BEL FUSE INC /NJ - Quarter Report: 2020 March (Form 10-Q)

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION

The terms the “Company,” “Bel,” “we,” “us,” and “our” as used in this report refer to Bel Fuse Inc. and its consolidated subsidiaries unless otherwise specified.

The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in Item 1A of our 2019 Annual Report on Form 10-K and the risk factors described in this quarterly report. 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, consolidated financial condition, operating results, and common stock prices.  Furthermore, this document and other documents filed by the Company with the Securities and Exchange Commission (“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.  Forward-Looking Statements are necessarily subject to risks and uncertainties, many of which are outside our control, that could cause actual results to differ materially from these statements. Forward-Looking Statements can be identified by such words as “anticipates,” “believes,” “plan,” “assumes,” “could,” “should,” “estimates,” “expects,” “intends,” “potential,” “seek,” “predict,” “may,” “will” and similar references to future periods.  All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives and regarding the anticipated impact of COVID-19 are Forward-Looking Statements.  These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in Item 1A of our 2019 Annual Report on Form 10-K and in the risk factors described in this quarterly report, 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 hereof or to reflect the occurrence of unanticipated events.  Any Forward-Looking Statement made by the Company is based only on information currently available to us and speaks only as of the date on which it is made.

PART I.  Financial Information

Item 1.  Financial Statements (Unaudited)

BEL FUSE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and the related notes set forth in Item 1 of Part I of this quarterly report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 2019 Annual Report on Form 10-K and our consolidated financial statements and related notes set forth in Item 8 of Part II of our 2019 Annual Report on Form 10-K. See Part II, Item 1A, “Risk Factors,” below and “Cautionary Notice Regarding Forward-Looking Information,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. All statements herein regarding the likely impact of COVID-19 constitute forward-looking statements.  All amounts and percentages are approximate due to rounding and all dollars in the text are in millions, except per share amounts or where otherwise noted. When we cross-reference to a “Note,” we are referring to our “Notes to Condensed Consolidated Financial Statements,” unless the context indicates otherwise.  All amounts noted within the tables are in thousands and amounts and percentages are approximate due to rounding.

Overview

Our Company

Bel designs, manufactures and markets a broad array of products that power, protect and connect electronic circuits.  These products are primarily used in the military, aerospace, networking, telecommunications, computing, transportation and broadcasting industries.  Bel’s portfolio of products also finds application in the automotive, medical and consumer electronics markets.

The Company operates through three product group segments, in addition to a Corporate segment.  In the three months ended March 31, 2020, 37% of the Company’s revenues were derived from Cinch Connectivity Solutions, 35% from Power Solutions and Protection and 28% from its 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, Dominican Republic, England, Czech Republic, Slovakia and the People’s Republic of China (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

During the first quarter of 2020, the Company has focused heavily on the continued safety and well-being of its associates around the world in light of COVID-19.  The majority of the products manufactured by Bel are utilized in military, medical and networking applications, and are therefore deemed essential by the various jurisdictions in which we operate. Our management team was able to respond quickly in implementing our business continuity plans around the world.  Significant protective measures were put in place throughout our facilities, including employee screenings, physical partitions, social distancing, use of face coverings, travel and visitor restrictions and work from home policies as we continue to service our customers.  The majority of our office staff is working remotely to avoid a large number of associates being present in an office setting at any one time.  With the significant increase in the number of staff working remotely, Bel's IT department took a variety of precautionary measures to protect the computer equipment that associates are utilizing in the remote environment.  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. 

Our first quarter 2020 financial results reflect the extended closure of our facilities in China early in the quarter due to the outbreak of COVID-19 and the related disruption to our supply chain.  This led to an estimated $14-$17 million of shipments scheduled for the first quarter being deferred to the second quarter.  In addition to the loss of revenue effects from such deferred shipments, the Company also incurred additional indirect COVID-19 related costs, including operational inefficiencies and employee retention programs in the first quarter.  These costs were partially offset by $2.2 million of COVID-19 relief funding received from the Chinese government during the first quarter.

All of our manufacturing sites are operating as of the filing date of this Quarterly Report, with only two factories running at substantially less than full production.  In March 2020, our manufacturing facility in the Dominican Republic, which supports our Signal Transformer products, was reduced to 35-50% of normal production levels in response to government mandates.  Further, in April 2020, our manufacturing facility in Reynosa, Mexico, which supports our Cinch Connectivity Solutions business, was reduced to 20% of normal production rates, also in response to government mandates.  By the filing date of this Quarterly Report, the Reynosa facility had increased production levels to 60%.  The reduced production capacity at these two North American factories had an estimated $2.4 million unfavorable impact on revenue during the month of April 2020. We are unable to predict when the production levels at these two facilities will return to more typical levels. As the scope of the COVID-19 outbreak continues to be uncertain in North America and Europe, additional Bel facilities could also become subject to reductions in production levels in the future. 

The Company anticipates further impacts to its financial results while the COVID-19 pandemic persists.  Although the majority of our factories in North America, Europe and Asia are currently at 90+% of their normal workforce levels, we are experiencing lower productivity and efficiency rates (estimated at 80-85%) at certain sites.  In order to comply with social distancing requirements, certain of our factory floors have been reconfigured to provide additional spacing in production lines, which has resulted in some inefficiencies related to product flow.  Bel has also experienced higher freight costs for products typically shipped by air due to lower cargo capacity with the reduction in commercial air travel.  While there are some delays within the supply chain in the movement of products related to border closures, to date such delays have not materially impacted our ability to operate our business or achieve our business goals.  To date, we have not seen a significant reduction in demand for our products due to COVID-19, as many of our products support military, medical and networking applications, which generally have not been negatively impacted by COVID-19.  However, approximately 5% of our revenue relates to products utilized in end markets that have been impacted by COVID-19, such as commercial aerospace. 

Given the general uncertainty regarding the impact of COVID-19 on our manufacturing capability and on our customers, we are unable to quantify the ultimate impact of COVID-19 on our future results at this time. 

Based on our analysis of ASC 350 and ASC 360 during the three months ended March 31, 2020, we are currently not aware of any material impairments 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 $68.4 million at March 31, 2020 as compared to $72.3 million at December 31, 2019, despite a voluntary debt payment of $8.2 million made during the first quarter.  Our cash balance on hand as of April 30, 2020 was $68.2 million.  The Company also has availability under its current revolving credit facility; as of March 31, 2020, the Company could borrow an additional $12.5 million while still being in compliance with its debt covenants.  However, any further negative impact to our financial results related to COVID-19 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.  In order to assist with maintaining our liquidity position, the Company implemented several measures during the first quarter, including the deferral of employer social security taxes under the federal CARES Act, restrictions on new hires, suspension of salary reviews, the elimination of all business travel and restrictions on spending related to capital expenditures.  Management has developed Phase 2 and Phase 3 of the Company’s cash conservation/cost savings plan which would be implemented in the event our liquidity position or financial results become materially impacted by COVID-19.

Our statements regarding the future impact of COVID-19 represent Forward-Looking Statements.  See “Cautionary Notice Regarding Forward-Looking Information.”

Other Key Factors Affecting our Business

The Company believes that, in addition to COVID-19, the key factors affecting Bel’s results for the three months ended March 31, 2020 and/or future results include the following:

We've seen positive signs in Bel's underlying business as we enter the second quarter.  Orders received in the first quarter of 2020 were the highest since the third quarter of 2018, indicating that the excess inventory in the supply channel from 2019 has been worked through, and our customers and distribution partners are starting to place replenishment orders again.  Further, our acquisition of CUI in late 2019 was accretive to Bel's earnings during the first quarter, generating $8.2 million in revenue and contributing $865,000 of operating income.  CUI bookings during the first quarter were over $11 million, one of their highest booking quarters in history, which was a contributing factor to Bel's consolidated book-to-bill ratio of 1.3 for the first quarter. Based on these factors, we currently anticipate an improvement in revenue and financial results in the second quarter as compared to the first quarter.  However, beyond the second quarter, we have limited visibility due to the evolving COVID-19 environment.  The preceding sentences represent Forward-Looking Statements.  See “Cautionary Notice Regarding Forward-Looking Information.”

Summary by Operating Segment

Revenue

The Company’s revenue by operating segment for the three months ended March 31, 2020 and 2019 were as follows:

Connectivity Solutions:

Sales of our Connectivity Solutions products during the first quarter of 2020 declined $5.3 million primarily due to lower demand from commercial aerospace customers and products used in structured cabling applications.  This was partially offset by higher demand for our military products in the first quarter of 2020 as compared to the first quarter of 2019.

Magnetic Solutions:

Sales of our Magnetic Solutions products during the three months ended March 31, 2020 were down $9.5 million from the same period of 2019 as our ability to manufacture product in China was temporarily impacted during February 2020 due to the factory closures associated with COVID-19.

Power Solutions and Protection:

Sales of our Power Solutions and Protection products were $6.7 million lower in the first quarter of 2020 compared to the same quarter of 2019.  Sales of our Bel Power Solutions products into datacenter applications decreased by $11.9 million, due in part to factory closures in China following the Lunar New Year holiday in connection with COVID-19.  First quarter 2020 sales were also impacted by lower demand from a Cloud customer due to tariffs imposed on our product.  Sales of our Custom Module and DC/DC power products were $1.3 million and $1.1 million lower, respectively, as compared to last year’s first quarter.  These decreases were partially offset by the inclusion of the recently-acquired CUI business, which contributed $8.2 million in power sales during the first quarter of 2020.

Cost of Sales

Cost of sales as a percentage of revenue for the three months ended March 31, 2020 and 2019 consisted of the following:

The fluctuations in material costs and labor costs as a percentage of sales during the three months ended March 31, 2020 compared to the same period in 2019 were primarily due to a shift in classification of certain outsourced manufacturing from labor costs to material costs in connection with the transition of our TRP business onto the new ERP system effective January 1, 2020.  As such, material costs and labor costs should be viewed on a combined basis when comparing to the prior year period.  In the aggregate, these variable costs decreased from 53.3% of revenue in the first quarter of 2019 to 52.5% of revenue in the first quarter of 2020.  This reduction was primarily due to a more favorable exchange rate environment related to the Chinese Renminbi and Mexican Peso.  This was partially offset by PRC government-mandated minimum wage increases in one of the regions where Bel’s factories are located effective March 1, 2020. 

The other expenses noted in the table above include fixed cost items such as support labor and fringe, depreciation and amortization, and facility costs (rent, utilities, insurance).  In total, these other expenses decreased during the three months ended March 31, 2020 by $3.6 million as compared to the same period of 2019, primarily due to $2.2 million of subsidies received from the Chinese government to offset costs and inefficiencies incurred in the first quarter of 2020 due to the temporary closures of our factories in China in connection with COVID-19.

Research and Development (R&D) Expense:

R&D expense amounted to $6.1 million and $7.2 million for the three months ended March 31, 2020 and 2019, respectively.  The lower R&D expenses in 2020 as compared to the first quarter of 2019 is largely reflective of cost savings related to the realignment of our Power Solutions R&D implemented in 2019.

Selling, General and Administrative Expense (“SG&A”)

SG&A expenses during the first quarter of 2020 were $22.1 million, up from $19.2 million in the first quarter of 2019. Included within SG&A expenses is a reduction in the cash surrender value of our company-owned life insurance policies of $1.4 million in the first quarter of 2020 compared to a gain on these policies of $0.7 million in the first quarter of 2019.  SG&A expense was also higher in the first quarter of 2020 due to the inclusion of CUI expenses of $2.0 million for the quarter.  These factors were offset by lower ERP implementation costs of $1.0 million.

Provision for Income Taxes

The Company’s effective tax rate will fluctuate based on the geographic segment in which the pretax profits are earned.  Of the geographic jurisdictions in which the Company operates, the U.S. and Europe’s tax rates are generally equivalent; and Asia has the lowest tax rates.  See Note 10, “Income Taxes.”

The (benefit) provision for income taxes for the three months ended March 31, 2020 and 2019 was ($0.8) million and less than $0.1 million, respectively.  The Company’s earnings (loss) before income taxes for the three months ended March 31, 2020, were approximately $5.7 million lower than the same period in 2019, primarily attributable to a decrease in the income from the North America, Europe and Asia segments. The Company’s effective tax rate was 16.9% and 3.3% for the three months ended March 31, 2020 and 2019, respectively.  The change in the effective tax rate during the three months ended March 31, 2020 as compared to the same period in 2019, is primarily attributable to a decrease in taxes related to GILTI income and the federal tax law change for the CARES Act, and due in part to tax benefits relating to the reversal of valuation allowances, offset by the impact of permanent differences on U.S. tax exempt activities.  See Note 10, “Income Taxes.”

Liquidity and Capital Resources

Our primary sources of cash are the collection of trade receivables generated from the sales of our products and services to our customers and amounts available under our existing lines of credit, including our credit facility. Our primary uses of cash are payments 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, including all of the items mentioned above in the next twelve months.

At March 31, 2020 and December 31, 2019, $34.5 million and $29.1 million, respectively (or 50% and 40%, respectively), of cash and cash equivalents was held by foreign subsidiaries of the Company.  During the first three months of 2020, the Company repatriated $5.0 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.

Cash and cash equivalents, marketable securities and accounts receivable comprised approximately 30.9% of the Company’s total assets at March 31, 2020 and 31.6% of total assets at December 31, 2019. The Company’s current ratio (i.e., the ratio of current assets to current liabilities) was 3.4 to 1 at March 31, 2020 and 3.1 to 1 at December 31, 2019.

In June 2014, the Company entered into a senior Credit and Security Agreement, which was subsequently amended in December 2014, March 2016, and further amended and refinanced in December 2017.  The Credit and Security Agreement contains customary representations and warranties, covenants and events of default and financial covenants that measure (i) the ratio of the Company's total funded indebtedness, on a consolidated basis, to the amount of the Company's consolidated EBITDA, as defined ("Leverage Ratio"), and (ii) the ratio of the amount of the Company's consolidated EBITDA to the Company's consolidated fixed charges ("Fixed Charge Coverage Ratio"). If an event of default occurs, the lenders under the Credit and Security 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.  On February 18, 2020, the Company further amended its credit agreement whereby the Company voluntarily prepaid a portion of its term loan under the Credit Agreement in the amount of $8.2 million. The Amendment also served to modify the interest rate and fees applicable to the loans under the credit agreement and changes certain covenants related to matters including acquisitions, share repurchases and financial ratios.

The Company was in compliance with its debt covenants as of March 31, 2020, including its most restrictive covenant, the Fixed Charge Coverage Ratio.  The unused credit available under the credit facility at March 31, 2020 was $43.0 million, of which we had the ability to borrow $12.5 million without violating our Leverage Ratio covenant based on the Company's existing consolidated EBITDA.

We are currently engaged in a multi-year process of conforming the majority of our operations onto one global Enterprise Resource Planning system (“ERP”).  The ERP is designed to improve the efficiency of our supply chain and financial transaction processes, accurately maintain our books and records, and provide information important to the operation of the business to our management team. The implementation of the ERP is being conducted by business unit on a three-phase approach through early 2021. Since inception of the project, we have incurred costs in a cumulative amount of $7.0 million in connection with this implementation, of which $1.0 million was incurred in the first quarter of 2019, with no additional costs incurred in the first quarter of 2020.  These costs are included in SG&A on the consolidated financial statements.  The first phase of the ERP implementation project was completed in the first quarter of 2019 with the Power Solutions business going live on the new system effective January 1, 2019.  The second phase of the project was completed in the first quarter of 2020 with the TRP business going live on the new system effective January 1, 2020.  To date, 40% of our overall business has transitioned to the new ERP system and we've achieved annual cost savings on ERP licensing fees of approximately $2 million within SG&A expense which were largely realized starting in 2019.  We anticipate completing this project with in-house resources by early 2021, with no further outside consulting costs. The preceding sentence represents a Forward-Looking Statement.  See "Cautionary Notice Regarding Forward-Looking Statements."

Cash Flows

Three Months Ended March 31, 2020

During the three months ended March 31, 2020, the Company’s cash and cash equivalents decreased by $3.9 million.  This decrease was primarily due to the following:

During the three months ended March 31, 2020, accounts receivable decreased by $6.7 million primarily due to lower sales during the first quarter of 2020 as compared to the fourth quarter of 2019.  Days sales outstanding (DSO) stayed consistent at 60 days at March 31, 2020 and December 31, 2019.  Inventory decreased by $2.1 million at March 31, 2020 compared to December 31, 2019.  Inventory turns were 3.3 at March 31, 2020 as compared to 3.6 at December 31, 2019.

Three Months Ended March 31, 2019

During the three months ended March 31, 2019, the Company’s cash and cash equivalents decreased by $10.7 million.  This decrease was primarily due to the following:  

During the three months ended March 31, 2019, accounts receivable increased by $2.3 million primarily due to a $2.4 million increase in revenue during the month of March 2019 as compared to the month of December 2018.  DSO increased to 68 days at March 31, 2019 from 59 days at December 31, 2018.  Inventory increased by $4.2 million at March 31, 2019 compared to December 31, 2018, primarily due to a slowdown in demand as customers worked through their inventory levels on hand.  Inventory turns were 3.3 at March 31, 2019 as compared to 3.7 at December 31, 2018. 

Critical Accounting Policies

Management’s discussion and analysis of Bel’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, goodwill, intangible assets, investments, warranties, SERP expense, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

The discussion of new financial accounting standards applicable to the Company is incorporated herein by reference to Note 1 to the Company’s Financial Statements, “Basis of Presentation and Accounting Policies,” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk primarily from changes in foreign currency exchange rates and changes in interest rates associated with its long-term debt.  During the first three months of 2020, the U.S. Dollar was stronger against most other currencies in which the Company pays its expenses.  In comparing average exchange rates during the first three months of 2020 versus those during the same period of 2019, the Euro depreciated by 2%, the Pound depreciated by 1%, the Peso depreciated by 2% and the Renminbi depreciated by 2% against the U.S. Dollar.  The Company estimates that the depreciation in these foreign currencies led to lower operating costs of $0.4 million, as the majority of our expenses in the PRC, Europe and Mexico are paid in local currency.  Foreign exchange gains were also recognized in the first three months of 2020 of less than $0.1 million on translation of local currency balance sheet accounts to the U.S. Dollar in consolidation, resulting from foreign currency fluctuations since December 31, 2019.  Refer to Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of market risks.

Item 4.   Controls and Procedures

Disclosure controls and procedures:  As of the end of the period covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Vice President of Finance, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.  Based on that evaluation, the Company’s Chief Executive Officer and Vice President of Finance concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in internal controls over financial reporting:  There were no significant changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.     Other Information

Item 1.   Legal Proceedings

The information called for by this Item is incorporated herein by reference to Note 13, "Commitments and Contingencies" of the Company’s Condensed Consolidated Financial Statements, under “Legal Proceedings”, as set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are also involved in various other legal actions incidental to our business. We believe, after consulting with counsel, that the disposition of these other legal proceedings and matters will not have a material effect on our condensed consolidated financial condition or results of operations.

Item 1A. Risk Factors

The risks described below, in addition to those described in Part I, Item 1A, "Risk Factors," of our annual Report on Form 10-K for the fiscal year ended December 31, 2019, should be carefully considered before making an investment decision. These are the risk factors that we consider to be the most significant risk factors, but they are not the only risk factors that should be considered in making an investment decision. This Form 10-Q also contains Forward-Looking Statements that involve risks and uncertainties. See the "Cautionary Notice Regarding Forward-Looking Information," above. Our business, consolidated financial condition and consolidated results of operations could be materially adversely affected by any of the risk factors described, under "Cautionary Notice Regarding Forward-Looking Information" or with respect to specific Forward-Looking Statements presented herein. The trading price of our securities could decline due to any of these risks, and investors in our securities may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially adversely affect our business in the future.  Except as required by the federal securities law, we undertake no obligation to update or revise any risk factor, whether as a result of new information, future events or otherwise.

Our global operations and demand for our products face risks related to health epidemics such as the coronavirus.

Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, consolidated financial condition and consolidated results of operations. In January 2020, the outbreak of COVID-19 was first identified and had an unfavorable impact on our four largest manufacturing facilities, which are located in China, throughout the first quarter of 2020.  Travel restrictions imposed by the local governmental authorities to control the spread of the virus resulted in an extended closure of our facilities in China over the Lunar New Year holiday, with the return of workers delayed until following the holiday break.  By March 9, 2020, our overall worker return rate at our China facilities was approximately 85%.  Our suppliers, customers and our customers’ contract manufacturers have been similarly impacted, and many are also currently operating at less than full capacity.  By the end of the first quarter of 2020, many of the jurisdictions in which we operate within North America and Europe had mandated shelter-in-place orders, with the exception of essential businesses.  In March 2020, our manufacturing facility in the Dominican Republic, which supports our Signal Transformer products, was reduced to 35-50% of normal production levels in response to government mandates.  Further, in April 2020, our manufacturing facility in Reynosa, Mexico, which supports our Cinch Connectivity Solutions business, was reduced to 20% of normal production rates, also in response to government mandates.  By the filing date of this Quarterly Report, the Reynosa facility had increased production levels of 60%.  As the status of the COVID-19 outbreak continues to be uncertain in the U.S. and Europe, additional Bel facilities could become negatively impacted.  In addition, COVID-19 has adversely affect the economies and financial markets of many countries, resulting in an economic downturn that has affected demand for certain of our end customers’ products. The extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments which are highly uncertain and cannot be predicted at the time of the filing of this Quarterly Report on Form 10-Q.

Our high level of indebtedness could negatively impact our access to the capital markets and our ability to satisfy financial covenants under our existing credit agreement.

We incurred substantial amounts of indebtedness to fund the acquisitions of Power Solutions and Connectivity Solutions in 2014, and CUI in December 2019, and we may need to incur additional indebtedness to finance operations or for other general corporate purposes in the future.  Our consolidated principal amount of outstanding indebtedness was $136.8 million at March 31, 2020, resulting in a leverage ratio of 4.46x adjusted EBITDA, as calculated in accordance with our credit agreement (as compared to the maximum leverage ratio of 5.00x as noted in our amended credit agreement).  As of March 31, 2020, our fixed charge coverage ratio was 1.03x, as calculated in accordance with our credit agreement (as compared to the minimum fixed charge coverage ratio of 1.00x).  Pursuant to the terms of our amended credit agreement, the leverage ratio will step down to 4.75x effective September 30, 2020, to 4.00x effective December 31, 2020, to 3.25x effective March 31, 2021 and to 3.00x effective June 30, 2021 and thereafter.  The fixed charge coverage ratio will step up to 1.05x effective June 30, 2020, to 1.10x effective September 30, 2020, to 1.15x effective December 31, 2020 and to 1.25x effective March 31, 2021 and thereafter.  Our U.S. debt service requirements are significant in relation to our U.S. revenue and cash flow.  This leverage exposes us to risk in the event of downturns in our business, in our industry or in the economy generally, and may impair our operating flexibility and our ability to compete effectively.  Our current credit agreement requires us to maintain certain covenant ratios, and as noted, the ratios become more restrictive at specific dates during the term.  If we do not continue to satisfy these required ratios or receive waivers from our lenders, we will be in default under the credit agreement, which could result in an accelerated maturity of our debt obligations.  We cannot assure investors that we will be able to access private or public debt or equity on satisfactory terms, or at all.  Any equity financing that could be arranged may dilute existing shareholders and any debt financing that could be arranged may result in the imposition of more stringent financial and operating covenants.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

*   Filed herewith.

** Submitted herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.