Q1 2020 Earnings Call

Ladies and gentlemen, my name is to be and I will be your conference call facilitator today at this time I would like to welcome everyone to the Kimball Electronics first quarter fiscal 2020 financial results Conference call. All lines have been placed on listen only mode to prevent any background noise. After the kimball's.

Seekers openings.

And.

Works, there will be a question and answer a period, where kimball respond to questions from analysts.

Analysts can ask questions. During the question and answer segment by simply pressing star and the number one on your telephone keypad.

And questions will be taken in the order that they are received.

Today's call November six 2019 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Reform Act of 1995 risk factors that may influence the outcome of forward looking statements can be seen in Kimball's annual report on Form 10-K for the year ended June Thirtyth.

2019, and in today's release the panel for today's call is Don Charron, Chairman of the Board and Chief Executive Officer, and Mike Fergus Cutter, Vice President and Chief Financial Officer of Kimball Electronics.

I would now like to turn todays call or shut down Chairman Mr. Sharon you may begin.

Thank you Sydney and welcome everyone to our first quarter conference call.

Earnings release was issued yesterday afternoon on results of our fiscal year, 2021st quarter ended September Thirtyth 2019.

We have posted a financial summary presentation to accompany this conference call. Please.

The presentation can be found on our Investor relations website within the events and presentations tab.

Or if you're listening via the webcast you can follow along by advancing the slides or download them from the downloads tab on the webcast portal.

I will begin by making a few remarks on the overall quarter and then I will turn it over to Mike for the financial overview.

After that we will answer any questions you may have.

We delivered excellent growth results in the first quarter fiscal year, two 2020, despite a general softening in the overall market, we achieved double digit growth in three of our for end market verticals when compared to the same period last year, and we set a new quarterly record for net sales in our medical end market vertical.

We're also starting to gain some traction in the new business opportunities pipeline for our G.S. business.

As we cycle through the downturn of the semiconductor and smart mobile device manufacturing end markets, which today are still the primary end markets that rgs customers served.

Our integration work with G.S. continues as we have now identified a dozen or so value, creating automation optical inspection and artificial intelligence projects that will eventually improve the productivity of our own existing manufacturing facilities and further leverage the technology, we acquired with this acquisition.

We're extremely pleased with the progress we made an expanding our operating margins in the first quarter when compared both year over year end sequentially through the fourth quarter fiscal year 2019.

As new programs ramp up to projected run rates and we continue to drive improvements in the G.S. operations, we expect to realize additional leverage from our sales growth.

Across all of our units, we continue to drive lean six Sigma projects and global supply chain initiatives to improve yield and throughput and drive further improvement in our margins.

Margin expansion in capital efficiency will continue to be priorities of focus for us.

Our cash conversion date decreased from 77 days for the previous quarter ended June 32019 to 73 days for the quarter for the current quarter ended September Thirtyth 2019. However, it was up from 68 days in the same quarter last year accounts receivable days or D.S. So.

Decreased nine days from the previous quarter as we took advantage of available supplier financing programs from various customers.

Also compared to the prior quarter, our accounts payable or for 80 days decreased three days, well inventory or Pds, a wage plus contract asset days increased two days.

Thus far we've managed to minimize the direct impact to the China test.

However, the indirect impact on the overall demand in China, and the added strain on supplier and customer relationships continues to be a concern.

During the first quarter fiscal year 2020 over $1 million of tariffs on purchased raw material were rebuild to our customers.

We continue to anxiously await the outcome of the U.S. in China trade talk.

We're also keeping a close eye on the impact from the you ADW strike at GM and our production for the remainder of the second quarter fiscal year 2020.

During the month of October our production lines that support our customers who support G. M. In North America produced only a fraction of their normal run rate.

Our production lines are now back up and running but not yet at their normal run rate.

We invested $11.7 million in capital expenditures in the first quarter fiscal year 2020.

The majority of these capital investments where to support the launch and ramp up new programs and for capacity expansion.

During the first quarter fiscal year 2020, we also returned $3.5 million to our shareholders by purchasing 230000 shares of our common stock, which brings our total to $71.4 million and 4.7 million shares purchased since October 2015.

Under our board authorized share repurchase program.

And finally as I stated earlier, we continue to work diligently on the integration of GE, Yes. The acquisition of G.S. brings us new technologies and capabilities and automation test and measurement and supports industrial applications in various areas. This is the significant step in our strategy as a multi.

Actually solutions provider.

We're excited about the opportunities to present, the G.S. capabilities to our existing customers end to end to deploy these technologies and solutions in our own manufacturing facilities as part of our overall digital and industry 4.0 strategy.

Now I will turn it over to Mike to discuss our first quarter results in more detail. We we'll then open the call to your question.

Mike.

Thanks, Don during my comments I'll be referring to the slide deck, Don mentioned, which can be found on our investor relations website within events and presentations tab Arguer listening via webcast you can follow along by advancing the slides on the webcast portal.

As shown on slide three our first quarter net sales were $313.4 million, which was an 18% increase compared to net sales of $265.6 million into prior your first quarter.

Adversely impacting our net sales for the quarter were foreign exchange rates, which reduced our net sales by approximately 2% compared to the first quarter a year ago.

However, offsetting the impact of foreign currency rates were sales, resulting from the GDS acquisition, which added 2% to our consolidated net sales in the quarter.

Slide four represents our net sales mix by vertical market.

Three of our for end market verticals experienced double digit growth over the prior year quarter.

Our automotive vertical was up 17% compared to the same quarter a year ago from increased volumes in each of our markets led by North America, which was largely driven by the continued ramp of new programs.

Our medical vertical was up 23% in the current quarter compared to the prior year first quarter, two a new quarterly record of $101.3 million.

Year over year increase was primarily related to strong demand for existing programs.

Our industrial vertical was up 13% from year ago. As a result of additional revenue associated with the GDS acquisition, an increase in demand and smart metering programs and new program introductions.

Lastly, sales in our public safety vertical was flat with the prior year first quarter.

Our gross margin in the first quarter reflected on slide five.

Was 7.1%, which improved 30 basis points from 6.8% in first quarter last fiscal year.

Our increase in gross margin into current year quarter compared to a year ago was the result of improvements that existing business units largely from the leverage of increased volumes.

Improved efficiencies in certain locations and lower domestic health care costs, which more than offset an adverse impact from the GE, yes in the quarter.

Selling and administrative expenses slide six in the deck were $11.1 million in the first quarter, which was down approximately $200000 an absolute dollars and is down 60 basis points for Ciena net sales compared to the prior year first quarter.

The decrease in selling and administrative absolute dollars included lower information system consulting costs, and lower stock compensation expense, which more than offset the amortization of finite lived intangible assets acquired with the us acquisition.

Operating income for the first quarter on slide seven in the deck came in at $11.1 million or 3.5% of net sales.

This compares to operating income of $7 million or 2.6% of net sales in the same period a year ago.

Other income expense net was an expense of $2.4 million in this first quarter.

This compares to expenses of 600000 hours in the first quarter fiscal year 2019.

Other expense net in the current year first quarter was primarily the result of $1.2 million in entrances expense on increased borrowings on our credit facilities and net foreign currency losses of approximately $1.1 million from unfavorable exchange rate fluctuations.

The increase in borrowings on our credit facilities was primarily the result of the financing of the GDS acquisition last year and for general corporate purposes.

Other expense net in the prior year first quarter was largely the result of approximately 700000 hours and net foreign currency losses, and $400000 of interest expense, which were partially offset by approximately 500000 hours in foreign government subsidies.

The effective tax rate for the current year first quarter was 24.3%, which compares to 21.8% in the prior year first quarter.

The current year quarter effective tax rate was unfavorably impacted by approximately 300000 hours and discrete excess tax expense related to performance shares granted during the quarter, while the prior year first quarter included approximately $100000 of discrete excess tax benefits related to the granting of.

Form shares.

Slide eight reflects our adjusted net income trend.

Our net income in the first quarter of fiscal year 2020 came in at $6.6 million. This compares to GAAP net income of $5.1 million and non-GAAP adjusted net income of $5 million in the first quarter fiscal 2019.

non-GAAP adjusted net income in the prior year excludes proceeds received from a class action lawsuit, which we were a member.

Diluted earnings per share was 26 cents for the first quarter of this fiscal year, which is up seven pennies from 19 cents diluted earnings per share reported for the same quarter last year.

Cash and cash equivalents at September Thirtyth, 2019 were $55.4 million.

Operating cash flow trends are shown on slide 11.

Our cash flow provided by operating activities during the current year first quarter was $39.6 million.

Which was driven by net income was noncash items and a decrease in accounts receivable largely resulting from increased utilization of third party accounts receivable factoring arrangements.

In the prior year first quarter operating activities used $10 million of cash.

Our cash conversion days or CCD increased five days for the three months ended September Thirtyth 2019, when compared to the same period in the prior year largely related to a decrease in accounts payable days, which more than offset a decrease in days sales outstanding or do you have so.

However, compared sequentially to the fourth quarter of fiscal year, 2019, or CCD decreased four days as a reduction in our dsos were more than offset a decrease in or a few days as I mentioned earlier during the current year quarter, we increased utilization of our third party accounts receivable factoring arrangements, which helped.

Drive our Dsos lower.

Slide 12 reflects our capital and depreciation trends as Don mentioned, our capital investments in the first quarter totaled $11.7 million largely related to manufacturing equipment to support new production awards and to increase capacity.

Borrowings on our credit facility at September Thirtyth, 2019 were $110 million, which were down $17 million from our borrowings at June Thirtyth 2019.

A portion of our cash provided by operating activities. During the current quarter was utilized to pay down our current debt.

Our short term liquidity available representatives cash and cash equivalents plus the unused amount of our credit facilities totaled $132 million at September Thirtyth 2019.

In conclusion, our financial condition is strong and were an excellent position to continue the solid growth trend also driving hard to continue to improve our operating margin in our return on invested capital.

With that I would like to open up todays call to questions from the analysts Sydney do we have any analysts with questions in the Q.

Ladies and gentlemen analysts may ask a question at this time question. Please pressing star one on your dials had you right mavens yourself from the Q by pressing the pound key on your diet pad. We ask that if you are using a speaker phone you pick up your headset before making your question one moment. Please.

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Okay.

Thank you that brings us to the end of today's call. We appreciate your interest and look forward to speaking with you on our next call. Thank you and have a great day.

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