Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information in this MD&A should be read in conjunction with the Company's consolidated financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to imply any conclusion that such results, causes or trends will necessarily continue in the future. See "Cautionary Notice Regarding Forward-Looking Information" above for further information. Also, when we cross reference to a "Note," we are referring to our "Notes to Consolidated Financial Statements," unless the context indicates otherwise. All amounts and percentages are approximate due to rounding.
Under the SEC's amended definition of a "smaller reporting company," the Company is deemed to be a smaller reporting company. Accordingly, among other things, when it became eligible to use smaller reporting company disclosures, the Company reduced the number of years covered by its consolidated financial statements in Item 8.
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. Bel's portfolio of products also finds application in the automotive, medical, broadcasting and consumer electronics markets.
We operate through three product group segments, in addition to a Corporate segment. In 2022, 44% of the Company's revenues were derived from Power Solutions and Protection, 29% from Connectivity Solutions and 27% from our Magnetic Solutions operating segment.
Our operating expenses are driven principally by the cost of labor where the factories that Bel uses 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 labor cost and fringes and related allocations of factory overhead. Our products are manufactured at various facilities in the U.S., Mexico, India, the Dominican Republic, the United Kingdom, Czech Republic, Slovakia and the PRC.
We have little visibility into the ordering habits of our customers and we can be subjected to large and unpredictable variations in demand for our products. Accordingly, we must continually recruit and train new workers to replace those lost to attrition and be able to address peaks in demand that may occur from time to time. These recruiting and training efforts and related inefficiencies, and overtime required in order to meet any increase in demand, can add volatility to the labor costs incurred by us.
The Effects of COVID-19 on Bel’s Business
The Company continues to be focused on the safety and well-being of its associates around the world in light of COVID-19 and the variants of COVID that have followed. A significant amount of products manufactured by Bel are utilized in military, medical and networking applications, and are therefore deemed essential by many of the jurisdictions in which we operate. Our management team closely monitors the situation at each of Bel's facilities and has been able to effectively respond in implementing our business continuity plans around the world. Protective measures, where possible, remain in place throughout our facilities. The majority of our office staff now follow a hybrid work schedule. The combination of protective measures at our factories coupled with remote work arrangements have enabled us to maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
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Throughout 2021 and 2022, pandemic-related issues have created additional port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. In order to better control our costs, the expediting of raw material deliveries has been generally reserved for customer-specific requests for expedited timing whereby our end customer has agreed to pay the incremental fee. Further, the majority of our product is shipped via air, and we have therefore been minimally impacted by ocean-related logistic constraints. During March 2022, the PRC government issued a notice with immediate effect whereby certain regions were temporarily shut down to perform widespread testing in response to a COVID outbreak in those regions and in accordance with Beijing’s "zero-tolerance" policy at the time. Our Bel Power Solutions manufacturing facility in Shenzhen, China and our Magnetics TRP manufacturing facility in Changping, China were closed for approximately one week during the month of March 2022 while residents underwent testing. Upon the discontinuation of COVID protocols in the PRC in late 2022, we experienced approximately 3-4 weeks between December 2022 and January 2023 where the attendance rate of workers at our factories in the PRC were very low due to COVID outbreaks in the regions in which we operate. As of early February 2023 (following the Lunar New Year holiday), attendance rates at all of our factories in the PRC are in the 90%-95% range. We do not believe the aforementioned low attendance rates had a material impact on Bel's financial results in December 2022 or January 2023. To date, the COVID-related transportation delays and local outbreaks have not materially impacted our ability to operate our business or achieve our business goals.
Based on our analysis of ASC 350 and ASC 360 during the year ended December 31, 2022, we are not aware of any potential triggering events for impairment of our goodwill, indefinite-lived intangible assets or finite-lived assets. The Company will continue to assess the relevant criteria on a quarterly basis based on updated cash flow and market assumptions. Unfavorable changes in cash flow or market assumptions could result in impairment of these assets in future periods.
As our operations have continued, albeit at slightly reduced production and efficiency rates, we have not experienced a negative impact on our liquidity to date. Our balance of cash on hand continues to be strong at $70.3 million at December 31, 2022 as compared to $61.8 million at December 31, 2021. The Company also has availability under its current revolving credit facility; as of December 31, 2022, the Company could borrow an additional $80.0 million while still being in compliance with its debt covenants. However, any further pressure or negative impact to our financial results related to COVID would have a related negative impact on our financial covenants outlined in our credit agreement, which would impact the amount available to borrow under our revolving credit facility. The management team closely monitors the rapidly changing COVID situation and has developed plans which could be implemented to minimize the impact to the Company in the event the situation deteriorates.
Our statements regarding the future impact of COVID represent Forward-Looking Statements. See “Cautionary Notice Regarding Forward-Looking Information.”
Other Key Factors Affecting our Business
The Company believes the key factors affecting Bel's 2022 and/or future results include the following:
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Looking ahead, the focus will be on profitable growth by investing in key and high-growth market segments, new business development and internal investments needed to support our customers. We believe that we will benefit from our diversity in end markets in 2023, as lower bookings from our networking customers are expected to be offset by higher demand from the commercial aerospace and eMobility markets, which generally have a bright outlook for the year and beyond. The preceding sentences represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
Results of Operations - Summary by Operating Segment
Net Sales and Gross Margin
The Company's net sales and gross margin by major product line for the years ended December 31, 2022 and 2021 were as follows (dollars in thousands):
Year Ended
December 31,
Net Sales Gross Margin
Connectivity Solutions:
Sales of our Connectivity Solutions products increased by $22.0 million in 2022 as compared to 2021. This increase was primarily due to the continued rebound in demand from direct and after-market commercial aerospace customers of $13.4 million (76%) during 2022 as compared to 2021. Other increases in sales related to higher demand for our passive connector and cabling products for use in premise wiring applications and an increased volume of Connectivity Solutions products sold through our distribution channels. These sales increases were partially offset by a decline in military sales of $4.9 million (12%) during 2022 as compared to 2021. Gross margins for 2022 were unfavorably impacted by incremental costs and operational inefficiencies related to the ramp-up in commercial aerospace demand.
Magnetic Solutions:
Sales of our Magnetic Solutions products improved by $18.4 million during 2022 as compared to 2021. Demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver of the sales increase. The higher sales volume, coupled with pricing actions and favorable exchange rates with the Chinese renminbi versus the U.S. dollar, were the primary drivers of gross margin improvement for this product group compared with 2021.
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Power Solutions and Protection:
Sales of our Power Solutions and Protection products were higher by $70.3 million during 2022 as compared to 2021. The sales increase was led by approximately $32.5 million in raw material surcharge invoicing, the inclusion of EOS, which was acquired in March 2021 and contributed incremental sales of $5.2 million, a $4.4 million (18.4%) increase in circuit protection product sales, a $8.7 million (15.6%) increase in CUI sales, and a $10.4 million (105%) increase in sales of product going into the eMobility end market. Gross margin improved in 2022 as compared to 2021 as pricing actions, higher sales volume, favorable exchange rates with the Chinese renminbi versus the U.S. dollar, and a favorable shift in product mix offset the impact of increased material costs.
Cost of Sales
Cost of sales as a percentage of net sales for the years ended December 31, 2022 and 2021 consisted of the following:
Year Ended
December 31,
Labor costs 8.3 % 9.0 %
Total cost of sales 72.0 % 75.3 %
Material costs as a percentage of sales during 2022 were fairly stable compared to 2021, as recent pricing actions are helping to offset the continued heightened cost of certain raw materials. Labor costs as a percentage of sales have decreased from 2021 due to the favorable fluctuation in the Chinese renminbi exchange rate versus the U.S. Dollar. These lower labor costs as a percentage of sales were offset, in part, by incremental labor costs at our Connectivity group related to recruiting and training of new factory associates to accommodate the increase in demand from the commercial aerospace end market in 2022.
The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (i.e. rent, utilities, insurance). In total, these other expenses increased during 2022 by $11.1 million as compared to 2021. The recent ramp-up in commercial aerospace demand has resulted in significant headcount increases at our factories that support this end market, restoring some of the indirect labor and overhead expenses that had been previously reduced when demand was lower. Further, certain of our other factories have started to run additional shifts to accommodate the increase in demand from our customers, resulting in higher overhead costs. In addition to an increase in support labor headcount, wage rate increases, both inflationary and government-mandated increases to minimum wage rates, have led to higher costs in 2022 as compared to 2021.
Research and Development ("R&D")
R&D expenses were $20.2 million and $21.9 million for the years ended December 31, 2022 and 2021, respectively. The reduction in R&D expenses during 2022 is largely due to the favorable exchange rate environment related to the Euro and Chinese renminbi versus the U.S. Dollar in 2022.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses were $92.3 million in 2022 as compared with $86.6 million in 2021. Within SG&A, increases in office expenses of $2.8 million, SG&A salaries and fringe benefits of $2.8 million, sales commissions to reps of $1.7 million, and $1.1 million of higher advertising costs were partially offset by a $1.5 million reduction in legal and professional fees as compared to 2021.
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Restructuring Charges
The Company recorded $7.3 million of restructuring charges in 2022 in connection with the facility consolidations further described in "Other Key Factors Affecting our Business" above. In 2021, the Company recorded $1.2 million of restructuring charges related to the consolidation of its DC/DC power product line into a single factory, and the discontinuation of its custom modules product line.
Gain on Sale of Property
During 2022, the Company recorded a gain of $1.6 million related to the sale of one of its properties in Jersey City, New Jersey. In 2021, a gain of $6.6 million was recorded in connection with the sale of a property in Hong Kong.
Interest Expense
The Company incurred interest expense of $3.4 million in 2022 and $3.5 million in 2021 primarily due to its outstanding borrowings under the Company's credit and security agreement. The slight reduction in interest expense during 2022 related to a lower debt balance throughout 2022 as compared to 2021, largely offset by higher interest rates on the Company's variable portion of its outstanding balance during 2021. See "Liquidity and Capital Resources" and Note 10, "Debt" of the Notes to our Consolidated Financial Statements for further information on the Company's outstanding debt.
Other Expense, Net
Other expense, net was $2.7 million in 2022 compared to $0.4 million in 2021. The Company recorded a loss of $2.2 million related to its SERP investments in 2022 as compared to a gain of $1.3 million in 2021.
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 9, “Income Taxes”.
2022 as Compared to 2021
The provision for income taxes for the years ended December 31, 2022 and 2021 was $6.4 million and $2.5 million, respectively. The Company’s earnings before income taxes for the year ended December 31, 2022 were approximately $31.7 million higher as compared with the year ended December 31, 2021, primarily attributable to an increase in income in the Asia and North America regions. The Company’s effective tax rate was 10.8% and 9.2% for the years ended December 31, 2022 and 2021, respectively. The change in the effective tax rate during the year ended December 31, 2022 as compared to fiscal year 2021 is primarily attributable to an increase in U.S. tax expense resulting from higher U.S. income, which was offset by a decrease in tax expense relating to the addition of uncertain tax positions.
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Other Tax Matters
The Company has a portion of its products manufactured on the mainland of the PRC where Bel is not subject to corporate income tax on manufacturing services provided by third parties. Hong Kong has a territorial tax system which imposes corporate income tax at a rate of 16.5% on income from activities solely conducted in Hong Kong.
The Company holds an offshore business license from the government of Macao. With this license, a Macao offshore company named Bel Fuse (Macao Commercial Offshore) Limited has been established to handle the Company’s sales to third-party customers in Asia. Sales by this company primarily consist of products manufactured in the PRC. The Macao corporate profit taxes imposes a tax rate of 12% on income from activities solely conducted in Macao.
Due to the practicality of determining the deferred taxes on outside basis differences in our investments in our foreign subsidiaries, management has not provided for deferred taxes on outside basis differences at December 31, 2022 and deemed that these basis differences will be indefinitely reinvested.
Inflation and Foreign Currency Exchange
During the past two years, we do not believe the effect of inflation was material to our consolidated financial position or our consolidated results of operations. We are exposed to market risk from changes in foreign currency exchange rates. Fluctuations of the U.S. dollar against other major currencies have not significantly affected our foreign operations as most sales continue to be denominated in U.S. dollars or currencies directly or indirectly linked to the U.S. dollar. Most significant expenses, including raw materials, labor and manufacturing expenses, are incurred primarily in U.S. dollars or the Chinese renminbi, and to a lesser extent in British pounds, Indian rupees and Mexican pesos. The Euro and British pound each depreciated by 12%, the Indian rupee depreciated by 6% and the Chinese renminbi depreciated by 4% versus the U.S. dollar in 2022 compared to 2021. To the extent the renminbi or peso appreciate in future periods, it could result in the Company's incurring higher costs for most expenses incurred in the PRC and Mexico. 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 as further described in Note 12, "Derivative Instruments and Hedging Activities". The Company's European entities, whose functional currencies are Euros, British pounds and Czech korunas, enter into transactions which include sales that are denominated principally in Euros, British pounds and various other European currencies, and purchases that are denominated principally in U.S. dollars and British pounds. Such transactions, as well as those related to our multi-currency intercompany payable and receivable transactions, resulted in a net realized and unrealized currency exchange gain of $0.3 million in 2022 and a loss of less than $0.1 million in 2021 which were included in other expense, net on the consolidated statements of operations. Translation of subsidiaries' foreign currency financial statements into U.S. dollars resulted in translation adjustments, net of taxes, of ($8.2) million and ($1.8) million for the years ended December 31, 2022 and 2021, respectively, which are included in accumulated other comprehensive loss on the consolidated balance sheets.
Liquidity and Capital Resources
Our principal sources of liquidity include $70.3 million of cash and cash equivalents at December 31, 2022, cash provided by operating activities and borrowings available under our credit facility. We expect to use this liquidity for operating expenses, investments in working capital, capital expenditures, interest, taxes, dividends, debt obligations and other long-term liabilities. We believe that our current liquidity position and future cash flows from operations will enable us to fund our operations, both in the next twelve months and in the longer term.
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Cash Flow Summary
During the year ended December 31, 2022, the Company's cash and cash equivalents increased by $8.5 million. This increase was primarily due to the following:
• net cash provided by operating activities of $40.3 million; and
• purchases of property, plant and equipment of $8.8 million;
• dividend payments of $3.4 million; and
• repayments under our revolving credit line of $17.5 million.
During the year ended December 31, 2021, the Company's cash and cash equivalents decreased by $23.2 million. This decrease was primarily due to cash paid for acquisitions of $16.8 million, the purchase of property, plant and equipment of $9.4 million, net payments to our credit facility of $4.3 million, and dividend payments of $3.4 million, partially offset by cash provided by operations of $4.6 million and proceeds from the sale of properties of $7.3 million.
During the year ended December 31, 2022, accounts receivable increased $20.7 million primarily due to the higher sales volume in the second half of 2022 as compared to the same period of 2021. Days sales outstanding (DSO) increased to 58 days at December 31, 2022 from 54 days at December 31, 2021. Inventories increased by $36.6 million from the December 31, 2021 level as raw material supply constraints hindered our ability, and our end customers' ability, to fully manufacture our respective finished goods. Inventory turns, excluding R&D, were 2.6 times for the year ended December 31, 2022 as compared to 3.1 times for the year ended December 31, 2021.
Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 31.7% and 29.1% of the Company's total assets at December 31, 2022 and December 31, 2021, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 2.8 to 1 and 2.9 to 1 at December 31, 2022 and December 31, 2021, respectively. At December 31, 2022 and 2021, $50.1 million and $42.0 million, respectively (or 71% and 68%, respectively), of cash and cash equivalents was held by foreign subsidiaries of the Company. During 2022, the Company repatriated $13.0 million of funds from outside of the U.S., with minimal incremental tax liability. We continue to analyze our global working capital and cash requirements and the potential tax liabilities attributable to further repatriation, and we have yet to make any further determination regarding repatriation of funds from outside the U.S. to fund the Company's U.S. operations in the future. In the event these funds were needed for Bel's U.S. operations, the Company would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.
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Future Cash Requirements
The Company expects foreseeable liquidity and capital resource requirements to be met through existing cash and cash equivalents and anticipated cash flows from operations, as well as borrowings available under its revolving credit facility, if needed. The Company's material cash requirements arising in the normal course of business primarily include:
Debt Obligations and Interest Payments - The Company had $95.0 million outstanding under its revolving credit facility at December 31, 2022, as further described below and in Note 10, "Debt". During January 2023, the Company borrowed an additional $5.0 million from the revolving credit facility to fund its large annual payments related to incentive compensation and insurance payments. There are no mandatory principal payments due on the credit facility borrowings during 2023. The current balance of $100.0 million is due upon expiration of the credit facility on September 1, 2026. Anticipated interest payments due amount to $19.5 million, of which $5.3 million is expected to be paid in 2023 based on our debt balance and interest rate in place at December 31, 2022.
Lease Obligations - The Company has operating leases for its facilities used for manufacturing, research and development, sales and administration. There are also operating and finance leases related to manufacturing equipment, office equipment and vehicles. As of December 31, 2022, the Company was contractually obligated to pay future operating lease payments of $25.1 million, of which $6.8 million is expected to be paid in 2023, and future financing lease obligations of $2.5 million, of which $0.6 million is expected to be paid in 2023. See Note 17, "Leases" for further information.
Purchase Obligations - The Company submits purchase orders for raw materials to various vendors throughout the year for current production requirements, as well as forecasted requirements. Certain of these purchase orders relate to special purpose material and, as such, the Company may incur penalties if an order is cancelled. The Company had outstanding purchase orders related to raw materials in the amount of $113.4 million at December 31, 2022, of which $97.2 million is expected to be paid in 2023. The Company also had outstanding purchase orders related to capital expenditures which totaled $7.8 million at December 31, 2022, of which $7.7 million is expected to be paid in 2023.
Pension Benefit Obligations - As further described in Note 14, "Retirement Fund and Profit Sharing Plan", the Company maintains a Supplemental Executive Retirement Plan ("SERP"). At December 31, 2022, estimated future obligations under the plan amounted to $18.2 million. It is expected that the Company will pay $0.9 million in benefit payments in connection with the SERP during 2023. Included in other assets at December 31, 2022 is the cash surrender value of company-owned life insurance and marketable securities held in a rabbi trust with an aggregate value of $14.0 million, which has been designated by the Company to be utilized to fund the Company's SERP obligations.
Dividends - The Company has historically paid quarterly dividends on its two classes of common stock, which amounted to $3.4 million in each of 2021 and 2022. Consistent with the dividend rates declared in prior years, Bel's Board of Directors declared dividends on October 26, 2022 and again on February 22, 2023 on each of our two classes of common stock. These two quarterly payments will be made in the first half of 2023 in the total anticipated amount of $1.7 million.
Tax Payments - At December 31, 2022, we had liabilities for unrecognized tax benefits and related interest and penalties of $24.8 million, all of which is included in other liabilities on our consolidated balance sheet. At December 31, 2022, we cannot reasonably estimate the future period or periods of cash settlement of these liabilities. See Note 9, "Income Taxes," for further discussion. Also included on our consolidated balance sheet at December 31, 2022 is $6.2 million of liabilities for transition tax associated with the 2017 U.S. tax reform, of which $2.0 million is expected to be paid in 2023.
Credit Facility
In September 2021, the Company entered into a new credit facility (the "New Credit Agreement") which amends, restates and supersedes the Prior Credit Agreement, as further described in Note 10, "Debt". The New Credit Agreement contains customary representations and warranties, covenants and events of default. In addition, the New 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 New 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.
At
December 31, 2022, the Company had $95.0 million outstanding under its New Credit Agreement. The unused credit available under the credit facility at December 31, 2022 was $
80.0 million, of which we had the ability to borrow the full amount without violating our Leverage Ratio covenant based on the Company's existing consolidated EBITDA. At December 31, 2022, the Company was in compliance with its debt covenants, including its most restrictive covenant,
the Fixed Charge Coverage Ratio.
To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the New Credit Agreement, in November 2021, the Company executed two pay-fixed, receive-variable interest rate swap agreements covering approximately half of its variable interest exposure effective December 31, 2021 through August 2026. See Note 12, "Derivative Instruments and Hedging Activities" for further details.
Critical Accounting Estimates
The Company's consolidated financial statements include certain amounts that are based on management's best estimates and judgments. The Company bases its 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 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.
Business Combinations
In a business combination, we allocate the fair value of purchase price consideration to the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree based on their estimated fair values. The excess of the fair value of purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers or earned through the use of acquired trademarks, estimated royalty rates, acquired technology, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Inventory Valuation
Inventories consist of raw materials and purchased components and are stated at the lower of cost and net realizable value. Material costs are principally determined by standard cost or the weighted moving average method, both of which approximate actual cost. The Company reduces the carrying value of its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based on the aforementioned assumptions. Our reserve calculations are based on historical experience related to slow-moving inventory in addition to specific known concerns in the case of products going end-of-life or customer cancellations. As of December 31, 2022 and 2021, the Company had reserves for excess or obsolete inventory of $14.5 million and $12.1 million, respectively. With the recent increase in demand for our products coupled with higher raw material prices, our value of inventory on hand has increased by $33.1 million from December 31, 2021 to December 31, 2022. In the event of a sudden decrease in demand for our products, or a higher incidence of inventory obsolescence, the Company could be required to increase its inventory reserve, which would have an unfavorable impact on our gross margin.
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Goodwill
We use a fair value approach to test goodwill for impairment. We must recognize a non-cash impairment charge for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. We derive an estimate of fair values for each of our reporting units using a combination of an income approach and an appropriate market approach, each based on an applicable weighting. We assess the applicable weighting based on such factors as current market conditions and the quality and reliability of the data. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit's fair value.
Fair value computed by these methods is arrived at using a number of factors, including projected future operating results, anticipated future cash flows, effective income tax rates, comparable marketplace data within a consistent industry grouping, and the cost of capital. There are inherent uncertainties, however, related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair value of our reporting units. Assumptions for sales, net earnings and cash flows for each reporting unit were consistent among these methods.
Income Approach Used to Determine Fair Values
The income approach is based upon the present value of expected cash flows. Expected cash flows are converted to present value using factors that consider the timing and risk of the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis. We use a discount rate that reflects a market-derived weighted average cost of capital. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. The projections are based upon our best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value long-term growth rates, provisions for income taxes, future capital expenditures and changes in future cashless, debt-free working capital. We applied a combined weighting of 75% to the income approach when determining the fair value of our reporting units.
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Market Approach Used to Determine Fair Values
The market approach estimates the fair value of the reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Publicly Traded Company Method"). These multiples are derived from comparable publicly traded companies with similar investment characteristics to the reporting unit, and such comparables are reviewed and updated as needed annually. We believe that this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to our reporting units and the Company as a whole. The key estimates and assumptions that are used to determine fair value under this market approach include current and forward 12-month operating performance results and the selection of the relevant multiples to be applied. Under the Guideline Publicly Traded Company Method, a control premium, or an amount that a buyer is usually willing to pay over the current market price of a publicly traded company, is applied to the calculated equity values to adjust the public trading value upward for a 100% ownership interest, where applicable.
In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We evaluate the control premium by comparing it to control premiums of recent comparable market transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.
We applied a combined weighting of 25% to the market approach when determining the fair value of these reporting units.
As indicated in Note 4, "Goodwill and Other Intangible Assets", the fair value of each of our three reporting units exceeded their respective carrying values by a large margin (ranging from 69% to 173%). If market factors change and the discount rate utilized in the fair value calculation changes, it would result in a higher or lower fair value of our reporting units. The discount rates utilized in our October 1, 2022 impairment test ranged from 12.5% to 17.0%. An increase in the discount rate assumption of 50 basis points would have impacted the fair values of our reporting units, and would have reduced the excess of fair value over carrying value to a revised range of 60% to 166%. Further, if we are unable to achieve the projected revenue growth rates or margins assumed in our projections, this would also impact the fair value of our reporting units. If we change our reporting unit structure or other events and circumstances change (such as a sustained decrease in the price of our common stock, a decline in current market multiples, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, heightened competition, strategic decisions made in response to economic or competitive conditions or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of), we may be required to record impairment charges in future periods. Any impairment charges that we may take in the future could be material to our consolidated results of operations and consolidated financial condition.
The Company conducted its annual goodwill impairment test as of October 1, 2022, and no impairment was identified at that time. Management has also concluded that the fair value of its goodwill exceeded the associated carrying value at December 31, 2022 and that no impairment exists as of that date. See Note 4, "Goodwill and Other Intangible Assets," for details of our goodwill balance and the goodwill review performed in 2022. We will continue to monitor goodwill on an annual basis and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or significant declines in our stock price, indicate that there may be a potential indicator of impairment.
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Indefinite-Lived Intangible Assets
The Company tests indefinite-lived intangible assets for impairment annually on October 1, or upon a triggering event, using a fair value approach, the relief-from-royalty method (a form of the income approach). The Company conducted its annual impairment tests as of October 1, 2022 and 2021, and no impairment was identified at either testing date. Management has also concluded that the fair value of its trademarks exceeds the associated carrying values at December 31, 2022 and that no impairment existed as of that date. At December 31, 2022, the Company's indefinite-lived intangible assets related solely to trademarks.
Pension Benefit Obligations
Net periodic benefit cost for the Company's SERP totaled $1.5 million in 2022 and $1.7 million in 2021. Benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations. The changes in net periodic benefit cost year over year are attributable to demographic changes within the plan, as well as any changes to the discount rate or the assumption around the future annual increases in compensation. The discount rate utilized for the net periodic benefit cost was 2.75% at December 31, 2022 and 2.25% at December 31, 2021. An increase/decrease in this 2022 discount rate assumption of 25 basis points would have decreased/increased the 2022 periodic benefit cost by less than $0.1 million. The discount rate utilized for the pension benefit obligation was 5.00% at December 31, 2022 and 2.75% at December 31, 2021. An increase/decrease in this 2022 discount rate assumption of 25 basis points would have reduced/increased the pension benefit obligation by $0.5 million at December 31, 2022.
Other Matters
The Company believes that it has sufficient cash reserves to fund its foreseeable working capital needs. It may, however, seek to expand such resources through bank borrowings, at favorable lending rates, from time to time. If the Company were to undertake another substantial acquisition for cash, the acquisition would either be funded with cash on hand or would be financed through cash on hand and through bank borrowings or the issuance of public or private debt or equity. If the Company borrows additional money to finance acquisitions, this would further decrease the Company's ratio of earnings to fixed charges, and could further impact the Company's material restrictive covenants, depending on the size of the borrowing and the nature of the target company. Under its existing credit facility, the Company is required to obtain its lender's consent for certain additional debt financing and to comply with other covenants, including the application of specific financial ratios, and may be restricted from paying cash dividends on its common stock. Depending on the nature of the transaction, the Company cannot assure investors that the necessary acquisition financing would be available to it on acceptable terms, or at all, when required. If the Company issues a substantial amount of stock either as consideration in an acquisition or to finance an acquisition, such issuance may dilute existing stockholders and may take the form of capital stock having preferences over its existing common stock.
New Financial Accounting Standards
The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1, "Description of Business and Summary of Significant Accounting Policies."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is not required to provide the information called for by this Item as it is a "smaller reporting company," as defined in Rule 12b-2 of the Exchange Act.
Item 8. Financial Statements and Supplementary Data
See the consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements for the information required by this item.
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BEL FUSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
Notes to Consolidated Financial Statements 45
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bel Fuse Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Bel Fuse Inc. (a New Jersey corporation) and subsidiaries (the “Company”) as of December 31, 2022, and 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 10, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Goodwill – Connectivity Europe, Power Europe, and CUI reporting units
As described further in Notes 1 and 4 to the financial statements, the Company performed a quantitative goodwill impairment assessment as of October 1, 2022, the date of the annual impairment assessment, on three of its reporting units, Connectivity Europe, Power Europe, and CUI. These reporting units had goodwill balances totaling $23.8 million as of October 1, 2022. We identified the Company’s quantitative goodwill impairment assessment for the Connectivity Europe, Power Europe, and CUI reporting units as a critical audit matter.
The principal considerations for our determination that the quantitative goodwill impairment assessment is a critical audit matter are the significant management estimates and judgments related to forecasts of expected future cash flows used in the estimation of each reporting unit’s fair value. Management’s significant estimates and judgments include the determination of revenue growth rates, gross profit rates, operating expenses, projected long-term growth rates and discount rates. This required a high degree of auditor judgment and an increased extent of effort, including professionals with specialized skills and knowledge, in auditing these assumptions made by management.
Our audit procedures related to the quantitative goodwill impairment testing of the Connectivity Europe, Power Europe, and CUI reporting units included the following, among others:
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Iselin, New Jersey
March 10, 2023
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bel Fuse Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Bel Fuse Inc. (a New Jersey corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated March 10, 2023 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Iselin, New Jersey
March 10, 2023
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
December 31, December 31,
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lease liability, current 5,870 6,880
Long-term liabilities:
Liability for uncertain tax positions 24,798 28,434
Minimum pension obligation and unfunded pension liability 18,522 23,909
Commitments and contingencies (see Note 18)
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued - -
Accumulated other comprehensive loss (16,546 ) (18,863 )
Total liabilities and stockholders' equity $ 560,466 $ 511,846
See accompanying notes to consolidated financial statements.
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
Selling, general and administrative expenses 92,342 86,612
Gain on sale of property (1,596 ) (6,578 )
Earnings before provision for income taxes 59,059 27,327
Net earnings available to common shareholders $ 52,689 $ 24,821
Net earnings per common share:
Class A common shares - basic and diluted $ 4.01 $ 1.90
Class B common shares - basic and diluted $ 4.24 $ 2.02
Weighted-average shares outstanding:
Class A common shares - basic and diluted 2,143 2,145
Class B common shares - basic and diluted 10,394 10,258
See accompanying notes to consolidated financial statements.
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Year Ended December 31,
Other comprehensive income (loss):
Other comprehensive income (loss): 2,317 (800 )
See accompanying notes to consolidated financial statements.
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Accumulated
Other Class A Class B Additional
Retained Comprehensive Common Common Treasury Paid-In
Total Earnings (Loss) Income Stock Stock Stock Capital
Dividends declared:
Class A Common Stock, $0.24/share (515 ) (515 ) - - - - -
Class B Common Stock, $0.28/share (2,862 ) (2,862 ) - - - - -
Issuance of restricted common stock - - - - 21 - (21 )
Forfeiture of restricted common stock - - - - (4 ) - 4
Stock-based compensation expense 2,300 - - - - - 2,300
Change in unfunded SERP liability, net of taxes of ($875) 1,075 - 1,075 - - - -
Dividends declared:
Class A Common Stock, $0.24/share (514 ) (514 ) - - - - -
Class B Common Stock, $0.28/share (2,922 ) (2,922 ) - - - - -
Issuance of restricted common stock - - - - 33 - (33 )
Forfeiture of restricted common stock - - - - (4 ) - 4
Repurchase of treasury stock (349 ) (349 )
Stock-based compensation expense 2,382 - - - - - 2,382
See accompanying notes to consolidated financial statements.
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
Cash flows from operating activities:
Amortization of deferred financing costs 34 1,302
Unrealized (gains) losses on foreign currency revaluation (278 ) 44
Gain on sale of property, plant and equipment (1,596 ) (6,440 )
Changes in operating assets and liabilities:
Accrued restructuring costs 6,784 (119 )
Net cash provided by operating activities 40,257 4,632
Cash flows from investing activities:
Purchase of property, plant and equipment (8,832 ) (9,397 )
Payment for acquisitions, net of cash acquired - (16,811 )
Proceeds from disposal/sale of property, plant and equipment 1,833 7,330
Net cash used in investing activities (6,999 ) (18,878 )
(continued)
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BEL FUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
Year Ended December 31,
Cash flows from financing activities:
Dividends paid to common shareholders (3,413 ) (3,379 )
Purchase of treasury stock (349 ) -
Deferred financing costs - (675 )
Borrowings under revolving credit line - 115,000
Repayments under revolving credit line (17,500 ) (14,500 )
Repayments of long-term debt - (104,846 )
Net cash used in financing activities (21,262 ) (8,400 )
Effect of exchange rate changes on cash (3,486 ) (537 )
Net increase (decrease) in cash and cash equivalents 8,510 (23,183 )
Cash and cash equivalents - beginning of year 61,756 84,939
Cash and cash equivalents - end of year $ 70,266 $ 61,756
Supplemental cash flow information:
Cash paid during the year for:
Income taxes, net of refunds received $ 14,618 $ 2,872
Details of acquisitions:
Fair value of identifiable net assets acquired $ - $ 18,215
Fair value of net assets acquired $ - $ 20,714
Fair value of consideration transferred $ - $ 20,714
Less: Cash acquired in acquisitions - (3,903 )
Cash paid for acquisitions, net of cash acquired $ - $ 16,811
See accompanying notes to consolidated financial statements.
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BEL FUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED December 31, 2022 and 2021
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bel Fuse Inc. and subsidiaries ("Bel," the "Company," "we," "us," and "our") design, manufacture and market a broad array of products that power, protect and connect electronic circuits. These products are used in the networking, telecommunications, computing, general industrial, high-speed data transmission, military, commercial aerospace, transportation and eMobility industries around the world. We manage our operations by product group through our reportable operating segments, Connectivity Solutions, Power Solutions and Protection and Magnetic Solutions, in addition to a Corporate segment.
All amounts included in the tables to these notes to consolidated financial statements, except per share amounts, are in thousands.
Principles of Consolidation - The consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Certain amounts in the consolidated financial statements as of and for the year ended December 31, 2021 have been reclassified to conform to current year presentation for comparative purposes.
Estimates and Uncertainties - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including but not limited to those related to product returns, provisions for bad debt, inventories, goodwill, intangible assets, investments, Supplemental Executive Retirement Plan ("SERP") expense, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which 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.
Cash Equivalents - 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. Some of our balances are in excess of the FDIC insured limit.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We determine our allowance by both specific identification of customer accounts where appropriate and the application of historical loss experience to non-specific accounts.
Effects of Foreign Currency – In non-U.S. locations that are not considered highly inflationary, we translate the non-equity components of our foreign balance sheets at the end of period exchange rates with translation adjustments accumulated within stockholders' equity on our consolidated balance sheets. We translate the statements of operations at the average exchange rates during the applicable period. In connection with foreign currency denominated transactions, including multi-currency intercompany payable and receivable transactions and loans, the Company incurred a net realized and unrealized currency exchange gain of $0.3 million for the year ended December 31, 2022 and a loss of less than $0.1 million for the year ended December 31, 2021, which were included in other expense, net on the consolidated statements of operations.
Concentration of Credit Risk - Financial instruments which potentially subject us to concentrations of credit risk consist principally of accounts receivable and temporary cash investments. We grant credit to customers that are primarily original equipment manufacturers and to subcontractors of original equipment manufacturers based on an evaluation of the customer's financial condition, without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures and establish allowances for anticipated losses. See Note 13, "Segments," for disclosures regarding significant customers.
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Inventories - Inventories are stated at the lower of cost or net realizable value. Material costs are determined by standard costs or weighted average cost, both of which approximate actual costs. Costs related to inventories include raw materials, direct labor and manufacturing overhead which are included in cost of sales on the consolidated statements of operations.
Revenue Recognition – Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
Product Warranties – Warranties vary by product line and are competitive for the markets in which the Company operates. Warranties generally extend for one to three years from the date of sale, providing customers with assurance that the related product will function as intended. The Company reviews its warranty liability quarterly based on an analysis of actual expenses and failure rates accompanied with estimated future costs and projected failure rate trends. Factors taken into consideration when evaluating our warranty reserve are (i) historical claims for each product, (ii) volume increases, (iii) life of warranty, (iv) historical warranty repair costs and (v) other factors. To the extent that actual experience differs from our estimate, the provision for product warranties will be adjusted in future periods. Actual warranty repair costs are charged against the reserve balance as incurred. See Note 11, "Accrued Expenses."
Product Returns – We estimate product returns, including product exchanges under warranty, based on historical experience. In general, the Company is not contractually obligated to accept returns except for defective product or in instances where the product does not meet the Company's product specifications. However, the Company may permit its customers to return product for other reasons. In certain instances, the Company would generally require a significant cancellation penalty payment by the customer. The Company estimates such returns, where applicable, based upon management's evaluation of historical experience, market acceptance of products produced and known negotiations with customers. Such estimates are deducted from sales and provided for at the time revenue is recognized. Distribution customers often receive what is referred to as "ship and debit" arrangements, whereby Bel will invoice them at an agreed upon unit price upon shipment of product and a price reduction may be granted if the market price of the product declines after shipment. Distributors may also be entitled to special pricing discount credits, and certain customers are entitled to return allowances based on previous sales volumes. Bel deducts estimates for anticipated credits, refunds and returns from sales each quarter based on historical experience.
Goodwill and Identifiable Intangible Assets – Goodwill represents the excess of the aggregate of the following: (1) consideration transferred, (2) the fair value of any noncontrolling interest in the acquiree and, (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Identifiable intangible assets consist primarily of patents, licenses, trademarks, trade names, customer lists and relationships, non-compete agreements and technology-based intangibles and other contractual agreements. We amortize finite-lived identifiable intangible assets over the shorter of their stated or statutory duration or their estimated useful lives, ranging from 1 to 16 years, on a straight-line basis to their estimated residual values and periodically review them for impairment. Total identifiable intangible assets comprise 9.7% and 11.9% at December 31, 2022 and 2021, respectively, of our consolidated total assets.
We use the acquisition method of accounting for those business combinations in which we acquire 100% of the equity. We do not amortize goodwill or intangible assets with indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
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Impairment and Disposal of Long-Lived Assets – For definite-lived intangible assets, such as customer relationships, contracts, intellectual property, and for other long-lived assets, such as property, plant and equipment, whenever impairment indicators are present, we perform a review for impairment. We calculate the undiscounted value of the projected cash flows associated with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over the fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate.
For indefinite-lived intangible assets, such as trademarks and trade names, each year and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss for the excess of book value over the fair value, if any. In addition, in all cases of an impairment review we re-evaluate whether continuing to characterize the asset as indefinite-lived is appropriate. See Note 4, "Goodwill and Other Intangible Assets," for additional details.
Depreciation - Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated primarily using the straight-line method over the estimated useful life of the asset. The estimated useful lives primarily range from 1 to 33 years for buildings and leasehold improvements, and from 3 to 14 years for machinery and equipment.
Derivative Financial Instruments - As part of our risk management strategy, when considered appropriate, the Company uses derivative financial instruments including foreign currency forward contracts and interest rate swap agreements to hedge against certain foreign currency and interest rate exposures. The intent is to mitigate gains and losses caused by the underlying exposures with offsetting gains and losses on the derivative contracts. By policy, Bel does not enter into speculative positions with derivative instruments.
The Company records all derivatives as assets or liabilities on our consolidated balance sheets at their fair values. Gains and losses from the changes in values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting. The Company's interest rate swaps and foreign currency forward contracts related to the Chinese renminbi (both further described in Note 12, "Derivative Instruments and Hedging Activities") have been designated as cash flow hedges and as such, gains/losses are recorded in accumulated other comprehensive income until such time the hedged item affects earnings.
The counterparties to our derivative financial instruments consist of several major international financial institutions. We regularly monitor the financial strength of these institutions. While the counterparties to these contracts expose us to the potential risk of credit-related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such affected contracts.
Income Taxes - We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. See Note 9, “Income Taxes”.
We record net deferred tax assets to the extent we believe these assets will more-likely-than-not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. We have established valuation allowances for deferred tax assets that are not likely to be realized. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of our net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.
We establish liabilities for tax contingencies when, despite the belief that our tax return positions are fully supported, it is more likely than not that certain positions may be challenged and may not be fully sustained. The tax contingency liabilities are analyzed on a quarterly basis and adjusted based upon changes in facts and circumstances, such as the conclusion of federal and state audits, expiration of the statute of limitations for the assessment of tax, case law and emerging legislation. Our effective tax rate includes the effect of tax contingency liabilities and changes to the liabilities as considered appropriate by management.
Earnings per Share – We utilize the two-class method to report our earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. The Company's Certificate of Incorporation, as amended, states that Class B common shares are entitled to dividends at least 5% greater than dividends paid to Class A common shares, resulting in the two-class method of computing earnings per share. In computing earnings per share, the Company has allocated dividends declared to Class A and Class B shares based on amounts actually declared for each class of stock and 5% more of the undistributed earnings have been allocated to Class B shares than to the Class A shares on a per share basis. Basic earnings per common share are computed by dividing net earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share, for each class of common stock, are computed by dividing net earnings by the weighted-average number of common shares and potential common shares outstanding during the period. There were no potential common shares outstanding during the years ended December 31, 2022 and 2021 which would have had a dilutive effect on earnings per share.
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The earnings and weighted average shares outstanding used in the computation of basic and diluted earnings per share are as follows:
Year Ended December 31,
Numerator:
Less dividends declared:
Undistributed earnings allocation:
Class A undistributed earnings $ 8,084 $ 3,561
Net earnings allocation:
Denominator:
Weighted average shares outstanding:
Net earnings per share:
Research and Development ("R&D") - Our engineering groups are strategically located around the world to facilitate communication with and access to customers' engineering personnel. This collaborative approach enables partnerships with customers for technical development efforts. On occasion, we execute non-disclosure agreements with our customers to help develop proprietary, next generation products destined for rapid deployment. R&D costs are expensed as incurred, and are shown as a separate line within operating expenses on the consolidated statements of operations. Generally, R&D is performed internally for the benefit of the Company. R&D costs include salaries, building maintenance and utilities, rents, materials, administration costs and miscellaneous other items. R&D expenses for the years ended December 31, 2022 and 2021 amounted to $20.2 million and $21.9 million, respectively.
Fair Value Measurements - We utilize the accounting guidance for fair value measurements and disclosures for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The fair value is 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. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. We classify our fair value measurements based on the lowest level of input included in the established three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are defined as follows:
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
Level 3 - Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions
For financial instruments such as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amount approximates fair value because of the short maturities of such instruments. See Note 5, "Fair Value Measurements," for additional disclosures related to fair value measurements.
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Recently Issued Accounting Standards
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-14,Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). This guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The Company adopted amendments in ASU 2018-14 on a retrospective basis effective January 1, 2021. The adoption of this guidance modified the Company's annual disclosures for its defined benefit plan, but did not have a material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. This guidance was adopted by the Company effective January 1, 2021 and did not have a material impact on the Company’s consolidated financial statements.
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Accounting Standards Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended. The new guidance 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. The amendment is currently effective for the Company for annual reporting periods beginning after December 15, 2022, with early adoption permitted. Management is currently assessing the impact of ASU 2016-13, but it is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides temporary optional guidance on contract modifications and hedging accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which 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 extends 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 will be adopting ASU 2020-04 in the first quarter of 2023 and will be electing to apply the relevant practical expedients within the guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
2. ACQUISITIONS
rms Connectors
On January 8, 2021, the Company acquired rms Connectors, Inc. (“rms Connectors” or "rms"), from rms Company Inc., a division of Cretex Companies, Inc., for $9.0 million in cash, including a working capital adjustment. rms Connectors is a highly regarded connector manufacturer with over 30 years of experience producing harsh environment circular connectors used in a variety of military and aerospace applications. This acquisition complemented Bel's existing military and aerospace product portfolio and enabled us to expand key customer relationships within these end markets and leverage the combined manufacturing resources to improve our operational efficiency. Originally based in Coon Rapids, Minnesota, the rms Connectors business was relocated into Bel's existing facilities during the second quarter of 2021, and is part of Bel's Connectivity Solutions group. The transaction was funded with cash on hand.
EOS Power
On March 31, 2021, the Company completed the acquisition of EOS Power ("EOS") through a stock purchase agreement for $7.8 million, net of cash acquired, including a working capital adjustment. EOS, located in Mumbai, India, had sales of $12.0 million for the year ended December 31, 2020. EOS enhances Bel's position related to certain industrial and medical markets historically served by EOS, with a strong line of high-power density and low-profile products with high convection ratings. In addition to new products and customers acquired, this acquisition diversified Bel's manufacturing footprint in Asia. The EOS business is part of Bel’s Power Solutions and Protection group. The transaction was funded with cash on hand.
The acquisitions of rms Connectors and EOS may hereafter be referred to collectively as either the "2021 Acquisitions" or the "2021 Acquired Companies". As of the respective acquisition dates, all of the assets acquired and liabilities assumed were recorded at their fair values and the Company's consolidated results of operations for the year ended December 31, 2021 include the operating results of the 2021 Acquired Companies from their respective acquisition dates through December 31, 2021. During the year ended December 31, 2021, the Company incurred $0.5 million of acquisition-related costs related to the 2021 Acquisitions. No acquisition-related costs were incurred during 2022. These costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
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The final accounting related to the 2021 Acquisitions was completed as of the filing date of this Annual Report on Form 10-K. The following table depicts the Company's final acquisition date fair values of the consideration transferred and identifiable net assets acquired in these transactions:
Acquisition Date Fair Values
rms EOS Total
Cash and cash equivalents $ - $ 3,903 $ 3,903
Measurement period adjustments recorded during 2021 on the EOS acquisition related to finalization of EOS' pre-acquisition balance sheet and the Company's completion of its preliminary valuation of EOS whereby $2.2 million of intangible assets were identified and recorded on the consolidated balance sheet as of the acquisition date. These intangible assets are comprised of customer relationships valued at $1.9 million (to be amortized over an estimated life of 16 years) and the tradename, valued at $0.3 million (to be amortized over an estimated life of 2 years).
Based upon the purchase price allocation above, there is no goodwill associated with the rms acquisition. The goodwill recognized in connection with the EOS acquisition as noted above has been allocated to the Company's Power Solutions and Protection segment and is not deductible for tax purposes.
The results of operations of the 2021 Acquired Companies have been included in the Company’s consolidated financial statements for the periods subsequent to their respective acquisition dates. During the year ended December 31, 2021, the 2021 Acquired Companies together contributed aggregate revenues of $17.1 million and total estimated net earnings of $1.9 million to the Company since their respective acquisition dates. The unaudited pro forma information below presents the combined operating results of the Company and the 2021 Acquired Companies assuming that the acquisition of the 2021 Acquired Companies had occurred as of January 1, 2021. The unaudited pro forma results are presented for illustrative purposes only. They do not reflect the realization of any potential cost savings, or any related integration costs. This unaudited pro forma information does not purport to be indicative of the results that would have actually been obtained if the 2021 Acquisitions had occurred as of January 1,2021, nor is the pro forma data intended to be a projection of results that may be achieved in the future.
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The following unaudited pro forma consolidated results of operations assume that the acquisition of the 2021 Acquired Companies was completed as of January 1,2021:
Year Ended
December 31,
Earnings per Class A common share - basic and diluted 4.01 1.92
Earnings per Class B common share - basic and diluted 4.24 2.04
3. REVENUE
Nature of Goods and Services
Our revenues are substantially derived from sales of our products.
In our Connectivity Solutions product group, we provide connectors and cable assemblies to the aerospace, military/defense, commercial, rugged harsh environment and communication markets. This group also includes passive jacks, plugs and cable assemblies that provide connectivity in networking equipment, as well as modular plugs and cable assemblies used within the structured cabling system, known as premise wiring.
In our Power Solutions and Protection group, we provide AC/DC and DC/DC power conversion devices and circuit protection products. Applications range from board-mount power to system-level architectures for servers, storage, networking, industrial and transportation.
In our Magnetic Solutions group, we provide an extensive line of integrated connector modules (ICM), where an Ethernet magnetic solution is integrated into a connector package. Products within the Company's Magnetic Solutions group are primarily used in networking and industrial applications.
The Company also provides incremental services to our customers in the form of training, technical support, special tooling, and other support as deemed necessary from time to time. For purposes of ASC 606, all such incremental services were concluded to be immaterial in the context of the contracts.
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Types of Contracts
Substantially all of the Company's revenue is derived from contracts with its customers under one of the following types of contracts:
Significant Payment Terms
Contracts with customers indicate the general terms and conditions in which business will be conducted for a set period of time. Individual purchase orders state the description, quantity and price of each product purchased. Payment for products sold under direct contracts with customers or contracts with distributors is typically due in full within 30-90 days from the transfer of title to the customer. Payment for products sold under our customer-designated hub arrangements is typically due within 60 days of the customer pulling the product from the hub. Payment due related to our licensing agreements is generally within 30 days of receiving the licensee sales data, which is either on a quarterly or annual basis.
Since the customer agrees to a stated price for each product on each purchase order, the majority of contracts are not subject to variable consideration. However, the "ship and debit" arrangements with distributors, royalty income associated with our licensing agreements, and the product returns described above are each deemed to be variable consideration which requires the Company to make constrained estimates based on historical data.
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Disaggregation of 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:
Connectivity Power Solutions Magnetic
Solutions and Protection Solutions Consolidated
By Geographic Region:
By Sales Channel:
Connectivity Power Solutions Magnetic
Solutions and Protection Solutions Consolidated
By Geographic Region:
By Sales Channel:
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Contract Assets and Contract Liabilities:
A contract asset results when goods or services have been transferred to the customer but payment is contingent upon a future event, other than passage of time. In the case of our customer-controlled hub arrangements, we are unable to invoice the customer until product is pulled from the hub by the customer, which generates an unbilled receivable (a contract asset) when revenue is initially recognized.
A contract liability results when cash payments are received or due in advance of our performance obligation being met. We have certain customers who provide payment in advance of product being shipped, which results in deferred revenue (a contract liability).
The balances of the Company's contract assets and contract liabilities at December 31, 2022 and December 31, 2021 are as follows:
December 31, December 31,
Contract assets - current (unbilled receivables) $ 18,244 $ 28,275
Contract liabilities - current (deferred revenue) $ 8,847 $ 2,224
The change in balance of our unbilled receivables from December 31, 2021 to December 31, 2022 primarily relates to a timing difference between the Company's performance (i.e. when our product is shipped to a customer-controlled hub) and the point at which the Company can invoice the customer per the terms of the customer contract (i.e. when the customer pulls our product from the customer-controlled hub). The deferred revenue balance is included within other current liabilities on the accompanying balance sheets.
A tabular presentation of the activity within the deferred revenue account for the year ended December 31, 2022 is presented below:
Year Ended
Balance, January 1 $ 2,224
New advance payments received 10,624
Recognized as revenue during period (3,944 )
Other adjustments 5
Currency translation (62 )
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price and related acquisition costs over the fair value assigned to the net tangible and other intangible assets acquired in a business acquisition. At December 31, 2022 and 2021, the Company's reportable operating segments were as follows:
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The changes in the carrying value of goodwill classified by our segment reporting structure for the year ended December 31, 2022 are as noted in the table below.
Total Connectivity Solutions Power Solutions & Protection Magnetic Solutions
Balance at January 1, 2022:
Goodwill allocation related to acquisition - - - -
Foreign currency translation (1,552 ) (788 ) (764 ) -
The Company has accumulated impairment charges totaling $137.5 million, which were incurred under a former segment and reporting unit structure which was in place prior to October 1, 2019.
As discussed in Note 5,Fair Value Measurements, goodwill is reviewed for impairment on a reporting unit basis annually during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In testing goodwill for impairment, we may perform both a qualitative assessment and quantitative assessment. For the qualitative test, the assessment is based on a review of general macroeconomic conditions, industry and market conditions, changes in cost factors, overall financial performance (both actual and expected performance) and other reporting unit-specific events such as significant changes in management, customers, litigation or a change in the carrying amount of net assets. If it is determined that a potential impairment may exist, we would proceed with a quantitative assessment. In cases where we elect to perform a quantitative assessment, we estimate the fair value of these reporting units using a weighting of fair values derived from income and market approaches. Under the income approach, we determine the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit.
2022 Annual Impairment Test
The Company performed a qualitative assessment as of October 1, 2022 related to its EOS reporting unit, as the estimated fair value of this reporting unit significantly exceeded the carrying amount based on our baseline quantitative assessment, which was performed as of March 31, 2021. Our qualitative assessment determined that indicators that the fair value of this reporting unit was less than the carrying amount were not present.
On October 1, 2022, the Company completed a quantitative assessment of our annual goodwill impairment test for three of our reporting units. We concluded that the fair value of the Company's Connectivity Europe, Power Europe and CUI reporting units exceeded the carrying value and that there was no indication of impairment.
The excess of estimated fair values over carrying value, including goodwill for each of our reporting units that had goodwill as of the 2022 annual impairment test were as follows:
Reporting Unit % by Which Estimated Fair Value Exceeds Carrying Value
Connectivity Europe 69.0 %
Power Europe 84.4 %
2021 Impairment Tests
On October 1, 2021, the Company completed a quantitative assessment of our annual goodwill impairment test for our reporting units. We concluded that the fair value of the Company's Connectivity Europe, Power Europe and CUI reporting units (the only reporting units with goodwill other than the 2021 acquisitions) exceeded the carrying value and that there was no indication of impairment.
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As noted above, the fair value determined in connection with the goodwill impairment test completed in the fourth quarter of 2022exceeded the carrying value for each reporting unit. Therefore, there was no impairment of goodwill. However, if the fair value decreases in future periods, the Company may need to complete an interim goodwill impairment test and any potential goodwill impairment charge would be dependent upon the estimated fair value of the reporting unit at that time and the outcome of the impairment test. The fair values of the assets and liabilities of the reporting unit, including the intangible assets, could vary depending on various factors.
The future occurrence of a potential indicator of impairment, such as a decrease in expected net earnings, adverse equity market conditions, a decline in current market multiples, a sustained decrease in the price of our common stock, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, unanticipated competition, strategic decisions made in response to economic or competitive conditions, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, could require an interim assessment for some or all of the reporting units before the next required annual assessment. In the event of significant adverse changes of the nature described above, it may be necessary for us to recognize an additional non-cash impairment of goodwill, which could have a material adverse effect on our consolidated financial condition and consolidated results of operations.
Other Intangible Assets
Other identifiable intangible assets include patents, technology, license agreements, non-compete agreements and trademarks. Amounts assigned to these intangible assets have been determined by management. Management considered a number of factors in determining the allocations, including valuations and independent appraisals. Trademarks have indefinite lives and are reviewed for impairment on an annual basis, or when there is a triggering event. Other intangible assets, excluding trademarks, are being amortized over 1 to 16 years.
The Company tests indefinite-lived intangible assets for impairment using a fair value approach, the relief-from-royalty method (a form of the income approach). At December 31, 2022, the Company's indefinite-lived intangible assets related to the trademarks acquired in the CUI, Power Solutions, Connectivity Solutions, Cinch and Fibreco acquisitions.
The components of definite and indefinite-lived intangible assets are as follows:
Gross Carrying Accumulated Net Carrying Gross Carrying Accumulated Net Carrying
Amount Amortization Amount Amount Amortization Amount
Amortization expense was $6.0 million and $7.1 million during each of 2022 and 2021, respectively.
Estimated amortization expense for intangible assets for the next five years is as follows:
December 31, Amortization Expense
2022 and 2021 Impairment Tests
The Company completed its annual indefinite-lived intangible assets impairment test as of October 1, 2022 and October 1, 2021. Management has concluded that the fair value of these trademarks exceeded the related carrying values at both December 31, 2022 and December 31, 2021, with no indication of impairment at either date.
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5. FAIR VALUE MEASUREMENTS
As of December 31, 2022 and 2021, our available-for-sale securities primarily consisted of investments held in a rabbi trust which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations. These securities are measured at fair value using quoted prices in active markets for identical assets (Level 1) inputs and amounted to $0.1 million at December 31, 2022 and $0.3 million at December 31, 2021.
Throughout 2021 and 2022, the Company entered into a series of foreign currency forward contracts, the fair value of which was $0.4 million at December 31, 2022 and less than $0.1 million at December 31, 2021. The estimated fair value of foreign currency forward contracts is based on quotes received from the applicable counterparty, and represents the estimated amount we would receive or pay to settle the contracts, taking into consideration current exchange rates which can be validated through readily observable data from external sources (Level 2).
During the fourth quarter of 2021, the Company entered into two interest rate swap agreements as further described in Note 12, "Derivative Instruments and Hedging Activities". The fair value of the interest rate swap agreements was $5.5million and $0.1 million at December 31, 2022 and 2021, respectively, which was based on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
The Company does not have any financial assets measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during 2022 or 2021. There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during 2022.
There were no financial assets accounted for at fair value on a nonrecurring basis as of December 31, 2022 or December 31, 2021.
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 December 31, 2022 and 2021, the estimated fair value of total debt was $95.0 million and $112.5 million, respectively, compared to a carrying amount of $95.0 million and $112.5 million, respectively. The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of December 31, 2022.
Nonfinancial assets and liabilities, such as goodwill, indefinite-lived intangible assets and long-lived assets, are accounted for at fair value on a nonrecurring basis. These items are tested for impairment upon the occurrence of a triggering event or in the case of goodwill, on at least an annual basis. See Note 4, "Goodwill and Other Intangible Assets," for further information about goodwill and other indefinite-lived intangible assets.
6. OTHER ASSETS
At December 31, 2022 and 2021, the Company had obligations of $18.2 million and $23.6 million, respectively, associated with its SERP. As a means of informally funding these obligations, the Company has invested in life insurance policies related to certain employees and marketable securities held in a rabbi trust. At December 31, 2022 and 2021, these assets had a combined value of $14.0 million and $16.4 million, respectively.
Company-Owned Life Insurance
Investments in company-owned life insurance policies ("COLI") were made with the intention of utilizing them as a long-term funding source for the Company's SERP obligations. However, the cash surrender value of the COLI does not represent a committed funding source for these obligations. Any proceeds from these policies are subject to claims from creditors. The cash surrender value of the COLI of $13.9 million and $16.1 million at December 31, 2022 and 2021, respectively, is included in other assets in the accompanying consolidated balance sheets. The volatility in global equity markets in recent years has also had an effect on the cash surrender value of the COLI policies. The Company recorded income (expense) to account for the (decrease) increase in cash surrender value in the amount of ($2.2) million and $1.3 million during the years ended December 31, 2022 and 2021, respectively. These fluctuations are classified as other income (expense), net on the consolidated statements of operations for all periods presented. This classification is consistent with the costs associated with the long-term employee benefit obligations that the COLI is intended to fund.
Other Investments
At December 31, 2022 and 2021, the Company held, in the aforementioned rabbi trust, available-for-sale investments at a cost of $0.1 million and $0.3 million, respectively. Together with the COLI described above, these investments are intended to fund the Company's SERP obligations and are classified as other assets in the accompanying consolidated balance sheets. The Company monitors these investments for impairment on an ongoing basis. At December 31, 2022 and 2021, the fair market value of these investments was $0.1 million and $0.3 million, respectively.
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7. INVENTORIES
The components of inventories are as follows:
December 31,
8. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
December 31,
Property, plant and equipment, net $ 36,833 $ 38,210
Depreciation expense for the years ended December 31, 2022 and 2021 was $8.9 million and $9.7 million, respectively. At December 31, 2022 and December 31, 2021, a total of $1.5 million and $1.6 million, respectively, of property was classified as assets held for sale on the accompanying consolidated balance sheet related to our corporate headquarters in Jersey City, New Jersey.
9. INCOME TAXES
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 2019 and for state examinations before 2016. Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2012 in Asia and generally 2014 in Europe.
At December 31, 2022 and 2021, the Company has approximately $24.8 million and $28.4 million, respectively, of liabilities for uncertain tax positions. These amounts, if recognized, would reduce the Company’s effective tax rate. As of December 31, 2022, approximately $5.6 million of the Company’s liabilities for uncertain tax positions are expected to be resolved during the next twelve months by way of expiration of the related statute of limitations.
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, including the portion included in income taxes payable, is as follows:
Year Ended December 31,
Liability for uncertain tax positions - January 1 $ 28,434 $ 28,516
Additions based on tax positions related to the current year 1,284 2,054
Settlement/expiration of statutes of limitations (3,799 ) (2,467 )
Liability for uncertain tax positions - December 31 $ 24,798 $ 28,434
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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 years ended December 31, 2022 and 2021, the Company recognized $0.6 million and $0.7 million, respectively, in interest and penalties in the consolidated statements of operations. During the years ended December 31, 2022 and 2021, the Company recognized a benefit of $1.6 million and $1.0 million, respectively, for the reversal of such interest and penalties, relating to the expiration of statues of limitations and settlement of the acquired liability for uncertain tax positions, respectively. The Company has approximately $4.0 million and $5.0 million accrued for the payment of interest and penalties at December 31, 2022 and 2021, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the consolidated balance sheets.
The Company’s total earnings before provision for income taxes included losses from domestic operations of $14.2 million and $7.3 million for 2022 and 2021, respectively, and earnings before provision for income taxes from foreign operations of $44.8 million and $20.0 million for 2022 and 2021, respectively.
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
Current:
Deferred:
A reconciliation of taxes on income computed at the U.S. federal statutory rate to amounts provided is as follows:
Year Ended December 31,
$ % $ %
Tax provision computed at the federal statutory rate $ 12,402 21 % $ 5,739 21 %
(Decrease) increase in taxes resulting from:
Research and experimentation and foreign tax credits (139 ) (0 %) 343 1 %
State taxes, net of federal benefit 292 0 % 42 0 %
SERP/COLI and restricted stock income 733 1 % (172 ) (1 %)
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As of December 31, 2022, the Company has $24.1 million of deferred tax assets, which the Company evaluates for utilization on an annual basis. The Company has gross federal, state and foreign net operating losses (“NOL”) of $15.1 million which amount to $3.3 million of deferred tax assets. In addition, the Company has $1.3 million of credit carryforwards and acquired deferred tax assets of $0.9 million. The Company believes that it is more likely than not that the benefit arising from certain NOL, credit carryforwards and acquisition assets will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $4.0 million on these deferred tax assets. The federal and certain foreign NOL's can be carried forward indefinitely, the state and certain foreign NOL's expire at various times during 2026 – 2041 and the tax credit carryforwards expire at various times during 2029 - 2041.
Management has no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiaries as of December 31, 2022. Applicable income and dividend withholding taxes of $0.2 million have been reflected in the accompanying consolidated statements of operations for the year ended December 31, 2022. Due to the practicality of determining the deferred taxes on outside basis differences in our investments in our foreign subsidiaries, we have not provided for deferred taxes on outside basis differences and deemed that these basis differences will be indefinitely reinvested.
Components of deferred income tax assets and liabilities are as follows:
December 31,
Tax Effect Tax Effect
Deferred tax assets:
(Decrease) increase in unfunded pension liability (416 ) 965
Deferred tax liabilities:
The Company continues to monitor proposed legislation affecting the taxation of transfers of U.S. intangible property and other potential tax law changes.
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At December 31, 2022 and 2021, outstanding borrowings under the revolver amounted to $95.0 million and $112.5 million, respectively. The unused credit available under the credit facility was $80.0 million at December 31, 2022 and $62.5 million at December 31, 2021. The Company incurred $3.4 million and $3.5 million of interest expense during the years ended December 31, 2022 and 2021, respectively, in connection with interest due on its outstanding borrowings under the below-described credit agreements during each period, the effects of the 2021 Swaps and amortization of deferred financing costs. The interest expense for the year ended December 31, 2021 also included $0.8 million of deferred financing costs amortized in connection with the extinguishment of debt under the Prior Credit Agreement (as defined below) as further described under "2021 Refinancing" below.
The interest rate in effect at December 31, 2022 was 5.51%, which consisted of LIBOR of 4.38% plus the Company's margin of 1.125%. The interest rate in effect at December 31, 2021 was 1.60%, which consisted of LIBOR of 0.10% plus the Company's margin of 1.50%. In order to manage our interest rate exposure on our borrowings, and as further described in Note 12, "Derivative Instruments and Hedging Activities", the Company is party to the 2021 Swaps, each with an aggregate notional amount of $30 million, or $60 million in the aggregate, the effect of which is to fix the LIBOR portion of the interest rate on a portion of our outstanding debt on our Revolver. The 2021 Swaps require the Company to pay interest on the notional amount at the rate of 1.3055% and 1.3180%, respectively, in exchange for the one-month LIBOR rate. The effective rate of interest for our outstanding borrowings, including the impact of the 2021 Swaps, was 3.57% and 1.60%, respectively, during the years ended December 31, 2022 and 2021.
Prior Credit Agreement
Prior to September 2, 2021, the Company's credit agreement in effect included a Term Loan of $125.0 million and an available Revolver of $75.0 million. The borrowings under the Prior Credit Agreement bore interest at a rate equal to, at the Company's option, either (1) LIBOR, plus a margin ranging from 1.375% per annum to 2.75% per annum depending on the Company's leverage ratio, or (2)(a) an "Alternate Base Rate," which was the highest of (i) the federal funds rate plus 0.50%, (ii) KeyBank's prime rate and (iii) the LIBOR rate with a maturity of one month plus 1.00%, plus (b) a margin ranging from 0.375% per annum to 1.75% per annum, depending on the Company's leverage ratio. The Prior Credit Agreement was due to expire on December 11, 2022.
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2021 Refinancing
On September 2, 2021, the Company entered into an Amended and Restated Credit and Security Agreement (the “New Credit Agreement”), by and among the Company, as the borrower, KeyBank National Association (“KeyBank”), as administrative agent, swing line lender and issuing lender, and the other lenders identified therein. The New Credit Agreement amends, restates and supersedes Bel’s Prior Credit Agreement. The New Credit Agreement provides Bel with a $175 million 5-year senior secured revolving credit facility (the “New Revolver”), with a sublimit of up to $10 million available for letters of credit and a sublimit of up to $5 million available for swing line loans. The New Revolver replaces and refinances the $75 million revolving credit facility and the $125 million term loan facility that had existed under the Prior Credit Agreement.
Concurrent with its entry into the New Credit Agreement, the Company borrowed $115 million under the New Revolver facility, of which approximately $101.9 million and $12.0 million, respectively, was applied to discharge and satisfy in full the remaining obligations outstanding under the former term loan and the previous revolving credit facility that had existed under the Prior Credit Agreement.
Under the terms of the New Credit Agreement, the Company is entitled, subject to the satisfaction of certain conditions, to request additional commitments under the New Revolver or the addition of a term loan facility in the aggregate principal amount of up to $100 million for all such increases (revolver and term) to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. In addition to requesting loans denominated in U.S. dollars, the New Credit Agreement provides that up to a U.S. Dollar equivalent principal amount of $15 million of the New Revolver may be borrowed by Bel in alternate foreign currencies including Euros, Pounds Sterling, Japanese Yen and such other currency as requested by Bel and consented to by KeyBank and each lender.
In connection with the effectiveness of the New Credit Agreement, the Company and certain of the Company’s material U.S. subsidiaries (together with the Company, the “Loan Parties”) provided to the administrative agent, for the benefit of the lenders, confirmation of the continuing use and effectiveness of each guaranty of payment and each security document executed and delivered by the Loan Parties in connection with the Prior Credit Agreement. As a result, consistent with the Prior Credit Agreement, the obligations of the Company under the New Credit Agreement are guaranteed by the Loan Parties’ material U.S. subsidiaries, and secured by a first priority security interest in substantially all of the existing and future personal property of the Loan Parties, certain material real property of the Loan Parties and certain of the Loan Parties’ material U.S. subsidiaries, including 65% of the voting capital stock of certain of the Loan Parties’ direct foreign subsidiaries.
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The borrowings under the New Credit Agreement bear interest, generally payable quarterly, at a rate equal to, at the Company's option, either (1) LIBOR, plus a margin ranging from 1.125% per annum to 2.125% per annum depending on the Company’s leverage ratio, or (2)(a) an alternate “Base Rate,” which is the highest of (i) KeyBank’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the LIBOR rate with a maturity of one month plus 1%, plus (b) a margin ranging from 0.125% per annum to 1.125% per annum, depending on the Company’s leverage ratio. Additionally, the New Credit agreement contains standard provisions and procedures for transition to a benchmark other than the Eurodollar Rate to determine the applicable interest rate (including reference to the secured overnight financing rate (SOFR) published by the Federal Reserve Bank of New York), with provisions applying that alternate benchmark where applicable following the replacement of LIBOR. Pursuant to the terms of the New Credit Agreement, the Company has agreed to pay to KeyBank, as administrative agent for the ratable account of the revolving lenders in consideration for their commitments in respect of the New Revolver, a commitment fee due quarterly in arrears and calculated based on the average unused amount of the facility (exclusive of swing line exposure), at a rate ranging from 0.2% per annum to 0.3% per annum, depending on the Company’s leverage ratio. On January 12, 2023, the Company amended its New Credit Agreement for the purpose of transitioning its reference rate related to interest from LIBOR to SOFR.
Revolving loans borrowed under the New Credit Agreement mature on September 1, 2026, and the commitments with respect to the New Revolver will automatically terminate on such date.
The New Credit Agreement contains customary representations and warranties, covenants and events of default. In addition, the New 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 New 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.
The Company recorded $0.7 million of deferred financing costs associated with the New Credit Agreement, which are included in other current assets and other assets on the accompanying consolidated balance sheet at December 31, 2021 and are being amortized to interest expense over the five-year term of the New Credit Agreement.
At December 31, 2022, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Fixed Charge Coverage Ratio.
Interest Rate Swaps
In December 2021, the Company purchased two interest rate swaps (the "2021 Swaps"), each with an aggregate notional amount of $30 million, or $60 million in the aggregate, the effect of which is to fix the LIBOR portion of the interest rate on a portion of our outstanding debt on our New Revolver. The 2021 Swaps were effective December 31, 2021 and continue through August 31, 2026, the original termination date of the New Credit Agreement. The 2021 Swaps require the Company to pay interest on the notional amount at the rate of 1.3055% and 1.3180%, respectively, in exchange for the one-month LIBOR rate. See Note 12, "Derivative Instruments and Hedging Activities" for further information on these interest rate derivative instruments entered into in connection with the New Credit Agreement. In connection with the above-noted related change to its credit agreement, on January 18, 2023, the Company amended its two interest rate swap agreements to transition the related reference rates in these agreements from LIBOR to SOFR, effective January 31, 2023.
Scheduled principal payments of the total debt outstanding at December 31, 2022 are as follows (in thousands):
Total long-term debt 95,000
Less: Current maturities of long-term debt -
Noncurrent portion of long-term debt $ 95,000
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11. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
Salaries, bonuses and related benefits $ 27,422 $ 21,342
Accrued restructuring costs 6,796 9
The change in warranty accrual during 2022 primarily related to repair costs incurred and adjustments to pre-existing warranties. There were no new material warranty charges incurred during 2022.
Restructuring Activities:
Activity and liability balances related to restructuring costs for the year ended December 31, 2022 are as follows:
Year Ended
Liability at Cash Payments Liability at
December 31, New and Other December 31,
Other restructuring costs - 3,406 - 3,406
12. 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 $25.7 million and $17.1million as of December 31, 2022 and 2021, respectively. The Company's foreign currency forward contracts related to the Chinese renminbi are designated as cash flow hedges for accounting purposes and as such, changes in their fair value are recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and are reclassified into the statement of operations within cost of goods sold in the period in which the hedged transaction affects earnings.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the New Credit Agreement, in November 2021, we executed a pay-fixed, receive-variable interest rate swap agreement with each of two multinational financial institutions under which we (i) pay interest at a fixed rate of 1.3055% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million and (ii) pay interest at a fixed rate of 1.3180% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million (the “2021 Swaps”). The effective date of the 2021 Swaps was December 31, 2021, and settlements with the counterparties began on January 31, 2022 and occur on a monthly basis. The 2021 Swaps swill terminate on August 31, 2026. In January 2023, and in connection with related changes to its credit agreement, the Company amended its two interest rate swap agreements to transition the related reference rates in these agreements from LIBOR to SOFR, effective January 31, 2023.
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 income (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.
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Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our consolidated balance sheets as of December 31,2022 were as follows:
Balance Sheet Classification December 31, 2022 December 31, 2021
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges Other current assets $ 359 $ 57
Interest rate swap agreements:
Designated as a cash flow hedge Other assets 5,539 -
Total derivative assets $ 5,898 $ 57
Derivative liabilities:
Foreign currency forward contracts:
Not designated as hedging instruments Other current liabilities $ - $ 19
Interest rate swap agreements:
Designated as a cash flow hedge Other long-term liabilities - 116
Total derivative liabilities $ - $ 135
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the consolidated statements of operations for the years ended December 31, 2022 and 2021 were as follows:
Year Ended December 31,
Net (losses) gains recognized in AOCL:
Foreign currency forward contracts $ (119 ) $ 57