Q2 2020 Earnings Call
Conferencing Center a conference coordinator will be with you momentarily. Thank you.
[music].
And gentlemen, my name is Josh and I will be.
[music].
Paul facilitator today.
[music].
Everyone to the Kimball electronics second quarter.
[music].
Risk results conference call.
Paul.
[noise].
And have been placed on listen only mode to preventing you background noise.
[music].
Question and answer segment by simply pressing star in the number one and your telephone keypad.
[music].
They are.
[music].
Weve also February.
[music].
They contain.
Forward looking statements.
[music].
Under the under the private Securities Litigation Reform Act of 1990.
[music].
Yeah.
[music].
There is that may influence the outcome of forward looking statements can be seen kimball's.
[music].
Today's release.
[music].
Turn todays call over to Don Sharon.
[music].
Afternoon.
Hello.
Both of our second quarter.
Ended December 31 2019.
We have posted a financial summary presentation to accompany this conference call.
[music].
Now, let's dig that we will achieve our goal of 8% organic.
Thank you.
Fiscal year 2000.
<unk>.
We continue to monitor the uncertainties facing our customers and the corresponding impact on the production demand that they ultimately placed on us as their supply partner.
The signing of the phase one China.
Trade agreement and USM CA provide us with renewed optimism as we further develop our long term business plans for those geographies.
We also continue to monitor the unexpected and unfortunate Corona virus outbreak in China and its negative impacts on our operations in our to China facilities.
During the effect on shipments in and out of China.
The availability of critical components.
And the health and availability of our workforce.
The close relationships that we have with our customers our suppliers and our employees will help us manage through the difficult issues, resulting from the Corona virus.
Regaining stability in our base business and the ramp up of new business wins will be essential to helping us achieve our goal of 8% organic growth in fiscal year 2020.
We're pleased with the results of our efforts to minimize the operating margin impact of the strike at GM.
It is worth mentioning.
And that the impact of the strike at GM would have been far greater without the progress that we've made in our diversification strategy over the past decade or so.
The loss production and sales caused by the strike were offset by sales related to certain contracts with customers beginning to meet the criteria for.
For two recognize revenue overtime during the period and the ramp up of new programs, including programs for fully electric vehicles.
We continue to gain some traction in the new business opportunities pipeline for our GDS business.
We are encouraged by the recent new orders for machines with expected delivery.
Later this fiscal year.
Our integration work with G.S. continues as we have now identified a dozen or so value, creating automation optical inspection and artificial intelligence in artificial intelligence projects that will eventually improve the productivity of our own existing manufacturing facilities.
We're also excited about the role GDS is playing in our digital and industry Ford Auto strategy as we work to rollout EPM tab.
Yes develop software solution and all our global facilities in 2020.
We are working diligently to respond to the volatility in demand.
And in change in the mix of our overall business.
We continue our relentless pursuit to achieve our operating margin and return on invested capital goals, we're doubling down on execution across all of our units as we continue to drive lean six sigma projects and global supply initiatives to improve yield and throughput.
And drive improvement in our margins.
Margin expansion and capital efficiency will continue to be priorities of focus for us.
Our cash conversion days for the quarter ended December 31, 2019, or 76 days flat to the quarter ended December 31 2018.
And up from 73 days in the first quarter of fiscal year 2020.
While the volatility in demand has made it difficult for us to achieve our inventory objectives and thus our cash conversion days objectives, we remain committed to our inventory reduction goals and actions.
We invested 10.
Point $4 million and capital expenditures in the second quarter of fiscal year 2020. The majority of these capital investments where for capacity expansion and to support the launch and ramp up of new programs.
During the second quarter fiscal year 2020, we also returned $2.6 million.
Through our shareowners by purchasing 180000 shares of our common stock.
This brings our total to $74 million and 4.9 million shares purchased.
Since October of 2015 under our board authorized share repurchase program.
And finally.
As I stated earlier, we are making good progress on the integration of GE as the acquisition of GE EPS brings us new technologies and capabilities in automation test and measurement.
Industrial applications and is in a significant step in our strategy as a multifaceted manufacturing solutions provider.
We are excited about the opportunities to present, the GE EPS capabilities to our existing customers and today to deploy these technologies and solutions in our own manufacturing facilities as part of our overall digital and industry for not only strategy.
Now I'll turn it over to Mike to discuss our second quarter results.
Results in more detail.
We will then open the call to your questions.
Mike.
Thanks, Don during my comments I will be referring to the slide deck Don mentioned.
Usually which can be found on our investor relations website within the events and presentations tab Archer listening via the webcast you can follow along by.
Answering the slides on the webcast portal.
As shown on slide three our second quarter net sales were $307.1 million, which was an 8% increase compared to net sales of $284.1 million in the prior year second quarter.
Favorably impacting our consolidated net sales by two.
For the quarter was the acceleration of revenue for certain contracts with customers, which began to meet the criteria to recognize revenue overtime during the current quarter.
Partially offsetting the impact of the transition in revenue treatment for these certain contracts were foreign exchange rates, which reduced our consolidated net sales by.
By approximately 1% compared to the second quarter a year ago.
Slide four represents our net sales mix by vertical market comparing our net sales by vertical to the same quarter in the prior year, our automotive vertical was up 20% compared to the same quarter a year ago, largely driven by improved demand.
And in China compared to the second quarter of 2019.
Negative impacts of the GM strike were largely offset by an increase in revenue from certain contracts, which cost with customers beginning to meet the criteria to recognize revenue overtime during the current quarter.
Our medical vertical was.
In the current quarter compared to the prior year second quarter, resulting from mixed demand.
Our industrial vertical was up 7% from a year ago as a result of increased demand and new products, new product introductions, and smart metering programs, which more than offset decreases in demand for climate control programs.
Lastly, sales in our public safety vertical were down 18% from the prior year second quarter as a result of the phase out of certain programs.
Our gross margin in the second quarter reflect reflected on slide five was 6.7%, which declined 50 basis points from.
7.2% in the second quarter of last fiscal year.
Our decrease in gross margin in the current year quarter compared to a year ago was the result of unfavorable product mix and the unfavorable impact from the decline in sales to our customers of support GM due to the UAE w. labor strike, which more than.
Set any leverage again on higher revenue.
Selling and administrative expenses slide six in the deck were $11.8 million in the second quarter, which was up approximately $1.6 million in absolute dollars and is up 30 basis points as a percent of net sales compared to the prior.
Your second quarter.
The increase in selling and administrative absolute dollars was largely due to changes in the fair value of the supplemental employee retirement plan or serve.
The liability, which accounted for 40 basis point increase compared to the prior year second quarter.
The revaluation of the surplus mobility.
He is exactly offset by gains or losses recorded in the serve investments during the quarter, which is recorded in other income expense net and as a result has no impact on net income.
Operating income for the second quarter on slide seven in the deck came in at $8.7 million.
Our 2.8% of net sales.
This compares to operating income of two point of 10.2 million or 3.6% of sales in the same period a year ago.
As I previously mentioned the impact of the comparison to the prior year quarter relating to changes in the fair value of the surplus ability.
It was 40 basis points.
Other income expense net was income of $100000 in this second quarter, which compares to expense of $1.6 million in the second quarter of fiscal year 2019.
Other income net in the current year second quarter includes $800000.
From favorable exchange rate fluctuations and $500000 in gains on the surface investments.
Which were largely offset by $1.1 million and interest expense.
Other expense net in the prior year second quarter included $1.1 million of interest expense.
And 600000.
Hours in losses on serve investments.
Excuse me.
The effective tax rate for the current year second quarter was 25.1%, which compares to 17.4% in the prior year second quarter.
The difference in the effective tax rate compared to the prior year was primarily related to changes.
In the valuation allowance on state R&D tax credit carry forwards.
Slide eight reflects our adjusted net income trend.
Our net income in the second quarter of fiscal 2020 came in at $6.6 million.
This compares to GAAP net income of $7.1 million.
And non-GAAP adjusted net income of $6.9 million in the second quarter of fiscal 2019.
The non-GAAP adjusted net income in the prior year excludes adjustments to the provision for income taxes related to tax reform.
Diluted earnings per share was 26 cents for the second quarter of this.
Fiscal year, which compares to GAAP diluted EPS of 27 cents.
Non-GAAP adjusted diluted EPS of 26 cents reported for the same quarter last year.
Cash and cash equivalents at December 30, Onest 2019 were $52.2 million.
Operating cash flows are.
Shown on slide 11.
Our cash flow used by operating activities. During the current year second quarter was $300000, which was driven by changes in operating assets and liabilities largely from increases in accounts receivable and contract assets.
Which more than offset cash provided by net income plus.
Noncash items.
In the prior year second quarter operating activities provided $5.6 million of cash.
Our cash conversion days, our CCD was flat for the three months ended December 30, Onest 2019, when compared to the same period in the prior year.
However, compared.
Sequentially through the first quarter fiscal year 2020, RCD increased three days.
Driven by an increase in our DSO or days sales outstanding.
Slide 12 reflects our capital and depreciation trend.
As Don mentioned, our capital investments in the second quarter totaled 10.4 million.
$1 largely related to manufacturing equipment to support new production awards and to increase capacity.
Borrowings on our credit facilities at December 30, Onest 2019 were $119 million, which were down $7 million from our borrowings at June Thirtyth 2019.
A portion of our cash provided by operating activities. During the six months ended December 31, 2019 was utilized to partially paydown or current debt.
Our short term liquidity available representative cash and cash equivalents plus the unused amount of our credit facilities totaled $120 million.
At December 31, 2019.
In conclusion or financial condition is strong and we are in excellent position to continue this solid growth trend, while focusing on improvements in operating margin and our return on invested capital.
With that I would like to open up todays call to questions from the analysts.
Josh do we have any analyst with questions into Q.
Ladies and gentlemen, analysts me asking a question at this time by simply pressing star one on your Dow pad you made a move yourself from the Q by pressing the pound Keith on your dial pad, we ask that if you're using a speaker phone you pick up your handset before asking a question one moment. Please for the first.
Question.
And I'm not showing any questions at this time I would now like to turn the call back over to Don Charron for any further remarks. Thank.
Thank you, Josh and that brings us to the end up todays call.
We appreciate your interest and look forward to speaking with you on our next call. Thank you and had a great date.
At this time listeners may simply hang up to disconnect from the call. Thank you and have a nice day.
[music].
Okay.
[music].
And.
[music].