BEL FUSE INC /NJ (BELFB) FY 2022 MD&A

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

The information in this MD&A should be read in conjunction with the Company's consolidated financial statements and the notes related thereto.  The discussion of results, causes and trends should not be construed to imply any conclusion that such results, causes or trends will necessarily continue in the future. See "Cautionary Notice Regarding Forward-Looking Information" above for further information.  Also, when we cross reference to a "Note," we are referring to our "Notes to Consolidated Financial Statements," unless the context indicates otherwise.  All amounts and percentages are approximate due to rounding.

Under the SEC's amended definition of a "smaller reporting company," the Company is deemed to be a smaller reporting company.  Accordingly, among other things, when it became eligible to use smaller reporting company disclosures, the Company reduced the number of years covered by its consolidated financial statements in Item 8.

Overview

Our Company

We design, manufacture and market a broad array of products that power, protect and connect electronic circuits.  These products are primarily used in the networking, telecommunications, computing, general industrial, high-speed data transmission, military, commercial aerospace, transportation and eMobility industries.  Bel's portfolio of products also finds application in the automotive, medical, broadcasting and consumer electronics markets.

We operate through three product group segments, in addition to a Corporate segment.  In 2022, 44% of the Company's revenues were derived from Power Solutions and Protection, 29% from Connectivity Solutions and 27% from our Magnetic Solutions operating segment.

Our operating expenses are driven principally by the cost of labor where the factories that Bel uses are located, the cost of the materials that we use and our ability to effectively and efficiently manage overhead costs.  As labor and material costs vary by product line and region, any significant shift in product mix can have an associated impact on our costs of sales.  Costs are recorded as incurred for all products manufactured.  Such amounts are determined based upon the estimated stage of production and include labor cost and fringes and related allocations of factory overhead. Our products are manufactured at various facilities in the U.S., Mexico, India, the Dominican Republic, the United Kingdom, Czech Republic, Slovakia and the PRC.

We have little visibility into the ordering habits of our customers and we can be subjected to large and unpredictable variations in demand for our products.  Accordingly, we must continually recruit and train new workers to replace those lost to attrition and be able to address peaks in demand that may occur from time to time.  These recruiting and training efforts and related inefficiencies, and overtime required in order to meet any increase in demand, can add volatility to the labor costs incurred by us.

The Effects of COVID-19 on Bel’s Business

The Company continues to be focused on the safety and well-being of its associates around the world in light of COVID-19 and the variants of COVID that have followed.  A significant amount of products manufactured by Bel are utilized in military, medical and networking applications, and are therefore deemed essential by many of the jurisdictions in which we operate. Our management team closely monitors the situation at each of Bel's facilities and has been able to effectively respond in implementing our business continuity plans around the world.  Protective measures, where possible, remain in place throughout our facilities.  The majority of our office staff now follow a hybrid work schedule.  The combination of protective measures at our factories coupled with remote work arrangements have enabled us to maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.

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Throughout 2021 and 2022, pandemic-related issues have created additional port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. In order to better control our costs, the expediting of raw material deliveries has been generally reserved for customer-specific requests for expedited timing whereby our end customer has agreed to pay the incremental fee.  Further, the majority of our product is shipped via air, and we have therefore been minimally impacted by ocean-related logistic constraints. During March 2022, the PRC government issued a notice with immediate effect whereby certain regions were temporarily shut down to perform widespread testing in response to a COVID outbreak in those regions and in accordance with Beijing’s "zero-tolerance" policy at the time.  Our Bel Power Solutions manufacturing facility in Shenzhen, China and our Magnetics TRP manufacturing facility in Changping, China were closed for approximately one week during the month of March 2022 while residents underwent testing. Upon the discontinuation of COVID protocols in the PRC in late 2022, we experienced approximately 3-4 weeks between December 2022 and January 2023 where the attendance rate of workers at our factories in the PRC were very low due to COVID outbreaks in the regions in which we operate. As of early February 2023 (following the Lunar New Year holiday), attendance rates at all of our factories in the PRC are in the 90%-95% range. We do not believe the aforementioned low attendance rates had a material impact on Bel's financial results in December 2022 or January 2023. To date, the COVID-related transportation delays and local outbreaks have not materially impacted our ability to operate our business or achieve our business goals.

Based on our analysis of ASC 350 and ASC 360 during the year ended December 31, 2022, we are not aware of any potential triggering events for impairment of our goodwill, indefinite-lived intangible assets or finite-lived assets.  The Company will continue to assess the relevant criteria on a quarterly basis based on updated cash flow and market assumptions.  Unfavorable changes in cash flow or market assumptions could result in impairment of these assets in future periods.

As our operations have continued, albeit at slightly reduced production and efficiency rates, we have not experienced a negative impact on our liquidity to date.  Our balance of cash on hand continues to be strong at $70.3 million at December 31, 2022 as compared to $61.8 million at December 31, 2021.  The Company also has availability under its current revolving credit facility; as of December 31, 2022, the Company could borrow an additional $80.0 million while still being in compliance with its debt covenants.  However, any further pressure or negative impact to our financial results related to COVID would have a related negative impact on our financial covenants outlined in our credit agreement, which would impact the amount available to borrow under our revolving credit facility.  The management team closely monitors the rapidly changing COVID situation and has developed plans which could be implemented to minimize the impact to the Company in the event the situation deteriorates.

Our statements regarding the future impact of COVID represent Forward-Looking Statements.  See “Cautionary Notice Regarding Forward-Looking Information.”

Other Key Factors Affecting our Business

The Company believes the key factors affecting Bel's 2022 and/or future results include the following:

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Looking ahead, the focus will be on profitable growth by investing in key and high-growth market segments, new business development and internal investments needed to support our customers. We believe that we will benefit from our diversity in end markets in 2023, as lower bookings from our networking customers are expected to be offset by higher demand from the commercial aerospace and eMobility markets, which generally have a bright outlook for the year and beyond. The preceding sentences represent Forward-Looking Statements.  See "Cautionary Notice Regarding Forward-Looking Information."

Results of Operations - Summary by Operating Segment

Net Sales and Gross Margin

The Company's net sales and gross margin by major product line for the years ended December 31, 2022 and 2021 were as follows (dollars in thousands):

Connectivity Solutions:

Sales of our Connectivity Solutions products increased by $22.0 million in 2022 as compared to 2021. This increase was primarily due to the continued rebound in demand from direct and after-market commercial aerospace customers of $13.4 million (76%) during 2022 as compared to 2021. Other increases in sales related to higher demand for our passive connector and cabling products for use in premise wiring applications and an increased volume of Connectivity Solutions products sold through our distribution channels.  These sales increases were partially offset by a decline in military sales of $4.9 million (12%) during 2022 as compared to 2021. Gross margins for 2022 were unfavorably impacted by incremental costs and operational inefficiencies related to the ramp-up in commercial aerospace demand.

Magnetic Solutions:

Sales of our Magnetic Solutions products improved by $18.4 million during 2022 as compared to 2021. Demand for our Magnetic Solutions products from our networking customers and through our distribution channels has been the primary driver of the sales increase. The higher sales volume, coupled with pricing actions and favorable exchange rates with the Chinese renminbi versus the U.S. dollar, were the primary drivers of gross margin improvement for this product group compared with 2021.

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Power Solutions and Protection:

Sales of our Power Solutions and Protection products were higher by $70.3 million during 2022 as compared to 2021.  The sales increase was led by approximately $32.5 million in raw material surcharge invoicing, the inclusion of EOS, which was acquired in March 2021 and contributed incremental sales of $5.2 million, a $4.4 million (18.4%) increase in circuit protection product sales, a $8.7 million (15.6%) increase in CUI sales, and a $10.4 million (105%) increase in sales of product going into the eMobility end market.  Gross margin improved in 2022 as compared to 2021 as pricing actions, higher sales volume, favorable exchange rates with the Chinese renminbi versus the U.S. dollar, and a favorable shift in product mix offset the impact of increased material costs.

Cost of Sales

Cost of sales as a percentage of net sales for the years ended December 31, 2022 and 2021 consisted of the following:

Material costs as a percentage of sales during 2022 were fairly stable compared to 2021, as recent pricing actions are helping to offset the continued heightened cost of certain raw materials. Labor costs as a percentage of sales have decreased from 2021 due to the favorable fluctuation in the Chinese renminbi exchange rate versus the U.S. Dollar.  These lower labor costs as a percentage of sales were offset, in part, by incremental labor costs at our Connectivity group related to recruiting and training of new factory associates to accommodate the increase in demand from the commercial aerospace end market in 2022.

The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (i.e. rent, utilities, insurance).  In total, these other expenses increased during 2022 by $11.1 million as compared to 2021. The recent ramp-up in commercial aerospace demand has resulted in significant headcount increases at our factories that support this end market, restoring some of the indirect labor and overhead expenses that had been previously reduced when demand was lower.  Further, certain of our other factories have started to run additional shifts to accommodate the increase in demand from our customers, resulting in higher overhead costs.  In addition to an increase in support labor headcount, wage rate increases, both inflationary and government-mandated increases to minimum wage rates, have led to higher costs in 2022 as compared to 2021.

Research and Development ("R&D")

R&D expenses were $20.2 million and $21.9 million for the years ended December 31, 2022 and 2021, respectively.  The reduction in R&D expenses during 2022 is largely due to the favorable exchange rate environment related to the Euro and Chinese renminbi versus the U.S. Dollar in 2022.

Selling, General and Administrative Expenses ("SG&A")

SG&A expenses were $92.3 million in 2022 as compared with $86.6 million in 2021. Within SG&A, increases in office expenses of $2.8 million, SG&A salaries and fringe benefits of $2.8 million, sales commissions to reps of $1.7 million, and $1.1 million of higher advertising costs were partially offset by a $1.5 million reduction in legal and professional fees as compared to 2021.

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Restructuring Charges

The Company recorded $7.3 million of restructuring charges in 2022 in connection with the facility consolidations further described in "Other Key Factors Affecting our Business" above. In 2021, the Company recorded $1.2 million of restructuring charges related to the consolidation of its DC/DC power product line into a single factory, and the discontinuation of its custom modules product line.

Gain on Sale of Property

During 2022, the Company recorded a gain of $1.6 million related to the sale of one of its properties in Jersey City, New Jersey. In 2021, a gain of $6.6 million was recorded in connection with the sale of a property in Hong Kong.

Interest Expense

The Company incurred interest expense of $3.4 million in 2022 and $3.5 million in 2021 primarily due to its outstanding borrowings under the Company's credit and security agreement.  The slight reduction in interest expense during 2022 related to a lower debt balance throughout 2022 as compared to 2021, largely offset by higher interest rates on the Company's variable portion of its outstanding balance during 2021. See "Liquidity and Capital Resources" and Note 10, "Debt" of the Notes to our Consolidated Financial Statements for further information on the Company's outstanding debt.

Other Expense, Net

Other expense, net was $2.7 million in 2022 compared to $0.4 million in 2021. The Company recorded a loss of $2.2 million related to its SERP investments in 2022 as compared to a gain of $1.3 million in 2021.

Income Taxes

The Company’s effective tax rate will fluctuate based on the geographic regions in which the pretax profits are earned.  Of the jurisdictions in which the Company operates, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates of the Company’s three geographic regions.  See Note 9, “Income Taxes”.

2022 as Compared to 2021

The provision for income taxes for the years ended December 31, 2022 and 2021 was $6.4 million and $2.5 million, respectively.  The Company’s earnings before income taxes for the year ended December 31, 2022 were approximately $31.7 million higher as compared with the year ended December 31, 2021, primarily attributable to an increase in income in the Asia and North America regions.  The Company’s effective tax rate was 10.8% and 9.2% for the years ended December 31, 2022 and 2021, respectively. The change in the effective tax rate during the year ended December 31, 2022 as compared to fiscal year 2021 is primarily attributable to an increase in U.S. tax expense resulting from higher U.S. income, which was offset by a decrease in tax expense relating to the addition of uncertain tax positions.

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Other Tax Matters

The Company has a portion of its products manufactured on the mainland of the PRC where Bel is not subject to corporate income tax on manufacturing services provided by third parties.  Hong Kong has a territorial tax system which imposes corporate income tax at a rate of 16.5% on income from activities solely conducted in Hong Kong.

The Company holds an offshore business license from the government of Macao.  With this license, a Macao offshore company named Bel Fuse (Macao Commercial Offshore) Limited has been established to handle the Company’s sales to third-party customers in Asia.  Sales by this company primarily consist of products manufactured in the PRC.  The Macao corporate profit taxes imposes a tax rate of 12% on income from activities solely conducted in Macao.

Due to the practicality of determining the deferred taxes on outside basis differences in our investments in our foreign subsidiaries, management has not provided for deferred taxes on outside basis differences at December 31, 2022 and deemed that these basis differences will be indefinitely reinvested.

Inflation and Foreign Currency Exchange

During the past two years, we do not believe the effect of inflation was material to our consolidated financial position or our consolidated results of operations.  We are exposed to market risk from changes in foreign currency exchange rates.  Fluctuations of the U.S. dollar against other major currencies have not significantly affected our foreign operations as most sales continue to be denominated in U.S. dollars or currencies directly or indirectly linked to the U.S. dollar.  Most significant expenses, including raw materials, labor and manufacturing expenses, are incurred primarily in U.S. dollars or the Chinese renminbi, and to a lesser extent in British pounds, Indian rupees and Mexican pesos.  The Euro and British pound each depreciated by 12%, the Indian rupee depreciated by 6% and the Chinese renminbi depreciated by 4% versus the U.S. dollar in 2022 compared to 2021. To the extent the renminbi or peso appreciate in future periods, it could result in the Company's incurring higher costs for most expenses incurred in the PRC and Mexico.  The Company periodically uses foreign currency forward contracts to manage its short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates as further described in Note 12, "Derivative Instruments and Hedging Activities". The Company's European entities, whose functional currencies are Euros, British pounds and Czech korunas, enter into transactions which include sales that are denominated principally in Euros, British pounds and various other European currencies, and purchases that are denominated principally in U.S. dollars and British pounds.  Such transactions, as well as those related to our multi-currency intercompany payable and receivable transactions, resulted in a net realized and unrealized currency exchange gain of $0.3 million in 2022 and a loss of less than $0.1 million in 2021 which were included in other expense, net on the consolidated statements of operations.  Translation of subsidiaries' foreign currency financial statements into U.S. dollars resulted in translation adjustments, net of taxes, of ($8.2) million and ($1.8) million for the years ended December 31, 2022 and 2021, respectively, which are included in accumulated other comprehensive loss on the consolidated balance sheets.

Liquidity and Capital Resources

Our principal sources of liquidity include $70.3 million of cash and cash equivalents at December 31, 2022, cash provided by operating activities and borrowings available under our credit facility.  We expect to use this liquidity for operating expenses, investments in working capital, capital expenditures, interest, taxes, dividends, debt obligations and other long-term liabilities. We believe that our current liquidity position and future cash flows from operations will enable us to fund our operations, both in the next twelve months and in the longer term.

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Cash Flow Summary

During the year ended December 31, 2022, the Company's cash and cash equivalents increased by $8.5 million.  This increase was primarily due to the following:

During the year ended December 31, 2021, the Company's cash and cash equivalents decreased by $23.2 million.  This decrease was primarily due to cash paid for acquisitions of $16.8 million, the purchase of property, plant and equipment of $9.4 million, net payments to our credit facility of $4.3 million, and dividend payments of $3.4 million, partially offset by cash provided by operations of $4.6 million and proceeds from the sale of properties of $7.3 million.

During the year ended December 31, 2022, accounts receivable increased $20.7 million primarily due to the higher sales volume in the second half of 2022 as compared to the same period of 2021.  Days sales outstanding (DSO) increased to 58 days at December 31, 2022 from 54 days at December 31, 2021.  Inventories increased by $36.6 million from the December 31, 2021 level as raw material supply constraints hindered our ability, and our end customers' ability, to fully manufacture our respective finished goods.  Inventory turns, excluding R&D, were 2.6 times for the year ended December 31, 2022 as compared to 3.1 times for the year ended December 31, 2021.

Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 31.7% and 29.1% of the Company's total assets at December 31, 2022 and December 31, 2021, respectively. The Company's current ratio (i.e., the ratio of current assets to current liabilities) was 2.8 to 1 and 2.9 to 1 at December 31, 2022 and December 31, 2021, respectively.  At December 31, 2022 and 2021, $50.1 million and $42.0 million, respectively (or 71% and 68%, respectively), of cash and cash equivalents was held by foreign subsidiaries of the Company.  During 2022, the Company repatriated $13.0 million of funds from outside of the U.S., with minimal incremental tax liability.  We continue to analyze our global working capital and cash requirements and the potential tax liabilities attributable to further repatriation, and we have yet to make any further determination regarding repatriation of funds from outside the U.S. to fund the Company's U.S. operations in the future.  In the event these funds were needed for Bel's U.S. operations, the Company would be required to accrue and pay U.S. state taxes and any applicable foreign withholding taxes to repatriate these funds.

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Future Cash Requirements

The Company expects foreseeable liquidity and capital resource requirements to be met through existing cash and cash equivalents and anticipated cash flows from operations, as well as borrowings available under its revolving credit facility, if needed.  The Company's material cash requirements arising in the normal course of business primarily include:

Debt Obligations and Interest Payments - The Company had $95.0 million outstanding under its revolving credit facility at December 31, 2022, as further described below and in Note 10, "Debt".  During January 2023, the Company borrowed an additional $5.0 million from the revolving credit facility to fund its large annual payments related to incentive compensation and insurance payments. There are no mandatory principal payments due on the credit facility borrowings during 2023.  The current balance of $100.0 million is due upon expiration of the credit facility on September 1, 2026.  Anticipated interest payments due amount to $19.5 million, of which $5.3 million is expected to be paid in 2023 based on our debt balance and interest rate in place at December 31, 2022.

Lease Obligations - The Company has operating leases for its facilities used for manufacturing, research and development, sales and administration.  There are also operating and finance leases related to manufacturing equipment, office equipment and vehicles.  As of December 31, 2022, the Company was contractually obligated to pay future operating lease payments of $25.1 million, of which $6.8 million is expected to be paid in 2023, and future financing lease obligations of $2.5 million, of which $0.6 million is expected to be paid in 2023.  See Note 17, "Leases" for further information.

Purchase Obligations - The Company submits purchase orders for raw materials to various vendors throughout the year for current production requirements, as well as forecasted requirements.  Certain of these purchase orders relate to special purpose material and, as such, the Company may incur penalties if an order is cancelled.  The Company had outstanding purchase orders related to raw materials in the amount of $113.4 million at December 31, 2022, of which $97.2 million is expected to be paid in 2023.  The Company also had outstanding purchase orders related to capital expenditures which totaled $7.8 million at December 31, 2022, of which $7.7 million is expected to be paid in 2023.

Pension Benefit Obligations - As further described in Note 14, "Retirement Fund and Profit Sharing Plan", the Company maintains a Supplemental Executive Retirement Plan ("SERP").  At December 31, 2022, estimated future obligations under the plan amounted to $18.2 million.  It is expected that the Company will pay $0.9 million in benefit payments in connection with the SERP during 2023.  Included in other assets at December 31, 2022 is the cash surrender value of company-owned life insurance and marketable securities held in a rabbi trust with an aggregate value of $14.0 million, which has been designated by the Company to be utilized to fund the Company's SERP obligations.

Dividends - The Company has historically paid quarterly dividends on its two classes of common stock, which amounted to $3.4 million in each of 2021 and 2022.  Consistent with the dividend rates declared in prior years, Bel's Board of Directors declared dividends on October 26, 2022 and again on February 22, 2023 on each of our two classes of common stock. These two quarterly payments will be made in the first half of 2023 in the total anticipated amount of $1.7 million.

Tax Payments - At December 31, 2022, we had liabilities for unrecognized tax benefits and related interest and penalties of $24.8 million, all of which is included in other liabilities on our consolidated balance sheet. At December 31, 2022, we cannot reasonably estimate the future period or periods of cash settlement of these liabilities. See Note 9, "Income Taxes," for further discussion.  Also included on our consolidated balance sheet at December 31, 2022 is $6.2 million of liabilities for transition tax associated with the 2017 U.S. tax reform, of which $2.0 million is expected to be paid in 2023.

Credit Facility

In September 2021, the Company entered into a new credit facility (the "New Credit Agreement") which amends, restates and supersedes the Prior Credit Agreement, as further described in Note 10, "Debt".  The New Credit Agreement contains customary representations and warranties, covenants and events of default.  In addition, the New Credit Agreement contains financial covenants that measure (i) the ratio of the Company’s total funded indebtedness, on a consolidated basis, less the aggregate amount of all unencumbered cash and cash equivalents, to the amount of the Company’s consolidated EBITDA (“Leverage Ratio”) and (ii) the ratio of the amount of the Company’s consolidated EBITDA to the Company’s consolidated fixed charges (“Fixed Charge Coverage Ratio”).  If an event of default occurs, the lenders under the New Credit Agreement would be entitled to take various actions, including the acceleration of amounts due thereunder and all actions permitted to be taken by a secured creditor.

At
December 31, 2022, the Company had $95.0 million outstanding under its New Credit Agreement.  The unused credit available under the credit facility at December 31, 2022 was $
80.0 million, of which we had the ability to borrow the full amount without violating our Leverage Ratio covenant based on the Company's existing consolidated EBITDA.  At December 31, 2022, the Company was in compliance with its debt covenants, including its most restrictive covenant,
the Fixed Charge Coverage Ratio.

To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the New Credit Agreement, in November 2021, the Company executed two pay-fixed, receive-variable interest rate swap agreements covering approximately half of its variable interest exposure effective December 31, 2021 through August 2026.  See Note 12, "Derivative Instruments and Hedging Activities" for further details.

Critical Accounting Estimates

The Company's consolidated financial statements include certain amounts that are based on management's best estimates and judgments.  The Company bases its estimates on historical experience and on various other assumptions, including in some cases future projections, that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  Different assumptions and judgments could change the estimates used in the preparation of the consolidated financial statements, which, in turn, could change the results from those reported.  Management evaluates its estimates, assumptions and judgments on an ongoing basis.

Based on the above, we have determined that our most critical accounting estimates are those related to business combinations, inventory valuation, goodwill and other indefinite-lived intangible assets, and those related to our pension benefit obligations.

Business Combinations

In a business combination, we allocate the fair value of purchase price consideration to the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree based on their estimated fair values. The excess of the fair value of purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers or earned through the use of acquired trademarks, estimated royalty rates, acquired technology, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Inventory Valuation

Inventories consist of raw materials and purchased components and are stated at the lower of cost and net realizable value. Material costs are principally determined by standard cost or the weighted moving average method, both of which approximate actual cost. The Company reduces the carrying value of its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based on the aforementioned assumptions. Our reserve calculations are based on historical experience related to slow-moving inventory in addition to specific known concerns in the case of products going end-of-life or customer cancellations.  As of December 31, 2022 and 2021, the Company had reserves for excess or obsolete inventory of $14.5 million and $12.1 million, respectively.  With the recent increase in demand for our products coupled with higher raw material prices, our value of inventory on hand has increased by $33.1 million from December 31, 2021 to December 31, 2022.  In the event of a sudden decrease in demand for our products, or a higher incidence of inventory obsolescence, the Company could be required to increase its inventory reserve, which would have an unfavorable impact on our gross margin.

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Goodwill

We use a fair value approach to test goodwill for impairment. We must recognize a non-cash impairment charge for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. We derive an estimate of fair values for each of our reporting units using a combination of an income approach and an appropriate market approach, each based on an applicable weighting. We assess the applicable weighting based on such factors as current market conditions and the quality and reliability of the data. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit's fair value.

Fair value computed by these methods is arrived at using a number of factors, including projected future operating results, anticipated future cash flows, effective income tax rates, comparable marketplace data within a consistent industry grouping, and the cost of capital. There are inherent uncertainties, however, related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair value of our reporting units. Assumptions for sales, net earnings and cash flows for each reporting unit were consistent among these methods.

Income Approach Used to Determine Fair Values

The income approach is based upon the present value of expected cash flows. Expected cash flows are converted to present value using factors that consider the timing and risk of the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis. We use a discount rate that reflects a market-derived weighted average cost of capital. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. The projections are based upon our best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value long-term growth rates, provisions for income taxes, future capital expenditures and changes in future cashless, debt-free working capital.  We applied a combined weighting of 75% to the income approach when determining the fair value of our reporting units.

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Market Approach Used to Determine Fair Values

The market approach estimates the fair value of the reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Publicly Traded Company Method"). These multiples are derived from comparable publicly traded companies with similar investment characteristics to the reporting unit, and such comparables are reviewed and updated as needed annually. We believe that this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to our reporting units and the Company as a whole. The key estimates and assumptions that are used to determine fair value under this market approach include current and forward 12-month operating performance results and the selection of the relevant multiples to be applied. Under the Guideline Publicly Traded Company Method, a control premium, or an amount that a buyer is usually willing to pay over the current market price of a publicly traded company, is applied to the calculated equity values to adjust the public trading value upward for a 100% ownership interest, where applicable.

In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We evaluate the control premium by comparing it to control premiums of recent comparable market transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.

We applied a combined weighting of 25% to the market approach when determining the fair value of these reporting units.

As indicated in Note 4, "Goodwill and Other Intangible Assets", the fair value of each of our three reporting units exceeded their respective carrying values by a large margin (ranging from 69% to 173%).  If market factors change and the discount rate utilized in the fair value calculation changes, it would result in a higher or lower fair value of our reporting units.  The discount rates utilized in our October 1, 2022 impairment test ranged from 12.5% to 17.0%.  An increase in the discount rate assumption of 50 basis points would have impacted the fair values of our reporting units, and would have reduced the excess of fair value over carrying value to a revised range of 60% to 166%.  Further, if we are unable to achieve the projected revenue growth rates or margins assumed in our projections, this would also impact the fair value of our reporting units.  If we change our reporting unit structure or other events and circumstances change (such as a sustained decrease in the price of our common stock, a decline in current market multiples, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, heightened competition, strategic decisions made in response to economic or competitive conditions or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of), we may be required to record impairment charges in future periods. Any impairment charges that we may take in the future could be material to our consolidated results of operations and consolidated financial condition.

The Company conducted its annual goodwill impairment test as of October 1, 2022, and no impairment was identified at that time.  Management has also concluded that the fair value of its goodwill exceeded the associated carrying value at December 31, 2022 and that no impairment exists as of that date. See Note 4, "Goodwill and Other Intangible Assets," for details of our goodwill balance and the goodwill review performed in 2022.  We will continue to monitor goodwill on an annual basis and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or significant declines in our stock price, indicate that there may be a potential indicator of impairment.

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Indefinite-Lived Intangible Assets

The Company tests indefinite-lived intangible assets for impairment annually on October 1, or upon a triggering event, using a fair value approach, the relief-from-royalty method (a form of the income approach).  The Company conducted its annual impairment tests as of October 1, 2022 and 2021, and no impairment was identified at either testing date.  Management has also concluded that the fair value of its trademarks exceeds the associated carrying values at December 31, 2022 and that no impairment existed as of that date. At December 31, 2022, the Company's indefinite-lived intangible assets related solely to trademarks.

Pension Benefit Obligations

Net periodic benefit cost for the Company's SERP totaled $1.5 million in 2022 and $1.7 million in 2021.  Benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations.  The changes in net periodic benefit cost year over year are attributable to demographic changes within the plan, as well as any changes to the discount rate or the assumption around the future annual increases in compensation.  The discount rate utilized for the net periodic benefit cost was 2.75% at December 31, 2022 and 2.25% at December 31, 2021.  An increase/decrease in this 2022 discount rate assumption of 25 basis points would have decreased/increased the 2022 periodic benefit cost by less than $0.1 million.  The discount rate utilized for the pension benefit obligation was 5.00% at December 31, 2022 and 2.75% at December 31, 2021.  An increase/decrease in this 2022 discount rate assumption of 25 basis points would have reduced/increased the pension benefit obligation by $0.5 million at December 31, 2022.

Other Matters

The Company believes that it has sufficient cash reserves to fund its foreseeable working capital needs. It may, however, seek to expand such resources through bank borrowings, at favorable lending rates, from time to time. If the Company were to undertake another substantial acquisition for cash, the acquisition would either be funded with cash on hand or would be financed through cash on hand and through bank borrowings or the issuance of public or private debt or equity. If the Company borrows additional money to finance acquisitions, this would further decrease the Company's ratio of earnings to fixed charges, and could further impact the Company's material restrictive covenants, depending on the size of the borrowing and the nature of the target company. Under its existing credit facility, the Company is required to obtain its lender's consent for certain additional debt financing and to comply with other covenants, including the application of specific financial ratios, and may be restricted from paying cash dividends on its common stock. Depending on the nature of the transaction, the Company cannot assure investors that the necessary acquisition financing would be available to it on acceptable terms, or at all, when required. If the Company issues a substantial amount of stock either as consideration in an acquisition or to finance an acquisition, such issuance may dilute existing stockholders and may take the form of capital stock having preferences over its existing common stock.

New Financial Accounting Standards

The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1, "Description of Business and Summary of Significant Accounting Policies."