Q2 2020 SMTC Corp Earnings Call
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Good morning, and welcome to the.
I'm confused second quarter 2020 financial results conference call.
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I would now like to filling up on transport to Glenn Macinnes.
Thank you and over to you.
[noise] thinking before we begin the call I would like to remind everybody that the presentation will include statements about expected future events and financial results that are forward looking in nature and subject to risks and uncertainties. The company cautions that actual performance will be affected by a number of factors many of which are beyond the company's control.
And that future events in results may vary substantially from what the company currently foresees discussion of the various factors that may affect future results is contained in the company's annual report on form 10-K quarterly reports on form 10-Q, and subsequent reports on form 8-K in other filings with the Securities and Exchange Commission all forward looking statements.
Sure made after the date of this call.
Except as required by law, we do not intend to update this information.
During the call. We will also reference certain non-GAAP measures, including adjusted gross profit adjusted net income EBITDA and adjusted EBIDTA. Please refer to the press release, we issued yesterday for reconciliations between GAAP and adjusted results.
Management believes that these non-GAAP financial measures, which when used in conjunction with GAAP financial measures provide useful information to investors about operating results enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics. That's the TC uses in its financial.
And operational decision, making.
Companies management believes that adjusting for the additional temporary costs attributable to the Tobin 19 pandemic allows for a better comparison of the Companys performance to prior periods, which is consistent with the company's recent amendments to the financial covenants in its financing agreements. These non-GAAP financial measures are used by management to manage and monitor.
Espcs performance and also frequently used by analysts investors in other interested parties to evaluate companies in essence Ccs industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with gap.
It should not be construed as well and inference that that's and P.C.S future results will be affected by any items adjusted for in these non-GAAP financial measures.
Finally, this conference call will be available on the Investor Relations section of SMTC is website.
That includes a link to todays webcast at Www Dot SMTC Dot Com. The company has also posted a slide deck, which interested parties can find it next to the link as today's webcast, we will be referring to these slides from time to time during a call. This morning.
I'll now pass the call over to Eddie Smith.
SMTC, President and Chief Executive Officer.
Thank you Blair welcome and good morning, ladies.
Ladies and gentlemen, comedies, but that's and P.C.S President and Chief Executive Officer on this call with me today is referred Farrell, our Chief operating Officer, and Steve was a our financial Chief Financial Officer.
Our backgrounds are included on slide number three the Blair referenced first before discussing the quarter I want to thank the entire SMTC team and our supply chain partners for their hard work and dedication as we continue to navigate through these unprecedented times to meet our customers changing demand requirements.
I'd also like to thank our stockholders for their continued patients and support during these trying times.
As you can see on slide three revenue for the second quarter was $90.4 million.
From 90.9 in the same quarter, a year ago and down 5% from the prior quarter and below our second quarter guidance of 96 to $9 million to $11 million.
Well our customer demand during the first half of the second quarter of 2020 track to our internal plans, we experienced changes in demand requirements, primarily from some of our retail payment systems and commercial avionics customers.
And order rescheduling from other customers in the latter part of the quarter.
We believe this resulted from our customers modifying their requirements in response to the shifting demand of their respective in customers.
By maintaining a strong and diverse customer base and carefully managing our expenses and business operations, we were able to generate improved bottom line results, including adjusted EBITDA of $6.4 million or 7.1% of revenues, which was at the higher end of guidance range, which enabled us to report an adjusted.
Earnings per share eight cents per share.
Our supply chain did an outstanding job working around availability in a logistics issues, resulting from the covert 19 pandemic.
To ensure we couldn't meet our customer stranger requirements.
Drawing upon key supplier relationships that from early in his team have developed over the years, our supply chain team continues to proactively work around.
Many obstacles instituting new processes expediting material setting up new sources of supplies and anticipated potential component shortages in changing repos.
As I noted on slide four our business development teams continue to expand some Pcs market sure that expand our sales funnel.
Over the last three quarters, we saw strong traction in securing access of $130 million of new business, including 26 million in the second quarter, primarily from new and existing customers and aerospace defense and industrial I'll tell you markets.
Leveraging our RF and sensor manufacturing test expertise.
As we continue to navigate through the challenges presented by Kobin 19, pandemic, we've implemented innovative onboarding processes to overcome plant access and travel restrictions to win new business and launch new customer programs.
We're encouraged by the <unk> responses, we have seen from our customers and look forward to resuming our topline growth momentum beginning in the second half of 2020 and continuing in 2021.
Barring any significant new impacts of the continuing cobot 19 pandemic on our business. We believe we're position for an improving financial performance in the second half of the year.
As we look ahead, we expect the again to stay on track as we did in Q2.
For achieving our long term Mato grosso with gross margins ranging between 12% to 14% and our adjusted EBITDA in a range of 7% to 9% of revenues.
As pleased as I am with our ability to adapt quickly to the current environment, I'm, especially proud that our SMTC and our employees.
Continue to demonstrate a commitment to our local communities through donations and support including much needed P.P. equipment.
Let me wrap up my introductory remarks by reiterating that the health and safety or employees remains a top priority for SMTC as we continue to meet our customers' requirements and ensure continuity of our supply chain with all our facilities currently remaining open and operating in accordance with all applicable health and safety regulations.
Steve was that our CFO will now discuss our second quarter results in more detail and saw the steps, we're taking to improve our results in the back half for the year.
After Steve's remarks, I'll return for some additional commentary on our progress in the second quarter and our goals going forward before we open the call the questions Steve.
Thank you, Andy and I want to Additionally express my thanks to all the SMTC employees for their commitment and dedication as we work together through the challenges of the continuing cobot 19 pandemic I'm also grateful for the support of our customers and partners and the patients of our shareholders.
Now, let me discuss our financial results, which you can see on slide five as Eddie commented revenues in the second quarter of 2020 was 90.4 million compared to 95.1 million in the prior quarter and 90.9 million into the second quarter a year ago. During the second quarter of 2020, we had 110 plus customer.
846004 non-cash amortization of intangibles related in connection with the acquisition of Emcee Assembly <unk>.
One $2 million, a coke with 19 related costs and 907 71000 of non-cash unrealized foreign exchange gains on unsettled, Florida exchange contracts in comparison R. Q1, 2020, adjusted gross profit was 11 $7 million or 12, 3% of revenues.
Selling general and administrative expense for the second quarter of 2020 was seven $1 million essentially flat as compared to seven 2 million for the first quarter of 2020.
As a percent of revenues SG&A expense increased slightly to seven 9% and the second quarter of 2020 compared to seven 6% of remedies and the prior quarter in comparison SG&A was 72% of revenues and Q2 2019.
We reported net income of 955, and the second quarter of 2020 compared to 775000 and the prior quarter and a net loss of two $5 million in the same quarter a year ago.
Just a den and come in the second quarter of 2020 was two $4 million in comparison, we reported adjusted <unk> have to $2 million and the prior quarter and adjusted income of one $1 million in the same quarter a year ago.
It just it EBIT in the second quarter of 2020 was six $4 million or seven 1% of revenues, which includes the outback of one $2 million of Covid 19 related costs as compared to adjusted EBITDA, six $2 million or six 9% of revenues and the prior quarter and $6 $1 million or six.
Seven of revenues in the same quarter a year ago.
Now I'd like to take a few minutes to comment on the balance sheet and other key financial metrics reported for the second quarter, our cash to cast cycle averaged 82 days compared to 73 days during Q1 2020.
The increase in our cash to cash cycle is attributed to the shifting customer forecast within the quarter that result in higher than dissipated inventory levels Exisiting Q too.
Second quarter 2020.
DSL was 64 days with D. P. O 73 days inventory transfer Q2 thousand 20, or 4.0 turns compared to four five turns in Q1 2020.
Capital expenditures or approximately 700000 in Q2 2020.
Net that at the end of the second quarter of 2020 was 84 6 million compared to 83 6 million. The prior quarter. Both periods included three 6 million for the extension of the company's Fremont, California facility Leafs in February 2020.
In comparison net there was 95 $9 million for the same quarter a year ago.
Net debt, excluding our financing operating lease obligations at the end second quarter was 68 $4 million compared to 68 $3 million at the end of the prior quarter.
That to trailing 12 month adjusted EBITDA ratio is squeezing leases was 266, which we have reduced from 467 since the M. C Assembly acquisition <unk>.
Including capital leases or that to trailing 12 months EBITDA adjusted EBITDA ratio was 315, which is in line with our public company peers, we remain focused on continuing to reduce our depth to EBITA ratio by the end of the year.
As noted on slide six our financial.
During the covered 19.
Pandemic are squarely centered on tight control over expenses carefully managing are working capital and maintain as strong relationships with our partners to ensure financial flexibility. So we can adapt and support our operations through this uncertainty.
At the end of the quarter and subject to our debt covenants, we are $39 million available under asset based on lending facility to.
To provide increased covenant flexibility as we navigate through the continuing covered 19 pandemic. We are also amended our credit facilities.
Following up.
Q2 expense control initiatives that we've announced last earnings call in Q through we implemented additional costs 20 measures, including head count reductions primary <unk>, Mexico facility and reduced capital expenditures benefiting farmer installation of machinery equipment shipped from the China manufacturing operations.
Within a north American plants, concluding my comments based on our current demand and known supply chain visibility and assuming our facilities continued to remain open an operator currently planned levels.
We expect revenues to range from between 190, and $205 and adjusted EBITDA range between 13th $7 million and $15 million and the second half of 2020.
With that said here's Eddie for some additional comments on the business and thank you.
Thank you Steve before we open up that calls for questions I'd like to share with you a few of our accomplishments from the second quarter and then discuss our goals as we look ahead, which were noted starting on slide seven <unk>.
Cove at 19 pandemic is not only impacted our second quarter results, but is also clearly change the way we work live and play.
The last quarter's earnings call rich outline the new address safety measures and health safeguards, we implemented to protect our employees and their families.
Those efforts to remain in effect and we're continuing to invest in these and other health and safety initiatives.
In fact, we've invested approximately one $2 million and cute too and plan to incur a civil level of costs and the second half of 2020 to support those initiatives.
Now, let me recap a few of our second quarter accomplishments to enhance our north American plant capacity, we completed the installation of equipment with shipped back from our factory in China that we closed on December when the lease expired. This whole enable us to support additional production in North American facilities without the significant capital expenditures, we would've otherwise.
Needed.
To overcome travel restrictions.
So overcome travel restrictions imposed by kovar 19 pandemic protect our employees.
And maintain operations.
At all facilities reinstated virtual onboarding for new customer programs, using gopro cameras zoom in Microsoft team software.
Keep the flow of new products entering volume production of the second half of this year or engineering production stuff in Boston Fremont successfully launched eight new product introductions MPI programs and the second quarter.
Both of these factories have been instrumental in our ability to secure new programs from our existing customers.
[noise] to grow our topline going forward, we've added more than 26 million, new multi customer orders and Q2 from north for new customers and ate existing customers, bringing the total of new orders will order to us to over $130 million over the past three quarters I'm gratified by the confidence and loyalty our customers are placed on us I'm pleased that are back.
Remains strong as we enter a second half of 2020.
Let me switch gears and discuss our key initiatives and goals for the second half of this year.
As I look ahead are are top floor Kohl's remain.
First my priorities to launch the new programs awarded SMC and continue to grow our market share in key markets that play to our strengths, including Iowa industrial Iot the highly complex unregulated markets of customer supporting the defensive aerospace industry, which you can see on slide eight <unk>.
These markets provide a stable and solid base the properly go our business and the second half of 2020 and beyond.
To achieve and maintain our leadership positions in terms of operational performance among our tier three <unk> peers, including revenue growth gross margin EBITA margin and net margin percentage. We've included how we stackup favorably against our peers and slides nine and 10.
Third to keep our employees and their families healthy and safe and prudently manage the business through the ongoing Kogut 19 pandemic.
We will do this by maintaining the health and safety measures we are implemented.
Steve said, we're focused on tight control over expenses carefully managing are working capital and maintaining strong relationships with our partners to insure financial flexibility. So we can adapt and support our operations throw uncertainty.
And finally to remain very customer focused.
By providing superior service that will together with operational excellence ultimately reward are stockholders, where the enhanced shareholder value.
With that Steve Rich and I will take questions from those on a call today.
Thank you very myself.
Even now begin the question and answer session.
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At this time, we will pause momentarily to assemble rostow.
My first question is from the line of Mike Crawford from Beaver Island. Please go ahead.
Thank you that in Steve and rich.
Eddie Kitty walk through the capacity utilization load each of your primary facilities and way.
Currently in where you'd like to see that.
And.
Yeah.
So we don't put out Mike exact utilization. So I'll just give you some ranges and then.
So if you were to take <unk>, it's below 50%.
If you were to take our Chihuahua facility.
Above 80.
We don't like to get it above 90, so right now.
We're doing some expansion there we're building some extension to our building and doing some things.
So we have the equivalent to expand there.
We just need some space, so or in the process of doing that and Chihuahua.
Our Fremont plant is about 60%.
Where abouts.
R R.
Boston plan is is about 50.
And then our plant in Florida.
Probably a little bit above 50.
Closer to probably in the seventies.
So we have plenty of room to expand I think the only plant that really has what I would call a.
Need to expand in terms of footprint would be Chihuahua.
Rest of them could probably.
Add a significant amount of business and not have to expand the footprint.
May I have to buy some equipment, but we have plenty of expenditure.
Okay. Thanks.
Right now.
Defense is only 10% of the business next but seems to have captured the disproportionate.
Amount of <unk>.
Recently loans and the last three quarters so.
For the fast Florida. This time next year. After you have these defense programs pick up.
Two H 20, and then.
Early next year as well.
Where do you see that that mixed you see that to 20% of revenues.
That quickly or <unk>.
Maybe maybe I guess one year from now in there maybe three years from now.
Your best Crystal ball, where defense might be as part of your business mix.
Yeah. So if you think about it two years ago or at zero a year ago, we were at 5% same quarter, Mike. This year, we're at 10% of our revenue being being.
Defense Arrow.
I would expect it would've been if.
If the avionics business didn't.
Crater last quarter, it probably would've been 15, I would not be surprised.
Next year 2021, if we'd all finished Europe, 25% to 30% of our business being defense Sarah.
Okay, Great and then the last question for me.
This might be for Steve but.
Where.
Would you like to see inventory days.
Bye year.
As you kind of unraveled access.
Payment systems in Carmel avionics.
And then same with cash conversion cycle.
Yeah. So I think from an inventory perspective, we'd like to see that in the four five turns range was against that 80 days.
We do that then clearly we want to try to cash caches get this closer it into the low sixties in total.
Both of those initiatives are certainly a high priority for us.
Alright excellent well, thank you very much.
Okay. Thank you thanks bye.
Thank you.
Next question is from the line of China.
Mr from Greg Harlem. Please go ahead.
Hey, guys. Thanks for letting me a few questions on Christians behalf.
First question.
Any any additional color you could give on the second half split.
Based on your orders you customer converse agents, we expect.
Or even split between Q3 Q for a ramping in Q Q3, and a heavier Q for.
Any color that would be great.
Yeah. So.
Think we will see.
Close to a double digit Ram from cue to to Q3, and then I think that will slow down a little bit to a smaller ramping Q4.
But we are clearly growing this quarter from Q too.
Some of it being the fact that when avionics in retail payment systems.
Kinda went.
Sideways last quarter, there just wasn't enough time in a supply chain to get removed up and other portions of our new customers. So we've won a lot.
Of new customers I think last call we talked about.
Some of the wins and what markets they were in and significant amount of her into the fence aerospace market.
Other parts of the highly regulated market. So Tyler, we'll see a big jump Q Q3, and then we'll see.
Smaller jumped Q3 Q for.
That's great very helpful.
Then a.
A few thoughts on your strong margins here gross margin requires a 13% already at the midpoint ear long-term 12, 40% model.
Way ahead of where we are thinking they'd be so it's anything one time in nature, maybe to call in the quarter and.
Where should we where should we expect them going forward.
<unk> <unk> kind of a fair run later should we ask that maybe.
Ah dropped out tomorrow more towards 12 with a law percent of that range.
No I think 13, we will hold 13, if not if not go up a little tenths of points here and there based those the mixed gets.
Stronger aerospace defense, we're very comfortable with the 13 I don't see any reason that that will move down.
So.
We got what we wanted by starting to go after the type of customers about a year year and a half ago.
That get us those type of margins so.
And I think on the EBITA when you think about the same thought process on EBITDA.
When we get through this cove it for us it's a scale game right. So as we grow.
Our margins will continue to get better on the EBIT. Aside so I would think they're going to also get a little bit better I don't think dramatically better, but they will get a little bit better and then.
Next year as our defense Arrow business and some of the other new customers we add on.
I think they'll get even better so I'd see them both.
We've got on a journey, we went from three two years ago to six last year.
Hi, <unk>. This year now we're at seven and I expect that to continue to get better on EBIT and I would expect the gross margin.
13, or a little bit above as we go forward.
That's great Little fault I guess.
How should we be thinking about mix has an impact margin. Obviously just comment it's nathan positive, but anything else to call out.
Is it positive or negative.
Regarding the impact of Martin.
I would tell you the sensor and Iot business.
I call them highly regulated markets, they're not always.
Medical Marcus but there are Marcus that are regulated and the highly regulated markets. The things that are very complicated to build we normally get a better margin for then things that are just.
You'll go down the line or Green Board you dropped pieces on them and so we have quoted and received orders for what I would call much higher complexity box built.
Products and so I would continue to tell you that that's why I feel so strongly at the margin will stay where it is and maybe even slightly increase so.
We have stopped.
Searching out this low high volume low.
Margin business, because it just doesn't fit our model very well.
Tyler I would tell you. This is Steve real quick having been here look at the last four to five to six quarters.
With the acquisition of M. C is given us the opportunity to really move more into the complex areas within the manufacturing so the industrial Iot the RF the testing the sensors and then with with the with some of the aerospace and defense and that's bled over into Boston Bell wreck a facility and it's.
I also starting to see some wins that aren't going to be allocated into the Fremont facility. So that journey less 445 quarters since a lot rich on his leadership to really bring more complex Madden manufacturing expertise and culture into the company. So with that you don't typically step backwards and go into more mass production you stay with more complex.
So I'm really pleased with how we've grown their expertise.
Across in that much contributes to this improving gross margin. In addition to ratio span of marine and being very very crisp on cost controls.
The other the last thing I would tell you Tyler is we are getting from very vertically integrated with our customers.
As you know we have a metal shop, and we do cables down in Mexico, but one of the things that rich did last year, that's really paying dividends. This year as we got into the highly technical space of wire bonding hybrid circuitry.
Systems on a chip.
Stuff and.
It is very complex, but in our system censor business you need to do wire bonding and put part straight to board. So.
That's really been a big plus in terms of margins.
That's great. Thanks for all color that's all for me. Thank.
Thanks, Thanks, Thanks for your time too.
Thank you.
Next question is from the line of Steve calls from mangrove. Please go ahead.
Alright, good morning, guys and thank you for came from the questions.
I wanted to talk about a few things one could you speak a little bit about the employee base on our rent some team of them doing a real good job protecting him maybe.
Give us some color on kind of what the turnover looks like how to switch some folks out I know you're talking about a few cut some soccer practice, but but what's happened to kind of across the other plants.
Stable or are you planning better.
Condemning creating opportunities to get.
New people in some cases or what's happening there.
Yeah. It's.
So.
I can almost spend an hour just on this this subject and.
So first of all good good pointing Steve.
And.
The.
So everyone has a different story every state has different rules.
Every country is different rules so in Mexico.
We had one plant that was in a red state and one plant that was in a yellow state, but when they go red.
People that have underlying conditions women that are lactating you're pregnant.
People that are over a certain age are sent home with pay and those are those covid costs, a part of those Covid 19 costs that you see that are one time and then we have to go out and hire people to replace those people because obviously we have the work.
So there is some new new people and they get more efficient over time.
Super efficient and first day, we are trained him from our way.
So we do have some of that going on in Mexico.
And then we do live in our society now that people do get Covid and.
Different cases at different times.
We've only had one person actually come to work with Covid close call in sick and we take temperatures to four people come in and we go through all those safety things when somebody.
Comes download Covid, they stay home until we get negative tests.
Certain amount of time and there's other things so yes.
There's been cases are covered.
Yes people have stayed home, but in Mexico in particular, they have rules that people stay home, even without covered and so we've had the hire new people and move things around and I gave richness team all the plant manager with a lot of credit.
We haven't had plants shut down.
We've kept them operating.
Even though sometimes we have to take a certain amount of people out of the business sister had contact with somebody who's continent. So.
It's juggling Act.
We unfortunately have plants.
Florida and California.
Some of the highest states in the United States, the two highest states and so people get them.
Get this disease.
So then we got to go replace that person plus anybody they've been in contact with.
And.
Until we get through it.
We have had.
Instances of different places, where we do logistics.
At the border and different things so.
<unk> worked through it.
I can tell you that it hasn't.
Dramatically affected our business, but it has affected our business here and there and then we work through it looks like we should we have rules and regulations and processes to overcome it which is done a great job, creating those process and then we have to work with our employees.
Partners and that happens.
Let me ask a question just talking on a renters miracle worker on operating staff, but when I look at your capacity utilization rates and what are the margins are.
It seems that we move up how much 40 50.
780, and I know you're talking a temporary but.
Got a more dramatic move the margins, particularly with some extra shifting.
And are given the fixed cost nature of the business or what am I missing there.
<unk>.
Because as you grow you also.
As you grow right. Yeah also other costs in terms of buying equipment training people.
Buying inventory doing things should become whereas you add customers that first year least efficient right over time, you may get some efficiency, but then customers obviously as they see you are getting more efficient they want better pricing. They want this they want that and so in the end what are the things about being a public company.
That don't help the situation is customers margins.
So that doesn't help so I think moving to the top.
Really a dogfight between one and one other competitive hours in terms of being a top margin players in this segment and we will continue to progress I just don't think you'll be as quick as it may seem.
Steve Mississippi.
See remember remember to the mix of any talked about.
Our highest capacity is down and Chihuahua.
So that's going to be we're getting you probably your least margin increase because of that capacity is always fairly high.
The X or the additional capacity is more on Fremont Bell record and Melbourne, and that's where Onboarding new customers is Eddie's time, I, particularly Melbourne. So you may see increase margins for this capacity increases over time, but let's call two to three quarters as you on board new customers you won't see that so it's part of it as a mix issue to enter it or what.
He is with across the different sites with an S. M T C.
Mmm credit Steve Thank you and as you'd like to your new you have a good obviously strong.
Bookings over the first nine months what are you seeing in terms of your pipeline you mentioned some of the programs you haven't Barreca Fremont are you comfortable that you'll be gone after a bit of business somewhere chick.
New orders as we look on the Q for looking at 21 or two three and please for how does up how do you feel about your pipeline. These days.
I couldn't be more excited.
Say that.
Say that.
With no hesitation.
We have landed contracts and even though we're going to see a significant increase in the second half many of those contracts are going to be small as they ramp up and I would tell you I couldn't I couldn't be more excited about the contracts. We've landed during this cove at 19.
Lot of people say, how to yourselves people get contracts I would tell you a lot of it's based on now relationships.
And so customers are behaving differently, but.
I think going forward I couldn't be excited about the pipeline more excited.
And when you're a lot of 21 I hit the jump I know, you're just giving guidance obviously for the second half of this year, but how should we be looking plenty plenty of one so we'd be looking for topline growth from 20 and plenty of levels were margin expansions that you spoke of earlier and we got to putting Steve on hooked to restart to see some.
Cash coming up.
Turn it back half and until next year or how do you balanced growth person's free cash generation.
Yeah. So so.
Clearly I've not the expert on the Cove at 19.
Maxine I'm not an expert on where the world's going.
Like is just said I am very positive about the the.
Pipeline in the numbers, we've announced in terms of new contracts and all of that so I would say the same thing I just said I'm very very excited about next year.
We're not prepared to put out guidance for next year.
Probably do that.
Some time in the summer time frame I would think or later this year.
But until we have a vaccine I would be.
Missed the put out any numbers for next year.
And what's going to.
I don't expect I would tell you. This I don't expect some retail and the commercial airplanes.
Those two customer segments for us I have.
No expectation that they'll come back in 2021 at all.
Okay.
Alright, Steve just on the last question is Tom free cash how do you.
I know you're trying to.
Move those numbers around a bit here, but how do you see free cash that's very lockouts of the balance of this year on top.
Realizing that it's a little bit cloud.
Yes, without being specific about and Steve.
Yet anyway, we are generally free cash flow now and then we're getting you get saddled with the additional covered expenses. We did about 1 million two in the first half of the year. So that drained some of your cash, but we are generally fee cash flow now we've done a great job on the Capex side.
Bringing over the equipment from China, and all that so we are.
Single digit percentage wise on the operation spring and free cash flow to the company now so which is very different and we were six months ago, and we will continue to do that our cat or <unk> strong a collections on a our customers have been respectful with us.
In terms of how they're acting we're having great relations with our suppliers and the business is being efficient.
Gross margins gone out so we are generating I haven't called moderate level is a free cash flow.
And we're very encouraged by the outlet.
Deficiencies regains.
Alright. Thank you guys very much appreciate you taking my question.
No no. Thanks, you have a good day.
Thank you.
The next question is from the line of credit boots.
Please go ahead.
Yeah. So I'm wondering about any delays that you may have in business I think you mentioned one with the avionics just wondering if you could elaborate something on that.
Yeah.
So.
Most difficult thing for us has been so far.
He has been.
The delay of getting new program started up.
For reasons like people can travel engineers can't come in our factory qualification issues.
Those issues, we've started coming up with processes to work around that which I think we'll drive some good things in the second half of the year two.
2021.
Using.
Gold pros and ipads and all kinds of.
Flips and turns to get.
Customers qualified.
Think people more relaxed about qualifications right now so that's why I'm.
Very upbeat about it.
But clearly has pushed out.
A couple big contracts.
A quarter to where we will see major revenue in those contracts in 2021.
Minor revenue in Q3, Q for so yeah definitely push out.
But.
On the other hand customers are not moving around as much as they normally do because they can't qualify.
<unk> is either so you're getting a lot more renewals and that stuff. So yeah.
It happens, but we're learning how to work around it.
Craig the system wasn't until I would tell you that in the numbers that we looked out on the outlet for the second half we have played in avionics going substantially to zero.
And our outlooks based on what we're seeing today with Boeing and what are the airlines are and the second is retail payment systems, we don't see those coming back in the second half of the year either so we've we've added our forecast with our customers Eddie and rich R directly involved with our key customers with their forecast updates so.
All of those <unk>.
Turned down into our second half forecast as we as we look today.
Okay, I guess in relation to this still what about the big one that was announced in January with those three avionics zero space in defense contract business that that we talked about on that press release, how has that been affected by the Corbett.
That is pushed out the qualification.
Into ramping we thought it would ramp second half of 2020% will know ramp the first half of 2021, so it's pushed out things for a quarter or two.
Across all of that but we haven't even seen the ramp on those programs yet.
Why I'm excited about we're seeing growth in our existing customers back to a level, we thought we'd see.
Then we're seeing new customers on top of that so when they kick in it should be a very strong.
First half of next year.
Well that sounds good so it's just a matter of being patient I guess [laughter] hopefully I can do that have been so far so I guess I got one other one other quick question I hope this isn't anything to worry about when when rich was named to that.
E Board.
It made me wonder is there any danger that we could lose any of you guys to anybody else that might want you guys for themselves. Instead of you staying with US I'm just curious if you could mentioned on that [laughter].
I got to give you the award for the most original question of ever had on one of these.
We've worked together often on rich myself and Steve and this is something I'm very proud of and we've been able to remain together both this customers his peers.
And working together.
As much as you can figure in 20 years. So my answer to your Craig as we came in here to do something in our goal ultimately is to make this the best tier three contract manufacturer both financially and operationally, we're getting close to that goal were not there yet we have one strong competitor.
That.
Has kept us from being number one.
If you look back a year ago, and we would have these same results we would be number one, but they've gotten better over the year and we've gotten better.
But it a little faster rate so our jobs not done here and so I don't sit around everyday wondering about rich and Steve and myself.
We're here to finish this job and we will do that.
No doubt about the the board, that's rich and I couldn't be proud of that Amy.
Picked him to be on the board, there's no doubt that all three of us get approach to be on boards and different things and it's a matter of a time.
Rich that was really driven by <unk>.
People seeing what rich was doing a respect and his work.
But.
That particular won't drive him to go do something else.
Being number one here.
And once we get to the number one spot.
That'll be a year or two away and then we'll see what we go do.
We'll see how that goes but no I don't think that's not the high on my.
Brisk list right now Craig I'd also tell you stay that Richard nomination to that board.
What really excites shows that came through customers.
So they saw the work that we had done the quality, we deliver things of that nature. So.
Being nominated and be endorsed by your customers is just tremendous.
Oh, that's good that's good to hear and I'm I'm glad none of you were thinking about leaving near the main reason that I have stuck with you guys because I know the leadership beer's great.
Well. Thank you. Thank you.
As you know, there's always people that love us and always people to all of us so.
We appreciate the ones that do.
Done about it.
With that.
I think that was the last question so.
Okay.
Thank you.
K as in gentleman that was the last question for today.
Alright, I'll have the conference for watching Mr. Ed Smith foreclosing comments over to you Sir.
Sure. Thank you operator in closing I want to once again, thank our employees leadership team business partners distributors, but our stockholders for the continued support and look forward to reporting our progress to our various stakeholders as we go forward.
Thank you have a great day and be safe.
Thank you very much.
Ladies and gentlemen.
Sure Conference calls for today.
Thank you for attending today's presentation, you may know disconnect your lines.
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