bel10-q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

FORM 10-Q
(MARK ONE)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2011
or
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ____________

Commission File No. 0-11676
_____________________

BEL FUSE INC.
206 Van Vorst Street
Jersey City, NJ  07302
(201) 432-0463

(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)

NEW JERSEY
 
22-1463699
(State of  incorporation)
 
(I.R.S. Employer Identification No.)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]
No [   ]
     
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]
No [   ]
     
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [    ]
Accelerated filer [X]
Non-accelerated filer [    ]
(Do not check if a smaller reporting company)
Smaller reporting company [    ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ]
No [X]


 
Title of Each Class
 
Number of Shares of Common Stock Outstanding
 as of November 1, 2011
 
Class A Common Stock ($0.10 par value)
    2,174,912  
Class B Common Stock ($0.10 par value)
    9,639,443  

 
 

 



BEL FUSE INC.
       
INDEX
       
     
Page
Part I
 
Financial Information
 
       
 
Item 1.
Financial Statements (unaudited)
1
       
   
Condensed Consolidated Balance Sheets as of September 30, 2011
 
   
and December 31, 2010 (unaudited)
2
       
   
Condensed Consolidated Statements of Operations for the Three and Nine
 
   
Months Ended September 30, 2011 and 2010 (unaudited)
3
       
   
Condensed Consolidated Statement of Stockholders' Equity for
 
   
the Nine Months Ended September 30, 2011 (unaudited)
4
       
   
Condensed Consolidated Statements of Cash Flows for the Nine
 
   
Months Ended September 30, 2011 and 2010 (unaudited)
5
       
   
Notes to Condensed Consolidated Financial Statements (unaudited)
7 - 15
       
 
Item 2.
Management's Discussion and Analysis of
 
   
Financial Condition and Results of Operations
16 - 22
       
 
Item 3.
Quantitative and Qualitative Disclosures About
 
   
Market Risk
23
       
 
Item 4.
Controls and Procedures
23
       
Part II
 
Other Information
 
       
 
Item 1.
Legal Proceedings
23
       
 
Item 6.
Exhibits
25
       
 
Signatures
 
26
       

 
 

 

PART I.                      Financial Information

Item 1.                      Financial Statements (Unaudited)

Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  The following condensed consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results for the entire fiscal year or for any other period.

 
 
-1-

 


BEL FUSE INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands, except share and per share data)
 
(Unaudited)
 
             
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 96,503     $ 83,829  
Marketable securities
    5,745       1,706  
Accounts receivable - less allowance for doubtful accounts of $789
               
  and $653 at September 30, 2011 and December 31, 2010, respectively
    45,891       53,312  
Inventories
    54,158       56,970  
Prepaid expenses and other current assets
    4,635       2,354  
Refundable income taxes
    2,211       4,370  
Deferred income taxes
    1,552       1,023  
    Total Current Assets
    210,695       203,564  
                 
Property, plant and equipment - net
    41,042       44,793  
Restricted cash
    -       155  
Deferred income taxes
    2,746       3,201  
Intangible assets - net
    11,001       11,291  
Goodwill
    4,297       4,264  
Other assets
    9,337       9,904  
    TOTAL ASSETS
  $ 279,118     $ 277,172  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 18,740     $ 21,180  
Accrued expenses
    23,823       22,545  
Accrued restructuring costs
    160       160  
Income taxes payable
    632       1,584  
Dividends payable
    856       799  
    Total Current Liabilities
    44,211       46,268  
                 
Long-term Liabilities:
               
Accrued restructuring costs
    224       347  
Liability for uncertain tax positions
    4,053       2,874  
Minimum pension obligation and unfunded pension liability
    8,043       7,350  
    Total Long-term Liabilities
    12,320       10,571  
    Total Liabilities
    56,531       56,839  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity:
               
Preferred stock, no par value, 1,000,000 shares authorized; none issued
    -       -  
Class A common stock, par value $.10 per share, 10,000,000 shares
               
    authorized; 2,174,912 shares outstanding at each date (net of
               
    1,072,769 treasury shares)
    217       217  
Class B common stock, par value $.10 per share, 30,000,000 shares
               
     authorized; 9,641,443 and 9,527,343 shares outstanding, respectively
               
     (net of 3,218,307 treasury shares)
    965       953  
Additional paid-in capital
    24,902       23,725  
Retained earnings
    196,765       195,477  
Accumulated other comprehensive loss
    (262 )     (39 )
    Total Stockholders' Equity
    222,587       220,333  
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 279,118     $ 277,172  
                 
See notes to unaudited condensed consolidated financial statements.
 

 
-2-

 


BEL FUSE INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(dollars in thousands, except share and per share data)
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net Sales
  $ 75,903     $ 85,041     $ 226,479     $ 218,842  
                                 
Costs and expenses:
                               
Cost of sales
    63,865       64,797       186,365       173,524  
Selling, general and administrative
    9,856       11,181       30,327       30,642  
Litigation charges
    247       -       3,471       -  
(Gain) loss on sale of property, plant and equipment
    (3 )     (388 )     4       (369 )
      73,965       75,590       220,167       203,797  
                                 
Income from operations
    1,938       9,451       6,312       15,045  
                                 
Gain on sale of investment
    -       -       119       -  
Interest income and other, net
    120       87       281       325  
                                 
Earnings before provision for (benefit from) income taxes
    2,058       9,538       6,712       15,370  
Provision for (benefit from) income taxes
    1,046       (463 )     3,030       699  
                                 
Net earnings
  $ 1,012     $ 10,001     $ 3,682     $ 14,671  
                                 
                                 
Earnings per share:
                               
Class A common share - basic and diluted
  $ 0.08     $ 0.82     $ 0.29     $ 1.19  
Class B common share - basic and diluted
  $ 0.09     $ 0.86     $ 0.32     $ 1.27  
                                 
Weighted-average shares outstanding:
                               
Class A common share - basic and diluted
    2,174,912       2,174,912       2,174,912       2,174,912  
Class B common share - basic and diluted
    9,643,641       9,528,303       9,584,444       9,496,367  
                                 
Dividends paid per share:
                               
Class A common share
  $ 0.06     $ 0.06     $ 0.18     $ 0.18  
Class B common share
  $ 0.07     $ 0.07     $ 0.21     $ 0.21  
                                 
                                 
See notes to unaudited condensed consolidated financial statements.
 


 
-3-

 


BEL FUSE INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
(dollars in thousands)
 
(Unaudited)
 
         
 
         
Accumulated
               
Additional
 
                     
Other
   
Class A
   
Class B
   
Paid-In
 
         
Comprehensive
   
Retained
   
Comprehensive
   
Common
   
Common
   
Capital
 
   
Total
   
Income
   
Earnings
   
Loss
   
Stock
   
Stock
   
(APIC)
 
 
                                         
Balance, January 1, 2011
  $ 220,333           $ 195,477     $ (39 )   $ 217     $ 953     $ 23,725  
                                                       
Cash dividends declared on Class A common stock
    (391 )           (391 )                                
Cash dividends declared on Class B common stock
    (2,003 )           (2,003 )                                
Issuance of restricted common stock
    -                                     13       (13 )
Termination of restricted common stock
    -                                     (1 )     1  
Currency translation adjustment
    350     $ 350               350                          
Unrealized holding losses on marketable securities
                                                       
   arising during the year, net of taxes of ($305)
    (499 )     (499 )             (499 )                        
Reclassification adjustment for gains included
                                                       
   in net earnings, net of taxes of ($45)
    (74 )     (74 )             (74 )                        
Reduction in APIC pool associated with tax
                                                       
   deficiencies related to restricted stock awards
    (86 )                                             (86 )
Stock-based compensation expense
    1,275                                               1,275  
Net earnings
    3,682       3,682       3,682                                  
      Comprehensive income
          $ 3,459                                          
                                                         
Balance, September 30, 2011
  $ 222,587             $ 196,765     $ (262 )   $ 217     $ 965     $ 24,902  
                                                         
                                                         
See notes to unaudited condensed consolidated financial statements.
 

 
-4-

 


BEL FUSE INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(dollars in thousands)
 
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net earnings
  $ 3,682     $ 14,671  
Adjustments to reconcile net earnings to net
               
 cash provided by (used in) operating activities:
               
Depreciation and amortization
    6,448       6,486  
Stock-based compensation
    1,275       1,774  
Realized gain on sale of investment
    (119 )     -  
Loss (gain) on sale of property, plant and equipment
    4       (369 )
Other, net
    886       220  
Deferred income taxes
    180       601  
Changes in operating assets and liabilities (see below)
    9,365       (24,663 )
      Net Cash Provided by (Used in) Operating Activities
    21,721       (1,280 )
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (2,196 )     (1,536 )
Purchase of marketable securities
    (5,128 )     (1,191 )
Cash transferred from restricted cash
    162       -  
Purchase of company-owned life insurance
    -       (1,571 )
Payment for acquisition, net of cash acquired
    -       (40,424 )
Proceeds from sale of marketable securities
    433       -  
Proceeds from sale of property, plant and equipment
    10       586  
       Net Cash Used in Investing Activities
    (6,719 )     (44,136 )
                 
Cash flows from financing activities:
               
Dividends paid to common shareholders
    (2,336 )     (2,324 )
       Net Cash Used In Financing Activities
    (2,336 )     (2,324 )
                 
Effect of exchange rate changes on cash
    8       (17 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    12,674       (47,757 )
Cash and Cash Equivalents - beginning of period
    83,829       124,231  
Cash and Cash Equivalents - end of period
  $ 96,503     $ 76,474  
                 
(Continued)
 
See notes to unaudited condensed consolidated financial statements.
 

 
-5-

 


BEL FUSE INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(dollars in thousands)
 
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
             
Changes in operating assets and liabilities consist of:
           
Decrease (increase) in accounts receivable
  $ 7,568     $ (13,930 )
Decrease (increase) in inventories
    2,924       (17,901 )
Increase in prepaid expenses and other current assets
    (2,275 )     (681 )
Decrease in other assets
    1       10  
(Decrease) increase in accounts payable
    (2,442 )     3,660  
Increase in accrued expenses
    1,330       5,515  
Cash payments of accrued restructuring costs
    (123 )     (119 )
Increase (decrease) in income taxes payable
    2,382       (1,217 )
    $ 9,365     $ (24,663 )
                 
Supplementary information:
               
Cash paid during the period for:
               
    Income taxes, net of refunds received
  $ 490     $ 1,375  
    Interest
    -       14  
                 
Details of acquisition:
               
   Fair value of identifiable net assets acquired
  $ -     $ 38,132  
   Goodwill
    -       2,349  
       Fair value of net assets acquired
  $ -     $ 40,481  
                 
   Fair value of consideration transferred
  $ -     $ 40,481  
   Less: Cash acquired in acquisition
    -       (57 )
      Cash paid for acquisition, net of cash acquired
  $ -     $ 40,424  
See notes to unaudited condensed consolidated financial statements.
 

 
-6-

 

BEL FUSE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 

The condensed consolidated balance sheet as of September 30, 2011, and the condensed consolidated statements of operations, stockholders' equity and cash flows for the periods presented herein have been prepared by Bel Fuse Inc. (the "Company" or "Bel") and are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position, results of operations, changes in stockholders' equity and cash flows for all periods presented have been made.  The results for the three and nine months ended September 30, 2011 should not be viewed as indicative of the Company’s annual results or the Company’s results for any other period.  The information for the condensed consolidated balance sheet as of December 31, 2010 was derived from audited financial statements.  These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Bel Fuse Annual Report on Form 10-K for the year ended December 31, 2010.

On January 29, 2010, the Company completed its acquisition of 100% of the issued and outstanding capital stock of Cinch Connectors, Inc. (“Cinch U.S.”), Cinch Connectors de Mexico, S.A. de C.V. (“Cinch Mexico”) and Cinch Connectors Ltd. (“Cinch Europe”) (collectively “Cinch”) from Safran S.A.  Accordingly, as of January 29, 2010, all of the assets acquired and liabilities assumed were recorded at their fair values and the Company’s condensed consolidated results of operations for the nine months ended September 30, 2010 include Cinch’s operating results from January 29, 2010 through September 30, 2010.  In accordance with the accounting guidance for business combinations, the results of operations and cash flows for the three and nine months ended September 30, 2010 have been adjusted retrospectively to reflect measurement period adjustments as if they had been recorded on the date of acquisition.  The measurement period adjustments did not have a significant impact on our condensed consolidated statement of operations or cash flows for the three or nine months ended September 30, 2010.

Recent Accounting Pronouncements

The Company’s significant accounting policies are summarized in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  There were no significant changes to these accounting policies during the nine months ended September 30, 2011.  Recent accounting pronouncements that will impact future periods are as follows:

Accounting Standards Update No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”)
 
ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This ASU requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The Company will implement the provisions of ASU 2011-05 by presenting the components of net income and other comprehensive income in two separate but consecutive financial statements beginning in the first quarter of 2012.
 
Accounting Standards Update No. 2011-08 – Testing Goodwill for Impairment (Topic 350): Intangibles—Goodwill and Other (“ASU No. 2011-08”)
 
ASU No. 2011-08 updates existing guidance regarding testing of goodwill for impairment. This ASU gives entities the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective during the first quarter of 2012, with early adoption permitted. The adoption of this standard during the first quarter of 2012 is not expected to have a material impact on the Company’s results of operations or financial condition.

2.  
EARNINGS PER SHARE

The Company utilizes the two-class method to report its earnings per share.  The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings.  The Company’s Certificate of Incorporation, as amended, states that Class B common shares are entitled to dividends at least 5% greater than dividends paid on Class A common shares, resulting in the two-class method of computing earnings per share.  In computing earnings per share, the Company has allocated dividends declared to Class A and Class B based on amounts actually declared for each class of stock and 5% more of the undistributed earnings has been allocated to Class B shares than to the Class A shares on a per share basis.  Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the period.  Diluted earnings per common share, for each class of common stock, are computed by dividing net earnings by the weighted-average number of common shares and potential common shares outstanding during the period.  There were no potential common shares outstanding during the three or nine months ended September 30, 2011 or 2010 which would have had a dilutive effect on earnings per share.
 
 
 
-7-

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Numerator:
                       
Net earnings
  $ 1,012     $ 10,001     $ 3,682     $ 14,671  
Less Dividends:
                               
     Class A
    130       130       391       391  
     Class B
    670       667       2,003       1,998  
Undistributed earnings
  $ 212     $ 9,204     $ 1,288     $ 12,282  
                                 
Undistributed earnings allocation - basic and diluted:
                               
     Class A undistributed earnings
  $ 37     $ 1,644     $ 229     $ 2,199  
     Class B undistributed earnings
    175       7,560       1,059       10,083  
     Total undistributed earnings
  $ 212     $ 9,204     $ 1,288     $ 12,282  
                                 
Net earnings allocation - basic and diluted:
                               
     Class A allocated earnings
  $ 167     $ 1,774     $ 620     $ 2,590  
     Class B allocated earnings
    845       8,227       3,062       12,081  
     Net earnings
  $ 1,012     $ 10,001     $ 3,682     $ 14,671  
                                 
Denominator:
                               
Weighted-average shares outstanding:
                               
     Class A common share - basic and diluted
    2,174,912       2,174,912       2,174,912       2,174,912  
     Class B common share - basic and diluted
    9,643,641       9,528,303       9,584,444       9,496,367  
                                 
Earnings per share:
                               
     Class A common share - basic and diluted
  $ 0.08     $ 0.82     $ 0.29     $ 1.19  
     Class B common share - basic and diluted
  $ 0.09     $ 0.86     $ 0.32     $ 1.27  
                                 



3.           ACQUISITION

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

Cinch manufactures a broad range of interconnect products for customers in the military and aerospace, high-performance computing, telecom/datacom, and transportation markets.  The addition of Cinch’s well-established lines of connector and cable products and extensive clientele has enabled Bel to broaden its customer base to include aerospace and military markets.  The acquisition of Cinch has also created the opportunity for expense reduction and the elimination of redundancies.  The combination of these factors has given rise to $2.3 million of goodwill ($1.2 million allocated to the Company’s North America operating segment and $1.1 million allocated to the Company’s Europe operating segment).

During the three and nine months ended September 30, 2010, the Company expensed $0 and $0.3 million, respectively, of acquisition-related costs.  These costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

 
 
-8-

 
Cinch’s results of operations have been included in the Company’s condensed consolidated financial statements for the period subsequent to the Acquisition Date.  Cinch contributed revenues of $40.3 million and estimated net earnings of $1.9 million to the Company for the period from the Acquisition Date through September 30, 2010.  The unaudited pro forma information presents the combined operating results of the Company and Cinch.  The following unaudited pro forma consolidated results of operations assume that the acquisition of Cinch was completed as of January 1, 2010 (in thousands):


   
Nine Months Ended
 
   
September 30, 2010
 
       
Revenue
  $ 222,511  
Net earnings
    14,550  
Earnings per Class A common share - basic and diluted
    1.18  
Earnings per Class B common share - basic and diluted
    1.26  


  
4.   FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date.  Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  There are three levels of inputs that may be used to measure fair value:

Level 1 – Observable inputs such as quoted market prices in active markets

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable
 
Level 3 – Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions
 
As of September 30, 2011 and December 31, 2010, the Company held certain financial assets that are measured at fair value on a recurring basis.  These consisted of the Company’s investments in a Rabbi Trust, which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations, and other marketable securities described below.  These are categorized as available-for-sale securities and are included as other assets in the accompanying condensed consolidated balance sheets at September 30, 2011 and December 31, 2010.

During 2010, the Company purchased equity securities at a purchase price of $1.2 million.  During the nine months ended September 30, 2011, the Company purchased additional marketable equity securities at a purchase price of $0.1 million and invested $5.0 million in a mutual fund categorized as a fixed income available-for-sale marketable security.  As of September 30, 2011 and December 31, 2010, these marketable securities had a combined fair value of $5.7 million and $1.7 million, respectively, and gross unrealized (losses) gains of ($0.3) million and $0.5 million, respectively.  Such unrealized (losses) gains are included, net of tax, in accumulated other comprehensive loss.  The fair value of the equity securities is determined based on quoted market prices in public markets and is categorized as Level 1.  The fair value of the fixed income securities is determined based on other observable inputs, and are therefore categorized as Level 2 in the table below.  The Company does not have any financial assets measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2011 and 2010.  There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the nine months ended September 30, 2011.

 
-9-

 
The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (dollars in thousands).

         
Assets at Fair Value Using
 
   
Total
   
Quoted Prices in Active Markets for Identical Assets 
(Level 1)
   
Significant Other Observable Inputs 
(Level 2)
   
Significant Unobservable Inputs 
(Level 3)
 
As of September 30, 2011
                       
Available-for-sale securities:
                       
   Investments held in Rabbi Trust
  $ 5,777     $ 5,777     $ -     $ -  
   Marketable securities:
                               
        Publicly-traded equity securities
    741       741       -       -  
        Fixed income securities
    5,004       -       5,004       -  
                                 
   Total
  $ 11,522     $ 6,518     $ 5,004     $ -  
                                 
As of December 31, 2010
                               
Available-for-sale securities:
                               
   Investments held in Rabbi Trust
  $ 5,924     $ 5,924     $ -     $ -  
   Marketable securities:
                               
        Publicly-traded equity securities
    1,706       1,706       -       -  
                                 
   Total
  $ 7,630     $ 7,630     $ -     $ -  
                                 


The Level 2 fixed income securities noted in the table above represent the Company’s investment in a fund that consists of debt securities (bonds), primarily U.S. government securities, corporate bonds, asset-backed securities and mortgage-backed securities.  The value of the fund is determined based on quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data.

The Company has other financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued expenses, which are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature.  The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of September 30, 2011 or December 31, 2010.

Nonfinancial assets and liabilities, such as goodwill, indefinite-lived intangible assets and long-lived assets, are accounted for at fair value on a nonrecurring basis.   These items are tested for impairment on the occurrence of a triggering event or, in the case of goodwill and indefinite-lived intangible assets, on at least an annual basis.  There were no triggering events that occurred during the nine months ended September 30, 2011 or 2010 that would warrant interim impairment testing.

5.           INVENTORIES

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

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Raw materials
  $ 32,180     $ 35,157  
Work in progress
    6,943       5,930  
Finished goods
    15,035       15,883  
    $ 54,158     $ 56,970  
                 

 
-10-

 

6.            BUSINESS SEGMENT INFORMATION

The Company operates in one industry with three reportable operating segments, which are geographic in nature.  The segments consist of North America, Asia and Europe.  The primary criteria by which financial performance is evaluated and resources are allocated are sales and income from operations.  The following is a summary of key financial data (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total segment sales:
                       
     North America
  $ 37,842     $ 34,214     $ 113,195     $ 89,991  
     Asia
    46,501       55,660       136,638       140,381  
     Europe
    8,577       9,591       26,742       26,560  
Total segment sales
    92,920       99,465       276,575       256,932  
Reconciling item:
                               
     Intersegment sales
    (17,017 )     (14,424 )     (50,096 )     (38,090 )
Net sales
  $ 75,903     $ 85,041     $ 226,479     $ 218,842  
                                 
Income (loss) from operations:
                               
     North America
  $ 1,785     $ 925     $ 6,061     $ 2,023  
     Asia
    (143 )     7,691       (1,272 )     11,935  
     Europe
    296       835       1,523       1,087  
    $ 1,938     $ 9,451     $ 6,312     $ 15,045  
                                 


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

Litigation Charges – During the three and nine months ended September 30, 2011, the Company recorded $0.2 million and $3.5 million, respectively, of litigation charges related to ongoing lawsuits, as further described in Note 11.  These charges primarily impacted the Company’s Asia operating segment.

Cinch Acquisition – Sales for the nine months ended September 30, 2010 include Cinch results after January 29, 2010.  Cinch’s January 2011 revenue accounted for $5.5 million of the increase in Bel’s total net sales for the first nine months of 2011.  Cinch sales relate primarily to the North America operating segment and to a lesser extent in the Europe operating segment.

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

7.            INCOME TAXES

As of September 30, 2011 and December 31, 2010, the Company has approximately $4.1 million and $3.8 million, respectively, of liabilities for uncertain tax positions ($0 and $0.9 million, respectively, included in income taxes payable and $4.1 million and $2.9 million, respectively, included in liability for uncertain tax positions) all of which, if reversed, would reduce the Company’s effective tax rate.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions.  The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2007 and for state examinations before 2005.   Regarding foreign subsidiaries, the Company is no longer subject to examination by tax authorities for years before 2003 in Asia and generally 2005 in Europe.  During September 2010 and April 2011, the Company was notified of an Internal Revenue Service (“IRS”) tax audit for the years ended December 31, 2004 through 2009.  The Company believes the audit is a result of various carryback claims to the years ended December 31, 2004, 2005 and 2006.  As the statute of limitations for the years 2004, 2005 and 2006 has expired, any tax adjustment proposed by the IRS for these years would be limited to the amount of the carryback claims of approximately $2.5 million.

As a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized benefits for tax positions taken regarding previously filed tax returns may change materially from those recorded as liabilities for uncertain tax positions in the Company’s condensed consolidated financial statements.  At September 30, 2011, a total of $1.0 million of previously recorded liabilities for uncertain tax positions relates to the 2007 tax year.  The statute of limitations related to this liability, which was scheduled to expire on September 15, 2011, was extended until the conclusion of the IRS audit discussed above.

 
-11-

 
The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of the current provision for income taxes.  During the nine months ended September 30, 2011 and 2010, the Company recognized $0.2 million and $0.1 million, respectively, in interest and penalties in the condensed consolidated statements of operations.  The Company has approximately $0.6 million and $0.4 million accrued for the payment of interest and penalties at September 30, 2011 and December 31, 2010, respectively, which is included in both income taxes payable and liability for uncertain tax positions in the condensed consolidated balance sheets.

In connection with the Cinch acquisition, the Company acquired certain tax assets and liabilities.  Cinch Europe had net operating loss and capital loss carryforwards in the amounts of $0.6 million and $0.2 million, respectively, as of the acquisition date.  The related tax benefits were $0.2 million and $0.1 million, respectively.  The capital loss carryforward was acquired with a valuation allowance, which the Company maintained at September 30, 2011.  During the year ended December 31, 2010, the entire $0.6 million net operating loss was utilized.  Additionally, Cinch Europe had a deferred tax liability in the amount of $0.1 million for various timing differences and $0.1 million in refundable income taxes.  At the time of the acquisition, Cinch U.S. had a deferred tax asset in the amount of $0.1 million relating to vacation accruals.  Cinch Mexico was acquired with a refundable income tax in the amount of $0.1 million, which was applied to current year income tax for 2010.  The Company has received a fair market value report of property, plant and equipment, and intangibles related to Cinch Europe and Cinch Mexico which resulted in the establishment of deferred tax liabilities at the date of acquisition in the amounts of $0.4 million and an immaterial amount, respectively. At September 30, 2011, a deferred tax liability of $0.3 million remains on the condensed consolidated balance sheet.  None of the reversals of the deferred tax asset or deferred tax liabilities or use of NOL carryforwards acquired from the Cinch acquisition will impact the condensed consolidated statement of operations.

The Company has made an election under IRC Section 338(h)(10) to step-up the tax basis of the Cinch U.S. assets and IRC Section 338(g) to step-up the tax basis of assets for the Cinch Mexico and Cinch U.K. entities acquired to fair value.  The elections made under Section 338(h)(10) and Section 338(g) only affect U.S. income taxes (not those of the foreign countries where non-U.S. Cinch entities are incorporated).

On August 10, 2010, President Obama signed into law the “Education Jobs & Medicaid Assistance Act” (H.R. 1586) (the “Act”).  The Act’s international tax provisions place certain restrictions on the use of foreign tax credits.  The Company has evaluated the newly-enacted international tax provisions and determined that they do not materially affect the Company’s operating results or financial condition.
 
The Company continues to monitor proposed legislation affecting the taxation of transfers of U.S. intangible property and other potential tax law changes.

8.           ACCRUED EXPENSES

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

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Sales commissions
  $ 1,461     $ 1,740  
Subcontracting labor
    2,213       2,467  
Salaries, bonuses and related benefits
    5,687       7,405  
Litigation reserve
    11,346       8,103  
Other
    3,116       2,830  
    $ 23,823     $ 22,545  
                 

 
-12-

 
Accrued Restructuring Costs

Activity and liability balances related to restructuring charges for the nine months ended September 30, 2011 are as follows (these charges are associated with the 2008 closure of the Company’s facility in Westborough, Massachusetts):

   
Liability at
   
New
   
Cash Payments &
   
Liability at
 
   
December 31, 2010
   
Charges
   
Other Settlements
   
September 30, 2011
 
Facility lease obligation
  $ 507     $ -     $ (123 )   $ 384  
                                 

The Company has included the current portion of $0.2 million in accrued restructuring costs in the condensed consolidated balance sheet at September 30, 2011, and has classified the remaining $0.2 million of the liability related to the facility lease obligation as noncurrent.
 

 
9.           RETIREMENT FUND AND PROFIT SHARING PLAN

The Company maintains a domestic 401(k) plan, which consists of profit sharing, contributory stock ownership and individual voluntary savings to provide non-defined retirement benefits for plan participants.  The expense for the three months ended September 30, 2011 and 2010 amounted to approximately $0.3 million and $0.2 million, respectively.  The expense for the nine months ended September 30, 2011 and 2010 amounted to approximately $0.7 million and $0.4 million, respectively.  As of September 30, 2011, the plans owned 15,926 and 238,599 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The Company’s subsidiaries in Asia have a non-defined retirement fund covering substantially all of their Hong Kong-based full-time employees.  The expense for the three months ended September 30, 2011 and 2010 amounted to approximately $0.1 million in each period and the expense for the nine months ended September 30, 2011 and 2010 amounted to approximately $0.2 million in each period. As of September 30, 2011, the plan owned 3,323 and 17,342 shares of Bel Fuse Inc. Class A and Class B common stock, respectively.

The SERP is designed to provide a limited group of key management and highly compensated employees of the Company with supplemental retirement and death benefits.

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

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service cost
  $ 93     $ 85     $ 279     $ 255  
Interest cost
    101       84       303       252  
Amortization of adjustments
    37       33       111       99  
Total SERP expense
  $ 231     $ 202     $ 693     $ 606  
                                 

 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Balance sheet amounts:
           
   Minimum pension obligation
           
      and unfunded pension liability
  $ 8,043     $ 7,350  
                 
   Amounts recognized in accumulated
               
      other comprehensive loss, pretax:
               
         Prior service cost
  $ 1,143     $ 1,143  
         Net gains
    932       932  
    $ 2,075     $ 2,075  
                 

 
 
-13-

 
10.           COMPREHENSIVE INCOME
 
Comprehensive income for the three and nine months ended September 30, 2011 and 2010 consists of the following (dollars in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net earnings
  $ 1,012     $ 10,001     $ 3,682     $ 14,671  
Currency translation adjustment
    (588 )     1,072       350       (383 )
Reclassification adjustment for gains
                               
   included in net earnings, net of taxes
    -       -       (74 )     -  
(Decrease) increase in unrealized gain on
                               
   marketable securities, net of taxes
    (380 )     195       (499 )     236  
                                 
Comprehensive income
  $ 44     $ 11,268     $ 3,459     $ 14,524  
                                 

 

The components of accumulated other comprehensive loss as of September 30, 2011 and December 31, 2010 are summarized below (dollars in thousands):

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Currency translation adjustment
  $ 1,232     $ 882  
Unrealized holding (losses) gains on available-for-sale
               
  securities, net of taxes of ($29) and $322 as of
               
  September 30, 2011 and December 31, 2010
    (54 )     519  
Unfunded SERP liability, net of taxes of ($635) as
               
  of both September 30, 2011 and December 31, 2010
    (1,440 )     (1,440 )
                 
Accumulated other comprehensive loss
  $ (262 )   $ (39 )
                 


11.           LEGAL PROCEEDINGS

The Company is, from time to time, a party to litigation arising in the normal course of its business, including various claims of patent infringement.  See the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for the details of Bel’s material pending lawsuits.  Updates to pending litigation since the Company’s Form 10-K filing are described below.

The Company is a defendant in a lawsuit captioned SynQor, Inc. v. Artesyn Technologies, Inc., et al. brought in the United States District Court, Eastern District of Texas in November 2007.The plaintiff alleged that eleven defendants, including Bel, infringed its patents covering certain power products. With respect to the Company, the plaintiff claimed that the Company infringed its patents related to unregulated bus converters and/or point-of-load (POL) converters used in intermediate bus architecture power supply systems. The case went to trial in December 2010 and a partial judgment was entered on December 29, 2010 based on the jury verdict.  The jury found that certain products of the defendants directly and/or indirectly infringe the SynQor patents.  The jury awarded damages of $8.1 million against the Company, which was recorded by the Company as a litigation charge in the statement of operations in the fourth quarter of 2010.  On July 11, 2011, the Court awarded supplemental damages of $2.5 million against the Company.  Of this amount, $1.9 million is covered through an indemnification agreement with one of Bel’s customers and the remaining $0.6 million was recorded as an expense by the Company during the second quarter of 2011.  During the third quarter of 2011, the Company recorded costs and interest associated with this lawsuit of $0.2 million.  A final judgment in the case was entered on August 17, 2011.  The Company is in the process of appealing the verdict and judgment and filed a notice of appeal with the Federal Circuit Court of Appeals on October 28, 2011.  The Company was advised that the full amount of the damage award plus costs and interest would need to be posted as a supersedeas bond upon filing of the notice of appeal.  In November 2011, the Company posted a $13.0 million supersedeas bond to the Court in the Eastern District of Texas while the case is on appeal to the Federal Circuit.

In a related matter, on September 29, 2011, the United States District Court for the Eastern District of Texas ordered SynQor, Inc.’s continuing causes of action for post-injunction damages to be severed from the original action and assigned to a new case number.  The new action captioned SynQor, Inc. v. Artesyn Technologies, Inc., et al. (Case Number 2:11cv444) is a patent infringement action for damages in the form of lost profits and reasonable royalties for the period starting January 24, 2011.  SynQor, Inc. also seeks enhanced damages.  The Company has an indemnification agreement in place with one of its customers specifically covering post-injunction damages related to this case.  As a result, the Company does not anticipate that its consolidated statement of operations will be materially impacted by any potential post-injunction damages.

 
-14-

 
The Company was a defendant in a lawsuit captioned Halo Electronics, Inc. (“Halo”) v. Bel Fuse Inc., Pulse Engineering, Inc. and Technitrol, Inc. brought in Nevada Federal District Court.  The plaintiff claimed that the Company had infringed its patents covering certain surface mount discrete magnetic products made by the Company.  Halo sought unspecified damages, which it claimed should be trebled.  In December 2007, this case was dismissed by the Nevada Federal District Court for lack of personal jurisdiction. Halo then re-filed this suit, with similar claims against the Company, in the Northern California Federal District Court, captioned Halo Electronics, Inc. v. Bel Fuse Inc., Elec & Eltek (USA) Corporation, Wurth Electronics Midcom, Inc., and Xfmrs, Inc.  In August 2011, a settlement agreement was signed by the Company and Halo with regard to this lawsuit, whereby the Company has agreed to pay Halo a royalty on past sales.  The Company recorded a $2.6 million liability related to past sales during the second quarter of 2011.  This is included as a litigation charge in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2011.  Bel has also agreed to take a license with respect to the Halo patents at issue in the lawsuit and pay an 8% royalty on all net worldwide sales of the above-mentioned products from June 7, 2011 through August 10, 2015.

The Company was a plaintiff in a lawsuit captioned Bel Fuse Inc. v. Halo Electronics, Inc. brought in the United States District Court of New Jersey during June 2007.  The Company claimed that Halo infringed a patent covering certain integrated connector modules made by Halo.  The Company was seeking an unspecified amount of damages plus interest, costs and attorney fees.  In August 2011, a settlement agreement was signed by the Company and Halo with regard to this lawsuit, whereby Halo has agreed to pay the Company a 10% royalty related to its net worldwide sales of its integrated connector modules in exchange for a fully paid-up license of the Bel patent.  This royalty income has been included in net sales in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2011.

12.           RELATED PARTY TRANSACTIONS

As of September 30, 2011, the Company has $2.0 million invested in a money market fund with GAMCO Investors, Inc., a current stockholder of the Company, with holdings of its Class A stock of approximately 31.6%.

 
-15-

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
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, 2010. 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, 2010, which could cause actual results to differ materially from these Forward-Looking Statements.  The Company undertakes no obligation to publicly release the results of any revisions to these Forward-Looking Statements which may be necessary to reflect events or circumstances after the date such statements are made or to reflect the occurrence of unanticipated events.  An investment in the Company involves various risks, including those which are detailed from time to time in the Company’s SEC filings.
 
 
Overview

Our Company

Bel is a leading producer of electronic products that help make global connectivity a reality. The Company designs, manufactures and markets a broad array of magnetics, modules, circuit protection devices and interconnect products.  These products are designed to protect, regulate, connect, isolate or manage a variety of electronic circuits.  Bel’s products are primarily used in the networking, telecommunications, computing, military, aerospace and transportation industries.  Bel’s portfolio of products also finds application in the automotive, medical and consumer electronics markets.

Bel’s business is operated through three geographic segments:  North America, Asia and Europe.  During the nine months ended September 30, 2011, 44% of the Company’s revenues were derived from Asia, 45% from North America and 11% from its Europe operating segment.  Sales of the Company’s interconnect products represented approximately ­­37% of our total net sales for the nine months ended September 30, 2011.  The remaining revenues related to sales of the Company’s module products (31%), magnetic products (29%) and circuit protection products (3%).

The Company’s expenses are driven principally by the cost of labor where Bel’s factories are located, the cost of the materials that it uses and its ability to efficiently manage overhead costs.  As labor and material costs vary by product line, any significant shift in product mix has an associated impact on the Company’s costs of sales.  Costs are recorded as incurred for all products manufactured.  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; Haina, Dominican Republic; Reynosa and Cananea, Mexico; Louny, Czech Republic; Vinita, Oklahoma; and Worksop, England.

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.

 
-16-

 
Trends Affecting our Business

The Company believes the key factors affecting Bel’s nine months ended September 30, 2011 and/or future results include the following:

·  
Revenues – With the rebound of market conditions in 2010, the Company experienced record sales during the third and fourth quarters of 2010, as Bel worked to bring its backlog of orders down to a more typical level.  As the backlog has stabilized, the surge in sales volume that occurred during the latter part of 2010 did not continue into 2011 and is not expected to recur during the fourth quarter of 2011.

·  
Product Mix – Sales of the Company’s module products increased from 18% of total sales during the third quarter of 2010 to 31% of total sales during the third quarter of 2011.  Module products have a higher material and lower added-value content than the Company’s other product lines.  As a result, these products will not have as high a margin as Bel's other products.  The Company anticipates that its module product line will continue to grow and will make an increased contribution to the Company's revenue and profits in future periods.

·  
Pricing and Availability of Materials – While the Company has seen component pricing and availability stabilize for most of Bel’s product lines, the Company continues to experience some component shortages in its module product line which limits Bel’s ability to deliver its DC-DC products.  Although there has recently been some moderation in commodity prices, higher costs for commodities including gold, copper, and petroleum-based plastics continue to keep manufacturing costs high in comparison to the prior year.  Fluctuations in component prices and other commodity prices associated with Bel’s raw materials will have a corresponding impact on Bel’s profit margins.  The Company is currently monitoring the supply chain flow for all products potentially affected by recent floods in Thailand and is in the process of locating alternative sources for any potentially impacted components.

·  
Labor Costs – The costs of labor, particularly in the PRC where a significant percentage of Bel’s products are manufactured, have been higher in recent years as a result of government mandates for new higher minimum wage and overtime requirements.  The PRC government increased minimum wage levels by 21% in the areas where Bel’s products are manufactured effective May 1, 2010.  While Bel has implemented price increases to its customers during 2010 to partially offset the existing increases in labor and material costs, there was an additional government mandate effective March 2011 which increased the minimum wage level by 18% at certain of Bel’s facilities in the PRC. The Company believes that this increase and any additional increases to the minimum wage levels will have a negative impact on Bel’s profit margins in future quarters.

·  
Management of Overhead Costs – The Company has continued to monitor its overall profit margin percentage over the past several quarters and is currently realigning its organization to reduce overhead and other costs.  The Company expects to publicly announce its plan, including the anticipated costs and savings associated with it, as part of its fourth quarter earnings report. Future profit margins will be dependent in part upon Bel’s ability to effectively control overhead costs without adversely impacting productivity.

·  
Impact of Pending Lawsuits – As further described in the Company’s Annual Report on Form 10-K and as updated in Item 1. Legal Proceedings of Part II of this quarterly report, the Company is involved in several ongoing lawsuits related to patent infringement claims.  A $2.6 million litigation charge related to the Halo lawsuit and a $0.6 million litigation charge related to the SynQor lawsuit were recorded during the second quarter of 2011.  During the third quarter of 2011, the Company recorded $0.2 million in costs and interest related to the SynQor lawsuit. The Company is currently appealing the verdict in the SynQor case; however, if the Company is unsuccessful in its appeal, sales of certain of the Company’s existing products may be adversely affected.  This would result in decreased sales volume and would have a corresponding impact on the Company’s gross profit.

·  
Acquisition-Related Costs – Bel’s continuing strategy to actively consider potential acquisitions could give rise to significant legal and professional costs in future periods.

Bel is expecting business conditions to remain challenging into 2012.  The Company anticipates very modest growth overall in 2012, with continued pricing pressures from its customers.

 
-17-

 
Summary by Reportable Operating Segment

Net sales to external customers by reportable operating segment for the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
    North America
  $ 34,298       45 %   $ 30,522       36 %   $ 102,229       45 %   $ 79,014       36 %
    Asia
    33,308       44 %     45,251       53 %     98,484       44 %     114,112       52 %
    Europe
    8,297       11 %     9,268       11 %     25,766       11 %     25,716       12 %
    $ 75,903       100 %   $ 85,041       100 %   $ 226,479       100 %   $ 218,842       100 %
                                                                 



Net sales and income (loss) from operations by reportable operating segment for the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total segment sales:
                       
     North America
  $ 37,842     $ 34,214     $ 113,195     $ 89,991  
     Asia
    46,501       55,660       136,638       140,381  
     Europe
    8,577       9,591       26,742       26,560  
Total segment sales
    92,920       99,465       276,575       256,932  
Reconciling item:
                               
     Intersegment sales
    (17,017 )     (14,424 )     (50,096 )     (38,090 )
Net sales
  $ 75,903     $ 85,041     $ 226,479     $ 218,842  
                                 
Income (loss) from operations:
                               
    North America
  $ 1,785     $ 925     $ 6,061     $ 2,023  
    Asia
    (143 )     7,691       (1,272 )     11,935  
    Europe
    296       835       1,523       1,087  
    $ 1,938     $ 9,451     $ 6,312     $ 15,045  
                                 



The significant shift in the proportion of net sales between the Company’s Asia and North America reportable operating segments during the nine months ended September 30, 2011 was primarily due to a $17.4 million increase in sales of a product line within the module product group which is manufactured in China but sold to third parties in North America, and a $26.6 million decrease in sales of magnetic products, which primarily impacted the Company’s Asia segment.  In addition, the Cinch acquisition brought in an additional $5.5 million in sales during the nine months ended September 30, 2011 as compared to the same period of 2010, primarily in the North America operating segment and to a lesser extent in the Europe operating segment.  The Company recorded $0.2 million and $3.5 million in litigation charges during the three and nine months ended September 30, 2011, respectively, which primarily impacted the Company’s Asia operating segment.  See Note 6 to the notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for additional segment discussion.

Overview of Financial Results

An increase of more than 50% in shipments of module products was more than offset by decreases in sales of Bel’s other product lines during the third quarter of 2011.  Because the module product line typically has higher material content than Bel’s other product lines, this shift in the mix of products sold reduced the third quarter gross margin percentage.  As a result of this and other factors, Bel’s sales decreased by $9.1 million or 10.7% during the third quarter of 2011 as compared to the third quarter of 2010, while cost of sales only decreased by 1.4% compared to last year’s third quarter.  The reduction in gross margin was partially offset by a $1.3 million reduction in selling, general and administrative expense.   Net earnings were $1.0 million for the third quarter of 2011.   Additional details related to these factors affecting the third quarter results are described in the Results of Operations section below.

 
-18-

 
During the nine months ended September 30, 2011, the Company experienced a $7.6 million (or 3.5%) increase in sales as compared to the same period of 2010, while cost of sales increased by 7.4% for the same period.  Of the increase in sales, $5.5 million related to the additional month of Cinch sales in 2011 as compared to only eight months in 2010.  The remaining increase related to the increase in sales of module products described above, largely offset by a decrease in sales within the magnetic group, which includes Bel’s MagJack products.  The first nine months of 2011 were impacted by lower margins resulting from the shift in product mix and $3.5 million of litigation charges, partially offset by reduced labor costs due to a smoother transition out of the Lunar New Year in 2011 as compared to 2010.  The Company reported net income of $3.7 million for the nine months ended September 30, 2011.  Additional details related to these factors affecting the nine-month results are described in the Results of Operations section below.

Critical Accounting Policies

The Company’s discussion and analysis of its 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, 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 Company’s significant accounting policies are summarized in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  There were no significant changes to these accounting policies during the nine months ended September 30, 2011. Recent accounting pronouncements that will impact future periods are as follows:

Accounting Standards Update No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”)
 
ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This ASU requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The Company will implement the provisions of ASU 2011-05 in the first quarter of 2012.

Accounting Standards Update No. 2011-08 – Testing Goodwill for Impairment (Topic 350): Intangibles—Goodwill and Other (“ASU No. 2011-08”)
 
ASU No. 2011-08 updates existing guidance regarding testing of goodwill for impairment. This ASU gives entities the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective during the first quarter of 2012, with early adoption permitted. The adoption of this standard during the first quarter of 2012 is not expected to have a material impact on the Company’s results of operations or financial condition.

 
-19-

 
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,
     
2011
 
2010
   
2011
 
2010
 
                       
Net sales
 
         100.0
 %
         100.0
 %
 
         100.0
 %
         100.0
 %
Cost of sales
 
           84.1
 
           76.2
   
           82.3
 
           79.3
 
Selling, general and administrative ("SG&A") expenses
 
           13.0
 
           13.1
   
           13.4
 
           14.0
 
Litigation charges
 
             0.3
 
               -
   
             1.5
 
               -
 
Gain on sale of property, plant and equipment
 
               -
 
             0.5
   
               -
 
             0.2
 
Gain on sale of investment
 
               -
 
               -
   
             0.1
 
               -
 
Interest income and other, net
 
             0.2
 
             0.1
   
             0.1
 
             0.1
 
Earnings before provision (benefit) for income taxes
 
             2.7
 
           11.2
   
             3.0
 
             7.0
 
Provision (benefit) for income taxes
 
             1.4
 
           (0.5)
   
             1.3
 
             0.3
 
Net earnings
 
             1.3
 
           11.8
   
             1.6
 
             6.7
 

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

   
Decrease from
 
Increase (Decrease) from
   
Prior Period
 
Prior Period
   
Three Months Ended
 
Nine Months Ended
   
September 30, 2011
 
September 30, 2011
   
Compared with
 
Compared with
   
Three Months Ended
 
Nine Months Ended
   
September 30, 2010
 
September 30, 2010
                 
Net sales
 
                       (10.7)
 %
   
                              3.5
 %
Cost of sales
 
                          (1.4)
     
                              7.4
 
SG&A expenses
 
                        (11.9)
     
                            (1.0)
 
Net earnings
 
                        (89.9)
     
                          (74.9)
 


Sales

Net sales decreased 10.7% from $85.0 million during the three months ended September 30, 2010 to $75.9 million during the three months ended September 30, 2011.  Net sales increased 3.5% from $218.8 million during the nine months ended September 30, 2010 to $226.5 million during the nine months ended September 30, 2011.  The Company’s net sales by major product line for the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interconnect products
  $ 27,204       36 %   $ 27,804       33 %   $ 83,004       37 %   $ 74,593       34 %
Module products
    23,186       31 %     15,434       18 %     69,592       31 %     41,900       19 %
Magnetic products
    23,024       30 %     37,963       45 %     65,698       29 %     92,317       42 %
Circuit protection products
    2,489       3 %     3,840       4 %     8,185       3 %     10,032       5 %
    $ 75,903       100 %   $ 85,041       100 %   $ 226,479       100 %   $ 218,842       100 %
                                                                 


The Company has seen a significant shift in product mix during the nine months ended September 30, 2011, primarily due to growth in Bel’s module product line in 2011, specifically in its smart grid and DC-DC converter modules, combined with a significant decrease in sales of its magnetic products due to a reduction in customer demand for these products in 2011.  The acquisition of Cinch in early 2010 has also contributed to the shift in product mix, as shipments of Cinch’s interconnect products continued to be strong in the first nine months of 2011.

 
-20-

 
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, 2011 and 2010 were comprised of the following:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Material costs
51.9%
 
42.0%
 
50.7%
 
43.9%
Labor costs
11.0%
 
14.3%
 
10.3%
 
14.1%
Research and development expenses
3.9%
 
3.1%
 
3.9%
 
3.6%
Other expenses
17.3%
 
16.8%
 
17.4%
 
17.7%
   Total cost of sales
84.1%
 
76.2%
 
82.3%
 
79.3%
               

The most significant factor contributing to the increase in cost of sales as a percentage of sales relates to an increase in material costs resulting from the s