BEL FUSE INC /NJ - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

(MARK ONE)

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended September 30, 2019
or
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ____________

 

Commission File No. 0-11676

 

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BEL FUSE INC.

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

 

(Address of principal executive offices and zip code)

(Registrant’s telephone number, including area code)

 

NEW JERSEY		22-1463699
(State of incorporation)		(I.R.S. Employer Identification No.)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	Yes [X]	No [   ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).	Yes [X]	No [   ]
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [    ]

Accelerated filer [X]

Non-accelerated filer [    ]

Smaller reporting company [X]

Emerging growth company [    ]

 

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

[   ]

 

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

 

Title of Each Class		Trading Symbol		Name of Exchange on Which Registered
Class A Common Stock ($0.10 par value)		BELFA		Nasdaq Global Select Market
Class B Common Stock ($0.10 par value)		BELFB		Nasdaq Global Select Market

 

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

Yes [   ]

No [X]

 

Title of Each Class		Number of Shares of Common Stock Outstanding  as of November 1, 2019
Class A Common Stock ($0.10 par value)		2,144,912
Class B Common Stock ($0.10 par value)		10,128,602

 

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		September 30,				December 31,
		2019				2018
ASSETS
Current Assets:
Cash and cash equivalents		$	64,816			$	53,911
Accounts receivable, net of allowance for doubtful accounts of $1,975 and $1,638, respectively			79,110				91,939
Inventories			110,209				120,068
Unbilled receivables			14,868				15,799
Other current assets			9,058				8,792
Total current assets			278,061				290,509
Property, plant and equipment, net			42,470				43,932
Right-of-use assets			16,296				-
Intangible assets, net			57,509				62,689
Goodwill			10,778				19,817
Deferred income taxes			2,283				496
Other assets			26,948				26,081
Total assets		$	434,345			$	443,524
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	38,890			$	56,171
Accrued expenses			31,069				32,290
Current portion of long-term debt			4,743				2,508
Operating lease liability, current			6,039				-
Other current liabilities			5,785				15,061
Total current liabilities			86,526				106,030
Long-term Liabilities:
Long-term debt			107,588				111,705
Operating lease liability, long-term			10,713				-
Liability for uncertain tax positions			26,464				27,553
Minimum pension obligation and unfunded pension liability			19,346				18,683
Deferred income taxes			1,319				1,161
Other liabilities			11,749				1,922
Total liabilities			263,705				267,054
Commitments and contingencies
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued			-				-
Class A common stock, par value $.10 per share, 10,000,000 shares authorized; shares outstanding: 2,144,912 in 2019 and 2,174,912 in 2018 (net of 1,072,769 treasury shares)			214				217
Class B common stock, par value $.10 per share, 30,000,000 shares authorized; shares outstanding: 10,132,102 in 2019 and 10,092,352 in 2018 (net of 3,218,307 treasury shares)			1,013				1,009
Additional paid-in capital			33,206				31,387
Retained earnings			164,252				168,695
Accumulated other comprehensive loss			(28,045	)			(24,838	)
Total stockholders' equity			170,640				176,470
Total liabilities and stockholders' equity		$	434,345			$	443,524

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Net sales		$	124,479			$	146,489			$	377,284			$	405,451
Cost of sales			102,021				117,282				311,382				326,096
Gross profit			22,458				29,207				65,902				79,355
Selling, general and administrative expenses			17,909				18,691				56,472				57,690
Impairment of Goodwill			8,891				-				8,891				-
Restructuring charges			281				17				1,651				62
Gain on sale of property			-				-				(4,257	)			-
(Loss) Income from operations			(4,623	)			10,499				3,145				21,603
Interest expense			(1,305	)			(1,391	)			(4,126	)			(3,917	)
Other income (expense), net			28				43				(361	)			(479	)
(Loss) Earnings before provision for (benefit from) income taxes			(5,900	)			9,151				(1,342	)			17,207
Provision for (benefit from) income taxes			590				(2,201	)			1,049				523
Net (loss) earnings available to common stockholders		$	(6,490	)		$	11,352			$	(2,391	)		$	16,684
Net (loss) earnings per common share:
Class A common share - basic and diluted		$	(0.51	)		$	0.89			$	(0.20	)		$	1.31
Class B common share - basic and diluted		$	(0.53	)		$	0.94			$	(0.19	)		$	1.40
Weighted-average number of shares outstanding:
Class A common share - basic and diluted			2,173				2,175				2,174				2,175
Class B common share - basic and diluted			10,139				9,972				10,113				9,891

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Net (loss) earnings available to common stockholders		$	(6,490	)		$	11,352			$	(2,391	)		$	16,684
Other comprehensive (loss) income:
Currency translation adjustment, net of taxes of ($13) in the three months ended September 30, 2019, $1 in the three months ended September 30, 2018, ($12) in the nine months ended September 30, 2019 and ($11) in the nine months ended September 30, 2018			(2,561	)			(1,032	)			(2,854	)			(4,463	)
Unrealized losses on marketable securities arising during the period, net of taxes of $0 in the three months ended September 30, 2019, ($3) in the three months ended September 30, 2018, $0 in the nine months ended September 30, 2019 and $17 in the nine months ended September 30, 2018			-				(170	)			-				(201	)
Change in unfunded SERP liability, net of taxes of ($11) in the three months ended September 30, 2019, ($25) in the three months ended September 30, 2018, ($33) in the nine months ended September 30, 2019 and ($76) in the nine months ended September 30, 2018			37				85				111				256
Other comprehensive loss			(2,524	)			(1,117	)			(2,743	)			(4,408	)
Comprehensive (loss) income		$	(9,014	)		$	10,235			$	(5,134	)		$	12,276

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										Accumulated
										Other				Class A				Class B				Additional
						Retained				Comprehensive				Common				Common				Paid-In
		Total				Earnings				(Loss) Income				Stock				Stock				Capital
Balance at December 31, 2018		$	176,470			$	168,695			$	(24,838	)		$	217			$	1,009			$	31,387
Net earnings			1,131				1,131				-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(130	)			(130	)			-				-				-				-
Class B Common Stock, $0.07/share			(708	)			(708	)			-				-				-				-
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Foreign currency translation adjustment, net of taxes of $17			540				-				540				-				-				-
Stock-based compensation expense			813				-				-				-				-				813
Change in unfunded SERP liability, net of taxes of ($11)			37				-				37				-				-				-
Effect of adoption of ASU 2018-02 (Topic 220)			-				463				(463	)			-				-				-
Balance at March 31, 2019			178,153				169,451				(24,724	)			217				1,008				32,201
Net earnings			2,967				2,967				-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(131	)			(131	)			-				-				-				-
Class B Common Stock, $0.07/share			(704	)			(704	)			-				-				-				-
Issuance of restricted common stock			-				-				-				-				7				(7	)
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Foreign currency translation adjustment, net of taxes of ($16)			(834	)			-				(834	)			-				-				-
Stock-based compensation expense			788				-				-				-				-				788
Change in unfunded SERP liability, net of taxes of ($11)			37				-				37				-				-				-
Balance at June 30, 2019			180,276				171,583				(25,521	)			217				1,014				32,983
Net loss			(6,490	)			(6,490	)			-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(131	)			(131	)			-				-				-				-
Class B Common Stock, $0.07/share			(710	)			(710	)			-				-				-				-
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Repurchase of Class A common stock			(448	)			-				-				(3	)			-				(445	)
Foreign currency translation adjustment, net of taxes of ($13)			(2,561	)			-				(2,561	)			-				-				-
Stock-based compensation expense			667				-				-				-				-				667
Change in unfunded SERP liability, net of taxes of ($11)			37				-				37				-				-				-
Balance at September 30, 2019		$	170,640			$	164,252			$	(28,045	)		$	214			$	1,013			$	33,206

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										Accumulated
										Other				Class A				Class B				Additional
						Retained				Comprehensive				Common				Common				Paid-In
		Total				Earnings				(Loss) Income				Stock				Stock				Capital
Balance at December 31, 2017		$	157,960			$	147,807			$	(19,625	)		$	217			$	986			$	28,575
Net loss			(1,303	)			(1,303	)			-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(130	)			(130	)			-				-				-				-
Class B Common Stock, $0.07/share			(700	)			(700	)			-				-				-				-
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Foreign currency translation adjustment, net of taxes of $25			4,017				-				4,017				-				-				-
Unrealized holding losses on marketable securities
arising during the year, net of taxes of $20			(31	)			-				(31	)			-				-				-
Stock-based compensation expense			779				-				-				-				-				779
Change in unfunded SERP liability, net of taxes of ($25)			86				-				86				-				-				-
Effect of adoption of ASU 2014-09 (Topic 606)			3,497				3,497				-				-				-				-
Balance at March 31, 2018			164,175				149,171				(15,553	)			217				985				29,355
Net earnings			6,634				6,634				-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(131	)			(131	)			-				-				-				-
Class B Common Stock, $0.07/share			(689	)			(689	)			-				-				-				-
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Foreign currency translation adjustment, net of taxes of ($37)			(7,448	)			-				(7,448	)			-				-				-
Stock-based compensation expense			671				-				-				-				-				671
Change in unfunded SERP liability, net of taxes of ($25)			85				-				85				-				-				-
Balance at June 30, 2018			163,297				154,985				(22,916	)			217				984				30,027
Net earnings			11,352				11,352				-				-				-				-
Dividends declared:
Class A Common Stock, $0.06/share			(130	)			(130	)			-				-				-				-
Class B Common Stock, $0.07/share			(689	)			(689	)			-				-				-				-
Issuance of restricted common stock			-				-				-				-				24				(24	)
Forfeiture of restricted common stock			-				-				-				-				(1	)			1
Foreign currency translation adjustment, net of taxes of $1			(1,032	)			-				(1,032	)			-				-				-
Unrealized holding losses on marketable securities
arising during the year, net of taxes of ($3)			(170	)			-				(170	)			-				-				-
Stock-based compensation expense			598				-				-				-				-				598
Change in unfunded SERP liability, net of taxes of ($25)			85				-				85				-				-				-
Balance at September 30, 2018		$	173,311			$	165,518			$	(24,033	)		$	217			$	1,007			$	30,602

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		Nine Months Ended
		September 30,
		2019				2018
Cash flows from operating activities:
Net (loss) earnings		$	(2,391	)		$	16,684
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Impairment of goodwill			8,891				-
Depreciation and amortization			12,265				13,738
Stock-based compensation			2,268				2,046
Amortization of deferred financing costs			349				413
Deferred income taxes			(1,765	)			1,740
Net unrealized gains on foreign currency revaluation			(478	)			(2,396	)
Gain on sale of property			(4,257	)			-
Other, net			1,172				963
Changes in operating assets and liabilities:
Accounts receivable, net			12,395				(18,985	)
Unbilled receivables			931				(2,017	)
Inventories			8,383				(18,844	)
Account payable			(16,249	)			15,545
Accrued expenses			(874	)			1,969
Other operating assets/liabilities, net			(1,712	)			(6,687	)
Net cash provided by operating activities			18,928				4,169
Cash flows from investing activities:
Purchases of property, plant and equipment			(8,188	)			(8,770	)
Proceeds from sale of marketable securities within rabbi trust			-				1,348
Purchase of marketable securities within rabbi trust			-				(1,348	)
Proceeds from disposal/sale of property, plant and equipment			5,787				53
Net cash used in investing activities			(2,401	)			(8,717	)
Cash flows from financing activities:
Dividends paid to common stockholders			(2,403	)			(2,376	)
Borrowings under revolving credit line			12,000				7,500
Repayments of revolving credit line			(12,000	)			(7,500	)
Repayments of long-term debt			(2,231	)			(8,268	)
Purchase and retirement of Class A common stock			(448	)			-
Net cash used in financing activities			(5,082	)			(10,644	)
Effect of exchange rate changes on cash and cash equivalents			(540	)			134
Net increase (decrease) in cash and cash equivalents			10,905				(15,058	)
Cash and cash equivalents - beginning of period			53,911				69,354
Cash and cash equivalents - end of period		$	64,816			$	54,296
Supplementary information:
Cash paid during the period for:
Income taxes, net of refunds received		$	3,497			$	6,291
Interest payment		$	3,815			$	3,485

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1.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

The condensed consolidated balance sheets, statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for the periods presented herein have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented have been made.  The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Bel Fuse Annual Report on Form 10-K for the year ended December 31, 2018.

 

Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted from these condensed consolidated financial statements pursuant to the rules and regulations, including the interim reporting requirements, of the U.S. Securities and Exchange Commission (“SEC”).  The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

 

The Company’s significant accounting policies are summarized in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  There were no significant changes to these accounting policies during the nine months ended September 30, 2019, except as discussed in “Recently Adopted Accounting Standards” below.

 

All amounts included in the tables to these notes to condensed consolidated financial statements, except per share amounts, are in thousands.

 

Recently Adopted Accounting Standards

 

In 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 13, 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 condensed consolidated balance sheet as of January 1, 2019.  The adoption of this guidance did not have a material impact on the Company’s condensed 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 condensed 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.

 

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”).  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 public entities for annual reporting periods beginning after December 15, 2019, 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 condensed 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 timing and impact of adopting the updated provisions.

 

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”).  This guidance removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds 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 its 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.

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2.

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:

 

 

 

 

 

The balances of the Company’s contract assets and contract liabilities at September 30, 2019 and December 31, 2018 are as follows:

 

 

 

The change in balance of our unbilled receivables from December 31, 2018 to September 30, 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).

 

The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of September 30, 2019 related to contracts that exceed one year in duration amounted to $15.7 million, with expected contract expiration dates that range from 2020 - 2025. It is expected that 20% of this aggregate amount will be recognized in 2020, 57% will be recognized in 2021 and the remainder will be recognized in years beyond 2021.

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3.	(LOSS) EARNINGS PER SHARE

 

The following table sets forth the calculation of basic and diluted net (loss) earnings per common share under the two-class method for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

4.	FAIR VALUE MEASUREMENTS

 

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date.  Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  There are three levels of inputs that may be used to measure fair value:

 

Level 1 – Observable inputs such as quoted market prices in active markets;

 

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

Level 3 – Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of September 30, 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 $1.2 million at September 30, 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 the nine months ended September 30, 2019 or September 30, 2018.  There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the nine months ended September 30, 2019 or September 30, 2018.

 

There were no financial assets accounted for at fair value on a nonrecurring basis as of September 30, 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 September 30, 2019 and December 31, 2018, the estimated fair value of total debt was $116.8 million and $117.9 million, respectively, compared to a carrying amount of $112.3 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 September 30, 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  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 has a carrying value of $10.8 million related solely to the Company's Europe reporting unit.  See Note 5, Goodwill. 

 

Detailed below is a table of key underlying assumptions utilized in the fair value estimate calculation for the interim test performed as of July 31, 2019 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.

 

 

 

 

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.

 

5.

GOODWILL

 

The changes in the carrying value of goodwill classified by reportable operating segment for the nine months ended September 30, 2019 are as follows:

 

 

 

 

6.	INVENTORIES

 

The components of inventories are as follows:

 

 

 

 

7.	PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

 

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $2.5 million and $2.8 million, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $7.5 million and $8.9 million, respectively. Depreciation expense related to our manufacturing facilities and equipment is included in cost of sales and depreciation expense associated with administrative facilities and office equipment is included in selling, general and administrative expense within the accompanying condensed consolidated statements of operations.

 

During the second quarter of 2019, the Company transitioned its manufacturing and warehousing operations from its Inwood, New York facility to Bel’s existing facilities in Glen Rock, Pennsylvania and the Dominican Republic.  In connection with this transition, the Company sold its Inwood, New York property during the second quarter of 2019, which resulted in net proceeds of $5.8 million.  The accompanying condensed consolidated statements of operations for the nine months ended September 30, 2019 includes a related gain on sale of $4.3 million (pre-tax).

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8.	ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

 

The change in warranty accrual during the nine months ended September 30, 2019 primarily related to repair costs incurred and adjustments to pre-existing warranties.  There were no new material warranty charges incurred during the nine months ended September 30, 2019.

 

Restructuring Activities

 

Included within other accrued expenses in the table above are costs accrued related to the Company’s restructuring activities.  Activity and liability balances related to restructuring costs for the nine months ended September 30, 2019 are as follows:

 

 

 

During the nine months ended September 30, 2019, the Company’s restructuring charges included $1.1 million of costs associated with the Company’s decision to transition manufacturing and warehousing operations from our Inwood, New York facility to other existing Bel facilities.  The balance of the restructuring charges related to the realignment of our R&D resources dedicated to our Power Solutions and Protection group and other restructuring activities in Asia.

 

9.

DEBT

 

The Company has a Credit and Security Agreement with KeyBank National Association (as amended, the “CSA”).  The CSA consists of (i) a term loan, with outstanding borrowings of $113.8 million and $116.0 million at September 30, 2019 and December 31, 2018, respectively and (ii) a $75 million revolving credit facility (“Revolver”), with no outstanding borrowings at September 30, 2019 or December 31, 2018.  The CSA has a maturity date of December 11, 2022.  At September 30, 2019 and December 31, 2018, the carrying value of the debt on the condensed consolidated balance sheet is reflected net of $1.4 million and $1.8 million, respectively, of deferred financing costs. During the nine months ended September 30, 2019, the Company borrowed $12.0 million from its revolver, all of which was repaid by September 30, 2019.

 

The weighted-average interest rate in effect was 3.81% at September 30, 2019 and 4.31% at December 31, 2018 and consisted of LIBOR plus the Company’s credit spread, as determined per the terms of the CSA.  The Company incurred $1.3 million and $1.4 million of interest expense during the three months ended September 30, 2019 and September 30, 2018, respectively, and $4.1 million and $3.9 million of interest expense during the nine months ended September 30, 2019 and September 30, 2018, respectively.

 

The CSA contains customary representations and warranties, covenants and events of default and financial covenants that measure (i) the ratio of the Company's total funded indebtedness, on a consolidated basis, to the amount of the Company’s consolidated EBITDA, as defined, (“Leverage Ratio”) and (ii) the ratio of the amount of the Company’s consolidated EBITDA to the Company’s consolidated fixed charges. If an event of default occurs, the lenders under the CSA would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor.  At September 30, 2019, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Fixed Charge Coverage Ratio.

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10.	INCOME TAXES

 

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions.  The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2016 and for state examinations before 2013.   Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2008 in Asia and generally 2011 in Europe.  The Company is currently under examination by the taxing authorities in Slovakia for the tax year 2014.

 

As a result of the expiration of the statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized benefits for tax positions taken regarding previously filed tax returns may change materially from those recorded as liabilities for uncertain tax positions in the Company’s consolidated financial statements at September 30, 2019.  The Company’s liabilities for uncertain tax positions totaled $28.6 million and $28.9 million at September 30, 2019 and December 31, 2018, respectively, of which $2.1 million and $1.4 million is included in other current liabilities at September 30, 2019 and December 31, 2018, respectively.  These amounts, if recognized, would reduce the Company’s effective tax rate.  As of September 30, 2019, approximately $2.1 million of the Company’s liabilities for uncertain tax positions are expected to be resolved during 2019 by way of expiration of the related statute of limitations.

 

The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of the current provision for income taxes.  During the nine months ended September 30, 2019 and 2018, the Company recognized $0.5 million and $0.7 million, respectively, in interest and penalties in the condensed consolidated statements of operations.  During the nine months ended September 30, 2019 and 2018, the Company recognized a benefit of $0.7 million and a benefit of $0.3 million, respectively, for the reversal of such interest and penalties, relating to the settlement of the liability for uncertain tax positions.  The Company has approximately $4.7 million and $3.8 million accrued for the payment of interest and penalties at September 30, 2019 and December 31, 2018, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the condensed consolidated balance sheets.

 

The Company continues to monitor the impacts of the U.S. tax reform and supplementary guidance as it becomes available.  At December 31, 2018, the remaining balance of the deemed repatriation tax was included in other current liabilities on the Company’s condensed consolidated balance sheet.  At September 30, 2019, the majority of the deemed repatriation tax is included in other long-term liabilities on the Company's condensed consolidated balance sheet due to clarification of an Internal Revenue Service notice received in December 2018.

 

11.	RETIREMENT FUND AND PROFIT SHARING PLAN

 

The Company maintains the Bel Fuse Inc. Employees’ Savings Plan, a defined contribution plan that is intended to meet the applicable requirements for tax-qualification under sections 401(a) and (k) of the Internal Revenue Code of 1986, as amended (the “Code”). The expense for the three months ended September 30, 2019 and 2018 amounted to $0.3 million in both periods. The expense for the nine months ended September 30, 2019 and 2018 amounted to $0.8 million in both periods. The Company’s matching contribution is made in the form of Bel Fuse Inc. Class A common stock. As of September 30, 2019, the plan owned 153,352 and 109,442 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

 

The Company's subsidiaries in Asia have a retirement fund covering substantially all of their Hong Kong based full-time employees.  The expense for the three months ended September 30, 2019 and 2018 amounted to $0.1 million in both periods. The expense for the nine months ended September 30, 2019 and 2018 amounted to $0.3 million in both periods.  As of September 30, 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.  As discussed in Note 4 above, the Company has investments in a rabbi trust which are intended to fund the obligations of the SERP.

 

The components of SERP expense are as follows:

 

 

 

The service cost component of net benefit cost is presented within cost of sales or selling, general and administrative expense on the accompanying condensed consolidated statements of operations, in accordance with where compensation cost for the related associate is reported.  All other components of net benefit cost, including interest cost and net amortization noted above, are presented within other income/expense, net in the accompanying condensed consolidated statements of operations.

 

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

 

 

 

 

12.	ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss at September 30, 2019 and December 31, 2018 are summarized below:

 

 

 

Changes in accumulated other comprehensive loss by component during the nine months ended September 30, 2019 are as follows.  All amounts are net of tax.

 

 

(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.