Good day and welcome to the Bill Fuse, Inc. 3rd Quarter 2019 Results Conference Call. Today's conference is being recorded. This time, I'd like to turn the conference over to Dan Bernstein, President and Chief Executive Officer. Please go ahead.
Thank you, James. Joining me on the call today is Greg Brocious, our Vice President Finance and Carlos Quintella, our corporate account manager. Before we begin the call, I'd like to ask Craig to go over the safe harbor statement. Craig?
Thanks Dan. Good morning, everybody. Before we start, I would like to read the following Safe Harbor statement. Except for historical information contained in this call, The matters discussed on this call, such as statements regarding anticipated cost savings, alignment of costs with anticipated business levels, restructuring efforts in Asia and long term sales growth are forward looking statements as described under the Private Securities Litigation Reform Act of T95. That involves risks and uncertainties.
Actual results could differ materially from Bell's projections. Among the factors that could cause actual results to differ materially from such statements are: the market concerns facing our customers to continuing viability of sectors that rely on our products, the effects of business and economic conditions, difficulties associated with integrating recently BARDA companies. Capacity and supply constraints are difficulties. Product Development commercialization or technological difficulties, a regulatory and trade environment risks associated with foreign currencies, uncertainties associated with 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. 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 now I'd like to turn the call back to Dan for a general business update.
Thank you, Craig. Before going through the financials, I would like to provide a brief update on how the business did from operational standpoint this quarter and what we see going forward. Overall, our 3rd quarter sales levels continue to reflect the softness in demand from customers and channel partners this year as they work through high inventory levels. On a positive note, we have made progress in reducing Our own level of inventory and the material costs running through our P and L are starting to decrease in the level seen earlier this year. Further, our successful execution of restructuring programs during the 1st 9 months of 2019 led to a 4,600,000 of annualized cost savings.
Approximately $2,300,000 of these cost savings began to be realized in the 3rd quarter with the balance expected to be realized beginning in fourth quarter. As the action to date have largely impacted our cost of sales, we believe these cost savings will be contributing factor to gross margin expansion. To date, we have identified additional actions in Asia that anticipate the year $1,100,000 annualized savings. These measures are scheduled to be completed in the fourth quarter with savings expected to be realized in beginning of the first quarter of 2020. As a global cost review continues, we anticipate further initiatives to improve profitability in U.
S. Europe agents throughout 2020. While third quarter bookings improved slightly from second quarter this year, we anticipate 4th quarter sales to be down from the 3rd quarter level. Based on our ship dates. That said, we are encouraged by projects within military, commercial, aerospace applications for harsh environment connectivity products, as well as high performance computing industry applications for our power products.
They're expected to take hold by the second quarter of 2020, In the meantime, our focus will be on streamlining our operations to create more efficiency foundation upon which we can grow our business on. As with that, I'll turn the call over to Craig to run through the financial update.
Thanks, Jan. To provide a quick recap on sales, sales during the third quarter were $124,500,000. By geographic segment, North American sales were $65,800,000, a decline of 7% from last year's third quarter. Europe sales were 18,700,000, down 16% and Asia sales were 40,000,000 down 25% from last year's third quarter. By product group, Power Solutions and Protection sales were $40,300,000, down 10% from year's third quarter.
Connectivity solution sales were $44,500,000, a decline of 8% and Magnetic Solutions sales were $39,700,000, down 25% from last year's third quarter. Gross profit margin declined to 18% in the third quarter of 2019 as compared with 19.9% in the third quarter of 2018. As lower sales in 2019 combined with higher material costs had downward pressure on our gross margins during the third quarter of 2019. Our selling, general and administrative expenses were $17,900,000 or 14.4 percent of sales. As compared with $18,700,000 or 12.8 percent of sales in the third quarter of 2018.
Disc reduction in SG And A, primarily related to cost containment measures within the areas of incentive compensation and travel expense, which accounted for $860,000 of the decline. Legal and professional fees were also $680,000 lower in the 3rd quarter, of 2019 as compared to the same quarter of 2018. These favorable variances were partially offset by lower foreign exchange gains on the translation of our foreign balance sheet accounts of $900,000 as compared to last year's third quarter. On a go forward basis, we would expect SG per quarter in the near term or any significant fluctuations in foreign currencies. Based on our revised economic outlook each of our reportable operating segments, we completed an interim review of our goodwill during the third quarter.
Based on this analysis, our North America segment goodwill was deemed to be fully impaired. As a result, we recorded a goodwill impairment charge in the amount of $8,900,000 during the third quarter of 2019. These factors resulted in a loss from operations of $4,600,000 in the third quarter of 2019 as compared to income from operations of 10,500,000 2019, down slightly from the same period last year due to lower interest rate in effect during the 2019 period, coupled with a reduction in the debt balance. Our provision for income taxes $2,200,000 during last year's third quarter. The benefit during the third quarter of 2018 was the result of favorable measurement period adjustments of $2,600,000 related to the transition tax.
Earnings per share for Class A common shares was a loss of $0.51 per share in the third quarter of 2019 as compared with earnings $0.89 per share in the third quarter of 2018. Earnings per share for the Class B common shares was a loss of $0.53 third quarter of 2018. On a non GAAP basis, which excludes certain unusual and other non recurring items, EPS for Class A shares was $0.19 per share share in the third quarter of 2018. On a non GAAP basis, EPS for Class B shares was $0.20 per share in the third quarter of 2019. As compared with earnings of $0.75 per share in the third quarter of 2018.
And now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at September 30, 2019 was $64,800,000, an increase of $10,900,000 from December 31, 2018. During the 1st 9 months of 2019, we made net payments of $2,200,000 towards our outstanding debt balance. We also used cash for capital expenditures of $8,200,000, dividend payments of $2,400,000 and interest payments of $3,800,000. Accounts receivable were 79,100,000 1, 2018.
Days sales outstanding declined slightly to 58 days at September 30, 2019, as compared to 59 days at December 31, 2018. The reduction in our accounts receivable balance was largely due to the lower sales volume during the third quarter of 2019 as compared to the fourth quarter of 2018. Inventories were $110,200,000 at September 30, 2019, down $9,900,000 from December 31, 2018. The decline was primarily in raw materials as purchases of raw materials have slowed while we work through our inventory on hand. Accounts payable were $38,900,000 at September 30, 2019, down $17,300,000 from its level at December 31, 2018, primarily due to lower raw material purchases during the quarter.
Bell's total outstanding debt was reduced by $2,200,000 during the 1st 9 months of 2019, bringing the balance down to $112,300,000 as of September 30, 2019 net of deferred financing costs. Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of common stock outstanding, was $13.9 per share at September 30, 2019, as compared to $14.39 per share at December 31, 2018. One final note on the finance side, have historically been part of our cost of sales and therefore are a factor in arriving at a gross margin. Is still the case in the third quarter of 2019 financials presented in our earnings release today. This classification is different than the majority of our peers and investors should keep this in mind when comparing our gross margins to our peers.
Our current intention is to reclassify the presentation of this expense beginning in fourth quarter of 2019. And with that, I'll turn the call back over to Dan.
Thank you, Craig. James, we would like to open up the call for questions, if we could.
You. We'll take our first question today from Theodore O'Neill with Richfield Hills Research.
Thanks very much. Two questions for you today. When you talk to your distributor partners, What do you hear on the channel with regards to inventory? Are we halfway through, quarterly through this kind of correction? The correction that we're seeing and the other on Magnetic Solutions being down here in the quarter, is that tied to a customer or a product transition or both?
Okay. Let me address both questions. From what we hear in the channel, from our distributors, also from the, some of our competitors, and other people in the field, Everybody's predicting the second half of twenty twenty that the hope, hopefully the inventory will be flushed out completely. And that's, I guess, an educated guess. If it goes beyond that, then there's a substantial downturn in the market.
Your second question is, my net effect is based on, yes, We have one of our largest key customers had a large product in the introduction and they built up too much buffer stock to hit the high demand. And then once the new product came out, it kind of flattened out and we're working through inventory with them. And that might, Angelo, maybe by theendofthefirstquarter.
We'll take our next question from Jim Ricchiuti with Needham And Company.
I was wondering if you could maybe give us a little bit more color as to what you're seeing in the Power Solutions business. The decline was a little bit more pronounced in Q3 versus Q2? What are you seeing in that portion of the business?
I think the big problem we have generally overall, we weren't hit too bad with tariffs. However, a key customer was for us was Facebook with the data centers. Representing about $17,000,000 in sales. And because of the tariffs and some of our competitors being able to build in Thailand in different areas. They've, they only used us for Europe and it has become a very price sensitive product.
And that's where a big chunk of the decline came from that large customer.
I think to add to that, Jim, we did have a couple of kind of somewhat one off projects that we had last year in the pit mining. Bitcoin lining space that obviously when the when Bitcoin was high, the business was good, since it has come down since then. People aren't really building out their capacity at this point. So we had a couple of we had a lot of dollars in the third quarter last year. It didn't happen again this year.
But I think also overall, Jim, I think we're taking a more strategic approach with the power group where I think we focus maybe too heavily on substantially large customers that the revenue looked great, but the profitability wasn't too great. So a lot, we're shifting that relative more to industrial and real opportunities where the customers might be smaller but the profitability of substantially greater.
Okay. And maybe on that note, you showed some nice improvement in, sequential in gross margins and it sounds like a lot of that came from some of the restructuring you're doing. At these kinds of revenue levels, which sequentially looks like you're going to be down Q4, which is normally the case seasonally. But I'm wondering how we should think about gross margins in this kind of environment where we're probably not going to see a whole lot of improvement. It sounds like until the the second half of next year?
Yes. I mean, that's right, Jim. And we were we think we did a little bit better on the gross margin line the current quarter than we were expecting. And a lot of that had to do with we're in a somewhat favorable foreign exchange environment at the moment, particularly in China. We expect that to continue in the fourth quarter barring any significant geopolitical events that pop up here.
So if that's kind of stays consistent, we think our margins will hold in the fourth quarter, comparable to where they are today because the fact that the foreign exchange plus the we'll have a little bit more of a cost reduction, factored into the 3rd or the end of the fourth quarter. We think we'll be able to hold the margins where they are.
And on SG and A, you did better than we were expecting in Q3. Was there anything unusual? Because it does sound like you're expect that to get back
Yes, I think we did see some of our cost reductions hit there as well. The other another factor is we're, in our ERP conversion project. We are phasing out some of the support services that we were previously paying for. In prior periods. So we'll get a bit of a benefit from that as well.
So I think we lowered the range of SG And A going forward by roughly $500,000 per quarter
But you are assuming there's going to
be a little bit of
a bump up though in Q4 ish if I heard you correctly? Yes, I think we said about 17.5 to 18.5 something like that.
And just the fact that bookings up slightly versus Q2, doesn't sound like that's necessarily meaningful, but I'm just wondering, are there any parts of the business where you are beginning to see some signs of maybe improvement beyond just stabilizing?
Well, I think we're seeing just a slight uptick on the magnetic side. I mean, part of the issue with the magnetics is a lot of the revenue in that product line goes through VMI hubs. And so the visibility on that is not very long. And I think when we compare our backlog today versus where it was last year at this time, lead times were longer last year. So we had a lot more dollars in backlog.
So it's difficult. It's difficult to read at this point. We are seeing, like I said, a slight uptick in magnetics, but nothing that we would call a trend.
And the restructuring, additional restructuring that you're looking at in Asia, you're anticipating that's going to impact COGS, do you see any additional restructuring as you look out over the next couple of quarters as you try to align the business with the current environment?
I think if I was yes, we are taking a hard look at all the operations as you know, we have a large amount of our operations in China and there's certain uncertainty being too dependent on China. So we are looking at different areas that hopefully could be more cost competitive, more stable. We are looking at Vietnam, Malaysia, the Philippines, And it's too early to tell, but I would assume that if we do decide to move out, move out of China, there'd be some cost substantial costs associated with those moves?
Yes, Doug, and obviously, those are longer term initiatives that we're looking at now. We do have a couple of shorter term items that will be effective beginning in first quarter of next year. So another a potential $1,000,000 or so annualized going into effect in the first quarter next year.
Okay. And the last question for me, in this kind of environment, I'm wondering if you're seeing much activity, in the M and A pipeline, just if you're seeing any more attractive valuations just given this environment?
I think again, the biggest problem we see, and I think a majority of the companies we're looking at where we have, we think true synergistic value that should help us with the purchase price. And we think we should be the most competitive we've just been blown away by private equity. And we just think there's so much cash in private equity. It's made us extremely difficult to acquire some of these companies that we looked at in the arena. They're looking at maybe 15 times EBITDA and 3 times sales.
So the multiples are really, mostly in the military aerospace have really, really substantially higher than we think And for us, we are very caution. If you look at what's going to happen, if a Democrat is going to be elected, the next president, what's going to happen to military Aerospace valuations. And you assume that it has to go down not substantially, but you assume it go down from 15 times EBITDA to a 10 or 11 times EBITDA. However, we are looking at other areas that we're still hoping that we can have an acquisition by the end of the year that will end strength. But Again, the valuations at this point in time is driven by private equity funds not by, I should say, rational behavior.
Sorry, Jade. Don't know if that answered the question or not.
You did. Thanks a lot.
We'll now hear from Hendi Susanto with G. Research.
Hi, good morning.
Dan, the press release mentioned recent efforts focusing on targeted areas within military and commercial application. And also industrial and high performance computing. Would you give us some preview of your product roadmap or what what exciting products we should expect?
Sure. So Craig has it, Craig, do it?
Yes, I think we're working on, some active optical transceiver projects. We got orders on the books for those, begin shipping in the 4th quarter. Basically avionics type applications. We've got products going into certain missile programs for the U. S.
DOD. Again, a lot of these are follow on awards, projects that we've been in on, but also some new projects that are that we've been successful in winning share. So, So, yeah, we were optimistic on at least in the next several quarters on the military sites. Based on projects that we've been awarded.
On the aerospace side, I think we just signed an agreement. I can say with Boeing, to, for us to get approval at Boeing, we have to agree to pay them the qualification fees. And I think we finally came to turn to them, and this is one of the largest, uses of connectors, aerospace connectors. So we're working to get that part approved. Also, as we know, everybody's talking 5G.
We have a portfolio of products to support 5G. However, even though everybody's talking 5G, nobody's buying 5G components at this time, but we're very well situated on those products. As that market breaks loose, we can support them properly. And then we are making inroads into the industrial and thin rail for power supplies.
So Dan, how should we think of the first half of twenty twenty? You have some exciting products in Ministry and Aerospace at the same time we have double digit decline in the last two quarters and that double digit decline may presumably continue until inventory build resume in the second half. Belfuse does not share forward looking guidance, what are some guideposts we should have in mind?
Well, I think on the Mill arrow side, we are, as I mentioned, some new, some very good new programs in the military fees, but we are kind of we are susceptible to the 7 37 MAX activity. So, as that gets resolved. If they're able to resume production, then we should see a little bit of an upside there.
Just to give you some more insight on that, from everything we told before what happened, the situation happened, they were ramping up from 45 planes a month up to 61 planes a month. Just to give you an idea, we have about 5000 connectors on every plane that represents about $50,000 of sales. So again, we don't know how that ramp up is looking. Now, we know that they continue to build, but they're building more in the 41 to 45 range. But that ramps up, that is a very big opportunity for us.
Go ahead, go ahead,
Andrew. No, go ahead, Craig.
No, I think. And then on the magnetic side, I think that is really dependent on a couple of things. The inventory overstock situation, when does that clear out, if if that happens earlier than the second half of next year, then we should be see some good and positive impact to that.
But I think we all face with the same concerns with the tariffs and with Brexit. This overhang, you know, Hong Kong and China, this overhang of uncertainty, I think everybody out there is that down the hatches. I don't think anybody's committed to buying new equipment. And I don't I think everybody's a wait and see attitude. Again, if we sign a trade agreement with China tomorrow, I think the whole world will be a lot more positively
more comfortable. More comfortable.
And I think until that this cloud that hangs above everybody now, until that's taken care of, which is really difficult for us to give any visibility.
And then all things equal, will it be reasonable to assume double did decline on the top line in Q4 at the same time? It's not double digits. It would be
high single digits, Andy, I think.
Okay. High single digit. Okay. That's very helpful. And then last question.
Given the current share price, how much consideration, when it comes to share buyback?
Tremendous. We did buy back 30 shares. 30,000 shares. Last quarter, we had an opportunity with one chair, although wanting to that. Our problem is we do have some covenants with the banks.
So our hands are kind of tied. But my philosophy is anytime our stock falls below book value, we should be very aggressively buying the stock.
Thank you.
That will conclude today's question and answer session. I will now turn the conference over to Dan Bernstein for any additional or closing remarks.
Once again, we do appreciate everybody, on the call and looking at Bell. And if you have any other questions, don't hesitate to contact us. And thank you.
That does conclude today's conference call. Thank you for your participation. You may now disconnect