Good day, and welcome to the Bell Fuse, Inc. Second Quarter 2019 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, Shiloh. Joining me on the call today is Greg Brochas, our VP of Finance, and Lynn Cook can direct our 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 anticipated sales levels, gross margins, cost savings, cost reduction measures, demand for our products and the impact of long term growth drivers are 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, 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'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 GAAP results have been included in our release. I'd now like to turn the call back to Dan for a general business update.
Thank you, Nick. Before going through the financials, I would like to provide a brief update on how the business did from an operational standpoint this quarter and what we see going forward. Overall, our second quarter was challenging. Won both from the top line sales perspective and the impact of margins. As mentioned in the first quarter, we saw a decline in bookings as some of our customers are currently in an over inventory position.
Customers brought additional products into inventory throughout 2018 in response material shortages and the tariff increases that took effect in 20182019. This led a $13,000,000 year over year decline in our sales during the second quarter, which impacted each of our product groups. The lower sales based on higher material costs led to a low gross margins this quarter. While we have limited visibility of demand of our products, and our customer products. Our second quarter bookings continue to be soft, indicating flat to lower sales substantially in the third quarter.
We accelerated our effort to align our costs with our current business level and actively taking steps to reduce fixed costs and improve efficiencies at each of our facilities worldwide. During the second quarter, we completed the restructuring of Power R&D, resources and the transition of our single transform operation from Inwind New York to other existing Bell facilities. These initiatives are expected to result in annual cost savings of $2,100,000 beginning in third quarter of 2019. We're currently in the process of streamlining our operations in Asia to a chance productivity at these factories. To date, we have identified and substantially completed measures that will result in incremental annualized cost savings of $1,400,000, which should be expected to benefit from the beginning in the fourth quarter 2019.
The global initiative expected to continue over the next several quarters as we will complete our strategy that we have put in place. With the growth of 5G autonomous and electric vehicles, the cloud data centers, and spending in aerospace and military, we still remain very positive about our future growth opportunities. In the short term, there are areas of growth that will help offset some of the expected sales decline. With our Connectivity Solution group, we expect strong shipments of our micro miniature compass on these from I'm sorry, ammunition applications as well as increased demand for our high speed optical transceivers for 2 new fire to jet programs that are qualified. Our power system protection group is seeing more near term upside and power supply demand for use in heavy duty steel cutting equipment and high performance computing applications.
The Power Group has also recently project wins with traditional server applications which we expect to move into full production by the end of the fourth quarter. Our power truck products sold at e mobility applications. While still small from a dollar perspective, it grew by $700,000 or almost 50% from the second quarter of 2018. This area has significant growth potential down the road as some of our startups take hold and move into full production. And with that, I'd like to turn over the call to Craig to Rutherford for the Naturals update.
Thank you, Dan. To provide a quick recap on sales, sales during the second quarter $127,400,000. By geographic segment, North American sales were $67,100,000, a decline of 6% from last year's second quarter. European sales were $21,000,000, down 11% and agent sales were $39,300,000, down 14% from last year's second quarter. By product group, Power Solutions And Protection sales were $44,000,000, down 5% from last year's second quarter, Connectivity solutions sales were $42,500,000, a decline of 13% and Magnetic Solutions sales $40,900,000, down 10% from last year's second quarter.
Gross profit margin declined to 15.6% in the second quarter of 20 19 as compared with 20.6 percent in the second quarter of 2018 as lower sales in 2019 combined with higher material costs and an unfavorable shift in product mix, had significant downward pressure on our gross margin during the second quarter. Our selling, general and administrative expenses were $18,800,000 or 14.7 percent of sales, as compared with $18,300,000 or 13 percent of sales in the second quarter of 2018. This increase primarily related to foreign exchange fluctuations on the translation of our foreign balance sheet accounts, with an exchange dollars in limitation costs of $484,000 lower bad debt expense of $345,000 and reduced sales and marketing expenses of $273,000 compared to the second quarter of 2018. On a go forward basis, we would expect SG and A to run between $1920,000,000 per quarter in the near term, barring any significant fluctuations in foreign currency. During the second quarter, we closed on the sale of a property in Inwood, New York, which resulted in quarter of 2019 as compared to $10,700,000 in the second quarter of 2018.
Interest expense was $1,400,000 in the second quarter of 2019, up slightly from the same period last year due to the higher interest rate in effect in the 2019 period. Our provision for income taxes was $421,000 for the second quarter of 2019, compared to $2,400,000 during last year's second quarter. To provision for income taxes during the second quarter of 2019, was lower due to period. Earnings per share for the Class A common shares was $0.23 per share in the second quarter of 2019, as compared with earnings of $0.52 per share in the second quarter of 2018. Earnings per share from The Class B common shares was $0.24 per share in the second quarter of 2019 as compared with earnings of $0.56 per share in the second quarter of 2018.
On a non GAAP basis, which excludes certain unusual of other non recurring items, EPS for Class A shares was $0.03 per share in the second quarter of 2019 as compared with earnings of $0.58 per share in the second quarter of 2018. On a non GAAP basis, EPS for Class B shares was $0.03 per share in the second quarter of 2019, as compared with earnings of $0.62 per share in the second quarter of 2018. And now I'd like to go through the balance sheet and cash flow line Our cash and cash equivalents balance at June 30, 2019, was $58,400,000, an increase of $4,500,000 December 31, 2018. During the first half of twenty nineteen, we made net payments of $1,500,000 towards our outstanding debt balance. We also used cash for capital expenditures of $5,300,000, dividend payments of $1,600,000 and interest payments of two 500,000 Accounts receivable were $84,200,000 at June 30, 2019, as compared with $91,900,000 at December 31, 2018.
Day sales outstanding were 60 days at June 30, 2019 as compared to 59 days. At December 31, 2018. The reduction in our accounts receivable balances were largely due to the lower sales volume in the second quarter of 2019, as compared to the fourth quarter of 2018. 2019, down $1,900,000 from December 31, 2018. The decline was primarily in raw materials purchases of raw materials has flowed while we work through our inventory on hand.
Accounts payable were 42 $800,000 at June 30, 2019, down $13,400,000 from its level at December 31, 2018, primarily due to lower raw material outstanding debt was reduced by $1,500,000 during the first half of twenty nineteen, picking the balance down to $113,000,000 as of June 30, 2019, 18, excluding deferred financing costs. Book value per share, which is calculated as shareholders' equity divided by our combined A and B classes common stock outstanding was $14.64 per share at June 30, 2019, as compared to $14.39 per share, at December 31, 2018. One final note on the finance side, our R and D expenses have historically been part of our cost of sales, and therefore 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. We are currently evaluating potential reclassification of this expense presentation for future periods.
And with that, I'll turn the call back over to Dan.
Thank you. Shilo, can we open up for questions?
Thank you. You. We'll be taking our first question from Theodore O'Neil of Litchfield Hills Research. Please go ahead.
Thanks very much. And I'll vote for a reclass of R and D as a separate line item. The question I have for you, can you hear me okay?
Yes.
Okay. So, Craig, the question I have for you is that in the last quarter, in your prepared remarks, you guided SG and A to run at $20,000,000 to $21,000,000. And it came down in this quarter, also so did sales. And so I'm wondering, why would it be going up? Why would you guide for it to go up in the third quarter if you're looking for sales to continue you to be flat to down?
I think we guided last quarter in the $20,000,000 range. I think what we're guiding is slightly below that for 2019 to 2020.
So, Theo, if you're comparing it to the third quarter of 2018, Just keep in mind, the third quarter of 2018 had a $1,500,000 FX gain in that number, which we don't expect to recur in this year's third quarter unless something drastic happens in August or September.
Okay. And I do understand what's going on with inventory. And I don't think some of the distributors helped by making an online tool, so we could calculate advance, how much the tariffs were going to be and sort of scare everyone into buying in front of it. But, so I get that part of it. That's it for me.
Thank you.
Questions. We will now take our next question from Jim Ricchiuti of Needham And Company. Please go ahead.
Thank you. Good morning. A couple of questions. Wondering which of the product areas are being most impacted by the excess inventory in the OEM and channel. Is it mainly in Magnetic Solutions, or is it carrying over into some of the other product areas?
It's getting us across the board. But the major area is the magnetic where that's our integrated connector module, that we have. Which is affected by some very large OEM customers. So it's not as broad based as some of our other product lines we have.
Yes. And Dan, you've seen a few of these. How would you characterize the current inventory correction relative to some others that you've seen over the years?
Don't ask. No, to be honest, I think we are, I hate to say it, but we already had this 2 of But I think we are very optimistic about the future. I go back. I hate to say it with my father. It was the upsurge.
Everybody went out and bought a Kala TV. There's a lot of demand and all of a sudden we've had a call of TV, then it went down, then you made frame computers, then you did networking and high speed. So We always see these ups and quick downs as people get by the new product. But now we just see so many products that are being introduced from electric cars both from $16,000,000 to $25,000,000 from data centers, what Facebook, Google and Amazon need. I mean, you look at Amazon, a lot, all that growth you see is coming a lot of part from the data centers.
How do we penetrate those hyper accounts, 5G, where if you went to the Consumer Electronics Show, Everybody was talking 5G. We haven't seen anything, but everybody's introducing tremendous amount of new product. So again, we know this is going to flush out a certain point. What we're really looking at with, I guess, the term, I think Lincoln came up with the term electronic super cycle. That we just see a wealth of products out there that gives everybody a great amount of opportunity in order to really grow the industry.
Got it. If we looking at that sequential decline that you experienced in gross margins, Can you give us, can you give us a sense how much of that came from the higher material costs and relative to how much came might have come from product mix?
Sure. So, so majority of it related to the higher material costs, we're estimating about 3.8%. So 380 basis points, related to material costs, on the sales decline, just volume decline will have an impact on our margin percentage, but there was also a shift in product mix and we're estimating that that had, about a 250 basis point impact on our margins.
Got it.
And then there were some other favorable factors. We were in a more favorable FX environment so that that was an offset to those 2 unfavorable factors.
Okay. What you're seeing in higher material costs, is that primarily in the power solutions protection area?
I think it's across the board, but I think, probably the majority of it is in the power and protection area.
And Jim, as you know, as material lead times come down substantially, the pricing will fall close by.
But we haven't seen pricing return to those like 2017 levels. And we're not expecting that for a little while yet.
Okay. And one final question, I'll jump back in the queue. Just regarding the cost actions that you alluded to in the report, the earnings report today. I'm just wondering, you also are suggesting that you're reviewing some other potential initiatives. How should we think about those?
Other potential cost savings maybe in aggregate, over and beyond what you've already done?
Yeah. I mean, we're looking at, like we've mentioned, we're looking at all of our locations are in kind of the company structure. I think we can reasonably expect maybe another 3 to 5 $1,000,000 in fixed costs over a period of time. So these are not going to be short term type fixes. But But that's, I think, would be a reasonable expectation.
Thanks. Appreciate the call.
Our next question comes from Heidi Susanto of G. Research. Please go ahead.
Good morning and thank you for taking my questions. First question, can you characterize about the gross margin pressure due to product mix and when will it be until we shift to more favorable mix?
So in the second quarter, the product group that experienced the, the highest year over year decline was the connectivity business. And that most of that is military Aerospace driven. And on the military side, the timing is unpredictable. It's based on the timing of the various programs that we're on. So military had a bad quarter in the 2nd quarter, but we do expect that to improve in the 3rd quarter.
So we do expect, some upside in connectivity related to the military business. In the third quarter and at the higher margin business. So that we do expect some improvement in the third quarter related to product mix. Right.
And then that is big enough to swing the gross margin one way or the other, I assume?
What we're seeing for the third quarter, based on our existing backlog kind of basically indicates that we should see an uptick in gross margin percentage for the 3rd quarter.
And then I want to revisit, Jim's earlier questions. Can you characterize in which vertical in in which particular inventory correction is the most significant ones. Other companies have talked about excess inventories in hyperscale and data to accept their customers. I'm wondering whether you can share some colors, how similar your perspective versus others?
Well, I think we're seeing a large inventory correction in our networking equipment and product market. We sell to large OEMs that are overstock at the moment. So I think that one is one of the largest ones. We also see a similar over inventory situation in our distribution channel. And that's pretty much across the board in all of our product groups.
And it should be noted that we do $120,000,000 through the distribution channel. So it's a big, a big chunk of our sales. Go through that channel. And if you know, if you see writings on arrow and abnet, you know what's going on there. And I think everybody is in a very over inventory situation.
And then how long do you foresee this inventory correction will last?
From what we understand, most people are saying to the balance of this year, by September, we should get some more visibility people assume that September people order before Chinese New Year. But at this point, I don't know, I think we don't see any uptick for the balance of the year.
The next caller is from Hendi Susanto of G. Research again. One moment. Please go ahead.
You implied that the impact of higher material costs will continue into the second half. What will it look like beyond the second half? I'm wondering whether I'm wondering how you mitigated the higher material costs in 2020, whether that will come mainly from the cost saving initiative or whether there are other sources to mitigate that?
I think the bulk of the offset would be from our our cost reduction initiatives. We are we're expecting material costs to gradually trend down as, as there's more capacity in the market. But, I think we would, you know, primarily offset the increases with our cost reduction efforts.
Got it. Thank you.
It appears there are no further questions at this time. I'd like to turn the conference back to you.
Thank you, Shaul. We appreciate everybody joining us today. And hopefully, things will sort of improve. Have a nice summer. And thank you.
This concludes today's Bell Fuse Q2 Financial Update Call. Thank you again for your participation. All participants may now disconnect.