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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 nine months ended September 30, 2014, 44% of the Company's revenues were derived from Asia, 42% from North America and 14% from its Europe operating segment. Sales of the Company's Magnetic Solutions products represented approximately 38% of its total net sales during the nine months ended September 30, 2014. The remaining revenues related to sales of the Company's Connectivity Solutions products (32%) and Power Solutions and Protection products (30%). 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 and Melbourne, Florida; Waseca, Minnesota; Mesa, Arizona; Haina, Dominican Republic; Reynosa and Cananea, Mexico; Louny, Czech Republic; Worksop, Great Dunmow and Chelmsford, 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. -22--------------------------------------------------------------------------------- Return to Index Trends Affecting our Business The Company believes the key factors affecting Bel's results for the three and nine months ended September 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, its acquisition of Power Solutions in mid-June 2014, and its acquisition of Connectivity Solutions in late-July 2014 and late-August 2014. During the three and nine months ended September 30, 2014, these acquisitions contributed a combined $83.8 million and $128.6 million of sales, respectively, and a combined $3.7 million and $7.4 million of income from operations, respectively. During the three and nine months ended September 30, 2013, TRP and Array contributed combined sales of $26.4 million and $48.6 million, respectively, and combined income from operations of $4.5 million and $8.2 million, respectively. · 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 nine months ended September 30, 2014, the addition of Power Solutions and Connectivity Solutions had a favorable impact on the Company's profit margin percentage. · 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. Pricing of electrical components stabilized during the third quarter of 2014. 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 nine months 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 from 14.3% during the nine months ended September 30, 2013 to 12.4% during the comparable period of 2014. The primary factor driving the reduction was the addition of the Power Solutions products, which have a lower labor content than most of Bel's other products. Also, during early 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. · Acquisition-Related Costs -The Company incurred $3.8 million and $5.4 million in acquisition-related costs during the three and nine months ended September 30, 2014, respectively. These costs primarily related to the audits of the historical financial statements of the acquirees, as well as legal and consulting expenses associated with the 2014 Acquisitions. The Company also recorded purchase accounting adjustments in the third quarter of 2014 related to inventory step-up adjustments. These adjustments resulted in additional expense during the third quarter of 2014 of $4.6 million in cost of sales. Various purchase accounting adjustments and professional fees associated with the valuations of Power Solutions and Connectivity Solutions and related to the completion of 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 nine months ended September 30, 2014 compared to the same period in 2013 is primarily attributed to the increase in US taxes despite a pretax loss in the North America segment from taxes related to uncertain tax positions, valuation allowances and sub part F related income. This was offset in part by a true up of tax accruals. In addition, for the nine months ended September 30, 2013, the Company recognized an additional $0.4 million in R&E credits related to the year ended December 31, 2012 which offset the increase in the effective tax rate for the nine months ended September 30, 2014. See Note 8 of the condensed consolidated financial statements. Based on third quarter 2014 results of Bel and the recently acquired businesses, the Company is at a current run rate of approximately $650 million in annual sales. The focus going forward continues to 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 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. -23--------------------------------------------------------------------------------- Return to Index Summary by Reportable Operating Segment Net sales to external customers by reportable operating segment for the three and nine months ended September 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 North America $ 79,384 51 % $ 31,613 31 % $ 143,180 42 % $ 87,058 34 % Asia 54,656 35 % 60,751 60 % 148,927 44 % 142,323 55 % Europe 22,301 14 % 8,800 9 % 46,319 14 % 28,792 11 % $ 156,341 100 % $ 101,164 100 % $ 338,426 100 % $ 258,173 100 % Net sales and income from operations by reportable operating segment for the three and nine months ended September 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Total segment sales: North America $ 91,556 $ 34,273 $ 162,415 $ 95,796 Asia 87,714 69,602 199,574 166,362 Europe 44,778 9,313 72,220 30,029 Total segment sales 224,048 113,188 434,209 292,187 Reconciling item: Intersegment sales (67,707 ) (12,024 ) (95,783 ) (34,014 ) Net sales $ 156,341 $ 101,164 $ 338,426 $ 258,173 Income from operations: North America $ (1,964 ) $ (239 ) $ (2,698 ) $ (3,734 ) Asia 3,306 7,915 9,694 11,026 Europe 3,330 56 4,271 672 $ 4,672 $ 7,732 $ 11,267 $ 7,964 During the three and nine months ended September 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 and Europe segment sales during the three and nine months ended September 30, 2014 as compared to the same periods of 2013. The acquisition of Connectivity Solutions contributed to North America and Europe segment sales beginning in August 2014, and to Asia segment sales beginning in September 2014. See Note 7 to the accompanying condensed consolidated financial statements for further details. Within North America, the improvement in income from operations during the nine months ended September 30, 2014 as compared to the same period of 2013 was also attributable to the recovery of the Cinch operations. Both sales and income from operations during the nine months ended September 30, 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 nine months ended September 30, 2014 increased by 31.1% to $338.4 million from $258.2 million for the same period of 2013. Sales were favorably impacted by the contributions made by the 2013 and 2014 Acquisitions, 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 2014 sales figures above. Selling, general and administrative expense was $12.4 million higher in the nine months ended September 30, 2014 as compared to the same period of 2013, primarily due to the inclusion of expenses from the recent acquisitions and acquisition-related costs. These factors led to net earnings of $7.1 million for the nine months ended September 30, 2014 as compared to $8.5 million for the same period of 2013. Additional details related to these factors affecting the nine-month results are described in the Results of Operations section below. -24- -------------------------------------------------------------------------------- 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 Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 82.0 80.2 82.2 82.8 Selling, general and administrative ("SG&A") expenses 14.8 12.2 14.0 13.6 Restructuring charges 0.2 - 0.4 0.5 Interest expense 1.2 0.1 0.6 - Interest income and other, net - 0.1 - 0.1 Earnings before provision (benefit) for income taxes 1.8 7.8 2.7 3.2 Provision (benefit) for income taxes 0.8 0.5 0.6 (0.1 ) Net earnings 1.0 7.3 2.1 3.3 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 Nine Months Ended September 30, 2014 September 30, 2014 Compared with Compared with Three Months Ended Nine Months Ended September 30, 2013 September 30, 2013 Net sales 54.5 % 31.1 % Cost of sales 58.1 30.2 SG&A expenses 87.9 35.5 Net earnings (79.6 ) (16.9 ) -25--------------------------------------------------------------------------------- Return to Index Sales Net sales increased 54.5% from $101.2 million during the three months ended September 30, 2013 to $156.3 million during the three months ended September 30, 2014. Net sales increased 31.1% from $258.2 million during the nine months ended September 30, 2013 to $338.4 million during the nine months ended September 30, 2014. The Company's net sales by product group for the three and nine months ended September 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Magnetic solutions (a) $ 46,159 29 % $ 52,943 52 % $ 130,188 38 % $ 122,958 48 % Connectivity solutions (b) 44,985 29 % 29,976 30 % 107,352 32 % 83,181 32 % Power solutions and protection (c) 65,197 42 % 18,245 18 % 100,886 30 % 52,034 20 % $ 156,341 100 % $ 101,164 100 % $ 338,426 100 % $ 258,173 100 % (a) "Magnetic solutions" consists of Bel's legacy RJ45 connector business, the TRP business and the Company's Signal Transformer business. (b) "Connectivity solutions" represents the Company's former Interconnect group, consisting of Cinch, the recently acquired Emerson Connectivity Solutions business, Array Connector and the Stewart Connector passive connector lines. (c) "Power solutions and protection" represents the Company's former Modules group, consisting of Power-One, the Company's legacy DC-DC, modules manufacturing, and circuit protection business. Magnetic solutions net sales decreased from the third quarter of 2013 to the third quarter of 2014, principally as a result of a reduction in the sale of TRP products. Sales of Magnetic solutions products for the first nine months of 2014 increased as compared to the same period of 2013 as $51.1 million of TRP product sales are included in the 2014 period, as compared to $46.9 million for the same period of 2013 (TRP was acquired in late-March 2013). The acquisition of Array in August 2013 and Connectivity Solutions in late-July 2014 and late-August 2014 contributed combined sales of $15.7 million and $19.3 million, respectively, to the Company's Connectivity solutions product group during the three and nine months ended September 30, 2014. The acquisition of Power Solutions in mid-June 2014 contributed sales of $49.1 million and $56.3 million, respectively, to the three and nine-month Power solutions and protection sales figures noted above for the 2014 periods. This contribution was partially offset by a reduction in legacy-Bel DC/DC converter sales of $3.9 million and $9.3 million, respectively, during the three and nine months ended September 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 nine months ended September 30, 2014 and 2013 was comprised of the following: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Material costs 46.8 % 41.4 % 45.0 % 43.7 % Labor costs 10.7 % 14.7 % 12.4 % 14.3 % Research and development expenses 4.3 % 3.5 % 4.2 % 4.0 % Other expenses 20.2 % 20.6 % 20.6 % 20.8 % Total cost of sales 82.0 % 80.2 % 82.2 % 82.8 % Material costs as a percentage of sales were higher during the three and nine months ended September 30, 2014 as compared to the same periods of 2013, primarily due to the addition of Power Solutions products, which have a higher material content than Bel's other products. This increase was partially offset by a reduction in material costs as a percentage of sales associated with Bel's other products, due to lower sales of Bel's DC-DC products which have a higher material content, and an increase in connectivity products, which carry a lower material content. Labor costs during the periods presented for 2014 decreased as a percentage of sales as compared to the same periods of 2013. The most significant factor contributing to the lower labor costs as a percentage of sales was the inclusion of Power Solutions products since the date of acquisition. Power Solutions products have lower-labor content compared to Bel's historical average. There was a further reduction in labor costs as a percentage of sales in the 2014 periods presented due to the improvement of manufacturing efficiencies associated with the Cinch reorganization in 2013, and the realization of cost savings from that initiative. These reductions in labor costs were partially offset by the continued strengthening of the Chinese Renminbi, which had an unfavorable impact on the Company's labor costs in the PRC. -26- -------------------------------------------------------------------------------- Return to Index Included in cost of sales are research and development (R&D) expenses of $6.7 million and $3.5 million for the three-month periods ended September 30, 2014 and 2013, respectively, and $14.1 million and $10.3 million for the nine-month periods ended September 30, 2014 and 2013, respectively. The majority of these increases relate to the inclusion of R&D expenses associated with the 2013 and 2014 Acquisitions, which have been included in Bel's results since their respective acquisition dates. Selling, General and Administrative Expenses ("SG&A") For the three months ended September 30, 2014, SG&A expense was $10.8 million higher as compared to the same period of 2013. Of this increase, $8.2 million related to the inclusion of SG&A expenses of 2014 Acquisitions and $0.2 million in incremental SG&A expenses associated with a full three months of Array activity in 2014. Other contributing factors included a $3.7 million increase in acquisition-related costs, offset by lower incentive compensation expense of $2.0 million and a reduction in legal and professional fees of $0.5 million. Other items within SG&A increased by $1.2 million in total. For the nine months ended September 30, 2014, SG&A expense was $12.4 million higher as compared to the same period of 2013. Of this increase, $8.2 million related to the inclusion of SG&A expenses of 2014 Acquisitions and $1.0 million in incremental SG&A expenses associated with a full nine months of TRP and Array activity in 2014. Other contributing factors included a $4.6 million increase in acquisition-related costs, offset by lower incentive compensation expense of $2.2 million and a reduction in legal and professional fees of $0.8 million. Other items within SG&A increased by $1.6 million in total. 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 September 30, 2014 was $1.3 million compared to $0.5 million for the three months ended September 30, 2013. The Company's earnings before income taxes for the three months ended September 30, 2014 are approximately $5.0 million lower 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 46.7% and 5.9% for the three-month periods ended September 30, 2014 and 2013, respectively. The change in the effective tax rate during the three months ended September 30, 2014 compared to the third quarter of 2013 is primarily attributed to the increase in US taxes despite a pretax loss in the North America segment principally related to increases in the liability for uncertain tax positions, valuation allowances and sub part F related income. This was offset in part by a true up of tax accruals. Additionally, the increase in the effective tax rate is attributable to the increase in the European segments' profitability for the three months ended September 30, 2014 compared to the same period in 2013. The provision for income taxes for the nine months ended September 30, 2014 was $2.2 million compared to a benefit of $0.3 million for the nine months ended September 30, 2013. The Company's earnings before income taxes for the nine months ended September 30, 2014 are approximately $1.1 million higher than the same period in 2013. The Company's effective tax rate was 23.6% and (4.1%) for the nine-month periods ended September 30, 2014 and 2013, respectively. The change in the effective tax rate during the nine months ended September 30, 2014 compared to the same period in 2013 is primarily attributed to the same reasons as described above. In addition, for the nine months ended September 30, 2013, the Company recognized an additional $0.4 million in R&E credits related to the year ended December 31, 2012, which offset the increase in the effective tax rate for the nine months ended September 30, 2014. 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. -27- -------------------------------------------------------------------------------- Return to Index 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. On August 29, 2014, an additional payment of $9 million, funded from Bel's cash on hand, was made in connection with the closing of the China portion of the acquisition. 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 nine months ended September 30, 2014. There was no interest expense related to the line of credit during the nine months ended September 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 nine months ended September 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 September 30, 2014 was 2.25%, which consists of LIBOR of 0.25% plus the Company's margin of 2.00%. 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 September 30, 2014, the Company was in compliance with its most restrictive covenant, the Leverage Ratio. The unused credit available under the credit facility at September 30, 2014 was $27.0 million, of which we had the ability to borrow the full available balance 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. -28- -------------------------------------------------------------------------------- Return to Index 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. On July 25, 2014, 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 Connectivity Solutions. During the three and nine months ended September 30, 2014, the Company recorded deferred financing costs of $0.4 million and $5.8 million, respectively, which will be amortized over the five-year term, and incurred interest expense of $1.9 million and $2.1 million, respectively. Scheduled principal payments of the long-term debt outstanding at September 30, 2014 are as follows (in thousands): 2014 $ 2,687 2015 13,438 2016 16,125 2017 18,812 2018 24,188 Thereafter 160,063 Total long-term debt 235,313 Less: Current maturities of long-term debt (12,094 ) Noncurrent portion of long-term debt $ 223,219 Cash Flows During the nine months ended September 30, 2014, the Company's cash and cash equivalents increased by $21.0 million. This resulted primarily from $19.1 million provided by operating activities, $215.0 million of proceeds from long-term debt and $23.0 million of proceeds from borrowing under the revolver, partially offset by payments totaling $206.5 million, net of cash acquired, for the acquisitions of Power Solutions and Connectivity Solutions, $12.0 million of repayments under the revolving credit line, $2.7 million of repayments of long-term debt, $5.4 million paid in deferred financing costs, $5.8 million paid for the purchase of property, plant and equipment and $2.3 million for payments of dividends. As compared to the nine months ended September 30, 2013, cash provided by operating activities increased by $13.0 million, partially due to a $5.0 million increase in depreciation and amortization and a $2.0 million increase in accounts receivable during 2014, as compared to a $13.0 million increase in accounts receivable during 2013. The decrease in inventory during 2014 was mostly offset by a reduction in accounts payable and accrued expense balances during the nine months ended September 30, 2014. Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 37.4% and 40.9% of the Company's total assets at September 30, 2014 and December 31, 2013, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 2.6 to 1 and 3.0 to 1 at September 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 -29--------------------------------------------------------------------------------- Return to Index During the nine months ended September 30, 2014, in connection with the 2014 Acquisitions and the associated borrowings under the New Secured Credit Agreement, the following additional contractual obligations existed as of September 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 $ 235,313 $ 12,094 $ 33,594 $ 189,625 $ - Capital expenditure obligations 530 530 - - - Operating leases 7,342 3,929 2,702 711 - Raw material purchase obligations 19,325 19,296 29 - - Total $ 262,510 $ 35,849 $ 36,325 $ 190,336 $ - |