Bel Fuse Inc.

Thank you, Sayeed, and I'd like to welcome you to our conference call to review Bel's third quarter 2013 results. Before we start, I'd like to hand over to Colin Dunn, our Vice President of Finance.

Colin?

Thanks, Dan. Good morning, everybody.

Before we begin, I'd like to read the following statement. Except for historical information noted on this conference call, the matters discussed on this call, including the statements regarding further operating efficiencies and cost savings to be derived from the TRP acquisition, the accretive nature of the Array Connector Corporation acquisition and the timing of when that acquisition will become accretive to earnings and the implementation of price increases, are forward-looking statements that involve risks and uncertainties.

Actual results could differ materially from Bel's projections.

Among the factors that could cause actual results to differ materially from such statements are the market concerns facing our customers; the continuing viability of sectors that rely on our products; the effects of business and economic conditions; difficulties associated with integrating recently acquired companies; capacity and supply constraints or difficulties; product development; commercialization or technological difficulties; the regulatory and trade environment; risks associated with foreign currencies; uncertainties associated with legal proceedings; the market's acceptance of the company's new products and competitive responses to those new products; and the risk factors detailed from time to time in the company's SEC reports.

In light of the risk and uncertainties, there can be no assurance that any forward-looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

Now moving to general comments. The results of the Transpower Magnetics business of TE, now known as TRP Connector, acquired in late March 2013 and the Array Connector Corporation, acquired in August 2013, have been included in our consolidated results, since their respective acquisition dates.

In my discussion, I'll attempt to note where the inclusion of these acquired companies accounts for significant variance from prior periods.

Magnetics, $52.9 million, up nearly 78% over the third quarter of 2012, primarily due to sales of TRP Connector products; InterConnect, $30 million, an increase of 5.5% over last year's third quarter; third quarter 2013 InterConnect sales included $800,000 sales of Array Connector products; circuit protection, $3.4 million, an increase of 35.7% from the prior third quarter; and modules, $14.9 million, which is a 3.1% lower than sales in the third quarter of 2012. As we have discussed over the past few quarters, the modules group continues to be affected by a decrease in the level of sales activity of a major customer.

Cost of sales and net results. In Q3 2013, cost of sales of percentage of sales, decreased to 79.8% down from the 83% in Q2 of this year and down from 83.5% in Q3 of 2012.

Each of Bel's 4 core product groups experienced gross profit improvement in the third quarter of 2013. Several factors contributed to this.

First, 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, are intended to recover labor cost increases in China and other increases in manufacturing costs, such as the continued strengthening of the renminbi.

Also, there was a favorable shift in the mix of products away from higher material cost modules products towards Bel's other lower material cost products.

The startup costs we talked about last quarter related to the transition of Cinch Connectors' operations to our new facility located in Texas are now behind us, and the Cinch business returned to profitability in the third quarter. That higher sales volumes overall led to increased throughput, which contributed to improved overhead absorption in our facilities.

Selling, general and administrative expenses. SG&A expenses during the third quarter period ended September 30, 2013, increased by $2.2 million, in comparison to the same period of 2012.

SG&A as a percentage of sales for the third quarter of 2013 was 12%, down from 13.1% of sales during the third quarter last year. The dollar increase was primarily due to an increase of $2.3 million in incentive compensation based on Q3 results, $600,000 less payable currency exchange effects and the inclusion of SG&A expenses from recently acquired companies.

These costs were partially offset by approximately $700,000 of insurance proceeds related to Hurricane Sandy and a decrease of $500,000 in cost incurred for acquisition activities.

Taxes. Bel reported income tax expense of $605,000 for the 3 months ended September 30, 2013, compared to an income tax benefit of $1.8 million for the 3 months ended September 30, 2012.

Both periods reflect benefits from the net reversal of tax reserves due to the expiration of certain statutes of limitations and the benefit in 2012, which also included finalization of a multiyear IRS audit. Excluded from these tax benefits, which amounted to $529,000 in Q3 2013 and nearly $1.5 million in Q3 2012, the effective tax rates were 13.4% and negative 58.2%, respectively.

The company's effective tax rate, which is the income tax benefit or provision as a percentage of earnings before income taxes, fluctuates based on the geographic segments in which the pre-tax profits are earned.

Of the geographic segments in which Bel 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.

The lower effective rate in 2013 was primarily due to an increase in pre-tax income in Asia, where tax rates are lowest. The very favorable effective rate in 2012 was primarily due to a pre-tax loss in the U.S.

and lower taxes in Europe, which resulted in tax benefits, combined with strong earnings in Asia where tax rates are lower.

On an unordered GAAP basis, Bel reported income from operations of $8.3 million dollars and after-tax net income of $7.8 million for the third quarter of 2013. Last year, we reported income from operations of $900,000 and after-tax net earnings of $2.5 million for the third quarter of 2012.

To state the results on a comparable basis, non-GAAP income from operations for the third quarter of 2013 was $7.8 million compared to non-GAAP income from operations of $3.7 million for the third quarter of 2012. Acquisition costs, restructuring, reorganization and severance charges, gains and losses on investment, benefits from changes in tax reserves and the storm insurance proceeds have been included for non-GAAP income from operations.

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

Balance sheet cash and equivalents. At the of September 2013, our cash, cash equivalents and investment securities were $46.9 million, which was $24.4 million less than December 2012 balance of $71.3 million.

The decrease in cash resulted primarily from the net payment of $29 million for the acquisition of TRP Connector, $10 million for the acquisition of Array Connector, approximately $5.5 million of capital expenditures, $3.4 million for the repurchase of Class B common stock and $2.3 million in dividend payments partially offset by $12 million of borrowing in our bank line of credit and positive operating cash flows.

Receivables and payables. Receivables net of allowances was $68.7 million at September 30, 2013, compared to $42.9 million at December 31, 2012, which is an increase of $25.8 million.

This increase resulted from the addition of approximately $22 million of TRP and Array receivables and an increase of approximately $3 million in other trade receivables. Our accounts payable at December 30, 2013, were $35.3 million, an increase of $16.5 million from December 31, 2012.

This increase resulted from the addition of approximately $15 million of TRP and Array accounts payable and an increase of approximately $1 million in other trade accounts payable.

Inventories at the end of September 2013. Our inventories were $71.8 million, up $16.9 million from the December 2012 level.

Approximately $11.8 million of this increase resulted from the inclusion of the inventories of TRP and Array Connector.

Goodwill and intangible assets. The purchase price allocations for TRP Connector and Array Connector have not yet been completed.

As of September 30, 2013, we have booked approximately $8 million of preliminary TRP goodwill and approximately $6 million of preliminary Array goodwill. We expect a portion of each of these amounts to be reclassified primarily to intangible assets as well as smaller amounts to tangible assets upon completion of the purchase price allocation exercise.

A few other balance sheet comments. Our capital spending for the 3 months ended September 30, 2013, was approximately $2.5 million, while the depreciation and amortization was $2.7 million.

Our per share book value at September 30, 2013, was $19.42, excluding goodwill and intangibles. Excluding intangibles and goodwill, our per share book value was $15.03.

That's the end of my comments. And I'll now pass it back to Dan.

Thank you, Colin. Sayeed, we would like to open up the call for any questions people might have.

David Rold on for Sean Hannan. Just wondering, during the quarter, how much of the revenue growth was tied to the price increases you were talking about versus a change in actual demand?

I would have to say that we haven't had the full effect of the price increases into the fourth quarter. So very...

Very minimal -- well less than -- I'd say well less than 2%.

Okay. And is there still headroom there in terms of price increases across the product lines?

Or is some kind of as high as you can go?

I don't think there's much more headroom. The prices we put forth, again, weren't outrageous.

It's just confirming that products that we sell we have to make a reasonable profit. I think anytime we have a price increase it really affects our relationship with our customers.

Based on the industry, I think our customers somewhat accepted the price increases. But again, it's a very difficult task in this type of marketplace to ask for a price increases.

And it's something we generally don't do too often.

Okay. So the increases that are coming are already in place.

Now, you're just waiting for them to take effect? Is that accurate?

Yes. Because they're basically based off annual contracts.

And they have contracts you negotiating maybe 1 month to 2 months before the contract ends.

Okay, got it. And then in terms of demand strength, what was the linearity of that demand?

Was is it kind of consistent throughout the quarter? Do you have any commentary there?

No, I think, again, the big jump we had in our sales, I would say 90%, 95% of it came from the acquisition of TRP, from the sales we gained from them. So it wasn't a substantial increase in the marketplace.

Okay. Got it.

And then in terms of the acquired businesses. How is the integration of Transpower and Array Connector going?

And [indiscernible] on how you feel on how those businesses are doing?

We did a -- again, we had a transition agreement with TE for the past 6 months. The last step we had to do is remove ourselves from SAP and put their system on our system.

That was completed 2 weeks ago and it went excellent. I think, so far we did a super job of consolidating TE, TRP with Bel, and that's 100% competed now, and we don't need any further transition services.

Currently, at Array, we made many -- very little change, if at all. And the only thing we did is to reorganize the sales force so we have one sales force selling all our products.

But we see very little synergy, initially, with Array, and pretty much they're our standalone company at this time.

Okay. And what is the timeline of kind of recognizing any synergy?

I think it's more from increased sales. And so -- again, we still -- I think the big thing that we'll see going forward -- again, Array only accounts for $10 million in sales.

In the other hand, TE, TRP Connectors represent $75 million. We're in the initial stages of best practices, of manufacturing, how to take the best practices of manufacturing Bel in the MagJack area and see how we can combine that.

I'm going through all our raw material vendors, how to streamline that. So we are projecting, if things do go well, over the next 6 to 9 months to see additional $2 million to $3 million in savings, with TRP and Bel coming together.

Okay. But for December, we should kind of assume flattish in [indiscernible]?

Maybe $100,000, $200,000. And that's more based off the transition agreement we.

don't longer have to pay for.

Okay. So I guess in general for December, are you expecting any kind of margin expansion?

Or are you expecting it to come down [ph] a little bit before [indiscernible]?

The problem we had with December is our -- generally, historically, the fourth quarter our sales are always lower than the third quarter. But we are, I think, somewhat confident that our margins and profits should be the same.

Yes, yes.

It looks to me like you've finally integrated things so we have a clean quarter that's easy to read, which I'm glad to see.

We're glad to see it also, trust us.

The acquisitions work well in a long-term strategy, but again, we're not Amazon and the market doesn't give us credit for some of these things. So if we can kind of just do little bolt-on acquisitions going forward, it would make for clean reading going forward.

But certainly no complaints about the earnings. They're terrific.

Just a couple of quick questions. TRP, how is it comparing year-over-year in terms of revenue versus -- I know you didn't have it last year, but what kind of revenues did it do in the quarter?

We had a much stronger revenue with TRP. And the only problem is we don't know if it came at Bel's expense.

TRP has a lead time roughly of 8 to 10 weeks. Bel Fuse's lead time is 18 weeks.

So we did persuade some customers that were upset with our long lead times at Bel that it might have made more sense to go to TRP. So, again, that sales are up from what was projected to us, probably 10%, 15%.

We don't know if that can continue. But so far, we've been very pleased with the sales at TRP, surprisingly pleased.

Okay. So last year, if I recall, TRP did roughly $75 million in revenue, and this year is 10% or so ahead of that, is that something...

It look -- for the quarter, we did $25 million for the quarter. But I think we just had a tremendous quarter from them.

All right. Okay.

And in terms of -- can you tell if there was a lot of preordering in terms of people trying to get their orders in before the price increases that went into effect?

No. I don't think that's effect at all.

I don't -- I'll be surprised if that number is at all significant.

Okay. And then the price increase you put through, if I recall, it was roughly 3% to 5% on a volume basis across all, is that about right?

No. Just on the -- I think most of our price increases came in the MagJack ICM, which is the magnetics, which accounts for probably $75 million to $80 million of sales without TRP.

And again, it's -- across-the-board it's 3% or 5%, but what happens is, historically, what we did in the past, we did it that way. This one we had some we decreased price and others that we increased price by 10%.

So the problem that we have today is we don't know if we've lost business or not with the price increases. But if you average that across-the-board, it would fall into the 3% to 5% range.

Okay. And do you have a sense -- so we'll see a bump up in terms of margins partly from that, but do you have...

Only if the sales remain strong and our customers have no other place to go.

Right. But in terms of the rapidity of your cost increases, is this something that we'd need to look at where your margins would start deteriorating again in about 1 year or 6 months?

Or how long do you think will this hold...

There's so many different variables that affect it. The RMB in China, the labor in China, how much cost savings we can get out by the combined companies.

It's just -- how the marketplace changes, what new technology comes out. It's just -- whatever number we gave you, we wouldn't feel comfortable because it's just -- there's just too many balls up in the air at the same time.

Yes. Okay.

And your stock buyback, the dollar amount, I can't recall. Did you buy any shares in this quarter or not?

I think...

No. We haven't bought any shares since January.

And we don't -- I think, we used up all the money we had, and the board hasn't...

We had a buyback of, I think, it was $10 million, and we used the last of that up in January. And the board has not reapproved any additional buyback at this time.

Okay. And it looks like we have $12.5 million of short-term debt now.

Is that good rates, I guess, it was available and so you took it?

Yes. And that was just a matter where we had -- we've -- as you can see, we've got plenty of cash.

It was just where the cash was at the time we needed it. And that was purely that.

And we intend to pay that back, all things being equal, within 12 months.

And our interest rate is?

Low.

And last question, you talk a bit about acquisitions in the letter. We have roughly $30-some million in net cash now in the balance sheet.

And you've talked before in the past that you'd be comfortable using that on acquisitions. Can you talk a little bit about the pricing environment?

TRP, seems like it was a great deal. On the other hand, prices for lots of other assets seems to be going up pretty dramatically.

What are you guys seeing? Are things available that you're interested?

Or is it not like that?

It's -- I think we're seeing, for example, aerospace, military, a very high multiple for that arena. Our arena where -- has historically been to the networking, telecommunication.

We see that selling at 50%, 60% of sales. Ericsson got out of the power business, Power-One.

So I think it's more of the market you want to participate in. So there's no hard fast rule.

We know there's still private equity people out there that sometimes tend to be drunken sailors. However -- so I think it just depends on where the products and when the markets you want to support.

And again, aerospace, military, definitely are much higher multiple than companies that are supplying the networking industries.

Just wondering what you've seen in terms of demand so far this quarter, the first few weeks? At least that you can comment has that held up?

In terms of...

It's held up pretty steady. I think what happens now is I think people are going to start panicking about Chinese New Year.

So we would hope that they place their orders very quickly so they get in the pipeline. Historically, if you start placing orders after the New Year, Chinese New Year, Chinese New Year is going to bite you in the ass.

So again, we should have a -- I think our backlog should be strong, because generally people do put in orders protecting themselves after Chinese New Year, which is probably -- it is in the beginning of February when it's done.

Okay. And then just lastly, can you just comment a little bit on how the Cinch, Fibreco and Gigacom businesses are performing?

Fibreco is doing very well. Cinch, we probably, I think, got most of all the problems with the move behind us.

Our relationship at Boeing is improving everyday, with better shipments and deliveries. With the Gigacom and the new technology of fiber, we're participating a lot more on committee meetings.

I think we're very fortunate with the acquisition that gave common[ph] fiber, it gives us tremendous amount of knowledge and expanded [indiscernible] going forward. In addition to that, our relationship we had with Radiall, which is the standard that Boeing's using for most of their planes for connectors, the EX,P, that has given us a tremendous amount of visibility.

Again, however, because we're supplying aerospace and military, we know that it's a long haul. And we really won't see substantial sales increases for 3 or 4 years.

But we are very pleased with the groundwork that we have amongst those companies.

Thank you very much, Sayeed. And we'd like to thank everybody for their calls.

And once again, we're very pleased to have, I think, very positive results. And we look forward to maintaining them.

Thank you for your time.