NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES |
The condensed consolidated balance sheets and statements of operations, comprehensive income, stockholders’ equity and cash flows for the periods presented herein have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented have been made. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Bel Fuse Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations, including the interim reporting requirements, of the U.S. Securities and Exchange Commission (“SEC”). The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
The Company’s significant accounting policies are summarized in Note 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There were no significant changes to these accounting policies during the three months ended March 31, 2022, except as discussed in “Recently Adopted Accounting Standards” below.
All amounts included in the tables to these notes to condensed consolidated financial statements, except per share amounts, are in thousands.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). This guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The Company adopted amendments in ASU 2018-14 on a retrospective basis effective January 1, 2021. The adoption of this guidance modified the Company's annual disclosures for its defined benefit plan, but did not have any impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. This guidance was adopted by the Company effective January 1, 2021 and did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended. The new guidance will broaden the information that an entity must consider in developing its expected credit loss estimates related to its financial instruments and adds to U.S. GAAP an impairment model that is based on expected losses rather than incurred losses. The amendment is currently effective for the Company for annual reporting periods beginning after December 15, 2022, with early adoption permitted. Management is currently assessing the impact of ASU 2016-13, but it is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides temporary optional guidance on contract modifications and hedging accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. Management is currently evaluating the impact of this accounting standard update on the Company's consolidated financial statements and related disclosures.
rms Connectors
On January 8, 2021, the Company acquired rms Connectors, Inc. (“rms Connectors” or "rms"), from rms Company Inc., a division of Cretex Companies, Inc., for $9.0 million in cash, including a working capital adjustment. rms Connectors is a highly regarded connector manufacturer with over 30 years of experience producing harsh environment circular connectors used in a variety of military and aerospace applications. This acquisition complemented Bel's existing military and aerospace product portfolio and enabled us to expand key customer relationships within these end markets and leverage the combined manufacturing resources to improve our operational efficiency. Originally based in Coon Rapids, Minnesota, the rms Connectors business was relocated into Bel's existing facilities during the second quarter of 2021, and is part of Bel's Connectivity Solutions group. The transaction was funded with cash on hand.
EOS Power
On March 31, 2021, the Company completed the acquisition of EOS Power ("EOS") through a stock purchase agreement for $7.8 million, net of cash acquired, including a working capital adjustment. EOS, located in Mumbai, India, had sales of $12.0 million for the year ended December 31, 2020. EOS enhances Bel's position related to certain industrial and medical markets historically served by EOS, with a strong line of high-power density and low-profile products with high convection ratings. In addition to new products and customers acquired, this acquisition diversified Bel's manufacturing footprint in Asia. The EOS business is part of Bel’s Power Solutions and Protection group. The transaction was funded with cash on hand.
The acquisitions of rms Connectors and EOS may hereafter be referred to collectively as either the "2021 Acquisitions" or the "2021 Acquired Companies". As of the respective acquisition dates, all of the assets acquired and liabilities assumed were recorded at their fair values and the Company's condensed consolidated results of operations for the three months ended March 31, 2021 include the operating results of the 2021 Acquired Companies from their respective acquisition dates through March 31, 2021. During the three months ended March 31, 2021, the Company incurred $0.2 million of acquisition-related costs related to the 2021 Acquisitions. No acquisition-related costs were incurred during the first quarter of 2022. These costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
The results of operations of the 2021 Acquired Companies have been included in the Company’s condensed consolidated financial statements for the periods subsequent to their respective acquisition dates. During the three months ended March 31, 2021, rms Connectors contributed revenues of $2.1 million and estimated net earnings of $0.4 million to the Company since its acquisition date. As EOS was acquired on March 31, 2021, this acquisition did not have any contribution to revenue or net earnings during the first quarter of 2021. The unaudited pro forma information below presents the combined operating results of the Company and the 2021 Acquired Companies assuming that the acquisition of the 2021 Acquired Companies had occurred as of January 1, 2021. The unaudited pro forma results are presented for illustrative purposes only. They do not reflect the realization of any potential cost savings, or any related integration costs. This unaudited pro forma information does not purport to be indicative of the results that would have actually been obtained if the 2021 Acquisitions had occurred as of January 1, 2021, nor is the pro forma data intended to be a projection of results that may be achieved in the future.
The following unaudited pro forma consolidated results of operations assume that the acquisition of the 2021 Acquired Companies was completed as of January 1, 2021:
| | | |
| | Three Months Ended | |
| | March 31, 2021 | |
Revenue, net | | $ | 113,665 | |
Net earnings | | | 3,429 | |
Earnings per Class A common share - basic and diluted | | | 0.26 | |
Earnings per Class B common share - basic and diluted | | | 0.28 | |
The following table provides information about disaggregated revenue by geographic region and sales channel, and includes a reconciliation of the disaggregated revenue to our reportable segments:
| | Three Months Ended March 31, 2022 | |
| | Connectivity Solutions | | | Power Solutions and Protection | | | Magnetic Solutions | | | Consolidated | |
| | | | | | | | | | | | | | | | |
By Geographic Region: | | | | | | | | | | | | | | | | |
North America | | $ | 32,532 | | | $ | 42,349 | | | $ | 10,878 | | | $ | 85,759 | |
Europe | | | 9,214 | | | | 9,385 | | | | 2,471 | | | | 21,070 | |
Asia | | | 1,967 | | | | 7,056 | | | | 20,866 | | | | 29,889 | |
| | $ | 43,713 | | | $ | 58,790 | | | $ | 34,215 | | | $ | 136,718 | |
| | | | | | | | | | | | | | | | |
By Sales Channel: | | | | | | | | | | | | | | | | |
Direct to customer | | $ | 26,053 | | | $ | 35,844 | | | $ | 25,738 | | | $ | 87,635 | |
Through distribution | | | 17,660 | | | | 22,946 | | | | 8,477 | | | | 49,083 | |
| | $ | 43,713 | | | $ | 58,790 | | | $ | 34,215 | | | $ | 136,718 | |
| | Three Months Ended March 31, 2021 | |
| | Connectivity Solutions | | | Power Solutions and Protection | | | Magnetic Solutions | | | Consolidated | |
| | | | | | | | | | | | | | | | |
By Geographic Region: | | | | | | | | | | | | | | | | |
North America | | $ | 29,542 | | | $ | 29,777 | | | $ | 7,077 | | | $ | 66,396 | |
Europe | | | 6,747 | | | | 9,959 | | | | 1,248 | | | | 17,954 | |
Asia | | | 1,767 | | | | 3,905 | | | | 20,621 | | | | 26,293 | |
| | $ | 38,056 | | | $ | 43,641 | | | $ | 28,946 | | | $ | 110,643 | |
| | | | | | | | | | | | | | | | |
By Sales Channel: | | | | | | | | | | | | | | | | |
Direct to customer | | $ | 23,637 | | | $ | 26,489 | | | $ | 24,335 | | | $ | 74,461 | |
Through distribution | | | 14,419 | | | | 17,152 | | | | 4,611 | | | | 36,182 | |
| | $ | 38,056 | | | $ | 43,641 | | | $ | 28,946 | | | $ | 110,643 | |
The balances of the Company’s contract assets and contract liabilities at March 31, 2022 and December 31, 2021 are as follows:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Contract assets - current (unbilled receivables) | | $ | 20,556 | | | $ | 28,275 | |
Contract liabilities - current (deferred revenue) | | $ | 3,977 | | | $ | 2,224 | |
The change in balance of our unbilled receivables from December 31, 2021 to March 31, 2022 primarily relates to a timing difference between the Company’s performance (i.e. when our product is shipped to a customer-controlled hub) and the point at which the Company can invoice the customer per the terms of the customer contract (i.e. when the customer pulls our product from the customer-controlled hub).
The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of March 31, 2022 related to contracts that exceed one year in duration amounted to $61.5 million, with expected contract expiration dates that range from 2023 - 2025. It is expected that 88% of this aggregate amount will be recognized in 2023, 7% will be recognized in 2024 and the remainder will be recognized in years beyond 2024.
The following table sets forth the calculation of basic and diluted net earnings per common share under the two-class method for the three months ended March 31, 2022 and 2021:
| | Three Months Ended | |
| | March 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Numerator: | | | | | | | | |
Net earnings | | $ | 5,064 | | | $ | 3,199 | |
Less dividends declared: | | | | | | | | |
Class A | | | 129 | | | | 128 | |
Class B | | | 727 | | | | 716 | |
Undistributed earnings | | $ | 4,208 | | | $ | 2,355 | |
| | | | | | | | |
Undistributed earnings allocation - basic and diluted: | | | | | | | | |
Class A undistributed earnings | | $ | 692 | | | $ | 394 | |
Class B undistributed earnings | | | 3,516 | | | | 1,961 | |
Total undistributed earnings | | $ | 4,208 | | | $ | 2,355 | |
| | | | | | | | |
Net earnings allocation - basic and diluted: | | | | | | | | |
Class A net earnings | | $ | 821 | | | $ | 522 | |
Class B net earnings | | | 4,243 | | | | 2,677 | |
Net earnings | | $ | 5,064 | | | $ | 3,199 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | |
Class A - basic and diluted | | | 2,145 | | | | 2,145 | |
Class B - basic and diluted | | | 10,374 | | | | 10,203 | |
| | | | | | | | |
Net earnings per share: | | | | | | | | |
Class A - basic and diluted | | $ | 0.38 | | | $ | 0.24 | |
Class B - basic and diluted | | $ | 0.41 | | | $ | 0.26 | |
5. | FAIR VALUE MEASUREMENTS |
Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date. Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 – Observable inputs such as quoted market prices in active markets;
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of March 31, 2022 and December 31, 2021, our available-for-sale securities primarily consisted of investments held in a rabbi trust which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations. These securities are measured at fair value using quoted prices in active markets for identical assets (Level 1) inputs and amounted to $0.2 million at March 31, 2022 and $0.3 million at December 31, 2021.
Throughout 2022 and 2021, the Company entered into a series of foreign currency forward contracts, the fair value of which was $0.1 million at March 31, 2022 and less than $0.1 million at December 31, 2021. The estimated fair value of foreign currency forward contracts is based on quotes received from the applicable counterparty, and represents the estimated amount we would receive or pay to settle the contracts, taking into consideration current exchange rates which can be validated through readily observable data from external sources (Level 2).
During the fourth quarter of 2021, the Company entered into two interest rate swap agreements as further described in Note 9, "Derivative Instruments and Hedging Activities". The fair value of the interest rate swap agreements was $2.9 million at March 31, 2022 and $0.1 million at December 31, 2021, which was based on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
The Company does not have any financial assets measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during the three months ended March 31, 2022 or March 31, 2021. There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the three months ended March 31, 2022 or March 31, 2021.
There were no financial assets accounted for at fair value on a nonrecurring basis as of March 31, 2022 or December 31, 2021.
The Company has other financial instruments, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued expenses, which are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. The fair value of the Company’s long-term debt is estimated using a discounted cash flow method based on interest rates that are currently available for debt issuances with similar terms and maturities. At each March 31, 2022 and December 31, 2021, the estimated fair value of total debt was $112.5 million, compared to a carrying amount of $112.5 million at each date. The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of March 31, 2022.
Nonfinancial assets and liabilities, such as goodwill, indefinite-lived intangible assets and long-lived assets, are accounted for at fair value on a nonrecurring basis. These items are tested for impairment upon the occurrence of a triggering event or in the case of goodwill, on at least an annual basis. Based on the Company's assessment, it was concluded that no triggering events occurred during the three months ended March 31, 2022 or March 31, 2021.
The components of inventories are as follows:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Raw materials | | $ | 69,239 | | | $ | 67,127 | |
Work in progress | | | 44,117 | | | | 31,103 | |
Finished goods | | | 41,985 | | | | 41,153 | |
Inventories | | $ | 155,341 | | | $ | 139,383 | |
7. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consist of the following:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Land | | $ | 1,105 | | | $ | 1,105 | |
Buildings and improvements | | | 21,469 | | | | 20,915 | |
Machinery and equipment | | | 122,051 | | | | 120,961 | |
Construction in progress | | | 4,462 | | | | 5,081 | |
| | | 149,087 | | | | 148,062 | |
Accumulated depreciation | | | (111,518 | ) | | | (109,852 | ) |
Property, plant and equipment, net | | $ | 37,569 | | | $ | 38,210 | |
Depreciation expense was $2.4 million for each of the three month periods ended March 31, 2022 and 2021. Depreciation expense related to our manufacturing facilities and equipment is included in cost of sales and depreciation expense associated with administrative facilities and office equipment is included in selling, general and administrative expense within the accompanying condensed consolidated statements of operations.
At March 31, 2022, a total of $1.6 million of property was classified as assets held for sale on the accompanying condensed consolidated balance sheet related to our corporate headquarters in Jersey City, New Jersey.
Accrued expenses consist of the following:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Sales commissions | | $ | 2,012 | | | $ | 2,049 | |
Subcontracting labor | | | 1,977 | | | | 1,622 | |
Salaries, bonuses and related benefits | | | 17,065 | | | | 21,342 | |
Warranty accrual | | | 1,038 | | | | 1,056 | |
Other | | | 8,024 | | | | 8,384 | |
| | $ | 30,116 | | | $ | 34,453 | |
The change in warranty accrual during the three months ended March 31, 2022 primarily related to repair costs incurred and adjustments to pre-existing warranties. There were no new material warranty charges incurred during the three months ended March 31, 2022.
9. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Chinese Renminbi and the Mexican Peso. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $17.3 million and $17.1 million as of March 31, 2022 and December 31, 2021, respectively.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the credit agreement (further described in Note 10, "Debt"), in December 2021, we executed a pay-fixed, receive-variable interest rate swap agreement with each of two multinational financial institutions under which we (i) pay interest at a fixed rate of 1.3055% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million and (ii) pay interest at a fixed rate of 1.3180% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million (the “2021 Swaps”). The effective date of the 2021 Swaps was December 31, 2021, and settlements with the counterparties began on January 31, 2022 and occur on a monthly basis. The 2021 Swaps will terminate on August 31, 2026.
The 2021 Swaps are designated as cash flow hedges for accounting purposes and as such, changes in their fair value are recognized in accumulated other comprehensive loss in the condensed consolidated balance sheets and are reclassified into the condensed consolidated statements of operations within interest expense in the period in which the hedged transaction affects earnings.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 were as follows:
| Balance Sheet Classification | | March 31, 2022 | | | December 31, 2021 | |
Derivative assets: | | | | | | | | | |
Foreign currency forward contracts: | | | | | | | | | |
Designated as cash flow hedges | Other current assets | | $ | 67 | | | $ | 57 | |
Not designated as hedging instruments | Other current assets | | | 43 | | | | - | |
Interest rate swap agreements: | | | | | | | | | |
Designated as a cash flow hedge | Other assets | | | 2,868 | | | | | |
Total derivative assets | | $ | 2,978 | | | $ | 57 | |
| | | | | | | | | |
Derivative liabilities: | | | | | | | | | |
Foreign currency forward contracts: | | | | | | | | | |
Designated as cash flow hedges | Other current liabilities | | $ | - | | | $ | - | |
Not designated as hedging instruments | Other current liabilities | | | - | | | | 19 | |
Interest rate swap agreements: | | | | | | | | | |
Designated as a cash flow hedge | Other long-term liabilities | | | - | | | | 116 | |
Total derivative liabilities | | $ | - | | | $ | 135 | |
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statements of operations for the three months ended March 31, 2022 and March 31, 2021 were as follows:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Net gains recognized in AOCL: | | | | | | | | |
Foreign currency forward contracts | | $ | 154 | | | $ | - | |
Interest rate swap agreements | | | 2,809 | | | | - | |
| | $ | 2,963 | | | $ | - | |
| | | | | | | | |
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations: | | | | | | | | |
Foreign currency forward contracts | | $ | 67 | | | $ | - | |
Interest rate swap agreements | | | (176 | ) | | | - | |
| | $ | (109 | ) | | $ | - | |
The gain related to the foreign currency forward contracts is included as a component of currency translation adjustment on the accompanying condensed consolidated statements of comprehensive income at March 31, 2022 and December 31, 2021. The unrealized gains (losses) related to the interest rate swap agreements on the accompanying condensed consolidated statements of comprehensive income at March 31, 2022 and December 31, 2021 includes an immaterial amount of unrealized gain (loss) on marketable securities as of each date. There were no net gains (losses) reclassified from AOCL to the consolidated statements of operations during the three months ended March 31, 2021.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three months ended March 31, 2022 and March 31, 2021 were as follows:
| | | Three Months Ended March 31, | |
| Classification in Consolidated Statements of Operations | | 2022 | | | 2021 | |
Foreign currency forward contracts | Other (expense) income, net | | $ | (7 | ) | | $ | 10 | |
| | | $ | (7 | ) | | $ | 10 | |
The Company has a Credit and Security Agreement with KeyBank National Association (as amended, the "credit agreement" or the "CSA"). The CSA provides a $175 million 5-year senior secured revolving credit facility ("Revolver"), with a sublimit of up to $10 million available for letters of credit and a sublimit of up to $5 million available for swing line loans. The Company had $112.5 million in outstanding borrowings under the Revolver at each of March 31, 2022 and December 31, 2021. Revolving loans borrowed under the CSA mature of September 1, 2026.
The weighted-average interest rate in effect for the variable-rate portion of our outstanding borrowings ($52.5 million at each date) was 1.96% at March 31, 2022 and 1.60% at December 31, 2021 and consisted of LIBOR plus the Company’s credit spread, as determined per the terms of the CSA. In order to manage our interest rate exposure on the remaining borrowings, and as further described in Note 9, "Derivative Instruments and Hedging Activities", the Company is party to the 2021 Swaps, each with an aggregate notional amount of $30 million, or $60 million in the aggregate, the effect of which is to fix the LIBOR portion of the interest rate on a portion of our outstanding debt on our Revolver. The 2021 Swaps require the Company to pay interest on the notional amount at the rate of 1.3055% and 1.3180%, respectively, in exchange for the one-month LIBOR rate. The effective rate of interest for our outstanding borrowings, including the impact of the 2021 Swaps, was 2.41% during the first quarter of 2022. In connection with interest due on its outstanding borrowings under the CSA during each period, the effects of the 2021 Swaps and amortization of deferred financing costs, the Company incurred $0.7 million and $0.8 million of interest expense during the three months ended March 31, 2022 and March 31, 2021, respectively.
The CSA contains customary representations and warranties, covenants and events of default. In addition, the CSA contains financial covenants that measure (i) the ratio of the Company’s total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of the Company’s consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of the Company’s consolidated EBITDA to the Company’s consolidated fixed charges (“Fixed Charge Coverage Ratio”). If an event of default occurs, the lenders under the CSA would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor. At March 31, 2022, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Leverage Ratio.
The Company's estimated taxable income in future periods is not on a legal entity basis and therefore income tax expense for the interim period is not measured using the annual effective tax rate ("AETR") method. The Company is working on developing reliable estimates for future periods. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2018 and for state examinations before 2015. Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2011 in Asia and generally 2013 in Europe.
As a result of the expiration of the statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized benefits for tax positions taken regarding previously filed tax returns may change materially from those recorded as liabilities for uncertain tax positions in the Company’s consolidated financial statements at March 31, 2022. The Company’s liabilities for uncertain tax positions totaled $28.7 million and $28.4 million at March 31, 2022 and December 31, 2021, respectively, of which $4.1 million are expected to be resolved during 2022 by way of expiration of the related statute of limitations. These amounts, if recognized, would reduce the Company’s effective tax rate.
The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of the current provision for income taxes. During the three months ended March 31, 2022 and 2021, the Company recognized $0.2 million in interest and penalties in the condensed consolidated statements of operations during each period. The Company has approximately $5.2 million and $5.0 million, respectively, accrued for the payment of interest and penalties at March 31, 2022 and December 31, 2021, which is included in liability for uncertain tax positions in the condensed consolidated balance sheets.
12. | RETIREMENT FUND AND PROFIT SHARING PLAN |
The Company maintains the Bel Fuse Inc. Employees’ Savings Plan, a defined contribution plan that is intended to meet the applicable requirements for tax-qualification under sections 401(a) and (k) of the Internal Revenue Code of 1986, as amended. The expense for the three months ended March 31, 2022 and 2021 amounted to $0.4 million and $0.3 million, respectively. The Company’s matching contribution is made in the form of Bel Fuse Inc. Class A common stock. As of March 31, 2022, the plan owned 321,707 and 99,858 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.
The Company also maintains a Nonqualified Deferred Compensation Plan (the "DCP"). With certain exception, the Company's contributions to the DCP are discretionary and become fully vested by the participants upon reaching age 65. The expense for the three months ended March 31, 2022 and 2021 amounted less than $0.1 million during each period. As the plan is fully funded, the assets and liabilities related to the DCP were in equal amounts of $0.7 million at March 31, 2022 and $0.8 million at December 31, 2021. These amounts are included in other assets and other liabilities, respectively, on the accompanying condensed consolidated balance sheets as of each date.
The Company's subsidiaries in Asia have a retirement fund covering substantially all of their Hong Kong based full-time employees. The expense for the three months ended March 31, 2022 and 2021 amounted to $0.8 million and $0.1 million, respectively. As of March 31, 2022, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.
The Company maintains a SERP, which is designed to provide a limited group of key management and other key employees of the Company with supplemental retirement and death benefits. As discussed in Note 5 above, the Company has investments in a rabbi trust which are intended to fund the obligations of the SERP.
The components of SERP expense are as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2022 | | | 2021 | |
Service cost | | $ | 126 | | | $ | 169 | |
Interest cost | | | 159 | | | | 135 | |
Net amortization | | | 78 | | | | 127 | |
Net periodic benefit cost | | $ | 363 | | | $ | 431 | |
The service cost component of net benefit cost is presented within cost of sales or selling, general and administrative expense on the accompanying condensed consolidated statements of operations, in accordance with where compensation cost for the related associate is reported. All other components of net benefit cost, including interest cost and net amortization noted above, are presented within other (expense) income, net in the accompanying condensed consolidated statements of operations.
The following amounts are recognized net of tax in accumulated other comprehensive loss:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Prior service cost | | $ | 428 | | | $ | 460 | |
Net loss | | | 1,345 | | | | 1,391 | |
| | $ | 1,773 | | | $ | 1,851 | |
13. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of accumulated other comprehensive loss at March 31, 2022 and December 31, 2021 are summarized below:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Foreign currency translation adjustment, net of taxes of ($404) at March 31, 2022 and ($417) at December 31, 2021 | | $ | (16,127 | ) | | $ | (14,911 | ) |
Unrealized gains (losses) on interest rate swap cash flow hedge, net of taxes of ($7) at March 31, 2022 and ($7) at December 31, 2021 | | | 2,897 | | | | (87 | ) |
Unfunded SERP liability, net of taxes of ($485) at March 31, 2022 and ($502) at December 31, 2021 | | | (3,804 | ) | | | (3,865 | ) |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (17,034 | ) | | $ | (18,863 | ) |
Changes in accumulated other comprehensive loss by component during the three months ended March 31, 2022 are as follows. All amounts are net of tax.
| | | | | | Unrealized | | | | | | | | | | |
| | Foreign Currency | | | Gains (Losses) on | | | | | | | | | | |
| | Translation | | | Interest Rate Swap | | | Unfunded | | | | | | |
| | Adjustment | | | Cash Flow Hedge | | | SERP Liability | | | | Total | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | | $ | (14,911 | ) | | $ | (87 | ) | | $ | (3,865 | ) | | | $ | (18,863 | ) |
Other comprehensive (loss) income before reclassifications | | | (1,216 | ) | | | 2,984 | | | | (6 | ) | | | | 1,762 | |
Amount reclassified from accumulated other comprehensive loss | | | - | | | | - | | | | 67 | | (a) | | | 67 | |
Net current period other comprehensive (loss) income | | | (1,216 | ) | | | 2,984 | | | | 61 | | | | | 1,829 | |
| | | | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | $ | (16,127 | ) | | $ | 2,897 | | | $ | (3,804 | ) | | | $ | (17,034 | ) |
(a) This reclassification relates to the amortization of prior service costs and gains/losses associated with the Company's SERP Plan. This expense is reflected in other (expense) income, net on the accompanying condensed consolidated statements of operations. |
14. | COMMITMENTS AND CONTINGENCIES |
Legal Proceedings
On June 23, 2021, a patent infringement lawsuit styled Bel Power Solutions, Inc. v. Monolithic Power Systems, Inc., Case Number 6:21cv00655, was filed in the United States District Court for the Western District of Texas (Waco Division) by Bel Power Solutions, Inc. against Monolithic Power Systems, Inc. ("MPS") for infringement of various patents directed towards systems, methods and articles of manufacture that provide a substantial improvement in power control for circuits, including novel and unique point-of-load regulators. MPS filed a Motion to Dismiss and a Motion to Transfer Venue to the Northern District of California in September 2021. On May 5, 2022, the Western District of Texas court denied MPS’s motion to dismiss and its efforts to challenge venue. As such, the suit shall remain and continue in the Western District of Texas. The Company has made a demand for a jury trial.
In connection with the Company's 2014 acquisition of the Power-One Power Solutions business ("Power Solutions") of ABB Ltd., there is an ongoing claim by the Arezzo Revenue Agency in Italy concerning certain tax matters related to what was then Power-One Asia Pacific Electronics Shenzhen Co. Ltd. (now Bel Power Solutions Asia Pacific Electronics Shenzhen Co. Ltd, or “BPS China”) for the years 2004 to 2006. In September 2012, the Tax Court of Arezzo ruled in favor of BPS China and cancelled the claim. In February 2013, the Arezzo Revenue Agency filed an appeal of the Tax Court’s ruling. The hearing of the appeal was held on October 2, 2014. On October 13, 2014, BPS China was informed of the Regional Tax Commission of Florence ruling which was in favor of the Arezzo Revenue Agency and against BPS China. An appeal was filed on July 18, 2015 before the Regional Tax Commission of Florence and rejected. On December 5, 2016, the Arezzo Revenue Agency filed an appeal with the Supreme Court and BPS China filed a counter-appeal on January 4, 2017. The Supreme Court has yet to render its judgment. The estimated liability related to this matter is approximately $12.0 million and has been included as a liability for uncertain tax positions on the accompanying condensed consolidated balance sheets. As Bel is fully indemnified in this matter per the terms of the stock purchase agreement with ABB, a corresponding other asset for indemnification is also included in other assets on the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021.
The Company is not a party to any other legal proceeding, the adverse outcome of which is likely to have a material adverse effect on the Company's consolidated financial condition or results of operations.
The Company operates in one industry with three reportable operating segments, which represent the Company's three product groups and a corporate segment. The segments consist of Connectivity Solutions, Power Solutions and Protection, Magnetic Solutions and a Corporate segment. The primary criteria by which financial performance is evaluated and resources are allocated are revenue and gross profit. The following is a summary of key financial data:
| | Three Months Ended March 31, 2022 | |
| | Connectivity | | | Power Solutions | | | Magnetic | | | Corporate | | | | | |
| | Solutions | | | and Protection | | | Solutions | | | Segment | | | Total | |
Revenue | | $ | 43,713 | | | $ | 58,790 | | | $ | 34,215 | | | $ | - | | | $ | 136,718 | |
Gross Profit | | | 11,596 | | | | 15,938 | | | | 6,890 | | | | (300 | ) | | | 34,124 | |
Gross Profit % | | | 26.5 | % | | | 27.1 | % | | | 20.1 | % | | | nm | | | | 25.0 | % |
| | Three Months Ended March 31, 2021 | |
| | Connectivity | | | Power Solutions | | | Magnetic | | | Corporate | | | | | |
| | Solutions | | | and Protection | | | Solutions | | | Segment | | | Total | |
Revenue | | $ | 38,056 | | | $ | 43,641 | | | $ | 28,946 | | | $ | - | | | $ | 110,643 | |
Gross Profit | | | 9,773 | | | | 10,782 | | | | 3,961 | | | | (257 | ) | | | 24,259 | |
Gross Profit % | | | 25.7 | % | | | 24.7 | % | | | 13.7 | % | | | nm | | | | 21.9 | % |