See the consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements for the information required by this item.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED December 31, 2019 and 2018
1.
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DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Bel Fuse Inc. and subsidiaries ("Bel," the "Company," "we," "us," and "our") design, manufacture and sell a broad array of products that power, protect and connect electronic circuits. These products are used in the networking, telecommunication, high-speed data transmission, commercial aerospace, military, broadcasting, transportation and consumer electronic industries around the world. We manage our operations by product group through our reportable operating segments, Cinch 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.
Reclassifications - During the fourth quarter of 2019, the Company changed its financial statement presentation of research and development costs. These costs were previously included within cost of sales and were a factor in arriving at gross profit. Research and development costs in the amount of $26.9 million and $29.5 million have been reclassified from cost of sales to a separate line item below gross profit in the accompanying statements of operations for the years ended December 31, 2019 and 2018, respectively. Also during the fourth quarter of 2019, the Company changed its financial statement presentation related to gain/loss on foreign currency exchange. These gains/losses were previously included within selling, general and administrative expense. Gains on foreign currency exchange in the amount of $0.1 million and $2.7 million have been reclassified from selling, general and administrative expense and are now included within other (expense) income, net on the accompanying statements of operations for the years ended December 31, 2019 and 2018, respectively. These changes in presentation are consistent with that of our peers.
Use of Estimates - 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, litigation and the impact related to tax reform. 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 net realized and unrealized currency exchange gains of $0.1 million and $2.7 million for the years ended December 31, 2019 and 2018, respectively, which were included in other (expense) income, 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 12, "Segments," for disclosures regarding significant customers.
We place temporary cash investments with quality financial institutions and commercial issuers of short-term paper and, by policy, limit the amount of credit exposure in any one financial instrument.
Inventories - Inventories are stated at the lower of weighted-average cost or market. 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. The Company utilizes the average cost method in determining amounts to be removed from inventory.
Revenue Recognition – 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. The adoption of ASC 606 represents a change in accounting principle that more closely aligns 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.
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 15.4% and 14.1% in 2019 and 2018, respectively, of our consolidated total assets.
We use the acquisition method of accounting for all business combinations and 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.
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 2 to 33 years for buildings and leasehold improvements, and from 3 to 15 years for machinery and equipment.
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.
(Loss) Earnings per Share – We utilize the two-class method to report our (loss) earnings per share. The two-class method is a (loss) earnings allocation formula that determines (loss) earnings per share for each class of common stock according to dividends declared and participation rights in undistributed (losses) 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 (loss) earnings per share. In computing (loss) earnings per share, the Company has allocated dividends declared to Class A and Class B based on amounts actually declared for each class of stock and 5% more of the undistributed (losses) earnings have been allocated to Class B shares than to the Class A shares on a per share basis. Basic (loss) earnings per common share are computed by dividing net (loss) earnings by the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per common share, for each class of common stock, are computed by dividing net (loss) 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, 2019 and 2018 which would have had a dilutive effect on (loss) earnings per share.
The (loss) earnings and weighted average shares outstanding used in the computation of basic and diluted (loss) earnings per share are as follows:
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|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(8,743
|
)
|
|
$
|
20,709
|
|
Less dividends declared:
|
|
|
|
|
|
|
|
|
Class A
|
|
|
518
|
|
|
|
522
|
|
Class B
|
|
|
2,834
|
|
|
|
2,796
|
|
Undistributed (loss) earnings
|
|
$
|
(12,095
|
)
|
|
$
|
17,391
|
|
|
|
|
|
|
|
|
|
|
Undistributed (loss) earnings allocation - basic and diluted:
|
|
|
|
|
|
|
|
|
Class A undistributed (loss) earnings
|
|
$
|
(2,049
|
)
|
|
$
|
2,999
|
|
Class B undistributed (loss) earnings
|
|
|
(10,046
|
)
|
|
|
14,392
|
|
Total undistributed (loss) earnings
|
|
$
|
(12,095
|
)
|
|
$
|
17,391
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings allocation - basic and diluted:
|
|
|
|
|
|
|
|
|
Class A net (loss) earnings
|
|
$
|
(1,531
|
)
|
|
$
|
3,521
|
|
Class B net (loss) earnings
|
|
|
(7,212
|
)
|
|
|
17,188
|
|
Net (loss) earnings
|
|
$
|
(8,743
|
)
|
|
$
|
20,709
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Class A - basic and diluted
|
|
|
2,167
|
|
|
|
2,175
|
|
Class B - basic and diluted
|
|
|
10,117
|
|
|
|
9,939
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Class A - basic and diluted
|
|
$
|
(0.71
|
)
|
|
$
|
1.62
|
|
Class B - basic and diluted
|
|
$
|
(0.71
|
)
|
|
$
|
1.73
|
|
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, 2019 and 2018 amounted to $26.9 million and $29.5 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.
Recently Issued Accounting Standards
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), 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 was 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 Company adopted ASU 2016-02, as amended, effective January 1, 2019 using the modified retrospective approach. In connection with the adoption, we elected to utilize the Comparatives Under 840 Option whereby the Company will continue to present prior period financial statements and disclosures under ASC 840. In addition, we elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. We implemented a new lease system to facilitate the requirements of the new standard and completed the necessary changes to our accounting policies, processes, disclosures and internal control over financial reporting.
Adoption of the new standard resulted in the recording of right-of-use assets in the amount of $20.7 million and lease liabilities related to our operating leases in the amount of $21.0 million on our consolidated balance sheet as of January 1, 2019. The standard did not materially affect the Company’s consolidated net earnings or have any impact on cash flows. See Note 16, Leases, for Topic 842 disclosures in connection with the adoption of ASU 2016-02.
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. This guidance was adopted by the Company effective January 1, 2019. In accordance with this guidance, the Company reclassified $0.5 million of stranded tax effects from accumulated other comprehensive income to retained earnings within the equity section of the consolidated balance sheet as of January 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
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. This guidance was adopted by the Company effective January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.
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 elected to early adopt ASU 2017-04 effective July 1, 2019, and accounted for the goodwill impairment charge discussed in Note 4 under this guidance.
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 by $3.4 million upon the January 1, 2018 adoption date. Apart from this adjustment and the inclusion of additional required disclosures in Note 3, the adoption of the new revenue standards did not have a material impact on the Company's 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 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, 2018, 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 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. Prior U.S. GAAP prohibited 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 consolidated financial position or consolidated 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.
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 13 to the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 as the basis for applying the retrospective application required by the standard. The amounts reclassified within the statement of operations for the year ended December 31, 2018 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), as amended. The new guidance will broaden the information that an entity must consider in developing its expected credit loss estimates related to its financial instruments and adds to U.S. GAAP an impairment model that is based on expected losses rather than incurred losses. The amendment is currently effective for the Company for annual reporting periods beginning after December 15, 2022, with early adoption permitted. Management is currently assessing the impact of ASU 2016-13, but it is not expected to have a material impact on the Company’s consolidated financial statements.
In 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 impact of adopting the updated provisions, but it is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). This guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and 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. The Company is 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.
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. ASU 2019-12 is effective for the Company for interim and annual reporting periods beginning after December 15, 2021. The Company is currently assessing the impact of ASU 2019-12, but it is not expected to have a material impact on the Company’s consolidated financial statements.
On December 3, 2019, the Company completed the acquisition of the majority of the power supply products business of CUI Inc. (the "CUI power business") through an asset purchase agreement with CUI Global Inc. for $29.2 million (after a working capital adjustment), plus the assumption of certain liabilities. The CUI power business designs and markets a broad portfolio of AC/DC and DC/DC power supplies and board level components. The CUI power business is headquartered in Tualatin, Oregon and had sales of $32.0 million for the year ended December 31, 2019. The acquisition of the CUI power business enhances Bel's existing offering of power products, allowing us to better address all of our customer power needs. It also introduces an alternative business model to Bel's, one which carries a higher gross margin profile and lower manufacturing risk.
On October 1, 2018, the Company completed the acquisition of BCMZ Precision Engineering Limited ("BCMZ"), a U.K. manufacturer of precision machined components, for approximately $2.6 million in cash. The transaction was funded with cash on hand. BCMZ has a diversified portfolio of customers in the automotive, aerospace, defense, telecommunication, fiber-optic and medical industrial sectors and has been a long-term key supplier of precision machined components for our Cinch Connectivity Solutions U.K. 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.
The results of operations of the CUI Power business and BCMZ have been included in the Company's consolidated financial statements for the period subsequent to their respective acquisition dates. During the year ended December 31, 2019, the CUI power business contributed revenue of $2.2 million and an operating loss of $0.4 million. During the years ended December 31, 2019 and December 31, 2018, BCMZ contributed revenue of $1.0 million and $0.5 million, respectively, and operating income (loss) of less than $0.1 million and less than ($0.1) million, respectively, to the Company's consolidated financial results. During the years ended December 31, 2019 and December 31, 2018, the Company incurred $0.2 million and less than $0.1 million, respectively, in acquisition-related costs relating the previously-mentioned acquisitions. These costs are included in selling, general and administrative expense in the accompanying consolidated statement of operations.
Due to the proximity of the acquisition date to the filing date of this Annual Report on Form 10-K, the initial accounting related to the acquisition of the CUI power business is still under review as of the filing date of this Annual Report on Form 10-K. The following table depicts the Company’s estimated acquisition date fair values of the combined consideration transferred and identifiable net assets acquired in this transaction:
|
|
|
|
|
|
Measurement
|
|
|
Acquisition-Date
|
|
|
|
Acquisition-Date
|
|
|
Period
|
|
|
Fair Values
|
|
|
|
Fair Values
|
|
|
Adjustments
|
|
|
(As adjusted)
|
|
Cash and cash equivalents
|
|
$
|
193
|
|
|
$
|
-
|
|
|
$
|
193
|
|
Accounts receivable
|
|
|
3,404
|
|
|
|
-
|
|
|
|
3,404
|
|
Inventories
|
|
|
4,686
|
|
|
|
-
|
|
|
|
4,686
|
|
Other current assets
|
|
|
101
|
|
|
|
-
|
|
|
|
101
|
|
Property, plant and equipment
|
|
|
81
|
|
|
|
-
|
|
|
|
81
|
|
Right-of-use asset
|
|
|
1,299
|
|
|
|
-
|
|
|
|
1,299
|
|
Intangible assets
|
|
|
-
|
|
|
|
16,000
|
|
|
|
16,000
|
|
Total identifiable assets
|
|
|
9,764
|
|
|
|
16,000
|
|
|
|
25,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(3,599
|
)
|
|
|
-
|
|
|
|
(3,599
|
)
|
Accrued expenses
|
|
|
(879
|
)
|
|
|
-
|
|
|
|
(879
|
)
|
Refund liability
|
|
|
(1,078
|
)
|
|
|
-
|
|
|
|
(1,078
|
)
|
Operating lease liability, current
|
|
|
(230
|
)
|
|
|
-
|
|
|
|
(230
|
)
|
Operating lease liability, long-term
|
|
|
(1,069
|
)
|
|
|
-
|
|
|
|
(1,069
|
)
|
Total liabilities assumed
|
|
|
(6,855
|
)
|
|
|
-
|
|
|
|
(6,855
|
)
|
Net identifiable assets acquired
|
|
|
2,909
|
|
|
|
16,000
|
|
|
|
18,909
|
|
Goodwill
|
|
|
29,091
|
|
|
|
(18,804
|
)
|
|
|
10,287
|
|
Net assets acquired
|
|
$
|
32,000
|
|
|
$
|
(2,804
|
)
|
|
$
|
29,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
32,000
|
|
|
|
(2,804
|
)
|
|
|
29,196
|
|
Fair value of consideration transferred
|
|
$
|
32,000
|
|
|
$
|
(2,804
|
)
|
|
$
|
29,196
|
|
The identifiable assets acquired included $11.0 million assigned to customer relationships, which will be amortized over its estimated future life of 13 years utilizing the straight-line method, and $5.0 million assigned to the CUI tradename, which is concluded to have an indefinite life.
The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities assumed as of the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The goodwill noted above related to the CUI acquisition was allocated to the Company's Power Solutions and Protection operating segment at the time of acquisition. The Company has determined that all of the goodwill and intangible assets associated with the CUI acquisition will be deductible for tax purposes.
The following unaudited pro forma information presents a summary of the combined results of operations of the Company and the results of CUI for the periods presented as if the acquisition had occurred on January 1, 2018, along with certain pro forma adjustments. These pro forma adjustments give effect to the amortization of certain definite-lived intangible assets, interest expense related to the financing of the business combination, and related tax effects. The pro forma results do not reflect the realization of any potential cost savings, or any related integration costs. Certain cost savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. The unaudited pro forma results are presented for illustrative purposes only and are not necessarily indicative of the results that would have actually been obtained if the acquisition had occurred on the assumed date, nor is the pro forma data intended to be a projection of results that may be obtained in the future:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
522,128
|
|
|
$
|
588,425
|
|
Net earnings
|
|
|
(7,715
|
)
|
|
|
25,232
|
|
Earnings per Class A common share - basic and diluted
|
|
|
(0.63
|
)
|
|
|
1.98
|
|
Earnings per Class B common share - basic and diluted
|
|
|
(0.63
|
)
|
|
|
2.11
|
|
Nature of Goods and Services
Our revenues are substantially derived from sales of our products.
In our Cinch 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 (e.g., servers, aircraft, missiles and rail applications). The OEMs, ODMs or CMs that purchase 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 gave 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.
|
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:
|
|
Year Ended December 31, 2019
|
|
|
|
Cinch Connectivity
|
|
|
Power Solutions
|
|
|
Magnetic
|
|
|
|
|
|
|
|
Solutions
|
|
|
and Protection
|
|
|
Solutions
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Product Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
128,096
|
|
|
$
|
93,540
|
|
|
$
|
34,408
|
|
|
$
|
256,044
|
|
Europe
|
|
|
33,099
|
|
|
|
41,016
|
|
|
|
7,507
|
|
|
|
81,622
|
|
Asia
|
|
|
11,153
|
|
|
|
28,972
|
|
|
|
114,621
|
|
|
|
154,746
|
|
|
|
$
|
172,348
|
|
|
$
|
163,528
|
|
|
$
|
156,536
|
|
|
$
|
492,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Sales Channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to customer
|
|
$
|
113,115
|
|
|
$
|
110,587
|
|
|
$
|
132,911
|
|
|
$
|
356,613
|
|
Through distribution
|
|
|
59,233
|
|
|
|
52,941
|
|
|
|
23,625
|
|
|
|
135,799
|
|
|
|
$
|
172,348
|
|
|
$
|
163,528
|
|
|
$
|
156,536
|
|
|
$
|
492,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Cinch Connectivity
|
|
|
Power Solutions
|
|
|
Magnetic
|
|
|
|
|
|
|
|
Solutions
|
|
|
and Protection
|
|
|
Solutions
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Product Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
135,454
|
|
|
$
|
98,432
|
|
|
$
|
37,805
|
|
|
$
|
271,691
|
|
Europe
|
|
|
34,130
|
|
|
|
45,556
|
|
|
|
9,604
|
|
|
|
89,290
|
|
Asia
|
|
|
17,140
|
|
|
|
32,065
|
|
|
|
137,998
|
|
|
|
187,203
|
|
|
|
$
|
186,724
|
|
|
$
|
176,053
|
|
|
$
|
185,407
|
|
|
$
|
548,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Sales Channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to customer
|
|
$
|
120,333
|
|
|
$
|
120,787
|
|
|
$
|
157,539
|
|
|
$
|
398,659
|
|
Through distribution
|
|
|
66,391
|
|
|
|
55,266
|
|
|
|
27,868
|
|
|
|
149,525
|
|
|
|
$
|
186,724
|
|
|
$
|
176,053
|
|
|
$
|
185,407
|
|
|
$
|
548,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2019 and January 1, 2019 are as follows:
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Contract assets - current (unbilled receivable)
|
|
$
|
16,318
|
|
|
$
|
15,799
|
|
Contract liabilities - current (deferred revenue)
|
|
$
|
653
|
|
|
$
|
1,036
|
|
The change in balance of our unbilled receivables from January 1, 2019 to December 31, 2019 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 year ended December 31, 2019 is presented below:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Balance, January 1
|
|
$
|
1,036
|
|
New advance payments received
|
|
|
3,204
|
|
Recognized as revenue during period
|
|
|
(3,598
|
)
|
Currency translation
|
|
|
11
|
|
Balance, December 31
|
|
$
|
653
|
|
Transaction Price Allocated to Future Obligations:
The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of December 31, 2019 related to contracts that exceed one year in duration amounted to $16.9 million, with expected contract expiration dates that range from 2021 - 2025. It is expected that 76% of this aggregate amount will be recognized in 2021, 20% will be recognized in 2022 and the remainder will be recognized in years beyond 2022. The majority of the Company's total backlog of orders at December 31, 2019 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.
|
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.
Throughout 2018 and until September 30, 2019, the Company operated under three reportable operating segments which were geographic in nature: North America, Asia and Europe. In connection with the transition in ERP systems, and resulting discussions around how management would like to view the results of the Company on a go-forward basis, management determined that viewing the Company by product group for purposes of managing the business and asset allocation decisions was most appropriate. This change in management's view resulted in a reorganization of the Company's reportable operating segments effective October 1, 2019. The new reportable operating segments are:
|
•
|
Cinch Connectivity Solutions: includes the 2010 acquisition of Cinch Connectors, the 2012 acquisitions of Fibreco Limited and GigaCom Interconnect, the 2013 acquisition of Array Connector, the 2014 acquisition of Emerson Network Power Connectivity Solutions, in addition to sales and an estimated allocation of expenses related to connectivity products manufactured at Bel sites that are not product group specific.
|
|
|
|
|
•
|
Power Solutions and Protection: includes the 2012 acquisition of Powerbox Italia, the 2014 acquisition of Power-One's Power Solutions business, the 2019 acquisition of the majority of CUI Inc.'s power products business, in addition to sales and an estimated allocation of expenses related to power products manufactured at Bel sites that are not product group specific.
|
|
|
|
|
•
|
Magnetic Solutions: includes the 2013 acquisition of TE Connectivity's Coil Wound Magnetics business, our Signal Transformer business, in addition to sales and an estimated allocation of expenses related to Bel's ICM and discrete magnetic products that are manufactured at Bel sites that are not product group specific.
|
As of the October 1, 2019 segment reorganization date, the remaining goodwill under the former segment structure was reassigned to the new reporting units identified within the three product group reportable operating segments using a relative fair value allocation approach.
The changes in the carrying value of goodwill classified by our segment reporting structure for the years ended December 31, 2019 and 2018 are as noted in the table below.
|
|
Segment Structure Prior to October 1, 2019
|
|
|
|
Total
|
|
|
North America
|
|
|
Asia
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
$
|
148,768
|
|
|
$
|
63,364
|
|
|
$
|
54,508
|
|
|
$
|
30,896
|
|
Accumulated impairment charges
|
|
|
(128,591
|
)
|
|
|
(54,474
|
)
|
|
|
(54,508
|
)
|
|
|
(19,609
|
)
|
Goodwill, net
|
|
|
20,177
|
|
|
|
8,890
|
|
|
|
-
|
|
|
|
11,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill allocation related to acquisition
|
|
|
1,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,290
|
|
Foreign currency translation
|
|
|
(1,650
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
148,408
|
|
|
|
63,364
|
|
|
|
54,508
|
|
|
|
30,536
|
|
Accumulated impairment charges
|
|
|
(128,591
|
)
|
|
|
(54,473
|
)
|
|
|
(54,508
|
)
|
|
|
(19,610
|
)
|
Goodwill, net
|
|
|
19,817
|
|
|
|
8,891
|
|
|
|
-
|
|
|
|
10,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
(8,891
|
)
|
|
|
(8,891
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation
|
|
|
(122
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(122
|
)
|
Measurement period adjustment
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
148,260
|
|
|
|
63,364
|
|
|
|
54,508
|
|
|
|
30,388
|
|
Accumulated impairment charges
|
|
|
(137,482
|
)
|
|
|
(63,364
|
)
|
|
|
(54,508
|
)
|
|
|
(19,610
|
)
|
Goodwill, net
|
|
$
|
10,778
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,778
|
|
|
|
Segment Structure Effective October 1, 2019
|
|
|
|
Total
|
|
|
Cinch Connectivity Solutions
|
|
|
Power Solutions & Protection
|
|
|
Magnetic Solutions
|
|
Balance at October 1, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross (reallocation)
|
|
$
|
10,778
|
|
|
$
|
6,467
|
|
|
$
|
4,311
|
|
|
$
|
-
|
|
Goodwill, net
|
|
|
10,778
|
|
|
|
6,467
|
|
|
|
4,311
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill allocation related to acquisition
|
|
|
10,287
|
|
|
|
-
|
|
|
|
10,287
|
|
|
|
-
|
|
Foreign currency translation
|
|
|
928
|
|
|
|
712
|
|
|
|
216
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
21,993
|
|
|
|
7,179
|
|
|
|
14,814
|
|
|
|
-
|
|
Goodwill, net
|
|
$
|
21,993
|
|
|
$
|
7,179
|
|
|
$
|
14,814
|
|
|
$
|
-
|
|
The Company has not reallocated the historical accumulated impairment charges to its new segment structure due to impracticability.
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. We estimated 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.
2019 Interim Impairment Test
As weakened market conditions from earlier in 2019 continued into the third quarter without a visible rebound in incoming orders, the Company’s actual revenue and margin levels in 2019 were significantly lower than the financial projections utilized in the annual goodwill impairment analysis (performed as of October 1, 2018), and were not projected to rebound to those levels in 2019. The Company determined that current business conditions, and the resulting decrease in the Company’s projected undiscounted and discounted cash flows, together with the accompanying stock price decline, constituted a triggering event, which required the Company to perform interim impairment tests related to its long-lived assets and goodwill during the third quarter of 2019. This resulted in a full impairment of the Company's North America operating segment, and the Company recorded a resulting goodwill impairment charge of $8.9 million in the third quarter of 2019. No impairment existed as of the July 31, 2019 interim test date related to the Company's Europe operating segment. As of the interim test date, the estimated fair value of the Company's Europe operating segment exceeded its carrying value by 17.3%.
2019 Annual Impairment Test
On October 1, 2019, the Company completed step one of our annual goodwill impairment test for our reporting units. We concluded that the fair value of the Company's Europe reporting unit (the only remaining reporting unit with goodwill) exceeded the carrying value and that there was no indication of impairment. As described above, the Company reorganized its segment structure effective October 1, 2019. In connection with the segment reorganization, the Company also completed step one of our annual goodwill impairment test for our new reporting units. We concluded that the fair value each of the Company's reporting units exceeded the respective carrying values and that there was no indication of impairment on that date.
The excess of estimated fair values over carrying value, including goodwill for each of our reporting units that had goodwill as of the 2019 annual impairment test were as follows:
Reporting Unit
|
|
% by Which Estimated Fair Value Exceeds Carrying Value
|
|
Connectivity Europe
|
|
138.8
|
%
|
Power Europe
|
|
|
16.4
|
%
|
As noted above, the fair value determined in connection with the goodwill impairment test completed in the fourth quarter of 2019 exceeded 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 decline in our common stock price, 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.
2018 Annual Impairment Test
Based on annual impairment tests performed in the prior year, there was no indication of goodwill impairment at the October 1, 2018 testing date.
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. 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, 2019, 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:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, licenses and technology
|
|
$
|
38,885
|
|
|
$
|
21,757
|
|
|
$
|
17,128
|
|
|
$
|
38,845
|
|
|
$
|
18,281
|
|
|
$
|
20,564
|
|
Customer relationships
|
|
|
55,656
|
|
|
|
17,231
|
|
|
|
38,425
|
|
|
|
44,588
|
|
|
|
14,193
|
|
|
|
30,395
|
|
Non-compete agreements
|
|
|
2,701
|
|
|
|
2,701
|
|
|
|
-
|
|
|
|
2,683
|
|
|
|
2,683
|
|
|
|
-
|
|
Trademarks
|
|
|
16,852
|
|
|
|
40
|
|
|
|
16,812
|
|
|
|
11,770
|
|
|
|
40
|
|
|
|
11,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,094
|
|
|
$
|
41,729
|
|
|
$
|
72,365
|
|
|
$
|
97,886
|
|
|
$
|
35,197
|
|
|
$
|
62,689
|
|
Amortization expense was $6.4 million and $6.4 million in 2019 and 2018, respectively.
Estimated amortization expense for intangible assets for the next five years is as follows:
Year Ended December 31,
|
|
Amortization Expense
|
|
|
|
|
|
|
2020
|
|
$
|
7,112
|
|
2021
|
|
|
7,108
|
|
2022
|
|
|
5,735
|
|
2023
|
|
|
4,473
|
|
2024
|
|
|
4,412
|
|
2019 Impairment Tests
Due to weakened market conditions discussed above, the Company completed an interim impairment test related to its indefinite-lived intangible assets as of July 31, 2019, noting no impairment. The Company also completed its annual indefinite-lived intangible assets impairment test during the fourth quarter of 2019, noting no impairment. Management has concluded that the fair value of these trademarks exceeded the related carrying values at December 31, 2019 and that there was no indication of impairment.
5.
|
FAIR VALUE MEASUREMENTS
|
As of December 31, 2019 and December 31, 2018, 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 $1.1 million at December 31, 2019 and $1.4 million at December 31, 2018. 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 2019 or 2018. There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during 2019.
There were no financial assets accounted for at fair value on a nonrecurring basis as of December 31, 2019 or December 31, 2018.
The Company has other financial instruments, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued expenses, which are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. The fair value of the Company’s long-term debt is estimated using a discounted cash flow method based on interest rates that are currently available for debt issuances with similar terms and maturities. At December 31, 2019 and 2018, the estimated fair value of total debt was $146.4 million and $117.9 million, respectively, compared to a carrying amount of $143.7 million and $114.2 million, respectively. The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of December 31, 2019.
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. We review goodwill 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. As weakened market conditions from earlier in 2019 continued into the third quarter without a visible rebound in incoming orders, the Company’s actual revenue and margin levels in 2019 were significantly lower than the financial projections utilized in the annual goodwill impairment analysis (performed as of October 1, 2018), and were not projected to rebound to those levels in 2019. The Company determined that current business conditions, and the resulting decrease in the Company’s projected undiscounted and discounted cash flows, together with the accompanying stock price decline, constituted a triggering event, which required the Company to perform interim impairment tests related to its long-lived assets and goodwill during the third quarter of 2019. The Company’s interim test on its long-lived assets indicated that the carrying value of its long-lived assets was recoverable and that no impairment existed as of the July 31, 2019 testing date.
The Company’s Level 3 fair value analysis related to the interim test for goodwill impairment was supported by a weighting of two generally accepted valuation approaches, the income approach and the market approach, as further described in Note 4, "Goodwill and Other Intangible Assets". These approaches include numerous assumptions with respect to future circumstances, such as industry and/or local market conditions, which might directly impact each of the reporting units’ operations in the future, and are therefore uncertain. These approaches are utilized to develop a range of fair values and a weighted average of these approaches is utilized to determine the best fair value estimate within that range.
The July 31, 2019 interim impairment test related to the Company's goodwill was performed by reporting unit (North America and Europe). The valuation test, which heavily weights future discounted cash flow projections, indicated impairment of the goodwill associated with the Company’s North America reporting unit. As a result, the Company recorded a non-cash goodwill impairment charge of $8.9 million ($8.5 million after-tax) during the third quarter of 2019. The Company’s goodwill associated with its North America reporting unit originated from several of Bel’s prior acquisitions, primarily Power Solutions and Connectivity Solutions. The carrying value of the Company's goodwill was $19.8 million at December 31, 2018. The remaining goodwill as of September 30, 2019 had a carrying value of $10.8 million related solely to the Company's Europe reporting unit. Effective October 1, 2019, in connection with a change in how management views the business as a result of our ongoing transition in ERP systems and the recent acquisition of CUI, the Company reorganized its segment reporting structure. The Company's new reportable operating segments are Cinch Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions. At our October 1, 2019 annual goodwill impairment test date, an analysis was performed on both the former segments and the new segments to ensure no impairment existed under either structure as of the reorganization date. See Note 4, "Goodwill and Other Intangible Assets".
In connection with the fair value estimate calculation for the interim test performed as of July 31, 2019, detailed below is a table of key underlying assumptions utilized in the interim test as compared to those assumptions utilized during the annual valuation performed as of October 1, 2018. The table below shows the assumptions utilized for the North America reporting unit.
|
|
Goodwill Impairment Analysis
|
|
|
|
Key Assumptions
|
|
|
|
2019 - Interim
|
|
|
2018 - Annual
|
|
|
|
|
|
|
|
|
|
|
Income Approach - Discounted Cash Flows:
|
|
|
|
|
|
|
|
|
Revenue 5-year compound annual growth rate (CAGR)
|
|
|
1.5
|
%
|
|
|
2.6
|
%
|
EBITDA margins (next 12 month forecast)
|
|
|
3.9
|
%
|
|
|
7.6
|
%
|
Cost of equity capital
|
|
|
15.4
|
%
|
|
|
14.2
|
%
|
Cost of debt capital
|
|
|
4.0
|
%
|
|
|
3.7
|
%
|
Weighted average cost of capital
|
|
|
14.0
|
%
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
Market Approach - Multiples of Guideline Companies:
|
|
|
|
|
|
|
|
|
Net operating revenue multiples used
|
|
|
0.3
|
|
|
|
0.4
|
|
Operating EBITDA multiples used
|
|
|
7.0 - 8.0
|
|
|
|
5.1 - 5.7
|
|
Invested capital control premium
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
Weighting of Valuation Methods:
|
|
|
|
|
|
|
|
|
Income Approach - Discounted Cash Flows
|
|
|
75
|
%
|
|
|
75
|
%
|
Market Approach - Multiples of Guideline Companies
|
|
|
25
|
%
|
|
|
25
|
%
|
The Company had also performed an interim impairment analysis of its indefinite-lived intangible assets as of July 31, 2019. 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, 2018, the Company’s indefinite-lived intangible assets related to the trademarks acquired in the Power Solutions, Connectivity Solutions, Cinch and Fibreco acquisitions. The Company's interim test on its indefinite-lived intangible assets indicated that the carrying value of its long-lived assets was recoverable and that no impairment existed as of the July 31, 2019 testing date. Based on an additional analysis performed as of the October 1, 2019 annual test date (see Note 4), management concluded that no impairment existed as of that date.
At December 31, 2019 and 2018, the Company has obligations of $21.5 million and $18.7 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, 2019 and 2018, these assets had a combined value of $14.7 million and $13.0 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 $13.7 million and $11.6 million at December 31, 2019 and 2018, 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 increase (decrease) in cash surrender value in the amount of $2.4 million and ($0.4) million during the years ended December 31, 2019 and 2018, respectively. These fluctuations in the cash surrender value were allocated between cost of sales and selling, general and administrative expenses on the consolidated statements of operations for the years ended December 31, 2019 and 2018. The allocation 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, 2019 and 2018, the Company held, in the aforementioned rabbi trust, available-for-sale investments at a cost of $1.1 million and $1.4 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, 2019 and 2018, the fair market value of these investments was $1.1 million and $1.4 million, respectively.
The components of inventories are as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
47,936
|
|
|
$
|
63,348
|
|
Work in progress
|
|
|
27,065
|
|
|
|
21,441
|
|
Finished goods
|
|
|
32,275
|
|
|
|
35,279
|
|
Inventories
|
|
$
|
107,276
|
|
|
$
|
120,068
|
|
8.
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment, net consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
1,431
|
|
|
$
|
2,251
|
|
Buildings and improvements
|
|
|
29,722
|
|
|
|
30,119
|
|
Machinery and equipment
|
|
|
132,134
|
|
|
|
126,747
|
|
Construction in progress
|
|
|
5,090
|
|
|
|
4,687
|
|
|
|
|
168,377
|
|
|
|
163,804
|
|
Accumulated depreciation
|
|
|
(126,434
|
)
|
|
|
(119,872
|
)
|
Property, plant and equipment, net
|
|
$
|
41,943
|
|
|
$
|
43,932
|
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $10.0 million and $11.8 million, respectively.
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 2016 and for state examinations before 2013. Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2009 in Asia and generally 2011 in Europe. The Company is currently under examination by the taxing authorities in Slovakia for the tax year 2014 and has accrued tax based on preliminary findings.
At December 31, 2019 and 2018, the Company has approximately $29.1 million and $28.9 million, respectively, of liabilities for uncertain tax positions ($2.2 million and $1.4 million, respectively, is included in other current liabilities on the consolidated balance sheets and $26.9 million and $27.5 million, respectively, is included in liability for uncertain tax positions on the consolidated balance sheets). These amounts, if recognized, would reduce the Company’s effective tax rate. As of December 31, 2019, approximately $2.2 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.
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 December 31, 2019. A total of $2.2 million of the liability for uncertain tax positions, of which $0.9 million related to the 2009 tax year is scheduled to expire on June 1, 2020. The remaining $1.3 million relates to the 2016 tax year and is scheduled to expire on September 15, 2020. Of the $1.4 million of liability for uncertain tax positions that expired in 2019, $1.0 million of liability relates to the 2008 tax year, $0.1 million relates to the 2015 tax year and the remaining $0.3 million relates to the interest on the 2017 transition tax that was settled during the tax year ended December 31, 2019.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Liability for uncertain tax positions - January 1
|
|
$
|
28,951
|
|
|
$
|
30,430
|
|
Additions based on tax positions related to the current year
|
|
|
1,738
|
|
|
|
1,703
|
|
Translation adjustment
|
|
|
(211
|
)
|
|
|
(657
|
)
|
Settlement/expiration of statutes of limitations
|
|
|
(1,417
|
)
|
|
|
(2,525
|
)
|
Liability for uncertain tax positions - December 31
|
|
$
|
29,061
|
|
|
$
|
28,951
|
|
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, 2019 and 2018, the Company recognized $0.7 million and $1.3 million, respectively, in interest and penalties in the consolidated statements of operations. During the years ended December 31, 2019 and 2018, the Company recognized a benefit of $0.7 million and $0.3 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 $4.9 million and $3.8 million accrued for the payment of interest and penalties at December 31, 2019 and 2018, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the consolidated balance sheets.
The Company’s total (loss) earnings before provision for income taxes included (loss) earnings from domestic operations of ($17.1) million and $0.3 million for 2019 and 2018, respectively, and earnings before provision for income taxes from foreign operations of $9.8 million and $23.3 million for 2019 and 2018, respectively.
The provision (benefit) for income taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(215
|
)
|
|
$
|
(3,517
|
)
|
State
|
|
|
141
|
|
|
|
152
|
|
Foreign
|
|
|
3,687
|
|
|
|
3,782
|
|
|
|
|
3,613
|
|
|
|
417
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,222
|
)
|
|
|
2,895
|
|
State
|
|
|
(135
|
)
|
|
|
196
|
|
Foreign
|
|
|
185
|
|
|
|
(601
|
)
|
|
|
|
(2,172
|
)
|
|
|
2,490
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,441
|
|
|
$
|
2,907
|
|
A reconciliation of taxes on income computed at the U.S. federal statutory rate to amounts provided is as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Tax (benefit) provision computed at the federal statutory rate
|
|
$
|
(1,534
|
)
|
|
|
21
|
%
|
|
$
|
4,959
|
|
|
|
21
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Different tax rates applicable to foreign operations
|
|
|
2,978
|
|
|
|
(41
|
%)
|
|
|
1,231
|
|
|
|
5
|
%
|
Increase in (reversal of) liability for uncertain tax positions - net
|
|
|
320
|
|
|
|
(4
|
%)
|
|
|
(822
|
)
|
|
|
(3
|
%)
|
Impact of U.S. Tax Reform
|
|
|
-
|
|
|
|
0
|
%
|
|
|
(2,628
|
)
|
|
|
(11
|
%)
|
Research and experimentation and foreign tax credits
|
|
|
(907
|
)
|
|
|
12
|
%
|
|
|
(300
|
)
|
|
|
(1
|
%)
|
State taxes, net of federal benefit
|
|
|
(54
|
)
|
|
|
1
|
%
|
|
|
322
|
|
|
|
1
|
%
|
SERP/COLI and restricted stock income
|
|
|
(547
|
)
|
|
|
7
|
%
|
|
|
195
|
|
|
|
1
|
%
|
Impairment of goodwill
|
|
|
1,522
|
|
|
|
(21
|
%)
|
|
|
-
|
|
|
|
0
|
%
|
Other, including under/(over) accruals, unrealized foreign exchange gains and amortization of purchase accounting intangibles
|
|
|
(337
|
)
|
|
|
5
|
%
|
|
|
(50
|
)
|
|
|
0
|
%
|
Tax provision computed at the Company's effective tax rate
|
|
$
|
1,441
|
|
|
|
(20
|
%)
|
|
$
|
2,907
|
|
|
|
12
|
%
|
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 consist of products manufactured in the PRC. This company is not subject to Macao corporate profit taxes which are imposed at a tax rate of 12%. On September 21, 2018, the Executive Council of the Macao SAR Government has proposed to abolish the existing Offshore Law. It is proposed that the existing law and the relevant regulations related to the offshore business will be abolished, and that the operating permit to carry on offshore business will be terminated on January 1, 2021. The Company is keeping the operations in Macao and will be subject to a 12% tax on its income from this operation.
As of December 31, 2019, the Company has gross foreign income tax net operating losses (“NOL”) of $29.6 million, foreign tax credits of $0.3 million and capital loss carryforwards of $0.2 million which amount to a total of $7.1 million of deferred tax assets. The Company has established valuation allowances totaling $7.1 million against these deferred tax assets. In addition, the Company has gross federal and state income tax NOLs of $1.5 million, including $0.8 million of NOLs acquired from Array, which amount to $0.2 million of deferred tax assets and tax credit carryforwards of $2.1 million. The Company has established valuation allowances of $1.1 million against these deferred tax assets. The foreign NOL's can be carried forward indefinitely, the NOL acquired from Array expires at various times during 2026 – 2027, the state NOL's expire at various times during 2020 – 2033 and the tax credit carryforwards expire at various times during 2026 - 2035.
Management has no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiaries as of December 31, 2019. 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, 2019. 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.
During the fourth quarter of 2018, the Company completed the analysis of the impacts of the U.S. tax reform and recognized the tax consequences of all unremitted foreign earnings. At December 31, 2017, 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. On the basis of revised earnings and profit computations that were completed during the year ended December 31, 2018, the Company recognized a measurement-period adjustment reducing 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. After payments made during 2018, the remaining deemed repatriation taxes payable of $10.8 million is included in other current liabilities on the Company’s consolidated balance sheet at December 31, 2018. At December 31, 2019, the majority of the deemed repatriation tax is included in other long-term liabilities on the Company’s consolidated balance sheet due to clarification on an Internal Revenue Service notice received in December 2018.
Components of deferred income tax assets are as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Tax Effect
|
|
|
Tax Effect
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State tax credits
|
|
$
|
1,046
|
|
|
$
|
1,000
|
|
Unfunded pension liability
|
|
|
1,102
|
|
|
|
605
|
|
Reserves and accruals
|
|
|
2,721
|
|
|
|
2,483
|
|
Federal, state and foreign net operating loss and credit carryforwards
|
|
|
8,042
|
|
|
|
8,370
|
|
Depreciation
|
|
|
686
|
|
|
|
850
|
|
Amortization
|
|
|
698
|
|
|
|
-
|
|
Lease accounting
|
|
|
3,961
|
|
|
|
-
|
|
Other accruals
|
|
|
5,079
|
|
|
|
5,641
|
|
Total deferred tax assets
|
|
|
23,335
|
|
|
|
18,949
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,901
|
|
|
|
1,666
|
|
Amortization
|
|
|
6,973
|
|
|
|
7,930
|
|
Lease accounting
|
|
|
3,871
|
|
|
|
-
|
|
Other accruals
|
|
|
370
|
|
|
|
893
|
|
Total deferred tax liabilities
|
|
|
13,115
|
|
|
|
10,489
|
|
Valuation allowance
|
|
|
8,216
|
|
|
|
9,200
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
2,004
|
|
|
$
|
(740
|
)
|
The Company continues to monitor proposed legislation affecting the taxation of transfers of U.S. intangible property and other potential tax law changes.
At December 31, 2019 and 2018, borrowings outstanding related to the respective term loans described below were $113.0 million and $116.0 million, respectively, with $32.0 million and $0 borrowings outstanding under the revolver, respectively. The unused credit available under the applicable credit facility was $43.0 million at December 31, 2019 and $75.0 million at December 31, 2018. At December 31, 2019 and 2018, the carrying value of the debt on the consolidated balance sheets is reflected net of $1.3 million and $1.8 million, respectively, of deferred financing costs.
The interest rate in effect at December 31, 2019 was 3.31%, which consisted of LIBOR of 1.81% plus the Company's margin of 1.50%. The interest rate in effect at December 31, 2018 was 4.31%, which consisted of LIBOR of 2.56% plus the Company's margin of 1.75%. In connection with its outstanding borrowings and amortization of the deferred financing costs described below, the Company incurred $5.4 million and $5.3 million of interest expense during the years ended December 31, 2019 and 2018, respectively.
2014 Credit and Security Agreement
On June 19, 2014, the Company entered into a senior Credit and Security Agreement with KeyBank National Association ("KeyBank"), as administrative agent and lender, which was amended on June 30, 2014 principally to add a syndicate of additional lenders (as so amended, the "2014 CSA"). The 2014 CSA consisted of (i) a $50 million revolving credit facility ("Revolver"), (ii) a $145 million term loan facility ("Term Loan") and (iii) a $70 million delayed draw term loan ("DDTL"). The maturity date of the 2014 CSA was June 18, 2019. The Company recorded $5.8 million of deferred financing costs associated with the 2014 CSA, to be amortized through interest expense over the 5-year term of the agreement.
2016 Amendment
In March 2016, the Company amended the terms of the 2014 CSA to modify (i) the date by which the Company was obligated to make excess cash flow prepayments in 2016 on account of excess cash flow achieved for fiscal year 2015, (ii) the method of application of mandatory and voluntary prepayments related to the Company's loans, and (iii) the maximum Leverage Ratio of the Company allowed under the 2014 CSA for the period from the effective date of the amendment through September 2016. In connection with this amendment to the 2014 CSA, the Company paid $0.7 million of deferred financing costs, and the modification to the amortization schedule resulted in $0.5 million of existing deferred financing costs to be accelerated and recorded as interest expense during the first quarter of 2016.
2017 Amendment and Refinancing
On December 11, 2017, the Company refinanced the borrowings under the 2014 CSA and further amended its terms as follows: (i) extended the maturity date to December 11, 2022, (ii) revised the amount of the Term Loan to $125.0 million, (iii) increased the amount available under the Revolver to $75.0 million, (iv) reduced mandatory amortization payments over the first four years of the new 5-year term; and (v) reduced the pricing grid related to interest expense, among other items (the "2017 CSA"). Concurrent with its entry into the 2017 CSA, the Company's outstanding balances due under the DDTL and Revolver were paid in full. In connection with 2017 CSA and related refinancing, the Company paid $1.8 million of deferred financing costs. Due to the magnitude of the modifications to the 2014 CSA, including a reduction in the number of lenders within the syndicate, this modification was deemed an extinguishment of the balances outstanding related to the Term Loan and DDTL that originated under the 2014 CSA. As a result, $1.0 million of existing deferred financing costs were accelerated and recorded as interest expense during the fourth quarter of 2017.
Under the terms of the 2017 CSA, the Company is entitled, subject to the satisfaction of certain conditions, to request additional commitments under the revolving credit facility or term loans in the aggregate principal amount of up to $75 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans.
The obligations of the Company under the 2017 CSA are guaranteed by certain of the Company's material U.S. subsidiaries (together with the Company, the "Loan Parties") and are 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.
The borrowings under the 2017 CSA bear 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 is 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 2017 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 ("Fixed Charge Coverage Ratio"). If an event of default occurs, the lenders under the CSA would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor.
2020 Amendment
On February 18, 2020, the Company further amended its credit agreement whereby the Company voluntarily prepaid a portion of its term loan under the Credit Agreement in the amount of $8.2 million. The Amendment also served to modify the interest rate and fees applicable to the loans under the credit agreement and change certain covenants related to matters including acquisitions, share repurchases and financial ratios.
At December 31, 2019, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Fixed Charge Coverage Ratio.
Scheduled principal payments of the total debt outstanding at December 31, 2019 are as follows (in thousands):
2020
|
|
$
|
5,948
|
(1)
|
|
2021
|
|
|
5,948
|
|
|
2022
|
|
|
133,118
|
|
|
Total long-term debt
|
|
|
145,014
|
|
|
Less: Current maturities of long-term debt
|
|
|
(5,948
|
)
|
|
Noncurrent portion of long-term debt
|
|
$
|
139,066
|
|
|
(1) The $5.9 million of scheduled principal payments for 2020 noted in the table above was paid in full on February 18, 2020, as part of the above-mentioned $8.2 million voluntary prepayment made in connection with the amendment to the Credit Agreement.
Accrued expenses consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Sales commissions
|
|
$
|
2,542
|
|
|
$
|
2,609
|
|
Subcontracting labor
|
|
|
990
|
|
|
|
1,550
|
|
Salaries, bonuses and related benefits
|
|
|
14,715
|
|
|
|
18,275
|
|
Warranty accrual
|
|
|
1,576
|
|
|
|
1,078
|
|
Other
|
|
|
7,095
|
|
|
|
8,778
|
|
|
|
$
|
26,918
|
|
|
$
|
32,290
|
|
The change in warranty accrual during 2019 primarily related to repair costs incurred and adjustments to pre-existing warranties. There were no new material warranty charges incurred during 2019.
The Company operates in one industry with three reportable operating segments, which represent the Company's three product groups and a corporate segment. The segments consist of Cinch Connectivity Solutions, Power Solutions and Protection, Magnetic Solutions and a Corporate segment. The primary criteria by which financial performance is evaluated and resources are allocated are net sales and income from operations. The following is a summary of key financial data:
|
|
Year Ended December 31, 2019
|
|
|
|
Connectivity
|
|
|
Power Solutions
|
|
|
Magnetic
|
|
|
Corporate
|
|
|
|
|
|
|
|
Solutions
|
|
|
and Protection
|
|
|
Solutions
|
|
|
Segment
|
|
|
Total
|
|
Net sales
|
|
$
|
172,348
|
|
|
$
|
163,528
|
|
|
$
|
156,536
|
|
|
$
|
-
|
|
|
$
|
492,412
|
|
Gross Profit
|
|
|
44,417
|
|
|
|
32,846
|
|
|
|
34,350
|
|
|
|
(916
|
)
|
|
|
110,697
|
|
Gross Profit %
|
|
|
25.8
|
%
|
|
|
20.1
|
%
|
|
|
21.9
|
%
|
|
|
nm
|
|
|
|
22.5
|
%
|
Total Assets
|
|
|
145,344
|
|
|
|
168,422
|
|
|
|
89,463
|
|
|
|
65,688
|
|
|
|
468,917
|
|
Capital Expenditures
|
|
|
2,934
|
|
|
|
4,570
|
|
|
|
2,387
|
|
|
|
-
|
|
|
|
9,891
|
|
Depreciation and Amortization Expense
|
|
|
6,021
|
|
|
|
7,858
|
|
|
|
2,592
|
|
|
|
-
|
|
|
|
16,471
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Connectivity
|
|
|
Power Solutions
|
|
|
Magnetic
|
|
|
Corporate
|
|
|
|
|
|
|
|
Solutions
|
|
|
and Protection
|
|
|
Solutions
|
|
|
Segment
|
|
|
Total
|
|
Net sales
|
|
$
|
186,724
|
|
|
$
|
176,053
|
|
|
$
|
185,407
|
|
|
$
|
-
|
|
|
$
|
548,184
|
|
Gross Profit
|
|
|
55,092
|
|
|
|
39,976
|
|
|
|
46,467
|
|
|
|
(2,278
|
)
|
|
|
139,257
|
|
Gross Profit %
|
|
|
29.5
|
%
|
|
|
22.7
|
%
|
|
|
25.1
|
%
|
|
|
nm
|
|
|
|
25.4
|
%
|
Total Assets
|
|
|
140,240
|
|
|
|
171,165
|
|
|
|
119,573
|
|
|
|
12,546
|
|
|
|
443,524
|
|
Capital Expenditures
|
|
|
5,004
|
|
|
|
3,661
|
|
|
|
2,929
|
|
|
|
-
|
|
|
|
11,594
|
|
Depreciation and Amortization Expense
|
|
|
6,269
|
|
|
|
9,225
|
|
|
|
2,713
|
|
|
|
-
|
|
|
|
18,207
|
|
Entity-Wide Information
The following is a summary of entity-wide information related to the Company's net sales to external customers by geographic area and by major product line.
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net Sales by Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
256,044
|
|
|
$
|
271,691
|
|
Macao
|
|
|
154,745
|
|
|
|
187,204
|
|
United Kingdom
|
|
|
24,877
|
|
|
|
26,340
|
|
Slovakia
|
|
|
22,705
|
|
|
|
24,123
|
|
Germany
|
|
|
14,855
|
|
|
|
15,298
|
|
Switzerland
|
|
|
10,654
|
|
|
|
13,279
|
|
All other foreign countries
|
|
|
8,532
|
|
|
|
10,249
|
|
Consolidated net sales
|
|
$
|
492,412
|
|
|
$
|
548,184
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Major Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity solutions
|
|
$
|
172,348
|
|
|
$
|
186,724
|
|
Magnetic solutions
|
|
|
156,536
|
|
|
|
185,407
|
|
Power solutions and protection
|
|
|
163,528
|
|
|
|
176,053
|
|
Consolidated net sales
|
|
$
|
492,412
|
|
|
$
|
548,184
|
|
The following is a summary of long-lived assets by geographic area as of December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Long-lived Assets by Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
27,377
|
|
|
$
|
27,505
|
|
People's Republic of China (PRC)
|
|
|
30,245
|
|
|
|
29,563
|
|
Slovakia
|
|
|
5,726
|
|
|
|
6,475
|
|
Switzerland
|
|
|
2,339
|
|
|
|
3,023
|
|
United Kingdom
|
|
|
2,053
|
|
|
|
2,330
|
|
All other foreign countries
|
|
|
1,123
|
|
|
|
1,117
|
|
Consolidated long-lived assets
|
|
$
|
68,863
|
|
|
$
|
70,013
|
|
Long-lived assets consist of property, plant and equipment, net and other assets of the Company that are identified with the operations of each geographic area.
The territory of Hong Kong became a Special Administrative Region ("SAR") of the PRC in the middle of 1997. The territory of Macao became a SAR of the PRC at the end of 1999. Management cannot presently predict what future impact this will have on the Company, if any, or how the political climate in the PRC will affect the Company's contractual arrangements in the PRC. A significant portion of the Company's manufacturing operations and approximately 30.5% of its identifiable assets are located in Asia.
Net Sales to Major Customers
The Company had net sales to one customer in excess of ten percent of consolidated net sales in each of 2019 and 2018. The net sales associated with this customer was $50.2 million in 2019 (10.2% of sales) and $67.7 million in 2018 (12.3% of sales). Net sales related to this significant customer were primarily reflected in the Magnetic Solutions operating segment during each of the two years discussed.
13.
|
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 Employees' Savings Plan allows eligible employees to voluntarily contribute a percentage of their eligible compensation, subject to Code limitations, which contributions are matched by the Company in an amount equal to 100% of the first 1% of compensation contributed by participants, and 50% of the next 5% of compensation contributed by participants. The Company's matching contribution is made in the form of Bel Fuse Inc. Class A common stock. Prior to January 1, 2012, the Company's matching and profit sharing contributions were made in the form of shares of Bel Fuse Inc. Class A and Class B common stock. The expense for the years ended December 31, 2019 and 2018 amounted to $1.1 million and $1.3 million, respectively. As of December 31, 2019, the plan owned 166,004 and 108,868 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. Eligible employees contribute up to 5% of salary to the fund. In addition, the Company must contribute a minimum of 5% of eligible salary, as determined by Hong Kong government regulations. The Company currently contributes 7% of eligible salary in cash or Company stock. The expense for the years ended December 31, 2019 and 2018 amounted to approximately $0.3 million in each year. As of December 31, 2019, 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. Participants in the SERP are selected by the Compensation Committee of the Board of Directors. The SERP initially became effective in 2002 and was amended and restated in April 2007 to conform with applicable requirements of Section 409A of the Internal Revenue Code and to modify the provisions regarding benefits payable in connection with a change in control of the Company. The Plan is unfunded. Benefits under the SERP are payable from the general assets of the Company, but the Company has established a rabbi trust which includes certain life insurance policies in effect on participants as well as other investments to partially cover the Company's obligations under the Plan. See Note 6, "Other Assets," for further information on these assets.
The benefits available under the SERP vary according to when and how the participant terminates employment with the Company. If a participant retires (with the prior written consent of the Company) on his normal retirement date (65 years old, 20 years of service, and 5 years of Plan participation), his normal retirement benefit under the Plan would be annual payments equal to 40% of his average base compensation (calculated using compensation from the highest five consecutive calendar years of Plan participation), payable in monthly installments for the remainder of his life. If a participant retires early from the Company (55 years old, 20 years of service, and five years of Plan participation), his early retirement benefit under the Plan would be an amount (i) calculated as if his early retirement date were in fact his normal retirement date, (ii) multiplied by a fraction, with the numerator being the actual years of service the participant has with the Company and the denominator being the years of service the participant would have had if he had retired at age 65, and (iii) actuarially reduced to reflect the early retirement date. If a participant dies prior to receiving 120 monthly payments under the Plan, his beneficiary would be entitled to continue receiving benefits for the shorter of (i) the time necessary to complete 120 monthly payments or (ii) 60 months. If a participant dies while employed by the Company, his beneficiary would receive, as a survivor benefit, an annual amount equal to (i) 100% of the participant's annual base salary at date of death for one year, and (ii) 50% of the participant's annual base salary at date of death for each of the following four years, each payable in monthly installments. The Plan also provides for disability benefits, and a forfeiture of benefits if a participant terminates employment for reasons other than those contemplated under the Plan. The expense related to the Plan for the years ended December 31, 2019 and 2018 amounted to $1.5 million and $1.8 million, respectively.
Net Periodic Benefit Cost
The net periodic benefit cost related to the SERP consisted of the following components during the years ended December 31, 2019 and 2018:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Service Cost
|
|
$
|
576
|
|
|
$
|
732
|
|
Interest Cost
|
|
|
739
|
|
|
|
664
|
|
Net amortization
|
|
|
192
|
|
|
|
443
|
|
Net periodic benefit cost
|
|
$
|
1,507
|
|
|
$
|
1,839
|
|
The service cost component of net benefit cost is presented within cost of sales or selling, general and administrative expense on the accompanying consolidated statements of operations, in accordance with where compensation cost for the related associate is reported. All other components of net benefit cost, including interest cost and net amortization noted above, are presented within other (expense) income, net in the accompanying consolidated statements of operations.
Obligations and Funded Status
Summarized information about the changes in plan assets and benefit obligation, the funded status and the amounts recorded at December 31, 2019 and 2018 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Fair value of plan assets, January 1
|
|
$
|
-
|
|
|
$
|
-
|
|
Company contributions
|
|
|
430
|
|
|
|
325
|
|
Benefits paid
|
|
|
(430
|
)
|
|
|
(325
|
)
|
Fair value of plan assets, December 31
|
|
$
|
-
|
|
|
$
|
-
|
|
Benefit obligation, January 1
|
|
$
|
18,676
|
|
|
$
|
19,134
|
|
Service cost
|
|
|
576
|
|
|
|
732
|
|
Interest cost
|
|
|
739
|
|
|
|
664
|
|
Benefits paid
|
|
|
(430
|
)
|
|
|
(325
|
)
|
Plan amendments
|
|
|
-
|
|
|
|
39
|
|
Actuarial (gains) losses
|
|
|
1,980
|
|
|
|
(1,568
|
)
|
Benefit obligation, December 31
|
|
|
21,541
|
|
|
|
18,676
|
|
Underfunded status, December 31
|
|
$
|
(21,541
|
)
|
|
$
|
(18,676
|
)
|
The Company has recorded the 2019 and 2018 underfunded status as a long-term liability on the consolidated balance sheets. The accumulated benefit obligation for the SERP was $18.5 million as of December 31, 2019 and $16.5 million as of December 31, 2018. The aforementioned company-owned life insurance policies and marketable securities held in a rabbi trust had a combined value of $14.7 million and $13.0 million at December 31, 2019 and 2018, respectively. See Note 6, "Other Assets," for additional information on these investments.
The estimated net loss and prior service cost for the SERP that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $0.3 million. The Company expects to make contributions of $0.4 million to the SERP in 2020. The Company had no net transition assets or obligations recognized as an adjustment to other comprehensive income and does not anticipate any plan assets being returned to the Company during 2020, as the plan has no assets.
The following benefit payments, which reflect expected future service, are expected to be paid:
Year Ending
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
$
|
662
|
|
2021
|
|
|
|
890
|
|
2022
|
|
|
|
893
|
|
2023
|
|
|
|
932
|
|
2024
|
|
|
|
968
|
|
2025 - 2029
|
|
|
|
5,432
|
|
The following gross amounts are recognized net of tax in accumulated other comprehensive loss:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prior service cost
|
|
$
|
738
|
|
|
$
|
918
|
|
Net loss
|
|
|
1,965
|
|
|
|
1,977
|
|
|
|
$
|
2,703
|
|
|
$
|
2,895
|
|
Actuarial Assumptions
The weighted average assumptions used in determining the periodic net cost and benefit obligation information related to the SERP are as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.00
|
%
|
|
|
3.50
|
%
|
Rate of compensation increase
|
|
|
2.50
|
%
|
|
|
3.00
|
%
|
Benefit obligation:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
Rate of compensation increase
|
|
|
2.50
|
%
|
|
|
2.50
|
%
|
14.
|
SHARE-BASED COMPENSATION
|
The Company has an equity compensation program (the "Program") which provides for the granting of "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options and restricted stock awards. The Company believes that such awards better align the interest of its employees with those of its shareholders. The 2011 Equity Compensation Plan provides for the issuance of 1.4 million shares of the Company's Class B common stock. At December 31, 2019, 323,850 shares remained available for future issuance under the 2011 Equity Compensation Plan.
The Company records compensation expense in its consolidated statements of operations related to employee stock-based options and awards. The aggregate pretax compensation cost recognized for stock-based compensation amounted to approximately $2.9 million and $2.8 million for 2019 and 2018, respectively, and related solely to restricted stock awards. The Company did not use any cash to settle any equity instruments granted under share-based arrangements during 2019 and 2018. At December 31, 2019 and 2018, the only instruments issued and outstanding under the Program related to restricted stock awards.
Restricted Stock Awards
The Company provides common stock awards to certain officers, directors and key employees. The Company grants these awards, at its discretion, from the shares available under the Program. Unless otherwise provided at the date of grant or unless subsequently accelerated, the shares awarded are typically earned in 25% increments on the second, third, fourth and fifth anniversaries of the award and are distributed provided the employee has remained employed by the Company through such anniversary dates; otherwise the unearned shares are forfeited. The market value of these shares at the date of award is recorded as compensation expense on the straight-line method over the applicable vesting period from the respective award dates, as adjusted for forfeitures of unvested awards. During 2019 and 2018, the Company issued 70,000 shares and 262,000 shares of the Company's Class B common stock, respectively, under a restricted stock plan to various officers, directors and employees.
A summary of the restricted stock activity under the Program for the year ended December 31, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Restricted Stock
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
Awards
|
|
Shares
|
|
|
Award Price
|
|
|
Contractual Term (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
527,900
|
|
|
$
|
24.37
|
|
|
|
3.5 years
|
|
Granted
|
|
|
70,000
|
|
|
|
20.80
|
|
|
|
|
|
Vested
|
|
|
117,850
|
|
|
|
23.58
|
|
|
|
|
|
Forfeited
|
|
|
34,750
|
|
|
|
25.06
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
445,300
|
|
|
$
|
23.96
|
|
|
|
3.4 years
|
|
As of December 31, 2019, there was $6.8 million of total pretax unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the restricted stock award plan. That cost is expected to be recognized over a period of 4.4 years. This expense is recorded in cost of sales and SG&A expense based upon the employment classification of the award recipients.
The Company's policy is to issue new shares to satisfy restricted stock awards. Currently the Company believes that the majority of its restricted stock awards will vest.
As of December 31, 2019, according to regulatory filings, there was one shareholder of the Company's common stock (other than shareholders subject to specific exceptions) with ownership in excess of 10% of Class A outstanding shares with no ownership of the Company's Class B common stock. In accordance with the Company's certificate of incorporation, the Class B Protection clause is triggered if a shareholder owns 10% or more of the outstanding Class A common stock and does not own an equal or greater percentage of all then outstanding shares of both Class A and Class B common stock (all of which common stock must have been acquired after the date of the 1998 recapitalization). In such a circumstance, such shareholder must, within 90 days of the trigger date, purchase Class B common shares, in an amount and at a price determined in accordance with a formula described in the Company's certificate of incorporation, or forfeit its right to vote its Class A common shares. As of December 31, 2019, to the Company's knowledge, this shareholder had not purchased any Class B shares to comply with these requirements. In order to vote its shares at Bel's next shareholders' meeting, this shareholder must either purchase the required number of Class B common shares or sell or otherwise transfer Class A common shares until its Class A holdings are under 10%. As of December 31, 2019, to the Company's knowledge, this shareholder owned 21.5% of the Company's Class A common stock in the aggregate and had not taken steps to either purchase the required number of Class B common shares or sell or otherwise transfer Class A common shares until its Class A holdings fall below 10%. Unless and until this situation is satisfied in a manner permitted by the Company's Restated Certificate of Incorporation, the subject shareholder will not be permitted to vote its shares of common stock.
Throughout 2019 and 2018, the Company declared cash dividends on a quarterly basis at a rate of $0.06 per Class A (voting) share of common stock and $0.07 per Class B (non-voting) share of common stock. The Company declared and paid cash dividends totaling $3.4 million and $3.3 million in 2019 and 2018, respectively. There are no contractual restrictions on the Company's ability to pay dividends, provided that the Company is not in default under its credit agreements immediately before such payment and after giving effect to such payment.
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. These leases have remaining lease terms ranging from 1 year to 8 years. Certain of the leases contain options to extend the term of the lease and certain of the leases contain options to terminate the lease within a specified period of time. These options to extend or terminate a lease are included in the lease term only when it is reasonably likely that the Company will elect that option. The Company is not a party to any material sublease arrangements.
The components of lease expense, which are included in cost of sales and selling, general and administrative expense, based on the underlying use of the ROU asset, were as follows:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Amortization of ROU assets - finance leases
|
|
$
|
134
|
|
Interest on lease liabilities - finance leases
|
|
|
48
|
|
Operating lease cost (cost resulting from lease payments)
|
|
|
7,897
|
|
Short-term lease cost
|
|
|
102
|
|
Variable lease cost (cost excluded from lease payments)
|
|
|
256
|
|
Sublease income
|
|
|
-
|
|
Total lease cost
|
|
$
|
8,437
|
|
Supplemental cash flow information related to leases are as follows:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
7,840
|
|
Operating cash flows from finance leases
|
|
|
48
|
|
Finance cash flows from finance leases
|
|
|
117
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
|
24,494
|
|
Finance leases
|
|
|
9
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
December 31, 2019
|
|
Operating Leases:
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
18,504
|
|
Operating lease liability, current
|
|
|
7,377
|
|
Operating lease liability, long-term
|
|
|
11,751
|
|
Total operating lease liabilities
|
|
|
19,128
|
|
|
|
|
|
|
Finance Leases:
|
|
|
|
|
Property, plant and equipment, gross
|
|
$
|
882
|
|
Accumulated depreciation
|
|
|
(262
|
)
|
Property, plant and equipment, net
|
|
|
620
|
|
Other current liabilities
|
|
|
121
|
|
Other long-term liabilities
|
|
|
512
|
|
Total finance lease liabilities
|
|
$
|
633
|
|
|
|
December 31, 2019
|
|
Weighted-Average Remaining Lease Term:
|
|
|
|
|
Operating leases (in years)
|
|
|
3.36
|
|
Finance leases (in years)
|
|
|
4.86
|
|
|
|
|
|
|
Weighted-Average Discount Rate:
|
|
|
|
|
Operating leases
|
|
|
6.0
|
%
|
Finance leases
|
|
|
6.4
|
%
|
Our discount rate is based on our incremental borrowing rate, as adjusted based on the geographic regions in which our leases assets are located.
Maturities of lease liabilities were as follows as of December 31, 2019:
Year Ending
|
|
Operating
|
|
|
Finance
|
|
December 31,
|
|
Leases
|
|
|
Leases
|
|
2020
|
|
$
|
7,217
|
|
|
$
|
232
|
|
2021
|
|
|
6,126
|
|
|
|
232
|
|
2022
|
|
|
4,190
|
|
|
|
232
|
|
2023
|
|
|
2,145
|
|
|
|
232
|
|
2024
|
|
|
578
|
|
|
|
218
|
|
Thereafter
|
|
|
544
|
|
|
|
141
|
|
Total undiscounted cash flows
|
|
|
20,800
|
|
|
|
1,287
|
|
Less imputed interest
|
|
|
(1,672
|
)
|
|
|
(654
|
)
|
Present value of lease liabilities
|
|
$
|
19,128
|
|
|
$
|
633
|
|
Maturities of lease liabilities were as follows as of December 31, 2018:
Year Ending
|
|
Operating
|
|
December 31,
|
|
Leases
|
|
2019
|
|
$
|
7,363
|
|
2020
|
|
|
6,017
|
|
2021
|
|
|
4,967
|
|
2022
|
|
|
3,338
|
|
2023
|
|
|
1,194
|
|
Thereafter
|
|
|
442
|
|
|
|
$
|
23,321
|
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
Other Commitments
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 $42.5 million and $58.9 million at December 31, 2019 and December 31, 2018, respectively. The Company also had outstanding purchase orders related to capital expenditures in the amount of $2.8 million and $5.2 million at December 31, 2019 and December 31, 2018, respectively.
Legal Proceedings
The Company is party to a number of legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material adverse effect on the Company's consolidated results of operations or consolidated financial position.
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 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 December 31, 2019 and December 31, 2018.
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 3rd 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) 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 parties entered into a settlement agreement on December 17, 2018 resolving all outstanding claims and a Stipulation of Dismissal was filed and entered on January 10, 2019.
The Company is not a party to any other legal proceeding, the adverse outcome of which is likely to have a material adverse effect on the Company's consolidated financial condition or consolidated results of operations.
18.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The components of accumulated other comprehensive loss as of December 31, 2019 and 2018 are summarized below:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
(20,032
|
)
|
|
$
|
(22,635
|
)
|
Unrealized holding gain on available-for-sale securities, net of taxes of $0 and $0 as of December 31, 2019 and 2018
|
|
|
12
|
|
|
|
12
|
|
Unfunded SERP liability, net of taxes of ($639) and ($680) as of December 31, 2019 and 2018
|
|
|
(4,045
|
)
|
|
|
(2,215
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(24,065
|
)
|
|
$
|
(24,838
|
)
|
Changes in accumulated other comprehensive (loss) income by component during the years ended December 31, 2019 and 2018 are as follows. All amounts are net of tax.
|
|
|
|
|
|
Unrealized Holding
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Gains 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 income (loss) before reclassifications
|
|
|
(6,098)
|
|
|
|
37
|
|
|
|
679
|
|
|
|
|
(5,382)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
(170)
|
|
|
|
339
|
|
(a)
|
|
|
169
|
|
Net current period other comprehensive income (loss)
|
|
|
(6,098)
|
|
|
|
(133)
|
|
|
|
1,018
|
|
|
|
|
(5,213)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
(22,635)
|
|
|
|
12
|
|
|
|
(2,215)
|
|
|
|
|
(24,838)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
2,603
|
|
|
|
-
|
|
|
|
(1,492)
|
|
|
|
|
1,111
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
(a)
|
|
|
125
|
|
Effect of adoption of ASU 2018-02 (Topic 220)
|
|
|
-
|
|
|
|
-
|
|
|
|
(463)
|
|
|
|
|
(463)
|
|
Net current period other comprehensive income (loss)
|
|
|
2,603
|
|
|
|
-
|
|
|
|
(1,830)
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
(20,032)
|
|
|
$
|
12
|
|
|
$
|
(4,045)
|
|
|
|
$
|
(24,065)
|
|
|
(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.
|
Credit Agreement Amendment
On February 18, 2020, the Company further amended its credit agreement whereby the Company voluntarily prepaid a portion of its term loan under the Credit Agreement in the amount of $8.2 million. The Amendment also served to modify the interest rate and fees applicable to the loans under the credit agreement and change certain covenants related to matters including acquisitions, share repurchases and financial ratios.
Coronavirus Outbreak
In January 2020, the recent outbreak of a novel strain of coronavirus was first identified and had an unfavorable impact on our four largest manufacturing facilities, which are located in China, throughout the first quarter of 2020. Travel restrictions imposed by the local governmental authorities to control the spread of the virus resulted in an extended closure of our facilities in China over the Lunar New Year holiday, with the return of workers delayed until following the holiday break. By March 9, 2020, our overall worker return rate at our China facilities was approximately 85%. Our suppliers, customers and our customers’ contract manufacturers have been similarly impacted, and many are also currently operating at less than full capacity. As the coronavirus continues to spread across Europe and the U.S., additional Bel facilities may be negatively impacted. In addition, the coronavirus has started to adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products. The extent to which the coronavirus will impact our business and our consolidated financial results will depend on future developments which are highly uncertain and cannot presently be predicted or estimated.