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BEL FUSE INC /NJ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2013. 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, 2013, 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 The Company is primarily engaged in the design, manufacture, and sale of products used in aerospace, data transmission, military, transportation, and consumer electronics. Bel's product groups include Magnetic Solutions (discrete components, power transformers and MagJack® connectors with integrated magnetics), Power Solutions and Protection (AC-DC power supplies, DC-DC converters, custom designs, miniature, micro, surface mount and resettable fuses) and Connectivity Solutions (micro, circular, filtered D Sub, fiber optic, RF connectors, microwave components, passive jacks, plugs and cable assemblies). Bel's business is operated through three geographic segments: North America, Asia and Europe. During the six months ended June 30, 2014, 52% of the Company's revenues were derived from Asia, 35% from North America and 13% from its Europe operating segment. Sales of the Company's Magnetic Solutions products represented approximately 46% of its total net sales during the six months ended June 30, 2014. The remaining revenues related to sales of the Company's Connectivity Solutions products (34%) and Power Solutions and Protection products (20%). The Company's expenses are driven principally by the cost of labor where the factories that Bel uses are located, the cost of the materials that it uses and its ability to effectively and efficiently manage overhead costs. As labor and material costs vary by product line, any significant shift in the mix of higher- versus lower-margin product lines will have an associated impact on the Company's 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. The Company's products are manufactured at various facilities in: the People's Republic of China ("PRC"); Glen Rock, Pennsylvania; Inwood, New York; McAllen, Texas; Miami, Florida; Haina, Dominican Republic; Reynosa and Cananea, Mexico; Louny, Czech Republic; Worksop and Great Dunmow, England; and Dubnica nad Vahom, Slovakia. In the PRC, 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 the PRC. 21-------------------------------------------------------------------------------- Return to Index Trends Affecting our Business The Company believes the key factors affecting Bel's results for the three and six months ended June 30, 2014 and/or future results include the following: · Recent Acquisitions - The Company completed its acquisitions of TRP and Array during late March and mid-August 2013, respectively, and its acquisition of Power Solutions in mid-June 2014. During the three and six months ended June 30, 2014, these acquisitions contributed a combined $26.9 million and $44.8 million of sales, respectively, and a combined $2.7 million and $3.7 million of income from operations, respectively. TRP contributed sales of $22.2 million and income from operations of $3.7 million during both the three and six months ended June 30, 2013. Due to the timing of the acquisition dates, there were no contributions of operating results related to the acquisitions of Array or Power Solutions during the three and six months ended June 30, 2013. · Revenues - Excluding the revenue contributions from the 2013 and 2014 acquisitions described above, the Company's revenues for the three and six months ended June 30, 2014 increased by $0.7 million and $2.5 million, respectively, as compared to the same periods of 2013. · 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. During the first half of 2014, the Company experienced a favorable shift in the mix of products sold as compared to the same period of 2013. · Pricing and Availability of Materials - Pricing and availability of components that constitute raw materials in our manufacturing processes have been stable for most of the Company's product lines, although lead times on electrical components are still extended. While pricing of electrical components during the first half of 2014 was consistent with the same period of 2013, there have been recent pricing pressures in this area which may impact future quarters. With regard to commodity pricing, the cost of certain commodities that are contained in components and other raw materials, such as gold and copper, were lower during the first half of 2014 as compared to the same period of 2013. Any fluctuations in component prices and other commodity prices associated with Bel's raw materials will have a corresponding impact on Bel's profit margins. · Labor Costs - Labor costs as a percentage of sales decreased slightly from 14.0% during the first half of 2013 to 13.8% during the first half of 2014. During the first half of 2013, the Company incurred higher labor costs due to inefficiencies associated with the Cinch reorganization. These additional costs did not recur in 2014. This decrease in labor costs as a percentage of sales was largely offset by rising labor costs in the PRC and the strengthening of the Chinese Renminbi. With the addition of TRP and prior to the Power Solutions acquisition, approximately half of Bel's total sales were generated from labor-intensive magnetic products, which are primarily manufactured in the PRC. · Acquisition-Related Costs - In connection with the acquisition of Power Solutions in June 2014 and the subsequent acquisition of Connectivity Solutions which closed in July 2014, the Company incurred $1.4 million during the first half of 2014, primarily during the second quarter. Various purchase accounting adjustments and professional fees, associated with the valuations of Power Solutions and Connectivity Solutions and related to ongoing audits of the historical financial statements of the acquirees, are also expected in future quarters. · Effective Tax Rate - The Company's effective tax rate will fluctuate based on the geographic segment in which the pretax profits are earned. Of the geographic segments in which the Company operates, the U.S. has the highest tax rates; Europe's tax rates are generally lower than U.S. tax rates; and Asia has the lowest tax rates of the Company's three geographical segments. The change in the effective tax rate during the six months ended June 30, 2014 compared to the same period in 2013 is primarily attributed to a significantly lower pretax loss in the North America segment for the six months ended June 30, 2014 compared to the same period in 2013. In addition, for the six months ended June 30, 2013, the Company recognized an additional $0.4 million in R&E credits related to the year ended December 31, 2012. See Note 8 of the condensed consolidated financial statements. Based on historical results of Bel and the recently acquired businesses (including CS), the Company is at a current run rate of approximately $700 million in annual sales. The focus going forward will be on improving quality at the factory levels, working closely with our large customers and their engineering teams, and continued overhead cost containment internally. Management has already implemented annual cost savings of over $5.0 million related to the acquisitions of Power Solutions and Connectivity Solutions and has identified additional opportunities to streamline the consolidated businesses in the future. Statements regarding future results constitute Forward-Looking Statements and could be materially adversely affected by the risk factors identified by the Company in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 22-------------------------------------------------------------------------------- Return to Index Summary by Reportable Operating Segment Net sales to external customers by reportable operating segment for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 North America $ 35,064 35 % $ 28,628 30 % $ 63,795 35 % $ 55,444 35 % Asia 51,223 52 % 55,157 59 % 94,271 52 % 81,573 52 % Europe 13,152 13 % 10,196 11 % 24,019 13 % 19,992 13 % $ 99,439 100 % $ 93,981 100 % $ 182,085 100 % $ 157,009 100 % Net sales and income from operations by reportable operating segment for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Total segment sales: North America $ 39,405 $ 32,301 $ 70,859 $ 61,523 Asia 61,968 64,036 111,860 96,760 Europe 16,550 10,591 27,441 20,716 Total segment sales 117,923 106,928 210,160 178,999 Reconciling item: Intersegment sales (18,484 ) (12,947 ) (28,075 ) (21,990 ) Net sales $ 99,439 $ 93,981 $ 182,085 $ 157,009 Income from operations: North America $ (1,617 ) $ (2,012 ) $ (734 ) $ (3,495 ) Asia 4,715 3,776 6,388 3,112 Europe 616 (105 ) 941 615 $ 3,714 $ 1,659 $ 6,595 $ 232 During the three and six months ended June 30, 2014 as compared to the same periods of 2013, the 2013 acquisitions of TRP and Array contributed significantly to Bel's Asia and North America segment sales, and TRP's income from operations in Asia more than offset Bel's loss from operations in North America. The acquisition of Power Solutions in June 2014 contributed significantly to Bel's North America segment sales, and to a lesser extent Europe segment sales during the three and six months ended June 30, 2014 as compared to the same periods of 2013. See Note 7 to the accompanying condensed consolidated financial statements for further details. Within North America, the improvement in income from operations during the three and six months ended June 30, 2014 as compared to the same periods of 2013 was also attributable to the recovery of the Cinch operations. Both sales and income from operations during the first half of 2013 were negatively impacted by the relocation of Cinch's North American manufacturing operations. Manufacturing inefficiencies resulted in reduced production levels and lower overall sales of Cinch products. In addition, various other costs associated with the Cinch reorganization further reduced our income from operations in North America during early 2013. These transition issues were resolved by the end of 2013. Overview of Financial Results Sales for the six months ended June 30, 2014 increased by 16.0% to $182.1 million from $157.0 million for the same period of 2013. Sales were favorably impacted by the contributions made by the acquisitions of TRP, Array and Power Solutions, and the rebounding of Cinch sales after the relocation of its manufacturing operations in early 2013. Pricing to customers was adjusted during the latter half of 2013 to recover some of the higher labor costs in China and other cost increases resulting from the continued strengthening of the Chinese Renminbi. These increased prices are reflected in the first half of 2014 sales figures above. Selling, general and administrative expense was $1.6 million higher in the first six months of 2014 as compared to the same period of 2013, primarily due to the inclusion of expenses from the recent acquisitions. These factors led to net earnings of $5.6 million for the first half of 2014 as compared to $1.1 million for the same period of 2013. Additional details related to these factors affecting the six-month results are described in the Results of Operations section below. 23 -------------------------------------------------------------------------------- Return to Index Critical Accounting Policies Management's discussion and analysis of Bel's financial condition and results of operations are based upon the Company's condensed 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, warranties, SERP expense, income taxes and 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. Recent Accounting Pronouncements The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1 to the Company's Financial Statements, "Basis of Presentation and Accounting Policies," included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Results of Operations 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. Percentage of Net Sales Percentage of Net Sales Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 82.0 83.8 82.4 84.5 Selling, general and administrative ("SG&A") expenses 13.3 13.1 13.4 14.5 Restructuring charges 1.1 1.3 0.6 0.9 Interest expense (0.2) - (0.1) - Interest income and other, net - 0.1 0.1 0.1 Earnings before provision (benefit) for income taxes 3.6 1.8 3.5 0.2 Provision (benefit) for income taxes 0.5 - 0.5 (0.5) Net earnings 3.1 1.8 3.1 0.7 The following table sets forth the year over year percentage increase of certain items included in the Company's condensed consolidated statements of operations. Increase from Increase from Prior Period Prior Period Three Months Ended Six Months Ended June 30, 2014 June 30, 2014 Compared with Compared with Three Months Ended Six Months Ended June 30, 2013 June 30, 2013 Net sales 5.8 % 16.0 % Cost of sales 3.5 13.1 SG&A expenses 6.8 7.1 Net earnings 81.5 392.3 24-------------------------------------------------------------------------------- Return to Index Sales Net sales increased 5.8% from $94.0 million during the three months ended June 30, 2013 to $99.4 million during the three months ended June 30, 2014. Net sales increased 16.0% from $157.0 million during the six months ended June 30, 2013 to $182.1 million during the six months ended June 30, 2014. The Company's net sales by product group for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Magnetic solutions $ 44,732 45 % $ 48,758 52 % $ 84,029 46 % $ 70,015 45 % Connectivity solutions 32,197 32 % 27,093 29 % 62,367 34 % 53,205 34 % Power solutions and protection 22,510 23 % 18,130 19 % 35,689 20 % 33,789 21 % $ 99,439 100 % $ 93,981 100 % $ 182,085 100 % $ 157,009 100 % Sales of the Company's Magnetic Solutions products for the first six months of 2014 include $34.0 million of TRP integrated connector module (ICM) products, as compared to $22.2 million for the same period of 2013 (as TRP was acquired in late-March 2013). The acquisition of Array in August 2013 contributed $1.9 million and $3.5 million of sales, respectively, to the Company's Connectivity Solutions product group during the three and six months ended June 30, 2014. During the first half of 2013, the Company experienced a reduction in sales of Cinch's Connectivity Solutions products due to the relocation of its manufacturing operations. Cinch's sales have since rebounded, and are a contributing factor to the increase in Connectivity Solutions sales in the 2014 periods noted above, as compared to 2013. The acquisition of Power Solutions in mid-June 2014 contributed sales of $7.2 million to the three and six-month Power Solutions and Protection sales figures noted above for the 2014 periods. This increase in Power Solutions and Protection sales was partially offset by a reduction in legacy-Bel DC/DC converter sales of $3.9 million and $5.4 million, respectively, during the three and six months ended June 30, 2014 as compared to the same periods of 2013. Cost of Sales The Company's cost of sales as a percentage of consolidated net sales for the three and six months ended June 30, 2014 and 2013 was comprised of the following: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Material costs 44.4% 44.4% 43.4% 45.2% Labor costs 13.5% 15.0% 13.8% 14.0% Research and development expenses 4.1% 4.0% 4.1% 4.3% Other expenses 20.0% 20.4% 21.1% 21.0% Total cost of sales 82.0% 83.8% 82.4% 84.5% Material costs as a percentage of sales were lower in the first six months of 2014 as compared to the first six months of 2013, primarily due to the reduction in sales of legacy-Bel DC/DC converters, which have a higher material content than Bel's other products. An increase in sales of Cinch and Array products in 2014 also contributed to the decrease, as these products have lower material content than Bel's other products. Material costs during the first half of 2013 were also unusually high as the Company experienced start-up issues related to the relocation of Cinch's U.S. manufacturing operations resulting in higher purchase prices and inbound freight costs for materials. Labor costs during 2014 decreased as a percentage of sales as compared to 2013, primarily during the second quarter. The Company faced certain challenges with the relocation of Cinch's U.S. manufacturing facility, which resulted in $2.8 million of unanticipated costs during the three and six months ended June 30, 2013. These costs did not recur in 2014 and the Company began to realize cost savings from that initiative. This reduction in labor costs as a percentage of sales was partially offset by the addition of TRP and Array in 2013, a higher proportion of sales of Bel integrated magnetic products and Cinch products, and the shift in product mix away from the low-labor content products described above. Government-mandated wage increases in the PRC and the strengthening of the Chinese Renminbi further increased labor costs over the prior year. Included in cost of sales are research and development (R&D) expenses of $4.0 million and $3.7 million for the three-month periods ended June 30, 2014 and 2013, respectively, and $7.4 million and $6.8 million for the six-month periods ended June 30, 2014 and 2013, respectively. The majority of the increase relates to the inclusion of R&D expenses associated with TRP, Array and Power Solutions, which have been included in Bel's results since their respective acquisition dates. 25-------------------------------------------------------------------------------- Return to Index Selling, General and Administrative Expenses ("SG&A") For the three months ended June 30, 2014, SG&A expense was $0.8 million higher as compared to the same period of 2013. Of this increase, $0.3 million related to the inclusion of SG&A expenses of Array and Power Solutions. Other contributing factors included a $1.3 million increase in acquisition-related costs and additional bad debt expense of $0.4 million, partially offset by favorable fluctuations in foreign currency exchange rates of $0.3 million, a reduction in legal and professional fees of $0.6 million and a decrease in other SG&A expenses of $0.3 million. For the six months ended June 30, 2014, SG&A expense was $1.6 million higher as compared to the same period of 2013. Of this increase, $0.7 million related to the inclusion of SG&A expenses of Array and Power Solutions. Other contributing factors included a $0.9 million increase in acquisition-related costs, higher wage and fringe-related items of $0.6 million and additional bad debt expense of $0.3 million, partially offset by a reduction in legal and professional fees of $0.4 million, an improvement in freight costs of $0.2 million and a decrease in other SG&A expenses of $0.3 million. Provision (Benefit) for Income Taxes The Company's effective tax rate will fluctuate based on the geographic segment in which the pretax profits are earned. Of the geographic segments in which the Company operates, the U.S. has the highest tax rates; Europe's tax rates are generally lower than U.S. tax rates; and Asia has the lowest tax rates of the Company's three geographical segments. The provision for income taxes for the three months ended June 30, 2014 was $0.5 million compared to less than $0.1 million for the three months ended June 30, 2013. The Company's earnings before income taxes for the three months ended June 30, 2014 are approximately $1.8 million higher than the same period in 2013. The Company's effective tax rate, the income tax provision as a percentage of earnings before provision for income taxes, was 13.4% and 2.0% for the three-month periods ended June 30, 2014 and 2013, respectively. The change in the effective tax rate during the three months ended June 30, 2014 compared to the second quarter of 2013 is primarily attributed to the increase of the Europe and Asia segments' profitability. The provision for income taxes for the six months ended June 30, 2014 was $0.9 million compared to a benefit of ($0.8) million for the six months ended June 30, 2013. The Company's earnings before income taxes for the six months ended June 30, 2014 are approximately $6.1 million higher than the same period in 2013. The Company's effective tax rate, the income tax provision (benefit) as a percentage of earnings before provision (benefit) for income taxes, was 13.5% and (241.7%) for the six-month periods ended June 30, 2014 and 2013, respectively. The change in the effective tax rate during the six months ended June 30, 2014 compared to the same period in 2013 is primarily attributed to a significantly lower pretax loss in the North America segment for the six months ended June 30, 2014 compared to the same period in 2013. In addition, for the six months ended June 30, 2013, the Company recognized an additional $0.4 million in R&E credits related to the year ended December 31, 2012. See Note 8 of the condensed consolidated financial statements. Liquidity and Capital Resources Historically, the Company has financed its capital expenditures primarily through cash flows from operating activities and has financed acquisitions through cash flows from operating activities, cash reserves, borrowings, and the issuance of Bel Fuse Inc. common stock. Management believes that the cash flow from operations after payments of dividends and mandatory principal payments of long-term debt combined with its existing capital base, the Company's cash reserves and available line of credit will be sufficient to fund its operations for at least the next twelve months. Such statement constitutes a Forward-Looking Statement. Factors which could cause the Company to require additional funding include, among other things, a softening in the demand for the Company's existing and recently-acquired products; an inability to respond to customer demand for new products; an inability to successfully integrate the recent acquisitions discussed below, which could require substantial capital; future expansion of the Company's operations and net losses that would result in net cash being used in operating activities, resulting in net decreases in cash and cash equivalents. Net losses may impact availability under our credit facility and preclude the Company from raising debt or equity financing in the capital markets on affordable terms or otherwise. On April 25, 2014, the Company entered into a Stock and Asset Purchase Agreement with ABB Ltd. ("ABB") pursuant to which the Company agreed to acquire the Power-One Power Solutions business from ABB for approximately $117.0 million, subject to adjustments based on working capital and the amount of cash at closing. On June 19, 2014, the Company completed its acquisition of Power Solutions with a cash payment, net of cash acquired and including a working capital adjustment, of $110.0 million. The Power Solutions acquisition was funded through bank borrowings, as discussed below. On May 16, 2014, the Company entered into a Stock Purchase Agreement with Emerson Electric Co. ("Emerson") pursuant to which the Company agreed to acquire the Emerson Network Power Connectivity Solutions ("CS") business from Emerson for $98.0 million, subject to adjustments based on working capital and the amount of cash at closing. On July 25, 2014, the Company completed its acquisition of the U.S. and U.K. entities of the CS business from Emerson with a payment, net of cash acquired and including a working capital adjustment, of $90.7 million. This portion of the CS acquisition was funded primarily through additional bank borrowings and with $3.9 million funded from Bel's cash on hand. A remaining payment of approximately $9 million is expected to be paid by the end of the third quarter, upon the closing of the China portion of the acquisition. 26 -------------------------------------------------------------------------------- Return to Index At December 31, 2013, the Company maintained a $30 million line of credit with Bank of America (the "Credit Agreement"), which was due to expire on October 14, 2016. At December 31, 2013, borrowings under the line of credit amounted to $12.0 million and the balance available under the Credit Agreement was $18.0 million. The Credit Agreement bore interest at LIBOR plus 1.00% to 1.50% based on certain financial statement ratios maintained by the Company. The interest rate in effect on the borrowings outstanding at December 31, 2013 was 1.4%. The Company incurred interest expense of less than $0.1 million related to the borrowings under the Credit Agreement during the six months ended June 30, 2014. There was no interest expense related to the line of credit during the six months ended June 30, 2013 as there were no borrowings outstanding during that period. Under the terms of the Credit Agreement, the Company was required to maintain certain financial ratios and comply with other financial conditions. During the six months ended June 30, 2014, the Company repaid the full $12.0 million balance outstanding and terminated the Credit Agreement. On June 19, 2014, the Company entered into a senior Credit and Security Agreement with KeyBank National Association ("KeyBank"), as administrative agent, and lender, which was amended on June 30, 2014 principally to add a syndicate of additional lenders (as so amended, the "New Secured Credit Agreement"). The maturity date of the New Secured Credit Agreement is June 18, 2019. The New Secured Credit Agreement consists of (i) a $50 million revolving credit facility ("Revolver"), (ii) a $145 million term loan facility ("Term Loan") and (iii) a $70 million delayed draw term loan ("DDTL"). Under the terms of the New Secured Credit Agreement, the Company is entitled, subject to the satisfaction of certain conditions, to request additional commitments under the revolving credit facility or term loans in the aggregate principal amount of up to $100 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. The obligations of the Company under the New Secured Credit Agreement are guaranteed by certain of the Company's material U.S. subsidiaries (together with the Company, the "Loan Parties") and are secured by a first priority security interest in substantially all of the existing and future personal property of the Loan Parties, certain material real property of the Loan Parties and certain of the Loan Parties' material U.S. subsidiaries, including 65% of the voting capital stock of certain of the Loan Parties' direct foreign subsidiaries. The borrowings under the New Secured Credit Agreement will bear interest at a rate equal to, at the Company's option, either (1) LIBOR, plus a margin ranging from 1.75% per annum to 3.00% per annum depending on the Company's leverage ratio, or (2)(a) an "Alternate Base Rate," which is the highest of (i) the federal funds rate plus 0.50%, (ii) KeyBank's prime rate and (iii) LIBOR with a maturity of one month plus 1.00%, plus (b) a margin ranging from 0.75% per annum to 2.00% per annum, depending on the Company's leverage ratio. The interest rate in effect at June 30, 2014 was 3.0%, which consists of LIBOR of 0.25% plus the Company's margin of 2.75%. The New Secured Credit Agreement contains customary representations and warranties, covenants and events of default and financial covenants that measure (i) the ratio of the Company's total funded indebtedness, on a consolidated basis to the amount of the Company's consolidated EBITDA, as defined, ("Leverage Ratio") and (ii) the ratio of the amount of the Company's consolidated EBITDA to the Company's consolidated fixed charges ("Fixed Charge Coverage Ratio"). If an event of default occurs, the lenders under the New Secured 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 June 30, 2014, the Company was in compliance with its most restrictive covenant, the Leverage Ratio. The unused credit available under the credit facility at June 30, 2014 was $120 million, of which we had the ability to incur total additional indebtedness of $100.1 million without violating our Leverage Ratio covenant based on the Company's existing consolidated EBITDA. KeyBank and certain of the agents and lenders party to the New Secured Credit Agreement (and each of their respective subsidiaries or affiliates) have provided and may in the future provide investment banking, cash management, underwriting, lending, commercial banking, trust, leasing services, foreign exchange and other advisory services to, or engage in transactions with, the Company and its subsidiaries or affiliates. Certain of these parties have received, and these parties may in the future receive, customary compensation from the Company and its subsidiaries or affiliates, for such services. Concurrent with its entry into the New Secured Credit Agreement on June 19, 2014, the Company borrowed $145.0 million under the Term Loan to complete its acquisition of Power Solutions. During the three and six months ended June 30, 2014, the Company recorded $5.4 million in deferred financing costs, which will be amortized over the five-year term, and incurred $0.2 million of interest expense. At June 30, 2014, borrowings outstanding of $145.0 million related solely to the Term Loan. The $70.0 million DDTL and $50.0 million Revolver were fully available at June 30, 2014. 27 -------------------------------------------------------------------------------- Return to Index Scheduled principal payments of the long-term debt outstanding at June 30, 2014 are as follows (in thousands): 2014 $ 3,625 2015 9,063 2016 10,875 2017 12,687 2018 16,313 Thereafter 92,437 Total long-term debt 145,000 Less: Current maturities of long-term debt (7,250 ) Noncurrent portion of long-term debt $ 137,750 Subsequent to the June 30, 2014 quarter-end, the Company borrowed the full $70.0 million available under the DDTL and $20.0 million of the Revolver in order to fund the acquisition of CS in July 2014. Cash Flows During the six months ended June 30, 2014, the Company's cash and cash equivalents increased by $25.6 million. This resulted primarily from $12.7 million provided by operating activities and $145.0 million of proceeds from long-term debt, partially offset by a $109.9 million payment, net of cash acquired, for the acquisition of Power Solutions, $12.0 million of repayments under the revolving credit line, $3.0 million paid for the purchase of property, plant and equipment and $1.5 million for payments of dividends. As compared to the six months ended June 30, 2013, cash provided by operating activities increased by $16.6 million, partially due to the improvement in net earnings in 2014 and a $4.5 million decrease in inventory levels during the first half of 2014, as compared to a $4.5 million increase in inventory levels during the first half of 2013. Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 37.4% and 40.9% of the Company's total assets at June 30, 2014 and December 31, 2013, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 2.7 to 1 and 3.0 to 1 at June 30, 2014 and December 31, 2013, respectively. Contractual Obligations The following table sets forth at December 31, 2013 the amounts of payments due under specific types of contractual obligations, aggregated by category of contractual obligation, for the time periods described below. This table excludes $2.2 million of unrecognized tax benefits as of December 31, 2013, as the Company is unable to make reasonably reliable estimates of the period of cash settlements, if any, with the respective taxing authorities. Payments due by period (dollars in thousands) 1-3 3-5 More than Contractual Obligations Total Less than 1 year years years 5 years Capital expenditure obligations $ 3,014 $ 3,014 $ - $ - $ - Operating leases 15,305 4,522 5,630 2,654 2,499 Raw material purchase obligations 23,376 23,288 88 - - Total $ 41,695 $ 30,824 $ 5,718 $ 2,654 $ 2,499 28-------------------------------------------------------------------------------- Return to Index During the six months ended June 30, 2014, in connection with the acquisition of Power Solutions and the associated borrowings under the New Secured Credit Agreement, the following additional contractual obligations exist as of June 30, 2014: Payments due by period (dollars in thousands) 1-3 3-5 More than Contractual Obligations Total Less than 1 year years years 5 years Long-term debt obligations $ 145,000 $ 7,250 $ 21,750 $ 116,000 $ - Capital expenditure obligations 431 431 - - - Operating leases 3,900 2,097 1,797 6 - Raw material purchase obligations 15,533 15,504 29 - - Total $ 164,864 $ 25,282 $ 23,576 $ 116,006 $ - Subsequent to the June 30, 2014 quarter-end, the Company's long-term debt obligations increased by an additional $90.0 million in connection with its borrowings under the Revolver and the DDTL in order to fund the acquisition of CS in July 2014. |