NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The condensed consolidated balance sheet as of March 31, 2013,2014, and the condensed consolidated statements of operations, comprehensive income and cash flows for the periods presented herein have been prepared by Bel Fuse Inc. (the “Company” or “Bel”) and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.  The results for the three months ended March 31, 20132014 should not be viewed as indicative of the Company’s annual results or the Company’s results for any other period.  The information for the condensed consolidated balance sheet as of December 31, 20122013 was derived from audited financial statements.  These 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, 2012.2013.

On March 9, 2012, the Company completed its acquisition of 100% of the issued and outstanding capital stock of GigaCom Interconnect AB (“GigaCom”).  On July 31, 2012, the Company consummated its acquisition of 100% of the issued and outstanding capital stock of Fibreco Ltd. (“Fibreco”).  On September 12, 2012, the Company completed its acquisition of 100% of the issued and outstanding capital stock of Powerbox Italia S.r.L. and its subsidiary, Powerbox Design (collectively, “Powerbox”S.r.L (“Powerbox”).  The acquisitions of GigaCom, Fibreco and Powerbox may hereafter be referred to collectively as either the “2012 Acquisitions” or the “2012 Acquired Companies”.  Accordingly, as of the respective acquisition dates, all of the assets acquired and liabilities assumed were recorded at their preliminary fair values.  The accompanying condensed consolidated statement of operations for the three months ended March 31, 2013 has been restated to reflect immaterial measurement period adjustments related to the applicable 2012 Acquisitions.

On March 29, 2013, the Company completed its acquisition of 100% of the issued and outstanding capital stock of Transpower Technologies (HK) Limited (“Transpower”) and certain other tangible and intangible assets related to the Transpower magnetics business of TE Connectivity.Connectivity (“TRP”).  On August 20, 2013, the Company completed its acquisition of 100% of the issued and outstanding capital stock of Array Connector Corporation (“Array”). The acquisitions of TRP and Array may hereafter be referred to collectively as either the “2013 Acquisitions” or the “2013 Acquired Companies”.  Accordingly, as of the respective acquisition dates, all of the assets acquired and liabilities assumed were recorded at their preliminary fair valuesvalues. The accompanying condensed consolidated financial statements as of December 31, 2013 and for the three months ended March 31, 2013 have been restated to reflect immaterial measurement period adjustments related to the applicable 2013 Acquisitions. There were no operating activities related to either of the 2013 Acquisitions during the three months ended March 31, 2013. The Company’s condensed consolidated results of operations for the three months ended March 31, 2013 and March 31, 20122014 include the operating results of the acquired companies from their respective acquisition date through the respective period end dates.  The measurement period adjustments impacting the first quarter of 2012 related solely to an immaterial amount of depreciation associated with GigaCom.  Due to the immaterial amount, the results of operations and cash flows2013 Acquisitions for the three months ended March 31, 2012 have not been restated to reflect this measurement period adjustment.

Recent Accounting Pronouncements

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, 2012.2013.  There were no significant changes to these accounting policies during the three months ended March 31, 2013.2014.  Recent accounting pronouncements adopted during the first quarterthree months of 20132014 are as follows:

Accounting Standards Update No. 2012-022013-11 – Intangibles – Goodwill and OtherIncome Taxes (Topic 350)740): Testing Indefinite-Lived Intangible Assets for ImpairmentPresentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU No. 2012-02”2013-11”)

The Company utilizes the two-class method to report its earnings (loss) earnings per share.  The two-class method is aan earnings (loss) earnings allocation formula that determines earnings (loss) earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings (loss) earnings..  The Company’s Certificate of Incorporation, as amended, states that Class B common shares are entitled to dividends at least 5% greater than dividends paid to Class A common shares, resulting in the two-class method of computing earnings (loss) earnings per share.  In computing earnings (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 earnings (loss) earnings have been allocated to Class B shares than to the Class A shares on a per share basis.  Basic earnings (loss) earnings per common share are computed by dividing net earnings (loss) earnings by the weighted-average number of common shares outstanding during the period.  Diluted earnings (loss) earnings per common share, for each class of common stock, are computed by dividing net earnings (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 three months ended March 31, 20132014 or 2012March 31, 2013 which would have had a dilutive effect on 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 (dollars in thousands, except share and per share data):

3.           ACQUISITIONS

On March 29, 2013, the Company acquired 100%completed its acquisition of the outstanding sharesTRP for $21.0 million, net of Transpower Technology (HK) Limited (“Transpower”), certain intellectual property and other tangible assets related to the Transpower magnetics business of TE Connectivity (“TE”) for $22.4 million in cash and additional consideration including the assumption of $0.1 million in liabilities and the grant of a license to TE related to three of the Company’s patents. The Company has accrued $7.2 million of additional consideration payable to TE related to a working capital adjustment at March 31, 2013.  Transpower Technology (HK) Limited is the sole shareholder of Dongguan Transpower Electronic Products Co., Ltd. in the People's Republic of China.  The operations acquired are now doing business as TRP Connector (“TRP”).acquired. The Company’s purchase of the TRP magnetics business consisted of the integrated connector module (“ICM”) family of products, including RJ45, 10/100 Gigabit, 10G, PoE/PoE+, MRJ21 and RJ.5, a line of modules for smart-grid applications, and discrete magnetics.

During the three months ended March 31, 2014 and 2013, the Company incurred less than $0.1 million and $0.3 million, respectively, of acquisition-related costs associated with TRP.the 2013 Acquisitions.  These costs are included in selling, general and administrative expense in the accompanying condensed consolidated statementstatements of operations for the three months ended March 31, 2014 and 2013.

The purchase price allocations for TRP and Array were finalized during the initial accounting related to the TRP acquisition is not complete asfirst quarter of the filing date of this Form 10-Q, the2014.  The following table depicts the Company’s initial estimate of thefinalized respective acquisition date fair values of the consideration paid or payable and identifiable net assets acquired (in thousands):

There were no operations related to TRP between the March 29, 2013 acquisition date and March 31, 2013.  As a result, TRP’sThe results of operations had no impact onof the 2013 Acquired Companies have been included in the Company’s condensed consolidated statement of operationsfinancial statements for the period subsequent to their respective acquisition dates.  During the three months ended March 31, 2013.  The preliminary fair values2014, the 2013 Acquired Companies contributed $17.9 million of revenue and $1.3 million of net assets acquired, as noted above, are included inearnings to the Company’s condensed consolidated balance sheet atfinancial results.  There was no operating activity related to either of the 2013 Acquisitions during the three months ended March 31, 2013.

The unaudited pro forma information below presents the combined operating results of the Company and TRP.the 2013 Acquired Companies.  The unaudited pro forma results are presented for illustrative purposes only.  They do not reflect the realization of any potential cost savings, or any related integration costs. Certain cost savings may result from the TRP acquisition;2013 Acquisitions; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the TRP acquisition2013 Acquisitions had occurred as of January 1, 2012, nor is the pro forma data intended to be a projection of results that may be obtained in the future.

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:

 

As of March 31, 20132014 and December 31, 2012,2013, the Company held certain financial assets that are measured at fair value on a recurring basis.  These consisted of securities that are among the Company’s investments in a rabbi trust which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations, and other marketable securities described below.  The securities that are held in the rabbi trust are categorized as available-for-sale securities and are included as other assets in the accompanying condensed consolidated balance sheets at March 31, 20132014 and December 31, 2012.2013.  The gross unrealized gains associated with the investments held in the rabbi trust were $0.5 million and $0.4 million at March 31, 2014 and December 31, 2013, respectively.  Such unrealized gains are included, net of tax, in accumulated other comprehensive income.

As of March 31, 20132014 and December 31, 2012,2013, the Company had marketable securities with a combined fair value of less than $0.1 million at each date, and gross unrealized lossesgains of less than $0.1 million at each date.  Such unrealized lossesgains are included, net of tax, in accumulated other comprehensive loss.income.  The fair value of the equity securities is determined based on quoted market prices in public markets and is categorized as Level 1.  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 three months ended March 31, 2013 and 2012.first quarter of 2014.  There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the three months ended March 31, 2013.first quarter of 2014.

The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring basis as of March 31, 20132014 and December 31, 20122013 (dollars in thousands).

The Company has other financial instruments, such as cash equivalents, accounts receivable, notes receivable, accounts payable, notes 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 Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of March 31, 20132014 or December 31, 2012.2013.

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 on the occurrence of a triggering event or, in the case of goodwill and indefinite-lived intangible assets, on at least an annual basis.  There were no triggering events that occurred during the three months ended March 31, 2013 or 20122014 that would warrant interim impairment testing.

 
 

The components of inventories are as follows (dollars in thousands):

6.            BUSINESS SEGMENT INFORMATION

The Company operates in one industry with three reportable operating segments, which are geographic in nature.  The segments consist of North America, Asia and Europe.  The primary criteria by which financial performance is evaluated and resources are allocated are sales and income from operations.  The following is a summary of key financial data (dollars in thousands):

The following items are included in the income (loss) income from operations presented above:

7.            INCOME TAXES

At March 31, 20132014 and December 31, 2012,2013, the Company has approximately $2.7$2.3 million and $2.2 million, respectively, of liabilities for uncertain tax positions ($0.50.8 million and $1.0 million, respectively, included in income taxes payable and $2.2$1.5 million and $1.2 million, respectively, included in liability for uncertain tax positions) all of which, if recognized, would reduce the Company’s effective tax rate.

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 2010 and for state examinations before 2007.   Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 20042008 in Asia and generally 2006 in Europe.

As a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized benefits for tax positions taken regarding previously filed tax returns may change materially from those recorded as liabilities for uncertain tax positions in the Company’s condensed consolidated financial statements at March 31, 2013.2014.  A total of $0.6$0.8 million of previously recorded liabilities for uncertain tax positions relates principally to the 20072010 tax year.  The statute of limitations related to these liabilities is scheduled to expire on September 15, 2013.2014.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits arising from uncertain tax positions as a component of the current provision for income taxes.  During each of the three months ended March 31, 20132014 and 2012,2013, the Company recognized an immaterial amount of interest and penalties and no interest and penalties, respectively, in the condensed consolidated statements of operations.  The Company has approximately $0.2 million accrued for the payment of such interest and penalties at March 31, 20132014 and December 31, 2012,2013, a portion of which is included in theeach of income taxes payable and liability for uncertain tax positions in the accompanying condensed consolidated balance sheets at each date.

The Company has made elections under Internal Revenue Code (“IRC”) Section 338(g)does not intend to step-upmake any election to step up the tax basis of the 2012 acquisitions2013 Acquisitions to fair value.  The elections madevalue under IRC Section 338(g) only affect the U.S. income taxes (not those of the foreign countries where the acquired entities were incorporated).

 

Accrued expenses consist of the following (dollars in thousands):

9.10.           RETIREMENT FUND AND PROFIT SHARING PLAN

The Company maintains the Bel Fuse Inc. Employees’ Savings Plan, a defined contribution plan that is intended to meet the applicable requirements for tax-qualification under sections 401(a) and (k) of the IRC. 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. The Company’s matching contributions are equal to 100% of the first 1% of compensation contributed by participants, and 50% of the next 5% of compensation contributed by participants. The expense for the three months ended March 31, 20132014 and 20122013 amounted to approximately $0.2 million and $0.1 million, in each period.respectively.  Prior to January 1, 2012, the plan’s structure provided for a Company match and discretionary profit sharing contributions that were made in the form of the Company’s common stock.  As of March 31, 2013,2014, the plan owned 15,32514,899 and 216,867186,030 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The Company’s subsidiaries in Asia, other than TRP, haveCompany also has a retirement fund coveringin Asia which covers substantially all of theirits 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 three months ended March 31, 20132014 and 20122013 amounted to approximately $0.1 million in each period.  As of March 31, 2013,2014, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The components of SERP expense are as follows (dollars in thousands):