Q4 2020 Kimball Electronics Inc Earnings Call
At this time I would like to welcome everyone to the Kimball electronics.
Fourth quarter fiscal 2020, <unk> financial results conference call.
All lines have been placed on listen only mode to vent any background and only after the Campbell speakers opening remarks, there will be a question Easter period, but kimball respond to questions from analysts.
Enlist can ask questions. During the course inter segment by simply Christian Star and the number one and good telephone keypad and questions will be take in order to dairy feet.
Today's call August 18, 2020 build to get Corey I may contain forward looking statements as defined under armour Securities Litigation Reform Act 1995.
Rich factors that may influence the outcome of forward looking statements can be seen in campus and we'll report on form 10-K 40 year ended June 30 of 2018.
And in today's release.
The panel for today's call is Don Charron Chairman of the board.
Chief Executive Officer.
And Mike Sergio Guetter, Vice President and Chief Financial Officer of Kimball Electronics.
I would now like to turn todays call over to Don Chery, Mr. Sharon you may begin.
Thank you Dimitrios.
Welcome everyone to our fourth quarter conference call.
Our earnings release was issued yesterday afternoon, and the results of our fourth quarter and fiscal year ended June 32020.
We have posted a financial summary presentation to accompany this conference call, which can be found at our Investor relations website within the events and presentations gap.
Or if you are listening via the webcast.
You can follow along by advancing the slides or download down from the downloads caps on the webcast portal.
I will begin by making a few remarks on the quarter and then I'll turn it over to Mike for the financial overview.
After that we will answer any questions you may have.
We're pleased with the operating results we delivered in the fourth quarter fiscal year 2020, despite the global interruptions and challenges caused by the cobot 19 pandemic.
The health and safety of our employees remains our number one priority and we continue to make every effort to keep our facilities safe.
Utilizing protective shields face mask.
He temperature scanning social distancing and proper hygiene.
So our 6400 employees around the world.
Approximately 1% have tested positive for the virus and in each positive case our responses.
Our our responses followed our procedures for communication to our employees.
Contact tracing self quarantining testing and Sanitization I'll be affected work Aries.
Because of the disciplined response, an extraordinary effort of our people around the world we were able to perform our mission as an essential business and amongst many things completed the first phase of our ramp up to support this significant increase in demand from our medical customers for their respiratory care.
And patient monitoring products.
In the fourth quarter fiscal year 2020 sales from our medical vertical were up 23% compared to the fourth quarter fiscal year, 2019, and up 42% sequentially.
We are currently on track with the second phase of our ramp up to meet the continued demand for respiratory care and patient monitoring products and expect this momentum in our medical vertical to continue through the first half.
Fiscal year 2021.
I feel honored and privileged to our company can play such an important role to help on the recovery of those inspected by the buyers.
And our automotive vertical fourth quarter fiscal year, 2020 sales were down 43% year over year and down 41% sequentially.
The decline in sales and our automotive automotive vertical was disappointing, but not a surprise given the extensive automotive plant shutdowns in North America and Europe during the months of April and May.
Fortunately, we were able to redirect machine capacity and manufacturing associates from certain automotive production lines to medical production lines, where we were experiencing we are experiencing cobot 19 related increases.
This helped us on multiple fronts, including employee morale as well as capacity utilization.
Well the automotive industry restart has been slower than expected.
We were encouraged to see our June and being run rates start to approach pre Colby 19 levels.
In addition, we continue to ramp up of several new automotive programs, including a large program for an existing customer who supports a vehicle OEM that specializes in fully electric vehicles.
When 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 pre Colby 19 levels by the middle of fiscal year 2021.
Well, we recognize the goodwill impairment charge in the quarter related to our G.S. reporting unit.
We continue to make nice progress on our integration and diversification plan.
And G.S. realize their strongest net sales and operating performance during the quarter since our acquisition of G.S. in October 2018.
On an adjusted basis, excluding the goodwill impairment and a one time non operating charge related to the net working capital adjustment on the purchase of GDS. After the measurement period GE wasn't G.S. was accretive to our EPS for the fourth quarter.
The impairment charge is an adjustment that does not affect the company's cash position cash flow from operations for debt covenants.
It is important to note that while we continue to gain traction with the new business pipeline for GE, Yes, we do have a degree of seasonality in that business with fiscal fourth quarter being their strongest.
We also remain excited about the role G.S. is playing in our industry for data with strategy as we work to rollout Ian tab.
Which is a G.S. developed AI driven manufacturing management software solution in all our global facilities in calendar year 2020.
We are working diligently to respond to the volatility in demand in the change in mix of our overall business and 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 initiatives to improve yield and throughput.
To drive improvement in our margins.
Margin expansion in capital efficiency will continue to be priorities the focus for us.
Our cash conversion days for the quarter ended June Thirtyth 2020 were 81 days.
Up from 77 days in the quarter ended June 32019, and flat when compared to the third quarter fiscal year 2020.
While the volatility in demand has made it difficult for us to achieve our inventory objectives and das or cash conversion days objectives, we remain committed to our inventory reduction goals and actions.
We invested $11 million and capital expenditures in the fourth quarter fiscal year 2020.
The majority of these capital investments where for capacity expansion and to support the launch and ramp up of new programs.
There were no shares purchased in the fourth quarter fiscal year 2020, as a result at the corporate 19 environment. Our plan has been temporarily suspended suspended until further determination by our board.
For fiscal year 2020, a total of $8.8 million was returned to our shareowners.
By purchasing 623000 shares of our common stock.
Which brings our total to 76.7 million.
Dollars and 5.1 million shares purchased since October 2015, under our board authorized share repurchase program.
And lastly.
As I stated earlier.
I'm, so proud of our people around the world and our collective response to the corporate 19 pandemic.
Our strong company culture, and core values have and will continue to help us get through this together.
Our number one priority continues to be keeping our employees healthy and safe.
We will continue to deliver on our promises to our customers.
And with our strong cash flow and balance sheet. 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 fourth 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 slide deck, Don mentioned, which can be found on our investor relations website within the events and presentations tab.
If you're listening via the webcast you can follow along by advancing the slides on webcast portal.
As shown on slide three or fourth quarter net sales were $286.2 million, which was a 10% decrease compared to net sales of $318.6 million in the prior year fourth quarter.
The decline in net sales compared to the prior year was largely the result of the impact from Cobiz 19 in the automotive vertical.
Don mentioned, the domestic automakers shut down for a period of time during the quarter.
However, partially offsetting the automotive decline were increases in our medical and industrial verticals.
Also contributing to the decrease in net sales for the quarter were unfavorable foreign exchange rates, which reduced our net sales one per cent compared to the fourth quarter a year ago.
Slide four represents our net sales mix by vertical market.
Our automotive vertical was down 43% compared to the same quarter year ago, as our fourth quarter results reflect a severe impact so covert 19.
On current quarter demand in the automotive industry.
Or medical vertical was up 23% into current quarter compared to the prior year fourth quarter, two a new quarterly record $123.7 million, reflecting a significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct repo.
<unk> of the Cobot, 19, pandemic and global shortage respirator equipment.
Our industrial vertical was up 9% from year ago, as GDS experienced strong revenue growth.
With the increase in delivery of test and measurement equipment.
GDS increase more than offset declines due to lower demand in climate control products and program axis.
Lastly, our public safety vertical sales were $12 million, which were down 26% from the prior year fourth quarter. As a result of the continued phase out of certain programs and lower overall demand.
Our gross margin in the fourth quarter reflected on slide five.
7.3% unchanged from the fourth quarter of last fiscal year.
Favorable margin increases.
Related to respiratory care and patient monitoring products in our medical vertical along with increased margins for Geos.
Were offset by declines across our customer base, most notably in the automotive vertical on lower volumes.
Additional direct cost incurred as a result of the covert 19 pandemic and higher depreciation expense were largely offset by governmental covert 19 related benefits in certain countries and lower profit sharing bonus expense.
Selling and administrative expenses slide six in the deck were $11.4 million in the fourth quarter, which were down $1.7 million dollars in absolute dollars.
And down 20 basis points compared to the prior year fourth quarter.
The decrease in selling and administrative absolute dollars was driven by reduced incentive compensation cost warranty travel expenses due to the koeppen 19 restrictions and other administrative expenses.
This was partially offset by 1.1 billion dollar increase in the fair value of the supplemental employee retirement plan or serve liability.
Which accounted for 30 basis point increase compared to the prior year fourth quarter.
Revaluation of the serve liability is exactly offset by gains or losses recorded on the certain investments during the quarter, which is recorded in other income and expansion.
And as a result has no impact on net income.
Operating income for the fourth quarter came in at $1.6 million or 0.6% of sales as shown on slide seven in the deck.
Adjusted operating income was $9.5 million or 3.3% of net sales.
This compares to operating income of $10.3 million and adjusted operating income of $10.1 million.
Both 3.2% of net sales in the same period a year ago.
The 2019 fourth quarter operating income was adjusted for 200000 dollar income recognition recognized related to proceeds received from class action lawsuits of which we remembers.
Fiscal 2024th quarter operating income was adjusted to exclude 7.9 million dollar impairment charge on Rgs reporting unit as a result of identifying an indicator of impairment related to future anticipated revenues.
Our GDS forecast was updated to reflect the adjusted anticipated revenues aligning with the current economic environment and to update the impairment analysis.
The updated analysis indicated that the fair value of discounted cash flows was lower than our carrying value, resulting in the impairment charge.
Well the contract nature of the GDS business limits, our future forecast visibility our team is making good progress on new opportunities to achieve our growth and diversification goals.
We continue to be excited about the capabilities and technologies acquired would yes, as we leverage those capabilities, both within the company and across our target market verticals.
This impairment charges and adjustment that does not affect the company's cash position cash flow from operations or debt covenants and is excluded for the non-GAAP measures.
Other income expansion there was an expense of $2.7 million in the fourth quarter, which compares to expense of $1.6 million in the fourth quarter fiscal year 2019.
Other expense net in the current year fourth quarter included $3.8 million pretax charge related to the final net working capital adjustment on the GDS acquisition. After the end of the measurement period, which was determined through the dispute resolution procedure provided under the terms of the asset purchase agreement.
The net working capital adjustment along with 900000 hours of interest expense were partially offset by $1.3 million and gains on the serp investments.
600000 hours in foreign currency gain.
The effective tax rate for the current year fourth quarter was approximately a negative 18%.
Impairment charge had a negative 35% impact to the effective tax rate.
Active tax rate was also impacted by favorable mix of earnings in our various tax jurisdictions as well as state and federal R&D tax credits and adjustments.
In the prior year fourth quarter, the effective tax rate was approximately 14% and was favorably impacted by state tax credits and adjustments and federal R&D tax credit adjustments.
Slide eight reflects our adjusted net income trends.
Our GAAP net loss in the fourth quarter of fiscal year 2020 came in at $1.3 million and we had adjusted net income of $8.5 million. After adjusting for the after tax impacts of the GDS goodwill impairment charge and the net working capital adjustment.
This compares to GAAP net income of $7.5 million and adjusted net income of $7.4 million in the fourth quarter of fiscal 2019.
Prior year non-GAAP adjusted net income excluded adjustments related to lawsuit lawsuit settlement proceeds.
Loss per share in the current year fourth quarter was five cents with adjusted diluted earnings per share of 34 cents.
These comparative both diluted EPS and adjusted diluted EPS of 29 cents reported for the same quarter last year.
Cash and cash equivalents at June Thirtyth, 2020 were $65 million.
Operating cash flow trends are shown on slide 11.
Our cash flow provided by operating activities during the fourth fiscal quarter was $21.5 million compared to $12.2 million in the prior year quarter.
This increase was driven primarily by net income plus non cash items.
Decline in receivables and an increase in accounts payable.
Partially offsetting these was an increase in inventories largely to support the increase in medical order volumes.
Our cash conversion days RCC the was up four days for the three months ended June Thirtyth 2020, when compared to the same period in the prior year and flat sequentially to third quarter fiscal 2020.
Compared to the third quarter of fiscal 2020, an increase in Pds wage our production days sales on hand, our inventory metric.
Was offset by a decrease in day sales outstanding and an increase in accounts payable days.
Slide 12 reflects our capital and depreciation trends capital investments in the fourth quarter totaled $11 million largely related to manufacturing equipment to increase capacity and support new production Awards.
Borrowings on our credit facilities at June Thirtyth, 2020 were $118 million, which is down $8 million from June Thirtyth 2019.
Our short term liquidity available representatives cash and cash equivalents boasts the unused amount of our credit facilities totaling $142.5 million at June Thirtyth 2020.
Which includes a $30 million secondary short term credit facility agreement entered into on May 19, 2020, or working capital in general corporate purposes to provide additional domestic liquidity to support the increased demand and medical assemblies attributed to the opened 19 pandemic.
In conclusion, our financial condition continues to be strong and we believe we're in a solid position to continue to be able to support the increased demand in the medical market related to that go with 19 pandemic and to do our part in helping.
To helping to solve the shortage of critical medical devices necessary to help save lives.
As Don mentioned, we're very proud of the work our teams are doing to support the average to combat this disease on a global scale.
With that I would like to open up these calls to questions from analysts Dimitris do we have any analysts with questions into Q.
Ladies and gentlemen, and unless we asked a question at this time I can think pressing star one linger down Pat.
They remove itself in Q I present, all right to on your down.
We actually that if you are using the speaker phone you pick up your handset before asking your question.
Please state your first question.
And our first question comes from.
And yet so I guess Jim Sidoti.
You May proceed.
Hello, Hello on you.
Hey, congratulations.
Great quarter, I'm, maybe I missed that a challenging backdrop.
Good.
That's a medical left that pull in from the first half of what it does an additional.
Did you see the demand for that increase in the quarter and is gonna be sustainable at the same level I ask the fourth quarter and to the SEC and into the first half of 21.
Yes, so that demand itself started to move up.
Really at the coal the 19 pandemic.
Had spread and and gained let's say at the pace of the spread in the U.S. in Europe.
So really the first phase of the demand.
Was presented to us.
In the March April timeframe.
And as I mentioned in the script.
Pretty significant demand and you could really look at it in two distinct phases.
And so phase one.
In completing phase one you saw that increase that we reported here in the fourth quarter of fiscal year 2020.
And the second Phase then we'll we'll.
We'll need to be executed now here in the first quarter fiscal year 2021.
That's about the extent that the visibility that we have at this point.
So.
So you can expect that.
We'll give you an update at the end of next quarter on where we're at with the sort of Covidien 19 related surge.
The one important note there is that we have obviously a significant increase in those respiratory care and patient monitoring products.
But there has also been let's say a negative offset or a decrease in sales to customers that we support that have products.
There are.
Our supporting elective procedures for example that are actually down in the same period.
So if we put all that together for our medical vertical we.
We reported a 23% increase in sales for the quarter.
If you took out the Covidien 19 related increases.
And decreases the net number would it would still be growth in the upper let's say single digit range.
So that those are the numbers. We want you would want you to understand or to know about in terms of how our medical verticals progressing through this period of time.
Okay that was helpful and you have mentioned before that you. This a rather large complex does can kind of postponed but you think is going to offset the search and into Cogs related production and fiscal 2021, how is that coming along.
Well, we do see primarily program delays right now with our customer base that some of the volatility that I mentioned in the webcast script.
We're not we're not seeing the pull ins that we're seeing or the increases in demand or is really related to the.
Respiratory care and patient monitoring.
Products that we support customer that we support for those products.
I would say in general we're seeing more push outs in some of the larger programs, whether it be in medical or automotive or elsewhere.
So I.
We expect that when that pandemic.
See subside that.
Those programs will then get back on track and will will again, we'll have better visibility, but that may be a quarter or two out at least so on the I would say that.
Current run rate levels and.
Focusing on the call. The 19 impact is what's on our mind.
These days.
Okay understandable and then for the out of modem segment.
Well you'd be able to sort of catch off in the first half on on the lower production into fourth quarter.
How should we think about the cadence there.
Yes, it's hard it's hard to get a good view of that.
But I think if you if you go back to.
If you go back to our.
Our quarter end in March 31, which should be our.
Fiscal year 2023rd quarter.
That's a pretty good benchmark for us to have in front of us because we feel like that's as good of the good of a pre cove at 19 sort of number that we have.
To look at and.
Yes. It was obviously a big impact in Q4. The good news is in June we started to get to that sort of Pico bid 19 run rate.
So.
Yeah, we're hoping that the automotive.
Carmakers in North America in Europe can get back to their run rates, we hope that demand.
Is there from consumers are buyers are those cars and obviously at what we felt this past quarter was not only the shutdown, but it took a little while to crank up production again, whether it was the car makers are the tier ones or even us as a tier two the whole value chain had to get crank back up.
And so.
I think June was encouraging to us because we started to see some of those pre coal vid 19 run rates start to appear again in June for North America in Europe.
Okay. Thank you and then on dead, Yes, you mentioned that.
There's some seasonality there would that would that fourth quarter being the strongest assumed that was maybe a set of what the fiscal first quarter. So how should we think about that going into fiscal 2021.
It should we expect it to be a little bit softer than what is what drives that seasonality.
Well first of all we're you know we were working hard on a diversified growth and diversification strategy that will diversify the business and eventually flatten out some of that seasonality.
But you know GTS, primarily today still serves the value chain that supports smart mobile device.
Secondly, and semiconductor.
Manufacturing and so those are the two biggest areas and and so we are seasonality sort of follows their needs. If you will in those.
In those two areas.
We we are working hard on the growth and diversification strategy I don't think we will be there by Q4 of fiscal year 2021, So there.
It will be some seasonality steel in the business during fiscal year 2021 lease that's our expectation.
But it will be dampened somewhat I think with the work we're doing to diversify the business.
Okay and in terms of this semi cap has that been.
Let's start a big health impact. So did you asked in the fourth quarter us that is coming back or.
Is there is no doubt that there's we see some recovery there that's helping and also I would say, we're doing well in terms of winning projects in the in the value chain that supports smart mobile device manufacturing.
Okay and then.
And.
The goodwill write downs, but did yes.
Can you just explain a little bit and why you ticked up now and.
Sure, what's you're seeing there sure. It was scheduled the impairment study itself was scheduled for the fourth quarter fiscal year 2020.
We completed the study in the quarter and.
Yes at this point in time in this economic environment with the current projected outlook for the business, we were technically impaired and that's to charge that we took in the quarter, but I'll say that the strategic assets that we gained in the GDS acquisition.
Our very much at work in our business today, and they are helping to helping make us a better manufacturing company and opening up new doors.
For new growth opportunities for us. So we we remain optimistic and about how these assets will will continue to to add to our capabilities and add to our strategy for.
Becoming an even more.
Multifaceted manufacturing solutions company and and of course with there with our operating performance in Q4, we were very pleased so it's a little bit ironic that we we have the two non operating charges.
In the same quarter, we had our best operating quarter since we've owned the company over the last seven quarters.
But thats I guess, just adding a little more color to that on yen.
Yeah not that was helpful. Thank you. So my show US also me. Thank you.
Thank you on yet.
Once again you have a question at this time. Please press Star then line.
And our next question comes from Mike Smiley, well housing and company.
You May proceed.
Hello, Mike Mike how are you good Mike how are you.
Doing well, thanks, Hey, folks first of all really great job add posting year over year earnings growth, Despite how significant auto with your business.
Again really great job with the new afraid to achieve everything that you have been supporting the medical end markets with everything going on really great to see that.
Thank you.
Hey, guys longer term I think putting back about a year ago, you guys had talked about certain topline target margin targets.
ROI see target hovered around the 12.5% level.
Let's just talk about how you're thinking about the ROI fee targets that you might have set out a year ago versus.
How you're thinking about that over the next 12 months.
And beyond and getting that up a little bit.
Yes, so Mike first of all you know we dose deal those remain as our medium term and long term targets.
Clearly in this whole.
During this whole pandemic in this.
Past couple of quarters.
Sure.
We're a well responding the best we can to the environment, we're operating in but but when we look at the fundamentals of the business.
We believe those are still the right targets medium and long term.
I would say ROI see would be more to the to the long term side of that with the current capital deployed that we have.
We will need to have some strong recovery in automotive and yeah. We'll work that piece just as hard but that may be more towards the long term.
Part of that answer and medium term operating income that.
Four and a half, which we said last year at this time a 4.5%.
The fundamentals of the business and the business, we're winning and when we look at the anticipated financials of that business, we still think thats the right target.
So.
So so we're working hard to get there we were pleased with how the quarter ended up you know what Ed if you take out those two non operating adjustments. We were we were at 3.3 for the quarter.
You could you could put back some of that put back that syrup number. If you wanted to that would boost that that operating income a little more 30 basis points or or whatever and so you start to get within shouting distance of that four and a half even with automotive being down 43%.
So.
That gives us a lot of encouragement that weekend that we can get there.
And so yeah, we're pushing hard to get to the four and a half medium term.
Medium term.
Being in the in the next four or five quarters.
And then longer term the ROI see number we feel like is also going to be within our grasp.
Great that's helpful.
No one really thinking about fiscal 21 as you guys had into it.
In my mind, it seems like the first half of fiscal 21, the world is still going to be focusing all the medical needs.
Those products are by and large going to drive a lot of the.
Growth or revenue generation of the company, maybe thinking about the second half is it reasonable to think that auto might start to be a more meaningful contributor at least from where you got sits today. So that even if that medical piece does fall off a little bit as we go into the back half of the or the auto by some of that up.
Think about that correctly or.
That's certainly a possibility in one we'd like to have happened I think obviously that consumer I mean, the car makers have lost a lot of production time.
Here in the us.
Especially if you take for example general Motors.
Lost production during the GM strike, which seems like forever ago, but that was just in the December ending quarter of 2019, and then went right into the Colby 19 impact awful lot of production. So that they will be eager to ramp up and replenish inventories mental it'll come down to real consumer demand.
Europe seems to start seems to be picking up traction and and China for us kind of return to.
Pre cobot 19 levels, obviously, a lot a lot sooner so yeah, Mike I like our outlook for automotive is.
It could get there as we said in the script when we look at our all everything we got on our table between the contracts, we hadn't where they were running at pre coven 19, the new program ramp ups that we've got out ahead of us.
When we add those two together I think it's feasible think that we.
Get back to the Prequalified 19 levels by the middle of the fiscal year, and then let's see where the consumer demand takes that number by the end of fiscal year 2021.
Great makes sense.
Lastly from me you know.
You guys mentioned some of the new programs that you're winning.
Maybe just a broader sense has any of the work that you guys have been doing.
Medical vertical related its hope it has that started to open up more opportunities to speak with those customers and maybe talk about winning non coated business on a more normal environment.
And that opened up any conversations that maybe you haven't been able to have in the past or are those conversations happening more frequently how are you thinking about growth beyond those.
Well first of all of them in the short answer is yes. Our response in what we've done for the customers were supporting as is not lost on them.
I will say you know these are customers that are long standing customers of ours customers, who really value us as a partner and so already we were in very good standing in very good position to win new programs.
But with our efforts in what we've done in response.
The cold in 19 related surge in respiratory care and patient monitoring absolutely. It's only improved our position and yes. We are in a good position to continue to win.
Business. After this pandemic is behind us in these same areas and others as well.
I think move from our point of view on what our customers point of view.
The.
It's interesting to look at which of these which of these respiratory care in patient monitoring products and derivatives.
Those products will be most important to providing care.
For infected patients in the future I think you know early in the pandemic.
Focus in the media and elsewhere was really on ventilators.
It's interesting you know as we've had to continue to develop and evolve the care.
For infected patients derivatives and other products.
You know that are not let's say ventilators, but breathing assistance products.
That evolution has been interesting for us for worked for us to watch and be a part of kind of course, we we'd love to be the ones that are chosen to produce those products as they come to market.
Great. Thanks for the color folks appreciate it and stay safe and well that's all from same to you Mike. Thank you.
Pardon me, we currently do not have any further questions in queue I like to turn the call back over to Mr., Don Charron for any closing remarks.
Thank you Dimitrius. Thank you everyone 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 date.
At this time with this may simply can't get to disconnect from the car. Thank you had a nice day.
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