Good day. Welcome to the Bel Fuse Inc. First Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Bernstein, President and Chief Executive Officer. Please go ahead, sir.
Thank you, Mary. Joining me on the call today is Craig Brosius, our Vice President of Finance, Lynn Hutkin, 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 sales projections, customer demand, the impact of product releases, and anticipated cost savings, 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 Bel's 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 may also 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 an operations standpoint this quarter and what we see going forward. Overall, we were pleased with the continued year-over-year sales growth during the first quarter, with sales coming in at $125.4 million, up 6% from the first quarter of 2018. Our Power Solutions and Protection group continued their trend of year-over-year sales growth with an increase of $5.7 million compared to the first quarter of 2018, driven by continued demand for our power supplies and array of data center applications. Sales of our DC-to-DC products also saw growth in 2019. This was offset by a decline in demand for our custom modular products. Our Connectivity Solutions Group had year-over-year sales growth of $1.4 million.
Our CIS business increased revenue by $1.3 million compared to the first quarter 2018, led by strong demand for our connector products in commercial aerospace applications, both direct to customers and through aftermarket sales. Our Magnetic Solutions sales were generally the same as last year for the first quarter. The sales of our Signal Transformer products were strong during the first quarter of 2019 related to medical industrial applications. This increase was offset by lower demand during the quarter for MagJack products and discrete magnetic components. Following the record bookings in 2018, we did see some slowing in bookings during the first quarter attributed to customers working down heightened inventory levels, which has been built up in response to new product launches and potential rises in tariffs. These factors led to a backlog of $166.8 million at March 31st, 2019, a reduction of $4.4 million, or 3%, from 2018 year-end.
By product groups, the backlog of orders for our Connectivity Solutions products grew by $6.4 million from year-end, offset by declines of $5.8 million for our Magnetic Solutions products and $5 million for our Power Solutions and Protection products. From a profitability standpoint, we benefited more from a favorable exchange rate environment during the first quarter 2019 compared to the same quarter 2018. Improved stock market conditions led to a $1.1 million increase in cash surrender value of our COLI policies. These factors were offset by continued challenges with higher labor costs due to minimum wage increases in the People's Republic of China and Mexico and higher material costs as compared to the first quarter of 2018. The restructuring efforts implemented in late 2018 and early 2019 will help mitigate these rising costs and preserve our margins beginning in the second quarter.
Overall, while we expect some downward pressure on second quarter sales compared to last year's second quarter, we are generally optimistic for future sales growth and improved profitability in the second half of this year. As our customers work through their inventory on hand, we expect there will be an upswing in bookings. There are several positive drivers we look to the second half of the year, particularly related to key military aerospace platforms in which we participate in, continued momentum for our power products within the HEV market, and we're also investing time and resources on developing and launching products to support the up-and-coming 5G markets and believe that we're well-positioned to capture future growth as this new technology emerges. With that, I turn the call over to Craig to run through the financial update.
Thank you, Dan. To provide a quick recap on sales during the first quarter were $125.4 million.
North America sales were $64.6 million, up 8.6% from last year's first quarter. European sales were $23.5 million, up 16.6%, and Asian sales were $37.3 million, down 3.5%. By product group, Power Solutions and Protection sales were $42.8 million, up 15.3% from last year's first quarter. Connectivity Solutions sales were $44.4 million, up 3.4%, and Magnetic Solutions sales were $38.3 million, essentially the same as last year. Gross profit margin increased to 18.8% in the first quarter of 2019 as compared with 17.9% in the first quarter of 2018, as incremental sales in 2019 led to improved fixed cost absorption, partially offset by higher labor and material costs during 2019. Our selling general and administrative expenses were $19.8 million or 15.8% of sales as compared with $20.7 million or 17.5% of sales in the first quarter of 2018.
The decrease in SG&A expenses during the 2019 period primarily related to a $659,000 increase in cash surrender value over Company-Owned Life Insurance policies as a result of stock market rebounding during the first quarter of 2019. In addition, foreign exchange losses were $428,000 lower in 2019 versus the 2018 first quarter. These factors were offset by an increase in ERP implementation costs of $661,000 during the first quarter of 2019, as the first phase of our implementation went live in January. On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term, barring any significant fluctuations in foreign currencies. As a result of these factors, we generated income from operations of $2.8 million in the first quarter of 2019 as compared to $437,000 in the first quarter of 2018.
Interest expense was $1.4 million in the first quarter of 2019, up $263,000 from the same period last year due to the higher interest rate in effect during the 2019 period. Our provision for income taxes was $39,000 for the first quarter of 2019, compared to $325,000 during last year's first quarter. The provision for income taxes during the first quarter of 2019 benefited from a decrease in taxes related to uncertain tax positions and the impact from permanent tax differences on U.S. tax-exempt activities. Earnings per share for the Class A common shares was $0.08 per share in the first quarter of 2019 as compared with a loss of $0.11 per share in the first quarter of 2018.
Earnings per share for the Class B common shares was $0.09 per share in the first quarter of 2019 as compared with a loss of $0.11 per share in the first quarter of 2018. On a non-GAAP basis, which excludes certain unusual and other non-recurring items, EPS for Class A shares was $0.20 per share in the first quarter of 2019 as compared with a loss of $0.09 per share in the first quarter of 2018. On a non-GAAP basis, EPS for Class B shares was $0.22 per share in the first quarter of 2019 as compared with a loss of $0.09 per share in the first quarter of 2018. Now I'd like to go through some balance sheet and cash flow items. Our cash and cash equivalents balance at March 31st, 2019 was $43.2 million, a decrease of $10.7 million from December 31st, 2018.
During the first quarter of 2019, we made net payments of $744,000 towards our outstanding debt balance. We also used cash for capital expenditures of $2.4 million, dividend payments of $800,000, and interest payments of $1.2 million. Accounts receivable were $94.2 million at March 31st, 2019 as compared with $91.9 million at December 31st, 2018. Days Sales Outstanding were 68 days at March 31st, 2019 compared to 59 days at December 31st, 2018. The increase in our accounts receivable balance was largely due to the higher sales volume in the month of March 2019 as compared to the month of December in 2018. Our DSO during the first quarter was unfavorably impacted by the pause in shipping product to our customers' consignment hubs while we worked down their inventory levels. Inventories were $124.8 million at March 31st, 2019, up $4.7 million from December 31st, 2018.
The increase was primarily in work in process and finished goods due to the slowdown of incoming orders and the shipments to the consignment hubs during the quarter. Accounts payable were $48.1 million at March 31st, 2019, down $8 million from its level at December 31st, 2018, primarily due to lower raw material purchases during the quarter. Bel's outstanding debt was reduced by $744,000 during the first quarter, bringing the balance down to $115.2 million as of March 31st, 2019, excluding deferred financing costs.
You'll see that our balance sheet has a few new line items this quarter related to the adoption of the new lease standard, which requires us to record a right of use asset and associated lease liability in connection with assets utilized under an operating lease, which were previously off-balance-sheet items. On the January 1st, 2019 adoption date, we recorded right of use assets in the amount of $20.7 million and an associated lease liability in the amount of $21 million. Book value per share, which is calculated as stockholders' equity divided by our combined Class A and Class B classes of common stock outstanding, was $14.53 per share at March 31st, 2019, as compared to $14.39 per share at December 31st, 2018. Now I'd like to turn the call back to Dan and open the call for questions. Dan?
Yeah. Hi, Mary. Can we open up the call for questions?
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Just as a reminder, again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask your question, and we'll pause for just a moment to allow everyone that opportunity to signal for questions. Our first question is from Mike Morales with Walthausen & Company . Please go ahead.
Hi, good morning, guys, and thanks for taking my question. I want to dig into a little bit on the slower bookings that you commented on. I know last call that you said that January was running pretty strong, but there was some concerns about inventory levels out there. Can you just give more color on when and in what vertical you started to see the slower bookings in the first quarter?
Across the board, I think there's two major things that we're facing. One with the shortages that were out in the market, driven by ICs and capacitors, that people were being cautious on double booking, on making sure they had orders come in. That was one concern that we thought that was out there. The other concern was if the government moves from a 10% tariff to a 25% tariff, people want to get those products in before then. Also I think two of our major distributors that are both private companies, one is DigiKey, one is Mouser, I think really took a very aggressive stance in bringing in substantial inventory. We see both those distributors just holding back on their order process at this time. We're projecting that by this quarter, hopefully a lot of that inventory would be flushed out.
Got you. Just to make sure that I'm interpreting this correctly, you said you expect downward pressure in the second quarter. Is that a slight top-line contraction? Are you still projecting a little bit of growth in the second quarter? How are you thinking about that from where you sit today?
I think for the second quarter, as we indicated, we are expecting top-line sales to go down compared to last year's second quarter. At this point, we're estimating high single-digit decline.
Okay.
As we look to the second half of the year, it's still a little too early to tell at this point. We do see some positive growth drivers further out in the year, particularly related to some military programs that we're on and also HEV projects that are picking up. We typically only have about 12 weeks of visibility in our business, it's hard to predict at this point how the second half will look, we do see positive indicators as we look to the second half.
Great. That's very helpful. Thanks for the color. Dan, one of the things that you mentioned was some concern about the component shortages that are out there. I've heard over the past couple of months, people kind of point to June 2019 as when this starts to fully work itself out. We've seen some relief recently. From where you guys are sitting, what are you seeing on the component side? Is there any areas of tightness? Has it worked itself out? How is that right now?
I think at this point, we see a substantial easing of the lead times. We were facing some situations where lead times were stretched out past a year, 18 months. I think that's come down to substantially more reasonable levels. The big curveball that we have out there, I think, is electric cars, and the usage that they have with capacitors and ICs. For example, if you look at we do a lot with fuses and circuit protection, the standard non-electric car would maybe use 40 or 50 fuses. On a new car, electric car, you could have 500 fuses. We don't know how that's going to progress and how that's going to change the market. If you look back at the shortages that we were facing last year, I think it was largely dependent on the auto industry.
Okay. I've also read that China's kind of pulling back some subsidies on the HEVs.
Electric cars. Yeah.
Electric cars. Where would your HEV exposure be? Is it more China oriented? Is it U.S., Europe?
No, it's definitely more North American, European. I don't think we can be that cost competitive for the electric market in China. Our focus has been more from the power side, is more niche markets in Europe and North America. By that, for example, buses, trailers, not with.
Off-road equipment.
Off-road. Yeah. We're working a lot with boating companies now on battery chargers for them. Also, we do a lot of work with Tesla on circuit protection.
Got you. Dan, Lynn, Craig, thank you very much for the color. I appreciate it.
Appreciate the questions.
Once again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Our next question is from Hendi Susanto with Gabelli Funds. Please go ahead.
Good morning, Dan, Craig, and Lynn.
Hi.
Good morning.
Dan, do you have estimate of 5G addressable market for Bel Fuse? Can you remind us your major products that will benefit from 5G?
Okay. What we're doing is a lot of the wireless work, again, looking at telecommunication, where that's going, looking at the auto industry, different areas that are moving. If you look at 5G, basically, you have the whole world interconnects with itself, from what's going to happen with the lighting systems outside, how cars interact with each other. Basically, we're coming up with an array of products that can meet this new technology, really focused on the RF side and the wireless side of the business from a I should say, from the Cinch side, the high reliability side of the business than the commercial side.
Okay. Then, I think you cited lower demand of MagJack and discrete magnetic component in Q1. How should we expect those two product groups to trend as we see the remainder of 2019? Should we expect lower demand to continue?
I think both those product groups go heavily into the networking companies like HP or Cisco or Oracle. I think they have more of an over-inventory situation because of the concerns they had with the shortages that they brought in of substantially greater product than they need. We're hoping that a lot of that product could be flushed out this quarter and hopefully the beginning of next quarter. It should start improving by the second half of this year.
Okay. Lynn mentioned future expectation of high single-digit year-over-year. Can you elaborate, let's say, across different segments, whether one would see a higher decline versus a slower decline among your product groups, I mean?
Lynn, you want to take that one?
Sure. I think that on the Magnetic Solutions piece, we're probably going to see the highest decline in that group. Just related to what Dan was just referring to, one of our major customers had a new product launch. They have a lot of inventory on hand right now that they're working through. Under the new revenue recognition standard, we now record revenue as we ship it to their hubs. To the extent that they are using inventory and we're not shipping as much, that does have a downward impact on our sales. I think that's the group where we see the most decline. The Connectivity Solutions group, some pressure there. Could either be flat, slightly down, no major concerns there. On the Power Solutions group, we are expecting that to be down a bit from last year's second quarter.
We did have some shipments, especially into blockchain customers, that we don't anticipate repeating in this year's second quarter.
Okay. That's helpful. Thank you.
You're welcome.
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 comments or closing remarks.
Thank you, Mary. We appreciate everybody being on the call and look forward to speaking to you next quarter.
This concludes today's call. Thank you for your participation. You may now disconnect.