Bel Fuse - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 and 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. x  Yes      No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   o  Yes    o  No      Not applicable to the registrant.

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.o

 

At August 3, 2010, there were 2,174,912 shares of Class A Common Stock, $0.10 par value, outstanding and 9,529,093 shares of Class B Common Stock, $0.10 par value, outstanding.

 

 

 

 

PART I.  Financial Information

Item 1.  Financial Statements (Unaudited)

 

 

BEL FUSE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The condensed consolidated balance sheet as of June 30, 2010, and the condensed consolidated statements of operations, stockholders' equity 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, changes in stockholders' equity and cash flows for all periods presented have been made.  The results for the three and six months ended June 30, 2010 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, 2009 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 Inc. Annual Report on Form 10-K for the year ended December 31, 2009.

On January 29, 2010, the Company completed its acquisition of 100% of the issued and outstanding capital stock of Cinch Connectors, Inc. (“Cinch U.S.”), Cinch Connectors de Mexico, S.A. de C.V. (“Cinch Mexico”) and Cinch Connectors Ltd. (“Cinch Europe”) (collectively, “Cinch”) from Safran S.A.  Accordingly, as of January 29, 2010, all of the assets acquired and liabilities assumed were recorded at their preliminary fair values and the Company’s condensed consolidated results of operations for the six months ended June 30, 2010 include Cinch’s operating results from January 29, 2010 through June 30, 2010.

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, 2009.  There were no significant changes to these accounting policies during the six months ended June 30, 2010 and the Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

The Company utilizes the two-class method to report its earnings per share.  The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings (loss).  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 per share.  In computing earnings (loss) 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 (loss) earnings have been allocated to Class B shares than to the Class A shares on a per share basis.  Basic earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period.  There were no potential common shares outstanding during the three or six months ended June 30, 2010 or 2009 which would have had a dilutive effect on earnings per share.

 

 

The earnings (loss) and weighted-average shares outstanding used in the computation of basic and diluted earnings per share are as follows (dollars in thousands, except share and per share data):

 

3. ACQUISITION

On January 29, 2010 (the “Acquisition Date”), the Company completed its acquisition of 100% of the issued and outstanding capital stock of Cinch from Safran S.A.  As of June 30, 2010, Bel paid $39.7 million in cash and assumed an additional $0.8 million of expenses in exchange for the net assets acquired.    The transaction was funded with cash on hand.  Cinch is headquartered in Lombard, Illinois and has manufacturing facilities in Vinita, Oklahoma; Reynosa, Mexico; and Worksop, England.

Cinch manufactures a broad range of interconnect products for customers in the military and aerospace, high-performance computing, telecom/datacom, and transportation markets.  The Company believes that the addition of Cinch’s well-established lines of connector and cable products and extensive customer base will provide Bel with immediate access to the large and growing aerospace and military markets.  In addition to these strategic synergies, there is a significant opportunity for expense reduction and the elimination of redundancies.  The combination of these factors, and Bel’s ability to leverage its existing product line, have given rise to the provisional amount of goodwill detailed below.

 

 

 

The preliminary measurements of fair value set forth above are subject to change and such changes could be significant.  The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the Acquisition Date. While the purchase price allocation is not complete, the Company did receive additional information during the second quarter of 2010 related to the Acquisition Date fair values of certain property, plant and equipment, and intangible assets acquired.  These updates to the purchase price allocation are noted as measurement period adjustments in the above table.

During the ongoing valuation process, the Company is utilizing the income, cost, and market approaches in determining the fair values of the assets acquired and liabilities assumed. The fair value measurements are primarily based on significant inputs that are not observable in the market. The income approach is primarily being utilized to value the intangible assets, consisting primarily of trademarks, customer relationships and technology. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, is being utilized as appropriate for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation.

 

The preliminary fair value of property, plant and equipment acquired from Cinch consists of the following:

 

 

The preliminary fair value of identifiable intangible assets noted above consists of the following:

Of the $2.8 million of goodwill noted above, $1.7 million has been allocated to the Company’s North America reportable operating segment and $1.1 million has been allocated to the Company’s Europe reportable operating segment.  This allocation was determined based on those reportable operating segments expected to benefit from the acquisition of Cinch and was based primarily on the location of Cinch operations and associated revenue generation at the Acquisition Date.  The Company expects $1.7 million of the goodwill and $8.8 million of intangible assets allocated to the North America reportable operating segment to be deductible for tax purposes over a period of 15 years.

During the six months ended June 30, 2010, the Company expensed approximately $0.3 million of acquisition-related costs.  These costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.

Cinch’s results of operations have been included in the Company’s condensed consolidated financial statements for the periods subsequent to the Acquisition Date.  During the three and six months ended June 30, 2010, Cinch contributed revenues of $14.9 million and $24.8 million, respectively, and estimated net earnings of $0.8 million and $0.2 million, respectively, to the Company since the Acquisition Date.  The unaudited pro forma information below presents the combined operating results of the Company and Cinch.  The unaudited pro forma results are presented for illustrative purposes only and include the effects of headcount reductions that were effected on the Acquisition Date.  They do not reflect the realization of any other potential cost savings, or any related integration costs. Certain cost savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of January 1, 2009, nor is the pro forma data intended to be a projection of results that may be obtained in the future.

 

 

The following unaudited pro forma consolidated results of operations assume that the acquisition of Cinch was completed as of January 1, 2009 (dollars in thousands except per share data):

 

  

4.   FAIR VALUE MEASUREMENTS

The Company utilizes the accounting guidance for fair value measurements and disclosures for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis or on a nonrecurring basis during the reporting period.  The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date.  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability.  The accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as follows:

As of June 30, 2010 and December 31, 2009, the Company held certain financial assets that are measured at fair value on a recurring basis.  These consisted primarily of the Company’s investments in a Rabbi Trust, which are intended to fund the Company’s SERP obligations.  These are categorized as available-for-sale securities and are included as other assets in the accompanying condensed consolidated balance sheets at June 30, 2010 and December 31, 2009. The fair value of these investments 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 2 or Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during the three or six months ended June 30, 2010 and 2009.  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 or six months ended June 30, 2010.

 

 

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 June 30, 2010 and December 31, 2009 (dollars in thousands).

 

The Company has other financial instruments, such as accounts receivable, accounts payable and accrued expenses, which have been excluded from the tables above.  Due to the short-term nature of these instruments, the carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair values.  The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of June 30, 2010.

There were no financial assets or liabilities accounted for at fair value on a nonrecurring basis as of June 30, 2010 and December 31, 2009.  Nonfinancial assets and liabilities, such as goodwill 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 intangible assets with indefinite useful lives, on at least an annual basis.  There were no triggering events that occurred during the six months ended June 30, 2010 that would warrant interim impairment testing.

5. INVENTORIES

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 revenues and operating income.  The following is a summary of key financial data (dollars in thousands):

 

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

 

Acquisition of Cinch– The above figures for the three and six months ended June 30, 2010 include sales volume and expenses of Cinch since the acquisition date of January 29, 2010.  During the three months ended June 30, 2010, the Cinch acquisition contributed sales to external customers of $11.8 million and income from operations of $0.8 million to the Company’s North America operating segment and sales to external customers of $3.1 million and income from operations of $0.1 million to the Company’s Europe operating segment. During the six months ended June 30, 2010, the Cinch acquisition contributed sales to external customers of $19.8 million and income from operations of $0.3 million to the Company’s North America operating segment and sales to external customers of $5.0 million and an immaterial amount of income from operations to the Company’s Europe operating segment.

 

Restructuring Charges– In connection with the closure of its Westborough, Massachusetts facility in 2008, the Company incurred $0.4 million of restructuring charges during the six months ended June 30, 2009, including $0.1 million of severance costs and $0.3 million related to its facility lease obligation. These charges impacted the operating profit of the Company’s North America operating segment.

 

 

Gain on Sale of Property, Plant & Equipment – During the six months ended June 30, 2009, the Company recognized a previously-deferred $4.6 million pre-tax gain in the North America operating segment from the 2007 sale of a property in Jersey City, New Jersey.

Net Sales – Net sales to external customers are attributed to individual segments based on the geographic source of the billing for such customer sales.  Transfers between geographic areas include finished products manufactured in foreign countries which are then transferred to the United States and Europe for sale; finished goods manufactured in the United States which are transferred to Europe and Asia for sale; and semi-finished components manufactured in the United States which are sold to Asia for further processing. Income from operations represents net sales less operating costs and expenses.

7. INCOME TAXES

As of June 30, 2010 and December 31, 2009, the Company has approximately $5.2 million and $4.7 million, respectively, of liabilities for uncertain tax positions ($1.9 million and $1.8 million, respectively, included in income taxes payable and $3.3 million and $2.9 million, respectively, included in liability for uncertain tax positions) all of which, if reversed, 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 2006 and for state examinations before 2005.   Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2002 in Asia and generally 2004 in Europe.  The Company is not currently being audited by any tax authorities.

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 June 30, 2010.   A total of $1.9 million of previously recorded liabilities for uncertain tax positions relates to the 2006 tax year.  The statute of limitations related to this liability is scheduled to expire on September 15, 2010.

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 each of the six months ended June 30, 2010 and 2009, the Company recognized $0.2 million and $0.1 million, respectively, in interest and penalties in the condensed consolidated statements of operations.  The Company has approximately $0.8 million and $0.6 million accrued for the payment of interest and penalties at June 30, 2010 and December 31, 2009, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the condensed consolidated balance sheets.

In connection with the Cinch acquisition, the Company acquired the following tax assets and liabilities.  Cinch Europe had net operating loss and capital loss carryforwards in the amounts of $0.6 million and $0.2 million, respectively, as of the acquisition date.  The related tax benefits were $0.2 million and $0.1 million, respectively.  The capital loss carryforward was acquired with a valuation allowance, which the Company maintained at June 30, 2010.  During the quarter ended June 30, 2010, $0.2 million of the $0.6 million net operating loss was utilized.  Additionally, Cinch Europe had a deferred tax liability in the amount of $0.1 million for various timing differences.  Cinch U.S. had a deferred tax asset in the amount of $0.3 million relating to vacation accruals at the time of the acquisition.  Of this amount, $0.2 million remains on the balance sheet at June 30, 2010.  Cinch Mexico was acquired with a refundable income tax in the amount of $0.1 million, which should be collected or applied to current year income tax by December 31, 2010.  The Company has received a preliminary fair market value report of property, plant and equipment, and intangibles related to Cinch Europe and Cinch Mexico which resulted in the establishment of deferred tax liabilities at the date of acquisition in the amounts of $0.4 million and an immaterial amount, respectively. None of the reversals of the deferred tax asset or deferred tax liabilities or use of net operating loss carryforwards acquired from the Cinch acquisition will impact the condensed consolidated statement of operations.

 

 

The President of the United States has presented a budget to the United States Congress which contains various modifications to international tax provisions.  Some of the proposed changes might affect taxation regarding the transfer of intangible property and subject the Company to, among other things, additional income taxes and restrictions on how foreign tax credits would be calculated.  The Company cannot ascertain at this time what the final outcome of this proposed legislation will be or the effect, if any, on the Company's results of operations or financial condition.  Additionally, the Internal Revenue Service ("IRS") released a draft tax schedule and instructions that provide additional details on its proposal to require companies with assets of $10.0 million or more to report their uncertain tax positions annually, beginning with the 2010 tax year, on their business tax returns.

8. ACCRUED EXPENSES AND RESTRUCTURING COSTS

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

 

 

Activity and liability balances related to restructuring charges for the six months ended June 30, 2010 are as follows (these charges are associated with the 2008 closure of the Company’s facility in Westborough, Massachusetts) (dollars in thousands):

 

 

The Company has included the current portion of $0.2 million in accrued restructuring costs in the condensed consolidated balance sheet at June 30, 2010, and has classified the remaining $0.4 million of the liability related to the facility lease obligation as noncurrent.  During the six months ended June 30, 2009, the Company recorded $0.4 million in restructuring charges, including $0.1 million of severance charges and $0.3 million related to its facility lease obligations.

 

 

9. RETIREMENT FUND AND PROFIT SHARING PLAN

The Company maintains a domestic 401(K) plan, which consists of profit sharing, contributory stock ownership and individual voluntary savings to provide non-defined retirement benefits for plan participants.  The expense for the three months ended June 30, 2010 and 2009 amounted to approximately $0.1 million in each period.  The expense for the six months ended June 30, 2010 and 2009 amounted to approximately $0.3 million and $0.2 million, respectively. As of June 30, 2010, the plans owned 16,558 and 189,890 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The Company's subsidiaries in Asia have a non-defined retirement fund covering substantially all of their Hong Kong-based full-time employees.  The expense for the three months ended June 30, 2010 and 2009 amounted to approximately $0.1 million in each period. The expense for the six months ended June 30, 2010 and 2009 amounted to approximately $0.1 million and $0.2 million, respectively. As of June 30, 2010, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The Supplemental Executive Retirement Plan (the "SERP" or the “Plan”) is designed to provide a limited group of key management and highly compensated employees of the Company with supplemental retirement and death benefits.

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

 

 

10. COMPREHENSIVE INCOME

 

Comprehensive income for the three and six months ended June 30, 2010 and 2009 consists of the following (dollars in thousands):

 

The components of accumulated other comprehensive (loss) income as of June 30, 2010 and December 31, 2009 are summarized below (dollars in thousands):

 

 

11. COMMITMENTS AND CONTINGENCIES

The Company leases various facilities.  Some of these leases require the Company to pay certain executory costs (such as insurance and maintenance).  With the acquisition of Cinch in January 2010, the Company’s future commitments related to lease obligations have increased significantly since December 31, 2009.  At June 30, 2010, future minimum lease payments for operating leases are approximately as follows (dollars in thousands):

The Company submits purchase orders for raw materials to various vendors throughout the year for current production requirements, as well as forecasted requirements.  Certain of these purchase orders relate to special purpose material and, as such, the Company may incur penalties if the order is cancelled.  The Company had outstanding purchase orders related to raw materials in the amount of $34.0 and $19.9 million at June 30, 2010 and December 31, 2009, respectively.  Of the $14.1 million increase, the addition of Cinch commitments accounts for $5.7 million and the remaining $8.4 million increase relates to new purchase orders of raw materials to accommodate the increased demand for Bel’s products.  The Company also had outstanding purchase orders related to capital expenditures in the amount of $2.0 million and $1.4 million at June 30, 2010 and December 31, 2009, respectively.

The Company is, from time to time, a party to litigation arising in the normal course of its business, including various claims of patent infringement.  See the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for the details of Bel’s material pending lawsuits.  Updates to pending lawsuits since the Company’s Form 10-K filing are described below.

Cinch, a wholly-owned subsidiary of the Company, was defendant in a lawsuit captioned Engelbrecht v. Motorola, et. al. brought in the Circuit Court of the State of Oregon for the County of Douglas (the “Complaint”) on January 10, 2010.  With respect to this action, the plaintiff claimed that Cinch was engaged in the manufacture and sale of asbestos-containing radio components which allegedly caused him to sustain personal injuries due to his exposure to asbestos.  Cinch filed an answer to the Complaint, denying any legal liability or fault for the damages alleged in the Complaint, and affirmatively pleaded, among other defenses, that the plaintiff’s alleged damages, if any, were caused by persons for whom Cinch is not responsible.  Cinch was dismissed as a party to this case through a limited judgment of dismissal which was filed by the Douglas County Circuit Court on July 19, 2010.

 

12. RELATED PARTY TRANSACTIONS

As of June 30, 2010, the Company has $2.0 million invested in a money market fund with GAMCO Investors, Inc., a current shareholder of the Company, with holdings of its Class A stock of approximately 23.1%.

 

 

The Company’s quarterly and annual operating results are impacted by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results, and stock prices.  Furthermore, this document and other documents filed by the Company with the Securities and Exchange Commission (the “SEC”) contain certain forward-looking statements under the Private Securities Litigation Reform Act of 1995 (“Forward-Looking Statements”) with respect to the business of the Company.  These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which could cause actual results to differ materially from these Forward-Looking Statements.  The Company undertakes no obligation to publicly release the results of any revisions to these Forward-Looking Statements which may be necessary to reflect events or circumstances after the date such statements are made or to reflect the occurrence of unanticipated events.  An investment in the Company involves various risks, including those which are detailed from time to time in the Company’s SEC filings.

Overview

Our Company

Bel is a leading producer of electronic products that help make global connectivity a reality. The Company designs, manufactures and markets a broad array of magnetics, modules (including power conversion and integrated modules), circuit protection devices and interconnect products. Bel's products are designed to protect, regulate, connect, isolate or manage a variety of electronic circuits and are deployed primarily in the computer, networking and telecommunication industries. Bel’s expanding portfolio of products also finds application in the medical and consumer electronics markets.  New products brought on through the Cinch acquisition in January 2010 enhanced Bel’s existing interconnect product line and allowed Bel to expand into the military, aerospace and transportation industries.

Bel’s business is operated in one industry with three reportable operating segments, which are geographic in nature.  The segments consist of North America, Asia and Europe.  The acquisition of Cinch primarily affects the Company’s North America reportable operating segment with a lesser effect on the Company’s Europe reportable operating segment.

The Company’s expenses are driven principally by the cost of labor where Bel’s factories are located and the cost of the materials that it uses.  As labor and material costs vary by product line, any significant shift in product mix has an associated impact on the Company’s costs of sales.  Costs are recorded as incurred for all products manufactured either at third-party facilities or at the Company's own manufacturing facilities.  Such amounts are determined based upon the estimated stage of production and include labor cost and fringes and related allocations of factory overhead. The Company manufactures products at its own manufacturing facilities in the People’s Republic of China (“PRC”); Glen Rock, Pennsylvania; Inwood, New York; the Dominican Republic; Cananea, Mexico; the Czech Republic; and, subsequent to the Cinch acquisition, in Vinita, Oklahoma; Reynosa, Mexico; and Worksop, England.

 

 

In China, where the Company generally enters into processing arrangements with several independent third-party contractors and also has its own manufacturing facilities, the availability of labor is cyclical and is significantly affected by the migration of workers in relation to the annual Lunar New Year holiday as well as economic conditions in the PRC.  In addition, the Company has little visibility into the ordering habits of its customers and can be subjected to large and unpredictable variations in demand for its products.  Accordingly, the Company must continually recruit and train new workers to replace those lost to attrition each year and 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 demand, can add volatility to the costs incurred by the Company for labor in China.

Trends Affecting our Business

The Company believes the key factors affecting Bel’s second quarter 2010 and/or future results include the following:

 

 

These factors are expected to continue into the foreseeable future.  Given the need to maintain competitive pricing while incurring higher labor costs to accommodate the recent increase in demand, the Company anticipates that its results of operations for the remainder of 2010 will be materially adversely affected by the factors noted above.

Summary by Reportable Operating Segment

Net sales to external customers by reportable operating segment for the three and six months ended June 30, 2010 and 2009 were as follows:

 

 

Income (loss) from operations by reportable operating segment for the three and six months ended June 30, 2010 and 2009 were as follows (dollars in thousands):

 

The shift in net sales among the Company’s reportable operating segments was primarily due to the Cinch acquisition, which brought in an additional $14.9 million in sales during Bel’s second quarter 2010 and an additional $24.8 million in sales during the first half of 2010, primarily in the North America operating segment and to a lesser extent in the Europe operating segment.  See Note 6 to the notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for additional segment discussion.

 

 

Overview of Financial Results

The acquisition of Cinch in late January 2010 and the rebound of market conditions have impacted the Company considerably during the three and six months ended June 30, 2010.

During the second quarter of 2010, the Company experienced a 73.0% increase in sales as compared to the second quarter of 2009.  This was primarily due to legacy-Bel growth of 39.8% due to a rebound in demand for Bel’s products.  The addition of Cinch’s sales volume accounted for the remaining 33.2% increase in sales from Bel’s second quarter of 2009.  While sales increased 73.0% as compared to the second quarter of 2009, cost of sales increased by only 53.5% compared to last year’s second quarter.  A shift in sales among Bel’s product groups has resulted in a significant decrease in overall material costs, as the Company manufactured a reduced volume of product with high material content.  As an offsetting factor, the Company experienced a surge in labor costs in the first quarter of 2010, due to training expenses, production inefficiencies and overtime associated with the hiring of a large volume of new workers to meet the increased customer demand for Bel’s products.  This increase in labor costs continued into the second quarter of 2010.  Selling, general and administrative expenses increased by $2.7 million during the second quarter 2010 as compared to the second quarter of 2009.  This increase primarily related to the additional personnel, office expenses and other costs associated with the recently acquired Cinch facilities.  Additional details related to these factors affecting the second quarter results are described in the Results of Operations section below.

During the six months ended June 30, 2010, the Company experienced a 50.8% increase in sales as compared to the first half of 2009.  This was primarily due to the addition of Cinch’s sales volume since its acquisition on January 29, 2010, which accounted for a 27.9% increase from Bel’s first half of 2009.  The remaining 22.9% increase in sales relates to legacy-Bel sales growth due to a rebound in demand for Bel’s products.  While sales increased 50.8% as compared to the first half of 2009, cost of sales increased by only 38.7% compared to 2009 due to the same factors described above.  Selling, general and administrative expenses increased by $4.2 million during the first half of 2010 as compared to the first half of 2009, primarily due to the additional personnel, office expenses and other costs associated with the recently acquired Cinch facilities.  Additional details related to these factors affecting the six-month results are described in the Results of Operations section below.

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, goodwill, intangible assets, investments, SERP expense, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

 

The following table sets forth, for the periods presented, the percentage relationship to net sales of certain items included in the Company’s condensed consolidated statements of operations.

 

 

The following table sets forth the year over year percentage increase or decrease of certain items included in the Company's condensed consolidated statements of operations.