Good day, and welcome to the BellFuse Inc. 3rd Quarter 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.
Thank you, Ella. Joining me on the call today is Greg Brocious, our Vice President of Finance, Lynn Hunkin, our Director of Financial Reporting. Before we begin the call, I'd like to ask them to go over at the safe harbor statement. Lynn?
Thank you, Dan. Good morning, everybody. Before we start, I'd like to read the following Safe Harbor statement. Except for historical information contained on this call, the matters discussed on this call, such as statements regarding 4th quarter sales, anticipated cost savings from the closure of our power R and D facility in Eastern Switzerland and our sales office in Germany, as well as from a streamlining of our North America sales organization and the impact of potential future acquisitions. Our forward looking statements as described under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Actual results could differ materially from those sections. Among the factors that could cause actual results to differ materially from such statements are, the market concerns facing our customers, the continuing viability of sectors that rely on our products, the impact of public health crises, such as governmental, social, and economic effects of COVID 19, the effects of business and economic conditions, difficulties associated with integrating recently acquired companies. Capacity and supply constraints or difficulties, product development, commercialization, or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, the market acceptance to the company's new products and competitive responses to those new products, the impact of changes to U. S. Trade and tariff policies.
And the risk factors detailed from time to time in the company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward looking statement will in fact prove to be correct. We undertake no obligation to update or revise any forward looking statements. We also may discuss non GAAP results during this call and reconciliations of our GAAP results to non GAAP results have been included in our release. I would now like to turn the call back to Dan for a general business update.
Okay. Thank you for joining our call today. I hope you and your families continue to stay healthy during these times. Further, I would like to provide an update on the facilities around the world as it relates to COVID. We are pleased to report that all our manufacturing sites globally have been operational throughout the third quarter.
As always, the situation around Covance remains fluid. Especially as we enter the call amongst. We ensure ongoing compliance with local regulation to mitigate our risk. Our production managers, manufacturing associates have shown a relenting dedication to Bell and its customers over these past 7 months, and we truly appreciate they do for us each day during its challenging time. Now turning to our results.
We are pleased that our global reduction plan over the past year has gained translated as again, translated into meaningful gross margin improvement during the third quarter. The inclusion of sales related to our recently acquired CUR business along with our ongoing strategy to streamline the organization while eliminating certain low margin products had driven much of improvement in our results. Our sales level remain consistent with the pre COVID level of the third quarter of 2019, while Bell adjusted EBITDA as outlined in our release improved by 33% during this period. Excluding CUI sales in the third quarter, we were down $10,900,000 from last year's third quarter. These declines seen across each of our product groups.
The weakness in the commercial aerospace end market accounted for $7,000,000 of the decline. Sales of front end products Power Products were down $3,100,000 from last year's third quarter. Logi View was not accepting new orders from a low margin data center cost This is partially offset by the growth in our circuit protection sales of 1,400,000 Our integrated connector module sales were lower than the prior year by $1,300,000 due to a reduction in demand for one of our networking customers. In spite lower sales, we are encouraged to see that each of our 3 product groups showed improvement in gross margins compared to last year's third quarter. As a result of the successor execution of our global cost reduction plan.
As visibility remains limited going forward, We anticipate fourth quarter sales to be more comparative to fourth quarter of last year. However, we do have areas of continued strength. Fixed sales into the military segment during the third quarter were up 33%, leading to record shipping quarters for the end markets. The growth was seen in both U. S.
And European defense market in the areas of munitions, military avionics and ground communication programs. The CUI Group had a 40% increase in sales of their standalone sales during last year's first quarter. Our circuit protection sales also saw growth in the 3rd quarter with a 43% increase over the last year's third quarter. These are expected to be continued areas of growth for us. There's also been meaningful activity with our e mobility end market.
And we've been shipping power related prototype for several new products. Our Evobility products are expected to be significant treatments to Bell's growth in the long term. As part of our global cost reduction plan, the closure of our facility in Ultra Switzerland in late August has brought our annual fixed cost stand by $3,000,000. With Easter closing, the R and D activities have been shifted to other existing R and D groups throughout the world. Further, we recently announced anticipated closure of our sales office in Germany and streamlining of our North American sales organizations.
These actions are expected to result in incremental $1,000,000 of annual cost savings starting the fourth quarter of 2020. The bail management team remains focused on bottom line growth, while actively looking at strategic acquisitions that would better position Bell for the future. And with that, I'd like to turn the call over to Craig to work with financial updates. Craig?
Thanks, Dan. Sales by product segment for the third quarter of 2020 were as follows: Power Solutions protection sales were $47,800,000, up 18.5% from last year's 3rd quarter. Connectivity Solutions sales were $38,500,000, a decline of 13.5% and Magnetic Solutions sales were 38,200,000 dollars, down 3.7 percent from last year's third quarter. On a consolidated basis, gross profit margin, excluding R and D expense, increased to 26.9% in the third quarter of 2020 as compared with 23% in the third quarter of 2019, as a result of a combination of factors. Overhead and indirect labor costs were $3,000,000 lower during the third quarter of 2020, primarily due to restructuring measures implemented during late 2019 and a reduction in the cost structure of our Cinch Connectivity Solutions segment to align with current sales volumes within that segment.
A portion of the margin improvement in the third quarter of 2020 related to lower material costs and stocks of high cost components that had previously been build up in our supply chain, have not been worked through, resulting in significantly lower material costs in the P and L as compared to the same quarter last year. Research and development costs were $5,700,000 during the third quarter of 2020, a decline of $450,000, from the third quarter of 2019, primarily due to restructuring efforts implemented during the latter part of 2019. Our selling, general and administrative expenses were $18,900,000 or 15.2 percent of sales, as compared with $18,500,000 or 14.9 percent of sales in the third quarter of 2019. Lower travel expenses of $514,000 or reduction in ERP costs of $242,000, and savings from other cost containment efforts, largely offset the $1,900,000 of incremental SG and A expenses associated with the recently acquired CUI Business SG and A expense also included an incremental gain on the cash surrender value of COLI policies of $408,000 the third quarter of 2020 compared to the third quarter of 2019. On a go forward basis, we would expect SG and A to run between $19,000,000 $20,000,000 per quarter in the near term as we expect our T and E spend will continue to be lower than normal for the remainder of the year.
These factors resulted in income from operations of $8,800,000, third quarter of 2020 as compared to a loss from operations of $5,200,000 in the third quarter of 2019. If you recall, the third quarter 2019 included an $8,900,000 impairment charge related to our goodwill. Other income and expense net was an expense of $1,200,000 for the third quarter of 2020, as compared to income of $629,000 during the third quarter of 2019. The fluctuations from last year's third quarter was largely related to a foreign exchange foreign exchange gain of $600,000 in third quarter of 2019 interest expense was $1,200,000 in the third quarter of 2020, down slightly from the same quarter last year due to the lower interest rate in effect during the 2020 quarter. We expect interest rates to be lower in the 4th quarter related to the decreases in both LIBOR and in the company's spread on its credit facility.
Along with reduction in our outstanding debt 20 compared to a provision of $590,000 during last year's third quarter. Changes in federal tax law around the guilty tax coupled with a reversal of uncertain tax positions led to a benefit from income taxes in the third quarter of 2020. The tax provision for the third quarter of 2019 was unfavorably impacted by the impairment of goodwill in our North America segment. Earnings per share for the Class A common shares was earnings of $0.57 per share in the third quarter of 2020, as compared with a loss of $0.51 per share in the third quarter of 2019. Earnings per share from the Class B common shares was earnings of $0.61 per share in the third quarter of 2020 as compared with a loss of $0.53 per share in the third quarter of 2019.
On a non GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares, was earnings of $0.58 per share in the third quarter of 2020 as compared with earnings of $0.19 per share in the third quarter of 2019. On a non GAAP basis, EPS for Class B shares were $0.62 per share in the third quarter of 2020 as compared with earnings of $0.20 per share. In the third quarter of 2019. And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at September 30, 2020 was $81,100,000, an increase of 8,800,000 from December 31, 2019.
Our cash balance grew by $5,800,000 sequentially from the June 30th balance. During the 1st 9 months of 2020, we generated cash flows from operations of $34,800,000. We made net payments of $18,200,000 towards our outstanding debt balance and used cash for capital expenditures of $4,500,000, dividend payments of $2,400,000 and interest payments of $3,400,000. Accounts receivable were 69,700,000, at September 30, 2020, as compared with $76,100,000 at December 31, 2019. Day sales outstanding decreased to 52 days at September 30, 2020, as compared to 60 days at December 31, 2019.
The decrease in our accounts receivable balance is largely due to lower sales in Asia, where payment terms tend to be longest. Inventories were $103,600,000 at September 30, 2020, down $3,600,000 from December 31, 2019. The decline was seen in raw materials due to the reduced material intake in anticipation of a slower fourth quarter in 2020. Accounts payable were $40,100,000 at September 30, 2020, down $4,000,000 from its level at December 31, 2019, primarily due to lower purchases of raw materials during the third quarter of 2020. Bell's total outstanding debt balance was $125,400,000 as of September 30, 2020, net of deferred financing costs.
A decrease of $18,300,000 since the 2019 year end balance. This primarily reflects the Ontario debt repayments of $18,200,000 made during the 1st 9 months of 2020. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $14.46 per share at September 30, 2020, as compared to $13.69 per share at December 31, 2019. And with that, I'll turn the call back over to Dan. Dan?
Thank you, Craig. At this time, Eric, can we please open the call up the questions.
And we'll take a question from Mike Sikos with Needham And Company.
Hey guys, good morning, and thanks for taking the time for the questions today. First thing I wanted to ask you about was this guide for the flat year on year revenue as we look to Q4? And I know that you guys are walking away from some of this low margin business now from 2 customers, and you have the CUI acquisition under your umbrella now as well. Can you talk to, I guess, some of the puts and takes for the underlying organic business. Just wanted to get a sense of how you guys see the different segments playing out in Q4 to help you get to flat revenues from a year on year perspective?
Again, it's just no, we have certain segment premium products, as we mentioned, that CUI have, you know, have had since requiring them. They have an they had a tremendous job on top line growth. Our Hughes group has done very well on top line growth. The Cinch group has really got hit in the stomach pretty hard because, orgasm is one of the major aerospace companies are not planned to not allow to fly. We're hoping that they have permission by the end of this year.
But once when they do get permits in the year, how many airlines are they going to be buying airplanes? So we are so we have no idea, at one point, I said that they would be back in 2024. Now the latest news is 2022. So they just subsequently moved out visibility on the aerospace side is stuff to determine how we move forward with that with top line growth. On the other hand, we did have substantial military growth and we're really pleased by that and we think we can maintain that military growth, but it's difficult to offset what we lost in aerospace.
Again, with the CUI, addition has made that group substantially, the power group substantially stronger from a top line growth Also, circuit protection, as we mentioned, has had 40% growth. We do do a lot with V Mobility. We've probably signed about 50 NDA per month. So there's a lot of activity. In addition to that, I know, averaging we've been averaging a $2,000,000 a week bookings.
And this past week, we did about 5,000,000 So I do not know if that's a good sign or not, but it's the best booking week we had in probably 3 years. And then I think the Magnetic Group I think that has already, and of all the groups we have, that probably has the most limited, growth potential at this time, because of the limited customer base we have within that group. So we still think we set a lot of potential, again, on the Fitch military side. And then again, on the power side, I think they have growth in the mobility circuit protection, the adapters. And also, we are doing a lot on basic power products.
We build ourselves before the acquisition.
That's helpful. Thanks for walking you through that. And I guess another item I wanted to touch on, again, these gross margins continue to to growing NDA point of a positive point for the Bellevue story. Just curious if you could talk to any Anything that might have been one time in Q3? I know you spoke to the material costs in Q3 did you guys were you able to size up what the benefit was for Q3 from those material costs and if that becomes a headwind now in Q4 as well as typical seasonality going from Q3 to Q4.
I believe that those gross margins typically come down sequentially. But any input there would be beneficial.
Okay, Craig, do you want to address this or do you want to learn the discussion?
Yes, I can address part of it. I think with respect to maybe some one time items that may not continue going forward, I mean, we did receive additional subsidies from the the the Chinese government during the quarter, to the extent of about, $900,000. So, whether those continue into the new year, we don't know. There will be some impact in the fourth quarter, but not as substantial. We don't expect anywhere.
But I think what we'll see going forward is kind of a continuation of the impact of streamlining our product offerings and so on and so forth. So while we with the sales volume, expectation being comparable to last year. I think we'll see a little bit of margin degradation overall percentage wise. Just be just because of the volume. But, don't don't know if there's any other significant one time items that would be rolling through here.
Lynn, do you agree with that?
Yes, I agree. And Mike, just to answer hard the question on material costs. So the lower material costs in Q3 20 contributed, 270 basis points to our gross margin for as a percentage of sales was 44.9 percent, and that, declined to 42.2% in Q3 20. If you recall, we still had very high material costs running through our P and L in 2019. So we have seen that come down in the 2020 quarters.
And, and we expect that to to stay at, generally around this this lower level. It it may tick up a little bit, but, I think the 2019 level was unusually high.
That's great. Thanks. Thanks for all the color there. And then one more, if I may, just to squeeze it in. But question on the the streamlining that you're talking about for the North American sales organization?
I know that you announced that today in conjunction with the closing of the German facility. What is it that you guys have to do on that front? Just curious from an operational standpoint in mechanics, for that, I guess, 1,000,000 in annualized cost savings to start flowing through the P and L. Thank you.
K. Do you want to deal with the cost savings when it starts showing through the the P and L?
Oh, you have it. Go ahead, Linda.
I do. I do. So, the aggregate cost savings for those 2 actions, will be just over $1,000,000. And we expect, that's mostly start in 2021. It's just a small amount maybe 3000 or so, in q420.
Q 121, we expect about a 125,000 And then going forward, it would be 275,000 a quarter in cost savings, through the end of 2021.
All right.
Thanks for all the color guys. I'll turn it over to anyone else in my other questions. Thank you.
We'll now take a question from Theodore O'Neil with Litchfield Hills Research.
Thank you very much. In the prepared remarks last quarter, you talked about a $1,600,000 award for power supplies for a cost effective ventilator. Has that shipped yet? And is there any follow on business from that? I think we're in the process of sitting around.
I do believe we have other additional orders, but not to the extent we feel it probably And I think the customer there was the Canadian army.
Yes, we're Canadian government. We have started shipping. We could start shipping that in the 3rd quarter.
Okay great. Thanks very much.
And we'll now take a question from handy Susanto with Gabelli Fence.
Good morning, Dan, Craig, and Leon.
Good morning.
Dan, can you share what you are seeing in China? Other companies have talk about the impact of shipment ban to Huawei, sample in inventories ahead of the ban. And then so so what are you seeing in your market in China now?
Again, for us, Huawei's never been a big customer of ours. In China. We do see certain customers, minor customers that are having a difficult time to deal with American based companies. And we're starting to see some prejudice, but none of our key customers Most of our major customers in China are the the large subcontractors that go for the Cisco HPs of the world. So like a hanhay/foxcom, all electronics, jabil, these type of big large CEMs, generally have to buy off the spec of the American customers or the European customers.
And that's where a majority of our business goes to China. So that there's always some concern about the political situation being China, you know, a, between American China, B, between Hong Kong and China, and C, between China and India. So again, there's tremendous amount of uncertainty that we are concerned about. And one of the reasons we are looking at other areas of manufacturing besides China that give us the same low cost. Not to say that we would move out 100% of manufacturing, but I think we would like to get to a point that we're not still dependent on the low cost manufacturing in China.
Got it. And then some companies have also talked about, inventory or capacity digesting among data centers. You have any, insight into that?
About capacity regarding capacitors?
Oh, no. In in data center space, some companies have, talked about the fact that, sales to data centers have been strong. In the first half of twenty twenty. And then now we may see some inventory digestion.
No, we are, I don't think we have seen anything yet. Sorry. Yeah, I think what I think there,
I think we may have we may have benefited a little bit in the first half from that, Hendi. And I think, you know, going into the going into the the fourth quarter, we have seen our order book soften a little bit with respect to some of those, networking data center clients. So I think we are seeing a little bit of that.
Got it. For that, when you here that the growth in Metative Segment is somewhat limited now. What can be the next growth driver for the magnetic segment?
That's a good question. Again, I think our focus would probably you know, I think the magnetic group, you know, at some point, you might fall into the power group. You know, every power supply needs a magnetic but I think there's, again, you know, we make a very specific product, that we're the market leader on. We control 70%, you know, a good percentage with the high end customers on that product. So when you control 70% of the market, available market.
I think it's very difficult for us to grow it. So again, I think what we what our focus now is, you know, how we can combine, y'all, our magnetics we have there, with CUI, with signal transformer, with our power surprised. I think we have what we're looking at is how better we can solve our customer's problems, but be a a one stop solution company. Especially for the 2nd tier, 3rd tier accounts. So again, it's how do we bundle all these products we have are very similar.
And the first step with that was combining the Salesforce. So before we would have a direct signal transformer guy who go to New England, Then we have a CUI guy go to New England, then we would have a Bell guy go to New England. Now we have one point of contact that would go to New England that can sell all these products. So we're hoping by having one point of contact and make it easier for our our customers and channel partners to deal with us that we should get, greater sales at these customers.
I see. And then one more question, a question for Lynn. So then you talk about the benefit of material costs, coming down from 2019. Is lower lower left field cost behind now? Or do you still have some runway?
And then secondly, how I think in the past, you indicated that the gross margins should normalize between 23% to 25%. Should we still expect the gross margin range?
So the
first part of your question on the material costs. I think we're probably, at where we will land. I think the the Q3 material cost, and Craig, correct me if I'm wrong, is it's probably, where we will land, if anything, it it might go up a little bit. I know the cost of, some of the precious metals has been increasing, so that might put some additional pressure on it. But I think we can use Q3 as a a basis for that.
Regarding a normalized gross margin, I mean, really the only thing that was in our margin this quarter, as Craig mentioned, was the, the 900,000 of subsidy, from China that we received, which would be non nonrecurring I'm trying to think other than that, you know, the the remedy, we do need to keep an eye on. We did have some higher labor costs in Asia, in this year's third quarter, just due to the unfavorable comps in the FX versus last year. So that is something that will will impact our margins going forward if that continues to trend in an unfavorable direction. You know, I think if we had to put a range on it, you know, mid-twenty, you know, maybe maybe 24 to 26% Craig, do you have any thoughts on that?
No, I think that's right. And it's all obviously dependent on the on the mix of revenue that we have. Obviously, as the commercial or when the commercial aerospace recovers, that'll influence margins and how successful we are with some of our other cost actions will influence margins. But I think the 24% to 26% range is a reasonable reasonable range for projection purposes.
Got it. Thank you. Thank you, Dan, Lynn, and
Thank you. Have a good weekend.
We'll now take a question from John Hudson, who is a private investor.
Good morning. Hi, Dan.
I have a relative to operations in China. And I recognize the issues between the Chinese government and the U S government. And I don't need any further comment on that. But I'm interested appears to me that the relation between the company and the Chinese government has been basically very good over the COVID period and part of that is indicated by the subsidies that the Chinese government have provided. And I just wonder, is that your opinion?
And how do you see specifically the relationship between the Chinese government and the company today.
I you know, generally, when we talk to government, we generally deal with the local because we're not that big of a employer in China. So we generally deal with the local government. And we've been there substantially longer than a lot of other companies. And we are in the communities we deal with, we are a large employer. So historically, we employ a lot of people in the local town.
So we do have a very good relationship with the local community and the town government. And I think that's why we've been able to work so well. Our concern, again, is the political unrest and the tariffs and how, you know, your US government view things going forward. And, again, we do have a good portion of our activity is done in China. And I spent, you know, before COVID, you know, I I did a tour of, you know, the Philippines, Vietnam, Malaysia, you know, looking, you know, for another facility to just as a backstop.
And we're hoping that we can have an announcement shortly and one of the things we look at. But from our standpoint, you know, I think if we have, you know, setting up a greenfield operation from scratch, I think we would be a lot more in the area of acquiring a company that has manufacturing in one of those low cost areas. So we could get up and running very quickly and not worry about the political and, you know, who you have to know to get things done type of situation. So, again, you know, at this point, knock on wood, things are okay, but when it comes to China, it's like COVID and And, again, you know, we do have a, you know, we do have some people. We have, you know, you know, fifty people in a hard time that work for us.
And you know what? They're going through now, and China is very upsetting. And the relationship between the Hong Kong people and the China people is now a good situation. So, you know, it's something that we do keep a watchful eye on.
Sounds good. Thank you.
And we'll now take a follow-up from Mike Sekos with Needham And Company.
Hi guys. Just one more, if I could, thinking about the CUI acquisition, seems to be going at least better than what we had initially thought. So curious on what your assessment is of that acquisition. And then the follow-up to that would be, if you're looking for different opportunities on the M and A front, what kind of technologies would be of interest to you? Is it focused on a specific segment or would it maybe a caters to this diversifying the manufacturing footprint that we were just talking about.
I don't know. Leave it at that. Thanks, guys.
Okay. Let's just discuss CUI for a minute, first. You know, we've been we it took us 3 to 4 years to finally acquire CUI. Again, what we find very interesting with them is it's a different model than historically Bell has. Bell has always built everything we've sold.
CUI doesn't manufacture anything, they have private label. They have a very tremendous diversified customer base. What that what that done better than any other company out there is more from a marketing MPI new product introduction. When I was starting the business, everybody wanted to see a sales guy, everybody wanted to go out to lunch. Now nobody wants to see a sales guy.
Nobody wants to go out to lunch. They just wanna go on the internet and get that parts as quick as possible. And get it designed in. And this is where CUI really shines. They work with the the largest, ecommerce catalog houses.
Like the DigiKey Mowsers, and they do a great job with them to get their product out there to a diversified customer base. And that customer base could be 4 to 5000 customers. No customer accounting for more than 5%, and that's why they tend to be, you know, very profitable. And that's the same model that signal transformer has. So, again, we looked at that May, you know, we're tremendously pleased.
With their sales growth and the booking growth they had since we acquired them. And at this point now, what we really have to do is capitalize on their marketing MPI and bring it to the other Bell products. And how do we market us as one company to solve customer's problems? So I think from that side, as I mentioned before, I think there's tremendous upside that we can, you know, penetrate our existing customers. And there hasn't been as well as I like on the cross selling opportunities between our product groups, and that will change very quickly.
As we go forward looking at products, you know, again, we like to fill out our portfolio in connectors and power. Again, you know, our goal is very simple. You know, if a customer calls us up, if we can give them all the products they want, we think that's what's gonna count going forward. And as I said, as as, again, if we can talk, if they can go to one stop, you know, one stop and find all their magnetic needs, all their power supply needs, all their connector needs. That's tremendous for us as more and more engineers are moving away from dealing 101 with, you know, with this 101 contact, you know, in person contact.
And I think the COVID just escalated, you know, where the where the world's going. And I think instead of saying it's gonna be like this in 4 years, it might be like this in 2 years. So, again, you know, one of the things that we started up is, you know, a digital marketing, sales, transformation, how do we address customers a lot better through Facebook, LinkedIn, and putting a lot more resources in that group than we do with that, you know, outside salespeople going forward. So again, I think what, you know, in short, there's a revolution going on, we believe, and we're hoping, you know, to do everything to straighten it when the world changes, we'll
not be
in a position than we were a year ago. And any company that can help support us That's what we're looking at.
And we have no further questions and that will terminate this conference call. Thank you for participating.
Okay. Thank you, everybody, for joining. We look forward to talking to you again.