BELFB 10-Q
Bel Fuse Inc /Nj (BELFA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the Quarterly Period Ended |
| or | |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from ___________ to ____________ |
Commission File No.
BEL FUSE INC.
(Exact name of registrant as specified in its charter)
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| (State of incorporation) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
| Trading Symbol |
| Name of Exchange on Which Registered |
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| 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. | | No ☐ |
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| 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). | | No ☐ |
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| 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. | ☐ |
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| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No ☒ |
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| Number of Shares of Common Stock Outstanding as of October 25, 2024 |
| Class A Common Stock ($0.10 par value) |
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| Class B Common Stock ($0.10 par value) |
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| FORM 10-Q INDEX |
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (our “2023 Annual Report on Form 10-K”), and the risks and other factors described in this and our other Quarterly Reports on Form 10-Q, and in our other reports and documents that we have filed or may file from time to time with the Securities and Exchange Commission ("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") 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," "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 are Forward-Looking Statements.
These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in Item 1A of our 2023 Annual Report on Form 10-K, and the risks and other factors described in this and our other Quarterly Reports on Form 10-Q, and in our other reports and documents that we have filed or may file from time to time 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 2023 Annual Report on Form 10-K, in this and our other Quarterly Reports 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; |
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the continuing viability of sectors that rely on our products; |
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the effects of business and economic conditions, and challenges impacting the macroeconomic environment generally and/or our industry in particular; |
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the effects of rising input costs, and cost changes generally, including the potential impact and effects of inflationary pressures; |
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difficulties associated with integrating previously acquired companies, and any difficulties that may be experienced in integrating Enercon Technologies, Ltd. (“Enercon”) following the closing of the proposed Enercon acquisition; |
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capacity and supply constraints or difficulties, including supply chain constraints or other challenges; |
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the impact of public health crises (such as the governmental, social and economic effects of COVID or other future epidemics or pandemics); |
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difficulties associated with the availability of labor, and the risks of any labor unrest or labor shortages; |
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risks associated with our international operations, including our substantial manufacturing operations in the People’s Republic of China (the “PRC”), and following the acquisition of Enercon, risks associated with operations in Israel, which may be adversely affected by political or economic instability, major hostilities or acts of terrorism in the region; |
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risks associated with restructuring programs or other strategic initiatives, including any difficulties in implementation or realization of the expected benefits or cost savings; |
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product development, commercialization or technological difficulties; |
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the regulatory and trade environment, including the potential effects of trade restrictions that may impact Bel, its customers and/or its suppliers; |
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risks associated with fluctuations in foreign currency exchange rates and interest rates; |
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uncertainties associated with legal proceedings; |
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the market's acceptance of the Company's new products and competitive responses to those new products; |
| ● |
the impact of changes to U.S. and applicable foreign legal and regulatory requirements, including tax laws, trade and tariff policies; |
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| ● | unanticipated difficulties, delays or expenditures relating to the proposed Enercon acquisition, including, without limitation, difficulties that result in the failure to realize the expected benefits and synergies within the expected time period (if at all); disruptions of Company’s or Enercon’s current plans, operations and relationships with customers, suppliers, distributors, business partners and regulators caused by the announcement and pendency of the proposed Enercon acquisition; potential difficulties in employee retention due to the announcement and pendency of the proposed Enercon acquisition; and the possibility that the proposed Enercon acquisition does not close, including, but not limited to, failure to satisfy the closing conditions; and | |
| ● | market and economic factors impacting Enercon’s business, including trends in demand in Enercon’s aerospace and defense end markets which can be cyclical, as well as the impact of any reductions in defense spending. |
The foregoing 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 or otherwise update any Forward-Looking Statement to reflect events or circumstances after the date of 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.
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)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Held to maturity U.S. Treasury securities | ||||||||
| Accounts receivable, net of credit losses of $ and $, respectively | ||||||||
| Inventories | ||||||||
| Unbilled receivables | ||||||||
| Assets held for sale | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Related party note receivable | ||||||||
| Equity method investment | ||||||||
| Intangible assets, net | ||||||||
| Goodwill, net | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities, current | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Long-term debt | ||||||||
| Operating lease liabilities, long-term | ||||||||
| Liability for uncertain tax positions | ||||||||
| Minimum pension obligation and unfunded pension liability | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 15) | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, par value, shares authorized; issued | ||||||||
| Class A common stock, par value $ per share, shares authorized; and shares outstanding at September 30, 2024 and December 31, 2023, respectively (net of restricted treasury shares) | ||||||||
| Class B common stock, par value $ per share, shares authorized; and shares outstanding at September 30, 2024 and December 31, 2023, respectively (net of restricted treasury shares) | ||||||||
| Treasury stock (unrestricted, consisting of Class A shares and Class B shares) | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
BEL FUSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
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| Gross profit |
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| Research and development costs |
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| Selling, general and administrative expenses |
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| Restructuring charges |
||||||||||||||||
| Gain on sale of property |
( |
) | ( |
) | ||||||||||||
| Income from operations |
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| Gain on sale of Czech Republic business |
( |
) | ||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income |
||||||||||||||||
| Other (expense) income, net |
( |
) | ( |
) | ( |
) | ||||||||||
| Earnings before provision for income taxes |
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| Provision for income taxes |
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| Net earnings available to common stockholders |
$ | $ | $ | $ | ||||||||||||
| Net earnings per common share: |
||||||||||||||||
| Class A common share - basic and diluted |
$ | $ | $ | $ | ||||||||||||
| Class B common share - basic and diluted |
$ | $ | $ | $ | ||||||||||||
| Weighted-average number of shares outstanding: |
||||||||||||||||
| Class A common share - basic and diluted |
||||||||||||||||
| Class B common share - basic and diluted |
||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
BEL FUSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net earnings available to common stockholders | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Currency translation adjustment, net of taxes of $, ($), $, and ($), respectively | ( | ) | ( | ) | ||||||||||||
| Unrealized (losses) gains on interest rate swap cash flow hedge, net of taxes of $ in all periods presented | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized holding (losses) gains on marketable securities, net of taxes of $ in all periods presented | ||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($), ($), ($), ($), respectively | ||||||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
BEL FUSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Other | Class A | Class B | Additional | |||||||||||||||||||||||||||||||||
| Retained | Comprehensive | Common | Class A | Common | Class B | Treasury | Paid-In | |||||||||||||||||||||||||||||
| Total | Earnings | (Loss) Income | Stock | # of Shares | Stock | # of Shares | Stock | Capital | ||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Issuance of restricted common stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Forfeiture of restricted common stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Purchases of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of $ | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Unrealized gains on interest rate swap cash flow hedge, net of taxes of $ | - | - | ||||||||||||||||||||||||||||||||||
| Unrealized holding gains on marketable securities, net of taxes of $ | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Forfeiture of restricted common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Purchases of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of $ | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Unrealized losses on interest rate swap cash flow hedge | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Purchases of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of $ | - | - | ||||||||||||||||||||||||||||||||||
| Unrealized losses on interest rate swap cash flow hedge | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Other | Class A | Class B | Additional | |||||||||||||||||||||||||||||||||
| Retained | Comprehensive | Common | Class A | Common | Class B | Treasury | Paid-In | |||||||||||||||||||||||||||||
| Total | Earnings | (Loss) Income | Stock | # of Shares | Stock | # of Shares | Stock | Capital | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Forfeiture of restricted common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of $ | - | - | ||||||||||||||||||||||||||||||||||
| Unrealized losses on interest rate swap cash flow hedge, net of taxes of $ | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Unrealized holding gains on marketable securities, net of taxes of $ | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Issuance of restricted common stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Forfeiture of restricted common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of ($) | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Unrealized gains on interest rate swap cash flow hedge | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net earnings | - | - | ||||||||||||||||||||||||||||||||||
| Dividends declared: | ||||||||||||||||||||||||||||||||||||
| Class A Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Class B Common Stock, $/share | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Forfeiture of restricted common stock | - | ( | ) | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes of ($) | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Unrealized gains on interest rate swap cash flow hedge | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Change in unfunded SERP liability, net of taxes of ($) | - | - | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
BEL FUSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| 2024 |
2023 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net earnings |
$ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Stock-based compensation |
||||||||
| Amortization of deferred financing costs |
||||||||
| Deferred tax benefit |
( |
) | ( |
) | ||||
| Net unrealized losses on foreign currency revaluation |
||||||||
| Gain on sale of property |
( |
) | ||||||
| Gain on sale of Czech Republic business |
( |
) | ||||||
| Other, net |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
||||||||
| Unbilled receivables |
||||||||
| Inventories |
||||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Accrued expenses |
( |
) | ||||||
| Accrued restructuring costs |
( |
) | ( |
) | ||||
| Income taxes payable |
||||||||
| Other operating assets/liabilities, net |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
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| Cash flows from investing activities: |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Purchases of held to maturity and marketable securities |
( |
) | ||||||
| Proceeds from held to maturity securities |
||||||||
| Payment for equity method investment |
( |
) | ||||||
| Investment in related party notes receivable |
( |
) | ( |
) | ||||
| Proceeds from disposal/sale of property, plant and equipment |
||||||||
| Proceeds from sale of business |
||||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
||||||||
| Dividends paid to common stockholders |
( |
) | ( |
) | ||||
| Deferred financing costs |
( |
) | ||||||
| Repayments under revolving credit line |
( |
) | ||||||
| Borrowings under revolving credit line |
||||||||
| Purchases of common stock |
( |
) | ||||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
| Net increase in cash and cash equivalents |
||||||||
| Cash and cash equivalents - beginning of period |
||||||||
| Cash and cash equivalents - end of period |
$ | $ | ||||||
| Supplementary information: |
||||||||
| Cash paid during the period for: |
||||||||
| Income taxes, net of refunds received |
$ | $ | ||||||
| Interest payments |
$ | $ | ||||||
| ROU assets obtained in exchange for lease obligations |
$ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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 nine months ended September 30, 2024 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, 2023.
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 to the consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There were no significant changes to these accounting policies during the nine months ended September 30, 2024, except as discussed in “Recently Adopted Accounting Standards” below and as follows:
Cash, Cash Equivalents and Investments
Cash equivalents include short-term investments in money market funds and certificates of deposit with an original maturity of three months or less when purchased. Accounts at each U.S. institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. Substantially all of our U.S. cash and cash equivalents balances are in excess of the FDIC insured limit. The Company periodically invests its excess cash in money market funds and U.S. Treasury Bills. The Company's cash and cash equivalents are placed with high credit quality financial institutions.
The Company has held to maturity securities comprised of U.S. Treasury Bills. These investments are classified as held to maturity as the Company has the intent and ability to hold these investments until they mature. The held to maturity securities mature within the next 12 months. The table below shows the amortized costs, associated gross unrealized gains and associated fair value of the held to maturity securities at September 30, 2024:
| Amortized Cost | Gross Unrealized Gain | Fair Value | ||||||||||
| Held to maturity U.S. Treasury securities | $ | $ | $ | |||||||||
In determining the fair value of the Company's held to maturity U.S. Treasury securities, the Company utilized Level 1 inputs of the market price for comparable securities as of September 30, 2024.
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 original equity investment plus our share of those entities' undistributed earnings subsequent to our investment.
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 specific 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 March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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 market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refined the scope of Topic 848 and clarified some of its guidance as part of the FASB’s monitoring of global reference rate activities. This updated guidance was effective upon issuance, and the Company was initially allowed to elect to apply the amendments prospectively through December 31, 2022. In December 2022, the FASB 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 guidance did not have a material impact on the Company's consolidated financial statements.
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 broadens 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. 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.
Accounting Standards Issued But Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires a public entity to disclose the title and position of the Chief Operating Decision Maker (CODM). The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A public entity should apply the amendments in this ASU retrospectively to all prior periods presented in the financial statements. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows and financial condition.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU 2023-09 requires a public business entity (PBE) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.
| 2. | INVESTMENT IN INNOLECTRIC |
On February 1, 2023, the Company closed on a noncontrolling (-third) investment in Germany-based innolectric AG (“innolectric”) for consideration of million (approximately $
This passive investment creates a strategic alliance that is focused on Electric Vehicles (“EV”) on-board power electronics, and in particular next generation fast-charging technology. With no product overlap, this relationship expands the 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 this investment have been included in Bel's Power Solutions and Protection segment and amounted to losses of $
Related Party Transactions
From time to time, the Company provides cash loans to innolectric to fund working capital needs and further business development. During the three and nine months ended September 30, 2024, the Company provided incremental loans to innolectric in the amount of million and million, respectively. As of September 30, 2024 and December 31, 2023, the Company had loans outstanding to innolectric in the aggregate amount of million (approximately $
| 3. | ACQUISITION AND DIVESTITURE |
Agreement to Acquire Enercon
On September 18, 2024, the Company entered into a definitive Share Purchase Agreement, dated as of September 19, 2024 (the “Enercon Purchase Agreement”), with Enercon Technologies, Ltd. (“Enercon”), FF3 Holdings, L.P., for itself and as Sellers’ Representative (“FF3”), and the other seller parties signatory thereto (together with FF3, each a “Seller” and collectively, the “Sellers”). The Enercon Purchase Agreement provides for Bel’s acquisition of a majority stake in Enercon from the Sellers based on an enterprise value of $
Divestiture of Czech Republic Subsidiary
On June 1, 2023, the Company completed its divestment of Bel Stewart s.r.o., a former subsidiary in the Czech Republic which has historically been reported within Bel’s Connectivity Solutions segment. The business was sold to PEI Genesis for total consideration of $
The carrying amounts of the major classes of assets and liabilities included as part of the sale were as follows:
| Total | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Property, plant and equipment | ||||
| Other assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Income taxes payable | ( | ) | ||
| Other current liabilities | ( | ) | ||
| Other long-term liabilities | ( | ) | ||
| Total net assets transferred | ||||
| Consideration received | ||||
| Gain on sale recognized | $ | |||
| 4. | 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 September 30, 2024 | Nine Months Ended September 30, 2024 | |||||||||||||||||||||||||||||||
| Power Solutions and Protection | Connectivity Solutions | Magnetic Solutions | Consolidated | Power Solutions and Protection | Connectivity Solutions | Magnetic Solutions | Consolidated | |||||||||||||||||||||||||
| By Geographic Region: | ||||||||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||||||||||
| $ | 48,680 | $ | 55,715 | $ | 19,243 | $ | 123,638 | $ | 167,478 | $ | 167,822 | $ | 49,633 | $ | 384,933 | |||||||||||||||||
| By Sales Channel: | ||||||||||||||||||||||||||||||||
| Direct to customer | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Through distribution | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||
| Power Solutions and Protection | Connectivity Solutions | Magnetic Solutions | Consolidated | Power Solutions and Protection | Connectivity Solutions | Magnetic Solutions | Consolidated | |||||||||||||||||||||||||
| By Geographic Region: | ||||||||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| By Sales Channel: | ||||||||||||||||||||||||||||||||
| Direct to customer | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Through distribution | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
The balances of the Company’s contract assets and contract liabilities at September 30, 2024 and December 31, 2023 are as follows:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Contract assets - current (unbilled receivables) | $ | $ | ||||||
| Contract liabilities - current (deferred revenue) | $ | $ | ||||||
The change in balance of our unbilled receivables from December 31, 2023 to September 30, 2024 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). Our deferred revenue balances at December 31, 2023 and September 30, 2024 primarily relates to customer prepayments on invoices, which will be recorded as revenue in the period in which the related finished goods are shipped to the customer.
Transaction Price Allocated to Future Obligations
The aggregate amount of transaction price allocated to remaining performance obligations that have not been fully satisfied as of September 30, 2024 related to contracts that exceed one year in duration amounted to $
| 5. |
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 nine months ended September 30, 2024 and 2023:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Numerator: |
||||||||||||||||
| Net earnings |
$ | $ | $ | $ | ||||||||||||
| Less dividends declared: |
||||||||||||||||
| Class A |
||||||||||||||||
| Class B |
||||||||||||||||
| Undistributed earnings |
$ | $ | $ | $ | ||||||||||||
| Undistributed earnings allocation: |
||||||||||||||||
| Class A undistributed earnings |
$ | $ | $ | $ | ||||||||||||
| Class B undistributed earnings |
||||||||||||||||
| Total undistributed earnings |
$ | $ | $ | $ | ||||||||||||
| Net earnings allocation: |
||||||||||||||||
| Class A net earnings |
$ | $ | $ | $ | ||||||||||||
| Class B net earnings |
||||||||||||||||
| Net earnings |
$ | $ | $ | $ | ||||||||||||
| Denominator: |
||||||||||||||||
| Weighted-average shares outstanding: |
||||||||||||||||
| Class A |
||||||||||||||||
| Class B |
||||||||||||||||
| Net earnings per share: |
||||||||||||||||
| Class A |
$ | $ | $ | $ | ||||||||||||
| Class B |
$ | $ | $ | $ | ||||||||||||
| 6. | 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.
| September 30, 2024 | ||||||||||||||||
| Carrying value | Fair value | Cash and cash equivalents | Other Current Assets | |||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Level 1: | ||||||||||||||||
| Money market funds | ||||||||||||||||
| Money market funds (Rabbi Trust) | ||||||||||||||||
| Subtotal | ||||||||||||||||
| Level 2: | ||||||||||||||||
| Certificates of deposit and time deposits | ||||||||||||||||
| Subtotal | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Carrying value | Fair value | Cash and cash equivalents | Other Current Assets | |||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Level 1: | ||||||||||||||||
| Money market funds | ||||||||||||||||
| Money market funds (Rabbi Trust) | ||||||||||||||||
| Subtotal | ||||||||||||||||
| Level 2: | ||||||||||||||||
| Certificates of deposit and time deposits | ||||||||||||||||
| Subtotal | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
As of September 30, 2024 and December 31, 2023, our available-for-sale securities primarily consisted of investments held in a rabbi trust which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations. These securities are measured at fair value using quoted prices in active markets for identical assets (Level 1) inputs and amounted to $
Throughout 2024 and 2023, the Company entered into a series of foreign currency forward contracts, the fair values of which were ($
The Company is a party to two interest rate swap agreements as further described in Note 10, "Derivative Instruments and Hedging Activities". The fair value of the interest rate swap agreements was $
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023 were as follows:
| Balance Sheet Classification | September 30, 2024 | December 31, 2023 | |||||||
| Derivative assets: | |||||||||
| Foreign currency forward contracts: | |||||||||
| Designated as cash flow hedges | Other current assets | $ | $ | ||||||
| Non designated as hedging instruments | Other current assets | ||||||||
| Interest rate swap agreements: | |||||||||
| Designated as a cash flow hedge | Other assets | ||||||||
| Total derivative assets | $ | $ | |||||||
| Derivative liabilities: | |||||||||
| Foreign currency forward contracts: | |||||||||
| Designated as cash flow hedges | Other current liabilities | $ | $ | ||||||
| Not designated as hedging instruments | Other current liabilities | ||||||||
| Total derivative liabilities | $ | $ | |||||||
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 nine months ended September 30, 2024 or September 30, 2023. There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the nine months ended September 30, 2024 or September 30, 2023.
There were
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 September 30, 2024 and December 31, 2023, the estimated fair value of total debt was $
Nonfinancial assets and liabilities, such as goodwill, indefinite-lived intangible assets, long-lived assets and the net liability related to the put/call options pursuant to the innolectric investment agreement, 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 nine months ended September 30, 2024 or September 30, 2023.
| 7. |
INVENTORIES |
The components of inventories are as follows:
| September 30, |
December 31, |
|||||||
| 2024 |
2023 |
|||||||
| Raw materials |
$ | $ | ||||||
| Work in progress |
||||||||
| Finished goods |
||||||||
| Inventories |
$ | $ | ||||||
| 8. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consist of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Machinery and equipment | ||||||||
| Construction in progress | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation expense was $
At September 30, 2024, a total of $
| 9. |
ACCRUED EXPENSES |
Accrued expenses consist of the following:
| September 30, |
December 31, |
|||||||
| 2024 |
2023 |
|||||||
| Salaries, bonuses and related benefits |
$ | $ | ||||||
| Deferred revenue |
||||||||
| Accrued restructuring costs |
||||||||
| Sales commissions |
||||||||
| Warranty accrual |
||||||||
| Other |
||||||||
| $ | $ | |||||||
The change in warranty accrual during the nine months ended September 30, 2024 primarily related to repair costs incurred and adjustments to pre-existing warranties. There were no new material warranty charges incurred during the nine months ended September 30, 2024.
Restructuring Activities:
Activity and liability balances related to restructuring costs for the nine months ended September 30, 2024 are as follows:
| Nine Months Ended |
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| September 30, 2024 |
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| Liability at |
Cash Payments |
Liability at |
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| December 31, |
New |
and Other |
September 30, |
|||||||||||||
| 2023 |
Charges |
Settlements |
2024 |
|||||||||||||
| Severance costs |
$ | $ | $ | ( |
) | $ | ||||||||||
| Other restructuring costs |
||||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
| 10. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Chinese renminbi and the Mexican peso. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the Company's credit agreement (as defined and described in Note 11, "Debt", below), in November 2021, we executed a pay-fixed, receive-variable interest rate swap agreement with each of two multinational financial institutions under which we, prior to the January 2023 amendment described below which transitioned the reference rate from LIBOR to SOFR, (i) paid interest at a fixed rate of
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 consolidated balance sheet and are reclassified into the statement of operations within interest expense in the period in which the hedged transaction affects earnings.
Fair Values of Derivative Financial Instruments
See Note 6, "Fair Value Measurements" for the gross fair values of the Company's derivative assets and liabilities as of September 30, 2024 and December 31, 2023.
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 nine months ended September 30, 2024 and 2023 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net (losses) gains recognized in AOCL: | ||||||||||||||||
| Foreign currency forward contracts | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Interest rate swap agreements | ( | ) | ||||||||||||||
| $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Net gains (losses) reclassified from AOCL to the consolidated statement of operations: | ||||||||||||||||
| Foreign currency forward contracts | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Interest rate swap agreements | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The gains and losses related to the foreign currency forward contracts are included as a component of currency translation adjustment on the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2024 and 2023.
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 nine months ended September 30, 2024 and 2023 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| Classification in Consolidated Statements of Operations | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Foreign currency forward contracts | Other (expense) income, net | $ | ( | ) | $ | $ | $ | ||||||||||
| $ | ( | ) | $ | $ | $ | ||||||||||||
| 11. | DEBT |
The Company has a Credit and Security Agreement with KeyBank National Association (as amended, the "Existing Credit Agreement"). The Existing Credit Agreement provides a $
At September 30, 2024 and December 31, 2023, outstanding borrowings under the revolver amounted to $
The interest rate in effect at September 30, 2024 and December 31, 2023 was
The Existing Credit Agreement contains customary representations and warranties, covenants and events of default. In addition, the Existing Credit Agreement 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 Existing Credit Agreement 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.
Concurrently with the entry into the Enercon Purchase Agreement, Bel entered into a Commitment Letter, dated September 18, 2024 (the “Commitment Letter”), with KeyBank, Bank of America, N.A. (“BofA”), BMO Bank, N.A. (“BMO”), PNC Bank, National Association (“PNC”) (each of BofA, BMO, and PNC, together with KeyBank, the “Incremental Lenders”), KeyBanc Capital Markets Inc. (“KBCM”), PNC Capital Markets LLC (“PNC Capital”), and BofA Securities, Inc. (“BofA Securities”; together with KBCM, PNC Capital and the Incremental Lenders, the “Commitment Parties”), that provides a commitment, subject to satisfaction of certain conditions and the terms as agreed between the Company and the Commitment Parties, to increase the Maximum Revolving Amount available under the Existing Credit Agreement’s revolving credit facility by an aggregate of $
Among the satisfaction of other conditions and deliverables, the completion of the Revolving Facility Increase will be subject to the execution and delivery of an amendment to, or an amendment and restatement of, the Existing Credit Agreement.
In connection with Bel’s entry into the Commitment Letter, Bel entered into a Second Amendment Agreement dated September 18, 2024 (the “Second Amendment”) to the Existing Credit Agreement (as amended by the Second Amendment, the “Credit Agreement”). The Second Amendment makes certain amendments to the Existing Credit Agreement, including (i) increasing the cap set forth in Section 2.10(b) (governing “Increase in Commitment”) of the Existing Credit Agreement by $
At September 30, 2024, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Fixed Charge Coverage Ratio.
| 12. | 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 2020 and for state examinations before 2017. Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2013 in Asia and generally 2015 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 September 30, 2024. The Company’s liabilities for uncertain tax positions totaled $
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 nine months ended September 30, 2024 and 2023, the Company recognized $
| 13. | 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 September 30, 2024 and 2023 amounted to $
The Company also maintains a Nonqualified Deferred Compensation Plan (the "DCP"). With certain exceptions, the Company's contributions to the DCP are discretionary and become fully vested by the participants upon reaching age
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 September 30, 2024 and 2023 amounted to less than $
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 6 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Net amortization | ||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||
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 (expense) income, net in the accompanying condensed consolidated statements of operations.
The following amounts are recognized net of tax in accumulated other comprehensive loss:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Prior service cost | $ | $ | ||||||
| Net loss | ( | ) | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | |||
| 14. |
ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of accumulated other comprehensive loss at September 30, 2024 and December 31, 2023 are summarized below:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Foreign currency translation adjustment, net of taxes of ($) at September 30, 2024 and ($) at December 31, 2023 | $ | ( | ) | $ | ( | ) | ||
| Unrealized gains on interest rate swap cash flow hedge, net of taxes of $ at September 30, 2024 and $ at December 31, 2023 | ||||||||
| Unrealized holding gains on marketable securities, net of taxes of ($) at September 30, 2024 and ($) at December 31, 2023 | ||||||||
| Unfunded SERP liability, net of taxes of $ at September 30, 2024 and $ at December 31, 2023 | ||||||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
Changes in accumulated other comprehensive loss by component during the nine months ended September 30, 2024 are as set forth below. All amounts are net of tax:
| Foreign Currency |
Unrealized Gains on |
Unrealized Holding |
|||||||||||||||||||
| Translation |
Interest Rate Swap |
Gains on |
Unfunded |
||||||||||||||||||
| Adjustment |
Cash Flow Hedge |
Marketable Securities |
SERP Liability |
Total |
|||||||||||||||||
| Balance at December 31, 2023 |
$ | ) | $ | $ | $ | $ | ) | ||||||||||||||
| Other comprehensive (loss) income before reclassifications |
|||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive loss |
( |
) | ( |
) | (a) |
( |
) | ||||||||||||||
| Net current period other comprehensive (loss) income |
( |
) | ( |
) | |||||||||||||||||
| Balance at September 30, 2024 |
$ | ) | $ | $ | $ | $ | ) | ||||||||||||||
| (a) This reclassification relates to the amortization of prior service costs and gains/losses associated with the Company's SERP Plan. This expense is reflected in other (expense) income, net on the accompanying condensed consolidated statements of operations. |
| 15. | 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. On July 27, 2023, the Western District of Texas court filed an Order granting MPS’s motion for summary judgment of non-infringement. The Court’s memorandum and opinion is forthcoming. The Company is evaluating its options for appeal.
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 rendered a judgment against BPS China in March 2024. BPS China filed an appeal in July 2024. The estimated liability related to this matter is approximately $
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$
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.
Agreement to Acquire Enercon
On September 18, 2024, the Company entered into a definitive Share Purchase Agreement, dated as of September 19, 2024 (the “Enercon Purchase Agreement”), with Enercon Technologies, Ltd. (“Enercon”), FF3 Holdings, L.P., for itself and as Sellers’ Representative, and the other seller parties signatory thereto. See Note 3, “Acquisition and Divestiture”.
| 16. |
The Company operates in industry with reportable operating segments, which represent the Company's product groups, consisting of Power Solutions and Protection, Connectivity Solutions and Magnetic Solutions. 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 September 30, 2024 | ||||||||||||||||||||
| Power Solutions | Connectivity | Magnetic |
| |||||||||||||||||
| and Protection | Solutions | Solutions | Corporate | Total | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||
| Gross Profit % | % | % | % | nm | % | |||||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||||||
| Power Solutions | Connectivity | Magnetic |
| |||||||||||||||||
| and Protection | Solutions | Solutions | Corporate | Total | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||
| Gross Profit % | % | % | % | nm | % | |||||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||
| Power Solutions | Connectivity | Magnetic |
| |||||||||||||||||
| and Protection | Solutions | Solutions | Corporate | Total | ||||||||||||||||
| Revenue |
|
|
| $ - |
| |||||||||||||||
| Gross Profit | | | |
| | |||||||||||||||
| Gross Profit % | | | | nm | | |||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Power Solutions | Connectivity | Magnetic |
| |||||||||||||||||
| and Protection | Solutions | Solutions | Corporate | Total | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Gross Profit | ) | |||||||||||||||||||
| Gross Profit % | % | % | % | nm | % | |||||||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
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 2023 Annual Report on Form 10-K and our consolidated financial statements and related notes set forth in Item 8 of Part II of our 2023 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 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” included in Part I, Item 1, of this Quarterly Report on Form 10-Q, 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
We design, manufacture and market 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 eMobility industries. Our portfolio of products also finds application in the automotive, medical and consumer electronics markets.
We operate through three product group segments. In the nine months ended September 30, 2024, 43% of our revenues were derived from Power Solutions and Protection, 44% from our Connectivity Solutions and 13% from our Magnetic Solutions operating segment.
Our operating expenses are driven principally by the cost of labor where the factories that we 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 United States, Mexico, Dominican Republic, United Kingdom, 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.
Recent Developments – Agreement to Acquire Enercon
On September 18, 2024, we entered into a definitive Share Purchase Agreement, dated as of September 19, 2024 (the “Enercon Purchase Agreement”), with Enercon Technologies, Ltd. (“Enercon”), FF3 Holdings, L.P., for itself and as Sellers’ Representative (“FF3”), and the other seller parties signatory thereto (together with FF3, each a “Seller” and collectively, the “Sellers”). The Enercon Purchase Agreement provides for our acquisition of a majority stake in Enercon from the Sellers based on an enterprise value of $400 million. Pursuant to the terms and conditions of the Enercon Purchase Agreement, we will acquire an 80% stake upfront for $320 million in cash at the closing (subject to customary adjustments), plus up to $10 million of potential earnout payments for the 2025-2026 period, with the intent to purchase the remaining 20% by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing and subject to the terms and pricing prescribed thereby, which include future EBITDA performance. Enercon is a leading supplier of highly customized power conversion and networking solutions to aerospace and defense markets globally, providing robust and reliable solutions across air, land and sea applications. This acquisition will allow us to extend our product portfolio supporting the aerospace and defense markets to include power solutions, with clear potential cross selling opportunities in the future. Enercon is based in Netanya, Israel with additional facilities in New Hampshire, U.S. and Haryana, India. The transaction is expected to close in the fourth quarter of 2024 subject to satisfaction of customary closing conditions. The preceding discussion of the proposed Enercon acquisition contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
Key Factors Affecting our Business
We believe that in addition to recent global inflationary pressures on the costs of goods and services in general, and ongoing conflicts/political unrest including in or near the countries in which Bel operates, the key factors affecting and/or potentially affecting our results for the nine months ended September 30, 2024 and/or future results include the following:
| • |
Revenues – Our revenues in the first nine months of 2024 were down $114.9 million, or 23.0% as compared to the same period of 2023. The decrease was driven by our Power Solutions and Protection and Magnetics Solutions segments and largely related to lower demand from our networking customers and distribution partners as we believe they continue to work through inventory on hand. These decreases were offset in part by a modest increase in sales at our Connectivity Solutions group, driven by increased sales through our distribution channels and aerospace and defense end markets. |
| • |
Backlog – Our backlog of orders amounted to $287.4 million at September 30, 2024, a decrease of $85.7 million, or 23%, from December 31, 2023. From year-end 2023 to September 30, 2024, we saw a 33% decrease in the backlog for our Power Solutions and Protection business, a decline in backlog of 17% in our Magnetic Solutions business and a 5% decrease in backlog level at our Connectivity Solutions business. While order volumes in general have been lower in recent quarters, we saw the highest booking level in the third quarter of 2024 since the third quarter of 2023. |
| • |
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 our gross margin percentage. In general, our Connectivity products have historically had the highest contribution margins of our three product groups given the harsh environment and high-reliability nature of these products and the 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 our profit margins. See "Results of Operations - Summary by Operating Segment - Revenue and Gross Margin" below for further details. |
| • |
Pricing and Availability of Materials – There has been some stabilization of raw materials pricing since late 2023; however overall our cost of materials remains elevated. Supply constraints have eased related to components that constitute raw materials in our manufacturing processes, particularly with capacitors, resistors and copper. Lead times are still above normal though suppliers are now meeting the agreed delivery deadlines with more regularity. In addition, COVID remains a potential supply continuity risk due to the unknown nature of future outbreaks including potential further variants. Additionally, our access to parts or materials, and our ability to contract with suppliers utilized previously, may be limited or prohibited from time to time by trade restrictions or other legal or regulatory enactments. We anticipate continued downward pressure on our Power sales given trade restrictions on one of our former suppliers previously utilized for this segment, which had historically supported approximately $3 to $4 million per quarter of our sales into the consumer end market. We are currently evaluating alternative manufacturing options for the components previously supplied by this manufacturer. To the extent our suppliers in the PRC are negatively impacted by new or amended regulations, any such negative implications could adversely impact our supply chain, including in the form of increased costs, disruptions, shortages or unavailability of product or component parts, and/or other deleterious consequences, which could materially adversely affect our business and operating results. The preceding discussion of "Pricing and Availability of Materials" contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| • |
Labor Costs – Labor costs represented 7.8% of revenue during the first nine months of 2024 as compared to 6.5% of revenue during the same period of 2023. The period-over-period increase in labor costs as a percentage of sales for the first nine months of 2024 was largely impacted by the retention of a certain level of direct labor associates within our Magnetic Solutions business to accommodate the anticipated rebound within this segment. In addition, effective January 1, 2024, the statutory minimum wage rate in Mexico was increased by 20%, impacting labor costs at our Reynosa and Cananea, Mexico factories. We estimate the additional cost associated with this increase will be approximately $1.4 million annually. Also effective January 1, 2024, minimum wage increases which went into effect at our factory in Slovakia are expected to result in approximately $0.3 million of higher labor costs at that facility in 2024 as compared to 2023. This and any future increases in minimum wage rates will have an unfavorable impact on Bel's profit margins. The preceding five sentences represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| • | 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. The preceding two sentences contain Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| • |
Restructuring – In late 2023, we initiated a restructuring initiative within our Connectivity segment related to the transition of certain manufacturing from our Glen Rock, Pennsylvania facility to other existing Bel sites (the “Glen Rock initiative”). During the third quarter of 2024, we initiated a restructuring initiative within our Power segment related to the transition of our fuse manufacturing to other existing sites (the "Fuse initiative"). In addition to the Fuse initiative and the Glen Rock initiative, the Company also implemented headcount reductions within our Magnetics segment in response to the lower sales volume in recent quarters within that segment. In connection with these initiatives, the Company incurred $1.1 million and $1.8 million during the three and nine months ended September 30, 2024, respectively, which primarily consisted of severance costs. The Glen Rock initiative is expected to be complete by the end of 2024 at a total cost to implement of $0.6 million (almost all of which was incurred during the nine months ended September 30, 2024). Annual cost savings related to the Glen Rock initiative are estimated at $2.5 million (of this initial annualized amount, $1.5 million is expected to be realized throughout 2024, with the incremental $1.0 million to be realized in 2025). The Fuse initiative is expected to be complete by the end of the first quarter of 2025 at a total cost to implement of $4.2 million (of which $0.2 million was incurred in the third quarter of 2024, $2.1 million is expected to be incurred in the fourth quarter of 2024, with the balance to be incurred in early 2025). Annual cost savings related to the Fuse initiative are estimated at $1.5 million and are expected to be realized beginning in the second quarter of 2025. The Company will continue to review its operations to optimize the business, which may result in restructuring costs being recognized in future periods. The preceding statements about restructuring initiatives, including our projections and estimates, represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| • |
Impact of Foreign Currency – As further described below, during the nine months ended September 30, 2024, labor and overhead costs were $0.7 million lower than the corresponding 2023 period primarily due to a favorable foreign exchange environment involving the Chinese Renminbi, as compared to the prior year period. We realized foreign exchange transactional loss of $1.3 million during the nine months ended September 30, 2024, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, 2024 versus those in effect at December 31, 2023. 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. We were favorably impacted by transactional foreign exchange gains in the first nine months of 2024 due to the depreciation of the Chinese Renminbi against the U.S. dollar, as compared to exchange rates in effect during 2023. 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 approximately $0.7 million lower in the PRC, in the nine months ended September 30, 2024 as compared to the comparable period in 2023. We monitor changes in foreign currencies and have historically implemented foreign currency forward contracts, and may continue to implement pricing actions to help mitigate the impact that changes in foreign currencies may have on our consolidated operating results. The preceding sentence represents a Forward-Looking Statement. See "Cautionary Notice Regarding Forward-Looking Information." |
| • |
Effective Tax Rate – Our effective tax rate will fluctuate based on the geographic regions in which our pretax profits are earned. Of the geographic regions in which we operate, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of our three geographical regions. See Note 12, “Income Taxes”. |
Results of Operations - Summary by Operating Segment
Revenue and Gross Margin
Our revenue and gross margin by operating segment for the three and nine months ended September 30, 2024 and 2023 were as follows:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||||||||||
| September 30, |
September 30, |
|||||||||||||||||||||||||||||||
| Revenue |
Gross Margin |
Revenue |
Gross Margin |
|||||||||||||||||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||
| Power solutions and protection |
$ | 48,680 | $ | 74,862 | 39.4 | % | 41.7 | % | $ | 167,478 | $ | 245,134 | 43.2 | % | 37.5 | % | ||||||||||||||||
| Connectivity solutions |
55,715 | 51,771 | 36.6 | % | 35.8 | % | 167,822 | 160,010 | 37.3 | % | 35.8 | % | ||||||||||||||||||||
| Magnetic solutions |
19,243 | 32,049 | 27.3 | % | 22.0 | % | 49,633 | 94,659 | 23.9 | % | 23.0 | % | ||||||||||||||||||||
| $ | 123,638 | $ | 158,682 | 36.1 | % | 35.0 | % | $ | 384,933 | $ | 499,803 | 38.0 | % | 32.9 | % | |||||||||||||||||
Power Solutions and Protection:
Sales of our Power Solutions and Protection products were lower by $26.2 million (35.0%) and $77.7 million (31.7%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. The decrease resulted primarily from a decline in sales of our power products into networking applications of $15.9 million (52.0%) during the third quarter of 2024 and $49.1 million (49.1%) during the nine months ended September 30, 2024 as compared to the same periods of 2023. Sales of our CUI products were down by $6.1 million (50.5%) and $17.2 million (41.7%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. Sales of products into the eMobility end market decreased by $3.3 million and $9.0 million, and our circuit protection products declined by $0.2 million and $2.3 million during the third quarter and nine months ended September 30, 2024, respectively, compared to the corresponding periods of 2023. These areas of decline were partially offset by a $2.6 million and $9.1 million increase in sales of our rail products during the third quarter and nine months ended September 30, 2024, respectively, compared to the same periods of 2023.
Our gross margin for the Power segment declined in the third quarter of 2024 compared to the same period of 2023 due to lower sales and an unfavorable shift in product mix. This decline was result of lower sales volume, partially offset with the favorable exchange rates with the Chinese Renminbi versus the U.S. dollar.
Connectivity Solutions:
Sales of our Connectivity Solutions products increased by $3.9 million (7.6%) and $7.8 million (4.9%) during the three and nine months ended September 30, 2024, respectively, as compared to the same period of 2023. This increase was primarily due to increased volume of Connectivity Solutions products sold through our distribution channels, providing incremental growth of $1.2 million (6.1%) during the third quarter and $4.3 million (7.3%) during the nine-month period ended September 30, 2024, as compared to the same periods of 2023. Sales of Connectivity products into the military end market grew $0.5 million (1.5%) during the nine months ended September 30, 2024, as compared to the same period of 2023. Gross margins for the 2024 periods presented above were favorably impacted by pricing actions on certain contract renewals and operational efficiencies from the facility consolidations completed in 2023, partially offset by higher wage rates in Mexico and an unfavorable fluctuation in exchange rates between the U.S. dollar and Mexican peso in the 2024 periods as compared to the 2023 periods presented.
Magnetic Solutions:
Sales of our Magnetic Solutions products declined by $12.8 million (40.0%) and $45.0 million (47.6%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. Reduced demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver of the lower demand as we believe by these customers continue to work through inventory on hand. The lower sales volume, partially offset by favorable exchange rates with the Chinese Renminbi versus the U.S. dollar, were the primary drivers of gross margin reduction for this product group during the first nine months of 2024 as compared to the same period of 2023.
Cost of Sales
Cost of sales as a percentage of revenue for the three and nine months ended September 30, 2024 and 2023 consisted of the following:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Material costs |
31.7 | % | 40.5 | % | 29.2 | % | 41.8 | % | ||||||||
| Labor costs |
7.8 | % | 6.2 | % | 7.8 | % | 6.5 | % | ||||||||
| Other expenses |
24.4 | % | 18.3 | % | 25.0 | % | 18.8 | % | ||||||||
| Total cost of sales |
63.9 | % | 65.0 | % | 62.0 | % | 67.1 | % | ||||||||
Material costs as a percentage of sales during the three and nine months ended September 30, 2024 were lower compared to the same periods of 2023, due to a shift in production mix, the stabilization of raw material pricing, shorter lead times, and better procurement efforts. Labor costs in the 2024 periods as a percentage of sales have increased compared to the each of the third quarter and first nine months of 2023 due to lower sales volume, a shift in product mix, an unfavorable fluctuation of the Mexican Peso exchange rate versus the U.S. Dollar in 2024 compared to the previous year, and the increase in statutory minimum wage rate in Mexico. This increase in labor cost was partially offset by lower labor costs in China due to the favorable fluctuation in the Chinese Renminbi exchange rate versus the U.S. Dollar.
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). The percentage of other expenses as a cost of sales has increased during the three and nine months ended September 30, 2024 relative to the corresponding 2023 periods, due to the lower sales volume in the 2024 periods presented as compared to the same periods of 2023.
Research and Development ("R&D") Expense
R&D expense remained relatively steady and amounted to $5.4 million and $5.3 million during the three months ended September 30, 2024 and 2023, respectively and $16.7 million and $16.5 million for the nine-month periods ended September 30, 2024 and 2023, respectively.
Selling, General and Administrative Expense (“SG&A”)
SG&A expenses were $26.7 million for the third quarter of 2024, an increase from $23.7 million in the third quarter of 2023. This increase in SG&A was largely the result of a $4.3 million increase in professional fees related to the acquisition of Enercon expected to close in the fourth quarter of 2024. Salaries and fringe benefits also increased by $0.7 million and there was an increase of $0.4 million in a variety of other expenses, including amortization, advertising and travel. These increases were largely offset by lower variable organizational compensation by $0.7 million and lower business promotion expenses of $0.3 million in the third quarter of 2024 as compared to the third quarter of 2023 due to the lower sales base in the 2024 period.
SG&A expenses were $75.8 million for the first nine months of 2024, up from $74.1 million in the same period of 2023. This increase in SG&A was largely the result of a $4.3 million increase in professional fees related to the acquisition of Enercon, offset by a $3.7 million decline in legal fees largely due to costs associated with the aforementioned MPS patent infringement lawsuit further described in Note 15, "Commitments and Contingencies", which did not recur in the first nine months of 2024. Salaries and fringe benefits increased by of $2.8 million and there was also an increase of $0.4 million in a variety of other expenses, including amortization, advertising and travel in the first nine months of 2024 as compared to same period of 2023. These increases were offset by a decline of $1.3 million in commissions and a $0.5 million decline in business promotion expenses during the nine months ended September 30 2024, as compared to the same period of 2023 due to the lower sales base in the 2024 period.
Other (Expense) Income, Net
Other (expense) income, net was ($1.3) million and ($0.1) million for the three months ended September 30, 2024 and 2023, respectively. The year-over-year change within this line item was largely driven by the market fluctuations in our SERP investments which resulted in a gain of $0.5 million and loss of $0.5 million during the three months ended September 30, 2024 and 2023, respectively. The Company also recorded losses of $0.2 million and $0.3 million associated with its investment in innolectric during the third quarters of 2024 and 2023, respectively. We also realized foreign exchange transactional losses of $1.6 million during the three-month period ended September 30, 2024 versus a gain of $0.2 million for the same period in 2023 due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, versus those in effect at June 30, of each year.
Other (expense) income, net was less than $0.1 million and ($0.3) million for the nine months ended September 30, 2024 and 2023, respectively. The year-over-year change within this line item was largely driven by the market fluctuations in our SERP investments which resulted in a gain of $1.3 million during the nine months ended September 30, 2024 and a gain of $0.3 million during the same period in 2023. The Company also recorded $0.3 million of loss associated with its investment in innolectric during the nine months ended September 30, 2024. We also realized foreign exchange transactional losses of $1.3 million during the nine months ended September 30, 2024, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, 2024 versus those in effect at December 31, 2023. This compares to foreign exchange transactional losses of $0.1 million recorded during the nine months ended September 30, 2023.
Provision for Income Taxes
The Company’s effective tax rate will fluctuate based on the geographic regions in which the pretax profits are earned. Of the jurisdictions in which the Company operates, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of the Company’s three geographic regions. See Note 12, “Income Taxes”.
The provision for income taxes for the three months ended September 30, 2024 and 2023 was $3.1 million and $4.3 million, respectively. The Company’s earnings before income taxes for the three months ended September 30, 2024, were $12.6 million lower when compared with the same period in 2023, primarily attributable to a decrease in income from all of the regions. The Company’s effective tax rate was 27.8% and 18.2% for the three months ended September 30, 2024 and 2023, respectively. The change in the effective tax rate during the three months ended September 30, 2024 as compared to the same period in 2023, is primarily attributable to an increase in tax expense relating to prior period accruals, as well as a decrease in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statute of limitations. See Note 12, “Income Taxes”.
The provision for income taxes for the nine months ended September 30, 2024 and 2023 was $11.7 million and $8.0 million, respectively. The Company’s earnings before income taxes for the nine months ended September 30, 2024, were approximately $15.4 million lower when compared with the same period in 2023, primarily attributable to decrease in income from the North America and Asia regions, partially offset by an increase in the Europe region. The Company’s effective tax rate was 21.4% and 11.5% for the nine months ended September 30, 2024 and 2023, respectively. The change in the effective tax rate during the nine months ended September 30, 2024 as compared to the same period in 2023, is primarily attributable to an increase in tax expense relating to valuation allowances and prior period accruals as well as a decrease in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statute of limitations. See Note 12, “Income Taxes”.
Liquidity and Capital Resources
Our principal sources of liquidity include $134.3 million of cash and cash equivalents at September 30, 2024, $29.5 million of held to maturity investments in U.S. Treasury securities, 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, purchases of common stock under our Repurchase Program, and debt obligations and other long-term liabilities. Our liquidity may also be utilized to fund potential acquisitions in future periods. 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.
Cash Flow Summary
During the nine months ended September 30, 2024, our cash and cash equivalents increased by $44.9 million. This increase was primarily due to the following:
| • | net cash provided by operating activities of $65.7 million; and | |
| • | proceeds from held to maturity securities of $139.3 million; partially offset by: | |
| • | purchases of held to maturity and marketable securities of $131.3 million; | |
| • | purchases of common stock under our Repurchase Program of $16.1 million; | |
| • | purchases of property, plant and equipment of $7.9 million; and | |
| • | dividend payments of $2.5 million. |
During the nine months ended September 30, 2024, our accounts receivable decreased by $8.4 million due to lower sales volume in the third quarter. Days sales outstanding (DSO) was 57 days at September 30, 2024 and 55 days at December 31, 2023. Inventory decreased by $12.3 million at September 30, 2024 compared to December 31, 2023, as component availability has started to ease and we have worked to consume our inventory on hand. Inventory turns were 2.6 at September 30, 2024 as compared to 3.1 at December 31, 2023.
Cash and cash equivalents, held to maturity U.S. Treasury securities and accounts receivable comprised approximately 41.0% and 36.9% of our total assets at September 30, 2024 and at December 31, 2023, respectively. Our current ratio (i.e., the ratio of current assets to current liabilities) was4.0 to 1 at September 30, 2024 and 3.4 to 1 at December 31, 2023. At September 30, 2024 and December 31, 2023, $50.5 million and $40.9 million, respectively (or 38% and 46%, respectively), of our cash and cash equivalents was held by our foreign subsidiaries. We repatriated $11 million from outside of the U.S. during the nine months ended September 30, 2024. 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 our U.S. operations in the future. In the event these funds were needed for our U.S. operations, we would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.
Future Cash Requirements
We expect foreseeable liquidity and capital resource requirements in the ordinary course to be met through existing cash and cash equivalents and anticipated cash flows from operations, as well as borrowings available under our revolving credit facility, if needed. Our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Other than cash requirements arising from the Enercon acquisition pursuant to the Enercon Purchase Agreement expected to close in the fourth quarter of 2024 as described in the immediately following paragraph, there were no material changes to our future cash requirements during the nine months ended September 30, 2024.
In September 2024, the Company entered into the Enercon Purchase Agreement, as further described above in "Recent Developments - Agreement to Acquire Enercon". The transaction is expected to close during the fourth quarter of 2024 subject to satisfaction of customary closing conditions. The Company anticipates funding the acquisition of the 80% stake in Enercon through approximately $80 million of cash on hand and $240 million of incremental borrowings under its credit facility. Pursuant to the terms and conditions of the Enercon Purchase Agreement, there is $10 million of potential earnout payments for the 2025-2026 period, with the intent to purchase the remaining 20% by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing and subject to the terms and pricing prescribed thereby, which include future EBITDA performance.
Credit Facility
In September 2021, we entered into the Existing Credit Agreement, as further described in Note 11, "Debt". During January 2023, we amended the Existing 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. The Existing Credit Agreement contains customary representations and warranties, covenants and events of default. In addition, the Existing Credit Agreement contains financial covenants that measure (i) the ratio of our total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of our consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of our consolidated EBITDA to our consolidated fixed charges (“Fixed Charge Coverage Ratio”). If an event of default occurs, the lenders under the Existing Credit Agreement 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.
Concurrently with the entry into the Enercon Purchase Agreement, Bel entered into a Commitment Letter, dated September 18, 2024, as further described in Note 11, to increase the Maximum Revolving Amount available under the Existing Credit Agreement’s revolving credit facility by an aggregate of $150 million to an aggregate amount of $325 million.
Among the satisfaction of other conditions and deliverables, the completion of the Revolving Facility Increase will be subject to the execution and delivery of an amendment to, or an amendment and restatement of, the Existing Credit Agreement.
In connection with Bel’s entry into the Commitment Letter, on September 18, 2024, Bel entered into a Second Amendment which makes certain amendments to the Existing Credit Agreement, including (i) increasing the cap set forth in Section 2.10(b) (governing “Increase in Commitment”) of the Existing Credit Agreement by $50 million to $150 million, (ii) adding certain customary provisions permitting the use of revolving loans on a limited conditions basis to finance the Enercon acquisition, and (iii) permitting the Enercon acquisition under the Credit Agreement.
At September 30, 2024, we were in compliance with our debt covenants, including the most restrictive covenant, the Fixed Charge Coverage Ratio. The unused credit available under the credit facility at September 30, 2024 was $115.0 million, all of which we had the ability to borrow without violating our Leverage Ratio covenant based on our existing consolidated EBITDA.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements include certain amounts that are based on management's best estimates and judgments. We 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 our critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes in our critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in our 2023 Annual Report on Form 10-K.
Recent Accounting Pronouncements
The discussion of new financial accounting standards applicable to our Company is incorporated herein by reference to Note 1, “Basis of Presentation and Accounting Policies”.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk primarily from changes in foreign currency exchange rates and changes in interest rates associated with its long-term debt. Under the Company’s risk management strategy, the Company periodically uses foreign currency forward contracts to manage its short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. To partially mitigate risks associated with the variable interest rates on revolver borrowings under the Company's credit agreement (see Note 11, “Debt”, to the condensed consolidated financial statements herein, and Note 11, “Debt”, to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023), the Company maintains two pay-fixed, receive-variable interest rate swap agreements with two multinational financial institutions (see Note 10, “Derivative Instruments and Hedging Activities”, to the condensed consolidated financial statements herein, and Note 13, “Derivative Instruments and Hedging Activities”, to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023). The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. The Company enters into these contracts in the normal course of business to mitigate risks and not for speculative purposes. There have not been any material changes with regard to market risk during the nine months ended September 30, 2024. Refer to Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of market risks.
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
The information called for by this Item is incorporated herein by reference to Note 15, "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.
The risk factors described below, supplement the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The risk factors set forth below, together with the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, except as supplemented by the risk factors described below. 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, assumptions and uncertainties 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.
The Enercon Purchase Agreement includes a number of closing conditions and, if these conditions are not satisfied, the Enercon Purchase Agreement may be terminated in accordance with its terms and the acquisition may not be completed. We may fail to consummate the proposed Enercon acquisition, may not consummate the proposed acquisition on expected terms, or may not achieve the expected benefits.
In September 2024, we entered into the definitive Enercon Purchase Agreement with the Sellers to acquire an 80% stake in Enercon upfront at the closing, with the intent to purchase the remaining 20% interest in Enercon by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing. It is currently anticipated that the acquisition of the 80% interest pursuant to the Enercon Purchase Agreement will be completed in the fourth quarter of 2024. However, completion of the proposed Enercon acquisition is subject to satisfaction of customary closing conditions, including applicable regulatory approvals. Until all such closing conditions are satisfied or waived, the possible timing and likelihood of completion of the proposed Enercon acquisition are uncertain, and, accordingly, there can be no assurance that the Enercon acquisition will be completed on the expected terms, on the anticipated timing or at all. The Enercon Purchase Agreement may also be terminated prior to the consummation of the transaction by the mutual written consent of Bel and the Sellers and in certain other circumstances, including a termination right by either Bel or the Sellers, subject to certain terms and conditions, if the Closing has not occurred on or prior to the date six months following execution of the Enercon Purchase Agreement. We may experience unanticipated difficulties, delays, and expenditures relating to the proposed Enercon acquisition. Any delay in consummation of the Enercon acquisition may result in greater transaction costs and professional fees incurred by us. In addition, even if the proposed acquisition of the majority 80% stake in Enercon is completed pursuant to the Enercon Purchase Agreement, there can be no assurances that we will complete the acquisition of the remaining 20% interest in Enercon by early 2027 as intended.
Our efforts to complete the Enercon acquisition could cause substantial disruptions in our business. A substantial amount of our management’s attention is being directed towards the completion of the Enercon acquisition and such distraction could affect our management’s ability to service our existing business, pursue other business opportunities or could otherwise adversely affect our business. The announcement, pendency, and efforts to implement the acquisition may disrupt our and Enercon’s plans, operations and relationships with customers, suppliers, distributors, business partners and regulators, and can cause potential difficulties in employee retention.
If consummated, the success of the Enercon acquisition will depend, in significant part, on our ability to successfully integrate the acquired business, establish and maintain good relationships with new and existing customers, suppliers, and other business partners, grow the revenue of the consolidated company and realize the anticipated strategic benefits and synergies. The combination of businesses is a complex, costly and time-consuming process. As a result, we expect to devote significant management attention and resources prior to closing to prepare for integration, and we expect to devote significant management attention and resources post-closing to integrate the business practices and operations. The integration process may disrupt the businesses and, if implemented ineffectively, would impair the realization of the full expected benefits. The anticipated opportunities in terms of potential growth and expansion offered by, and the anticipated benefits of, the Enercon acquisition may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, strategic and revenue opportunities, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Enercon acquisition within a reasonable time, our business, financial condition and operating results may be materially adversely affected.
We may face risks related to conducting business in Israel following the Enercon acquisition, as conditions in Israel may materially and adversely affect Enercon’s business and as a result the business of consolidated Bel.
If we successfully complete the acquisition of a majority stake in Enercon, we may be subject to, and possibly adversely affected by, risks related to conducting business in Israel. Enercon, the target of our proposed Enercon acquisition in which we will acquire an upfront 80% stake at the closing expected to occur in fourth quarter of 2024 and intend to acquire the remaining 20% interest by early 2027, is based in Netanya, Israel with additional facilities in New Hampshire, U.S. and Haryana, India. Enercon has approximately 300 employees located in Israel.
Companies based in or operating in, or having a significant number of employees located in Israel, may be more susceptible to political and economic instability. Political, economic and military conditions in Israel may directly affect their business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighbors. In October 2023, Hamas conducted several terrorist attacks in Israel resulting in ongoing war across the country, forcing the closure of many businesses in Israel for several days. In addition, there continue to be hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disruption of economic activities. In early 2023, there were a number of changes proposed to the political system in Israel by the current government which, if implemented as planned, could lead to large-scale protests and additional uncertainty, negatively impacting the operating environment in Israel. Uprisings in various countries in the Middle East over the last few years have also affected the political stability of those countries and have led to a decline in the regional security situation. Such instability may also lead to deterioration in the political and trade relationships that exist between Israel and these countries. Any armed conflicts, terrorist activities or political instability involving Israel or other countries in the region, as well as any interruption or curtailment of trade between Israel and its present trading partners, could adversely affect the business, results of operations, financial condition, cash flows and prospects of Enercon, and of consolidated Bel following the closing of the Enercon acquisition. In addition, any of these events or circumstances involving Israel or the region prior to the closing of the Enercon acquisition may delay or prevent the closing of the proposed Enercon acquisition.
A number of countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continue or intensify. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on policies promulgated by the Israeli Government. Such boycotts, particularly if they become more widespread, may adversely impact Enercon’s business or our business.
The operations of the Enercon business could also be disrupted by the absence for significant periods of one or more key employees or a significant number of other employees because of military service. Enercon’s employees in Israel may be obligated to perform military reserve duty, and in certain emergency circumstances, employees may be called to immediate and unlimited active duty in the Israeli armed forces.
Demand in Enercon’s end markets can be cyclical, impacting the demand for its products, and Enercon’s business could be materially adversely affected by reductions in defense spending.
Enercon, in which we intend to acquire a majority stake pursuant to the Enercon Purchase Agreement, is a leading supplier of highly customized power conversion and networking solutions to aerospace and defense markets globally. For full fiscal year 2024, an estimated 93% and 7% of Enercon’s projected revenue is attributable to the defense and aerospace end markets, respectively. Demand in Enercon’s end-use markets can be sensitive to general economic conditions, competitive influences, and fluctuations in inventory levels throughout the supply chain. Enercon’s sales are sensitive to the market conditions present in the industries in which the ultimate consumers of its products operate, which in some cases have been highly cyclical and subject to substantial downturns.
As a result of the high correlation to government spending on defense and budgeting, Enercon has experienced, and in the future, it may experience, significant fluctuations in sales and results of operations with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations and liquidity.
Because certain of Enercon’s products are used in a variety of land, air and sea defense applications, Enercon derives a substantial portion of its revenue from the defense industry. For full fiscal year 2024, an estimated 93% of Enercon’s projected revenue is derived from customers in the defense industry. Although many of the programs under which Enercon sells products to prime U.S. and Israeli government contractors extend several years, they are subject to annual funding through governmental appropriations. While spending authorizations for defense-related programs by the U.S. and Israeli governments have increased in recent years, these spending levels may not be sustainable and could significantly decline. Future levels of expenditures, authorizations, and appropriations for programs Enercon supports may decrease or shift to programs in areas where Enercon does not currently provide services. Changes in spending authorizations, appropriations, and budgetary priorities could also occur due to a shift in the number, and intensity, of potential and ongoing conflicts, shifts in spending priorities from national defense as a result of competing demands for government funds, or other factors. Enercon’s business prospects, financial condition or operating results could be materially harmed among other causes by the following: 1) budgetary constraints affecting U.S. and/or Israeli government spending generally, or specific departments or agencies in particular, and changes in available funding; 2) changes in government programs or requirements; and 3) a prolonged government shutdown and other potential delays in the appropriations process.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (1)
The following table summarizes the activity related to repurchases of our equity securities during the quarter ended September 30, 2024 pursuant to the Repurchase Program (as defined below):
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (dollars in thousands) |
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| July 1, 2024 – July 31, 2024 |
5,726 (Class A) 20,921 (Class B) |
$83.41 (Class A) $66.92 (Class B) |
5,726 (Class A) 20,921 (Class B) |
$2,093 (Class A) $6,854 (Class B) |
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| August 1, 2024 – August 31, 2024 | - (Class A) - (Class B) |
$- (Class A) $- (Class B) |
- (Class A) - (Class B) |
$2,093 (Class A) $6,854 (Class B) |
||||
| September 1, 2024 – September 30, 2024 | - (Class A) - (Class B) |
$- (Class A) $- (Class B) |
- (Class A) - (Class B) |
$2,093 (Class A) $6,854 (Class B) |
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| Total | 5,726 (Class A) 20,921 (Class B) |
$83.41 (Class A) $66.92 (Class B) |
5,726 (Class A) 20,921 (Class B) |
$2,093 (Class A) $6,854 (Class B) |
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(1) On February 21, 2024, the Company’s Board of Directors authorized and the Company publicly announced a $25.0 million share repurchase program (the “Repurchase Program”). The Repurchase Program authorizes the repurchase of up to $25.0 million of shares of outstanding Class A Common Stock and Class B Common Stock. The aggregate $25.0 million available for repurchases under the Repurchase Program has been suballocated for purchases of Class A shares and Class B shares in portions of $4.0 million and $21.0 million, respectively, prorated to take into account the number of outstanding shares of each respective class. Shares of Common Stock may be repurchased pursuant to the Repurchase Program in open market, privately negotiated or block transactions or otherwise from time to time, depending upon market conditions and other factors, and in accordance with applicable law and regulations. The Repurchase Program has no expiration date. The Repurchase Program does not obligate the Company to repurchase any dollar amount or number of shares, and the Repurchase Program may be suspended or terminated at any time.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Rule 10b5-1 Trading Arrangements and Non-Rule 10b5-1 Trading Arrangements
During the fiscal quarter ended September 30, 2024, of our officers or directors, as those terms are defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K.
Other Information
The discussion captioned “Overview – Key Factors Affecting our Business – Restructuring,” as set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” above, is hereby incorporated by reference into this Part II, Item 5, of this Quarterly Report on Form 10-Q.
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| 2.1 | Share Purchase Agreement, dated as of September 19, 2024, by and among Bel Fuse Inc., Enercon Technologies Ltd., and the Shareholders of Enercon Technologies Ltd.† (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 24, 2024). |
| 10.1 | |
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| 10.3 | |
| 31.1* |
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| 32.1** |
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| 32.2** |
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| 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) |
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| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 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.
† Annexes, schedules and/or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby agrees to furnish supplementally a copy of any omitted attachment to the SEC on a confidential basis upon request.
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.
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BEL FUSE INC. |
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| Date: October 29, 2024 | By: |
/s/ Daniel Bernstein |
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Daniel Bernstein |
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President and Chief Executive Officer (Principal Executive Officer) |
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| Date: October 29, 2024 | By: |
/s/ Farouq Tuweiq |
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Farouq Tuweiq |
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Chief Financial Officer (Principal Financial Officer) |