Q3 2020 Earnings Call
At this time I would like to welcome everyone to the Kimball electronics third quarter fiscal 2020, <unk> financial results Conference call.
All lines have been placed on listen only mode to prevent any background noise.
It's Campbell speakers opening remarks, there will be a question and answer period for Campbell will respond to questions from analysts analysts can ask questions. During the question and answer segment I simply pressing star and the number one on your telephone keypad and questions will be taken in the order they RBC.
Today's call May fit Twentytwenty will be recorded and may contain forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
These factors that may influence the outcome of the forward looking statements can be seen in Campbell's annual report on form K 10-K for the year ending June 30 2019.
In other filings with the security an exchange Commission, the FCC and in today's release.
Panel for today's call is Don Cherilyn Chairman of the board in Chief Executive Officer, and might suggest scanner, Vice President and Chief Financial Officer of Kimball Electronics, I would now like to turn todays call over to Don Charron. Mr share on you may begin.
Thank you Angel.
Welcome everyone to our third quarter conference call.
Our earnings release was issued yesterday afternoon on the results of our third quarter ended March 31 2020.
We have posted a financial summary presentation to accompany this conference call.
Presentation can be found at our Investor relations website within the events and presentations tab or you are listening via the webcast you can follow along by advancing the slide 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 that you may have.
We are pleased with the results we delivered in the third quarter fiscal year 2020, despite the interruptions and challenges caused by the Colby 19 pandemic.
The safety and health of our employees customers suppliers and communities are Paramount.
We are making every effort to keep our facilities safe following current guidelines suggested by applicable country authorities.
Because of the variety of critical medical device assemblies, we manufacture around the world our facilities are classified as essential businesses and so ballpark currently operational.
But have been affected to varying degrees I called it 19.
We serve a diversified portfolio of markets geographies and customers.
In our third quarter, we experienced a double digit decline in sales to customers in our medical vertical which was primarily on related to corporate 19.
However, we are seeing a significant increase in demand for medical assemblies for the near future, specifically those related to respiratory care and patient monitoring products.
We have customers, whose products are essential to the health and safety of people around the globe.
We are proud of what we do for the World and we are proud of our people and their extraordinary efforts and contributions during this challenging time.
I feel honored and privileged that our company can play such an important role to help in this pandemic.
In our automotive vertical we started to see the impact of Colgate 19 in our third quarter results, although the severity of the impact from the extensive automotive plant shutdowns in North America in Europe will not be reflected in our results until our fiscal fourth quarter.
We are however, encouraged by the recent announcement of several of our domestic automotive customers and their plans to restart production on May 18.
We also are pleased with the return of our production output in China to near pre Colgate 19 run rates.
We continue to ramp up of several new programs, including a large program for an existing customer who supports a vehicle OEM that specialize.
So lies in fully electric vehicles.
We anticipate our overall run rates for our automotive vertical will return to a new normal and when added to the ramp up of these new programs will return us to middle single digit growth rates in the first half of fiscal year 2021.
Within our medical vertical we have been working hard to respond to the significant increases in demand from our existing customers for their respiratory care in patient monitoring products.
These increases are immediate and our customers expect that they will continue over the next several quarters as the world deals with a pandemic and the shortages of the medical equipment in these product categories.
These Corbett 19 related increases when added to our base medical business will help us generate strong double digit growth in our medical vertical in the fourth quarter of fiscal year 2020, and the first half of fiscal year 2021.
We continue to gain traction in the new business opportunities pipeline for our GBS business.
The recent new orders for machines, I mentioned on our last quarter call.
Our on schedule to be delivered in the fourth quarter fiscal year 2020.
We're also excited about the role G.S. is playing in our digital an industry for data with strategy.
As we work to rollout M. tab.
Gee AG. He asked developed software solution and all our global facilities in 2020.
We are working diligently to respond to the volatility in demand and 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 are doubling down on execution across all of our units as we continue to drive lean six Sigma projects and global supply chain initiatives to improve yield and throughput and drive improvement in our margins.
Margin expansion and capital efficiency will continue to be priorities and focus for us.
Our cash conversion days for the quarter ended March 31, 2020 were 81 days.
From 75 days in the quarter ended March 31, 2019, and from 76 days in the second quarter fiscal year 2020.
While the volatility and 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 $5.7 million in capital expenditures in the third quarter fiscal year 2020.
The majority of these capital investments where for capacity expansion and to support the launch and ramp up new programs.
During the third quarter fiscal year 2020, we also returned $2.7 million to our shareowners by purchasing 214000 shares of our common stock, which brings our total to $76.7 million and 5.1 million.
Shares purchased since October 2015, under our board authorized share repurchase program.
As a result, or the cobot 19 environment. Our plan has been temporarily suspended until further determination by our board.
And finally as I stated earlier I'm, so proud of our people around the world and our collective response to the coded 19 pandemic.
Our strong company culture, and core values have and will continue to help us get through this together.
Our number one priority will continue to be keeping our employees healthy and safe.
We will continue to deliver on our promises to our customers.
The company is in a solid position and we are committed to build success in the future.
Now I will turn it over to Mike to discuss our third quarter results in more detail. We we'll then open the call to your questions.
Mike.
Thanks, Don.
Before I get into my normal discussion or financial results I wanted to stress in our financial condition continues to be strong.
And we believe we were solid position to be able to support the increased demand in the medical market relative to the code 19 pandemic and to do our part in helping to solve the shortage of critical medical devices necessary to help save lives.
Our term liquidity available representatives cash cash equivalents, plus the unused amount of our credit facilities.
And $122 million at March 31st 2020.
We have the ability to increase the borrowing capacity on our primary credit facility by an additional $75 million upon request subject to consent of the participating lenders as well as other options to enhance our liquidity.
Regarding our Q3 results I will be referring to slide deck, Don mentioned, which can be found on our investor relations website within events and presentations tab Archer listening via the webcast you can follow along by advancing the slides on the webcast portal.
As shown on slide three.
Our third quarter net sales were $293.9 million, which was a 6% decrease.
Paired to a very strong third quarter fiscal year 2019, with net sales of 313.5.
Ladies and gentlemen, please hold.
I'll continue with ours or sales results. So.
As shown on slide three or third quarter net sales were 293.
Point $9 million, which was a 6% Dick decreased compared to a very strong third quarter fiscal year 2019, with net sales of $313.5 million.
The decline in net sales was largely the result of overall lower demand compared to the prior year, particularly in the medical vertical which was primarily unrelated to covert 19.
Foreign exchange rates reduced our consolidated net sales by approximately 1% compared to the third 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 or automotive vertical was down 2% compared to the same quarter year ago, driven largely by lower demand of existing products, including the negative impact to demand from Kobin 19, starting in the last part of the quarter, which was partially offset by the ramp up absurd.
Programs were fully electric vehicles, and new product introductions.
John mentioned, we started to see the coated the impact of cobot 19 on the automotive industry in our third quarter results. Although the severity of the impact will not be reflected in our results until fiscal fourth quarter.
Our medical vertical was down 12% and the current quarter compared to the prior year third quarter, resulting from lower overall demand that was partially offset by the ramp up of certain products.
We anticipate growth of sales to customers in the medical market in the upcoming quarters. As we are currently experiencing a significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the covert Nike endemic.
And related global shortage of respiratory equipment.
Our industrial vertical was down 3% from a year ago as lower.
End market demand for climate control products in the phase out of certain programs were partially offset by increased demand for smart metering products.
Lastly, sales in our public safety vertical were down 18% from the prior year third quarter. As result of the continued phase out of certain programs and lower overall demand.
Our gross margin into third quarter reflected on slide five was 6.9%, which was a decline of 160 basis points from the 8.5% in the third quarter last year.
However, our gross margin did improved 20 basis points sequentially from the second quarter fiscal year 2020.
Or decrease in gross margin and current year compared to a year ago was primarily due to lower volumes and unfavorable product mix, which partially were offset by lower profit sharing bonus expense.
Selling and administrative expenses slide six in the deck were $9.6 million in the third quarter, which was down approximately $2.4 million in absolute dollars is down 60 basis points as a percent of net sales compared to the prior year third quarter.
The decrease in selling and administrative absolute dollars was largely due to changes in the fair value of this supplemental employee retirement plan or serve liability.
Which accounted for 50 basis points of the decrease compared to the prior year third quarter.
Revaluation of the serve liabilities as exactly offset by gains or losses recorded in the serp investments during the quarter, which is recorded recorded in other income and expense net.
And as a result has no impact on net income.
Operating income for the third quarter on slide seven in the deck came in at $10.6 million or 3.6% of net sales. This compares to operating income of $14.5 billion or 4.6% of net sales in the same period a year ago.
And by the decline in our gross profit percent previously mentioned, which was partially offset by the favorable impact of the comparison to the prior year quarter relating to changes in the fair value of the serve liability.
Sequentially compared to our second quarter operating income as a percent of sales improved by 80 basis points on the revaluation survivability and improvement in gross profit.
Other income and expense net was an expense of $1.9 million in the third quarter, which compares to income of 200000 hours in the third quarter fiscal year 2019.
Other expense net in the current year third quarter includes 900000 hours and losses on the Serb investments and $1.2 million in interest expense.
Mostly offset by 200000 hours from favorable exchange rate fluctuations and other items.
Other net income net in the prior year third quarter included 800000 hours from favorable exchange rate fluctuations and other items and $600000 and gains on Serb investments, which were largely offset by $1.2 million of interest expense.
The effective tax rate for the current year third quarter was 28%, which compares to 19.3% in the prior year third quarter.
Current quarter rate is slightly above our expected effective tax rate of the mid 20% range, primarily due to a change in mix of earnings among our various tax jurisdictions.
The prior year third quarter effective tax rate was favorably impacted by discrete tax benefits related to provision to return adjustments.
Slide eight reflects our adjusted net income trends, our net income into third quarter fiscal year 2020 came in at $6.3 million. This compares to our quarterly net income of $11.8 million in the third quarter fiscal 2019.
Diluted earnings per share were 25 cents for the third quarter of this fiscal year, which compares to diluted EPS of 46 cents reported in the same quarter last year, which was also a record quarter four diluted EPS for us.
Cash and cash equivalents at March 30, Onest 2020 were $58.3 million.
Operating cash flow trends are shown on slide 11.
Our cash flow provided by operating activities during the current year third quarter was $12 million.
Which was driven by net income was non cash items, only partially offset by changes in operating assets and liabilities.
In the prior year third quarter operating activity used $14.6 million of cash.
Our cash conversion days or CCD was up six days are the three months ended March 30, Onest 2020, when compared to the same period in the prior year.
Sequentially to the second quarter.
Fiscal year, 2020, or CCD increased five days driven by an increase NRC, a new York contract asset days.
Slide 12 reflects our capital and depreciation trend.
Don mentioned, our capital investments in the third quarter totaled $5.7 million largely largely related to manufacturing equipment to support new production awards into increased capacity.
Borrowings on our credit facilities at March 30, Onest 2020 were $122 million, which were down $4 million from our borrowings at June Thirtyth 2019.
In conclusion or financial condition continues to be strong and we believe warehouse out position to be able to support the increased demand and medical market related to the Covance 19 pandemic tend to do our part in helping to solve the shortage of critical medical devices necessary to help save lives.
Don mentioned, we're very proud of the work our teams are doing to support the efforts to combat this disease on a global scale.
With that I would like to open up todays call the questions from analysts.
Angel do we have any analyst would questions in the Q.
Ladies and gentlemen analysts may ask a question at this time by simply pressing star one on your dial pad you may remove yourself on the Q by pressing the pound key.
On your Dol pad, we ask that if you are using a speaker phone you pick up your handset before asking your question one moment. Please for the first question.
And again, if you would like to ask a question. Please press star one.
Okay.
Thank you and your first question comes from Andrew shutdown.
Sodium and company. Please go ahead.
Yeah, Hi, everyone. Thank you for taking my questions.
If you could first give me some more color on on the Alpha.
Segment, it seems like even though and the Mike Yes.
Among the ultimate effect this you're going to be helped by new program ramps there.
Correct.
That's correct.
And maybe I guess.
Yes.
Yes.
Thanks, going a bit more severe slowdown among that in the out the industry how's that going to affect your dad New program ramps you think.
In the next coming quarters.
Yes, So I think he said in his script on yeah, I would start with the fact that at least now we have for North America in Europe.
Let's start date.
Nate 18.
And that affects the majority of our customers and so we basically.
Have been down for the month of April and yes for basically the first half of May cells.
We have a restart game that's the good news and we expect that once we start happens it'll it'll take a few weeks for.
Value chain that supports those Oems too.
Great back up to that pre cold did run rate.
But we expect towards the end of Q4 in the month of June will start approach those people did 19 run rate.
So.
Q4, two watt.
It looks like China.
At something near.
Three Colgate 19 run rate.
And North American Europe, essentially exiting the quarter somewhere around that level, but of course, the lost production essentially equal to half player.
Okay. Thank you that was helpful. Additional color and then in them and.
In the medical segment. This seems like it helped by that but it kovac related production, but.
This weakness in your other production know, what our Dawson and what do you see there.
In terms of trying to get there.
Yes separate product categories, obviously than respiratory care and patient monitoring.
We had some of our customers that are supporting VIX drug delivery device.
Fight category that are going through some significant changes change in their go to market strategy and so that resulted in a year over year change. If you will that made up the majority of the shortfall I think the good news.
There is that we expected that go to market change will be successful for them and their strategy will be successful.
It may take a few quarters for them to get back to the level of business, we enjoyed with them, but I think overall, it's good news, but it did impact the Q3 to Q3 comparison.
Because of that that change.
Going into effect.
Before this this most recent with 40 quarter.
Okay.
Sort of that weakness from that is expected to go on for a couple of quarters, but be offset then.
This partially by that Colvin 19 related production.
Yes, I again, I would say on relative to the comments in the script Danya I would say, we're expecting strong double digit growth and as I mentioned that demand.
For the respiratory care and patient monitoring product is immediate.
So while working through while we're working through capacity and supply chain or component availability issues. We expect the ramp up on that co bid 19 related business.
Two quick to occur immediately in the quarter were and and as I mentioned over the next several quarters.
Okay, and then just in terms of overall demand have you seen like them sort of any.
The impact from potential and prolonged economic slowdown on your order book.
The demand overall that our customers are relaying on to us.
He has been impacted by the shutdown so in places where government restricted.
Mobility and be able ability of workers that clearly has been in impact.
Difficult to to determine when those restrictions knowledge, there being lifted bulkier.
In North America, and Latin America, and also in Europe, Allfast, we'll get back to some run rate that.
Given that we were at pre pretty cold 19.
But I will say that we're starting to see signs.
Of the value chain that were in value chain that were in where these restrictions are being lifted.
Our customers are placing demand on us that lapping ramping this up fairly quickly.
[music] run rates, we were at or near that run rates. We were asked prequaled good morning.
But definitely I would say here on the short term here.
You know with with with the month of April seeing significant restrictions and shutdowns and and other related kinds of interruptions to the normal production flow into Q4 impact certainly will be there were.
Well, we're optimistic cautiously optimistic about how fast the value chain will ramp up once these restrictions are lifted and we get back to work.
Okay just.
Couple of capacity how.
What would you say you're running off now.
Overall.
That's it really difficult and complicated question too.
The answer, but let me give you my best shot at it I would say our automotive line.
Literally in North American Europe, where where shutdowns for the month of April and for the first half amazed so the utilization calculation.
Easy, but at six week period.
And then as we ramp up.
In most areas, though he knows auto automotive lives, we expect them to get back to the utilization run rate we were at.
If we hold at 19.
Our our medical line with the increases that have been placed on US we they will run a very high utilization rate and as Mike mentioned, we've even had to add some capital equipment to meet that demand over the next several quarters.
And.
The good news, we've been able to any utilize some of that capacity freed up on our automotive lines to support those ramp ups. So it is the Alaska lower utilization in automotive is not totally at a loss at this point because you are able to use a portion of that capacity to support the medical data.
The increase in the medical demand.
Okay. Thank you and there's some I.
I have noted.
Supply chain challenge S how's that affecting you.
Well, it's a challenge for us as well.
Especially as the pandemic, Brad it's too.
We took some time, but we know the value chain that includes the component suppliers listed on the other side up a lot.
They were also impacted with the restrictions and the shutdown and.
And so and just availability of workers, even after the restrictions were lifted and people are coming back to work and so.
Yes. It is a challenge advantage, it's been a challenge for us to to get to the ramp up levels. For example on those medical product increases offer respiratory care and patient monitoring, we're making great progress. There. Our teams are working really hard our supply partners working really hard to we're making great progress there.
But that certainly is the challenge here in the short term.
On the automotive side. It was it was different in that there was a shutdown and so now we're going back to work and where we starting here.
This week and next week so.
Yeah with a different kind of scenario there were not necessarily dealing with rapid increases were trying to return to run rates, which were asked let's say three colby. Thanks.
I'm not anticipating as many issues there, although you know our supply base for our automotive customers as global and every region has responded differently in this pandemic in terms of how they dealt with the restrictions and I would say, how they're dealing with the restart.
Okay. Thank you and then in terms of that GSS business I know you have that diversify that.
But now it's just like semi cap is coming back do you see an improvement there in terms to the Gs business and that's helping the industrial segment.
Yeah, you know I, we the Rgs business unit support.
Both the smart mobile device and market the manufacturing markets are the smart mobile devices and also as you mentioned the semiconductor.
Area and.
We've been getting some nice traction starting last quarter.
We were surprised that held up in Q4, so far in terms of demand for those machines. We're on schedule to deliver them as I mentioned in the scripts. So we'll see how that develops.
And yet it semiconductor guys are coming back to we are seeing some signs of positive momentum forming there. So.
We're in that position to take advantage of that when when that demand comes back.
And we're looking forward to.
So to see in the quarter here from up.
With those machines, we already accepted always slow.
Okay. Thank you know us off from me.
Thank you on your Great day.
And ladies and gentlemen, as a reminder, if he would like to ask your question. Please press star one on your dial pad.
And now I'd like to turn the call back over to Don for closing remarks.
Thank you Angel and that brings us to the end up today's call.
We appreciate your interest and look forward to speaking with you on our next call. Thank you and have a great date.
Thank you that brings us to the end of today's call. We appreciate your interest and look forward to speaking with you our next call.
At this time listeners may simply hang up and disconnect from the call. Thank you and have a nice day.