BEL Fuse Inc: Form 10-Q for the period ended Sep 30, 2024

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 2023 Annual Report on Form 10-K and our consolidated financial statements and related notes set forth in Item 8 of Part II of our 2023 Annual Report on Form 10-K. See Part II, Item 1A, “Risk Factors,” below and “Cautionary Notice Regarding Forward-Looking Information,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our Forward-Looking Statements. All amounts and percentages are approximate due to rounding and all dollars in the text are in millions, except per share amounts or where otherwise noted. When we cross-reference to a “Note,” we are referring to our “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1, of this Quarterly Report on Form 10-Q, unless the context indicates otherwise. All amounts noted within the tables are in thousands and amounts and percentages are approximate due to rounding.

Overview

Our Company

We design, manufacture and market a broad array of products that power, protect and connect electronic circuits. These products are primarily used in the networking, telecommunications, computing, general industrial, high-speed data transmission, military, commercial aerospace, transportation and eMobility industries. Our portfolio of products also finds application in the automotive, medical and consumer electronics markets.

We operate through three product group segments. In the nine months ended September 30, 2024, 43% of our revenues were derived from Power Solutions and Protection, 44% from our Connectivity Solutions and 13% from our Magnetic Solutions operating segment.

Our operating expenses are driven principally by the cost of labor where the factories that we use are located, the cost of the materials that we use and our ability to effectively and efficiently manage overhead costs. As labor and material costs vary by product line and region, any significant shift in product mix can have an associated impact on our costs of sales. Costs are recorded as incurred for all products manufactured. Such amounts are determined based upon the estimated stage of production and include materials, labor cost and fringes and related allocations of factory overhead. Our products are manufactured at various facilities in the United States, Mexico, Dominican Republic, United Kingdom, Slovakia, India and the People’s Republic of China (PRC).

We have little visibility into the ordering habits of our customers and we can be subjected to large and unpredictable variations in demand for our products. Accordingly, we must continually recruit and train new workers to replace those lost to attrition and be able to address peaks in demand that may occur from time to time. These recruiting and training efforts and related inefficiencies, and overtime required in order to meet any increase in demand, can add volatility to the labor costs incurred by us.

Recent Developments – Agreement to Acquire Enercon

On September 18, 2024, we entered into a definitive Share Purchase Agreement, dated as of September 19, 2024 (the “Enercon Purchase Agreement”), with Enercon Technologies, Ltd. (“Enercon”), FF3 Holdings, L.P., for itself and as Sellers’ Representative (“FF3”), and the other seller parties signatory thereto (together with FF3, each a “Seller” and collectively, the “Sellers”). The Enercon Purchase Agreement provides for our acquisition of a majority stake in Enercon from the Sellers based on an enterprise value of $400 million. Pursuant to the terms and conditions of the Enercon Purchase Agreement, we will acquire an 80% stake upfront for $320 million in cash at the closing (subject to customary adjustments), plus up to $10 million of potential earnout payments for the 2025-2026 period, with the intent to purchase the remaining 20% by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing and subject to the terms and pricing prescribed thereby, which include future EBITDA performance. Enercon is a leading supplier of highly customized power conversion and networking solutions to aerospace and defense markets globally, providing robust and reliable solutions across air, land and sea applications. This acquisition will allow us to extend our product portfolio supporting the aerospace and defense markets to include power solutions, with clear potential cross selling opportunities in the future. Enercon is based in Netanya, Israel with additional facilities in New Hampshire, U.S. and Haryana, India. The transaction is expected to close in the fourth quarter of 2024 subject to satisfaction of customary closing conditions. The preceding discussion of the proposed Enercon acquisition contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."

Key Factors Affecting our Business

We believe that in addition to recent global inflationary pressures on the costs of goods and services in general, and ongoing conflicts/political unrest including in or near the countries in which Bel operates, the key factors affecting and/or potentially affecting our results for the nine months ended September 30, 2024 and/or future results include the following:

• Revenues – Our revenues in the first nine months of 2024 were down $114.9 million, or 23.0% as compared to the same period of 2023. The decrease was driven by our Power Solutions and Protection and Magnetics Solutions segments and largely related to lower demand from our networking customers and distribution partners as we believe they continue to work through inventory on hand. These decreases were offset in part by a modest increase in sales at our Connectivity Solutions group, driven by increased sales through our distribution channels and aerospace and defense end markets.
• Backlog – Our backlog of orders amounted to $287.4 million at September 30, 2024, a decrease of $85.7 million, or 23%, from December 31, 2023. From year-end 2023 to September 30, 2024, we saw a 33% decrease in the backlog for our Power Solutions and Protection business, a decline in backlog of 17% in our Magnetic Solutions business and a 5% decrease in backlog level at our Connectivity Solutions business. While order volumes in general have been lower in recent quarters, we saw the highest booking level in the third quarter of 2024 since the third quarter of 2023.
• Product Mix – Material and labor costs vary by product line and any significant shift in product mix between higher- and lower-margin product lines will have a corresponding impact on our gross margin percentage. In general, our Connectivity products have historically had the highest contribution margins of our three product groups given the harsh environment and high-reliability nature of these products and the end markets they serve. Our Power products have a higher-cost bill of materials and are impacted to a greater extent by changes in material costs. As our Magnetic Solutions products are more labor-intensive in nature, margins on these products are impacted to a greater extent by minimum and market-based wage increases in the PRC and fluctuations in foreign exchange rates between the U.S. Dollar and the Chinese Renminbi. Fluctuations in revenue volume among our product groups will have a corresponding impact on our profit margins. See "Results of Operations - Summary by Operating Segment - Revenue and Gross Margin" below for further details.
• Pricing and Availability of Materials – There has been some stabilization of raw materials pricing since late 2023; however overall our cost of materials remains elevated. Supply constraints have eased related to components that constitute raw materials in our manufacturing processes, particularly with capacitors, resistors and copper. Lead times are still above normal though suppliers are now meeting the agreed delivery deadlines with more regularity. In addition, COVID remains a potential supply continuity risk due to the unknown nature of future outbreaks including potential further variants. Additionally, our access to parts or materials, and our ability to contract with suppliers utilized previously, may be limited or prohibited from time to time by trade restrictions or other legal or regulatory enactments. We anticipate continued downward pressure on our Power sales given trade restrictions on one of our former suppliers previously utilized for this segment, which had historically supported approximately $3 to $4 million per quarter of our sales into the consumer end market. We are currently evaluating alternative manufacturing options for the components previously supplied by this manufacturer. To the extent our suppliers in the PRC are negatively impacted by new or amended regulations, any such negative implications could adversely impact our supply chain, including in the form of increased costs, disruptions, shortages or unavailability of product or component parts, and/or other deleterious consequences, which could materially adversely affect our business and operating results. The preceding discussion of "Pricing and Availability of Materials" contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
• Labor Costs – Labor costs represented 7.8% of revenue during the first nine months of 2024 as compared to 6.5% of revenue during the same period of 2023. The period-over-period increase in labor costs as a percentage of sales for the first nine months of 2024 was largely impacted by the retention of a certain level of direct labor associates within our Magnetic Solutions business to accommodate the anticipated rebound within this segment. In addition, effective January 1, 2024, the statutory minimum wage rate in Mexico was increased by 20%, impacting labor costs at our Reynosa and Cananea, Mexico factories. We estimate the additional cost associated with this increase will be approximately $1.4 million annually. Also effective January 1, 2024, minimum wage increases which went into effect at our factory in Slovakia are expected to result in approximately $0.3 million of higher labor costs at that facility in 2024 as compared to 2023. This and any future increases in minimum wage rates will have an unfavorable impact on Bel's profit margins. The preceding five sentences represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
• Inflationary Pressures - Inflationary pressures could continue to result in higher input costs, including those related to our raw materials, labor, freight, utilities, healthcare and other expenses. Our future operating results will depend, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings initiatives and sourcing decisions. The preceding two sentences contain Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
• Restructuring – In late 2023, we initiated a restructuring initiative within our Connectivity segment related to the transition of certain manufacturing from our Glen Rock, Pennsylvania facility to other existing Bel sites (the “Glen Rock initiative”). During the third quarter of 2024, we initiated a restructuring initiative within our Power segment related to the transition of our fuse manufacturing to other existing sites (the "Fuse initiative"). In addition to the Fuse initiative and the Glen Rock initiative, the Company also implemented headcount reductions within our Magnetics segment in response to the lower sales volume in recent quarters within that segment. In connection with these initiatives, the Company incurred $1.1 million and $1.8 million during the three and nine months ended September 30, 2024, respectively, which primarily consisted of severance costs. The Glen Rock initiative is expected to be complete by the end of 2024 at a total cost to implement of $0.6 million (almost all of which was incurred during the nine months ended September 30, 2024). Annual cost savings related to the Glen Rock initiative are estimated at $2.5 million (of this initial annualized amount, $1.5 million is expected to be realized throughout 2024, with the incremental $1.0 million to be realized in 2025). The Fuse initiative is expected to be complete by the end of the first quarter of 2025 at a total cost to implement of $4.2 million (of which $0.2 million was incurred in the third quarter of 2024, $2.1 million is expected to be incurred in the fourth quarter of 2024, with the balance to be incurred in early 2025). Annual cost savings related to the Fuse initiative are estimated at $1.5 million and are expected to be realized beginning in the second quarter of 2025. The Company will continue to review its operations to optimize the business, which may result in restructuring costs being recognized in future periods. The preceding statements about restructuring initiatives, including our projections and estimates, represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information."
• Impact of Foreign Currency – As further described below, during the nine months ended September 30, 2024, labor and overhead costs were $0.7 million lower than the corresponding 2023 period primarily due to a favorable foreign exchange environment involving the Chinese Renminbi, as compared to the prior year period. We realized foreign exchange transactional loss of $1.3 million during the nine months ended September 30, 2024, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, 2024 versus those in effect at December 31, 2023. Since we are a U.S. domiciled company, we translate our foreign currency-denominated financial results into U.S. dollars. Due to the changes in the value of foreign currencies relative to the U.S. dollar, translating our financial results and the revaluation of certain intercompany as well as third-party transactions to and from foreign currencies to U.S. dollars may result in a favorable or unfavorable impact to our consolidated statements of operations and cash flows. We were favorably impacted by transactional foreign exchange gains in the first nine months of 2024 due to the depreciation of the Chinese Renminbi against the U.S. dollar, as compared to exchange rates in effect during 2023. We have significant manufacturing operations located in in the PRC where labor and overhead costs are paid in local currency. As a result, the U.S. Dollar equivalent costs of these operations were approximately $0.7 million lower in the PRC, in the nine months ended September 30, 2024 as compared to the comparable period in 2023. We monitor changes in foreign currencies and have historically implemented foreign currency forward contracts, and may continue to implement pricing actions to help mitigate the impact that changes in foreign currencies may have on our consolidated operating results. The preceding sentence represents a Forward-Looking Statement. See "Cautionary Notice Regarding Forward-Looking Information."
• Effective Tax Rate – Our effective tax rate will fluctuate based on the geographic regions in which our pretax profits are earned. Of the geographic regions in which we operate, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of our three geographical regions. See Note 12, “Income Taxes”.

Results of Operations - Summary by Operating Segment

Revenue and Gross Margin

Our revenue and gross margin by operating segment for the three and nine months ended September 30, 2024 and 2023 were as follows:

Power Solutions and Protection:

Sales of our Power Solutions and Protection products were lower by $26.2 million (35.0%) and $77.7 million (31.7%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. The decrease resulted primarily from a decline in sales of our power products into networking applications of $15.9 million (52.0%) during the third quarter of 2024 and $49.1 million (49.1%) during the nine months ended September 30, 2024 as compared to the same periods of 2023. Sales of our CUI products were down by $6.1 million (50.5%) and $17.2 million (41.7%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. Sales of products into the eMobility end market decreased by $3.3 million and $9.0 million, and our circuit protection products declined by $0.2 million and $2.3 million during the third quarter and nine months ended September 30, 2024, respectively, compared to the corresponding periods of 2023. These areas of decline were partially offset by a $2.6 million and $9.1 million increase in sales of our rail products during the third quarter and nine months ended September 30, 2024, respectively, compared to the same periods of 2023.

Our gross margin for the Power segment declined in the third quarter of 2024 compared to the same period of 2023 due to lower sales and an unfavorable shift in product mix. This decline was result of lower sales volume, partially offset with the favorable exchange rates with the Chinese Renminbi versus the U.S. dollar.

Connectivity Solutions:

Sales of our Connectivity Solutions products increased by $3.9 million (7.6%) and $7.8 million (4.9%) during the three and nine months ended September 30, 2024, respectively, as compared to the same period of 2023. This increase was primarily due to increased volume of Connectivity Solutions products sold through our distribution channels, providing incremental growth of $1.2 million (6.1%) during the third quarter and $4.3 million (7.3%) during the nine-month period ended September 30, 2024, as compared to the same periods of 2023. Sales of Connectivity products into the military end market grew $0.5 million (1.5%) during the nine months ended September 30, 2024, as compared to the same period of 2023. Gross margins for the 2024 periods presented above were favorably impacted by pricing actions on certain contract renewals and operational efficiencies from the facility consolidations completed in 2023, partially offset by higher wage rates in Mexico and an unfavorable fluctuation in exchange rates between the U.S. dollar and Mexican peso in the 2024 periods as compared to the 2023 periods presented.

Magnetic Solutions:

Sales of our Magnetic Solutions products declined by $12.8 million (40.0%) and $45.0 million (47.6%) during the three and nine months ended September 30, 2024, respectively, as compared to the same periods of 2023. Reduced demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver of the lower demand as we believe by these customers continue to work through inventory on hand. The lower sales volume, partially offset by favorable exchange rates with the Chinese Renminbi versus the U.S. dollar, were the primary drivers of gross margin reduction for this product group during the first nine months of 2024 as compared to the same period of 2023.

Cost of Sales

Cost of sales as a percentage of revenue for the three and nine months ended September 30, 2024 and 2023 consisted of the following:

Material costs as a percentage of sales during the three and nine months ended September 30, 2024 were lower compared to the same periods of 2023, due to a shift in production mix, the stabilization of raw material pricing, shorter lead times, and better procurement efforts. Labor costs in the 2024 periods as a percentage of sales have increased compared to the each of the third quarter and first nine months of 2023 due to lower sales volume, a shift in product mix, an unfavorable fluctuation of the Mexican Peso exchange rate versus the U.S. Dollar in 2024 compared to the previous year, and the increase in statutory minimum wage rate in Mexico. This increase in labor cost was partially offset by lower labor costs in China due to the favorable fluctuation in the Chinese Renminbi exchange rate versus the U.S. Dollar.

The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (rent, utilities, insurance). The percentage of other expenses as a cost of sales has increased during the three and nine months ended September 30, 2024 relative to the corresponding 2023 periods, due to the lower sales volume in the 2024 periods presented as compared to the same periods of 2023.

Research and Development ("R&D") Expense

R&D expense remained relatively steady and amounted to $5.4 million and $5.3 million during the three months ended September 30, 2024 and 2023, respectively and $16.7 million and $16.5 million for the nine-month periods ended September 30, 2024 and 2023, respectively.

Selling, General and Administrative Expense (“SG&A”)

SG&A expenses were $26.7 million for the third quarter of 2024, an increase from $23.7 million in the third quarter of 2023. This increase in SG&A was largely the result of a $4.3 million increase in professional fees related to the acquisition of Enercon expected to close in the fourth quarter of 2024. Salaries and fringe benefits also increased by $0.7 million and there was an increase of $0.4 million in a variety of other expenses, including amortization, advertising and travel. These increases were largely offset by lower variable organizational compensation by $0.7 million and lower business promotion expenses of $0.3 million in the third quarter of 2024 as compared to the third quarter of 2023 due to the lower sales base in the 2024 period.

SG&A expenses were $75.8 million for the first nine months of 2024, up from $74.1 million in the same period of 2023. This increase in SG&A was largely the result of a $4.3 million increase in professional fees related to the acquisition of Enercon, offset by a $3.7 million decline in legal fees largely due to costs associated with the aforementioned MPS patent infringement lawsuit further described in Note 15, "Commitments and Contingencies", which did not recur in the first nine months of 2024. Salaries and fringe benefits increased by of $2.8 million and there was also an increase of $0.4 million in a variety of other expenses, including amortization, advertising and travel in the first nine months of 2024 as compared to same period of 2023. These increases were offset by a decline of $1.3 million in commissions and a $0.5 million decline in business promotion expenses during the nine months ended September 30 2024, as compared to the same period of 2023 due to the lower sales base in the 2024 period.

Other (Expense) Income, Net

Other (expense) income, net was ($1.3) million and ($0.1) million for the three months ended September 30, 2024 and 2023, respectively. The year-over-year change within this line item was largely driven by the market fluctuations in our SERP investments which resulted in a gain of $0.5 million and loss of $0.5 million during the three months ended September 30, 2024 and 2023, respectively. The Company also recorded losses of $0.2 million and $0.3 million associated with its investment in innolectric during the third quarters of 2024 and 2023, respectively. We also realized foreign exchange transactional losses of $1.6 million during the three-month period ended September 30, 2024 versus a gain of $0.2 million for the same period in 2023 due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, versus those in effect at June 30, of each year.

Other (expense) income, net was less than $0.1 million and ($0.3) million for the nine months ended September 30, 2024 and 2023, respectively. The year-over-year change within this line item was largely driven by the market fluctuations in our SERP investments which resulted in a gain of $1.3 million during the nine months ended September 30, 2024 and a gain of $0.3 million during the same period in 2023. The Company also recorded $0.3 million of loss associated with its investment in innolectric during the nine months ended September 30, 2024. We also realized foreign exchange transactional losses of $1.3 million during the nine months ended September 30, 2024, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at September 30, 2024 versus those in effect at December 31, 2023. This compares to foreign exchange transactional losses of $0.1 million recorded during the nine months ended September 30, 2023.

Provision for Income Taxes

The Company’s effective tax rate will fluctuate based on the geographic regions in which the pretax profits are earned. Of the jurisdictions in which the Company operates, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of the Company’s three geographic regions. See Note 12, “Income Taxes”.

The provision for income taxes for the three months ended September 30, 2024 and 2023 was $3.1 million and $4.3 million, respectively. The Company’s earnings before income taxes for the three months ended September 30, 2024, were $12.6 million lower when compared with the same period in 2023, primarily attributable to a decrease in income from all of the regions. The Company’s effective tax rate was 27.8% and 18.2% for the three months ended September 30, 2024 and 2023, respectively. The change in the effective tax rate during the three months ended September 30, 2024 as compared to the same period in 2023, is primarily attributable to an increase in tax expense relating to prior period accruals, as well as a decrease in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statute of limitations. See Note 12, “Income Taxes”.

The provision for income taxes for the nine months ended September 30, 2024 and 2023 was $11.7 million and $8.0 million, respectively. The Company’s earnings before income taxes for the nine months ended September 30, 2024, were approximately $15.4 million lower when compared with the same period in 2023, primarily attributable to decrease in income from the North America and Asia regions, partially offset by an increase in the Europe region. The Company’s effective tax rate was 21.4% and 11.5% for the nine months ended September 30, 2024 and 2023, respectively. The change in the effective tax rate during the nine months ended September 30, 2024 as compared to the same period in 2023, is primarily attributable to an increase in tax expense relating to valuation allowances and prior period accruals as well as a decrease in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statute of limitations. See Note 12, “Income Taxes”.

Liquidity and Capital Resources

Our principal sources of liquidity include $134.3 million of cash and cash equivalents at September 30, 2024, $29.5 million of held to maturity investments in U.S. Treasury securities, cash provided by operating activities and borrowings available under our credit facility. We expect to use this liquidity for operating expenses, investments in working capital, capital expenditures, interest, taxes, dividends, purchases of common stock under our Repurchase Program, and debt obligations and other long-term liabilities. Our liquidity may also be utilized to fund potential acquisitions in future periods. We believe that our current liquidity position and future cash flows from operations will enable us to fund our operations, both in the next twelve months and in the longer term.

Cash Flow Summary

During the nine months ended September 30, 2024, our cash and cash equivalents increased by $44.9 million. This increase was primarily due to the following:

• net cash provided by operating activities of $65.7 million; and
• proceeds from held to maturity securities of $139.3 million; partially offset by:
• purchases of held to maturity and marketable securities of $131.3 million;
• purchases of common stock under our Repurchase Program of $16.1 million;
• purchases of property, plant and equipment of $7.9 million; and
• dividend payments of $2.5 million.

During the nine months ended September 30, 2024, our accounts receivable decreased by $8.4 million due to lower sales volume in the third quarter. Days sales outstanding (DSO) was 57 days at September 30, 2024 and 55 days at December 31, 2023. Inventory decreased by $12.3 million at September 30, 2024 compared to December 31, 2023, as component availability has started to ease and we have worked to consume our inventory on hand. Inventory turns were 2.6 at September 30, 2024 as compared to 3.1 at December 31, 2023.

Cash and cash equivalents, held to maturity U.S. Treasury securities and accounts receivable comprised approximately 41.0% and 36.9% of our total assets at September 30, 2024 and at December 31, 2023, respectively. Our current ratio (i.e., the ratio of current assets to current liabilities) was4.0 to 1 at September 30, 2024 and 3.4 to 1 at December 31, 2023. At September 30, 2024 and December 31, 2023, $50.5 million and $40.9 million, respectively (or 38% and 46%, respectively), of our cash and cash equivalents was held by our foreign subsidiaries. We repatriated $11 million from outside of the U.S. during the nine months ended September 30, 2024. We continue to analyze our global working capital and cash requirements and the potential tax liabilities attributable to further repatriation, and we have yet to make any further determination regarding repatriation of funds from outside the U.S. to fund our U.S. operations in the future. In the event these funds were needed for our U.S. operations, we would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.

Future Cash Requirements

We expect foreseeable liquidity and capital resource requirements in the ordinary course to be met through existing cash and cash equivalents and anticipated cash flows from operations, as well as borrowings available under our revolving credit facility, if needed. Our material cash requirements arising in the normal course of business are outlined in Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Other than cash requirements arising from the Enercon acquisition pursuant to the Enercon Purchase Agreement expected to close in the fourth quarter of 2024 as described in the immediately following paragraph, there were no material changes to our future cash requirements during the nine months ended September 30, 2024.

In September 2024, the Company entered into the Enercon Purchase Agreement, as further described above in "Recent Developments - Agreement to Acquire Enercon". The transaction is expected to close during the fourth quarter of 2024 subject to satisfaction of customary closing conditions. The Company anticipates funding the acquisition of the 80% stake in Enercon through approximately $80 million of cash on hand and $240 million of incremental borrowings under its credit facility. Pursuant to the terms and conditions of the Enercon Purchase Agreement, there is $10 million of potential earnout payments for the 2025-2026 period, with the intent to purchase the remaining 20% by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing and subject to the terms and pricing prescribed thereby, which include future EBITDA performance.

Credit Facility

In September 2021, we entered into the Existing Credit Agreement, as further described in Note 11, "Debt". During January 2023, we amended the Existing Credit Agreement and related interest rate swap agreements to transition the reference rate from LIBOR to a Secured Overnight Financing Rate ("SOFR") effective January 31, 2023. The Existing Credit Agreement contains customary representations and warranties, covenants and events of default. In addition, the Existing Credit Agreement contains financial covenants that measure (i) the ratio of our total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of our consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of our consolidated EBITDA to our consolidated fixed charges (“Fixed Charge Coverage Ratio”). If an event of default occurs, the lenders under the Existing Credit Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor.

Concurrently with the entry into the Enercon Purchase Agreement, Bel entered into a Commitment Letter, dated September 18, 2024, as further described in Note 11, to increase the Maximum Revolving Amount available under the Existing Credit Agreement’s revolving credit facility by an aggregate of $150 million to an aggregate amount of $325 million.

Among the satisfaction of other conditions and deliverables, the completion of the Revolving Facility Increase will be subject to the execution and delivery of an amendment to, or an amendment and restatement of, the Existing Credit Agreement.

In connection with Bel’s entry into the Commitment Letter, on September 18, 2024, Bel entered into a Second Amendment which makes certain amendments to the Existing Credit Agreement, including (i) increasing the cap set forth in Section 2.10(b) (governing “Increase in Commitment”) of the Existing Credit Agreement by $50 million to $150 million, (ii) adding certain customary provisions permitting the use of revolving loans on a limited conditions basis to finance the Enercon acquisition, and (iii) permitting the Enercon acquisition under the Credit Agreement.

At September 30, 2024, we were in compliance with our debt covenants, including the most restrictive covenant, the Fixed Charge Coverage Ratio. The unused credit available under the credit facility at September 30, 2024 was $115.0 million, all of which we had the ability to borrow without violating our Leverage Ratio covenant based on our existing consolidated EBITDA.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements include certain amounts that are based on management's best estimates and judgments. We base our estimates on historical experience and on various other assumptions, including in some cases future projections, that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Different assumptions and judgments could change the estimates used in the preparation of the condensed consolidated financial statements, which, in turn, could change the results from those reported. Management evaluates its estimates, assumptions and judgments on an ongoing basis.

Based on the above, we have determined that our most critical accounting estimates are those related to business combinations, inventory valuation, goodwill and other indefinite-lived intangible assets, and those related to our pension benefit obligations. For a detailed discussion of our critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes in our critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in our 2023 Annual Report on Form 10-K.

Recent Accounting Pronouncements

The discussion of new financial accounting standards applicable to our Company is incorporated herein by reference to Note 1, “Basis of Presentation and Accounting Policies”.

The Company is exposed to market risk primarily from changes in foreign currency exchange rates and changes in interest rates associated with its long-term debt. Under the Company’s risk management strategy, the Company periodically uses foreign currency forward contracts to manage its short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. To partially mitigate risks associated with the variable interest rates on revolver borrowings under the Company's credit agreement (see Note 11, “Debt”, to the condensed consolidated financial statements herein, and Note 11, “Debt”, to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023), the Company maintains two pay-fixed, receive-variable interest rate swap agreements with two multinational financial institutions (see Note 10, “Derivative Instruments and Hedging Activities”, to the condensed consolidated financial statements herein, and Note 13, “Derivative Instruments and Hedging Activities”, to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023). The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. The Company enters into these contracts in the normal course of business to mitigate risks and not for speculative purposes. There have not been any material changes with regard to market risk during the nine months ended September 30, 2024. Refer to Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of market risks.

Disclosure controls and procedures: As of the end of the period covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in internal controls over financial reporting: There has not been any change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The risk factors described below, supplement the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The risk factors set forth below, together with the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, should be carefully considered before making an investment decision. These are the risk factors that we consider to be the most significant risk factors, but they are not the only risk factors that should be considered in making an investment decision. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, except as supplemented by the risk factors described below. This Quarterly Report on Form 10-Q also contains Forward-Looking Statements that involve risks and uncertainties. See the "Cautionary Notice Regarding Forward-Looking Information," above. Our business, consolidated financial condition and consolidated results of operations could be materially adversely affected by any of the risk factors, assumptions and uncertainties described, under "Cautionary Notice Regarding Forward-Looking Information" or with respect to specific Forward-Looking Statements presented herein. The trading price of our securities could decline due to any of these risks, and investors in our securities may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially adversely affect our business in the future. Except as required by the federal securities law, we undertake no obligation to update or revise any risk factor, whether as a result of new information, future events or otherwise.

The Enercon Purchase Agreement includes a number of closing conditions and, if these conditions are not satisfied, the Enercon Purchase Agreement may be terminated in accordance with its terms and the acquisition may not be completed. We may fail to consummate the proposed Enercon acquisition, may not consummate the proposed acquisition on expected terms, or may not achieve the expected benefits.

In September 2024, we entered into the definitive Enercon Purchase Agreement with the Sellers to acquire an 80% stake in Enercon upfront at the closing, with the intent to purchase the remaining 20% interest in Enercon by early 2027 based on a put-call mechanism to be set forth in shareholders’ agreement to be entered into at closing. It is currently anticipated that the acquisition of the 80% interest pursuant to the Enercon Purchase Agreement will be completed in the fourth quarter of 2024. However, completion of the proposed Enercon acquisition is subject to satisfaction of customary closing conditions, including applicable regulatory approvals. Until all such closing conditions are satisfied or waived, the possible timing and likelihood of completion of the proposed Enercon acquisition are uncertain, and, accordingly, there can be no assurance that the Enercon acquisition will be completed on the expected terms, on the anticipated timing or at all. The Enercon Purchase Agreement may also be terminated prior to the consummation of the transaction by the mutual written consent of Bel and the Sellers and in certain other circumstances, including a termination right by either Bel or the Sellers, subject to certain terms and conditions, if the Closing has not occurred on or prior to the date six months following execution of the Enercon Purchase Agreement. We may experience unanticipated difficulties, delays, and expenditures relating to the proposed Enercon acquisition. Any delay in consummation of the Enercon acquisition may result in greater transaction costs and professional fees incurred by us. In addition, even if the proposed acquisition of the majority 80% stake in Enercon is completed pursuant to the Enercon Purchase Agreement, there can be no assurances that we will complete the acquisition of the remaining 20% interest in Enercon by early 2027 as intended.

Our efforts to complete the Enercon acquisition could cause substantial disruptions in our business. A substantial amount of our management’s attention is being directed towards the completion of the Enercon acquisition and such distraction could affect our management’s ability to service our existing business, pursue other business opportunities or could otherwise adversely affect our business. The announcement, pendency, and efforts to implement the acquisition may disrupt our and Enercon’s plans, operations and relationships with customers, suppliers, distributors, business partners and regulators, and can cause potential difficulties in employee retention.

If consummated, the success of the Enercon acquisition will depend, in significant part, on our ability to successfully integrate the acquired business, establish and maintain good relationships with new and existing customers, suppliers, and other business partners, grow the revenue of the consolidated company and realize the anticipated strategic benefits and synergies. The combination of businesses is a complex, costly and time-consuming process. As a result, we expect to devote significant management attention and resources prior to closing to prepare for integration, and we expect to devote significant management attention and resources post-closing to integrate the business practices and operations. The integration process may disrupt the businesses and, if implemented ineffectively, would impair the realization of the full expected benefits. The anticipated opportunities in terms of potential growth and expansion offered by, and the anticipated benefits of, the Enercon acquisition may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, strategic and revenue opportunities, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Enercon acquisition within a reasonable time, our business, financial condition and operating results may be materially adversely affected.

We may face risks related to conducting business in Israel following the Enercon acquisition, as conditions in Israel may materially and adversely affect Enercon’s business and as a result the business of consolidated Bel.

If we successfully complete the acquisition of a majority stake in Enercon, we may be subject to, and possibly adversely affected by, risks related to conducting business in Israel. Enercon, the target of our proposed Enercon acquisition in which we will acquire an upfront 80% stake at the closing expected to occur in fourth quarter of 2024 and intend to acquire the remaining 20% interest by early 2027, is based in Netanya, Israel with additional facilities in New Hampshire, U.S. and Haryana, India. Enercon has approximately 300 employees located in Israel.

Companies based in or operating in, or having a significant number of employees located in Israel, may be more susceptible to political and economic instability. Political, economic and military conditions in Israel may directly affect their business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighbors. In October 2023, Hamas conducted several terrorist attacks in Israel resulting in ongoing war across the country, forcing the closure of many businesses in Israel for several days. In addition, there continue to be hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disruption of economic activities. In early 2023, there were a number of changes proposed to the political system in Israel by the current government which, if implemented as planned, could lead to large-scale protests and additional uncertainty, negatively impacting the operating environment in Israel. Uprisings in various countries in the Middle East over the last few years have also affected the political stability of those countries and have led to a decline in the regional security situation. Such instability may also lead to deterioration in the political and trade relationships that exist between Israel and these countries. Any armed conflicts, terrorist activities or political instability involving Israel or other countries in the region, as well as any interruption or curtailment of trade between Israel and its present trading partners, could adversely affect the business, results of operations, financial condition, cash flows and prospects of Enercon, and of consolidated Bel following the closing of the Enercon acquisition. In addition, any of these events or circumstances involving Israel or the region prior to the closing of the Enercon acquisition may delay or prevent the closing of the proposed Enercon acquisition.

A number of countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continue or intensify. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on policies promulgated by the Israeli Government. Such boycotts, particularly if they become more widespread, may adversely impact Enercon’s business or our business.

The operations of the Enercon business could also be disrupted by the absence for significant periods of one or more key employees or a significant number of other employees because of military service. Enercon’s employees in Israel may be obligated to perform military reserve duty, and in certain emergency circumstances, employees may be called to immediate and unlimited active duty in the Israeli armed forces.

Demand in Enercon’s end markets can be cyclical, impacting the demand for its products, and Enercon’s business could be materially adversely affected by reductions in defense spending.

Enercon, in which we intend to acquire a majority stake pursuant to the Enercon Purchase Agreement, is a leading supplier of highly customized power conversion and networking solutions to aerospace and defense markets globally. For full fiscal year 2024, an estimated 93% and 7% of Enercon’s projected revenue is attributable to the defense and aerospace end markets, respectively. Demand in Enercon’s end-use markets can be sensitive to general economic conditions, competitive influences, and fluctuations in inventory levels throughout the supply chain. Enercon’s sales are sensitive to the market conditions present in the industries in which the ultimate consumers of its products operate, which in some cases have been highly cyclical and subject to substantial downturns.

As a result of the high correlation to government spending on defense and budgeting, Enercon has experienced, and in the future, it may experience, significant fluctuations in sales and results of operations with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations and liquidity.

Because certain of Enercon’s products are used in a variety of land, air and sea defense applications, Enercon derives a substantial portion of its revenue from the defense industry. For full fiscal year 2024, an estimated 93% of Enercon’s projected revenue is derived from customers in the defense industry. Although many of the programs under which Enercon sells products to prime U.S. and Israeli government contractors extend several years, they are subject to annual funding through governmental appropriations. While spending authorizations for defense-related programs by the U.S. and Israeli governments have increased in recent years, these spending levels may not be sustainable and could significantly decline. Future levels of expenditures, authorizations, and appropriations for programs Enercon supports may decrease or shift to programs in areas where Enercon does not currently provide services. Changes in spending authorizations, appropriations, and budgetary priorities could also occur due to a shift in the number, and intensity, of potential and ongoing conflicts, shifts in spending priorities from national defense as a result of competing demands for government funds, or other factors. Enercon’s business prospects, financial condition or operating results could be materially harmed among other causes by the following: 1) budgetary constraints affecting U.S. and/or Israeli government spending generally, or specific departments or agencies in particular, and changes in available funding; 2) changes in government programs or requirements; and 3) a prolonged government shutdown and other potential delays in the appropriations process.