BEL FUSE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
|
The condensed consolidated balance sheets, statements of operations, comprehensive income and cash flows for the periods presented herein have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented have been made. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Bel Fuse Annual Report on Form 10-K for the year ended December 31, 2017.
Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted from the following condensed consolidated financial statements pursuant to the rules and regulations, including the interim reporting requirements, of the SEC. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
The Company's significant accounting policies are summarized in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2017. There were no significant changes to these accounting policies during the nine months ended September 30, 2018, except as discussed in Note 2, Revenue, related to the adoption of the new revenue standards.
All amounts included in the tables to these notes to condensed consolidated financial statements, except per share amounts, are in thousands.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. Subsequently, the FASB issued several other updates related to revenue recognition (collectively with ASU 2014-09, the "new revenue standards" or "ASC 606"). We adopted the guidance under the new revenue standards effective January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings.
Upon adoption, the new revenue standards replaced most existing revenue recognition guidance in U.S. GAAP. Based on our review of representative samples of contracts and other forms of agreements with customers globally and our evaluation of the provisions under the five-step model specified by the new revenue standards, the Company has implemented changes with respect to timing of revenue recognition primarily related to arrangements for which the customer takes the Company's products from a facility holding consignment inventory.
In connection with the modified retrospective application of the new revenue standards, we recorded an adjustment to increase retained earnings of $3.4 million upon the January 1, 2018 adoption date. Apart from this adjustment and the inclusion of additional required disclosures in Note 2, the adoption of the new revenue standards did not have a material impact on the Company's condensed consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. This guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, entities will be required to measure certain equity investments at fair value and recognize any changes in fair value in net earnings, unless the investments qualify for the new practicability exception. The new standard was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. We adopted this guidance on January 1, 2018. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This guidance addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This accounting guidance was effective for annual reporting periods beginning after December 31, 2017, including interim reporting periods within those annual reporting periods, and should be applied retrospectively to all periods presented. This
guidance was adopted by the Company effective January 1, 2018 and it did not have any impact on the Company's condensed consolidated statement of cash flows in the periods presented.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfer until the asset has been sold to an
outside party. The new guidance eliminates the exception and requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This accounting guidance
was effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This guidance was adopted by the Company effective January 1, 2018 and it did not have a material impact on the Company's condensed consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
("ASU 2017-01"), to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. The Company adopted ASU 2017-01 on January 1, 2018, and the guidance will be applied on a prospective basis.
In March 2017, the FASB issued ASU 2017-07,
Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
("ASU 2017-07"). This guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. ASU 2017-07 requires employers to present the service cost component of the net periodic benefit cost in the same income statement line as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service costs and actuarial gains/losses, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. The guidance also specifies that the amount of costs that can be capitalized will be limited to service cost only. The Company adopted the guidance of ASU 2017-07 on January 1, 2018 and elected to apply the practical expedient and use the amounts disclosed in Note 9 to the financial statements included in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 as the basis for applying the retrospective application required by the standard. The amounts reclassified within the statement of operations for the three-month and nine-month periods ended September 30, 2017 were not material.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09")
. This update provides guidance about which changes to the terms or conditions of a share-based payment require an entity to apply modification accounting in Topic 718. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU 2017-09 on January 1, 2018, and the guidance within this update will be applied to any future award modifications.
Accounting Standards Issued But Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, to provide a new comprehensive model for lease accounting. Under
this guidance, lessees and lessors should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting in-line with revenue recognition guidance. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The updated guidance requires a modified retrospective adoption. We plan to adopt the standard on January 1, 2019. We are currently assessing the impact that the new standard will have on our consolidated financial statements, which will consist primarily of recording right-of-use assets and lease liabilities related to our operating leases on our consolidated balance sheet.
In January 2017, the FASB issued
ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is required to adopt ASU 2017-04 for its annual or any interim goodwill impairment tests for annual periods beginning after December 15, 2019, and the guidance is to be applied on a prospective basis.
In February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act, which was enacted on December 22, 2017. This guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. Tax Cuts and Jobs Act is recognized. Early adoption is permitted.
We are currently in the process of evaluating this new standard update.
In May 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. This guidance will better align the treatment of share-based payments to nonemployees with the requirements for such share-based payments granted to employees. This guidance is effective for all public entities for fiscal years beginning after December 15, 2018, including interim periods within that year. We are currently in the process of evaluating this new standard update.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
. The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.
In August 2018, the FASB issued ASU 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
. This guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. The standard is effective for fiscal years ending after December 15, 2020. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. We are currently assessing the impact the new guidance will have on our disclosures.
In August 2018, the FASB issued ASU 2018-15,
Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Cost
. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impacts that adoption of this ASU will have on its consolidated financial statements.
Significant Accounting Policy
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and provides financial statement readers with enhanced disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
In accordance with ASC 606, 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.
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.
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:
·
|
Direct with customer:
This includes contracts with original equipment manufacturers (OEMs), original design manufacturers (ODMs), and contract manufacturers (CMs). The nature of Bel's products are such that they represent components which are installed in various end applications (i.e. servers, aircraft, missiles and rail applications). The OEM, ODM or CM that purchases our product for further installation are our end customers. Contracts with these customers are broad-based and cover general terms and conditions. Details such as order volume and pricing are typically contained in individual purchase orders, and as a result, we view each product on each purchase order as an individual performance obligation. Incremental services included in the contracts, such as training, tooling and other customer support are determined to be immaterial in the context of the contract, both individually and in the aggregate. Revenue under these contracts is generally recognized at a point in time, generally upon shipping or delivery, which closely mirrors the shipping terms dictated by the applicable contract.
|
·
|
Distributor:
Distribution customers buy product directly from Bel and sell it in the marketplace to end customers. Bel contracts directly with the distributor. These contracts are typically global in nature and cover a variety of our product groups. Similar to contracts with OEMs, ODMs and CMs, each product on each purchase order is considered an individual performance obligation. Revenue is recognized at a point in time, generally upon shipping or delivery, which closely mirrors the shipping terms dictated by the applicable contract.
|
·
|
Consignment:
These customers operate under a type of concession agreement whereby the Company ships goods to a warehouse or hub, where they will be pulled by the customer at a later date. The terms specified in the consignment contracts specify that the Company will not invoice the customer for product until it is pulled from the warehouse or hub. Once product arrives at the hub, it is generally not returned to Bel unless there is a warranty issue (see "Warranties" section below). Similar to the contracts described above, each product on each purchase order is considered an individual performance obligation. Under ASC 606, it was determined that the majority of these hubs are customer-controlled, and therefore control transfers to the customer upon either delivery from Bel's warehouse, or arrival at the customer-controlled hub, depending upon the applicable shipping terms. Effective January 1, 2018, revenue is recognized as control of the product is transferred to the customer (for customer-controlled hubs, this is at the time product is shipped to the hub). This gives rise to an unbilled receivable balance, as we do not have the right to invoice the customer until product is pulled from the hub.
|
·
|
Licensing Agreements:
License agreements are only applicable to our Power Solutions and Protection product group, and include provisions for Bel to receive sales-based royalty income related to the licensing of Bel's patents or other intellectual property (IP) utilized by a third-party entity. Income related to these agreements is tracked by the licensee throughout the year based on their sales of product that utilize Bel's IP, and that data is reported to Bel either on a quarterly or annual basis, with payment generally received within 30 days of the reporting date. Our performance obligation is satisfied upon delivery of the IP at the beginning of the license period, as the licenses are functional in nature. However, the recognition of revenue associated with these licenses is subject to the sales- or usage-based constraint on variable consideration. As such, the Company records a constrained estimate of this variable consideration as royalty income in the period of the underlying customers' product sales, with adjustments made as actual licensee sales data becomes available.
|
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 7, "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.
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 customer. Payment for products sold under consignment contracts 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.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by product group and sales channel, and includes a reconciliation of the disaggregated revenue to our reportable segments:
|
|
Three Months Ended September 30, 2018
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Product Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity solutions
|
|
$
|
34,919
|
|
|
$
|
5,293
|
|
|
$
|
8,314
|
|
|
$
|
48,526
|
|
Magnetic solutions
|
|
|
10,586
|
|
|
|
40,100
|
|
|
|
2,286
|
|
|
|
52,972
|
|
Power solutions and protection
|
|
|
25,149
|
|
|
|
8,135
|
|
|
|
11,707
|
|
|
|
44,991
|
|
|
|
$
|
70,654
|
|
|
$
|
53,528
|
|
|
$
|
22,307
|
|
|
$
|
146,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Sales Channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to customer
|
|
$
|
46,802
|
|
|
$
|
46,965
|
|
|
$
|
15,184
|
|
|
$
|
108,951
|
|
Through distribution
|
|
|
23,852
|
|
|
|
6,563
|
|
|
|
7,123
|
|
|
|
37,538
|
|
|
|
$
|
70,654
|
|
|
$
|
53,528
|
|
|
$
|
22,307
|
|
|
$
|
146,489
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Product Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity solutions
|
|
$
|
100,797
|
|
|
$
|
13,533
|
|
|
$
|
26,043
|
|
|
$
|
140,373
|
|
Magnetic solutions
|
|
|
28,795
|
|
|
|
100,769
|
|
|
|
7,184
|
|
|
|
136,748
|
|
Power solutions and protection
|
|
|
71,759
|
|
|
|
23,760
|
|
|
|
32,811
|
|
|
|
128,330
|
|
|
|
$
|
201,351
|
|
|
$
|
138,062
|
|
|
$
|
66,038
|
|
|
$
|
405,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Sales Channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to customer
|
|
$
|
128,754
|
|
|
$
|
119,294
|
|
|
$
|
45,368
|
|
|
$
|
293,416
|
|
Through distribution
|
|
|
72,597
|
|
|
|
18,768
|
|
|
|
20,670
|
|
|
|
112,035
|
|
|
|
$
|
201,351
|
|
|
$
|
138,062
|
|
|
$
|
66,038
|
|
|
$
|
405,451
|
|
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 were as follows:
|
|
Balance at
|
|
|
Adjustments
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Due to
|
|
|
January 1,
|
|
|
|
2017
|
|
|
ASC 606
|
|
|
2018
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
-
|
|
|
$
|
14,536
|
|
|
$
|
14,536
|
|
Inventory
|
|
|
107,719
|
|
|
|
(11,044
|
)
|
|
|
96,675
|
|
Other current liabilities
|
|
|
6,204
|
|
|
|
43
|
|
|
|
6,247
|
|
Retained earnings
|
|
|
147,807
|
|
|
|
3,449
|
|
|
|
151,256
|
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our balance sheet as of September 30, 2018 and consolidated statement of operations for the three and nine months ended September 30, 2018 was as follows:
|
|
As of September 30, 2018
|
|
|
|
|
|
|
Balances
|
|
|
Effect of
|
|
|
|
As
|
|
|
Without Adoption
|
|
|
Change
|
|
|
|
Reported
|
|
|
of ASC 606
|
|
|
Higher/(Lower)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
16,553
|
|
|
$
|
-
|
|
|
$
|
16,553
|
|
Inventories
|
|
|
114,434
|
|
|
|
126,737
|
|
|
|
(12,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
3,836
|
|
|
|
3,715
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
165,518
|
|
|
|
161,389
|
|
|
|
4,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
Balances
|
|
|
Effect of
|
|
|
|
|
|
Balances
|
|
|
Effect of
|
|
|
|
As
|
|
|
Without Adoption
|
|
|
Change
|
|
|
As
|
|
|
Without Adoption
|
|
|
Change
|
|
|
|
Reported
|
|
|
of ASC 606
|
|
|
Higher/(Lower)
|
|
|
Reported
|
|
|
of ASC 606
|
|
|
Higher/(Lower)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
146,489
|
|
|
$
|
145,523
|
|
|
$
|
966
|
|
|
$
|
405,451
|
|
|
$
|
403,434
|
|
|
$
|
2,017
|
|
Cost of sales
|
|
|
117,282
|
|
|
|
116,312
|
|
|
|
970
|
|
|
|
326,096
|
|
|
|
324,837
|
|
|
|
1,259
|
|
Operating income
|
|
|
10,499
|
|
|
|
10,503
|
|
|
|
(4
|
)
|
|
|
21,603
|
|
|
|
20,845
|
|
|
|
758
|
|
(Benefit from) Provision for income taxes
|
|
|
(2,201
|
)
|
|
|
(2,163
|
)
|
|
|
(38
|
)
|
|
|
523
|
|
|
|
445
|
|
|
|
78
|
|
Net earnings
|
|
|
11,352
|
|
|
|
11,318
|
|
|
|
34
|
|
|
|
16,684
|
|
|
|
16,004
|
|
|
|
680
|
|
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 consignment 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 September 30, 2018 are as follows:
|
|
September 30,
|
|
|
January 1,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Contract assets - current (unbilled receivable)
|
|
$
|
16,553
|
|
|
$
|
14,536
|
|
Contract liabilities - current (deferred revenue)
|
|
$
|
776
|
|
|
$
|
855
|
|
The change in balance of our unbilled receivables from January 1, 2018 to September 30, 2018 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).
A tabular presentation of the activity within the deferred revenue account for the nine months ended September 30, 2018 is presented below:
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
Balance, January 1
|
|
$
|
855
|
|
New advance payments received
|
|
|
6,180
|
|
Recognized as revenue during period
|
|
|
(6,251
|
)
|
Currency translation
|
|
|
(8
|
)
|
Balance, September 30
|
|
$
|
776
|
|
Transaction Price Allocated to Future Obligations
:
The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of September 30, 2018 related to contracts that exceed one year in duration amounted to $17.6 million, with expected contract expiration dates that range from 2019 - 2024. It is expected that 14% of this aggregate amount will be recognized in the fourth quarter of 2019, 52% will be recognized in 2020 and the remainder will be recognized in years beyond 2020. The majority of the Company's total backlog of orders at September 30, 2018 is related to contracts that have an original expected duration of one year or less, for which the Company is electing to utilize the practical expedient available within the guidance, and are excluded from the transaction price related to these future obligations. The Company will generally satisfy the remaining performance obligations as we transfer control of the products ordered to our customers. The transaction price related to these future obligations also excludes variable consideration consisting of sales or usage-based royalties earned on licensing agreements. The variability related to these sales or usage-based royalties will be resolved in the periods when the licensee generates sales related to the licensed intellectual property.
Other Practical Expedients:
In the application of the recognition and measurement principles of ASC 606, the Company elected to utilize the following additional practical expedients which are provided for within the guidance:
·
|
Financing Components
: Bel has elected the practical expedient which enables management to disregard the effects of a financing component if the time difference between delivery of goods or services and payment for the goods or services is within one year.
|
·
|
Costs to Obtain a Contract
: As part of negotiations, Bel may incur incremental costs to obtain a contract. Incremental costs are only those costs that would not have been incurred if the contract had not been obtained (e.g. sales commissions). Bel has elected the practical expedient that allows incremental costs to obtain a contract to be expensed as incurred when the expected amortization period is one year or less.
|
The following table sets forth the calculation of basic and diluted net earnings per common share under the two-class method for the three and nine months ended September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
11,352
|
|
|
$
|
5,024
|
|
|
$
|
16,684
|
|
|
$
|
8,890
|
|
Less dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
130
|
|
|
|
131
|
|
|
|
391
|
|
|
|
392
|
|
Class B
|
|
|
689
|
|
|
|
691
|
|
|
|
2,079
|
|
|
|
2,079
|
|
Undistributed earnings
|
|
$
|
10,533
|
|
|
$
|
4,202
|
|
|
$
|
14,214
|
|
|
$
|
6,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocation - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A undistributed earnings
|
|
$
|
1,812
|
|
|
$
|
729
|
|
|
$
|
2,461
|
|
|
$
|
1,115
|
|
Class B undistributed earnings
|
|
|
8,721
|
|
|
|
3,473
|
|
|
|
11,753
|
|
|
|
5,304
|
|
Total undistributed earnings
|
|
$
|
10,533
|
|
|
$
|
4,202
|
|
|
$
|
14,214
|
|
|
$
|
6,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings allocation - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A net earnings
|
|
$
|
1,942
|
|
|
$
|
860
|
|
|
$
|
2,852
|
|
|
$
|
1,507
|
|
Class B net earnings
|
|
|
9,410
|
|
|
|
4,164
|
|
|
|
13,832
|
|
|
|
7,383
|
|
Net earnings
|
|
$
|
11,352
|
|
|
$
|
5,024
|
|
|
$
|
16,684
|
|
|
$
|
8,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A - basic and diluted
|
|
|
2,175
|
|
|
|
2,175
|
|
|
|
2,175
|
|
|
|
2,175
|
|
Class B - basic and diluted
|
|
|
9,972
|
|
|
|
9,864
|
|
|
|
9,891
|
|
|
|
9,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A - basic and diluted
|
|
$
|
0.89
|
|
|
$
|
0.40
|
|
|
$
|
1.31
|
|
|
$
|
0.69
|
|
Class B - basic and diluted
|
|
$
|
0.94
|
|
|
$
|
0.42
|
|
|
$
|
1.40
|
|
|
$
|
0.75
|
|
4.
FAIR VALUE MEASUREMENTS
F
air value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date. Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1
–
Observable inputs such as quoted market prices in active markets;
Level 2
–
Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3
–
Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of December 31, 2017, the Company held certain financial assets that are measured at fair value on a recurring basis. These consisted of securities that are among the Company's investments in a rabbi trust which are intended to fund the Company's Supplemental Executive Retirement Plan ("SERP") obligations. The gross unrealized gains associated with the investment securities held in the rabbi trust were $0.2 million at December 31, 2017. Such unrealized gains are included, net of tax, in accumulated other comprehensive loss. During the nine months ended September 30, 2018, the Company sold its securities and realized a gain on sale of $0.2 million. The proceeds of $1.3 million were reinvested in other securities within the rabbi trust.
As of September 30, 2018 and December 31, 2017, our securities primarily consisted of investments held in a rabbi trust of $1.3 million and $1.5 million, respectively, which were measured at fair value using quoted prices in active markets for identical assets (Level 1) inputs. The Company does not have any financial assets measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2018 or September 30, 2017. Excluding the changes made in accordance with the Company's adoption of ASU 2016-01, there were no additional changes to the Company's valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the nine months ended September 30, 2018.
There were no financial assets accounted for at fair value on a nonrecurring basis as of September 30, 2018 or December 31, 2017.
The Company has other financial instruments, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, accrued expenses and notes payable, which are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. The fair value of the Company's long-term debt is estimated using a discounted cash flow method based on interest rates that are currently available for debt issuances with similar terms and maturities. At September 30, 2018 and December 31, 2017, the estimated fair value of total debt was $116.9 million and $124.8 million, respectively, compared to a carrying amount of $114.8 million and $122.7 million, respectively. The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of September 30, 2018.
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. There were no triggering events that occurred during the nine months ended September 30, 2018 that would warrant interim impairment testing.
5.
INVENTORIES
The components of inventories are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
62,373
|
|
|
$
|
46,712
|
|
Work in progress
|
|
|
21,602
|
|
|
|
17,688
|
|
Finished goods
|
|
|
30,459
|
|
|
|
43,319
|
|
Inventories
|
|
$
|
114,434
|
|
|
$
|
107,719
|
|
6.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
2,256
|
|
|
$
|
2,259
|
|
Buildings and improvements
|
|
|
30,572
|
|
|
|
30,761
|
|
Machinery and equipment
|
|
|
124,160
|
|
|
|
122,773
|
|
Construction in progress
|
|
|
4,133
|
|
|
|
1,511
|
|
|
|
|
161,121
|
|
|
|
157,304
|
|
Accumulated depreciation
|
|
|
(118,127
|
)
|
|
|
(113,809
|
)
|
Property, plant and equipment, net
|
|
$
|
42,994
|
|
|
$
|
43,495
|
|
Depreciation expense for the three months ended September 30, 2018 and 2017 was $2.8 million and $3.6 million, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $8.9 million and $10.6 million, respectively.
Accrued expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Sales commissions
|
|
$
|
2,685
|
|
|
$
|
2,461
|
|
Subcontracting labor
|
|
|
1,542
|
|
|
|
1,408
|
|
Salaries, bonuses and related benefits
|
|
|
19,177
|
|
|
|
16,531
|
|
Warranty accrual
|
|
|
1,104
|
|
|
|
1,769
|
|
Other
|
|
|
8,025
|
|
|
|
8,339
|
|
|
|
$
|
32,533
|
|
|
$
|
30,508
|
|
A tabular presentation of the activity within the warranty accrual account for the nine months ended September 30, 2018 and 2017 is presented below:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Balance, January 1
|
|
$
|
1,769
|
|
|
$
|
2,718
|
|
Charges and costs accrued
|
|
|
-
|
|
|
|
211
|
|
Adjustments related to pre-existing warranties
|
|
|
|
|
|
|
|
|
(including changes in estimates)
|
|
|
(494
|
)
|
|
|
(779
|
)
|
Less repair costs incurred
|
|
|
(181
|
)
|
|
|
(173
|
)
|
Currency translation
|
|
|
10
|
|
|
|
66
|
|
Balance, September 30
|
|
$
|
1,104
|
|
|
$
|
2,043
|
|
The Company has a Credit and Security Agreement with KeyBank National Association (as amended, the "CSA"). The CSA consists of (i) a term loan, with outstanding borrowings of $116.7 million and $125.0 million at September 30, 2018 and December 31, 2017, respectively and (ii) a $75 million revolving credit facility ("Revolver"), with no outstanding borrowings at September 30, 2018 or December 31, 2017. The CSA has a maturity date of December 11, 2022. At September 30, 2018 and December 31, 2017, the carrying value of the debt on the condensed consolidated balance sheet is reflected net of $1.9 million and $2.3 million, respectively, of deferred financing costs. During the nine months ended September 30, 2018, the Company made voluntary prepayments of $6.0 million. Per the terms of the CSA, such voluntary prepayments reduce the amount of future scheduled payments on a pro rata basis.
The weighted-average interest rate in effect was 4.25% at September 30, 2018 and 3.38% at December 31, 2017 and consisted of LIBOR plus the Company's credit spread, as determined per the terms of the CSA. The Company incurred $1.4 million and $1.5 million of interest expense during the three months ended September 30, 2018 and September 30, 2017, respectively, and $3.9 million and $4.5 million of interest expense during the nine months ended September 30, 2018 and September 30, 2017, respectively.
The CSA contains customary representations and warranties, covenants and events of default and financial covenants that measure (i) the ratio of the Company's total funded indebtedness, on a consolidated basis, to the amount of the Company's consolidated EBITDA, as defined, ("Leverage Ratio") and (ii) the ratio of the amount of the Company's consolidated EBITDA to the Company's consolidated fixed charges. If an event of default occurs, the lenders under the CSA would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor. At September 30, 2018, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Fixed Charge Coverage Ratio.
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 2015 and for state examinations before 2012. Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2008 in Asia and generally 2010 in Europe.
As a result of the expiration of the statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized benefits for tax positions taken regarding previously filed tax returns may change materially from those recorded as liabilities for uncertain tax positions in the Company's consolidated financial statements at September 30, 2018. The Company's liabilities for uncertain tax positions totaled $28.2 million and $30.4 million at September 30, 2018 and December 31, 2017, respectively, of which $1.1 million and $2.5 million is included in other current liabilities at September 30, 2018 and December 31, 2017, respectively. These amounts, if recognized, would reduce the Company's effective tax rate. As of September 30, 2018, approximately $2.5 million of the Company's liabilities for uncertain tax positions were resolved during 2018 by way of expiration of the related statute of limitations.
The Company's policy is to recognize interest and penalties related to uncertain tax positions as a component of the current provision for income taxes. During the nine months ended September 30, 2018 and 2017, the Company recognized $0.7 million and $0.6 million, respectively, in interest and penalties in the consolidated statements of operations. During the three and nine months ended September 30, 2018, the Company recognized
a benefit of $0.3 million and $0.7 million, respectively,
for the reversal of such interest and penalties, relating to the expiration of statutes of limitations and settlement of the acquired liability for uncertain tax positions.
There were no reversals of interest or penalties in the three or nine months ended September 30, 2017.
The Company has approximately $3.1 million and $3.2 million accrued for the payment of interest and penalties at September 30, 2018 and December 31, 2017, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the consolidated balance sheets.
Tax Reform
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Act; however, we had made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax in which we recognized a provisional amount of $18.1 million, which was included as a component of income tax expense from continuing operations. During the nine months ended September 30, 2018, the Company has made measurement-period adjustments related to foreign earnings and profits computations and foreign income tax calculations for the Company's non-U.S. subsidiaries. The Company's measurement-period adjustment reduced its estimate of the deemed repatriation tax by $2.6 million, resulting in the reduction of the Company's provisional estimate from $18.1 million to $15.5 million. The Company plans to pay the tax in installments in accordance with the Act.
The Company's estimates of the effects of the Act were calculated using currently available information; however, the Company is continuing to evaluate the underlying documentation and revisions to the current calculation may occur.
Effective January 1, 2018, the Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The Company has elected an accounting policy to provide for the tax expense related to the GILTI in the period the tax is incurred.
10.
RETIREMENT FUND AND PROFIT SHARING PLAN
The Company maintains the Bel Fuse Inc. Employees' Savings Plan, a defined contribution plan that is intended to meet the applicable requirements for tax-qualification under sections 401(a) and (k) of the Internal Revenue Code of 1986, as amended (the "Code"). The expense for the three months ended September 30, 2018 and 2017 amounted to $0.3 million in both periods. The expense for the nine months ended September 30, 2018 and 2017 amounted to $0.8 million and $0.9 million, respectively. The Company's matching contribution is made in the form of Bel Fuse Inc. Class A common stock. As of September 30, 2018, the plan owned 111,393 and 137,700 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.
The Company's subsidiaries in Asia have a retirement fund covering substantially all of their Hong Kong based full-time employees.
The expense for the three months ended September 30, 2018 and 2017 amounted to $0.1 million in both periods. The expense for the nine months ended September 30, 2018 and 2017 amounted to $0.3 million in both periods. As of September 30, 2018, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.
The Company maintains a SERP, which is designed to provide a limited group of key management and other key employees of the Company
with
supplemental retirement and death benefits. As discussed in Note 4 above, the Company has investments in a rabbi trust which are intended to fund the obligations of the SERP.
The components of SERP expense are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
183
|
|
|
$
|
175
|
|
|
$
|
549
|
|
|
$
|
525
|
|
Interest cost
|
|
|
166
|
|
|
|
168
|
|
|
|
498
|
|
|
|
505
|
|
Net amortization
|
|
|
111
|
|
|
|
94
|
|
|
|
332
|
|
|
|
281
|
|
Net periodic benefit cost
|
|
$
|
460
|
|
|
$
|
437
|
|
|
$
|
1,379
|
|
|
$
|
1,311
|
|
The service cost component of net benefit cost is presented within cost of sales or selling, general and administrative expense on the accompanying statements of operations, in accordance with where compensation cost for the related associate is reported. All other components of net benefit cost, including interest cost and net amortization noted above, are presented within other income/expense, net in the accompanying statements of operations.
The following amounts are recognized net of tax in accumulated other comprehensive loss:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prior service cost
|
|
$
|
943
|
|
|
$
|
1,135
|
|
Net loss
|
|
|
3,591
|
|
|
|
3,732
|
|
|
|
$
|
4,534
|
|
|
$
|
4,867
|
|
11.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at September 30, 2018 and December 31, 2017 are summarized below:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of taxes of ($790) at
|
|
|
|
|
|
|
September 30, 2018 and ($801) at December 31, 2017
|
|
$
|
(21,000
|
)
|
|
$
|
(16,537
|
)
|
Unrealized holding (losses) gains on available-for-sale securities, net of taxes of
|
|
|
|
|
|
|
|
|
$67 at September 30, 2018 and $85 at December 31, 2017
|
|
|
(56
|
)
|
|
|
145
|
|
Unfunded SERP liability, net of taxes of ($1,558) at September 30, 2018
|
|
|
|
|
|
|
|
|
and ($1,635) at December 31, 2017
|
|
|
(2,977
|
)
|
|
|
(3,233
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(24,033
|
)
|
|
$
|
(19,625
|
)
|
Changes in accumulated other comprehensive loss by component during the nine months ended September 30, 2018 are as follows. All amounts are net of tax.
|
|
|
|
|
Unrealized Holding
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Gains (Losses) on
|
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Available-for-
|
|
|
Unfunded
|
|
|
|
|
|
|
|
Adjustment
|
|
|
Sale Securities
|
|
|
SERP Liability
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
$
|
(16,537
|
)
|
|
$
|
145
|
|
|
$
|
(3,233
|
)
|
|
|
$
|
(19,625
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(4,463
|
)
|
|
|
(31
|
)
|
|
|
39
|
|
|
|
|
(4,455
|
)
|
Amount reclassified from accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive loss
|
|
|
-
|
|
|
|
(170
|
)
|
|
|
217
|
|
(a)
|
|
|
47
|
|
Net current period other comprehensive (loss) income
|
|
|
(4,463
|
)
|
|
|
(201
|
)
|
|
|
256
|
|
|
|
|
(4,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
$
|
(21,000
|
)
|
|
$
|
(56
|
)
|
|
$
|
(2,977
|
)
|
|
|
$
|
(24,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) This reclassification relates to the amortization of prior service costs and gains/losses associated with the Company's SERP plan.
|
|
|
|
|
|
|
This expense is allocated between cost of sales and selling, general and administrative expense based upon the employment
|
|
|
|
|
|
|
classification of the plan participants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to a number of legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material adverse effect on the Company's consolidated results of operations or financial position.
In connection with the acquisition of Power Solutions, there is an ongoing claim by the Arezzo Revenue Agency in Italy concerning certain tax matters related to what was then Power-One Asia Pacific Electronics Shenzhen Co. Ltd. (now Bel Power Solutions Asia Pacific Electronics Shenzhen Co. Ltd, or "BPS China") for the years 2004 to 2006. In September 2012, the Tax Court of Arezzo ruled in favor of BPS China and cancelled the claim. In February 2013, the Arezzo Revenue Agency filed an appeal of the Tax Court's ruling. The hearing of the appeal was held on October 2, 2014. On October 13, 2014, BPS China was informed of the Regional Tax Commission of Florence ruling which was in favor of the Arezzo Revenue Agency and against BPS China. An appeal was filed on July 18, 2015 before the Regional Tax Commission of Florence and rejected. On December 5, 2016, the Arezzo Revenue Agency filed an appeal with the Supreme Court and BPS China filed a counter-appeal on January 4, 2017. The Supreme Court has yet to render its judgment. The estimated liability related to this matter is approximately $12.0 million and has been included as a liability for uncertain tax positions on the accompanying condensed consolidated balance sheets. As Bel is fully indemnified in this matter per the terms of the stock purchase agreement with ABB, a corresponding other asset for indemnification is also included in other assets on the accompanying consolidated balance sheets at September 30, 2018 and December 31, 2017.
In 2015, the Company was provided notice of a potential patent infringement claim by Setec Netzwerke AG ("Setec"), a German company for the alleged infringement of their patent EP 306 934 B1. Setec subsequently filed a lawsuit against the Company and three of its subsidiaries in the Regional Court of Dusseldorf, Germany on January 29, 2016 for patent infringement. The Company filed its defense to Setec's Complaint and a nullity lawsuit against Setec's patent on August 31 2016. The Court hearing on infringement took place on March 23, 2017. Upon hearing argument from both parties, the Court issued a decision on April 6, 2017 staying final judgment in the infringement case pending resolution of the nullity lawsuit in the Federal Patents Courts in Munich, Germany. The Federal Patents Courts issued its preliminary opinion regarding the patent-in-suit on March 29, 2018, stating that it considers the patent-in-suit to not be novel over the prior art documents presented in the case. The parties agreed to withdraw from the pending infringement and nullity proceedings and entered into a settlement agreement on June 29, 2018. The Company paid Setec 75,000 Euro in exchange for a perpetual, worldwide royalty-free license to the patent-in-suit and all its counterparts.
In 2015,
one of the Company's subsidiaries in the PRC, Dongguan Transpower Electric Products Co., Ltd. ("Dongguan Transpower"), was provided notice of a claim by DG Yu Shing Industrial Development Company Limited against Dongguan Transpower and three other defendants for past due construction costs of approximately $3.2 million. In April 2018, the 3
rd
People Court of Dongguan ruled and provided an unfavorable judgment against Dongguan Transpower and two of the other defendants requiring payment of the aforementioned amount. The defendants were held to be jointly and severally liable for approximately $3.2 million in costs. Due to the fact that none of the other defendants had sufficient funds to pay the damages amount, the Court ordered the entire amount (CNY 20,133,174.10) to be paid by Dongguan Transpower. On May 25, 2018, the Court enforced its order and withdrew the damages amount from Dongguan Transpower's bank accounts. On May 31, 2018, Dongguan Transpower filed an action against the other defendants in CP Court to recoup the damages amount paid pursuant to an indemnification letter dated October 16, 2015. The Court heard arguments on July 2, 2018 and rendered a verdict on July 9, 2018 ordering the Jinmei entities (defendants) to pay CNY 20,133,174 back to Dongguan Transpower together with the incurred interest. On August 27, 2018, Dongguan Transpower received payment of CNY 20,430,203 (approximately $3.2 million) from the defendants and this case was closed.
On June 1, 2018, the Company filed an action against Unipower, LLC in the United States District Court for the Southern District of New York for breach of contract. Specifically, the Company alleges in its Complaint that Unipower has willfully violated the Master Services Agreement ("MSA") entered into by the parties on January 23, 2015 by failing to make payment for the products it contracted for under the MSA. The Company is claiming irreparable harm and substantial damages in excess of $1.0 million. The case is currently in the discovery phase of the litigation.
The Company is not a party to any other legal proceeding, the adverse outcome of which is likely to have a material adverse effect on the Company's consolidated financial condition or results of operations.
13.
SEGMENTS
The Company operates in one industry with three reportable operating segments, which are geographic in nature. The segments consist of North America, Asia and Europe. The primary criteria by which financial performance is evaluated and resources are allocated are net sales and income from operations. The following is a summary of key financial data:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net Sales to External Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
70,654
|
|
|
$
|
59,537
|
|
|
$
|
201,351
|
|
|
$
|
184,873
|
|
Asia
|
|
|
53,528
|
|
|
|
45,919
|
|
|
|
138,062
|
|
|
|
127,801
|
|
Europe
|
|
|
22,307
|
|
|
|
20,930
|
|
|
|
66,038
|
|
|
|
58,997
|
|
|
|
$
|
146,489
|
|
|
$
|
126,386
|
|
|
$
|
405,451
|
|
|
$
|
371,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
73,932
|
|
|
$
|
62,348
|
|
|
$
|
211,105
|
|
|
$
|
193,473
|
|
Asia
|
|
|
78,008
|
|
|
|
66,534
|
|
|
|
204,152
|
|
|
|
193,364
|
|
Europe
|
|
|
25,398
|
|
|
|
23,633
|
|
|
|
77,341
|
|
|
|
67,434
|
|
Less intercompany net sales
|
|
|
(30,849
|
)
|
|
|
(26,129
|
)
|
|
|
(87,147
|
)
|
|
|
(82,600
|
)
|
|
|
$
|
146,489
|
|
|
$
|
126,386
|
|
|
$
|
405,451
|
|
|
$
|
371,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,360
|
|
|
$
|
366
|
|
|
$
|
6,021
|
|
|
$
|
2,566
|
|
Asia
|
|
|
5,753
|
|
|
|
5,408
|
|
|
|
10,987
|
|
|
|
11,759
|
|
Europe
|
|
|
1,386
|
|
|
|
1,020
|
|
|
|
4,595
|
|
|
|
2,090
|
|
|
|
$
|
10,499
|
|
|
$
|
6,794
|
|
|
$
|
21,603
|
|
|
$
|
16,415
|
|
Net Sales
– Segment net sales are attributed to individual segments based on the geographic source of the billing for such customer sales. Intercompany sales include finished products manufactured in foreign countries which are then transferred to the United States and Europe for sale; finished goods manufactured in the United States which are transferred to Europe and Asia for sale; and semi-finished components manufactured in the United States
which
are sold to Asia for further processing.
Income from operations represents net sales less operating costs and expenses and does not include any amounts related to intercompany transactions.
14.
SUBSEQUENT EVENT
On October 1, 2018, the Company completed the acquisition of BCMZ Precision Engineering Limited, a UK manufacturer of precision machined components, for approximately $2.6 million in cash. The final purchase price remains subject to certain adjustments related to working capital. The transaction was funded with cash on hand. The purchase price allocation was still in progress and was not available at the time of filing of this Quarterly Report.
BCMZ has a diversified portfolio of customers in the automotive, aerospace, defense, telecommunication, fibre-optic and medical industrial sectors and has been a long-term key supplier of precision machined components for our Cinch Connectivity Solutions UK business. BCMZ is additionally expected to give Cinch the capability to continue to support key defense and industrial customers across Europe with localized in-house machining ability.