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 September 30, 2004
Commission file number 1-11471

Bell Industries, Inc.

(Exact name of Registrant as specified in its charter)

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.

YES x NO o

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

YES o NO x

As of November 10, 2004, there were 8,437,724 outstanding shares of the Registrant’s Common Stock.

BELL INDUSTRIES, INC.

FORM 10-Q

INDEX

Part I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited, in thousands, except per share data)

See Accompanying Notes to Consolidated Condensed Financial Statements.

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BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)

See Accompanying Notes to Consolidated Condensed Financial Statements.

2

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)

See Accompanying Notes to Consolidated Condensed Financial Statements.

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Table of Contents

BELL INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Accounting Principles

The accompanying consolidated condensed financial statements for the three and nine month periods ended September 30, 2004 and 2003 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 independent public accountants, but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the 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, 2003 has been derived from the 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 disclosures included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but the disclosures 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, 2003.

Special Item

During the quarter ended September 30, 2004, the Company recorded a special pre-tax charge totaling $700,000 in connection with an employment agreement for a former executive. Substantially all costs related to this charge were paid in October 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 $1.1 million and $3.0 million during the three and nine month periods ended September 30, 2004, respectively, and $1.0 million and $2.7 million during the three and nine month periods ended September 30, 2003, respectively. These costs are included, net of amounts billed to customers, within selling and administrative expenses in the Consolidated Condensed Statement of Operations. Amounts billed to customers totaled approximately $250,000 and $150,000 during the three month periods ended September 30, 2004 and 2003 respectively, and $600,000 and $400,000 during the nine month periods ended September 30, 2004 and 2003, respectively.

Floor Plan Arrangements

The Company finances certain inventory purchases in its Technology Solutions business unit through floor plan arrangements with two finance companies. At September 30, 2004 and December 31, 2003, the Company had outstanding floor plan obligations of $2.6 million and $4.1 million, respectively, which are classified within accounts payable.

Accrued Liabilities

The Company’s accrued liabilities include approximately $4.3 million and $4.9 million of amounts attributable to disposed businesses at September 30, 2004 and December 31, 2003, respectively. These amounts relate to certain legal, environmental and contractual matters specifically identifiable to these disposed businesses.

Stock-Based Compensation

The Company 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 No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and, accordingly, recognizes no compensation expense for the stock option grants. Stock-based compensation costs determined under the fair value method as prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” would have increased net loss by approximately $40,000 (less than $.01 per share) for each of the three month periods ended September 30, 2004 and 2003, respectively, and increased net loss by approximately $110,000 ($.01 per share) and $140,000 ($.02 per share) for the nine month periods ended September 30, 2004 and 2003, respectively.

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The weighted average number of common shares outstanding for each of the three and nine month periods ended September 30, 2004 and 2003 is set forth in the following table (in thousands):

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 distributor of standard and custom magnetic products.

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

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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 Bell in a stock purchase completed in January 1997. The complaint sought an accounting and restitution representing alleged damages as a result of the infractions. Bell has not been named in any complaint and was not a party to the alleged infractions. Milgray has vigorously defended the case on several grounds and continues to assert that it 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 7^th 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. 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.

The defense and any indemnification of the Company in the Williams litigation may be covered by insurance. The Company has obtained a summary judgment against an insurer of Milgray in an Illinois state court action entitled American Motorists Insurance Company v. Milgray Electronics, Inc. The insurance company has appealed and the matter is currently pending in the First Judicial District of the Appellate Court of Illinois. The Company cannot predict the outcome of this litigation.

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

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, 2003, 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, 2003 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.

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Results of operations

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 nine months ended September 30, 2004 and 2003.

Net revenues

Net revenues for the three months ended September 30, 2004 decreased slightly to $39.5 million from $39.6 million in 2003. For the nine months ended September 30, 2004, net revenues increased 6.0% to $117.7 million from $111.0 million in 2003. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

Operating income (loss)

Operating loss for the three months ended September 30, 2004 increased 10.3% to $322,000, including a special pre-tax charge totaling $700,000, from $292,000 in 2003. For the nine months ended September 30, 2004, operating loss decreased 83.6% to $218,000, including the $700,000 charge, from $1.3 million in 2003. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

Corporate costs

Corporate costs for the three months ended September 30, 2004 decreased 27.9% to $566,000 from $785,000 in 2003. For the nine months ended September 30, 2004, corporate costs decreased 10.7% to $2.0 million from $2.2 million in 2003. These decreases are attributable to approximately $90,000 collected during the three months ended September 30, 2004 on a fully reserved note receivable related to a previously sold business and other reductions in net corporate expenses.

Special item

During the quarter ended September 30, 2004, the Company recorded a special pre-tax charge totaling $700,000 in connection with an employment agreement for a former executive.

Interest, net

Net interest income for the three months ended September 30, 2004 decreased to $39,000 from $59,000 in 2003. For the nine months ended September 30, 2004, net interest income decreased to $107,000 from $125,000 in 2003. These decreases are primarily attributable to lower average cash balances during the three months ended September 30, 2004 as compared to the corresponding period in 2003.

Technology Solutions

Technology Solutions revenues for the three months ended September 30, 2004 decreased slightly to $25.8 million from $25.9 million in 2003. For the nine months ended September 30, 2004, Technology Solutions revenues increased 6.1% to $73.6 million from $69.4 million in 2003. Product revenues for three months ended September 30, 2004 increased 9.8% to $18.6 million from $17.0 million in 2003. For the nine months ended September 30, 2004, product revenues increased 17.7% to $50.5 million from $42.9 million in 2003. The increase in product revenues is attributable to a large product sourcing engagement for a major account during the second and third quarters of 2004 and sales to new clients, particularly in the education sector. Decreased margins were realized on product sales during the three and nine-month periods ended September 30, 2004 as compared to the 2003 periods due to increased competition in the technology hardware environment and lower overall margins on the large product sourcing engagement. Services revenues for the three months ended September 30, 2004 decreased 19.7% to $7.2 million from $9.0 million in 2003. For the nine months ended September 30, 2004, services revenues decreased 12.7% to $23.1 million from $26.4 million in 2003. The decrease in services revenues is attributable to the ending of an outsourcing engagement in 2004 and a significant deployment project during the first part of 2003. These decreases in services revenues were offset, in part, by sales to new clients. Operating income for the three months ended September 30, 2004 totaled $177,000 compared to a loss of $49,000 in 2003. For the nine months ended September 30, 2004, operating loss decreased 75.5% to $311,000 from $1.3 million in 2003. The improvement in operating results is primarily attributable to cost containment efforts and related reductions in administrative expenses. Results include costs associated with continued business development efforts and investments to integrate new clients.

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Recreational Products

Recreational Products revenues for the three months ended September 30, 2004 decreased 2.6% to $11.9 million from $12.2 million in 2003, while operating income increased slightly to $432,000 from $427,000. For the nine months ended September 30, 2004, Recreational Products revenues increased 3.3% to $38.0 million from $36.8 million, and operating income increased 7.8% to $1.5 million in 2004 from $1.4 million in the prior year period. The increase in revenues and operating income for the nine months ended September 30, 2004 is attributable to increased sales of recreational vehicle, marine and snow products during the first half of 2004 as compared to 2003. An increase in product margins during the three months ended September 30, 2004 was offset by continued high fuel costs during this period.

Electronic Components

Electronics Components revenues for the three months ended September 30, 2004 increased 23.2% to $1.8 million from $1.5 million in 2003, and operating income increased 191.3% to $335,000 from $115,000. For the nine months ended September 30, 2004, Electronics Components revenues increased 25.7% to $6.1 million from $4.8 million, and operating income increased 68.3% to $1.2 million from $735,000. Increased product demand and new product development contributed to the revenue growth in 2004. The increased revenues and higher margins due to changes in product mix during the three months ended September 30, 2004 contributed to the improvement in operating income.

Cost of products sold

As a percentage of product revenues, cost of products sold for the three months ended September 30, 2004 decreased to 81.9% from 82.5% in 2003. For the nine months ended September 30, 2003, this percentage increased to 82.2% from 81.6%. The decrease for the three months ended September 30, 2004 is primarily attributable to higher margins at the Recreational Products and Electronic Component business units offset by the increased competition and lower margins on the large product sourcing engagement at the Technology Solutions business unit. The increased competition and the large product sourcing engagement contributed to overall increase in this percentage for the nine months ended September 30, 2004.

Cost of services provided

As a percentage of services revenues, cost of services provided for the three months ended September 30, 2004 decreased to 79.1% from 81.1% in 2003. For the nine months ended September 30, 2004, this percentage decreased to 79.8% from 80.3% in 2003. These decreases are primarily attributable to reduced payroll costs incurred to integrate new clients and deliver services in 2004 as compared to 2003.

Selling and administrative expenses

As a percentage of revenues, selling and administrative expenses for the three months ended September 30, 2004 decreased to 17.7% from 18.5% in 2003. For the nine months ended September 30, 2004, this percentage decreased to 17.8% from 19.9%. These decreases are primarily attributable to reduced payroll costs, depreciation expense and other operating expenses at the Technology Solutions business unit, offset slightly by higher fuel costs at the Recreational Products business unit.

Income tax

For the three and nine-month periods ended September 30, 2004, the Company recorded provisions for income taxes totaling $31,000 and $75,000, respectively. These amounts are primarily related to state taxes. As of September 30, 2004, the Company continues to record a full valuation allowance against net deferred tax asset balances. The Company recognized a $277,000 income tax provision for the three months ended September 30, 2003. This provision represented the reversal of previously recorded income tax benefits during the first six months of 2003 and resulted in no estimated tax benefit being recognized on the $1.2 million pre-tax loss during the nine months ended September 30, 2003.

Net loss

Net loss for the three months ended September 30, 2004 totaled $314,000, including the $700,000 special charge described above, a decrease of $196,000 from the corresponding prior year period. For the nine months ended September 30, 2004, the net loss totaled $186,000, including the $700,000 special charge, a decrease of $1.0 million from the net loss in the corresponding prior year period. These changes in net loss resulted from the factors described above.

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Changes in Financial Condition

Liquidity and Capital Resources

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

Net cash used in operating activities was $774,000 for the nine months ended September 30, 2004, compared to net cash provided by operating activities of $3.2 million for the comparable prior year period. The cash used in operating activities during 2004 reflects decreased accounts payable, partially offset by decreased accounts receivable. The changes in accounts payable and accounts receivable relate primarily to the timing of payments and receipts. The cash flow from operating activities in 2003 reflects the receipt of a federal tax refund and a reduction in inventories, partially offset by an increase in accounts receivable and a decrease in account payable.

Net cash used in investing activities totaled $362,000 for the nine months ended September 30, 2004, compared to $585,000 in 2003. The amounts in both years include expenditures for fixed assets used in our businesses.

Net cash provided by financing activities totaled $27,000 for the nine months ended September 30, 2004, which represents the exercise of employee stock options.

The Company believes that it has sufficient cash resources for the foreseeable future to support requirements for its operations and commitments through available cash and cash generated by operations, however, management is currently evaluating its options in regard to obtaining financing, as additional cash resources may be needed to support future growth.

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, 2003.

Trends And Uncertainties

The challenging technology market conditions and costs associated with building our technology outsourcing practices have continued to impact operating results. The success of our Technology Solutions business is dependent to a significant extent on the ability to generate services business with new and existing clients. We believe that our services offerings are currently well positioned as organizations begin to move toward addressing their technology infrastructure needs in what appears to be an improving economy. We believe that continued focus on developing new business opportunities and expanding market penetration are key steps towards long term growth. Yet, because of the challenges in selling technology lifecycle and outsourced services in what is still a difficult environment, there can be no assurance that such efforts will be successful. The success of these efforts is critical to the profitability of the Company.

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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 September 30, 2004. Based on this evaluation, the Company’s acting chief executive officer and chief financial officer concluded that, as of September 30, 2004, 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 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 September 30, 2004 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

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

(a)		None
(b)		None
(c)		None
(d)		None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

10.z.		Severance Agreement between the Registrant and Russell A. Doll, dated December 1, 2003.
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.
31.1		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.

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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.

Dated: November 15, 2004

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