Good day, and welcome to the Bell Fuse Incorporated Second 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, Steve. Joining me on the call today is Greg Brocious, our Vice President of Finance, and Lynn Huck, our Director of Financial Reporting. Before we begin the call, I'd like to ask Lynn to go over 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 call, such as statements regarding our efforts to improve profitability, the impact of the closure of our power R and D facility in User, Switzerland. Anticipated cost savings resulting from restructuring and the continuing impact of Bell's efforts to reevaluate its customer base and product port value are forward looking statements as described under the Private Securities Litigation Reform Act of 1995, given both risks and uncertainties.
Actual results could differ materially from belt projections. 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 factors that rely on our products. The impact of public health crises, such as the governmental, so 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. Topic development, commercialization, or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, a market's acceptance of the company's new products, and competitive responses to those new products. The impact of changes to US trade and tariff policies, the risk factors detailed from time to time, and 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 may also discuss non GAAP results during 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.
Thank you, Lynn, and thank you for joining our call today. I hope that you and your families are staying safe during these difficult times. Our first priority throughout this past quarter continues to be the safety of our associates around the world. We continue to provide these essential products to our customers. As of today, we are pleased to report that all our manufacturing sites are operating with the majority of them at or near normal production rate.
However, the situation remains fluid. Our production managers around the world have done an excellent job in ensuring ongoing compliance with local regulations related to COVID 19. I would once again like to take a moment to acknowledge our manufacturing associates in each of Bell's factories for their dedication to our company and our customers during this period. Turning to our results, We were pleased that our efforts related to cost reductions and containment measures over the past year have translated into meaningful gross margin improvement. As reflected in our second quarter 2020 financial results.
Many of the factors that drove this improvement are expected to provide a sustained benefit to our margins for the foreseeable future. Those factors include lower overhead costs from restructuring efforts, a reduction of material prices related to components, lower direct labor costs due to the foreign favorable foreign exchange rates in effect during 2020 and the inclusion of higher margin CUI sales. Further, we made a concerted effort to exit customers, and product lines that have lower margins in order to better utilize our manufacturing resources. As a result of these and other factors, sales adjusted EBITDA has outlined in our release more than doubled compared to last year's second quarter, despite the lower sales volume, Sales were down $6,200,000 or 4.9 percent from last year's 2nd quarter. Acquisition of CUI Lake 2019 contributed to $10,600,000 for sales during the second quarter and a gross margin of over 39%.
Driven by sales of Adaptors used in home workplace. Excluding CUI sales in the second quarter, we were down 16 point $9,000,000 from last year's second quarter, with declines, we declined to incur all product groups. Sales of front end power products were down 7,300,000 last year second quarter, largely due to reduction in sales to low margin customers. The weakness in commercial aerospace end markets accounted for $5,600,000 of this decline, and sales to our distribution partners remain lower than price prior year, quarter by $2,900,000. We entered the second half of the year with very limited visibility as our 2nd quarter build bookings were soft.
However, there are areas of change as we enter the 3rd quarter. Recent awards for connectivity products on key defense programs in munitions, military avionics, platforms, mobile communication programs, resulted in improvement in military sales of over 40% in 2nd quarter versus last year's 2nd quarter. Booking this year does also remain healthy, providing an opportunity for continued strength and shipments throughout the second half of the year. Our Magnetic Solutions group continues to see strong, strong demand for product going into communication hardware and next generation network infrastructure as our associates need to accommodate increased bandwidth requirements to do a large number of people working from home. Within the power solution protection group, Bell was awarded a design win for power supply for cost effective ventilator.
This non cancelable non return award totaled $1,600,000 and expected start shipping in the 3rd quarter. We also continue to see year over year growth related to the c r CUI acquisition to the remainder of the year. In addition, our surge protection group had a 14% increase for the quarter due to a competitor not being able to ship. The closure of our facility in Hooster Switzerland will bring our annual fixed costs down by $3,000,000 with those savings taking place by the fourth quarter of this year. The Bail management team remained focused on bottom line growth and continue to focus on which customer products and bell facilities best align with the goal of improving profitability.
Before I turn back the call to Craig, I would like again to acknowledge and thank our global team. The efforts enable us to be flexible in responding to this rapidly changing environment, our ability to generate results, we did disclose much of the credit of our frontline associates for making it happen under these difficult circumstances. And with that, I'll turn the call over to Craig to run through the financial update. Craig?
Thanks, Stan. Sales by product segment for the second quarter of 2020 were as follows. Power Solutions And Protection sales were $45,100,000, up 2% from last year's second quarter. Connectivity Solutions sales were $38,900,000, a decline of 9% and Magnetic Solutions sales were $37,200,000, also down 9% from last year's second quarter. On a consolidated basis, gross profit margin excluding R and D expenses increased to 26.2 percent in the second quarter of 2020 as compared with 21% in the quarter of 2019 as a result of the combination of factors.
Overhead and indirect labor costs were $4,700,000 lower during the second quarter of 2020, primarily due to restructuring measures implemented during late 2019. And a reduction in the cost structure for our Synch Connectivity Solutions segment to align with current sales volumes within that segment. A portion of the margin improvement in the second quarter of 2020 related to lower material costs, stocks of high cost components that had previously been build up in our supply chain, but now been worked through, resulting in significantly lower material costs in the P and L as compared to the same quarter last year. A favorable shift in product mix and lower direct labor costs resulting from favorable fluctuation in foreign exchange rates were also factors contributing to the margin improvement. In the second quarter of 2020 as compared to the same period of 2019.
Research and development costs were $6,100,000 during the second quarter of 2020, a decline of over $700,000 from the second quarter of 2019 as a result of restructuring efforts implemented during the latter part of 20 18. Our selling, general and administrative expenses were $18,100,000 or 14.9 percent of sales, as compared with $19,200,000 or 15.1 percent of sales in the second quarter of 2019. Lower travel expenses of $682,000 of reduction of ERP costs of $391,000, and savings from other cost containment efforts outweighed the $1,900,000 of incremental SG and A expenses associated with the newly acquired CUI business. SG and A expense also included a gain on the cash surrender value of COLI policies of $1,000,000 in the second quarter of 2020 compared to a gain on these policies of $159,000 in the second 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 travel and entertainment spend will be lower than normal for the remainder of the year. These factors resulted in income from operations of $7,500,000 in the second quarter of 2020 as compared to income from operations of $4,500,000 in the second quarter of 2019. Other income and expense, net was an expense of $302,000 for the second quarter of 2020 as compared to income of $267,000 during the second quarter of 2019. Fluctuations from last year's second quarter was largely related to a foreign exchange loss of $103,000 in the second quarter of 2020, as compared to a foreign exchange gain of $450,000 in the second quarter of 2019. Interest expense was $1,300,000 in the second quarter of 2020, down slightly from the same quarter last year to the due to the lower interest rate effect during the 2020 quarter.
We expect interest expense to be lower by approximately $600,000 to $700,000 in the second half of the year as compared to the first half of twenty twenty related to the decreases in both LIBOR and in the company's fed on its credit facility. We had a provision for income taxes of $423,000 in the second quarter of 2020. Compared to a provision of $421,000 during last year's second quarter. The impact of permanent differences on U. S.
Tax exempt activities, led to a slightly higher effective tax rate in the second quarter of 2020 as compared to the same quarter of 2019. Earnings per share for the Class A common shares was earnings of $0.43 per share in the second quarter of 2020, as compared with earnings of $0.23 per share in the second quarter of 2019. Earnings per share for the Class B common shares with earnings of $0.46 per share in the second quarter of 2020 as compared with earnings of $0.24 per share in the second quarter of 2019. On a non GAAP basis, which excludes certain unusual and other nonrecurring items, EPS for Class A shares with earnings of $0.43 per share in the second quarter of 2020 as compared with earnings of $0.03 per share in the second quarter of 2019. On a non GAAP basis, EPS for Class B shares was $0.46 per share in the second quarter of 2020.
As compared with earnings of $0.03 per share in the second 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 June 30, 2020 was $75,300,000, a decrease $3,000,000 from December 31, 2019. Our cash balance grew by $6,900,000 sequentially from the March 31st balance. During the first half of twenty twenty, we generated cash flows from operating activities of $16,800,000.
We made net payments of $8,200,000 towards our outstanding debt balance and used cash for capital expenditures of $3,000,000 dividend payments of $1,600,000 and interest payments of $2,300,000. Accounts receivable were $78,300,000, at June 30, 2020, as compared with $76,100,000 at December 31, 2019. Day sales outstanding decreased slightly to 59 days at June 30 2020 as compared to 60 days after 7 31st, 2019. Increase on our accounts receivable balance was largely due to higher sales volume in the second quarter of 2020 as compared to the fourth quarter of 2019. Inventories were $104,700,000 at June 30 2020, down $2,600,000 from December 31st 2019 level.
The decline was seen in finished goods, partially offset by increases in work in process. The reduction in inventory is also partially due to the write down of excess stocks related to projects that ended. Accounts payable were $44,800,000 at June 30, 2020, up $657,000 from its level at December 31 2019, primarily due to the implementation of new supplier payment guidelines to better manage our cash reserves. Total outstanding debt balance was $135,200,000 as of June 30th 2020, net of deferred financing costs, a decrease of $8,500,000 since the 2019 year end balance. This primarily reflects the voluntary prepayment of $8,200,000 made during the first quarter of 2020 in connection with an amendment to our credit agreement.
Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding. Was $13.57 per share at June 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, Steve, we would like to open up the call for any questions. Keepa might have.
If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will take our first question from Mr. Theodore O'Neil with Litchfield Hills Research.
Please go ahead.
Thank you. Congratulations on a good quarter. One question here. You talked in the press release about rationalizing the customer base and the product portfolio. And I was wondering if you talk about, give us a little more color on that and which vertical was impacted the most by that.
And if there were opportunities where you could sort of x out a customer that also took care of the product as well, or was it 2 separate, you know, analysis going on?
Thanks. Okay. We had one major, building a product from one of the big data storage people. That had a, you know, there was an internet company that had their own data storage and the and it was a power supply that we do, has the capabilities to work with Second Tier 3rd tier of companies, which we think we could do a better job. If you're looking at the Amazon's, the Googles, the Facebook's, It tend to be overly price sensitive, and the volume just the the cost just can't we can't compete in that market any longer.
So that was one situation. The other major situation that we're getting out of, which represents about 12 to 13,000,000 is a modular product. We build a custom built product where we do the manufacturing for our company and private label it, and the margins are just too low. But we are working with other companies on doing OEM, ODM work where we act as a design and a manufacturing And in those opportunities where we we can offer more value, I think we can be competitive in those types of products. But again, just being very sensitive at this time, if, you know, know, I think, historically, we were always looking at top line growth and took product in that maybe we should not just to to have that growth.
I think at this point in time, We really want to focus on getting any cash into the company and working off our debt.
We will take our next question from Jim Ricchiuti with Needham And Company.
Please go ahead. Hi, good morning. Thank you Good morning.
And
maybe just to follow on, Pia's question, just, is there a way to aggregate all of this? And in terms of of total revenue impact. I mean, you gave us some of it in pieces. And I'm just wondering if there's a way to think about it in totality because there's some off that to it as well, I guess.
I think the, you know, the 2 big pieces is is I think both one customer we walked away from again, and that was a data center company customer. And I think that sales are going anywhere from 12 to 15,000,000 annually. Going forward, starting in the 4th quarter, probably be another 10 to 13,000,000. Okay. Those those major hits.
There are other, you know, customers, but the volumes are not that that substantial.
Got it. And I think we're also I think we're also looking at at, you know, individual products in in certain customer portfolios where they may not, you know, meet the meet the margin, you know, standards that we're setting. So it wouldn't mess necessarily be everything we sell to a customer, but the products within that portfolio might not be suitable anymore. Understood. You you called out, some of the impact that you experience in the commercial aerospace market.
I got the number right. It's it's about 5,600,000
in, in the quarter.
That's correct.
That's correct.
Yeah. I'm wondering, is that I don't recall. What was the number in in in Q1? Do you guys have that if you're ready? If not, we can discuss it offline.
What I'm trying to do is I'm trying to I mean, it doesn't look like we're gonna see a recovery anytime soon in the commercial aerospace market or maybe there's some aftermarket that you're going to get But I'm wondering if we should think about this as kind of a a a 20,000,000 dollar or more headwind that you have that you're going to probably have to deal with over the next, you know, year or so.
I think, Jim, I think we've dealt with it. We realigned our manufacturer me. And I think that's why, you know, that we did so well this quarter on the aerospace, you know, is that we, you know, we did lose those sales. If you looked at yesterday's wall a journal where, you know, a major, you know, Boeing at statements that they're going to, they won't hit they're initially gonna hit 31 planes in 20 21. They push that back by a year, and they get no visibility of how well they're gonna do.
So, again, you know, based on that, you know, it's gonna be, you know, tough sledding for the next 18 months in the aerospace business. But I think we're aligned. There's no more alignment we have to do to address this. We know what, you know, we know what it is, and we've we've taken the steps already. To address the new sales volume.
We're going to have it with these customers.
Yeah. No. Just looking at the margins, please, my
Just to answer your question, Jim, initially, in the first quarter, our commercial aerospace sales were down 3,400,000 versus last year's first quarter. And then in the 2nd quarter, we saw a, year over year decline of the 5,600,000 that we had mentioned. So overall, about 9,000,000 down versus the 1st 6 months of 29 team.
Got it. And to your point, Dan, I mean, it sounds like you've already aligned the cost structure in other, not only here, but in other parts of the company. I guess that's the other question. I mean, how there are a lot of puts and takes here, a lot of moving parts to gross margins. And, yeah, I'm wondering how we we might think about gross margins given some of the things you're doing, areas you're de emphasizing, areas where you've got some opportunities like there's still some nice pipeline in the defense side of the business.
And just generally given the overall macro environment, is there any way to think about gross margins in this? Alright, Greg. You've got that one. Thank you. Yeah.
I mean, in the quarter, Jim, we did, you know, there were some, below some favorability that we would we would kinda look at, like, more of a, like, a one one time impact. But I think looking looking forward, And, obviously, we can't look too far forward, but, we would think probably our more normalized margin might be in that, maybe 23, 25% range. Taking out these these one time, you know, influences that we had. Ma'am.
So that would be, I
think, an incremental incremental improvement over last year's at least the third quarter. So But, yeah, not quite, maybe not quite as good as we saw this quarter. That's helpful. And then final question, for me is, I mean, it sounds like a lot of the focus here is, is on, you know, paying down debt. Strengthening the balance sheet and it's all good stuff.
I'm just wondering, is M and A at least for the time being off the table, or are you, you know, just still, you know, looking at the various potential assets that might be out there. What's your what's your point of view in terms of near term on that? Are you taking more of, you know, kind of wait and see?
No. No. I think we we are still very active in the M and A area. However, as you know, there's not much activity going on. We do have a smaller, you know, we are talking to 2 or 3 potentials companies out there that we're looking at.
However, they tend to be on the smaller side, more of strategic fits. However, you know, if something comes across our table, that makes sense. We we definitely would look at possibly of acquiring another company. Yes. And we're still seeing it active as we can.
That's it for me. I'll jump back in the queue. Thanks
a lot.
We will take our next question from Lenny Dunn with Mutual TrustCo of America. Please go ahead.
Dana, I'm very pleased to hear that you're only going to do, likely, only going to do small acquisitions. And then you are finally addressing getting the balance sheet stronger and working on gross margins. Those are all things that music to my ears. So I just wanted to express that to you.
And even if we do see a big acquisition though, might have to take a look at it. So I'm sorry to tell you that.
Well, that I that I understand, but, at least you're not aggressively doing just for top line growth, and, those things have been disappointments over the last few years. Anyhow, it sounds to me that you're pointed in the right direction and I guess I could see something that makes sense, but it has to be make a lot of sense to,
there is a special
balance sheet.
Yes. I'm going to be correct about that.
And things look good. I mean, I thought the numbers were better than I expected, and I expect that a fairly good quarter, but, appreciate what you've done in what I would consider very adverse conditions.
It appears there are no further questions at this time. Mr. Bernstein, I'd like to turn the conference back over to you for any additional or closing remarks.
Thank you, Steve. Again, we appreciate everybody joining the call today during these difficult times, and we just wish you and your family the best and looking forward to speaking to you again next quarter. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.