BEL FUSE INC /NJ (BELFB) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 consolidated financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to imply any conclusion that such results, causes or trends will necessarily continue in the future. See "Cautionary Notice Regarding Forward-Looking Information" above for further information. Also, when we cross reference to a "Note," we are referring to our "Notes to Consolidated Financial Statements," unless the context indicates otherwise. All 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 defense, commercial aerospace, networking, telecommunications, computing, general industrial, high-speed data transmission, transportation and eMobility industries. Bel's portfolio of products also finds application in the automotive, medical, broadcasting and consumer electronics markets.
We operate through three product group segments. In 2024, 46% of the Company's revenues were derived from Power Solutions and Protection, 41% from 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 Bel uses 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 labor cost and fringes and related allocations of factory overhead. Our products are manufactured at various facilities in the U.S., Mexico, Israel, India, the Dominican Republic, the United Kingdom, Slovakia and the 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.
Key Factors Affecting our Business
The Company believes the key factors affecting Bel's 2024 and/or future results include the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Revenues – The Company's revenues decreased by $105.0 million, or 16.4%, in 2024 as compared to 2023. By product segment, Power Solutions and Protection sales decreased by 21.8%, Connectivity Solutions sales increased by 4.7% and Magnetic Solutions sales decreased by 40.2%. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Backlog – Our backlog of orders totaled $381.6 million at December 31, 2024, representing a decrease of $8.5 million, or 2%, from December 31, 2023. From 2023 to the 2024 year-end, the backlog for our Power Solutions and Protection (excluding Enercon) products decreased by 44%, due to a reduction in demand within the networking end market and in the distribution channel. Enercon backlog at December 31, 2024 was $119 million. Our Magnetic Solutions backlog decreased by 13%, primarily due to reduced order volume from a large networking customer. The backlog for our Connectivity Solutions products decreased by $8.2 million (7%) in 2024 from the 2023 level, due to reduced demand from customers in the networking and industrial end markets partially offset by an increase in demand from our military customers. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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 the Company’s gross margin percentage. In general, our Connectivity products have historically had the highest contribution margins due to the harsh environment, high-reliability end applications for these products. 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, 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 sales volume among our product groups will have a corresponding impact on Bel's profit margins. See Note 14, "Segments" for profit margin information by product group. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Pricing and Availability of Materials – There has been some stabilization of raw materials pricing in 2024; 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 Integrated circuits ("IC's"). Sharp increases in metal commodity prices, particularly copper and gold over the years continues to impact cost structures and supplier pricing. Lead times are still above normal though suppliers are now meeting the agreed delivery deadlines with more regularity. 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. Further, governments may impose tariffs to raise domestic revenue, protect domestic industries or exert political leverage over another country. We are a global organization with a material volume of shipments of raw materials, work in progress and finished goods into and out of the U.S. to and from a number of other countries, including but not limited to the PRC, Mexico, India and throughout Europe. Any new or increase in tariffs imposed either by the U.S. government on foreign imports or by a foreign government on U.S. exports related to the countries in which we transact business could lead to reduced margins or increased prices that could cause decreased customer demand. The preceding discussion about pricing and availability of materials contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
21
Table of Contents
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Labor Costs – Labor costs as a percentage of sales fluctuate based upon our product mix, with our Magnetic Solutions segment sales comprised largely of labor-intensive ICM products. Further, our labor costs in the PRC, Mexico and Israel are largely paid in local currencies and any significant fluctuations in these exchange rates versus the U.S. dollar will have an impact on our labor costs. By segment, our Magnetic Solutions segment is most impacted by fluctuations in the exchange rates of the Chinese renminbi versus the U.S. dollar; our Connectivity Solutions segment is most impacted by fluctuations in the exchange rate of the Mexican peso versus the U.S. dollar; and our Power Solutions and Protection segment is most impacted by fluctuations in the exchange rates of the Chinese renminbi and the Israeli shekel versus the U.S. dollar. In addition to foreign exchange rate exposure, our labor costs are also subject to government-regulated minimum wage increases in the countries in which we operate. On January 1, 2025, minimum wage increases went into effect at our factory in PRC and are expected to result in approximately $0.4 million of higher labor costs at that facility in 2025 as compared to 2024. The preceding discussion about labor costs, including our estimates of expected costs associated with increases, contains Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Inflationary Pressures – Inflationary pressures could 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 represent Forward-Looking Statements. See "Cautionary Notice Regarding Forward-Looking Information." |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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 $3.5 million of restructuring costs during the year ended December 31, 2024 which primarily consisted of severance costs. The Glen Rock initiative was largely complete by the end of 2024 at a total cost to implement of $0.8 million (almost all of which was incurred during the year ended December 31, 2024). Annual cost savings related to the Glen Rock initiative are estimated at $3.1 million (of this annualized amount, $1.5 million was realized throughout 2024, with the incremental $1.6 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 $2.0 million was incurred in the year ended December 31, 2024, with the balance to be incurred in early 2025). Annual cost savings related to the Fuse initiative are estimated at $1.8 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." |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Impact of Foreign Currency – As further described below in this "Impact of Foreign Currency" discussion, during 2024, labor and overhead costs were $0.4 million lower than in 2023 due to favorable foreign exchange environment involving the Chinese renminbi and the Mexican peso, partially offset by unfavorable foreign exchange fluctuations due to the Israeli shekel as compared to the prior year period. Also as described below in the discussion captioned "Inflation and Foreign Currency Exchange", the Company realized foreign exchange transactional losses of $1.9 million during 2024, due to the fluctuation of the spot rates of certain currencies in effect when translating our balance sheet accounts at December 31, 2024 versus those in effect at December 31, 2023. Since Bel is a U.S. domiciled company, our foreign currency-denominated financial results are translated 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 2024 due to the depreciation of the Chinese renminbi and Mexican peso against the U.S. dollar, which was largely offset by an appreciation of the Israeli shekel against the U.S. dollar, as compared to exchange rates in effect during 2023. We have significant manufacturing operations located in the PRC, Mexico and Israel 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, and $0.5 million lower in Mexico, largely offset by higher costs in Israel of approximately $0.8 million, in 2024 as compared to 2023. The Company monitors changes in foreign currencies and has historically implemented additional foreign currency forward contracts, and may continue to implement pricing actions to help mitigate the impact that changes in foreign currencies may have on its consolidated operating results. The preceding sentence represents a Forward-Looking Statement. See "Cautionary Notice Regarding Forward-Looking Information." |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Effective Tax Rate – The Company's effective tax rate will fluctuate based on the geographic region 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 10 to the Company's Consolidated Financial Statements - "Income Taxes". |
22
Table of Contents
Results of Operations - Summary by Operating Segment
Net Sales and Gross Margin
The Company's net sales and gross margin by major product line for the years ended December 31, 2024, 2023 and 2022 were as follows (dollars in thousands):
| Years Ended | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | ||||||||||||||||||||||||
| Net Sales | Gross Margin | |||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2024 | 2023 | 2022 | |||||||||||||||||||
| Power solutions and protection | $ | 245,551 | $ | 314,105 | $ | 288,366 | 42.4 | % | 38.1 | % | 30.5 | % | ||||||||||||
| Connectivity solutions | 220,370 | 210,572 | 187,085 | 37.1 | % | 34.2 | % | 25.9 | % | |||||||||||||||
| Magnetic solutions | 68,871 | 115,136 | 178,782 | 25.3 | % | 22.0 | % | 27.6 | % | |||||||||||||||
| $ | 534,792 | $ | 639,813 | $ | 654,233 | 37.8 | % | 33.7 | % | 28.0 | % |
2024 as Compared to 2023
Power Solutions and Protection:
Sales of our Power Solutions and Protection products were lower by $68.6 million in 2024 as compared to 2023. This decrease was primarily due to lower sales of our front-end power products and board mount power products of $45.3 million and $9.5 million, respectively, both of which are used in networking and datacenter applications. Sales of our CUI products were down by $21.2 million in 2024 as compared to 2023 due to the loss of sales in connection with a trade restriction placed on one of our suppliers in the PRC. Further, sales of product into the eMobility end market decreased by $12.9 million as compared to 2023. These decreases were offset in part by an increase in sales of our rail products by $11.8 million as compared to 2023. Raw material expedite fee revenue for this segment totaled $0.1 million in 2024 as compared to $14.9 million in 2023. Enercon contributed $20.8 million of military, aerospace and defense applications sales in the last two months of 2024. Gross margin improved in 2024 as compared to 2023 as a result of the Enercon acquisition, favorable exchange rates with the Chinese renminbi versus the U.S. dollar, a lower volume of low-margin expedite fees and a favorable shift in product mix.
Connectivity Solutions:
Sales of our Connectivity Solutions products increased by $9.8 million (4.7%) in 2024 as compared to 2023. This increase was primarily due to an increase in sales into the commercial aerospace end market of $3.6 million (6.8%) in 2024 as compared to 2023. Sales into our military end market also grew by $2.3 million (5.2%) in 2024 as compared to 2023. We also experienced an increased volume of Connectivity Solutions products sold through our distribution channels in 2024 of $2.3 million (2.9%) compared to 2023. Gross margin for 2024 was favorably impacted by pricing actions on certain contract renewals, operational efficiencies from the facility consolidations completed in 2023 and a favorable fluctuation in exchange rates between the U.S. dollar and Mexican peso in 2024 versus 2023. These factors were partially offset by higher wage rates in Mexico in 2024 as compared to 2023.
Magnetic Solutions:
Sales of our Magnetic Solutions products declined by $46.3 million during 2024 as compared to 2023. Reduced demand for our ICM products from our networking customers and through our distribution channels was the primary driver as we believe these customers continue to work through inventory on hand. Recent facility consolidations in the PRC, diligent cost management, product mix and a favorable exchange rate with the Chinese renminbi versus the U.S. dollar, were the primary drivers of gross margin expansion for this product group in 2024 as compared with 2023, despite the decline in revenue.
2023 as Compared to 2022
Power Solutions and Protection:
Sales of our Power Solutions and Protection products were higher by $25.7 million in 2023 as compared to 2022. This increase was primarily due to higher sales of our front-end power products and board mount power products of $42.7 million and $6.9 million, respectively, both of which are used in networking and datacenter applications. Further, sales of product into the eMobility end market increased by more than $7.5 million (40%) and sales of product into the rail end market increased by $7.5 million (33%) in 2023 as compared to 2022. These increases were offset in part by a reduction in sales of our CUI products of $13.7 million and a decline in sales of our circuit protection products of $9.9 million, both of which were largely impacted by the lower demand from our distribution customers. Raw material expedite fee revenue for this segment totaled $14.9 million in 2023 as compared to $32.5 million in 2022. Gross margin improved in 2023 as compared to 2022 as pricing actions, higher sales volume, favorable exchange rates with the Chinese renminbi versus the U.S. dollar, a lower volume of low-margin expedite fees and a favorable shift in product mix offset the impact of increased material costs.
Connectivity Solutions:
Sales of our Connectivity Solutions products increased by $23.5 million (12.6%) in 2023 as compared to 2022. These increases were primarily due to an increase in sales into the commercial aerospace end market of $22.2 million (71%) in 2023 as compared to 2022. Sales into our military end market also grew by $8.8 million (24%) in 2023 as compared to 2022. We also experienced an increased volume of Connectivity Solutions products sold through our distribution channels in 2023 compared to 2022. These sales increases were offset in part by a decline in sales of passive connector and cabling products used in the industrial premise wiring and 5G/IoT markets of $11.0 million (29.0%) for 2023 as compared to 2022. Gross margins for the 2023 periods presented above were favorably impacted by the higher overall sales volume, pricing actions and operational efficiencies implemented during 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 2023 as compared to 2022.
Magnetic Solutions:
Sales of our Magnetic Solutions products declined by $63.6 million during 2023 as compared to 2022. Reduced demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver as we believe these customers continue to work through inventory on hand. The lower sales volume and favorable exchange rates with the Chinese renminbi versus the U.S. dollar, were the primary drivers of gross margin reduction for this product group in 2023 compared with 2022.
23
Table of Contents
Cost of Sales
Cost of sales as a percentage of net sales for the years ended December 31, 2024, 2023 and 2022 consisted of the following:
| Years Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Material costs | 29.7 | % | 40.8 | % | 45.4 | % | ||||||
| Labor costs | 7.8 | % | 6.6 | % | 8.3 | % | ||||||
| Other expenses | 24.7 | % | 18.9 | % | 18.3 | % | ||||||
| Total cost of sales | 62.2 | % | 66.3 | % | 72.0 | % |
2024 as Compared to 2023
Material costs as a percentage of sales during 2024 were lower compared to 2023, due to a shift in product mix, the stabilization of raw material pricing, shorter lead times, and better procurement efforts. Labor costs in 2024 as a percentage of sales have increased compared to 2023 due to lower sales volume, a shift in product mix 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 the PRC 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 (i.e. rent, utilities, insurance). In total, these other expenses within cost of sales have decreased by $1.5 million in 2024 as compared to 2023. As a percentage of sales, other expenses increased due to the lower sales volume in 2024 as compared to 2023.
2023 as Compared to 2022
Material costs as a percentage of sales during 2023 came down compared to 2022, as pricing actions helped to offset the continued heightened cost of certain raw materials. Labor costs in 2023 as a percentage of sales decreased significantly from 2022 due to a variety of factors, including the shift in product mix resulting in a lower consolidated percentage of sales from of our labor-intensive Magnetic products, lower labor costs in the PRC due to the favorable fluctuation in the Chinese renminbi exchange rate versus the U.S. dollar, and the restructuring and efficiency programs implemented throughout 2023 in our Connectivity Solutions segment. The reduction in labor costs were partially offset by the unfavorable fluctuation of the Mexican Peso exchange rate versus the U.S. dollar in 2023 versus 2022.
The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (i.e. rent, utilities, insurance). In total, these other expenses were largely the same in 2023 as compared to 2022 as the benefits realized on cost savings initiatives were offset by higher costs from the redundant operations in the PRC that were in place while our facility consolidation project was underway for much of 2023.
Research and Development ("R&D")
R&D expenses were $23.6 million, $22.5 million and $20.2 million for the years ended December 31, 2024, 2023, and 2022, respectively. The increase noted in R&D expenses during 2024 compared to 2023 is largely due to higher salaries, benefits, product development costs and R&D expense of the 2024 Enercon acquisition, which have been included in Bel's results since its acquisition date. The increase noted in R&D expenses during 2023 compared to 2022 is largely due to higher salaries, benefits, and product development costs.
Selling, General and Administrative Expenses ("SG&A")
2024 as Compared to 2023
SG&A expenses were $110.6 million in 2024 as compared with $99.1 million in 2023. The primary drivers for the increase in SG&A during 2024 related to acquisition-related costs within SG&A of $10.9 million in connection with the acquisition of Enercon, and $2.5 million of SG&A expenses attributable to the acquired business for the two months of 2024 under Bel ownership. Excluding these items related to Enercon, legacy-Bel SG&A expenses declined due to lower legal fees, as well as lower incentive compensation, commissions and business promotion expenses in 2024, as compared to 2023 due to the lower sales base in the 2024 period.
2023 as Compared to 2022
SG&A expenses were $99.1 million in 2023 as compared with $92.3 million in 2022. Within SG&A, increases in salaries and fringe benefits of $6.1 million, legal and professional fees of $2.4 million, and travel of $1.0 million were partially offset by a $1.3 million reduction in commissions to outside sales representatives, and a $1.2 million reduction in depreciation and amortization as compared to 2022.
Restructuring Charges
The Company recorded $3.5 million of restructuring charges in 2024 largely in connection with the Glen Rock initiative and the Fuse initiative, as further described in "Overview - Key Factors Affecting our Business - Restructuring" above. In 2023, the Company recorded $10.1 million of restructuring charges largely in connection with the four facility consolidation projects in the U.S., UK and PRC. In 2022, the Company recorded $7.3 million of restructuring charges related to these same four facility consolidation projects in the U.S., UK and PRC.
Gain on Sale of Properties
During 2023, the Company recorded a gain of $3.8 million related to the sale of one of its properties in Jersey City, New Jersey. In 2022, a gain of $1.6 million was recorded in connection with the sale of a separate property in Jersey City.
24
Table of Contents
Interest Expense
2024 as Compared to 2023
The Company incurred interest expense of $4.1 million in 2024 and $2.9 million in 2023 primarily due to its outstanding borrowings under the Company's credit agreement. The increase in interest expense during 2024 related to a increase in debt balance in the fourth quarter of 2024 due to Enercon acquisition (see Note 3, “Acquisition and Divestiture” for additional details). See "Liquidity and Capital Resources" and Note 11, "Debt" for further information on the Company's outstanding debt.
2023 as Compared to 2022
The Company incurred interest expense of $2.9 million in 2023 and $3.4 million in 2022 primarily due to its outstanding borrowings under the Company's credit agreement. The lower interest expense during 2023 related to a lower debt balance throughout 2023 as compared to 2022.
Interest Income
The Company earned interest income of $4.8 million in 2024, $1.7 million in 2023, and $0.2 million in 2022, primarily related to its investments in U.S. Treasury Bills during the 2023 and 2024 periods.
Other Expense, Net
2024 as Compared to 2023
Other expense, net was a net expense of $3.2 million in 2024 compared to a net expense of $4.5 million in 2023. The net expense in 2024 was comprised of a foreign exchange loss of $1.9 million, $0.6 million of losses associated with Bel's investment in innolectric and $2.0 million of stamp duty fees related to Enercon; partially offset by a gain of $1.3 million related to the Company's SERP investments. The net expense in 2023 was comprised of a foreign exchange loss of $1.4 million, the loss on liquidation of a foreign subsidiary of $2.7 million, $0.8 million of losses associated with Bel's investment in innolectric and $0.8 million of other expense; partially offset by a gain of $1.2 million related to the Company's SERP investments.
2023 as Compared to 2022
Other expense, net was a net expense of $4.5 million in 2023 compared to a net expense of $2.9 million in 2022. The net expense in 2023 was comprised of a foreign exchange loss of $1.4 million, the loss on liquidation of a foreign subsidiary of $2.7 million, $0.8 million of losses associated with Bel's investment in innolectric and $0.8 million of other expense; partially offset by a gain of $1.2 million related to the Company's SERP investments. The net expense in 2022 was comprised of a foreign exchange loss of $2.2 million in 2022 related to the Company's SERP investments and $1.0 million of other expense; partially offset by foreign exchange gains of $0.3 million.
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 10, “Income Taxes.”
2024 as Compared to 2023
The provision for income taxes for the years ended December 31, 2024 and 2023 was$12.6 million and $9.5 million, respectively. The Company’s earnings before income taxes for the year ended December 31, 2024 were approximately $21.5 million lower as compared with the year ended December 31, 2023, primarily attributable to a decrease in income in the Asia and North America regions. The Company’s effective tax rate was 20.5% and 11.4% for the years ended December 31, 2024 and 2023, respectively. The change in the effective tax rate during the year ended December 31, 2024 as compared to 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 statutes of limitations.
2023 as Compared to 2022
The provision for income taxes for the years ended December 31, 2023 and 2022 was $9.5 million and $6.4 million, respectively. The Company’s earnings before income taxes for the year ended December 31, 2023, were approximately $24.2 million higher as compared with the year ended December 31, 2022, primarily attributable to an increase in income in the Asia and North America regions. The Company’s effective tax rate was 11.4% and 10.8% for the years ended December 31, 2023 and 2022, respectively. The change in the effective tax rate during the year ended December 31, 2023, as compared to 2022 is primarily attributable to an increase in tax expense resulting from higher U.S. income, which was offset by a benefit resulting from the impact of permanent differences on U.S. activities, as well as an increase in the tax benefit relating to the reversal of uncertain tax positions resulting from the expiration of certain statutes of limitations.
Other Tax Matters
The Company has a portion of its products manufactured on the mainland of the PRC where Bel is not subject to corporate income tax on manufacturing services provided by third parties. Hong Kong has a territorial tax system which imposes corporate income tax at a rate of 16.5% on income from activities solely conducted in Hong Kong.
The Company holds an offshore business license from the government of Macao. With this license, a Macao offshore company named Bel Fuse (Macao Commercial Offshore) Limited ("Bel Fuse Macao") has been established to handle the Company’s sales to third-party customers in Asia. Sales by this company primarily consist of products manufactured in the PRC. Bel Fuse Macao is subject to Macao's corporate tax rate of 12% on income from activities solely conducted in Macao.
Due to the practicality of determining the deferred taxes on outside basis differences in our investments in our foreign subsidiaries, management has not provided for deferred taxes on outside basis differences at December 31, 2024 and deemed that these basis differences will be indefinitely reinvested.
25
Table of Contents
Inflation and Foreign Currency Exchange
During the past two years, we do not believe the effect of inflation was material to our consolidated financial position or our consolidated results of operations. We are exposed to market risk from changes in foreign currency exchange rates. Fluctuations of the U.S. dollar against other major currencies have not significantly affected our foreign operations as most sales continue to be denominated in U.S. dollars or currencies directly or indirectly linked to the U.S. dollar. Most significant expenses, including raw materials, labor and manufacturing expenses, are incurred primarily in U.S. dollars, Mexican pesos, the Chinese renminbi or the Israeli shekel, and to a lesser extent in British pounds, or Indian rupees. The Mexican pesos depreciated by 3%, the Euro was flat, the British pound appreciated by 2%, and the Indian rupee and the Chinese renminbi each depreciated by 2% versus the U.S. dollar in 2024 compared to 2023. To the extent the renminbi, peso or shekel appreciate in future periods, it could result in the Company's incurring higher costs for most expenses incurred in the PRC, Mexico and Israel. 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 as further described in Note 13, "Derivative Instruments and Hedging Activities". The Company's European entities, whose functional currencies are Euros and British pounds, enter into transactions which include sales that are denominated principally in Euros, British pounds and various other European currencies, and purchases that are denominated principally in U.S. dollars and British pounds. Such transactions, as well as those related to our multi-currency intercompany payable and receivable transactions, resulted in a net realized and unrealized currency exchangeloss of $1.9 million in 2024, a loss of $1.4 million in 2023 and a gain of $0.3 million in 2022 which were included in other expense, net on the consolidated statements of operations. Translation of subsidiaries' foreign currency financial statements into U.S. dollars resulted in translation adjustments, net of taxes, of ($5.5) million and $6.7 million for the years ended December 31, 2024 and 2023, respectively, which are included in accumulated other comprehensive loss on the consolidated balance sheets.
Liquidity and Capital Resources
Our principal sources of liquidity include $68.3 million of cash and cash equivalents at December 31, 2024, $1.0 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, debt obligations and other long-term liabilities. 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.
26
Table of Contents
Cash Flow Summary
During the year ended December 31, 2024, the Company's cash and cash equivalents decreased by $21.1 million. This decrease was primarily due to the following:
| ● | payment for Enercon acquisition of $320.5 million; | |
|---|---|---|
| ● | purchase of common stock of $16.1 million; | |
| ● | repayment of long-term debt of $15 million; | |
| ● | dividend payments of $3.5 million; | |
| ● | deferred financing costs of $1.7 million; | |
| ● | purchases of property, plant and equipment of $14.1 million; and | |
| ● | purchases of held to maturity and marketable securities of $131.3 million; partially offset by | |
| ● net cash provided by operating activities of $74.1 million; | ||
| ● proceeds of long-term debt of $242.5 million; | ||
| ● proceeds from held to maturity securities of $167.9 million; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● proceeds from the sale of property, plant and equipment of $0.9 million. |
During the year ended December 31, 2024, accounts receivable decreased by $6.8 million primarily due to the lower sales volume in 2024 as compared to 2023. Days sales outstanding (DSO) increased to 68 days at December 31, 2024 from 55 days at December 31, 2023. Inventories increased by $24.8 million from the December 31, 2023 level primarily due to the inclusion of Enercon's inventory balance at December 31, 2024 of $42.7 million. Inventory turns were 2.1 times for the year ended December 31, 2024 and 3.1 times for the year ended December 31, 2023. Given the nature of Enercon’s manufacturing process and low unit quantity per order, a higher value of inventory is kept on hand for longer periods of time, with Enercon’s inventory turns being 1.6 times, bringing Bel’s consolidated inventory turn level down substantially.
During the year ended December 31, 2023, the Company's cash and cash equivalents increased by $19.1 million. This increase was primarily due to cash provided by operating activities of $108.3 million, proceeds from the sale of property, plant and equipment of $6.0 million, proceeds from held to maturity securities of $19.9 million, and proceeds from the sale of our business in the Czech Republic of $5.1 million; partially offset by the purchases of held to maturity and marketable securities of $60.0 million, payments for our equity method investment in innolectric of $10.3 million, purchases of property, plant and equipment of $12.1 million, dividend payments of $3.5 million, and net repayments under our revolving credit line of $35.0 million. During the year ended December 31, 2023, accounts receivable decreased $22.5 million primarily due to the lower sales volume in the second half of 2023 as compared to the same period of 2022. DSO decreased to 55 days at December 31, 2023 from 58 days at December 31, 2022. Inventories decreased by $33.6 million from the December 31, 2022 level. Inventory turns were 3.1 times for the year ended December 31, 2023 and 2.7 times for the year ended December 31, 2022.
During the year ended December 31, 2022, the Company's cash and cash equivalents increased by $8.5 million. This increase was primarily due to cash provided by operating activities of $40.3 million, and proceeds from the sale of property, plant and equipment of $1.8 million; partially offset by the purchase of property, plant and equipment of $8.8 million, dividend payments of $3.4 million, and repayments under our revolving credit line of $17.5 million. During the year ended December 31, 2022, accounts receivable increased $20.7 million primarily due to the higher sales volume in 2022 as compared to 2021. DSO increased to 58 days at December 31, 2022 from 54 days at December 31, 2021. Inventories increased by $36.6 million from the December 31, 2021 level as raw material supply constraints hindered our ability, and our end customers' ability, to fully manufacture our respective finished goods. Inventory turns were 2.6 times for the year ended December 31, 2022 as compared to 3.1 times for the year ended December 31, 2021.
Cash and cash equivalents, held to maturity U.S. Treasury securities and accounts receivable comprised approximately 19.0% and36.9% of the Company's total assets at December 31, 2024 and December 31, 2023, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 2.9 to 1 and 3.4 to 1 at December 31, 2024 and December 31, 2023, respectively. At December 31, 2024 and 2023, $48.4 million and $40.9 million, respectively (or 71% and 46%, respectively), of cash and cash equivalents was held by foreign subsidiaries of the Company. During 2024, the Company repatriated $48 million of funds from outside of the U.S., with minimal incremental tax liability. 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 the Company's U.S. operations in the future. In the event these funds were needed for Bel's U.S. operations, the Company would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.
Future Cash Requirements
The Company expects foreseeable liquidity and capital resource requirements to be met through its existing cash and cash equivalents, held to maturity investments in U.S. Treasury securities and anticipated cash flows from operations, as well as borrowings available under its revolving credit facility, if needed. The Company's material cash requirements arising in the normal course of business primarily include:
Debt Obligations and Interest Payments - The Company had $287.5 million outstanding under its revolving credit facility at December 31, 2024, as further described below and in Note 11, "Debt". There are no mandatory principal payments due on the credit facility borrowings during 2025. The current balance of $287.5 million is due upon expiration of the credit facility on September 1, 2026. Anticipated interest payments due amount to $28.7 million, of which $17.2 million is expected to be paid in 2025 based on our debt balance and interest rate in place at December 31, 2024.
Lease Obligations - The Company has operating leases for its facilities used for manufacturing, research and development, sales and administration. There are also operating and finance leases related to manufacturing equipment, office equipment and vehicles. As of December 31, 2024, the Company was contractually obligated to pay future operating lease payments of $29.0 million, of which $9.1 million is expected to be paid in 2025, and future financing lease obligations of $3.0 million, of which $0.8 million is expected to be paid in 2025. See Note 18, "Leases," for further information.
Purchase Obligations - The Company submits purchase orders for raw materials to various vendors throughout the year for current production requirements, as well as forecasted requirements. Certain of these purchase orders relate to special purpose material and, as such, the Company may incur penalties if an order is cancelled. The Company had outstanding purchase orders related to raw materials in the amount of $82.2 million at December 31, 2024, of which $75.1 million is expected to be paid in 2025. The Company also had outstanding purchase orders related to capital expenditures which totaled $4.7 million at December 31, 2024, all of which is expected to be paid in 2025.
Pension Benefit Obligations - As further described in Note 15, "Retirement Fund and Profit Sharing Plan", the Company maintains a Supplemental Executive Retirement Plan ("SERP"). At December 31, 2024, estimated future obligations under the plan amounted to $18 million. It is expected that the Company will pay $0.9 million in benefit payments in connection with the SERP during 2025. Included in other assets at December 31, 2024 is the cash surrender value of company-owned life insurance and marketable securities held in a rabbi trust with an aggregate value of $17.0 million, which has been designated by the Company to be utilized to fund the Company's SERP obligations.
27
Table of Contents
Dividends - The Company has historically paid quarterly dividends on its two classes of common stock, which amounted to $3.5 million in 2024 as compared to $3.5 million in 2023. Consistent with the dividend rates declared in prior years, Bel's Board of Directors declared dividends on November 1, 2024 and again on February 12, 2025 on each of our two classes of common stock. These two quarterly payments will be made in the first half of 2025 in the total anticipated amount of $1.7 million.
Share Repurchase Program - In February 2024, Bel's Board of Directors authorized the repurchase of up to $25 million of the Company's common stock. The Repurchase Program does not obligate the Company to repurchase any dollar amount or number of shares, and the Repurchase Program may be suspended or terminated at any time. The timing and actual number of shares repurchased will depend on a variety of factors including price, market conditions, corporate and regulatory requirements and the consideration of other uses of cash including other investment opportunities. At December 31, 2024, the Company had an aggregate amount of $9.0 million of authorized repurchases under the plan that had not yet been executed upon.
Tax Payments - At December 31, 2024, we had liabilities for unrecognized tax benefits and related interest and penalties of $18.1 million, all of which is included in other liabilities on our consolidated balance sheet. At December 31, 2024, we cannot reasonably estimate the future period or periods of cash settlement of these liabilities. See Note 10, "Income Taxes", for further discussion. Also included on our consolidated balance sheet at December 31, 2024 is $2.0 million of liabilities for transition tax associated with the 2017 U.S. tax reform, all of which is expected to be paid in 2025.
In addition to its cash requirements arising in the normal course of business described above, the Company has potential future cash requirements related to its acquisition of Enercon, whereby the Company has recorded earnout liabilities having a fair value as of December 31, 2024 in the amount of $3.5 million that would be paid over 2025 and 2026 in the event certain financial thresholds are achieved by the acquired business based on the Purchase Agreement provision which provides for potential earnout payments of up to $5 million for each of the fiscal 2025 and fiscal 2026 earnout periods subject to the achievement of the financial thresholds. Further, there are put-call options associated with the redeemable noncontrolling interest in early 2027. As described elsewhere in this Annual Report, we have the current intention to purchase the remaining 20% interest in Enercon by early 2027 in accordance with the terms and subject to the conditions of the shareholders' agreement. At December 31, 2024, the redemption value related to the redeemable noncontrolling interest was $80.6 million. See Note 3, "Acquisition and Divestiture" and Note 6, "Fair Value Measurements" for further information.
Contractual Obligations
The following table sets forth at December 31, 2024 the amounts of payments due under specific types of contractual obligations, aggregated by category of contractual obligation, for the time periods described below.
| Payments due by period (dollars in thousands) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| Long-term debt obligations(1) | $ | 287,500 | $ | - | $ | 287,500 | $ | - | $ | - | |||||||||
| Interest payments due on long-term debt(2) | 28,742 | 17,198 | 11,544 | - | - | ||||||||||||||
| Capital expenditure obligations | 4,693 | 4,693 | - | - | - | ||||||||||||||
| Operating leases(3) | 28,983 | 9,079 | 10,870 | 5,026 | 4,008 | ||||||||||||||
| Raw material purchase obligations | 82,215 | 75,126 | 7,089 | - | - | ||||||||||||||
| First quarter 2025 quarterly cash dividend declared | 880 | 880 | - | - | - | ||||||||||||||
| Total | $ | 433,013 | $ | 106,976 | $ | 317,003 | $ | 5,026 | $ | 4,008 |
| (1) | Represents the principal amount of the debt required to be repaid in each period. | |
|---|---|---|
| (2) | Includes interest payments required under our CSA related to our revolver balance. The interest rate in place under our Credit and Security Agreement on December 31, 2024 was utilized and this calculation assumes obligations are repaid when due. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (3) | Represents estimated future minimum annual rental commitments primarily under non-cancelable real and personal property leases as of December 31, 2024. |
Credit Facility
The Company is a party to a credit agreement, as further described in Note 11,
"Debt"
. The credit agreement contains customary representations and warranties, covenants and events of default. In addition, the credit agreement contains financial covenants that measure (i) the ratio of the Company’s total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of the Company’s consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of the Company’s consolidated EBITDA to the Company’s consolidated fixed charges (“Fixed Charge Coverage Ratio”). If an event of default occurs, the lenders under the 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.
At December 31, 2024, the Company had $287.5 million outstanding under its credit agreement. The unused credit available under the credit facility at December 31, 2024 was $37.5 million, of which we had the ability to borrow the full amount without violating our Leverage Ratio covenant based on the Company's existing consolidated EBITDA. At December 31, 2024, the Company was in compliance with its debt covenants, including its most restrictive covenant, the Leverage Ratio.
At December 31, 2024, the Company was also a party to two pay-fixed, receive-variable interest rate swap agreements covering the full amount of its then variable interest exposure through August 2026. See Note 13,
"Derivative Instruments and Hedging Activities" for further details.
28
Table of Contents
Critical Accounting Estimates
The Company's consolidated financial statements include certain amounts that are based on management's best estimates and judgments. The Company bases its 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 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.
Business Combinations
In a business combination, we allocate the fair value of purchase price consideration to the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree based on their estimated fair values. The excess of the fair value of purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers or earned through the use of acquired trademarks, estimated royalty rates, acquired technology, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Inventory Valuation
Inventories consist of raw materials and purchased components and are stated at the lower of cost and net realizable value. Material costs are principally determined by standard cost or the weighted moving average method, both of which approximate actual cost. The Company reduces the carrying value of its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based on the aforementioned assumptions. Our reserve calculations are based on historical experience related to slow-moving inventory in addition to specific known concerns in the case of products going end-of-life or customer cancellations. As of December 31, 2024 and 2023, the Company had reserves for excess or obsolete inventory of $14.5 million and $13.7 million, respectively. With the recent acquisition of Enercon our value of inventory on hand has increased by $24.8 million from December 31, 2023 to December 31, 2024. In the event of a sudden decrease in demand for our products, or a higher incidence of inventory obsolescence, the Company could be required to increase its inventory reserve, which would have an unfavorable impact on our gross margin.
Goodwill
We use a fair value approach to test goodwill for impairment. We must recognize a non-cash impairment charge for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. We derive an estimate of fair values for each of our reporting units using a combination of an income approach and an appropriate market approach, each based on an applicable weighting. We assess the applicable weighting based on such factors as current market conditions and the quality and reliability of the data. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit's fair value.
Fair value computed by these methods is arrived at using a number of factors, including projected future operating results, anticipated future cash flows, effective income tax rates, comparable marketplace data within a consistent industry grouping, and the cost of capital. There are inherent uncertainties, however, related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair value of our reporting units. Assumptions for sales, net earnings and cash flows for each reporting unit were consistent among these methods.
Income Approach Used to Determine Fair Values
The income approach is based upon the present value of expected cash flows. Expected cash flows are converted to present value using factors that consider the timing and risk of the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis. We use a discount rate that reflects a market-derived weighted average cost of capital. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. The projections are based upon our best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value long-term growth rates, provisions for income taxes, future capital expenditures and changes in future cashless, debt-free working capital. We applied a combined weighting of 75% to the income approach when determining the fair value of our reporting units.
29
Table of Contents
Market Approach Used to Determine Fair Values
The market approach estimates the fair value of the reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Publicly Traded Company Method"). These multiples are derived from comparable publicly traded companies with similar investment characteristics to the reporting unit, and such comparables are reviewed and updated as needed annually. We believe that this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to our reporting units and the Company as a whole. The key estimates and assumptions that are used to determine fair value under this market approach include current and forward 12-month operating performance results and the selection of the relevant multiples to be applied. Under the Guideline Publicly Traded Company Method, a control premium, or an amount that a buyer is usually willing to pay over the current market price of a publicly traded company, is applied to the calculated equity values to adjust the public trading value upward for a 100% ownership interest, where applicable.
In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We evaluate the control premium by comparing it to control premiums of recent comparable market transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.
We applied a combined weighting of 25% to the market approach when determining the fair value of our reporting units.
As indicated in Note 5, "Goodwill and Other Intangible Assets", the fair value of each of our four reporting units exceeded their respective carrying values by a very large margin (ranging from 44% to 500%). If market factors change and the discount rate utilized in the fair value calculation changes, it would result in a higher or lower fair value of our reporting units. The discount rates utilized in our October 1, 2024 impairment test ranged from 10.0% to 14.5%. An increase in the discount rate assumption of 50 basis points would have impacted the fair values of our reporting units, and would have reduced the excess of fair value over carrying value to a revised range of 38% to 478%. Further, if we are unable to achieve the projected revenue growth rates or margins assumed in our projections, this would also impact the fair value of our reporting units. Effective with the October 1, 2024 testing date, we changed our reporting unit structure to align with how management is currently reviewing and managing the business. Based on the testing performed, no impairment existed either under the former reporting unit structure or under the new reporting unit structure. If we were to change our reporting unit structure again or if other events and circumstances change (such as a sustained decrease in the price of our common stock, a decline in current market multiples, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, heightened competition, strategic decisions made in response to economic or competitive conditions or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of), we may be required to record impairment charges in future periods. Any impairment charges that we may take in the future could be material to our consolidated results of operations and consolidated financial condition.
The Company conducted its annual goodwill impairment test as of October 1, 2024, and no impairment was identified at that time. Management has also concluded that the fair value of its goodwill exceeded the associated carrying value at December 31, 2024 and that no impairment exists as of that date. See Note 5, "Goodwill and Other Intangible Assets," for details of our goodwill balance and the goodwill review performed in 2024. We will continue to monitor goodwill on an annual basis and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or significant declines in our stock price, indicate that there may be a potential indicator of impairment.
Indefinite-Lived Intangible Assets
The Company tests indefinite-lived intangible assets for impairment annually on October 1, or upon a triggering event, using a fair value approach, the relief-from-royalty method (a form of the income approach). The Company conducted its annual impairment tests as of October 1, 2024 and in connection with its analysis, identified and recorded a $0.4 million impairment charge related to its CUI tradename. This charge is reflected in the accompanying statement of operations during the year ended December 31, 2024. No impairment was identified at the Company's October 1, 2023 testing date. Management has also concluded that the fair value of its trademarks exceeds the associated carrying values at December 31, 2024 and that no impairment existed as of that date. At December 31, 2024, the Company's indefinite-lived intangible assets related solely to trademarks.
Pension Benefit Obligations
Net periodic benefit cost for the Company's SERP totaled $1.4 million in 2024, $1.3 million in 2023, and $1.5 million in 2022. Benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations. The changes in net periodic benefit cost year-over-year are attributable to demographic changes within the plan, as well as any changes to the discount rate or the assumption around the future annual increases in compensation. The discount rate utilized for the net periodic benefit cost was 4.75% at December 31, 2024 and 5.0% at December 31, 2023. An increase or decrease in this 2024 discount rate assumption of 25 basis points would have increased/decreased the 2024 periodic benefit cost by less than $0.1 million. The discount rate utilized for the pension benefit obligation was 5.50% at December 31, 2024 and 4.75% at December 31, 2023. An increase in this 2024 discount rate assumption of 25 basis points would have reduced the pension benefit obligation by $0.4 million at December 31, 2024. A decrease in this 2024 discount rate assumption of 25 basis points would have increased the pension benefit obligation by $0.5 million at December 31, 2024.
Other Matters
The Company believes that it has sufficient cash reserves to fund its foreseeable working capital needs. It may, however, seek to expand such resources through bank borrowings, at favorable lending rates, from time to time. If the Company were to undertake another substantial acquisition for cash, the acquisition would either be funded with cash on hand or would be financed through cash on hand and through bank borrowings or the issuance of public or private debt or equity. If the Company borrows additional money to finance acquisitions, this would further decrease the Company's ratio of earnings to fixed charges, and could further impact the Company's material restrictive covenants, depending on the size of the borrowing and the nature of the target company. Under its existing credit facility, the Company is required to obtain its lender's consent for certain additional debt financing and to comply with other covenants, including the application of specific financial ratios, which may limit the Company’s ability to pay cash dividends on its common stock and/or the amounts thereof, including to the extent that payment of any such dividend would cause noncompliance with any such financial ratio. Depending on the nature of the transaction, the Company cannot assure investors that the necessary acquisition financing would be available to it on acceptable terms, or at all, when required. If the Company issues a substantial amount of stock either as consideration in an acquisition or to finance an acquisition, such issuance may dilute existing stockholders and may take the form of capital stock having preferences over its existing common stock.
New Financial Accounting Standards
The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1, "Description of Business and Summary of Significant Accounting Policies."
30
Table of Contents