. I think if we look at the adjusted net income you have in the reconciliation and you divided it by the shares there, I come up to about $0.31 versus $0.32, I'm assuming that some of those percent add backs in the back of your statement have a little bit of a rounding effect there.

And as we go through the Q&A, just want to see if that might be something you could validate for me? So specifically, I wanted to understand the size of the price increases that you have been able to pass through and the success of implementing these.

Specifically, what products in the portfolio saw some stronger increases? I'm not sure if the ICM saw a little bit more versus other products.

Any color there would be helpful.

Okay. Again, we didn't have across-the-board price increases.

What we tried to do this time is look at the major increases that we did have. I would say a majority of them came through our ICM product line, which is our largest product line.

What we were trying to do this time is look at specific part numbers that we didn't have reasonable margins on. And you could tell the customer that we have no specific part numbers, again, we might have a customer that buys 45 different part numbers and it may be that those 45 different part numbers, 6 or 7 that we would say are below water.

So on those 6 or 7, we might come back with anywhere of 8% to 10% price increase on those items. Overall, I mean if you leverage everything together, the whole package, it would probably be at 3% to 4% increase that we're looking at on the total volume.

It's really focused on specific part numbers than across the board -- than across all part numbers. But if you want to average it out, I would say we're trying to get anywhere from a 3% to 5% price increase.

Okay, that's helpful. Now in terms of the June quarter, it sounds like there was a little bit of an effect there, just want to get an understanding of when some of those increases took effect, how much that impact the June quarter?

I would say -- I think they really come in the third, I would say 60%, 65% coming in the third quarter and then balance comes in the fourth quarter. But at least we're not decreasing price, which is a step in the right direction.

Okay, now when you look at the end markets, wanted to see if we can get a little bit more color around what you're seeing thematically. I realize a lot of the business that you'll -- or a lot of the customers that you sell into are typically the contract manufacturers, but I think you typically have those some insight in terms of where your products are ultimately going.

So is there any color you could provide around whether there's been some relative strength in, say, Datacom or telecom markets or storage or anything like that?

It's -- again, we always shove for 30 years now, we're the tip of the tail of the dog. Generally, the color we get are never too good.

We -- and we track, HP, we track Dell, we track Cisco, we track Alcatel. And again, I think, from -- the way the economy still is there's just so much uncertainty out there.

We haven't seen -- no one is able to predict a quarter beyond. We just have very limited visibility.

I wish that wasn't the case, but we don't have anybody -- everybody kind of a wait and see, what's going to happen with the deficit again that comes up in a couple of weeks. Just -- there's just so much uncertainty.

Okay. Last question I have for the moment, could you individually talk about Fibreco, Powerbox, Transpower, each of those businesses, how they're performing presently?

It sounds like the Transpower business is performing very well. Trying to get a sense of how these are all performing individually in terms of revenues or margins, versus how they've performed, say, historically or your expectations kind of at the close of the transaction.

I think, again, TRP, it's very difficult to do it from a gross margin, from a margin standpoint, a profitability standpoint, because we haven't put any overhead on them and we didn't receive much overhead. So that's going to take us a while to get a better understanding.

From a sales standpoint, stronger than we thought it was. From a transition standpoint, I think our team did a tremendous job of bringing it into the company.

I think we have a great team that came with the TRP people. So from a TRP standpoint, I don't think we could be more pleased than we have been.

Again, from a profit picture, it's going to take us a little longer when we get a better understanding of how we spread out the overheads and to understand where the profitability is. Powerbox, from a sales standpoint, the sales, what, $750,000?

They had a couple of payment problems in Italy, and again we thought that would be a 2- or 3-year project. On the other hand, Fibreco is very -- $2 million and we can tell what the profit was, they had some $500,000, so they tend to be very -- they were very profitable and they have been very profitable since we acquired them.

Again, when we look at Fibreco and we look at Powerbox, those are really stepping stones to get us in bigger and larger markets. There's no question, the announcement we just had because of Radiall, we couldn't have done that announcement with Radiall without Fibreco and Gigacom not being part of the family.

So again -- so we really don't see the benefits of Fibreco and Gigacom probably for 4 or 5 years. Even though Fibreco is very profitable and their sales are strong.

And the same thing with Powerbox, we really won't see those sales and profitability for another 2 years or probably 1.5 years until we can go into Cisco and Alcatel and combine their products into our customers and vice versa. But it's nice to know that they're doing very well as expected.

The other thing that we should mention -- the other thing we do have out -- standing out that might be a little bit of a cloud is we do have to transition the TRP computer system, which is a SAP, onto our system, and that comes in October, and that's going to be a pretty big task that we do -- we still have to finish up with that. But once that's completed, then we'll full steam ahead.

And, Sean, just to your question earlier on. Yes, the difference per share, difference is due to revenue.

Okay, great. So we're looking at -- more of a $0.31 quarter.

Yes.

Yes, I had a couple of questions. Just want to make sure I understand TRP right.

So we spent $29 million but we got $8 million back in cash and it looked like, historically, they're doing about $7.5 million a year in net income, is that right?

Well the net income figure I'm not going to comment on, but the rest of the numbers are confirmed.

Okay. Yes, I was just getting that out of your performance from your financials, the 10-K.

But -- so, I mean, TRP it looks like it was a really great deal, are the results very cyclical or why do we get such a good deal on it?

No. I think, again -- I think the reason we had a -- it wasn't a good -- it's a good deal because we were able to buy it to consolidate the industry, I think.

And that we wouldn't be -- we don't have to pick up any of their overhead structure. There's no question, we were the market leader 3 years ago, ourselves and Pulse Engineering, about 4 years ago.

Because of our success, TE, Molex and other companies got involved in the business. Because of the added competition and other factors, all of a sudden, no one in the industry could make money.

Now that, that's back to normal supply base, I think it's a lot more -- it could be -- it can support the sales. Basically, the sales that we were having, we couldn't support it.

But now, by increasing -- doubling our sales, it does make us a lot more efficient to run the operation. So again, if we didn't have TRP, we wouldn't be profitable today, I don't think in this market segment.

Okay. Okay.

And then you talked about, you're looking at additional acquisitions, we're down to, what, $38 million in cash? Can you just talk about in terms of how you see the balance sheet?

What you're looking for, would they be big deals, small deals, what kind of things you think we can support?

Okay. I think, a couple things.

One, I don't know how long you've been involved or looking at Bel but, historically, we have spent a lot of time over the past 8 years looking at some major acquisitions of up to $500 million. Power-One, Artesyn, we believe very strongly, as a public company, one of the things that hold us back is our limited float.

And we'd like to look at a -- we're not averse to looking at a major deal where we can use paper and get more float out there. However, recently, with all the consolidation in the industry, most deals we see out there are a lot smaller.

And we have no problem taking debt mostly when we think the interest rates are at a historically low level. Would I like to have a $100 million or $200 million of debt?

No, but I feel comfortable going up to maybe $45 million to $50 million of debt. What we're looking for now, I think, is to support the Connector business especially the military aerospace.

We feel that's an area that has pretty strong profit margins, a lot better customer relationships. And we've been very pleased with the Cinch acquisition and the Gigacom and the Fibreco acquisitions.

Also we like to diversify ourselves. I think we've been too dependent on networking telecommunications, which is roughly, now, represents 70% of our sales.

And I think we would like to get that down to about 50% if we could. So I think -- we still, we have -- if you asked me a year ago, would I ever buy an integrated connected module company, I would say that's the least -- be last to my list.

But knowing what it could do for us, it was a great -- I think it's going to be a very good acquisition.

Okay. And, Cinch, so the move is done now, and thank you for putting in the detail about the cost on that.

Is there an opportunity there to pick up some sales now that, that's done or were you restricted at all in terms of filling orders? Can you just talk about?

Yes. So our hands are kind of tied.

We were in a situation that we had to give some business to our competitors because we couldn't meet delivery. So we hope that going forward that we should be able to pick up business and that we should start seeing some increases.

And also the -- what we've done with our licensing agreement with Radiall, with Fibreco and Gigacom, our presence in the area is really changing. Our name is changing.

And that people are looking at it in a whole different light. So besides the move and the constraints we have at the move, I think also what the proxy would bring into our basket, people looking at Cinch a lot different than they had over the past 3 or 4 years.

Okay. And then the 3.4 million stock buyback, that was all in the first quarter, correct?

Yes.

Okay. And is there a reason you guys didn't buy back stock in the second quarter or what are your thoughts?

Because my board refuses to listen to me. So yes, I think what we -- I felt very strongly that we should be buying back stock, it's something we discuss all the time.

And again, I think it's something we'll always going to -- we're going to evaluate. But I do believe -- so I think the stock -- I think the numbers speak for themselves, and I think we've turned the corner and, hopefully, the stock market does appreciate what we're doing, had it's not been.

And hopefully the board would say that it's an opportunity to buy back stock.

Glad to see a good quarter that's easy to read, not complex as the last 4 or 5 have been. Now, in the past, I've heard that you'd raise the dividend, which you Dan had said you'd like to do, but the board's not amenable.

Instead, I'm urging you now to tell them that it really is the right thing to do, to buy back stock. I'd rather that we'd you see do that than raise the dividend at this point, the stock is selling at a substantial discount to book value.

Your accounting is conservative so it's real book. And I -- because being conservative is one thing, not buying back stock at a big discount is another.

And I would urge you to focus on that and note your shareholders want you to.

Lenny, I've got -- I think you have a -- I'm 100% behind you. Colin, you want to comment on my conversations with the board on this one?

No, there's been plenty of them.

So, yes. So I think, again, I think it's something that we are discussing even we're supposed to have a meeting in another couple of days to discuss it further, and we're not going to wait until next board meeting.

So again, it's something that we're minding a lot those...

At that point -- urge them at that point. You certainly can quote me as -- a guide in the past is I heard you'd raise the dividend, which of course I'm not opposed to.

But I think the very best use of funds right now would be to buy back stock anywhere near these levels.

Okay. Would you borrow -- I had a question for you, Lenny, would you borrow back money to buy back stock?

Absolutely, at these prices and with the current interest rate environment.

Okay. Thank you.

I have a -- I guess it's a minor question but it's a little confusing for me. You're showing different earnings for the Class A shares and the Class B shares, why is that?

The accounting rules and the way you have to calculate it will always come up with a -- it's a fairly complicated formula. I'll find -- I can -- if you want to shoot me an e-mail to [email protected] we can send you the calculations.

But the way the rules read when you do the calculation you'll always end up with a difference between the A and the B.

Well I would have thought that they all have the same denominator for the calculations.

No, no. There's a -- it's fairly complex.

I wanted to ask a little bit about the module business. This is an area where I think you guys need to rebuild some revenues here.

There was a large, I think, smart grid communications company where -- that had been a customer and has kind of come down from some pretty strong levels. You've talked a little bit about some recent momentum with a robotic vacuum company, as well as another smart grid-oriented company.

So I just want to see if we can get an update in terms of have we hit an inflection point? What's going on with these other opportunities that might be gaining a little bit of momentum for you?

And any detail around that would be helpful.

Okay. So if you look at the third quarter of last -- hold on, give me just a second.

Let's see how quick I can do it. Here we go.

So if you look at the third quarter of last year, where we're heading into, modules we get about $7 million. So most likely, again, we'll probably do about roughly the same thing, $3 million to $4 million.

And then I would hope going into -- I would say probably be around -- modules, from the peak of about $11 million, I would say, going forward, we'd probably do $3.5 million to $4 million and possibly, starting the beginning of next year, get it back to $6 million to $7 million. And those are just some rough numbers.

So we don't see it getting back to the -- I think our peak was $15 million.

Sean, it's business we look for but it's -- by the nature of it, it's always going to be the a...

Feast or famine.

Yes, feast or famine. It's going to come and go.

We're still dealing with all these folks and they have programs that come and go and when the programs ramp up we're there to take care of the needs and then when they go down, we get into a bit of a trough. This is not a key business, it's certainly an add-on business for us and -- that does fill up when we go to capacity about -- it's a nice little filler, but we just take it as it comes, but that's not our bread-and-butter by any way.

I’ll just make one comment here. To look at the EPS calculation, if anybody wants to go and do that compare A -- compared to B, if you go back to the Note 1 in the 10-K, if you will just look at Note 1 in our 10-K, it will tell you how the calculation is done.

Thanks. Okay.

All right, great then. Thank you, Charlotte, and I'd like to thank everybody for this call.

Again we're very pleased with this quarter and, hopefully, we can maintain it going forward. Thank you for your time.