UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2022March 31, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________

 

Commission File No. 000-11676

 


 

BEL FUSE INC.

(Exact name of registrant as specified in its charter)

 

206 Van Vorst Street
Jersey City, NJ  07302
(201) 432-0463

 

(Address of principal executive offices and zip code)

(Registrant’s telephone number, including area code)

 

New Jersey

 

22-1463699

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

 Trading Symbol

 

Name of Exchange on Which Registered

Class A Common Stock ($0.10 par value)

 

 BELFA

 

Nasdaq Global Select Market

Class B Common Stock ($0.10 par value)

 

 BELFB

 

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

 

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒

No ☐

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated

filer ☐

Accelerated

filer

 ☒

Non-accelerated

filer ☐

Smaller reporting

company ☒

Emerging growth

company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

 No ☒

 


Title of Each Class

 

Number of Shares of Common Stock Outstanding

 as of AugustMay 1, 20222023

Class A Common Stock ($0.10 par value)

 

2,141,589

Class B Common Stock ($0.10 par value)

 

10,343,26010,632,260

 

 

 

 

 

BEL FUSE INC. AND SUBSIDIARIES

 

FORM 10-Q INDEX

 

 

 

 

Page

Part I

 

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2022March 31, 2023 and December 31, 20212022 (unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2023 and 2022 and 2021 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30,March 31, 2023 and 2022 and 2021 (unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30,March 31, 2023 and 2022 and 2021 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2023 and 2022 and 2021 (unaudited)

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7 - 17

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18 - 2324

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

 

 

Item 1A.

Risk Factors

24

 

 

 

 

 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds25
    
 Item 3.Defaults Upon Senior Securities25
    
 Item 4.Mine Safety Disclosures25
    
 Item 5.Other Information25
    

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

 

27

 

 

 

 

 

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION

 

The terms the “Company,” “Bel,” “we,” “us,” and “our” as used in this report refer to Bel Fuse Inc. and its consolidated subsidiaries unless otherwise specified.

 

The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in Item 1A of our 2021 Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “2022 Annual Report on Form 10-K”), and the riskrisks and other factors described in this orand our other Quarterly Reports on Form 10-Q, and in our other reports and documents that we have filed thereafter, andor may file from time to time in our other filings with the Securities and Exchange Commission (“SEC”("SEC"). As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, operating results, and common stock prices.  Furthermore, this document and other reports and documents filed by the Company with the SEC contain certain forward-looking statements under the Private Securities Litigation Reform Act of 1995 (“("Forward-Looking Statements”Statements") with respect to the business of the Company.  Forward-Looking Statements are necessarily subject to risks and uncertainties, many of which are outside our control, that could cause actual results to differ materially from these statements. Forward-Looking Statements can be identified by such words as “anticipates,” “believes,” “plan,” “assumes,” “could,” “should,” “estimates,” “expects,” “intends,” “potential,” “seek,” “predict,” “may,” “will”"anticipates," "believes," "plan," "assumes," "could," "should," "estimates," "forecasts," "projects," "expects," "intends," "potential," "seek," "predict," "may," "will" and similar references to future periods.  All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives and regarding the anticipated impact of COVID-19 are Forward-Looking Statements.

These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in Item 1A of our 20212022 Annual Report on Form 10-K, and in the riskrisks and other factors described in this orand our other Quarterly Reports on Form 10-Q, and in our other reports and documents that we have filed thereafter, andor may file from time to time in our other filings with the SEC, which could cause actual results to differ materially from these Forward-Looking Statements.  Any Forward-Looking Statements are qualified in the entirety by reference to such risk factors discussed throughout our 2022 Annual Report on Form 10-K, in this Quarterly Report on Form 10-Q and as described in our other reports and documents filed from time to time with the SEC.  Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the Forward-Looking Statements include but are not limited to:

the market concerns facing our customers, and risks for the Company’s business in the event of the loss of certain substantial customers;

the continuing viability of sectors that rely on our products;

the effects of business and economic conditions;

the impact of public health crises (such as the governmental, social and economic effects of COVID-19);

the effects of rising input costs, and cost changes generally, including the potential impact and effects of inflationary pressures;

difficulties associated with integrating previously acquired companies;

capacity and supply constraints or difficulties, including supply chain constraints or other challenges;

difficulties associated with the availability of labor, and the risks of any labor unrest or labor shortages;

risks associated with our international operations, including our substantial manufacturing operations in China;

risks associated with restructuring programs or other strategic initiatives, including any difficulties in implementation or realization of the expected benefits or cost savings;

product development, commercialization or technological difficulties;

the regulatory and trade environment;

risks associated with fluctuations in foreign currency exchange rates and interest rates;

uncertainties associated with legal proceedings;

the market's acceptance of the Company's new products and competitive responses to those new products; and

the impact of changes to U.S. and applicable foreign legal and regulatory requirements, including tax laws, trade and tariff policies.

The Company undertakesforegoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any Forward-Looking Statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference into this report. Except as required by law, we assume no obligation and expressly disclaim any duty to publicly release the results of any revisions to these Forward-Looking Statements which may be necessaryor otherwise update any Forward-Looking Statement to reflect events or circumstances after the date hereofof this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any Forward-Looking Statements contained in this Quarterly Report on Form 10-Q. Any Forward-Looking Statement made by the Company is based only on information currently available to us and speaks only as of the date on which it is made. All Forward-Looking Statements are expressly qualified in their entirety by the cautionary statements contained in this section.

 

 

1

 

 

 

PART I.  Financial Information

 

Item 1.  Financial Statements (Unaudited)

 

BEL FUSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

ASSETS

            

Current Assets:

          

Cash and cash equivalents

 $65,830  $61,756  $77,840  $70,266 

Accounts receivable, net of allowance for doubtful accounts of $1,380 and $1,536, respectively

 98,777  87,135 

Accounts receivable, net of allowance for doubtful accounts of $1,632 and $1,552, respectively

 108,965  107,274 

Inventories

 160,593  139,383  165,814  172,465 

Unbilled receivables

 23,277  28,275  15,070  18,244 

Assets held for sale

 1,626 1,626  1,466 1,466 

Other current assets

  10,999  10,841   13,446  11,693 

Total current assets

 361,102  329,016  382,601  381,408 
  

Property, plant and equipment, net

 36,105 38,210  38,498 36,833 

Right-of-use assets

 24,234 21,252  20,322 21,551 

Related party note receivable

 1,958 - 

Equity method investment

 9,975 - 

Intangible assets, net

 56,563  60,995  53,163  54,111 

Goodwill

 24,771  26,651  25,400  25,099 

Deferred income taxes

 7,422  4,461  8,359  7,281 

Other assets

  32,163   31,261   34,250   34,183 

Total assets

 $542,360 $511,846  $574,526 $560,466 
  

LIABILITIES AND STOCKHOLDERS' EQUITY

            

Current Liabilities:

          

Accounts payable

 $70,020  $65,960  $60,237  $64,589 

Accrued expenses

 37,551  34,453  47,618  50,873 

Operating lease liabilities, current

 7,251  6,880  5,239  5,870 

Other current liabilities

  13,928   4,719   16,763   14,972 

Total current liabilities

 128,750  112,012  129,857  136,304 
  

Long-term Liabilities:

          

Long-term debt

 112,500  112,500  100,000  95,000 

Operating lease liabilities, long-term

 17,065  14,668  15,072  15,742 

Liability for uncertain tax positions

 24,576  28,434  25,217  24,798 

Minimum pension obligation and unfunded pension liability

 24,177  23,909  18,657  18,522 

Deferred income taxes

 1,286  1,487  1,199  1,257 

Other liabilities

  8,011   10,093   6,461   6,497 

Total liabilities

  316,365   303,103   296,463   298,120 
  

Commitments and contingencies (see Note 14)

              
  

Stockholders' Equity:

          

Preferred stock, no par value, 1,000,000 shares authorized; none issued

 0 0  - - 

Class A common stock, par value $.10 per share, 10,000,000 shares authorized; 2,141,589 and 2,144,912 shares outstanding at June 30, 2022 and December 31, 2021, respectively (net of 1,072,769 restricted treasury shares)

 214  214 

Class B common stock, par value $.10 per share, 30,000,000 shares authorized; 10,343,260 and 10,377,102 shares outstanding at June 30, 2022 and December 31, 2021, respectively (net of 3,218,307 restricted treasury shares)

 1,036  1,038 

Class A common stock, par value $.10 per share, 10,000,000 shares authorized; 2,141,589 shares outstanding at each date (net of 1,072,769 restricted treasury shares)

 214  214 

Class B common stock, par value $.10 per share, 30,000,000 shares authorized; 10,632,760 and 10,642,760 shares outstanding at March 31, 2023 and December 31, 2022, respectively (net of 3,218,307 restricted treasury shares)

 1,066  1,067 

Treasury stock (unrestricted, consisting of 3,323 Class A shares and 17,342 Class B shares)

 (349) 0  (349) (349)

Additional paid-in capital

 39,509  38,419  41,675  40,772 

Retained earnings

 208,326  187,935  250,885  237,188 

Accumulated other comprehensive loss

  (22,741)  (18,863)  (15,428)  (16,546)

Total stockholders' equity

  225,995   208,743   278,063   262,346 

Total liabilities and stockholders' equity

 $542,360  $511,846  $574,526  $560,466 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

 

BEL FUSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 
  

Net sales

 $170,572  $138,741  $307,290  $249,385  $172,344  $136,718 

Cost of sales

  125,120   104,537   227,879   190,241   118,680   102,594 

Gross profit

 45,452  34,204  79,411  59,144  53,664  34,124 
  

Research and development costs

 4,661  5,464  9,505  10,384  5,223  5,009 

Selling, general and administrative expenses

 23,965  21,828  44,992  43,569  25,296  21,026 

Restructuring charges

 31 277 31 277   3,507   - 

Gain on sale of property

  0   0   0   (6,175)

Income from operations

 16,795  6,635  24,883  11,089  19,638  8,089 
  

Interest expense

 (779) (721) (1,467) (1,523) (983) (688)

Other (expense) income, net

  (1,724)  113   (2,496)  660 

Other income (expense), net

  81   (773)

Earnings before provision for income taxes

 14,292  6,027  20,920  10,226  18,736  6,628 
  

Benefit from income taxes

  (2,746)  (1,853)  (1,182)  (854)

Provision for income taxes

  4,164   1,564 

Net earnings available to common stockholders

 $17,038  $7,880  $22,102  $11,080  $14,572  $5,064 
  
  

Net earnings per common share:

  

Class A common share - basic and diluted

 $1.30  $0.61  $1.68  $0.85  $1.09  $0.38 

Class B common share - basic and diluted

 $1.37  $0.64  $1.78  $0.91  $1.15  $0.41 
  

Weighted-average number of shares outstanding:

  

Class A common share - basic and diluted

  2,144   2,145   2,145   2,145   2,142   2,145 

Class B common share - basic and diluted

  10,362   10,237   10,368   10,220   10,639   10,374 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3

 

 

BEL FUSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net earnings available to common stockholders

 $17,038  $7,880  $22,102  $11,080 
                 

Other comprehensive (loss) income:

                

Currency translation adjustment, net of taxes of ($31), ($333), ($43) and ($324), respectively

  (6,764)  2,540   (7,980)  11 

Unrealized gains (losses) on interest rate swap cash flow hedge, net of taxes of $0 in all periods presented

  1,008   0   3,992   0 
    Unrealized holding losses on marketable securities, net of taxes of $0 in all periods presented  (12)  0   (12)  (1)

Change in unfunded SERP liability, net of taxes of ($17), ($28), ($35) and ($56), respectively

  61   100   122   199 

Other comprehensive (loss) income

  (5,707)  2,640   (3,878)  209 
                 

Comprehensive income

 $11,331  $10,520  $18,224  $11,289 
  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 
         

Net earnings available to common stockholders

 $14,572  $5,064 
         

Other comprehensive income (loss):

        

Currency translation adjustment, net of taxes of $9 and ($12), respectively

  1,998   (1,216)

Unrealized (losses) gains on interest rate swap cash flow hedge, net of taxes of $0 in all periods presented

  (894)  2,984 

Unrealized holding gains on marketable securities, net of taxes of $0 in all periods presented

  1   - 

Change in unfunded SERP liability, net of taxes of ($4) and ($17), respectively

  13   61 

Other comprehensive income

  1,118   1,829 
         

Comprehensive income

 $15,690  $6,893 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

BEL FUSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except per share data)

 (unaudited)

 

     

Accumulated

              

Accumulated

         
     

Other

 

Class A

 

Class B

   

Additional

      

Other

 

Class A

 

Class B

   

Additional

 
   

Retained

 

Comprehensive

 

Common

 

Common

 

Treasury

 

Paid-In

    

Retained

 

Comprehensive

 

Common

 

Common

 

Treasury

 

Paid-In

 
 

Total

  

Earnings

  

(Loss) Income

  

Stock

  

Stock

  

Stock

  

Capital

  

Total

  

Earnings

  

(Loss) Income

  

Stock

  

Stock

  

Stock

  

Capital

 
  

Balance at December 31, 2021

 $208,743  $187,935  $(18,863) $214  $1,038  $0  $38,419 

Balance at December 31, 2022

 $262,346  $237,188  $(16,546) $214  $1,067  $(349) $40,772 

Net earnings

 5,064  5,064  0  0  0  0  0  14,572  14,572  -  -  -  -  - 

Dividends declared:

  

Class A Common Stock, $0.06/share

 (129) (129) 0  0  0  0  0  (128) (128) -  -  -  -  - 

Class B Common Stock, $0.07/share

 (727) (727) 0  0  0  0  0  (747) (747) -  -  -  -  - 

Forfeiture of restricted common stock

 0  0  0  0  (1) 0  1  -  -  -  -  (1) -  1 

Foreign currency translation adjustment, net of taxes of ($12)

 (1,216) 0  (1,216) 0  0  0  0 

Unrealized gains on interest rate swap cash flow hedge

 2,984  0  2,984  0  0  0  0 

Foreign currency translation adjustment, net of taxes of $9

 1,998  -  1,998  -  -  -  - 

Unrealized losses on interest rate swap cash flow hedge, net of taxes of $0

 (894) -  (894) -  -  -  - 

Unrealized holding gains on marketable securities, net of taxes of $0

 1 - 1 - - - - 

Stock-based compensation expense

 576  0  0  0  0  0  576  902  -  -  -  -  -  902 

Change in unfunded SERP liability, net of taxes of ($17)

  61   0   61   0   0   0   0 

Balance at March 31, 2022

  215,356   192,143   (17,034)  214   1,037   0   38,996 
 

Net earnings

 17,038  17,038  0  0  0  0  0 

Dividends declared:

 

Class A Common Stock, $0.06/share

 (129) (129) 0  0  0  0  0 

Class B Common Stock, $0.07/share

 (726) (726) 0  0  0  0  0 

Forfeiture of restricted common stock

 0  0  0  0  (1) 0  1 

Repurchase of treasury stock

 (349) 0  0  0  0  (349) 0 

Foreign currency translation adjustment, net of taxes of ($31)

 (6,764) 0  (6,764) 0  0  0  0 

Unrealized gains on interest rate swap cash flow hedge

 1,008  0  1,008  0  0  0  0 

Unrealized holding losses on marketable securities arising during the period, net of taxes of $0

 (12) 0  (12) 0  0  0  0 

Stock-based compensation expense

 512  0  0  0  0  0  512 

Change in unfunded SERP liability, net of taxes of ($17)

  61   0   61   0   0   0   0 

Balance at June 30, 2022

 $225,995  $208,326  $(22,741) $214  $1,036  $(349) $39,509 

Change in unfunded SERP liability, net of taxes of ($4)

  13   -   13   -   -   -   - 

Balance at March 31, 2023

 $278,063  $250,885  $(15,428) $214  $1,066  $(349) $41,675 

 

 

     

Accumulated

            

Accumulated

       
     

Other

 

Class A

 

Class B

 

Additional

      

Other

 

Class A

 

Class B

 

Additional

 
   

Retained

 

Comprehensive

 

Common

 

Common

 

Paid-In

    

Retained

 

Comprehensive

 

Common

 

Common

 

Paid-In

 
 Total  Earnings  (Loss) Income  Stock  Stock  Capital  Total  Earnings  (Loss) Income  Stock  Stock  Capital 
  

Balance at December 31, 2020

 $185,799  $166,491  $(18,063) $214  $1,021  $36,136 

Balance at December 31, 2021

 $208,743  $187,935  $(18,863) $214  $1,038  $38,419 

Net earnings

 3,199  3,199  0  0  0  0  5,064  5,064  -  -  -  - 

Dividends declared:

  

Class A Common Stock, $0.06/share

 (128) (128) 0  0  0  0  (129) (129) -  -  -  - 

Class B Common Stock, $0.07/share

 (716) (716) 0  0  0  0  (727) (727) -  -  -  - 

Forfeiture of restricted common stock

 0  0  0  0  (1) 1  -  -  -  -  (1) 1 

Foreign currency translation adjustment, net of taxes of $9

 (2,529) 0  (2,529) 0  0  0 

Unrealized holding losses on marketable securities

 (1) 0 (1) 0 0 0 

Foreign currency translation adjustment, net of taxes of ($12)

 (1,216) -  (1,216) -  -  - 

Unrealized gains on interest rate swap cash flow hedge

 2,984 - 2,984 - - - 

Stock-based compensation expense

 600  0  0  0  0  600  576  -  -  -  -  576 

Change in unfunded SERP liability, net of taxes of ($28)

  99   0   99   0   0   0 

Balance at March 31, 2021

  186,323   168,846   (20,494)  214   1,020   36,737 
 

Net earnings

 7,880 7,880 0 0 0 0 

Dividends declared:

 

Class A Common Stock, $0.06/share

 (129) (129) 0 0 0 0 

Class B Common Stock, $0.07/share

 (714) (714) 0 0 0 0 

Issuance of restricted common stock

 0 0 0 0 8 (8)

Forfeiture of restricted common stock

 0 0 0 0 (1) 1 

Foreign currency translation adjustment, net of taxes of ($333)

 2,540 0 2,540 0 0 0 

Stock-based compensation expense

 598 0 0 0 0 598 

Change in unfunded SERP liability, net of taxes of ($28)

  100  0  100  0  0  0 

Balance at June 30, 2021

 $196,598 $175,883 $(17,854) $214 $1,027 $37,328 

Change in unfunded SERP liability, net of taxes of ($17)

  61   -   61   -   -   - 

Balance at March 31, 2022

 $215,356  $192,143  $(17,034) $214  $1,037  $38,996 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

BEL FUSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

March 31,

 
 

2022

  

2021

  

2023

  

2022

 
  

Cash flows from operating activities:

          

Net earnings

 $22,102  $11,080  $14,572  $5,064 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

          

Depreciation and amortization

 8,316 8,478  3,236 4,301 

Stock-based compensation

 1,087  1,198  902  576 

Amortization of deferred financing costs

 34 331  33 34 

Deferred income taxes

 (2,965) 576 

Net unrealized gains on foreign currency revaluation

 (373) (131)

Gains on sale of property

 0 (6,175)

Deferred tax benefit

 (1,137) (451)

Net unrealized losses (gains) on foreign currency revaluation

 199 (289)

Other, net

 90 496  465 131 

Changes in operating assets and liabilities:

          

Accounts receivable, net

 (12,704) (12,593) (1,316) (6,694)

Unbilled receivables

 4,998 (4,142) 3,175 7,719 

Inventories

 (25,284) (10,362) 7,652 (16,344)

Accounts payable

 6,323 11,066  (4,831) (1,194)

Accrued expenses

 4,421 4,148  (6,417) (3,564)

Accrued restructuring costs

 2,590 - 

Income taxes payable

 3,931 473 

Other operating assets/liabilities, net

  5,101  (5,893)  (6,219)  2,490 

Net cash provided by (used in) operating activities

 11,146  (1,923) 16,835  (7,748)
  

Cash flows from investing activities:

          

Purchases of property, plant and equipment

 (3,546) (2,465) (3,761) (2,040)

Payments for acquisitions, net of cash acquired

 0 (16,811)

Payments for equity method investment

 (9,975) - 

Proceeds from sale of property, plant and equipment

  87  6,756   25  87 

Net cash used in investing activities

 (3,459) (12,520) (13,711) (1,953)
  

Cash flows from financing activities:

          

Dividends paid to common stockholders

 (1,646) (1,630) (829) (823)

Purchase of treasury stock

 (349) 0 

Repayments of long-term debt

  0  (2,974)

Net cash used in financing activities

 (1,995) (4,604)

Borrowings under revolving credit line

  5,000  - 

Net cash provided by (used in) financing activities

 4,171  (823)
  

Effect of exchange rate changes on cash and cash equivalents

  (1,618)  533   279  3 
  

Net increase (decrease) in cash and cash equivalents

 4,074  (18,514) 7,574  (10,521)

Cash and cash equivalents - beginning of period

  61,756   84,939   70,266   61,756 

Cash and cash equivalents - end of period

 $65,830  $66,425  $77,840  $51,235 
  
  

Supplementary information:

          

Cash paid during the period for income taxes, net of refunds received

 $4,614 $2,036 

Cash paid during the period for interest payments

 $1,105 $1,174 

Cash paid during the period for:

     

Income taxes, net of refunds received

 $976 $1,152 

Interest payments

 $

1,415

 $

461

 
ROU assets obtained in exchange for lease obligations $5,734 $6,032  $380 $3,340 
  

Details of acquisitions:

     

Fair value of identifiable net assets acquired

 $0 $18,215 

Goodwill

  0  2,499 

Fair value of net assets acquired

 $0 $20,714 
 

Fair value of consideration transferred

 $0 $20,714 

Less: Cash acquired in acquisitions

  0  (3,903)

Cash paid for acquisitions, net of cash acquired

 $0 $16,811 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

BEL FUSE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 and sixmonths ended June 30, 2022March 31, 2023 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, 20212022.

 

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, 20212022.  There were no significant changes to these accounting policies during the sixthree months ended June 30, 2022March 31, 2023, except as discussed in “Recently Adopted Accounting Standards” below.below and as follows:

Investments

We account for non-marketable investments using the equity method of accounting if the investment gives us the ability to exercise significant influence over, but not control, of an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions.

Equity in earnings of unconsolidated affiliates, in the consolidated statements of operations, reflects our proportionate share of the investee's net income, including any associated affiliate taxes. Our proportionate share of the investee’s other comprehensive income (loss), net of income taxes, is recorded in the consolidated statements of stockholders’ equity and consolidated statements of comprehensive income. In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus those entities' undistributed earnings.

We evaluate our equity method investments for impairment at least annually or whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of an investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment. See Note 2, "Investment in Innolectric", below, for our discussion on equity method investments.

Where we are unable to exercise significant influence over the investee, or when our investment balance is reduced to zero from our proportionate share of losses, the investments are accounted for under the cost method. Under the cost method, investments are carried at cost and adjusted only for other-than-temporary declines in fair value, distributions of earnings, additional investments, or in the case of an observable price change in an orderly transaction for an identical security.

 

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.

7

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 refinesrefined the scope of Topic 848 and clarifiesclarified some of its guidance as part of the FASB’s monitoring of global reference rate activities. The newThis updated guidance was effective upon issuance, and the Company iswas initially allowed to elect to apply the amendments prospectively through December 31, 2022.  Management is currently evaluating In December 2022, the impactFASB issued ASU 2022-06,Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, which extended the date by which companies could elect to apply the amendments to December 31, 2024. During January 2023, the Company amended its credit agreement and related interest rate swap agreements to transition the reference rate from LIBOR to a Secured Overnight Financing Rate ("SOFR") effective January 31, 2023. In connection with these amendments, the Company adopted ASU 2020-04 in the first quarter of 2023 and elected to apply the relevant practical expedients within the guidance. The adoption of this accounting standard updateguidance did not have a material impact on the Company's consolidated financial statementsstatements.

7

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 related disclosures.adds to U.S. GAAP an impairment model that is based on expected losses rather than incurred losses.  On January 1, 2023, the Company adopted ASU 2016-13. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

 

 

2.

ACQUISITIONSINVESTMENT IN INNOLECTRIC

 

On February 1, 2023, the Company closed on a noncontrolling (rms Connectorsone-third) investment in Germany-based innolectric AG (“innolectric”) for consideration of €8.0 million (approximately $8.8 million). Transaction costs associated with the Company's investment in innolectric amounted to $1.3 million and these costs have been recorded as part of the carrying value of the investment. Under the terms of the investment agreement, if innolectric achieves certain profitability thresholds within a specified timeframe, the Company would be committed to acquiring the remaining shares of innolectric at that time. The original $8.8 million investment includes both the value of the one-third equity method investment and the value associated with the purchase option for the remaining shares outlined in the agreement in the event certain profitability thresholds are met.

 

OnThis passive investment will create a strategic alliance that is focused on Electric Vehicles (“EV”) on-board power electronics, and in particular next generation fast-charging technology. With January 8, 2021, no product overlap, this relationship expands the Company acquired rms Connectors, Inc. (“rms Connectors” or "rms"),Bel eMobility Power portfolio, further enhancing Bel's competitive position in this emerging field. Our investment in innolectric is accounted for using the equity method and we have determined that the innolectric investment is not a variable interest entity (VIE). Results from rms Company Inc., a division of Cretex Companies, Inc., for $9.0 millionthis investment, which were not recorded 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 secondfirst quarterthree months of2021, and is part of Bel's Connectivity Solutions group.  The transaction was funded with cash on hand.  

EOS Power

On March 31, 2021,2023 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, locateddue to immateriality, will be included 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.  segment in future periods.

 

The acquisitions of rms Connectors and EOS may hereafter be referredRelated Party Transactions

From time 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 and six months ended June 30, 2021 include the operating results of the 2021 Acquired Companies from their respective acquisition dates through June 30, 2021. During the three and six months ended June 30, 2021,time, the Company incurred $0.3 millionprovides cash loans to innolectric to fund working capital needs and $0.5 million, respectively, of acquisition-related costs related to the 2021 Acquisitions.  NaN acquisition-related costs were incurred during the three or six months ended June 30, 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.further business development. During the three and six months ended June 30, 2021, the 2021 Acquired Companies contributed revenues of $6.0 million and $8.1 million, respectively, and estimated net earnings of $1.0 million and $1.4 million, respectively, to the Company since their respective acquisition dates.  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 2021.2023,  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 purportprovided loans 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 achievedinnolectric in the future.

The following unaudited pro formaaggregate amount of €1.8 million (approximately $2.0 million). These loans bear interest at a rate of5% per annum. This balance is shown as a related-party note receivable on the accompanying condensed consolidated results of operations assume that the acquisition of thebalance sheet at 2021 Acquired Companies was completed as of January 1,2021:March 31, 2023.

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2021

  

June 30, 2021

 

Revenue, net

 $138,741  $252,406 

Net earnings

  7,880   11,309 

Earnings per Class A common share - basic and diluted

  0.61   0.87 

Earnings per Class B common share - basic and diluted

  0.64   0.92 

 

8

 
 

3.

REVENUE

 

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 June 30, 2022

  

Six Months Ended June 30, 2022

  

Three Months Ended March 31, 2023

 
 

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

  

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

  

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

 
  

By Geographic Region:

                        

North America

 $34,781 $52,407 $14,248 $101,436 $67,313 $94,755 $25,126 $187,194  $43,013 $62,800 $10,354 $116,167 

Europe

 8,354 11,101 3,121 22,576 17,568 20,486 5,592 43,646  8,401 13,599 2,766 24,766 

Asia

  2,961  7,518  36,081  46,560  4,928  14,574  56,948  76,450   1,982  6,782  22,647  31,411 
 $46,096  $71,026  $53,450  $170,572  $89,809  $129,815  $87,666  $307,290  $53,396  $83,181  $35,767  $172,344 
  

By Sales Channel:

                        

Direct to customer

 $28,544  $45,604  $39,515  $113,663  $54,597  $81,447  $65,254  $201,298  $33,725  $59,614  $27,411  $120,750 

Through distribution

  17,552   25,422   13,935   56,909   35,212   48,368   22,412   105,992   19,671   23,567   8,356   51,594 
 $46,096  $71,026  $53,450  $170,572  $89,809  $129,815  $87,666  $307,290  $53,396  $83,181  $35,767  $172,344 

 

 

Three Months Ended June 30, 2021

  

Six Months Ended June 30, 2021

  

Three Months Ended March 31, 2022

 
 

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

  

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

  

Connectivity Solutions

  

Power Solutions and Protection

  

Magnetic Solutions

  

Consolidated

 
  

By Geographic Region:

                        

North America

 $33,182  $37,867  $9,594  $80,643  $62,724  $67,644  $16,671  $147,039  $32,532  $42,349  $10,878  $85,759 

Europe

 7,557  9,668  2,242  19,467  14,304  19,627  3,491  37,422  9,214  9,385  2,471  21,070 

Asia

  2,307   7,855   28,469   38,631   4,074   11,760   49,090   64,924   1,967   7,056   20,866   29,889 
 $43,046  $55,390  $40,305  $138,741  $81,102  $99,031  $69,252  $249,385  $43,713  $58,790  $34,215  $136,718 
  

By Sales Channel:

                        

Direct to customer

 $25,785  $34,116  $32,746  $92,647  $49,422  $60,605  $57,082  $167,109  $26,053  $35,844  $25,738  $87,635 

Through distribution

  17,261   21,274   7,559   46,094   31,680   38,426   12,170   82,276   17,660   22,946   8,477   49,083 
 $43,046  $55,390  $40,305  $138,741  $81,102  $99,031  $69,252  $249,385  $43,713  $58,790  $34,215  $136,718 


The balances of the Company’s contract assets and contract liabilities at June 30, 2022March 31, 2023 and December 31, 20212022 are as follows:

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 
  

Contract assets - current (unbilled receivables)

 $23,277  $28,275  $15,070  $18,244 

Contract liabilities - current (deferred revenue)

 $7,844 $2,224  $7,145 $8,847 

 

The change in balance of our unbilled receivables from December 31, 20212022 to June 30, 2022March 31, 2023 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 increase in ourOur deferred revenue balance fromat December 31, 2021 2022to and June 30, 2022 March 31, 2023primarily relates to customer prepayments on raw materialinvoices related to surcharges and expedite fees, which will be recorded as revenue in the period in which the related finished goods are shipped to the customer.

 

The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of June 30, 2022 related to contracts that exceed one year in duration amounted to $96.0 million, with expected contract expiration dates that range from 2023 - 2025. It is expected that 78% of this aggregate amount will be recognized in 2023, 20% will be recognized in 2024 and the remainder will be recognized in 2025.

 

9

 
 

4.

EARNINGS PER SHARE

 

The following table sets forth the calculation of basic and diluted net earnings per common share under the two-class method for the three and sixmonths ended June 30, 2022March 31, 2023 and 20212022:

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 
  

Numerator:

  

Net earnings

 $17,038  $7,880  $22,102  $11,080  $14,572  $5,064 

Less dividends declared:

  

Class A

 129  129  258  257  128  129 

Class B

  726   714   1,453   1,430   747   727 

Undistributed earnings

 $16,183  $7,037  $20,391  $9,393  $13,697  $4,208 
  

Undistributed earnings allocation - basic and diluted:

  

Class A undistributed earnings

 $2,664  $1,170  $3,356  $1,565  $2,203  $692 

Class B undistributed earnings

  13,519   5,867   17,035   7,828   11,494   3,516 

Total undistributed earnings

 $16,183  $7,037  $20,391  $9,393  $13,697  $4,208 
  

Net earnings allocation - basic and diluted:

  

Class A net earnings

 $2,793  $1,299  $3,614  $1,822  $2,331  $821 

Class B net earnings

  14,245   6,581   18,488   9,258   12,241   4,243 

Net earnings

 $17,038  $7,880  $22,102  $11,080  $14,572  $5,064 
  

Denominator:

  

Weighted-average shares outstanding:

  

Class A - basic and diluted

  2,144   2,145   2,145   2,145   2,142   2,145 

Class B - basic and diluted

  10,362   10,237   10,368   10,220   10,639   10,374 
  

Net earnings per share:

  

Class A - basic and diluted

 $1.30  $0.61  $1.68  $0.85  $1.09  $0.38 

Class B - basic and diluted

 $1.37  $0.64  $1.78  $0.91  $1.15  $0.41 

 

 

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.

 

10

 

As of June 30, 2022March 31, 2023 and December 31, 20212022, our equity 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 $0.1$0.3 million at June 30, 2022March 31, 2023 and $0.3$0.1 million at December 31, 20212022

 

Throughout 20222023 and 20212022, the Company entered into a series of foreign currency forward contracts, the fair value of which was ($$0.30.3) million at June 30, 2022March 31, 2023 and less than $0.1$0.4 million at December 31, 20212022.  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, theThe Company entered intois a party to 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 $3.94.6 million at June 30, 2022March 31, 2023 and $0.1$5.5 million at December 31, 20212022, which was based on market data, 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 sixthree months ended June 30, 2022March 31, 2023 or June 30, 2021March 31, 2022.  There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the sixthree months ended June 30, 2022March 31, 2023 or June 30, 2021March 31, 2022.

 

There were 0no financial assets accounted for at fair value on a nonrecurring basis as of June 30, 2022March 31, 2023 or December 31, 20212022.

 

The Company has other financial instruments, such as cash and cash equivalents, accounts receivable, 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 June 30, 2022March 31, 2023 and December 31, 20212022, the estimated fair value of total debt was $112.5$99.0 million and $95.0 million, respectively, compared to a carrying amount of $112.5$100.0 million at each date.and $95.0 million, respectively.  The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of June 30, 2022March 31, 2023.

 

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 sixthree months ended June 30, 2022March 31, 2023 or June 30, 2021March 31, 2022.  

 

 

6.

INVENTORIES

 

The components of inventories are as follows:

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Raw materials

 $69,038  $67,127  $75,057  $74,572 

Work in progress

 46,462  31,103  50,121  44,397 

Finished goods

  45,093   41,153   40,636   53,496 

Inventories

 $160,593  $139,383  $165,814  $172,465 

 

 

7.

 PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Land

 $1,093  $1,105  $1,103  $1,098 

Buildings and improvements

 21,301  20,915  21,517  21,529 

Machinery and equipment

 122,537  120,961  120,055  118,358 

Construction in progress

  2,195   5,081   5,552   4,239 
 147,126  148,062  148,227  145,224 

Accumulated depreciation

  (111,021)  (109,852)  (109,729)  (108,391)

Property, plant and equipment, net

 $36,105  $38,210  $38,498  $36,833 

 

Depreciation expense was $2.3$2.1 million and $2.5$2.4 million, respectively, for the three months ended June 30, 2022March 31, 2023 and 2021 and $4.7 million and $5.0 million, respectively, for the six months ended June 30, 2022and 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 each of June 30, 2022March 31, 2023 and December 31, 2021,2022, a total of $1.6$1.5 million of property was classified as assets held for sale on the accompanying condensed consolidated balance sheetsheets related to our corporate headquarters in Jersey City, New Jersey. See NoteThis property is under contract for sale and the transaction is expected to close during the 16,second "Subsequent Event", for additional information.quarter of 2023.   

 

11

 
 

8.

ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Salaries, bonuses and related benefits

 $20,749  $27,422 

Deferred revenue

 7,145 8,847 

Accrued restructuring costs

 9,387 6,796 

Sales commissions

 $2,369  $2,049   2,440   2,521 

Subcontracting labor

 3,301  1,622  1,864  1,875 

Salaries, bonuses and related benefits

 21,725  21,342 

Warranty accrual

 1,177  1,056  1,183  1,287 

Other

  8,979   8,384   4,850   2,125 
 $37,551  $34,453  $47,618  $50,873 

 

The change in warranty accrual during the sixthree months ended June 30, 2022March 31, 2023 primarily related to repair costs incurred and adjustments to pre-existing warranties.  There were no new material warranty charges incurred during the sixthree months ended June 30, 2022March 31, 2023.

 

Restructuring Activities:

Activity and liability balances related to restructuring costs for the three months ended March 31, 2023 are as follows:

      

Three Months Ended

     
      

March 31, 2023

     
  

Liability at

      

Cash Payments

  

Liability at

 
  

December 31,

  

New

  

and Other

  

March 31,

 
  

2022

  

Charges

  

Settlements

  

2023

 

Severance costs

 $3,390  $2,657  $(917) $5,130 

Other restructuring costs

  3,406   851   -   4,257 

Total

 $6,796  $3,508  $(917) $9,387 

During the third quarter of 2022, a series of initiatives were launched to streamline our operational footprint. In a project expected to be completed by late-2023,two of our Magnetics sites in Zhongshan and Pingguo, China, are being consolidated into a single centralized site in the Binyang county of Southwestern China (the new Bel Guangxi facility). Further, facility consolidation actions within our Connectivity Solutions group have been underway in both the U.S. and Europe. In the U.S., our Tempe, Arizona and Melbourne, Florida sites are transitioning their manufacturing operations into our existing site in Waseca, Minnesota. In Europe, operations at our facility in Sudbury, UK are being consolidated into our existing site in Chelmsford, UK. The Tempe, Arizona move was completed during the first quarter of 2023, the UK transition is on schedule for completion in the second quarter of 2023 and the Melbourne, Florida transition is expected to be completed in the fourth quarter of 2023. The $3.5 million of restructuring charges incurred during the three months ended March 31, 2023, and the accrued restructuring costs of $9.4 million at March 31, 2023, are associated with these collective initiatives.

 

 

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 Renminbirenminbi and the Mexican Peso.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. The foreign currency forward contracts related to the Chinese Renminbi have been designated for hedge accounting.

 

We held outstanding foreign currency forward contracts with notional amounts of $15.414.9 million and $17.1$25.7 million as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.  The Company's foreign currency forward contracts related to the Chinese renminbi 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 consolidated balance sheet and are reclassified into the statement of operations within cost of goods sold in the period in which the hedged transaction affects earnings. 

 

12

 

Interest Rate Swap Agreements

 

To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the Company's credit agreement (further(as defined and described in Note 10, "Debt"), below), in DecemberNovember 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.In January 2023, and in connection with related changes to its credit agreement, the Company amended its two interest rate swap agreements to transition the related reference rates in these agreements from LIBOR to SOFR, effective January 31, 2023. Under the Amended 2021 Swaps, the Company is required to pay interest on the notional amount at the rate of 1.334% and 1.348%, respectively, in exchange for the daily SOFR rate plus 10 basis points. 

 

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 sheetssheet and are reclassified into the condensed consolidated statementsstatement 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 June 30, 2022March 31, 2023 and December 31, 20212022 were as follows:

 

Balance Sheet Classification

 

June 30, 2022

  

December 31, 2021

 

Balance Sheet Classification

 

March 31, 2023

  

December 31, 2022

 

Derivative assets:

        

Foreign currency forward contracts:

  

Designated as cash flow hedges

Other current assets

 $0  $57 

Other current assets

 $329  $359 

Interest rate swap agreements:

  

Designated as a cash flow hedge

Other assets

  3,875   0 

Other assets

  4,645   5,539 

Total derivative assets

Total derivative assets

 $3,875  $57 

Total derivative assets

 $4,974  $5,898 
  

Derivative liabilities:

    

Foreign currency forward contracts:

 

Designated as cash flow hedges

Other current liabilities

 $302  $0 

Not designated as hedging instruments

Other current liabilities

 0  19 

Interest rate swap agreements:

 

Designated as a cash flow hedge

Other long-term liabilities

  0   116 

Total derivative liabilities

 $302  $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 and sixmonths ended June 30, 2022March 31, 2023 and 20212022 were as follows:  

 

 

Three Months Ended

 
 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Net (losses) gains recognized in AOCL:

  

Foreign currency forward contracts

 $(679) $0  $(525) $0  $(361) $154 

Interest rate swap agreements

  924   0   3,733   0   (408)  2,809 
 $245  $0  $3,208  $0  $(769) $2,963 
  

Net losses reclassified from AOCL to the consolidated statement of operations:

 

Net gains (losses) reclassified from AOCL to the consolidated statement of operations:

 

Foreign currency forward contracts

 $(140) $0  $(73) $0  $151  $67 

Interest rate swap agreements

  (83)  0   (259)  0   486   (176)
 $(223) $0  $(332) $0  $637  $(109)

 

13

 

The gainlosses related to the foreign currency forward contracts isare included as a component of currency translation adjustment on the accompanying condensed consolidated statements of comprehensive income at June 30, 2022March 31, 2023 and December 31, 2021.2022.    The unrealized gains (losses) related to the interest rate swap agreements on the accompanying condensed consolidated statements of comprehensive income at June 30, 2022 and December 31, 2021 includes an immaterial amount of unrealized gain (loss) on marketable securities as of each date.  

 

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 and sixmonths ended June 30, 2022March 31, 2023 and 20212022 were as follows: 

 

   

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

Classification in Consolidated Statements of Operations

 

2022

  

2021

  

2022

  

2021

 

Foreign currency forward contracts

Other (expense) income, net

  48   41   41   51 
   $48  $41  $41  $51 
   

Three Months Ended

 
   

March 31,

 
 

Classification in Consolidated Statements of Operations

 

2023

  

2022

 

Foreign currency forward contracts

Other (expense) income, net

 $-  $(7)
   $-  $(7)

 

 

10.

 DEBT

 

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$100.0 million and $95.0 million in outstanding borrowings under the Revolver at each of June 30, 2022March 31, 2023 and December 31, 20212022., respectively.  Revolving loans borrowed under the CSA mature ofon September 1, 2026.During January 2023, the Company amended its CSA and related interest rate swap agreements to transition the reference rate from LIBOR to SOFR effective January 31, 2023.        

 

The weighted-average interest rate in effect for the variable-rate portion of our outstanding borrowings ($52.540.0 million at each date) was 2.56% at June 30, 2022March 31, 2023 and 1.60%$35.0 million at December 31, 20212022) was 5.78% at March 31, 2023 and 5.51% at December 31, 2022 and consisted of SOFR plus the Company's credit spread at March 31, 2023 and LIBOR plus the Company’s credit spread at December 31, 2022, 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 SOFR portion (or, for periods prior to January 31, 2023, the LIBOR portionportion) of the interest rate on a portion of our outstanding debt on our Revolver. TheIn periods prior to January 31, 2023, the 2021 Swaps requirerequired 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. Effective January 31, 2023, in connection with the Company's transition of its reference rate from LIBOR to SOFR as further described in Recently Adopted Accounting Standards in Note 1, "Basis of Presentation and Accounting Policies", the 2021 Swaps require the Company to pay interest on the notional amount at the rate of 1.334% and 1.348%, respectively, in exchange for the daily SOFR rate plus 10 basis points. The effective rate of interest for our outstanding borrowings, including the impact of the 2021 Swaps, was 2.98%was 3.79% and 3.57%, respectively, as of March 31, 2023 and December 31, 2022. The Company incurred $1.0 million and $0.7 million of interest expense during the secondthree quarter ofmonths ended 2022.March 31, 2023 Inand March 31, 2022, respectively 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 $0.8 million and $0.7 million of interest expense during the three months ended June 30, 2022 and June 30, 2021, respectively, and $1.5 million during each of the six-month periods ended June 30, 2022 and 2021, respectively.costs.    

 

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 June 30, 2022March 31, 2023, the Company was in compliance with its debt covenants, including its most restrictive covenant, the LeverageFixed Charge Coverage Ratio. 

Subsequent to March 31, 2023, the Company made a voluntary payment of $12.5 million towards its Revolver balance, bringing the outstanding borrowings under the Revolver to $87.5 million as of April 30, 2023.

 

14

 
 

11.

INCOME TAXES

 

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 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 20182019 and for state examinations before 2015.2016.  Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2012 in Asia and generally 20132014 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 condensed consolidated financial statements at June 30, 2022.March 31, 2023.  The Company’s liabilities for uncertain tax positions totaled $24.6$25.2 million and $28.4$24.8 million at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, of which $4.1$5.6 million is included in other current liabilities at December 31, 2021 and wasare expected to be resolved during 20222023 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 sixthree months ended June 30, 2022March 31, 2023 and 2021,2022, the Company recognized $0.3$0.1 million and $0.4$0.2 million, respectively, in interest and penalties in the condensed consolidated statements of operations during each period.operations.  The Company has approximately $3.6$4.0 million and $5.0 million, respectively, accrued for the payment of interest and penalties at each of June 30, 2022March 31, 2023 and December 31, 2021,2022, which is included in both income taxes payable and liability for uncertain tax positions in the condensed consolidated balance sheets.

 

 

12.

RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS

 

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 June 30, 2022March 31, 2023 and 20212022 amounted to $0.3$0.4 million for each period.  The expense for the six months ended June 30, 2022 and 2021 amounted to $0.7 million and $0.6 million, respectively. The Company’s matching contribution is made in the form of Bel Fuse Inc. Class A common stock. As of June 30, 2022March 31, 2023, the plan owned333,576 292,901 and 97,808 91,654 shsharesares 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,exceptions, 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 June 30, 2022March 31, 2023 and 20212022 amounted to less than $0.1 million during each period.  The expense for the six months ended June 30, 2022 and 2021 amounted to $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 $0.6$0.7 million at June 30, 2022March 31, 2023 and $0.8$0.7 million at December 31, 2021.2022.  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 June 30, 2022March 31, 2023 and 20212022 amounted to $0.6 million and $0.8 million, and $0.2 million, respectively and the expense for the six months ended June 30, 2022 and 2021 amounted to $1.6 million and $0.3 million, respectively..  As of December 31, 2021, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively. During the second quarter of 2022, the Company repurchased all shares back from the Asia retirement plan and 0no shares were owned by the plan as of June 30,March 31, 2023 or December 31, 2022.

 

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

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Service cost

 $126  $169  $251  $339  $92  $126 

Interest cost

 159  135  318  270  221  159 

Net amortization

  78   127   156   255   18   78 

Net periodic benefit cost

 $363  $431  $725  $864  $331  $363 

 

15

 

The service cost component of net benefit cost is presented within cost of sales, research and development costs 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 income (expense) income,, net in the accompanying condensed consolidated statements of operations.

 

The following amounts are recognized net of tax in accumulated other comprehensive loss:

 

 

June 30,

 

December 31,

  

March 31,

 

December 31,

 
 

2022

  

2021

  

2023

  

2022

 

Prior service cost

 $397  $460  $303  $334 

Net loss

  1,298   1,391   (2,203)  (2,216)
 $1,695  $1,851  $(1,900) $(1,882)

 

 

13.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss at June 30, 2022March 31, 2023 and December 31, 20212022 are summarized below:

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 
         

Foreign currency translation adjustment, net of taxes of ($373) at June 30, 2022 and ($417) at December 31, 2021

 $(22,891) $(14,911)

Unrealized gains (losses) on interest rate swap cash flow hedge, net of taxes of $0 at June 30, 2022 and $0 at December 31, 2021

  3,876   (116)

Unrealized holding gains (losses) on marketable securities, net of taxes of ($7) at June 30, 2022 and ($7) at December 31, 2021

  17   29 

Unfunded SERP liability, net of taxes of ($468) at June 30, 2022 and ($502) at December 31, 2021

  (3,743)  (3,865)
         

Accumulated other comprehensive loss

 $(22,741) $(18,863)
  

March 31,

  

December 31,

 
  

2023

  

2022

 
         

Foreign currency translation adjustment, net of taxes of ($378) at March 31, 2023 and ($369) at December 31, 2022

 $(21,109) $(23,107)

Unrealized gains on interest rate swap cash flow hedge, net of taxes of $0 at March 31, 2023 and $0 at December 31, 2022

  4,645   5,539 

Unrealized holding gains on marketable securities, net of taxes of ($7) at March 31, 2023 and ($7) at December 31, 2022

  19   18 

Unfunded SERP liability, net of taxes of $883 at March 31, 2023 and $879 at December 31, 2022

  1,017   1,004 
         

Accumulated other comprehensive loss

 $(15,428) $(16,546)

 

Changes in accumulated other comprehensive loss by component during the sixthree months ended June 30, 2022March 31, 2023 are as follows.  All amounts are net of tax.

 

   

Unrealized

 

Unrealized

        

Unrealized

 

Unrealized

       
 

Foreign Currency

 

Gains (Losses) on

 

Holding Gains

        

Foreign Currency

 

Gains (Losses) on

 

Holding Gains

       
 

Translation

 

Interest Rate Swap

 

(Losses) on

 

Unfunded

      

Translation

 

Interest Rate Swap

 

(Losses) on

 

Unfunded

     
 

Adjustment

  

Cash Flow Hedge

  

Marketable Securities

  

SERP Liability

   

Total

  

Adjustment

  

Cash Flow Hedge

  

Marketable Securities

  

SERP Liability

   

Total

 
                        

Balance at December 31, 2021

 $(14,911) $(116) $29  $(3,865)  $(18,863)

Balance at December 31, 2022

 $(23,107) $5,539  $18  $1,004   $(16,546)

Other comprehensive (loss) income before reclassifications

 (8,053) 3,733  (12) (6)  (4,338) 1,617  (408) 1  (1)  1,209 

Amount reclassified from accumulated other comprehensive loss

  73   259   0   128 

(a)

  460   381   (486)  -   14 

(a)

  (91)

Net current period other comprehensive (loss) income

  (7,980)  3,992   (12)  122    (3,878)  1,998   (894)  1   13    1,118 
                        

Balance at June 30, 2022

 $(22,891) $3,876  $17  $(3,743)  $(22,741)

Balance at March 31, 2023

 $(21,109) $4,645  $19  $1,017   $(15,428)

 

(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 income (expense) income,, net on the accompanying condensed consolidated statements of operations.

 

16

 
 

14.

COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

The Company is party to a number of legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material adverse effect on the Company's consolidated results of operations or consolidated financial position.

 

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 inThe Court scheduled trial for September 2021.  August 2023.​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.  sheets at March 31, 2023 and December 31, 2022. 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 June 30, 2022March 31, 2023 and December 31, 2022.

In connection with the Company's 2021. acquisition of EOS Power ("EOS"), there is an ongoing claim asserted with respect to EOS by the Principal Commissioner of Customs (Preventive), Mumbai related to customs duties and imposed fines and penalties dating back to 1994. The original demand was in the amount of approximately $1.4 million, of which EOS has paid $0.5 million. EOS filed an Appeal in 2016 which is pending with the Customs, Excise and Service Tax Appellate Tribunal in Mumbai related to the $0.9 million balance of the original demand net of EOS' payment. As part of the EOS acquisition agreement entered into in March 2021, the Company is indemnified for this matter for a period of 7 years from the acquisition date. The Company is unable to determine at this time what amount, if any, may ultimately be due in connection with this claim. As such, no estimate was accrued as of March 31, 2023. 

 

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 consolidated results of operations.

 

 

15.

SEGMENTS

 

The Company operates in 1one industry with 3three reportable operating segments, which represent the Company's 3three 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 June 30, 2022

  

Three Months Ended March 31, 2023

 
 

Connectivity

 

Power Solutions

 

Magnetic

 

Corporate

    

Connectivity

 

Power Solutions

 

Magnetic

 

Corporate

   
 

Solutions

  

and Protection

  

Solutions

  

Segment

  

Total

  

Solutions

  

and Protection

  

Solutions

  

Segment

  

Total

 

Revenue

 $46,096  $71,026  $53,450  $0  $170,572  $53,396  $83,181  $35,767  $-  $172,344 

Gross Profit

 12,718 20,036 15,085 (2,387) 45,452  18,196 29,680 8,168 (2,380) 53,664 

Gross Profit %

 27.6% 28.2% 28.2% nm  26.6% 34.1% 35.7% 22.8% nm  31.1%

 

  

Three Months Ended June 30, 2021

 
  

Connectivity

  

Power Solutions

  

Magnetic

  

Corporate

     
  

Solutions

  

and Protection

  

Solutions

  

Segment

  

Total

 

Revenue

 $43,046  $55,390  $40,305  $0  $138,741 

Gross Profit

  13,050   14,373   9,343   (2,562)  34,204 

Gross Profit %

  30.3%  25.9%  23.2%  nm   24.7%

  

Six Months Ended June 30, 2022

 
  

Connectivity

  

Power Solutions

  

Magnetic

  

Corporate

     
  

Solutions

  

and Protection

  

Solutions

  

Segment

  

Total

 

Revenue

 $89,809  $129,815  $87,666  $0  $307,290 

Gross Profit

  24,315   35,974   21,975   (2,853)  79,411 

Gross Profit %

  27.1%  27.7%  25.1%  nm   25.8%

  

Six Months Ended June 30, 2021

 
  

Connectivity

  

Power Solutions

  

Magnetic

  

Corporate

     
  

Solutions

  

and Protection

  

Solutions

  

Segment

  

Total

 

Revenue

 $81,102  $99,031  $69,252  $0  $249,385 

Gross Profit

  22,823   25,155   13,304   (2,138)  59,144 

Gross Profit %

  28.1%  25.4%  19.2%  nm   23.7%

16.

SUBSEQUENT EVENT

On July 21, 2022, the Company closed on the sale of one of its two buildings in Jersey City, New Jersey. In connection with this sale, the Company received proceeds in the amount of $1.8 million and anticipates recognizing a gain on sale during the third quarter of 2022 in the amount of $1.6 million. The other property in Jersey City, New Jersey continues to be classified as held for sale at a net book value of $1.5 million. 

  

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%

 

17

  
 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 20212022 Annual Report on Form 10-K and our consolidated financial statements and related notes set forth in Item 8 of Part II of our 20212022 Annual Report on Form 10-K. See Part II, Item 1A, “Risk Factors,” below and “Cautionary Notice Regarding Forward-Looking Information,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our Forward-Looking Statements. All statements herein regarding the anticipated or likely impact of COVID-19 constitute Forward-Looking Statements.  All amounts and percentages are approximate due to rounding and all dollars in the text are in millions, except per share amounts or where otherwise noted. When we cross-reference to a “Note,” we are referring to our “Notes to Condensed Consolidated Financial Statements,” unless the context indicates otherwise.  All amounts noted within the tables are in thousands and amounts and percentages are approximate due to rounding.


Overview

 

Our Company

 

Bel designs, manufacturesWe design, manufacture and marketsmarket a broad array of products that power, protect and connect electronic circuits.  These products are primarily used in the networking, telecommunications, computing, general industrial, high-speed data transmission, military, commercial aerospace, transportation and e-MobilityeMobility industries.  Bel’sOur portfolio of products also finds application in the automotive, medical, broadcasting and consumer electronics markets.

 

The Company operatesWe operate through three product group segments, in addition to a Corporate segment. In the sixthree months ended June 30, 2022, 42%March 31, 2023, 48% of the Company’sour revenues were derived from Power Solutions and Protection, 29%31% from Connectivity Solutions and 29%21% from itsour Magnetic Solutions operating segment.  

 

Our operating expenses are driven principally by the cost of labor where the factories that Bel useswe use are located, the cost of the materials that we use and our ability to effectively and efficiently manage overhead costs.  As labor and material costs vary by product line and region, any significant shift in product mix can have an associated impact on our costs of sales.  Costs are recorded as incurred for all products manufactured.  Such amounts are determined based upon the estimated stage of production and include materials, labor cost and fringes and related allocations of factory overhead. Our products are manufactured at various facilities in the U.S., Mexico, Dominican Republic, England, Czech Republic, Slovakia, India and the People’s Republic of China (PRC).

 

We have little visibility into the ordering habits of our customers and we can be subjected to large and unpredictable variations in demand for our products.  Accordingly, we must continually recruit and train new workers to replace those lost to attrition and be able to address peaks in demand that may occur from time to time.  These recruiting and training efforts and related inefficiencies, and overtime required in order to meet any increase in demand, can add volatility to the labor costs incurred by us.

 

The Effects of COVID-19 on Bel’s Business

 

The Company continuesWe continue to be focused on the safety and well-being of itsour associates around the world in light of COVID-19 and the variants of COVID that have followed.  A significant amount of products manufactured by Belwe manufacture are utilized in military, medical and networking applications, and are therefore deemed essential by many of the jurisdictions in which we operate. Our management team closely monitors the situation at each of Bel'sour facilities and has been able to effectively respond in implementing our business continuity plans around the world.  Protective measures, where possible, remain in place throughout our facilities.  The majority of our office staff now follow a hybrid work schedule.  The combination of protective measures at our factories coupled with remote work arrangements have enabled us to maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. 

 

On March 13, 2022,Over the PRC government issued a notice with immediate effect whereby certain regions were temporarily shut down to perform widespread testing in response to a COVID-19 outbreak in those regions and in accordance with Beijing’s "zero-tolerance" policy.  Our Bel Power Solutions manufacturing facility in Shenzhen, China and our Magnetics TRP manufacturing facility in Changping, China were closed for approximately one week during the month of March 2022 while residents underwent testing.  Further, certain of Bel’s customers and suppliers are also located within these regions, which caused a temporary disruption in the related supply chain.  Although all of our manufacturing sites are running at normal workforce levels as of the filing date of this Quarterly Report on Form 10-Q, COVID-19 remains a potential supply continuity risk due to the unknown nature of future outbreaks. Given the general uncertainty regarding the impact of COVID-19 on our manufacturing capability, on our customers and our suppliers, we are unable to quantify the ultimate impact of COVID-19 on our future results at this time.

18

Beginning in the third quarter of 2021,past several quarters, pandemic-related issues have created additional port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. In order to better control our costs, the expediting of raw material deliveries has been generally reserved for customer-specific requests for expedited timing whereby our end customer has agreed to pay the incremental fee.  Further, the majority of our product is shipped via air, and we have therefore been minimally impacted by ocean-related logistic constraints. While there are some delays withinDuring March 2022, the supply chainPRC government issued a notice with immediate effect whereby certain regions were temporarily shut down to perform widespread testing in response to a COVID outbreak in those regions and in accordance with Beijing’s "zero-tolerance" policy at the time.  Our Bel Power Solutions manufacturing facility in Shenzhen, China and our Magnetics TRP manufacturing facility in Changping, China were closed for approximately one week during the month of March 2022 while residents underwent testing. Upon the discontinuation of COVID protocols in the movementPRC in late 2022, we experienced approximately 3-4 weeks between December 2022 and January 2023 where the attendance rate of products relatedworkers at our factories in the PRC were very low due to border closuresCOVID outbreaks in the regions in which we operate. As of March 31, 2023 (following the Lunar New Year holiday), attendance rates at all of our factories in the PRC were in the 90%-95% range. We do not believe the aforementioned low attendance rates had a material impact on Bel's financial results in the first quarter of 2023. To date, the COVID-related transportation delays and government monitoring/treatment of goods being transported across borders, to date such delayslocal outbreaks have not materially impacted our ability to operate our business or achieve our business goals.   

 

18

Based on our analysis of ASC 350 and ASC 360 during the sixthree months ended June 30, 2022,March 31, 2023, we are not aware of any potential triggering events for impairment of our goodwill, indefinite-lived intangible assets or finite-lived assets.  The CompanyWe will continue to assess the relevant criteria on a quarterly basis based on updated cash flow and market assumptions.  Unfavorable changes in cash flow or market assumptions could result in impairment of these assets in future periods.

 

As our operations have continued, albeit at slightly reduced production and efficiency rates, we have not experienced a negative impact on our liquidity to date.  Our balance of cash on hand continues to be strong at $65.8$77.8 million at June 30, 2022March 31, 2023  as compared to $61.8$70.3 million at December 31, 2021.  The Company2022.  We also hashave availability under itsour current revolving credit facility; as of June 30, 2022, the CompanyMarch 31, 2023, we could borrow an additional $62.5 $75.0 million while still being in compliance with itsour debt covenants.  However, any further pressure or negative impact to our financial results related to COVID-19COVID would have a related negative impact on our financial covenants outlined in our credit agreement, which would impact the amount available to borrow under our revolving credit facility.  TheOur management team closely monitors the rapidly changing COVID situation and has developed plans which could be implemented to minimize the impact to theour Company in the event the situation deteriorates.

 

Our statements regarding the future impact of COVID-19 represent Forward-Looking Statements.  See “Cautionary Notice Regarding Forward-Looking Information.”

 

Other Key Factors Affecting our Business

 

The Company believesWe believe that, in addition to uncertainties around COVID-19, the Russia-Ukraine conflict and recent global inflationary pressures on the costs of goods and services in general, the key factors affecting Bel’sour results for the sixthree months ended June 30, 2022March 31, 2023 and/or future results include the following:

 

 

Revenues – The Company’sOur revenues in the first sixthree months of 20222023 were up $57.9$35.6 million, or 23.2%,26.1% as compared to the same period of 2021.2022.  The increase was primarily seen within our Power Solutions and Protection group from incremental revenue associated with the EOS acquisition, increased demand forhigher sales of our CUIfront-end and circuit protectionboard mount power products, and recent power design wins moving into production within the e-MobilityeMobility end market.  In addition, each of our three product groups experienced an increase in sales through our distribution partners during the first half of 2022 as compared to 2021.  Our Connectivity Solutions group iswas also benefiting from a rebound withinsignificant contributor to our sales growth in the first quarter of 2023, driven by increased sales to customers in the commercial aerospace and military end market, which contributed to higher sales for this group as compared to the first half of 2021.markets.

 

 

Backlog – Our backlog of orders amounted to $580.5$510.0 million at June 30, 2022, an increaseMarch 31, 2023, a decrease of $112.7$55.3 million, or 24%10%, from December 31, 2021.2022.  From year-end 20212022 to June 30, 2022,March 31, 2023, we saw a 41% increase10% decrease in the backlog for our Power Solutions and Protection business, due to increased demand across the majority of our Power product lines.  At quarter-end, thea decline in backlog of orders for20% in our Magnetics business and a 2% decrease in backlog level at our Connectivity Solutions products grew by 21% from year-end, primarilybusiness.  Order volumes in general have been lower in recent quarters which we believe to be due in part to higher demand from our distribution customers and continued recovery in demand from our direct and after-market commercial aerospace customers.  During the first half of 2022, the backlog for our Magnetic Solutions products decreased by 2% from the 2021 year-end levels, largely driven by the ordering pattern of one large networking customer.customers' working through inventory on hand.

 

19

 

 

Product Mix – Material and labor costs vary by product line and any significant shift in product mix between higher- and lower-margin product lines will have a corresponding impact on the Company’sour gross margin percentage.  In general, our Connectivity products have historically had the highest contribution margins of our three product groups though margins for this group in 2022 have been challenged due to costsgiven the harsh environment and inefficiencies associated withhigh-reliability nature of these products and the ramp-up in commercial aerospace.end markets they serve.  Our Power products have a higher cost bill of materials and are impacted to a greater extent by changes in material costs.  As our Magnetic Solutions products are more labor intensive in nature, margins on these products are impacted to a greater extent by minimum and market-based wage increases in the PRC and fluctuations in foreign exchange rates between the U.S. Dollar and the Chinese Renminbi.  Fluctuations in revenue volume among our product groups will have a corresponding impact on Bel’sour profit margins.  See "Results of Operations - Summary by Operating Segment - Revenue and Gross Margin" below for further details.

 

 

Pricing and Availability of Materials – There have been ongoing supply constraints related to components that constitute raw materials in our manufacturing processes, particularly with resistors, capacitors, discrete semiconductors plastic resin and copper. Lead times have been extended and the reduction in supply also caused an increase in prices for certain of these components. The Company’sBeginning in late-2022, there has been some stabilization of raw material pricing and availability for a portion of the components that we purchase, but in general supply constraints continue to be a challenge and we expect this environment to continue through at least the third quarter of 2023. Our material costs as a percentage of revenue were45.7% 43.5% of sales during the first six monthsquarter of 2022,2023, down slightly from 46.0%44.6% during the same periodfirst quarter of 20212022 as a result of a favorable shift in product mix and the impact of recentour pricing actions over the past year, offset in part by higher material costs in the 2022 period.2023.

 

 

Labor Costs – Labor costs were 8.7%represented 6.8% of revenue during the first sixthree months of 20222023 as compared to 9.4%9.5% of revenue during the same period of 20212022.  The reduction in labor costs as a percentage of sales for the first halfquarter of 20222023 was largely impacted by recent pricing actions taken by our Company over the past year and favorable exchange rate fluctuations in 20222023 leading to lower labor costs at our PRC factories.  

Inflationary Pressures - Inflationary pressures could continue to result in higher input costs, including those related to our raw materials, labor, freight, utilities, healthcare and other expenses. Our future operating results will depend, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings initiatives and sourcing decisions.

 

 

Restructuring – While there were no significantDuring the third quarter of 2022, we launched a series of initiatives to simplify our operational footprint. In a project expected to be completed by end of the third quarter of 2023, we will initially be consolidating two of our Magnetics sites in Zhongshan and Pingguo, China, spread across 9 manufacturing buildings in total, and bringing them together into a single centralized site in the Binyang county of southwestern China. Further, within our Connectivity Solutions group, facility consolidation actions are underway in both the U.S. and Europe. In the U.S., our Tempe, Arizona and Melbourne, Florida sites are transitioning their manufacturing operations into our existing site in Waseca, Minnesota. The Tempe move was completed in the first quarter of 2023 and the Melbourne transition is expected to be completed in the fourth quarter of 2023. In Europe, we are exiting our facility in Sudbury, UK and consolidating those operations into our existing site in Chelmsford, UK, with this project on schedule for completion in the second quarter of 2023. The aforementioned restructuring initiatives in the aggregate are expected to result in incremental future restructuring costs incurredof approximately $2-3 million, of which the majority is expected to be expensed in the second quarter of 2023 with a smaller portion expected to be expensed in the third quarter of 2023.  Aggregate annual cost savings are estimated at approximately $5.0 million, which we anticipate to begin to realize during the six months ended June 30, 2022, the Companyfourth quarter of 2023. We will continue to explore opportunitiesreview our operations to streamline the organization to further improve profitability.  These effortsoptimize our business, which may result in restructuring costs being recognized in future periods. The preceding two sentences represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."

 

 

Impact of Foreign Currency – As further described below, during the sixthree months ended June 30, 2022,March 31, 2023, labor and overhead costs were $0.7$0.9 million lower than the samecorresponding 2022 period of 2021primarily due to a favorable foreign exchange environment involving the Chinese Renminbi and Euro as compared to the prior year period.  Also as described below, the Companywe realized foreign exchange transactional gainslosses of $0.4$0.2 million during the sixthree months ended June 30, 2022,March 31, 2023, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at June 30, 2022March 31, 2023 versus those in effect at December 31, 2021.2022. Since we are a U.S. domiciled company, we translate our foreign currency-denominated financial results into U.S. dollars.  Due to the changes in the value of foreign currencies relative to the U.S. dollar, translating our financial results and the revaluation of certain intercompany as well as third-party transactions to and from foreign currencies to U.S. dollars may result in a favorable or unfavorable impact to our consolidated statements of operations and cash flows.  The Company wasWe were favorably impacted by transactional foreign exchange gains in the first sixthree months of 20222023 due to the depreciation of the Chinese Renminbi and Euro against the U.S. dollar as compared to exchange rates in effect during 2021.  The Company has2022.  We have significant manufacturing operations located in in the PRC where labor and overhead costs are paid in local currency.  As a result, the U.S. Dollar equivalent costs of these operations were $0.7$0.9 million lower in the sixthree months ended June 30, 2022March 31, 2023 as compared to the samecomparable period of 2021.  The Company monitorsin 2022.  We monitor changes in foreign currencies and in 2022have historically implemented additional foreign currency forward contracts, and may continue to implement pricing actions to help mitigate the impact that changes in foreign currencies may have on itsour consolidated operating results. The preceding sentence represents a Forward-Looking Statement.  See "Cautionary Notice Regarding Forward-Looking Information."

 

 

Effective Tax Rate – The Company’sOur effective tax rate will fluctuate based on the geographic regions in which theour pretax profits are earned.  Of the geographic regions in which the Company operates,we operate, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of the Company’sour three geographical regions.  See Note 11, “Income Taxes”.

 

The strategic initiatives we put in place are translating into unprecedented new milestones for Bel as we continue with our transformation. Our focus remains on higher-margin revenue, operational efficiencies and investing in the future. Given our achievements to date and current backlog, we are confident about Bel’s near and long-term prospects. The preceding sentences represent Forward-Looking Statements.  See “Cautionary Notice Regarding Forward-Looking Information.”

 

20

 

Results of Operations - Summary by Operating Segment

 

Revenue and Gross Margin

 

The Company’sOur revenue and gross margin by operating segment for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 were as follows:

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

Revenue

  

Gross Margin

  

Revenue

  

Gross Margin

  

Revenue

  

Gross Margin

 
 

2022

  

2021

  

2022

  

2021

  

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Connectivity solutions

 $46,096  $43,046  27.6% 30.3% $89,809  $81,102  27.1% 28.1% $53,396  $43,713  34.1% 26.5%

Magnetic solutions

 53,451  40,305  28.2% 23.2% 87,666  69,252  25.1% 19.2% 35,767  34,215  22.8% 20.1%

Power solutions and protection

  71,026   55,390   28.2%  25.9%  129,815   99,031   27.7%  25.4%  83,181   58,790   35.7%  27.1%
 $170,573  $138,741   26.6%  24.7% $307,290  $249,385   25.8%  23.7% $172,344  $136,718   31.1%  25.0%

 

Connectivity Solutions:

 

Sales of our Connectivity Solutions products increased by $3.1$9.7 million and $8.7 million(22%) during three and six months ended June 30, 2022, respectively,the first quarter of 2023 as compared to the same periodsfirst quarter of 2021.2022.  This increase was primarily due to the continued reboundan $8.4 million (135%) increase in demand from direct and after-marketsales into the commercial aerospace customers of $2.4end market and a $1.2 million (43%(14%) during the three months ended June 30, 2022 and $5.3 million (60%) during the six months ended June 30, 2022 as compared to the same periods of 2021.   Other increasesincrease in sales related to higher demand for our passive connector and cabling products andinto the military end market versus the first quarter of 2022. There was also an increased volume of Connectivity Solutions products sold through our distribution channels.channels during the first quarter of 2023, providing an incremental $2.0 million of sales versus the first quarter of 2022.  These sales increases were partially offset by a decline in militarylower sales of $0.7 million (7%) duringproducts used in the three months ended June 30, 2022industrial premise wiring and 5G/IOT markets. Gross margins for the first quarter 2023 showed a decline of $2.3 million (11%) during the six months ended June 30, 2022significant improvement as compared to the priorfirst quarter of 2022, driven by the renewal of several multi-year contracts in this segment in recent quarters. This enabled the Connectivity segment to realign profitability given its rising input costs over the past year periods. Gross margins for the 2022 periods presented above were unfavorably impacted by incremental costs and operational inefficiencies relatedadditional overhead needed to the ramp-up in commercial aerospace demand.accommodate current demand levels.   

 

Magnetic Solutions:

 

Sales of our Magnetic Solutions products improved by $13.1$1.6 million and $18.4 million(4.5%) during the three and six months ended June 30, 2022, respectively,March 31, 2023 as compared to the same periodsfirst quarter of 2021.2022. Demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver of the sales increase. The higher sales volume, coupled with pricing actions over the past year and favorable exchange rates with the Chinese Renminbi versus the U.S. dollar, were the primary drivers of gross margin improvement for this product group from last year's periods.first quarter.  

 

Power Solutions and Protection:

 

Sales of our Power Solutions and Protection products were higher by $15.6$24.4 million (41.5%) during the secondfirst quarter of 2023 as compared to the first quarter of 2022.  This increase was primarily driven by higher sales of our front-end power products ($12.8 million) and board-mount power products ($3.9 million). Sales of our eMobility power products increased by $2.5 million as compared to the first quarter of 2022, and by $30.8invoicing for expedite fees was $4.6 million duringhigher in the first halfquarter of 2022 as compared to the same periods of 2021.  The sales increase for the second quarter was primarily driven2023 versus last year's first quarter. These increases were offset by $9.2a $3.2 million in purchase price variance ("PPV") invoicing, a $3.1 million (89%) increasereduction in sales of product going into the e-Mobility end market, and a $1.8 million (13%) increase in CUI sales.  The sales increase for the first half of 2022 was led by approximately $12.4 million in PPV invoicing, the inclusion of EOS, acquired in March 2021, which contributed sales of $5.3 million, a $5.0 million (49%) increase inour circuit protection product sales, a $5.6 million (23%) increase in CUI sales, and a $5.9 million (89%) increase in sales of product going into the e-Mobility end market.products during those same periods. Gross margin improved in the 2022 periods above as compared tofirst quarter of 2023 versus the 2021 periodsfirst quarter of 2022 as pricing actions, higher sales volume, favorable exchange rates with the Chinese Renminbi versus the U.S. dollar, and a favorable shift in product mix offset the impact of increased material costs.

 

Cost of Sales

 

Cost of sales as a percentage of revenue for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 consisted of the following:

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

 

Material costs

 46.6% 46.4% 45.7% 46.0% 43.5% 44.6%

Labor costs

 8.0% 9.5% 8.7% 9.4% 6.8% 9.5%

Other expenses

  18.8%  19.4%  19.8%  20.9%  18.6%  20.9%

Total cost of sales

  73.4%  75.3%  74.2%  76.3%  68.9%  75.0%

 

Material costs as a percentage of sales during the three and six months ended June 30, 2022March 31, 2023 were fairly stabledown slightly compared to the same periodsfirst quarter of 2021,2022, as recent pricing actions taken over the past year are offsettinghelping to offset the continued heightened cost of certain raw materials.  Labor costs as a percentage of sales have decreased significantly from the 2021 periods noted abovefirst quarter of 2022 due to a variety of factors, including the shift in product mix resulting in a lower consolidated percentage of sales from of our labor-intensive Magnetic products, lower labor costs in China due to the favorable fluctuation in the Chinese Renminbi exchange rate versus the U.S. Dollar.Dollar, and contract renewals within the Connectivity segment which enabled us to align with current costs of material and labor, thereby improving profitability within that segment.  These lower labor costs as a percentage of sales were offset, in part, by incremental labor costs at our Connectivity group related to recruiting and training of new factory associates to accommodate the increase in demand from the commercial aerospace end market in 2022. 

 

The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (rent, utilities, insurance).  In total, these other expenses increased during the three and six months ended June 30, 2022March 31, 2023 by $4.8$3.3 million and $8.2 million, respectively, as compared to same periodsthe first quarter of 2021 due2022.  Towards the end of the first quarter of 2022, our Connectivity segment increased its production capacity to a variety of factors.  The recentaccommodate the ramp-up in commercial aerospace demand, has resulted in significant headcount increases at our factories thatleading to higher support this end market, restoring some of the indirect labor and overhead expenses that had been previously reduced when demand was lower.  Further, certaincosts. The first quarter of our other factories have started to run additional shifts to accommodate the increase in demand from our customers, resulting in higher overhead2023 includes a full quarter of these incremental costs. In addition, to an increase in support labor headcount,global wage rate increases, both inflationary and government-mandated increases to minimum wage rates, have led to higher fixed costs in the 2022 periodsfirst quarter of 2023 as compared to 2021.the first quarter of 2022.

 

21

 

Research and Development ("R&D") Expense

 

R&D expense amounted to $4.7$5.2 million and $5.5$5.0 million for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $9.5 million and $10.4 million for the six months ended June 30, 2022 and 2021, respectively. The lower R&D expense in the 2022 periods as compared to the same periods of 2021 is largely due to the favorable exchange rate environment related to the Euro and Chinese Renminbi versus the U.S. Dollar in 2022.   

 

Selling, General and Administrative Expense (“SG&A”)

 

SG&A expenses were $24.0$25.3 million for the secondfirst quarter of 2022,2023, up from $21.8$21.0 million in the secondfirst quarter of 2021.2022.  This increase in SG&A salaries and fringe benefits increased by $0.9 million, office expenses were $0.6 million higher and advertising costs increased by $0.3 million. 

SG&A expenses were $45.0 million duringwas largely the six months ended June 30, 2022, up from $43.6 million during the same periodresult of 2021. Within SG&A, increases inhigher SG&A salaries and fringe benefits of $0.7 million, office expenses of $0.5$2.8 million and a $0.4incremental litigation costs of $1.6 million increaseassociated with the MPS patent infringement lawsuit further described in each of property insuranceNote 14, "Commitments and advertising costs were partially offset by a $1.1 million reduction in legal and professional fees as compared to the first half of 2021. Contingencies". 

 

Other Income (Expense) Income,, Net

 

Other income (expense) income,, net was expense of $1.7less than $0.1 million and income of $0.1($0.8) million for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and expense of $2.5 million and income of $0.7 million for the six months ended June 30, 2022 and 2021, respectively. The year-over-year movements within this line item were largely driven by market fluctuations in the Company'sour SERP investments which resulted in lossesa gain of $1.5$0.4 million and $2.2a loss of $0.8 million during the three and six months ended June 30,March 31, 2023 and 2022, respectively. This compares to gains recorded on the SERP investments of $0.6 million and $0.9 million during the three and six months ended June 30, 2021, respectively. 

 

Provision for Income Taxes

 

The Company’sOur effective tax rate will fluctuate based on the geographic regions in which theour pretax profits are earned.  Of the geographic regions in which the Company operates,we operate, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of the Company’sour three geographical regions.  See Note 11, “Income Taxes”.

 

The benefitprovision for income taxes was $4.2 million and $1.6 million for the three months ended June 30,March 31, 2023 and March 31, 2022, and 2021 was ($2.7) million and ($1.9) million, respectively. The Company’sOur earnings before income taxes for the three months ended June 30, 2022,March 31, 2023 were $8.3 million higher when compared with the same period in 2021, primarily attributable to an increase in income from the Asia and Europe regions, offset by a decrease in the North America region. The Company’s effective tax rate was (19.2%) and (30.7%) for the three months ended June 30, 2022 and 2021, respectively.  The change in the effective tax rate during the three months ended June 30, 2022 as compared to the same period in 2021, is primarily attributable to an increase in U.S. taxes related to income from foreign subsidiaries taxed in the U.S. as part of the Tax Cuts and Jobs Act, as well as an increase in the impact of permanent differences on U.S. tax exempt activities, which was offset by an increase in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statute of limitations.  

The benefit for income taxes for the six months ended June 30, 2022 and 2021 was ($1.2) million and ($0.9) million, respectively.  The Company’s earnings before income taxes for the six months ended June 30, 2022, were approximately $10.7$12.1 million higher than the same period in 2021,2022, primarily attributable to an increase in the income from the Asia region,North America and Europe regions, offset by a decrease in the North America region. The Company’sAsia regions. Our effective tax rate was (5.7%)relatively consistent at 22.2% and (8.4%)23.6% for the sixthree months ended June 30,March 31, 2023 and 2022, respectively, affected by tax rates in foreign jurisdictions and 2021, respectively.  The changethe relative amounts of income earned in the effective tax rate during the six months ended June 30, 2022 as compared to the same period in 2021, is primarily attributable the same factors noted. those jurisdictions.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity include $65.8$77.8 million of cash and cash equivalents at June 30, 2022,March 31, 2023, cash provided by operating activities and borrowings available under our credit facility.  We expect to use this liquidity for operating expenses, investments in working capital, capital expenditures, interest, taxes, dividends, debt obligations and other long-term liabilities. We believe that our current liquidity position and future cash flows from operations will enable us to fund our operations, both in the next twelve months and in the longer term.

 

22

 

Cash Flow Summary

 

During the sixthree months ended June 30, 2022, the Company’sMarch 31, 2023, our cash and cash equivalents increased by $4.1$7.6 million.  This increase was primarily due to the following:

 

 net cash provided by operating activities of $11.1$16.8 million; and
borrowings under our revolving credit facility of $5.0 million; partially offset by
 

purchases of property, plant and equipment of $3.5$3.8 million; and

 

payments for our equity method investment in innolectric of $10.0 million; and

dividend payments of $1.6 million

$0.8 million.

 

During the sixthree months ended June 30, 2022,March 31, 2023, accounts receivable increased by $12.7$1.3 million due to higher sales volume in the second quarter and the conversion of unbilled receivables into invoiced receivables during the first half of 2022 related to activity in our customer-controlled hub arrangements.quarter.  Days sales outstanding (DSO) decreased slightly to 5357 days at June 30, 2022March 31, 2023 as compared to 5458 days at December 31, 2021.2022.  Inventory increaseddecreased by $25.3$7.7 million at June 30, 2022March 31, 2023 compared to December 31, 2021, largely in WIP2022, to accommodate the continued increase in product orders.  Inventory turns excluding R&D, were 3.1were 2.9 at March 31, 2023 as compared to 2.6 at each of June 30, 2022 and December 31, 2021.2022.  

 

Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 30.4%32.5% of the Company’sour total assets at June 30, 2022March 31, 2023 and 29.1%31.7% of total assets at December 31, 2021. The Company’s2022. Our current ratio (i.e., the ratio of current assets to current liabilities) was 2.82.9 to 1 at June 30, 2022March 31, 2023 and 2.92.8 to 1 at December 31, 2021.2022. At June 30, 2022March 31, 2023 and December 31, 2021, $50.12022, $62.1 million and $42.0$50.1 million, respectively (or 76%80% and 68%71%, respectively), of our cash and cash equivalents was held by our foreign subsidiaries of the Company.  During the first six months of 2022, the Companysubsidiaries.  We did not repatriate any funds from outside of the U.S. during the three months ended March 31, 2023. We continue to analyze our global working capital and cash requirements and the potential tax liabilities attributable to further repatriation, and we have yet to make any further determination regarding repatriation of funds from outside the U.S. to fund the Company’sour U.S. operations in the future.  In the event these funds were needed for Bel’sour U.S. operations, the Companywe would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.

 

Future Cash Requirements

 

The Company expectsWe expect foreseeable liquidity and capital resource requirements to be met through existing cash and cash equivalents and anticipated cash flows from operations, as well as borrowings available under itsour revolving credit facility, if needed.  The Company'sOur material cash requirements arising in the normal course of business are outlined in Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.  There were no material changes to the Company'sour future cash requirements during the sixthree months ended June 30, 2022.March 31, 2023.

 

Credit Facility

 

In September 2021, the Companywe entered into the CSA, as further described in Note 10, "Debt".  During January 2023, we amended our CSA and related interest rate swap agreements to transition the reference rate from LIBOR to a Secured Overnight Financing Rate ("SOFR") effective January 31, 2023. 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’sour total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of the Company’sour consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of the Company’sour consolidated EBITDA to the Company’sour 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 June 30, 2022, the Company wasMarch 31, 2023, we were in compliance with itsour debt covenants, including itsthe most restrictive covenant, the LeverageFixed Charge Coverage Ratio. The unused credit available under the credit facility at June 30, 2022March 31, 2023 was $62.5$75.0 million, all of which we had the ability to borrow without violating our Leverage Ratio covenant based on the Company'sour existing consolidated EBITDA. Subsequent to March 31, 2023, we made a voluntary payment of $12.5 million towards our Revolver balance, bringing the outstanding borrowings under the Revolver to $87.5 million as of April 30, 2023.

 

Critical Accounting Policies and Estimates

 

The Company'sOur condensed consolidated financial statements include certain amounts that are based on management's best estimates and judgments.  The Company bases itsWe base our estimates on historical experience and on various other assumptions, including in some cases future projections, that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  Different assumptions and judgments could change the estimates used in the preparation of the condensed consolidated financial statements, which, in turn, could change the results from those reported.  Management evaluates its estimates, assumptions and judgments on an ongoing basis.  

 

Based on the above, we have determined that our most critical accounting estimates are those related to business combinations, inventory valuation, goodwill and other indefinite-lived intangible assets, and those related to our pension benefit obligations. For a detailed discussion of the Company’sour critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. There have been no material changes in the Company’sour critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in the Company’s 2021our 2022 Annual Report on Form 10-K.

 

23

 

Recent Accounting Pronouncements

 

The discussion of new financial accounting standards applicable to theour Company is incorporated herein by reference to Note 1 to the Company’s Financial Statements, “Basis of Presentation and Accounting Policies,” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

The Company is not required to provide the information called for by this Item as it is a "smaller reporting company," as defined in Rule 12b-2 of the Exchange Act.

 

Item 4.   Controls and Procedures

 

Disclosure controls and procedures:  As of the end of the period covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in internal controls over financial reporting:  There has not been any change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.     Other Information

 

Item 1.   Legal Proceedings

 

The information called for by this Item is incorporated herein by reference to Note 14, "Commitments and Contingencies" of the Company’s Condensed Consolidated Financial Statements, under “Legal Proceedings”, as set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are also involved in various other legal actions incidental to our business. We believe, after consulting with counsel, that the disposition of these other legal proceedings and matters will not have a material effect on our condensed consolidated financial condition or results of operations.

 

Item 1A. Risk Factors

 

The risk factors described in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 should be carefully considered before making an investment decision. These are the risk factors that we consider to be the most significant risk factors, but they are not the only risk factors that should be considered in making an investment decision. This Quarterly Report on Form 10-Q also contains Forward-Looking Statements that involve risks and uncertainties. See the "Cautionary Notice Regarding Forward-Looking Information," above. Our business, consolidated financial condition and consolidated results of operations could be materially adversely affected by any of the risk factors described, under "Cautionary Notice Regarding Forward-Looking Information" or with respect to specific Forward-Looking Statements presented herein. The trading price of our securities could decline due to any of these risks, and investors in our securities may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially adversely affect our business in the future.  Except as required by the federal securities law, we undertake no obligation to update or revise any risk factor, whether as a result of new information, future events or otherwise.

 

24

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

As described in Note 12, "Retirement, Savings and Deferred Compensation Plans", of the Company’s Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q, the Company’s subsidiaries in Asia have a retirement fund covering substantially all of their Hong Kong based full-time employees (the “Asia retirement plan”).  As of December 31, 2021, the Asia retirement plan owned 3,323 and 17,342 shares of the Company’s Class A common stock and Class B common stock, respectively.  During the second quarter of 2022, in connection with restructuring of the Asia retirement plan, the Company repurchased all shares back from the Asia retirement plan and no shares were owned by the plan as of June 30, 2022.  The repurchase of the 3,323 shares of Class A common stock and 17,342 shares of Class B common stock was effectuated on June 10, 2022 at the respective closing prices of the Class A and Class B common stock on such date.  The following table sets forth certain information regarding this repurchase by the Company of its shares from the Asia retirement plan:

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

April 1 – April 30, 2022

-$---

May 1 – May 31, 2022

----

June 1 – June 30, 2022

3,323 (Class A)

17,342 (Class B)

$21.64 (Class A)

$15.97 (Class B)

--

Total

3,323 (Class A)

17,342 (Class B)

$21.64 (Class A)

$15.97 (Class B)

$--

Not applicable.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

25

 

Item 6.  Exhibits

 

 

 

Exhibits:

 

 

 

10.1†10.1EmploymentFirst Amendment Agreement, dated as of May 6,January 12, 2023, to Amended and Restated Credit and Security Agreement, dated as of September 2, 2021, by and among Bel Fuse Inc., as Borrower, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and the other lenders identified therein, is incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 10, 2023.
10.2Conformed Amended and Restated Credit and Security Agreement, dated as of September 2, 2021 (reflecting changes thereto pursuant to First Amendment Agreement dated as of January 12, 2023), by and among Bel Fuse Inc., as Borrower, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and the other lenders identified therein, is incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 10, 2023.
10.3Amended Confirmation of Transaction, by and between Bel Fuse Inc. and Farouq Tuweiq (incorporatedPNC Bank, National Association, dated as of January 18, 2023, is incorporated by reference to Exhibit 10.110.8 to the Company’s QuarterlyAnnual Report on Form 10-Q10-K for the quarterly periodfiscal year ended MarchDecember 31, 2022 as filed with the SEC on May 6, 2022).March 10, 2023.
10.4Amended Confirmation of Transaction, by and between Bel Fuse Inc. and KeyBank National Association, dated as of January 18, 2023, is incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 10, 2023.
  

31.1*

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 32.1**

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 32.2**

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS*

Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

 

 

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

 

 

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

  
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

 

 

*   Filed herewith.

** Submitted herewith.

         †   Management contract or compensatory plan or arrangement.

 

26

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

BEL FUSE INC.

AugustMay 5,, 20222023

 

By:

/s/ Daniel Bernstein

 

Daniel Bernstein

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

By:

/s/ Farouq Tuweiq

 

Farouq Tuweiq

 

Chief Financial Officer

(Principal Financial Officer)

 

27