Good day, and welcome to the Bell Fu's Incorporation Fourth Quarter And Fiscal Year 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Dan Bernstein, President and Chief Executive Officer. Please go ahead.
Thank you, Zena. Joining me on the call today is Craig Roaches, our Vice President of Finance, and then Hockin, 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 this call, such as statements regarding central sales growth, the anticipated impact of the acquisition of the Power Assets of CUI, Inc. On both sales and EBITDA margins, anticipated cost savings resulting from Bell's global cost structure initiatives, the timing of completion of Bell's ERP implementation the expected effects of streamlining on Bell's overall profitability, the anticipated impact of the coronavirus outbreak, the extended lunar new year holiday break and the grounding of Boeing 7 37 Max, productivity levels at L4 Manufacturing Sites in China, bell's ability to adjust workload levels at its China site and an increase in airline maintenance spend on existing aircraft.
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 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 sectors that rely on our products, the effects of business and economic conditions, the success of efforts to contain and otherwise bomb to the coronavirus difficulties associated with integrating recently acquired companies, capacity and supply constraints for difficulties. Product development, commercialization or technological difficulties, the regulatory and trade environment, risks associated with foreign currencies, uncertainties associated legal proceedings, the market's acceptance of 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. 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.
Thank you, Lynn. Before going through the financials, I would like to provide a brief update on how the business did from the operation standpoint this quarter. And what we see going forward. The fourth quarter continued to be challenging for us as our customers and distributors worked through the excess inventory on hand. Further, the ongoing tariffs have resulted in certain customers buying alternate sources for their product, which impacted our sales in the fourth quarter.
In addition, material costs remain hard to the end of this year, putting additional pressure on our margins. By year end, we showed an indication of customer inventory levels coming down and bookings for our Cinch and magnetic product groups have started to improve. During the fourth quarter, we closed our office in Shanghai and implemented other indirect headcount reductions in Asia. Overall, 2019, a total of $5,700,000 of analyzed cost savings were implemented. Of this amount, $1,700,000 were realized in the second half of twenty nineteen, and the incremental $4,000,000 will be realized in 2020.
In December, we closed on our acquisition of CUR Power Assets. We are pleased with the results we have been pleased with the results of this acquisition so far. On Friday, February 14th, we filed our 8 K with order financial pro form a relating to this acquisition. Historically, the gross margins of this supplier business were approximately 40% an EBITDA margin of 10% and down sales years. We look forward to a full year of contributions from business in 2020.
From what we see today, the first quarter will be very difficult, given the challenges around coronavirus and the grounding of the Boeing 737 Max. Bell is closely mounting the Coronavirus outbreak and its impact on our operations of supply channel. We can confirm at this point that all four of our manufacturing sites in China have resumed production, and we were currently running at approximately 50% to 60% of our normal run rate. Bell anticipates at a minimum to see an adverse financial impact as a result of lost sales profit incremental label costs for a period of time that associates were unable to work due to travel restrictions or illness. The welfare of our associates continue to be our top priority, and we're working with the local government to ensure the necessary preparations are made to allow our associates to safely return to work.
Many times have come and been pushed back by 4 weeks as we continue to assess the overall impact of our supply chain. Continued grounding of the Boeing 7 37 MAX is also expected to have an unfavorable impact on our comparison throughout 2020. There's currently a pause in the production of AXF at Boeing. And while we anticipate that this should resume in the coming months, will likely be reduced rate for a period of time. We hope we hope to lessen some of this exposure through a prompt adjustments to our workforce.
As a related facility. And the anticipation of strengthening our aftermarket sales of products, our realized increased maintenance spend on existing aircraft and their fleet. Our management team is proven capable of responding quickly to changes in these type of circumstances. And we are diligently working with our local teams to minimize the fact of these current events. As with that, I'd like to turn over the great global financials, right?
Thanks, Ben. Before running through the numbers, I want to point out a few changes in our financial statement presentation. And reporting disclosures that were implemented during the fourth quarter of 2019. As noted on last quarter's call, our research and development costs historically, including the component of cost of sales and were therefore factoring a rising interest profit. This classification was different than the majority of our peers.
Financial statements included in today's earnings release reflect the reclassification of R and D expense outside of cost of sales, and is shown on a separate line before gross profit. Prior periods have been recast to reflect this revised presentation. Similarly, foreign exchange gains and losses, which were historically included in our SG and A expense, have been reclassified to the other income and expense line in all periods presented. This change in presentation was also done to conform to the presentation of our peers to raising comparability for our investors. It also provides better transparency of the SG and A expense related to our day to day operations.
Lastly, we implemented a change to our reportable segments during the fourth quarter. In the past, our reportable operating segments were geographic in nature, North America, Europe and Asia. In connection with our migration to the new ERP system and with the acquisition of CUI, we are now looking at the business on a product group basis making decisions based on the profitability of our 3 product segments: connectivity solutions, power solutions, and protection and magnetic solutions. Profit measures for our pre FOX segments will be included in our upcoming 2019 10 K filing. Moving on to the financials, sales by product segment for the fourth quarter of 2019 were as follows: Inactivity solutions sales were $41,000,000, a decline of 12% from last year's 4th quarter.
Power Solutions And Protection sales were $36,100,000, down 24% and Magnetic Solutions sales were $38,000,000, down 22% from last year's fourth quarter. On a consolidated basis, gross profit margin, excluding R and D expense, declined to 21.4% in the fourth quarter of 2019. As compared with 26.8 percent in fourth quarter of 2018 as lower sales in 2019 combined with higher material costs continue to have a downward pressure on our gross margin during the fourth quarter of 2019. Research and development costs were $6,700,000 during the fourth quarter of 2019, a decline of $1,100,000 from the fourth quarter of 2018 as a result of restructuring efforts implemented during 2019. Our selling, general and administrative expenses, excluding exchange gains and losses, were $19,100,000 or 16.6 percent of sales, as compared with $22,500,000 or 15.8 percent of sales in the fourth quarter of 2018.
The $3,400,000 reduction in SG And A primarily related to a $1,000,000 decline in legal and professional fees, largely due to the elimination of redundant ERP system support costs. Lower incentive compensation and travel expense also contributed to decrease in SG and A from the 2018 period. On a go forward basis, we would expect SG and A to run between 20 $500,000 $21,500,000 per quarter in the near term. This includes the incremental SG and A associated with CUI. These factories resulted in a loss from operations of $2,200,000 in the fourth quarter of 2019 as compared to income from operations $7,700,000 in fourth quarter of 2018.
Other income and expense of $2,500,000 for the fourth quarter of 2019 as compared to income of $67,000 during fourth quarter of 2018. The extent in the fourth quarter of 2019 largely related to a $2,100,000 loss on liquidation of foreign subsidiaries. An unfavorable swing in foreign exchange gains and losses, which are now included in this line item, also contributed to the variance from the 2018 quarter. Interest expense was $1,300,000 in fourth quarter of 2019, down slightly from the same period last year, due to lower interest rate and effect during the 2019 period, coupled with a reduction in the lower than the average debt balance throughout the year. Our provision for income taxes was $392,000 for the fourth quarter of 2019, compared to a provision of $2,400,000 during last year's fourth quarter.
The provision in 4th quarter 2019 reflects a reduction in guilty tax and taxes related to uncertain tax positions as well as permanent tax differences of U. S. Tax exempt activities compared to the same quarter of 2018. Earnings per share or Class A common shares was a loss of $0.50 per share in the fourth quarter of 2019 as compared with earnings of $0.31 per share in the fourth quarter of 2018. Earnings per share to Class D common shares was a loss of $0.52 per share in the fourth quarter of 2019.
As compared with earnings of $0.33 per share in the fourth quarter of 2018. On a non GAAP basis, which excludes certain unusual and other nonrecurring items. EPS for Class A shares was a loss of $0.30 per share in the fourth quarter of 2019. As compared with earnings of $0.37 per share in the fourth quarter of 2018. On a non GAAP basis, EPS or Class B shares was a loss of $0.30 per share in the fourth quarter of 2019 as compared with earnings of $0.39 per share in the fourth quarter of 20 And now I'd like to go through some balance sheet and cash flow items.
Our cash and cash equivalents balance at December 31, 2019 was 73 point $2,000,000, an increase of $19,200,000 from December 31, 2018. During 2019, we generated cash flows from operating activities of $25,300,000 and received proceeds from the sale of property, of $5,800,000. We made net payments of $3,000,000 towards our outstanding debt balance and used cash for capital expenditures of $9,900,000, dividend payments of $3,400,000 and interest payments of $4,800,000. Accounts receivable were $75,700,000 at December 31, 2019, as compared with $91,900,000 at December 31, 2018. Days sales outstanding increased slightly to 60 days at December 31, 2019, as compared to 59 days, at December 31, 2018.
The reduction in our accounts receivable balance was largely due to lower sales volume in the fourth quarter of 2019 as compared to the fourth quarter of 2018. Inventories were $107,300,000 at December 31, 2019, down $12,800,000 from December 31, 2018. Excluding CUI, billed inventory balance down $17,500,000 from the end of 2018. The decline was primarily in raw materials purchases of raw materials have slowed while we work through our inventories on hand. Accounts payable were $44,400,000 at December 31, 2019, down $11,700,000 from its level at December 31, 2018, primarily due to lower raw material purchases during the quarter.
Bill outstanding debt balance was $143,700,000 as of December 31, 2019, net of deferred financing costs, increase of $29,500,000 since the 2018 year end balance. This reflects the incremental borrowings of $32,000,000, to fund our acquisition of CUI in December, partially offset by $3,000,000 of repayments during 2019. Book value per share, which is calculated as stockholders' equity divided value are combined A and B classes of common stock outstanding, was $13.69 per share at December 31, 2019, as compared to $14.09 per share at December 31, 2018. And with that, I'll turn the call back over to Dale.
Thank you, Fred. At this time, we'd like to open up the call for any questions that you might have.
Function is turned We will now take our first question from Theodore O'Neil from Litchfield Sales Research. Please go ahead.
Caller, your line is
Sorry, we're on mute here. So I understand there are a number of macroeconomic headwinds here. But were there any bright spots in the quarter or they could see, in the upcoming quarter?
I see in the first quarter, we really know, military, aerospace We do see some improved bookings on the magnetic product side. Bookings have improved slightly. However, we do think because lead times are going to be stretched out, because of the situation in China that more people will be putting orders in books. So again, we do think that the first quarter will be weaker than we proceed. Hopefully, things look a lot stronger in the second quarter going forward.
And is there anything you could do in the near term to to deal with the customer sourcing product from other than China?
We have been looking at other areas. Personally, we're visiting, Malaysia, the Philippines and Vietnam, A, besides looking for other sources looking at other manufacturing areas for us and becoming less dependent on China. But even if that's the case, for example, We're talking to a key distributor today, and he mentioned that 70% of the circuit boards that are bought in Europe come from China. So it's really a dominating position they have. And with that dominating position,
you have a lot of
cost pressure that they can give us if you do look at certain areas, can it be cost competitive? So it's almost like a 2 edge source. If you look at another area, and if they can't be price sensitive, it's great that you can protect yourself from the coronavirus, but change yourself a product because of the bill material costs. That's what we're trying to weigh out and look at everything else.
We will now take our next question from Jim Ricchiuti from Needham And Company. Please go ahead.
Hi, thanks. I'm just wondering, I know it's a very fluid situation there, but what buys the outlook for bringing the utilization of four facilities in China, to higher levels over the next few weeks. I assume this is mainly a case of just getting folks into the plants
No, it's a little bit more difficult. For example, once again, people coming throughout trying to get everybody's factory they have to get approval from the local town to show where they're going back to the factory and transportation and get into the factory. Just as important as bringing them to the factory, the government has our food, your facility, monitor facility, then you have the best hygiene practice in place. Even for example, it's down to how you eat food now at the cafeteria. You can no longer face someone in the cafeteria yet on your back for them when you eat And then a big dilemma that we're all facing is mass.
Basically, we have currently 400,000 BaaS at our facility, but there's a tremendous amount of shores throughout mass throughout the country. In China, we are required to each employee to have 2 baths per day. So that was the fact that you have. Also, again, the emphasis of federal express coming, and they're not coming. Most shipments go to Harm concert is a delay there.
So overall, we're currently back at 60% Our problem is, we do have work that's going back at 60% of what's our output rate? Do we have any bottlenecks to bring too many people back from one area. So again, I just, I don't think we're going to get probably if we have our goal and our objective is try by mid March to get back to the 85% 92%. And by April 1st, everybody's in production and we're running back to full production. But it's a very As I said, things can change very rapidly depending on how they control the situation.
Just one more point. This is all, of course, based on no further outbreaks. And from all our understanding, it's coming down back going up. So we're beyond the high point.
Got it. And from a logistics standpoint, is that is that improving at all or is that, also you feel We're
all at the same, we're all at the same 65%, 60% you know, ballpark. We're all doing that. Greg, do you want to add anything? Yes, I
think it's the transportation, we're able to we're able to ship product out of our factories in San Antonio, a lot of the boats in Hong Kong. We're able to do that, but there obviously getting it from there to the customer depends on the freight carriers and what their ability is to to provide transport equipment, you know, aircrafts, what have you. So it's like 2074, it's a fluid situation, but it's getting better.
And with respect to, the competitive environment, are you is it Are there any signs that some of this business is going elsewhere? And does that damage any of the relationships longer term?
Or do you see that as as temporary.
It sounds like both folks are in the same boat.
For us, all of us, I think we're all in the same boat. I think lead times are being stretched out by everybody. So I think again, when lead times are stretched out, our customers and other customers are more concerned about getting availability in. So there's no way anybody would cancel orders at this time to go to a competitor. So we don't think that is our major concern is getting product out of the door as quick as possible to our customers.
Okay. And on the aerospace defense side of the business, it sounds like defense, there's still a pretty healthy demand environment and that tends to be better margin for you. How much does that help you looking out over the balance of this year?
Well, the problem is it would have been very helpful if we can have the Boeing situation. So again, from a margin standpoint, but Again, again, again, every day there's something new that hold on for Boeing. Yesterday, we found a breeding in the fuel tanks. You just don't know what's going to happen. We know what we're currently on hold at this point in time and it should be released.
Shortly. But again, it's just a fluid situation we're dealing with. And we are, and at this point, when you want to fill us in, And what we got for Boeing?
Sure. So, related to Boeing, right now, they have these production we do expect that once they resume, it would be at a, a fraction of the rate and there would be a gradual increase from there. We do expect a financial impact in the first half of twenty twenty estimated at $5,000,000 to $6,000,000 of lost revenue in the first half of twenty twenty, just related to the 7 37 MAX. From a bottom line perspective, it's probably a couple of $1,000,000. And that will be more heavily weighted in the first quarter.
We are putting some, some items in place to help mitigate that cost impact that we hope to be in place in the second quarter, but things take time, to put in place. We have started, reducing our headcount at the impact of factories and also shifting some of that labor over to the military product lines that had an extended backlog, to help increase our military product, growing out the door. So these efforts will hopefully offset the impact, but we're doing everything that we can to mitigate.
Again, that's just a it's not a no to register aerospace. So you want to go for the market?
Well, I think what we're saying there is we're the by replacing some of the output, by shifting some of our production over to the military products, that would help our margins, by comparison to the product that we sell into the MAC. So again, we're going to have some lost margin here. We do hope we're going to be able to make some of that up by shifting our output towards the higher margin military problems.
And also the surplus market for the Connect as we build for 737s on the leasing?
Yes, that's true, Dan. It's basically the longer the max is out of service, airlines are going to have to maintain their existing fleet. And so we participate in the aftermarket side of that where airlines who are distributors would be selling the repair parts. So we should see an uptick in revenue on that side.
Got it. And last question for me is, just with respect to the CUI business, It sounds like you're pleased with it, but I would assume I would guess that you're seeing the same kind of headwinds in that business that you're seeing in other parts of the business as
a result of what's going on? This is for the short term because they use a lot of suppliers from China. We're also on the short term of that, but hopefully they have enough inventory in place to their channels that they're protected. And they did have their largest. Just to add on to that, they did have their 2 largest booking bumps, in January February through the past 12 months.
So that's, that follows very well.
We will now take our next question from Mike Morales from Ralthausen And Company. Please go ahead.
Good morning, Craig. And Dan, thank you for taking my question. Good morning, Mike. Hey, Dan, in thinking about the China business and some customers looking to find alternate sources outside of China. I'm curious on how you were thinking about or how you'll know if that business is permanently lost?
I mean, are you seeing customers kind of saying that even though they might be able to get whether it's a better price or a better quality out of Bell Products coming out of China. The value right now for the near to medium term of diversifying the supply chain outside of China from that. How are you thinking
about that? Okay, I think overall, I don't see we a major effect with the coronavirus. What we saw a major effect with is with tariffs. So we lost a key customer because a competitor of ours was able to build product in. We have one competitor that could build the Philippines and one competitor that could build in Thailand.
And that's resulted in a loss going forward of $17,000,000. And that's why, you know, what we had is, like, we are looking at acquisitions. We're also looking at a manufacturing base now inside of that for more of a tariff standpoint. And we also have deep concerns about the Hong Kong China relationship, what might happen in the future and under that situation. So we are, we do want to become less dependent on China.
And that's our goal for the year is to see if we come up with different manufacturing sites. In addition to that, we do have key customers that are the same with us, that are evaluating all their products, if they find any product at 100% 100% built in one country. They are trying to diversify and China find suppliers outside there. So we do have one key customer. That's working with us on possibly, helping us at the facility outside of China.
And we should have a better idea about that. When we report in the second quarter. So we just have a lot more visibility. So, basically, overall, it hasn't hit us that bad. But it is a concern we have, and we are looking at it.
And hopefully, we'll be addressing it in the second quarter.
Sure. That's helpful. And Dan, just to make sure that I heard you correctly, did you say that it was $17,000,000 of revenue impact from the lost business for shipping
to other countries in the 4th quarter? I think No, it wouldn't be in the 4th quarter. It basically about $13,000,000 on a module basis.
Okay. That's helpful. Thank you. Some of the commentary in the release talked about the positive trends that you guys have been seeing on the connector business and on magnetic Can you talk about the trends that you're seeing on the orders for some of the different power products and maybe how the outlook for that is over the first half and second half of twenty twenty?
I think with Pappo, we are trying to refocus. I think historically, we've been looking at the top tier customers. Data center customers, the Google's, the Facebook's, the microstructs of the world. We feel there's extreme amount of price pressure there. We probably anticipate, but it's probably enough selling our margins.
So we're spending a lot of time focusing more. We're very strong in Europe with about Belelta brand. Also, we're very strong for the distribution channel now with CUI. So we're really focused, going more of an industrial look, rail market, 2nd tier, 3rd tier markets where we feel it's an awful lot more engineering value to our customers. And offer a lot more to the channel.
So again, we are going to do somewhat of a transition period. We still are maintaining some of our key power customers. But we are using engineering resources to go well with a broad based in certain market segments.
That's helpful. And then thinking lastly, maybe something on the CUI acquisition. Maybe high level, is there anything that you feel that you can either take from CUI as far as best practices or bring from Bell to see CUI in order to make your revisions run better or what kind of opportunities be, be, make the model better or help help run better?
Hopefully, CUI can help us run better. But just to give you some background, We've been working with CURs for over 4 or 5 years. We have conversations to try to acquire them. We thought they had a very unique key strategy Neil, so where they do very well is with the E catalog people, people like to call Digi Key, our Bowser, that's owned by Berkshire Hathaway. And what happens in the old days, when I first started, basically people brought bought product through a salesman knocking at a door.
These people would either be, reps that would work directly with a company our distributors that do resale. Over the past 5 or 6 years, as more and more people are using the internet to buy their products, and mostly for product development, and digikea and mouse are the key drivers for that. So instead of having a salesman, software engineer, NGIS basically don't want to waste time with salespeople, they want to get on the internet, buy my part quickly and put it into play. Now the best example of that is Systems are the largest customers you probably know. We have 2 direct sales people calling on Cisco.
We had 2 engineers with badges calling on Cisco, and then we had, I think, 3 rep companies calling on Cisco. And we get a fuse order from Cisco and we can't find out which one of these people sold the fuse to Cisco and then we realized it came from Digi Key had nothing to do with our sales team. And that heightens, you know, and so what we feel with CUI, CUI is the largest power company at DigiKey. TGP is a $2,000,000,000 company. They have 600 suppliers and we compete against Marotta, Artisan, Delta multi $1,000,000,000 company and CUR is the largest power supply company.
So we feel that we can use a lot of their best practices and needs the E catalog situation. We really plan to see Savelle's future growth. In addition to that, with the CUR brand, with the Bell View brand, we go from a number 25 supplier to a number 16 supplier. So it gives us a lot more visibility to do a lot more marketing, branding, with DigiQUE than what has been done in the past. So we just think it's just a home run opportunity.
Well, again, we'd like to work closer with them. We have One grant that's very well suited, to work with them is our signal transformer group. There's thousands of customers like CUI, I think they can offer a lot of upside with both companies. Again, we did see an opportunity that we could address and CUI is trying to work with us on a high volume product. So again, I think we're very pleased and I think it's a tremendous growth opportunity for Bell.
That was very helpful. Thank you for that. Thanks for taking my questions. Appreciate it, folks.
Might have been a little too long winded, but I apologize about that. I don't get too excited to open that case. So when I get my chance, I got it real quick.
We'll now take our next question from Hendi Savento from Gabelli Fund. Please go ahead.
Good morning, Dan, Craig and Lynn. First question, can you quantify how much impact of lower production levels on gross margin can be?
Related to the virus.
We're ready to deliver productivity running at 50s to 60 and then hopefully it would go up over the 80s to 90s. Like how should we calculate productivity level, with gross margin?
That's difficult to quantify, Hendi, because, like you said, we've got people returning to the factories. In many cases, they're there and they got there and they weren't allowed to go to work because of some of the other factors Dan talked about. We are required to continue to pay their salaries while we're there, even if they're not working. So it's it's kind of difficult to quantify what that impact is going to be.
Got it. And then can you share CUI gross margin profile or relative to Belfuse as, Belfuse has stated that UI will enhance Belfuse gross margin profile?
Yes. CUI will answer, particularly the margin profile of the power segment. I think you mentioned in our release, their margins are typically high-30s to low-40s. Which is higher than what our typical margin are throughout the power group at Bell. So that definitely should show an improvement.
And, Hendi, on last Friday, we did file an 8 K with pro formas that included the decline for 2018 and the 9 months, 9 30 of 2019. So that should give you an idea of their gross profit and how it improved results as well. Yes.
And then quick, when we look into the $5,700,000 of annual cost saving, does that include the 1,000,000 cost facing identified at CUI?
That would not include that. And it also doesn't include the savings on the ERP system that we mentioned. Well. So these would be more, kind of, manufacturing and overhead savings that are included in the 5.7
also, I think CUI is up to $7.50 now, just to let you know.
Then can you share about new product introductions that you are planning for 2020 and belt use product footprint in 5G?
Specifically, I know we're doing a lot in the RF on 5G. And we are introducing it. We do have a 5G catalog that we've introduced to the market. However, at this time, we don't see it take up as fast as we do. But all our product groups are focusing on where this is going to take us and see if we can have product to support a problem.
Okay, got it. Thank you.
This concludes today's Q And A. I would now like to turn the call back to you.
Thank you, and I appreciate your time. And hopefully, next quarter should be, somewhat brighter visibly in the future.
Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect