Bell Industries 10-Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

Commission file number 1-11471

Bell Industries, Inc.

(Exact name of Registrant as specified in its charter)

California	95-2039211
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1960 E. Grand Avenue, Suite 560, El Segundo, California	90245
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (310) 563-2355

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YESR NO£

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES£ NOR

     As of the close of business on August 10, 2005, there were 8,460,224 outstanding shares of the Registrant’s Common Stock.

BELL INDUSTRIES, INC.

FORM 10-Q

INDEX

	Page
Part I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Statement of Operations for the three and six months ended June 30, 2005 and 2004 (unaudited)		3
Consolidated Condensed Balance Sheet as of June 30, 2005 (unaudited) and December 31, 2004		4
Consolidated Condensed Statement of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)		5
Notes to Unaudited Consolidated Condensed Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		16
Item 4. Controls and Procedures		16
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3. Defaults Upon Senior Securities		16
Item 4. Submission of Matters to a Vote of Security Holders		16
Item 5. Other Information		16
Item 6. Exhibits
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

(Unaudited, in thousands, except per share data)

	Three months ended						Six months ended
	June 30						June 30
	2005			2004			2005			2004
Net revenues
Products	$	29,896		$	36,250		$	51,380		$	62,345
Services		7,462			7,568			14,666			15,901
		37,358			43,818			66,046			78,246
Costs and expenses
Cost of products sold		23,374			29,973			40,248			51,388
Cost of services provided		5,835			6,000			11,847			12,732
Selling and administrative		7,207			7,012			13,723			14,022
Interest, net		(36	)		(38	)		(88	)		(68	)
		36,380			42,947			65,730			78,074
Income before income taxes		978			871			316			172
Income tax expense		30			44			45			44
Net income	$	948		$	827		$	271		$	128
Share and Per Share Data
BASIC
Net income	$	.11		$	.10		$	.03		$	.02
Weighted average common shares		8,460			8,375			8,457			8,373
DILUTED
Net income	$	.11		$	.10		$	.03		$	.02
Weighted average common shares		8,493			8,475			8,513			8,467

See Accompanying Notes to Consolidated Condensed Financial Statements.

3

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEET

(Unaudited, dollars in thousands)

	June 30			December 31
	2005			2004
	Unaudited
ASSETS
Current assets
Cash and cash equivalents	$	8,642		$	10,801
Accounts receivable, less allowance for doubtful accounts of $758 and $727		19,254			11,455
Inventories		10,920			14,364
Prepaid expenses and other		2,247			1,813
Total current assets		41,063			38,433
Fixed assets, net		3,314			3,139
Other assets		3,438			3,617
	$	47,815		$	45,189
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	13,949		$	11,170
Accrued liabilities and payroll		7,794			8,178
Total current liabilities		21,743			19,348
Deferred compensation, environmental matters and other		4,930			5,025
Shareholders’ equity:
Preferred stock
Authorized — 1,000,000 shares, outstanding — none
Common stock
Authorized — 35,000,000 shares, outstanding — 8,460,224 and 8,437,724 shares		32,600			32,545
Accumulated deficit		(11,458	)		(11,729	)
Total shareholders’ equity		21,142			20,816
Commitments and contingencies
	$	47,815		$	45,189

See Accompanying Notes to Consolidated Condensed Financial Statements.

4

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Unaudited, in thousands)

	Six months ended
	June 30
	2005			2004
Cash flows from operating activities:
Net income	$	271		$	128
Depreciation and amortization		659			902
Provision for losses on accounts receivable		106			72
Changes in assets and liabilities		(2,937	)		(5,172	)
Net cash used in operating activities		(1,901	)		(4,070	)
Cash flows from investing activities:
Purchases of fixed assets and other		(313	)		(180	)
Cash flows from financing activities:
Employee stock plans		55			27
Net decrease in cash and cash equivalents		(2,159	)		(4,223	)
Cash and cash equivalents at beginning of period		10,801			12,203
Cash and cash equivalents at end of period	$	8,642		$	7,980
Changes in assets and liabilities:
Accounts receivable	$	(7,830	)	$	(7,393	)
Inventories		3,444			(115	)
Accounts payable		2,779			3,425
Accrued liabilities and other		(1,330	)		(1,089	)
Net change	$	(2,937	)	$	(5,172	)

See Accompanying Notes to Consolidated Condensed Financial Statements.

5

BELL INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Accounting Principles

The accompanying consolidated condensed financial statements for the three and six month periods ended June 30, 2005 and 2004 have been prepared in accordance with generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements have not been audited by an independent registered public accounting firm, but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial condition, results of operations and cash flows for such periods. However, these results are not necessarily indicative of results for any other interim period or for the full year. The accompanying consolidated condensed balance sheet as of December 31, 2004 has been derived from audited financial statements, but does not include all disclosures required by GAAP.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to guidelines of the Securities and Exchange Commission (the “SEC”). Management believes that the disclosure included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but the disclosure contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Shipping and Handling Costs

Shipping and handling costs, consisting primarily of freight paid to carriers, Company-owned delivery vehicle expenses and payroll related costs incurred in connection with storing, moving, preparing, and delivering products, totaled approximately $1.0 million and $1.8 million during the three and six month periods ended June 30, 2005 and $1.0 million and $1.9 million during the three and six month periods ended June 30, 2004. These costs are included within selling and administrative expenses in the Consolidated Condensed Statement of Operations.

Floor Plan Arrangements

The Company finances certain inventory purchases in its Technology Solutions business unit through floor plan arrangements with two finance companies. At June 30, 2005 and December 31, 2004, the Company had outstanding floor plan obligations of $250,000 and $2.2 million, respectively, which are classified within accounts payable.

Accrued Liabilities

The Company accrues for liabilities associated with disposed businesses, including amounts related to legal, environmental and contractual matters. Accrued liabilities include approximately $3.5 million and $4.3 million of amounts attributable to disposed businesses at June 30, 2005 and December 31, 2004, respectively.

Stock-Based Compensation

The Company, from time to time, grants stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and, accordingly, recognizes no compensation expense for the stock option grants as the exercise price of all options granted is equal to or greater than the fair market value of the Company’s common stock at the date of grant. The following table illustrates the effect on net income and net income per share, for each of the three and six month periods ended June 30, 2005 and 2004, if the Company had applied the fair value method as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” (dollars in thousands):

6

	Three months ended						Six months ended
	June 30						June 30
	2005			2004			2005			2004
Net income, as reported	$	948		$	827		$	271		$	128
Compensation expense as determined under SFAS No. 123		(19	)		(37	)		(32	)		(67	)
Pro forma net income	$	929		$	790		$	239		$	61
Net income per share
Basic and diluted — as reported	$	.11		$	.10		$	.03		$	.02
Basic and diluted — pro forma	$	.11		$	.09		$	.03		$	.01

Per Share Data

Basic earnings per share data are based upon the weighted average number of common shares outstanding. Diluted earnings per share data are based upon the weighted average number of common shares outstanding plus the number of common shares potentially issuable for dilutive securities such as stock options and warrants. The weighted average number of common shares outstanding for each of the three and six month periods ended June 30, 2005 and 2004 is set forth in the following table (in thousands):

	Three months ended				Six months ended
	June 30				June 30
	2005		2004		2005		2004
Basic weighted average shares outstanding		8,460		8,375		8,457		8,373
Dilutive stock options		33		100		56		94
Diluted weighted average shares outstanding		8,493		8,475		8,513		8,467

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123 (revised 2004) revises SFAS No. 123 and APB No. 25 and related interpretations. SFAS No. 123 (revised 2004) requires compensation cost relating to all share-based payments to employees to be recognized in the financial statements based on their fair values in the first interim or annual reporting period beginning after June 15, 2005 either on a retroactive or a prospective basis. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. In April 2005, the SEC adopted a rule that delayed the effective date of SFAS No. 123 (revised 2004) to the first annual reporting period beginning after June 15, 2005. The Company is currently estimating the potential impact of the adoption of SFAS No. 123 (revised 2004) and has not yet selected the method of adoption.

Environmental Matters

Reserves for environmental matters primarily relate to the cost of monitoring and remediation efforts, which commenced in 1998, at a former leased facility site of the Company’s electronics circuit board manufacturing business (“ESD”). ESD was closed in the early 1990s. At June 30, 2005 and December 31, 2004. Estimated future remediation and related costs for ESD totaled approximately $3.0 million and $3.3 million, respectively. At June 30, 2005, approximately $850,000 (estimated current portion) is included in accrued liabilities and $2.1 million (estimated non-current portion) is included in deferred compensation, environmental matters and other in the Consolidated Condensed Balance Sheet. At June 30, 2005 and December 31, 2004, the estimated future amounts to be recovered from insurance totaled $2.3 million and $2.6 million, respectively. At June 30, 2005, approximately $1.1 million (estimated current portion) is included in prepaid expenses and other and $1.2 million (estimated non-current portion) is included in other assets in the Consolidated Condensed Balance Sheet.

7

Litigation

Williams Electronic Games litigation:In May 1997, Williams Electronics Games, Inc. (“Williams”) filed a complaint in the United States District Court for the Northern District of Illinois (“US District Court”) against a former Williams employee and several other defendants alleging common law fraud and several other infractions related to Williams’ purchase of electronic components at purportedly inflated prices from various electronics distributors under purported kickback arrangements during the period from 1991 to 1996. In May 1998, Williams filed an amended complaint adding several new defendants, including Milgray Electronics, Inc., a publicly traded New York corporation (“Milgray”), which was acquired by the Company in a stock purchase completed in January 1997. The complaint sought an accounting and restitution representing alleged damages as a result of the infractions. The Company has not been named in any complaint and was not a party to the alleged infractions. The Company, as the successor company to Milgray, has vigorously defended the case on several grounds and continues to assert that Milgray did not defraud Williams, and that Williams suffered no damages as electronic components were purchased by Williams at prevailing market prices.

The case proceeded to trial, which commenced and ended in March 2002, with a jury verdict resulting in Milgray having no liability to Williams. In July 2002, Williams appealed the jury verdict and, in April 2004, the United States Court of Appeals for the 7th Circuit (“US Appellate Court”) rendered its decision. The US Appellate Court concluded that jury instructions issued by the US District Court were in error and the case was ordered for retrial of Williams’ fraud and restitution claims. The case has been remanded to the US District Court and a new judge has been assigned. No trial date has been set. Williams’ claim is approximately $8.7 million, not including an additional claim of $4.8 million for pre-judgment interest. While the Company cannot predict the outcome of this litigation, a final judgment favorable to Williams could have a material adverse effect on the Company’s results of operations, cash flows or financial position. Management intends to continue a vigorous defense.

Other litigation:The Company is involved in other litigation, which is incidental to its current and discontinued businesses. The resolution of the other litigation is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position.

Business Segment Information

The Company has three reportable business segments: Technology Solutions, a provider of integrated technology solutions: Recreational Products, a distributor of replacement parts and accessories for recreational and other leisure-time vehicles; and Electronic Components, a specialty manufacturer and seller of standard and custom magnetic products.

The following summarizes financial information for the Company’s reportable segments (in thousands):

	Three months ended						Six months ended
	June 30						June 30
	2005			2004			2005			2004
Net revenues
Technology Solutions
Products	$	13,895		$	19,459		$	22,123		$	31,901
Services		7,462			7,568			14,666			15,901
		21,357			27,027			36,789			47,802
Recreational Products		13,920			14,651			25,311			26,171
Electronic Components		2,081			2,140			3,946			4,273
	$	37,358		$	43,818		$	66,046		$	78,246
Operating income (loss)
Technology Solutions	$	307		$	75		$	(460	)	$	(488	)
Recreational Products		834			1,002			1,052			1,108
Electronic Components		510			464			935			902
Corporate costs		(709	)		(708	)		(1,299	)		(1,418	)
		942			833			228			104
Interest, net		36			38			88			68
Income tax expense		(30	)		(44	)		(45	)		(44	)
Net income	$	948		$	827		$	271		$	128

8

Subsequent Event

During July 2005, the Company’s largest client, Philip Morris USA, a subsidiary of Altria Group, Inc., indicated its intention to transition certain outsourcing services and product sales provided by the Company to a new vendor on or before the contract termination date of April 2006. We are awaiting final determination of the details of this transition, including the timing of the transition. For the six months ended June 30, 2005, the portion of the engagement covered by this contractual relationship generated approximately $4.0 million in services revenue and $2.0 million in product revenues. For the six months ended June 30, 2004, services revenues from this portion of the engagement totaled approximately $4.0 million and product revenues amounted to approximately $6.7 million, of which approximately $4.5 million was related to a large product deployment engagement.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by, the consolidated condensed financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, within the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and within other filings with the SEC. This discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” and “estimated,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements that we make in this Quarterly Report are set forth below, are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and are set forth in other reports or documents that we file from time to time with the SEC. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the critical accounting policies were identified which affect the more significant estimates and assumptions used in preparing the consolidated financial statements. These policies have not changed from those previously disclosed.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123 (revised 2004) revises SFAS No. 123 and APB No. 25 and related interpretations. SFAS No. 123 (revised 2004) requires compensation cost relating to all share-based payments to employees to be recognized in the financial statements based on their fair values in the first interim or annual reporting period beginning after June 15, 2005 either on a retroactive or a prospective basis. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. In April 2005, the SEC adopted a rule that delayed the effective date of SFAS No. 123 (revised 2004) to the first annual reporting period beginning after June 15, 2005. The Company is currently estimating the potential impact of the adoption of SFAS No. 123 (revised 2004) and has not yet selected the method of adoption.

Results of Operations

The Note to Consolidated Condensed Financial Statements under the heading titled “Business Segment Information” includes a tabular summary of results of operations by business segment for the three and six month periods ended June 30, 2005 and 2004.

Net revenues

Net revenues for the three months ended June 30, 2005 decreased 14.7% to $37.4 million from $43.8 million in 2004. For the six months ended June 30, 2005, net revenues decreased 15.6% to $66.0 million from $78.2 million in 2004. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

9

Operating income

Operating income for the three months ended June 30, 2005 increased 13.1% to $942,000 from $833,000 in 2004. For the six months ended June 30, 2005, operating income increased 119.2% to $228,000 from $104,000 in 2004. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

Corporate costs

Corporate costs totaled approximately $700,000 during each of the three-month periods ended June 30, 2005 and 2004. For the six months ended June 30, 2005 corporate costs decreased 8.4% to $1.3 million from $1.4 million in 2004. The decrease is attributable to reduced corporate payroll, reduced corporate related insurance costs and other net reductions in corporate expenses.

Interest, net

Net interest income for the three months ended June 30, 2005 decreased slightly to $36,000 from $38,000 in 2004. For the six months ended June 30, 2005, net interest income increased to $88,000 from $68,000 in 2004. The increase is attributable to an increase in interest rates and higher average cash balances during the first quarter of 2005.

Technology Solutions

Technology Solutions revenues for the three months ended June 30, 2005 decreased 21.0% to $21.4 million from $27.0 million in 2004. For the six months ended June 30, 2005, Technology Solutions revenues decreased 23.0% to $36.8 million from $47.8 million in 2004. Product revenues for three months ended June 30, 2005 decreased 28.6% to $13.9 million from $19.5 million in 2004. For the six months ended June 30, 2005, product revenues decreased 30.7% to $22.1 million from $31.9 million in 2004. The decrease in product revenues is primarily attributable to a large product deployment engagement for a major account totaling approximately $4.5 million during the second quarter of 2004 that was not repeated this year and the continued significant market pressure due to direct sales models, intense price competition and extended technology purchasing cycles. The gross margin percentage on product sales increased during the three months ended June 30, 2005 as compared to the prior year due to stronger margins from the Company’s education account base and the non-recurrence in 2005 of the lower margin percentage on the large product deployment engagement in 2004. Services revenues for the three months ended June 30, 2005 decreased slightly to $7.5 million from $7.6 in 2004. For the six months ended June 30, 2005, services revenues decreased 7.8% to $14.7 million from $15.9 million in 2004. The decrease in services revenues is attributable to the ending of an outsourcing engagement in 2004 and the ending of a help desk engagement in the current year first quarter. Decreases in services revenues from these two engagements totaling approximately $1.8 million for the six months ended June 30, 2005 were offset by approximately $600,000 in net increases in services revenues from new and expanded engagements. Operating income for the three months ended June 30, 2005 increased to $307,000 from $75,000 in 2004. For the six months ended June 30, 2005, operating loss decreased 5.7% to $460,000 from $488,000 in 2004. The improvement in operating results for the six months ended June 30, 2005 is primarily attributable to the stronger product margins from the Company’s education account base and an increase in reverse logistics and depot repair business.

During July 2005, the Company’s largest client, Philip Morris USA, a subsidiary of Altria Group, Inc., indicated its intention to transition certain outsourcing services and product sales provided by the Company to a new vendor on or before the contract termination date of April 2006. We are awaiting final determination of the details of this transition, including the timing of the transition. For the six months ended June 30, 2005, the portion of the engagement covered by this contractual relationship generated approximately $4.0 million in services revenue and $2.0 million in product revenues. For the six months ended June 30, 2004, services revenues from this portion of the engagement totaled approximately $4.0 million and product revenues amounted to approximately $6.7 million, of which approximately $4.5 million was related to the large product deployment engagement.

10

Recreational Products

Recreational Products revenues for the three months ended June 30, 2005 decreased 5.0% to $13.9 million from $14.7 million in 2004, and operating income decreased 16.8% to $834,000 from $1.0 million. For the six months ended June 30, 2005, Recreational Products revenues decreased 3.3% to $25.3 million from $26.2 million in 2004, and operating income decreased 5.1% to $1,052,000 from $1,108,000. Operating results for the three months ended June 30, 2005 were impacted by Midwest weather that resulted in a delay to the start of the spring selling season.

Electronic Components

Electronic Components revenues for the three months ended June 30, 2005 decreased 2.8% to $2,081,000 from $2,140,000 in 2004, while operating income increased 9.9% to $510,000 from $464,000. For the six months ended June 30, 2005, Electronic Components revenues decreased 7.7% to $3.9 million from $4.3 million in 2004, while operating income increased 3.7% to $935,000 from $902,000. Despite the lower sales volume, increased sales of custom products and better vendor pricing resulted in higher overall gross margins during the 2005 periods. These custom products include custom coils and inductors used in medical test equipment and lighting fixtures, and in specialty magnetic switches for use in military aircraft worldwide.

Cost of products sold

As a percentage of product revenues, cost of products sold for the three months ended June 30, 2005 decreased to 78.2% from 82.7% in 2004. For the six months ended June 30, 2005, this percentage decreased to 78.3% from 82.4% in 2004. These decreases are primarily attributable to the stronger margins from the Technology Solutions education account base during 2005 coupled with the non-recurrence of lower margins achieved on the large product deployment engagement during 2004 and gross margin percentage improvement at the Recreational Products and Electronic Components business units.

Cost of services provided

As a percentage of services revenues, cost of services provided for the three months ended June 30, 2005 decreased to 78.2% from 79.3% in 2004. For the six months ended June 30, 2005 this percentage increased to 80.8% from 80.1% in 2004. The decrease for the three months ended June 30, 2005 is attributable to improved margins arising principally on increased revenues from reverse logistics and depot repair engagements. The overall increase for the six months ended June 30, 2005 is attributable to the $1.1 million decrease in services revenues during the first quarter of 2005 which resulted in relatively higher payroll related costs to deliver services to existing and new clients.

Selling and administrative expenses

As a percentage of sales, selling and administrative expenses for the three months ended June 30, 2005 increased to 19.3% from 16.0% in 2004. For the six months ended June 30, 2005, this percentage increased to 20.8% from 17.9% in 2004. These increases are primarily attributable to the overall decrease in revenues at the Technology Solutions business unit and the existence of certain fixed expenses. While total selling and administrative expenses decreased by approximately $300,000 during the six months ended June 30, 2005 as compared to 2004, these expenses as a percentage of sales increased because of the overall decrease in sales during the period.

Income tax

Income tax expense totaled $30,000 and $44,000 for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, income tax expense totaled $45,000 and $44,000, respectively. These amounts primarily relate to state taxes. As of June 30, 2005, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Net income

Net income for the three months ended June 30, 2005 totaled $948,000, an increase of 14.6% from the prior year period. For the six months ended June 30, 2005, net income totaled $271,000, an increase of 111.7% from the prior year period. The changes in net income resulted from the factors described above.

11

Changes in Financial Condition

Liquidity and Capital Resources

Selected financial data are set forth in the following tables (dollars in thousands, except per share amounts):

	June 30			December 31
	2005			2004
Cash and cash equivalents	$	8,642		$	10,801
Working capital	$	19,320		$	19,085
Current ratio		1.9:1			2.0:1
Long-term liabilities to total capitalization		18.9	%		19.4	%
Shareholders’ equity per share	$	2.50		$	2.47
	Three months ended
	June 30
	2005			2004
Days’ sales in receivables		45			47
Days’ sales in inventories		36			29

Net cash used in operating activities was $1.9 million for the six months ended June 30, 2005, compared with $4.1 million in 2004. The net cash used in operating activities during 2005 reflects increased accounts receivable, partially offset by decreased inventory levels and increased accounts payable. The increase in accounts receivable is primarily attributable to higher sales during June 2005 as compared to December 2004 and the timing of receivables collections. The increase in accounts payables relates to increased purchasing to support the higher sales level. The decrease in inventory is primarily attributable to reduced inventory levels at the Recreational Products business unit. The net cash used in operating activities in 2004 reflects increased accounts receivable partially offset by increased accounts payable.

Net cash used in investing activities totaled $313,000 for the six months ended June 30, 2005 compared to $180,000 in 2004. Purchases of technology related products and other fixed assets totaled $313,000 and $346,000 for the six months ended June 30, 2005 and 2004, respectively. Proceeds on a note receivable from a business sold in 1999 totaled $166,000 during the six months ended June 30, 2004.

Net cash provided by financing activities totaled $55,000 and $27,000 for the six months ended June 30, 2005 and 2004, respectively, which represented proceeds from the exercise of employee stock options.

The Company believes that sufficient cash resources exist for the foreseeable future to support requirements for its operations and commitments through available cash and cash generated by operations.

Off-Balance Sheet Arrangements

The Company does not have any material off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

There have been no material changes to the Company’s contractual obligations and commercial commitments as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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Factors That May Affect Future Results of Operations

In addition to other information contained in this report, we are subject to the following risks, which could materially adversely affect our business, financial condition and/or results of operations in the future.

We face certain significant risks related to the currently pending Williams litigation and from other potential litigation that could materially adversely affect our financial condition and results of operations.

We have been engaged in ongoing litigation in connection with our 1997 purchase of Milgray, which was named as a defendant by the plaintiff, Williams, in an action alleging common law fraud and other infractions related to Williams’ purchase of electronic components at allegedly inflated prices from 1991 to 1996. Despite a trial court verdict in 2002, which was favorable to us, the action has been remanded for retrial. Although the outcome of this litigation cannot be predicted, an adverse verdict could have a materially adverse effect on us. The defense of this lawsuit has required a significant amount of our management’s time and attention and, even if we prevail in defending this lawsuit, we will incur additional legal and related expenses. The disruptive effect and expense of this litigation could adversely affect our business, financial condition and/or results of operations. We also may become subject to other litigation in the future.

Our previously owned businesses subject us to potential environmental liabilities, which could adversely affect our results of operations.

We are subject to various federal, state and local environmental statutes, ordinances and regulations relating to disposal of certain toxic, volatile or otherwise hazardous substances and wastes used or generated in connection with previously owned businesses. Such laws may impose liability without regard to whether we knew of, or caused, the release of such hazardous substances. Although we establish reserves for specifically identified potential environmental liabilities, which reserves we believe to be adequate, there may be potential undisclosed environmental liabilities or liability in excess of the amounts reserved. Compliance with these environmental laws could require us to incur substantial expenses.

We rely on a limited number of hardware and software vendors to supply us with products in our technology solutions business and the loss of our ability to rely upon any of those vendors, or to obtain their products in the future would adversely affect our results of operations.

Our technology solutions business is heavily dependent on our relationships with leading hardware and software vendors and on our status as an authorized service provider. Although we are currently authorized to service the products of many industry-leading hardware and software vendors, we may not be able to maintain our relationships, or attract new relationships, with the computer hardware and software vendors that may be necessary for our technology solutions business. Since we rely upon our vendor relationships as a marketing tool, any change in these relationships could adversely affect our results of operations while we seek to establish alternative relationships with other vendors. In general, our authorization agreements with vendors include termination provisions, some of which are immediate, and we cannot predict whether vendors will continue to authorize us as an approved service provider. In addition, we cannot predict whether those vendors will authorize us as an approved service provider for new products, which they may introduce. Any impairment of these vendor relationships, or the loss of authorization as an approved service provider, could adversely affect our ability to provide the products and services which our technology solutions business requires and harm our competitive position. In addition, significant product supply shortages have resulted from time to time because manufacturers have been unable to produce sufficient quantities of certain products to meet demand. We expect to experience difficulty from time to time in obtaining an adequate supply of products from our major vendors, which may result in delays in completing sales.

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We may not be able to compete effectively with other companies in our business segments, which will cause our net sales and market share to decline and adversely affect our business, financial condition and results of operations.

Our businesses are highly competitive and we face strong competition from competitors that are substantially larger and have considerably greater financial, technical and marketing resources than us. We believe that our prices and delivery terms are competitive; however, our competitors may offer more aggressive pricing than we do. We have experienced and expect to continue to experience intense competitive pricing pressures in our businesses, which could require us to reduce prices, with a corresponding adverse impact on our operating results. Additionally, as competition in the technology industry has intensified, certain of our key technology suppliers have heightened their direct marketing initiatives. These initiatives have resulted in some of our clients electing to purchase technology products directly from the manufacturer, rather than through us. While we expect these initiatives to continue, there could be a material adverse impact on our business if the shift of clients to purchase directly from manufacturers occurs more quickly than anticipated.

Our technology solutions and electronic components businesses are dependent on a limited number of major customers and clients and the loss of any of these major customers and clients would materially and adversely affect our business, financial condition and results of operations.

Sales of our products and services in our technology solutions and electronic components businesses have been and will continue to be concentrated in a small number of clients and customers. Three of our clients accounted for approximately 39% of our total revenues for 2004 in our technology solutions business, with one client, Philip Morris USA, accounting for approximately 14% of our total consolidated net revenues for the year. Similarly, five customers accounted for approximately 64% of our total sales of electronic components in 2004. In the event that any of these major customers or clients should cease to purchase products or services from us, or purchase significantly fewer products and services in the future, we could experience materially adverse effects on our business, financial condition and results of operations.

During July 2005, Philip Morris USA indicated its intention to transition certain outsourcing services and product sales provided by the Company to a new vendor on or before the contract termination date of April 2006. We are awaiting the final determination of the details of this transition, including the timing of the transition. We plan to aggressively realign our cost structure in response to this development.

Our recreational products business is seasonal and is subject to fluctuations, based upon various economic and climatic conditions that could harm us.

Sales of our recreational products are affected directly by the usage levels and purchases of recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products. The purchase and, in particular, the usage of these types of vehicles, are affected by weather conditions. As a result, sales of our recreational products business are highly susceptible to unpredictable events, and ordinarily decline in the winter months resulting in losses during these periods of the year. Additionally, unusual weather conditions in a particular season, such as unusually cold weather in the spring or summer months, can cause period-to-period fluctuations in our sales of recreational products. The usage and purchases of recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products are also affected by consumers’ level of discretionary income and their confidence about economic conditions and changes in interest rates and in the availability and cost of gasoline. As a result, sales of our recreational products can fluctuate based upon unpredictable circumstances that are outside of our control.

Our recreational products business relies heavily upon vendors with which we have no long-term relationships.

We do not have long term supply contracts with our recreational products suppliers, which may adversely affect the terms on which we purchase products for resale or result in our inability to purchase products from one or more of such vendors in the future. These vendors may choose to distribute their products directly to aftermarket dealers or establish exclusive supply relationships with other distributors. Additionally, manufacturers of new recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products may choose to incorporate optional equipment as standard equipment on their vehicles at the time of manufacture that are similar to products available for sale to dealers by distributors such as us. In addition to decreased sales, we would encounter increased competition in our markets, or may be unable to offer certain products to our customers, upon any such changes in our relationships with our recreational products vendors.

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If we are unable to recruit and retain key personnel necessary to operate our businesses, our ability to compete successfully will be adversely affected.

We are heavily dependent on our current executive officers, management and technical personnel. The loss of any key employee or the inability to attract and retain qualified personnel could adversely affect our ability to execute our current business plans and successfully develop commercially viable products and services. Competition for qualified personnel is intense, and we might not be able to retain our existing key employees or attract and retain any additional personnel. In addition, our recent financial operating results may make it more difficult for us to attract and retain qualified personnel.

If we are unable to develop innovative products and services in our technology solutions and electronic component businesses, demand for our products and services may decrease.

Our future operating results in our technology solutions and electronic component businesses are dependent on our ability to continually develop, introduce and market new and innovative products, to modify existing products, to respond to technological change and to customize certain products to meet customer requirements. There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands. If this occurs, we could lose customers and experience adverse effects on our financial condition and results of operations.

Our electronic components business is cyclical and demand may decline in the future, which could adversely affect us.

Demand for electronic components, which had improved in 2003 and 2004, began to decline late in 2004. While we expect that this recent decline is temporary, improvement in demand in the electronic and semiconductor component industry may not materialize. If the anticipated improvement does not materialize, demand for our electronic components may decline and adversely affect our results of operations.

A significant or prolonged economic downturn could have a material adverse effect on our results of operations in our technology solutions business.

Our results of operations are affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets that they serve. The general economic weakness in the IT industry resulting from among other things, the decline in discretionary IT spending by our clients and prospective clients, has adversely affected our revenues in recent years. A lack of improvement or continued decline in the level of business activity of our clients could continue to adversely affect our revenues and profitability.

If we fail to maintain an effective system of internal and disclosure control, we may not be able to accurately report our financial results or prevent fraud, which would harm our business and the trading price of our securities.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We are in the process of beginning a review and analysis of our internal control over financial reporting for Sarbanes-Oxley compliance. As part of that process we may discover material weaknesses or significant deficiencies in our internal control as defined under standards adopted by the Public Company Accounting Oversight Board (“PCAOB”), that require remediation. Under the PCAOB standards, a “material weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency or combination of control deficiencies, that adversely affect a company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than remote likelihood that a misstatement of a company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

As a result of weaknesses that may be identified in our internal control, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our securities.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company has no investments in market risk-sensitive investments for either trading purposes or purposes other than trading purposes.

Item 4.Controls and Procedures

Our management, with the participation of our acting chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2005. Based on this evaluation, the Company’s acting chief executive officer and chief financial officer concluded that, as of June 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our acting chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

The Note to Consolidated Condensed Financial Statements under the heading titled “Litigation”, included in Part I of this report, is incorporated herein by reference.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders was held on May 24, 2005 to vote on the election of five directors to hold office until the next Annual Meeting of Shareholders. All of management’s nominees for director as listed in the proxy statement were elected with the following vote:

			Votes		Votes
Directors	Votes for		against		withheld
Russell A. Doll		7,373,983		-0-		43,615
John A. Fellows		7,307,551		-0-		110,047
L. James Lawson		7,269,353		-0-		148,245
Michael R. Parks		7,311,644		-0-		105,954
Mark E. Schwarz		7,036,026		-0-		381,572

Item 5.Other Information

None

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Item 6.Exhibits

31.1	Certification of Russell A. Doll, Acting Chief Executive Officer of Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Mitchell I. Rosen, Chief Financial Officer of Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Russell A. Doll, Acting Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Mitchell I. Rosen, Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		BELL INDUSTRIES, INC.
Dated: August 15, 2005	By:	/s/ Russell A. Doll
		Russell A. Doll
		Acting President and Chief Executive Officer
		(authorized officer of registrant)
Dated: August 15, 2005	By:	/s/ Mitchell I. Rosen
		Mitchell I. Rosen
		Vice President and Chief Financial Officer
		(principal financial and accounting officer)

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