Q2 2021 Kimball Electronics Inc Earnings Call
Good morning, Ladies and gentlemen, my name is Michelle and I will be your conference call facilitator today at this time I would like to welcome everyone to the Kimball Electronics second quarter fiscal 2021 financial results Conference call all lines have been placed on the.
Listen only mode to prevent any background noise. After the Kimball Speakers' opening remarks, there will be a question and answer period, where Kimball will respond to questions from analysts analysts can ask questions. During the question and answer segment by simply pressing star and the number one on your telephone keypad.
And questions will be taken any order that our receipt of today's call February 4th 2021 will be recorded and may contain forward looking statements as defined under the private security Litigation Reform Act of 1995 risk factors may influence the outcome of forward looking statements.
Can be seen in Kimball's annual report on form 10-K for the year ended June 30 of 2020 and in today's release the panel for today's call is Don Charron, Chairman of the board and Chief Executive Officer and Mike.
Circus, Gitter, Vice President and Chief Financial Officer of Kimball Electronics, I would now like to turn today's call over to John Sheridan Mr. Sharon you may begin.
Thank you Michelle.
And welcome everyone to our second quarter conference call.
Our earnings release was issued yesterday afternoon on the results of our second quarter ended December 31 2020.
We have posted a financial summary presentation to accompany this conference call, which can be found on our investor relations website within the events and presentations tab.
Or if you are listening via the webcast you can follow along by advancing the slides or download them from the downloads tab on the webcast portal.
I will begin by making a few remarks on the quarter and then turn it over to Mike for the financial overview.
After that we will answer any questions that you may have.
We are very pleased with the operating results for the second quarter of fiscal year 2021.
We again exceeded our goal of four 5% operating income and we continue to deliver excellent cash flow from operations.
Our strong results were primarily driven by improved operating execution favorable product mix and a weaker dollar.
Looking ahead, we expect that our performance should approximate our long stated goal of four five per cent of operating income.
The persistence of the pandemic continues to draw attention, it's difficult to predict what we will face in the future. However, we are confident that our business will remain strong and we are optimistic about our new business opportunities vinyl.
We remain committed to our goal of 8% organic growth and believe the goal is well within our reach for fiscal year 2021.
Our team remains resilient and I'm. So proud of our collective response to the adversity, while generating strong cash flow from operations for the third consecutive quarter.
Beyond our excellent financial results, we never lost sight of the fact that the health and safety of our employees remains our number one priority and we continue to make every effort to keep our facilities safe.
The number of our employees testing positive for COVID-19 has been kept out of low level and disruptions had been kept to a minimum and we continued to deliver on our promises to our customers.
In the second quarter of fiscal year 2021 sales in our medical vertical increased 2% compared to the second quarter of fiscal year 2020, but were down 31% sequentially.
As the COVID-19 related increases in the previous quarters were completed and our sales in our medical vertical normalized and began to approximate pre COVID-19 run rates during the second quarter of fiscal year 2021 as expected.
Sales in our automotive vertical continued to gain momentum during the quarter of fiscal year 2021, increasing 13% from the second quarter of fiscal year 2020.
We expect the sales in our automotive vertical will remain at these levels or even steadily increase throughout the remainder of fiscal year 2021.
We are however, keeping a close eye on the industry wide semiconductor shortages and the potential impact on global automotive production.
October one 2020 of marked the two year anniversary of our Ges acquisition the.
<unk> results for the second quarter of fiscal year, 2021, where again, a significant improvement when compared to the second quarter of fiscal year 2020.
It is it is important to note that we do have a degree of seasonality in the Ges business with the fiscal second quarter being there of weakest in the fiscal fourth quarter being the strongest our.
Our backlog of orders for machines to be shipped in the fourth quarter of fiscal year 2021 has grown nicely and ges is well positioned to deliver those machines as scheduled.
Our cash conversion days or CCD for the quarter ended December 31, 2020 were 75 days down from 76 days in both the quarter ended December 31, 2019, and the first quarter of fiscal year 2021.
In the second quarter of significant decrease in our production day supply on hand, or Pds of wage or inventory measure was largely offset by an increase in our day sales on hand.
All of the volatility in demand and product mix continues making it difficult to achieve our cash conversion days of Jeff objectives. We are encouraged by our inventory reductions this quarter and remain committed to our goals and actions.
We will continue to focus on optimizing our working capital and achieving our CCD goal of 65 days.
We invested $6 $1 million in capital expenditures in the second quarter of fiscal year 2021.
These capital investments were largely to support the launch and ramp up of new programs and to replace older machinery and equipment.
We continue to study our capacity needs to support growth plans the.
Board approved plan to expand our Thailand operation has been officially kicked off and other footprint expansions are currently under review.
There were 190000 shares repurchased in the second quarter of fiscal year 2021 for a total of $3 million.
Since October of 2015 under our board authorized share repurchase program.
Total of $79 $7 million was returned to our shareowners by purchasing five 3 million shares of our common stock.
And lastly, as I stated earlier I am so proud of our people around the world and our collective response of the COVID-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.
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'll turn it over to Mike to discuss our second quarter results in more detail. We will then open the call of your questions.
Mike.
Thanks, Don.
During my comments I'll be referring to the slide deck, Don mentioned, which can be found on our investor relations website within the events and presentations tab.
If you are listening via the webcast you can follow along by advancing the slides on the webcast portal.
As shown on slide three our second quarter net sales were $326 million, which was a 4% increase compared to net sales of $307 $1 million in the prior year's second quarter.
The increase of net sales compared to the prior year was largely driven by increased volumes in the automotive vertical foreign.
Foreign exchange rates favorably impacted our net sales, 3% compared to the second quarter of year ago.
Slide four represents our net sales mix by vertical market.
Our automotive vertical was up 13% compared to the same quarter, a year ago and up 28% sequentially driven largely by the ramp up of certain programs, including programs for fully electric vehicles.
The continued recovery from the COVID-19 shutdowns.
Lower volumes in the prior year due to the UAW strike and favorable foreign exchange rate impacts.
Our medical vertical was up 2% in the current quarter compared to the prior year second quarter.
As expected sales in the medical vertical normalized in the second quarter as the COVID-19 related increases experienced in the most recent two quarters were completed in our medical vertical began to approximate pre COVID-19 run rates.
Our industrial vertical was up 2% from a year ago, primarily due to improved sales of automation test and inspection equipment.
And higher end market demand for climate control products, which were partially offset by decreased demand for smart metering products.
Lastly, our public safety vertical sales were $10 $5 million, which were down 28% from the prior year second quarter, primarily due to the continued phase out of certain programs.
Our gross margin in the second quarter reflected on slide five was nine 3% of <unk>.
260 basis point increase from the second quarter of last fiscal year.
Gross margin improvement compared to the prior year second quarter was driven by a number of factors, including improved operating execution favorable product mix within our automotive vertical driven by a shift to more mature and larger programs.
Favorable foreign currency impacts driven by the weaker dollar.
And continued year over year, Ges operating improvements, which were partially offset by higher profit sharing bonus expense.
Adjusted selling and administrative expenses non-GAAP.
Which excluded the changes in the fair value of our surf liability were $12 $7 million in the second quarter up $1.4 million in absolute dollars and up 30 basis points compared to the prior year's second quarter.
The increase in adjusted selling and administrative absolute dollars was primarily driven by higher profit sharing bonus expense, resulting from our overall strong financial performance in the quarter.
Adjusted selling and administrative expenses excludes changes in the fair value of our surf liability, which is directly offset in other income and expense from changes in the fair value of the <unk> investments.
Adjusted operating income non-GAAP for the second quarter came in at $17 million or five 3% of net sales and as shown on slide seven in the deck and improvement from $9 $2 million or 3% of net sales in the same period, a year ago driven by the increase in gross gross profit.
As previously mentioned.
Adjusted operating income excludes changes in fair value of our liabilities.
Other income expense was income of $2 $4 million into the second quarter, which compares to income of $1 million in the second quarter of fiscal year 2020.
Other income net in the current year second quarter includes $2 $5 million and net foreign currency gains $800000 in gains on the surf investments, partially offset by $600000 of interest expense.
Other income net in the prior year's second quarter includes $1 1 million and interest expense of $800000 in net foreign currency gains and $500000 in gains on the surf investments.
The effective tax rate for the current year second quarter was approximately 19%.
The current period effective tax rate was favorably impacted by the mix of taxable earnings within our various tax jurisdictions, including the favorable impact of foreign exchange rate movements.
In the prior year's second quarter of the effective tax rate was approximately 25%.
Slide eight reflects our adjusted net income trend.
Our net income in the second quarter of fiscal year 2021 came in at $15 $1 million was adjusted net income non-GAAP of $15 $2 million.
After adjusting for the after tax the impacts of settlement charges. After the measurement period on the Ges acquisition.
This compares to net income of $6 $6 million in the second quarter of fiscal year 2020.
There were no non-GAAP adjustments in the second quarter of fiscal year 2020.
Diluted earnings per share in the current second.
Second quarter was 60 cents. This compares to diluted earnings per share of <unk> 46 reported in the same quarter last year non.
Non-GAAP adjusted items did not have an impact on diluted earnings per share in the current or prior year quarters.
Cash and cash equivalents of December 31, 2020 were $93 $6 million.
Operating cash flow trends are shown on slide 11.
Our cash flow provided by operating activities during the fiscal year second quarter was $51 $6 million, a quarterly record driven primarily by net income plus noncash depreciation and amortization and inventory reductions in.
In the prior year second quarter operating activities used $300000.
Our cash conversion days or CCD was down one day from the three months ended December 31, 2020, when compared to both the same period in the prior year in the first quarter of fiscal year 2021.
In the second quarter of significant decrease in our production day supply on hand, or Pds of age our inventory measure was largely offset by an increase in our days sales on hand.
Slide 12 reflects our capital and depreciation trends capital investments in the second quarter included totaled $6 $1 million largely related to manufacturing equipment to support new production awards and the replacement of older machinery and equipment.
The board approved the expansion of our Thailand operation has been officially kicked off as Don mentioned.
Which will double the capacity of the Thailand facility and is expected to take approximately 12 months to complete at a cost of $8 million.
Borrowings on our credit facilities at December 31, 2020.
Were $86 million, which is down $32 million from June 30 of 2020 of.
Our borrowings classified as long term have declined by $35 million from June 30 of 2020.
Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled $205 million of December 31, 2020.
In conclusion of our financial condition continues to be strong and we're in excellent position to take advantage of growth opportunities and improved operating margins and return on invested cash and improve operating margins and return on invested capital while being able to confront the continued uncertainties caused by the COVID-19 pandemic.
With that I would like to open up today's calls to questions from the analysts Michelle do we have any analysts with questions in the queue.
Ladies and gentlemen, analysts may ask questions at this time by simply pressing Star then one on your Touchtone phone.
Remove yourself from the queue by pressing the pound key we ask the if you are using the speaker phone you picked up the handset before asking your question one moment for questions.
Our first question comes from the line of Mike per Alice with.
Housing company. Your line is open. Please go ahead.
Hey, good morning, Don and Mike Hope, you're all staying safe and well.
Likewise, Mike.
Hey, guys a few questions the touch on here lets start with the supply chain.
The capacity expansion that you guys talked about you.
You called out the semiconductor shortages that you're seeing specifically as it relates to the auto can you just give a broad update on what youre seeing from the supply chain and thinking about specifically semiconductors, if we're searching for a silver lining here.
Did that help the ges business.
As people continue to add capacity in that space, just curious of what youre seeing.
Yes, so let's start with that the the last part of your question around Ges and could that could help our business outlook medium to longer term for Ges. The short answer is yes. That's one of the end market vertical is that our ges business focuses on and we do have.
Quite a bit of application experience in that space and so we would certainly hope to be cash.
Considered and winners of new business as the semi conductor industry overall.
Adds capacity.
Coming to the the shortage situation that we're facing now is it's really difficult to say whether or not it truly is a capacity issue or that it's more of COVID-19 impacted and then maybe the system just got a little out of balance.
You think about what we've all been through.
Last March are in the.
The spring timeframe.
When the pandemic settled in and we started the the whole.
Stay at home.
Serge of products took off in and of course, it consumed a lot of those same semi conductors.
Whether it was stay at home from work or for learning or stay at home for entertainment all of those products consumed.
Consume the same type of semiconductors that are now showing up as shortages in the auto sector.
And so you know.
Will that continue certainly there is a rebalancing of we had a.
I shut down within the automotive in North America, and Europe that lasted.
Proximately six weeks and during that time those other.
The products I mentioned were surging and so you know it definitely was the catalyst for this sort of rebalancing issue, we have right now.
That being said, we're you know we are experiencing shortages within our automotive book of business that has spilled over a little to other <unk>.
Areas outside of automotive as we said, we're watching that very closely.
We're thinking that it's going to be with this.
For a quarter or two.
Before things kind of catch up and get rebalanced.
That being said, where we were in a pretty good position to try to mitigate a lot of that risk and of the last point I would make is you know the automakers are already having to set priorities on allocations and of course, they set those priorities on the.
Less popular and profitable vehicles in their fleet.
And I would I think we believe that.
Are the vehicles that we where we have content would be at or near the top of that list for many of those vehicle manufacturers. So so we're we're hopeful that we will gain priority with those vehicle manufacturers in those allocations were made in our production will be less impacted maybe than it otherwise would.
And so, but we're keeping a close eye on it Mike it's developing and it's really I think started to manifest itself in the last 60 days. So it's pretty early but we're keeping a very close eye on it and taken as many countermeasures as we can to mitigate the risk.
Understood understood and taking what you guys had talked about with the auto remaining at this level or even the higher moving forward that incorporates the supply chain situation that you are seeing currently.
That's right.
Got it got it that's helpful.
I'd like to take the second to commend you guys on really the eye popping.
Cash flow this quarter really really strong performance there.
I'd like to dig into it a little bit and maybe help me understand.
I guess the sustainability of the certainly the see the balance sheet and net cash position now is.
Really good and thinking about moving forward.
Maybe we're not getting to this level of every quarter, but relative to history. How would you guys frame. The work that you guys have done on working capital.
And cash flow moving forward.
Yeah, well. Thank you for your kind words, we've been working on it for quite a while especially of the working capital part of that in <unk> and especially the inventory.
I think of you go back six or eight quarters.
We started the AD inventory due to shortages at that time that were more related to the capacitors.
Multilayer ceramic capacitors, namely.
But there were other shortages that we also felt like we needed the buffer with more inventory than we built up inventory.
To a point, where it was definitely noticeable on the negative side.
And we've been working that down and sort of at times. It felt like one step forward two steps back, but we kept our shoulder into it kept our focus on it in the last few quarters are making good progress there and that's as we reported unfortunately, not all of that progress is reflected in the cash flow number.
Our days sales outstanding moved up a bit and.
We're working that pretty hard as well in terms of really watching to make sure. We get paid on time from all of our customers and so the inventory efforts I would say, we'll continue we're not at our goals yet we're making good progress, but we're not at our goal. So we're going to continue to work on inventory and inventory reduction.
Initiatives.
That should help us.
It makes them more improvements there and the whole cash conversion cycle and of course, our operating activities without working capital of as it improve with the improved profitability that we've delivered.
The two are our just our execution getting better across multiple locations in multiple fronts.
And so I don't think we can sit here and say, we're going to report quarters like the one we just did Mike obviously best of all time for us, but we do expect to continue with strong cash flow going forward.
That's helpful. That's helpful.
And the last from me.
All of that on the cash flow and the work that you're continuing to do turning to capital deployment.
Any updates that you can give the on just how youre thinking about capital allocation I know acquisitions.
Specifically on the medical side Ben.
Hence of recently.
Are you guys seeing anything related to may be Colgate related demand tapering off.
The resulting in some multiples coming down to make things more attractive or.
Is that not really taken place so far.
The share repurchases and other uses of capital most likely deployment.
Well for sure Mike we're going to keep the number one priority on organic growth and we talked about the Thailand expansion and we have others under review.
We do and as I said in my comments, we're optimistic about our new opportunities funnel.
And you know when we look at our footprint we have.
Got some facilities that are reaching full capacity from the square footage standpoint, and so our strategy. There is to expand where we are and and you know we modeled total greenfields compared to <unk>.
Expansions of existing operations in the.
It's much more favorable less dilutive to expand an operation where we're operating in to do a full greenfield like we did with Romania, but we are we are looking at not the I mean, obviously the board approved Thailand, and we've officially kicked that off and we're looking at other operations debt.
We will need to make our capital allocation for.
For expansion that work's going on.
As you mentioned.
We are looking and are active in the market looking for acquisitions in the medical space.
Support our diversified contract manufacturing strategy there.
They are tough to find.
And answer to your question I think what we would say of if they have not been COVID-19 impacted.
They are interested and the there their name is in the market and the multiples are high.
If they have been COVID-19 impacted a lot of those targets of just coming off the market and just not talking and so it's.
It's been a challenge to find targets, where we're obviously active have been actively looking at targets.
And looking for targets so.
That's still on our list, but but it's been it's been tough it's been difficult in this market to find something that really works for us.
We restarted the share repurchase program. This past this past quarter that certainly on the allocation list and so.
Yeah.
The one priority is making sure we're we've allocated capital to support our organic growth that's number one.
Understood understood guys I appreciate the color as always I hope you folks be well.
Mike take care.
Thank you and our next question comes from the line and just sort of storm with Sidoti. Your line is open. Please go ahead.
Hi, Thank you for taking my question and congratulations on another great quarter and good questions asked already but if we can just expand a little bit the verdict on the capacity.
And the comments, where do you stand now in terms of capacity and what kind of.
The ability do you have to expand the existing loss until until dose of fully expanded and units of going into a greenfield.
Most of our locations like Thailand had debt.
We had.
Let's say land.
Jason too are very nearby our existing facility that's available for expansion and so and so of the good news is as we we have the capability to expand the majority of our facilities and literally do that expansion right next door, so to speak and so.
That provides a lot of synergy, especially around cost management and leveraging.
Costs in the infrastructure cost, while we're expanding the facility physically.
So that's the reason why we're focused on on that particular strategy for expansion.
In terms of our facilities and.
How full each one is.
Say you know obviously, we made the decision to expand Thailand, So that was pretty full and.
And with more business coming we we we were at the tipping point and that's why we move forward with that expansion.
The next on our list Mexico, Our Mexico facility has also been a very popular operation growing and so we're looking very closely there in terms of of an expansion to add more capacity and you know and I would say after that there's there's.
The time, where we feel like were those expansions will cover us and handle our organic growth given the available floor space, we have elsewhere in our footprint.
Okay. Thank you that was helpful.
And.
Also do you expect that the other two to contend to be elevated.
For the rest of the year do you see that continuing into next year and is that the near normal or.
The thing I would want you to think about is that you know.
The whole COVID-19, pandemic has reduced inventory levels, especially in the U S, but really globally inventory levels have been low and so getting caught back up if you will catching back up.
Two what would be considered normal inventory levels will provide a boost that won't carry on it it will take.
We think it would take three three quarters or so.
Yet for us to build up as it as the collective value chain to build back up those finished goods were carmakers are more comfortable to have them now it may take a little longer depending on the semi conductor shortage and how it impacts how fast those inventories.
It can be replenished, but you know the.
The auto analysts around the world are very very bullish about the buyers returning to the market.
And low inventories driving growth for the foreseeable future. So short term, we will have a little boost getting the inventories back to normal but.
And it will that growth that we would guess would subside a little once inventories reach the normal levels, but but I think overall, there's still expect expectations of the industry will grow we.
We will grow nicely in the years to come.
Okay.
Today's question and that's your ear.
Hold off for the rest of the year.
You were breaking up a little on could you ask that question again.
Yeah, just that one out in my head about around your of gross margins. The performance that it seems like that will be holding up the throughout the year. So all of them well certainly the operational improvements we made and when you look at the advance the advancements we've made in terms around around execution of our supply chain initiatives.
Lean six Sigma projects, yes, we expect those improvements to carry forward.
Some of the other sort of favorable tailwind that we mentioned today.
Those are not necessarily tailwind that we could expect in the future.
We talked about the fact that we know with the weaker dollar that helps us a little and we also.
We also know we had some benefit from mix, especially higher volumes on mature production lines.
Those are little more difficult to project going forward, but certainly we expect the operational improvements that we made to continue with us in <unk>.
And continue to reflect.
In our gross margin and operating income margin.
Okay. Thank you and then lastly.
You mentioned you feel confident in reaching the APAC you switching 8% yes.
The air revenue growth targets for this fiscal year, but how do you see that play out in the coming year.
Well, certainly we're going to be moving to benefit this year for some with some softer comparables in Q3 and Q4 in.
In the first half of fiscal year 'twenty. One are our growth is in the low single digits. After you adjust for FX.
As we look to the second half of the year, obviously to take double digit numbers in the second half the reach eight for the full year.
So as.
As we look forward beyond FY 'twenty one.
Theres a lot of factors that we have to we have to sort of settle in on before we could.
Before we could say that we would be confident that our 8% organic growth would be and would be our 8% organic growth goal would be within our reach for FY 'twenty two.
We feel confident to say that about FY 'twenty one.
Okay. Thank you and that was all from me. Thank you. So much. Thank you on your.
Thank you and our next question comes from the line of Hendi <unk> with Gabelli funds. Your line is open. Please go ahead.
Good morning, Don and Mike Hello, Hendi.
Hi.
Tom how should we be thinking about growth.
All of them what this business.
Companies by the growth metric to unit growth and comp and growth and then secondly, how much exposure do you have to.
EV.
Yes.
Definitely hendi, we when we look at our growth and our projected growth, where we're looking at our content.
And what those vehicles are expected to do in their respective markets.
And then we acquired add in new business that we've won that'll be ramping up and of course at the subtract off from programs that will go end of life. So we're doing all of that math when we.
When we come up with what we think our automotive growth number will be so it's definitely not a.
<unk> kind of approach.
It's more complicated than that in terms of the determining our growth and as you know automotive has been a real significant part of our growth over the last several years and so we continue to be successful in that end market with our value proposition. We continue to win new business and so we continue to be out.
Domestic about the automotive vertical there there are obviously a lot of disruptions coming to the automotive vertical as you mentioned.
Trick vehicles autonomous driving <unk>.
Sharing might have taken a step back in this pandemic.
But there are disruptions coming and so it's important to keep an eye on debt as well and.
There are automotive strategy has been focused around.
Applications that are going to be winning applications in the future maybe because of their architecture doesn't change.
Or because they are growing in popularity sales.
For example, we've talked in the past about the fact that we support electronic power steering.
That application and that architecture is largely the same for <unk>.
Quick vehicle as it is for an internal combustion engine vehicle and so we see that is of good area to continue to invest in and we have and we've got growth plans for the.
Of the future.
And we of the other applications are similar in terms of our approach and our focus we have been successful winning content on electric vehicles. It's been of a real success story for us.
I can't I can't give you names of our customer or their customer.
But it has been a significant part of our growth story in automotive.
We're producing modules that go on fully electric vehicles for.
For some of the most popular brands in the world through this customer relationship and we are of very strong relationship with them.
And so we expect to continue to grow that relationship and it's becoming.
The amount of our business that is actually on fully electric vehicles is becoming a significant part of our overall automotive book of business.
Got it and then.
Don Industrials.
Some exciting growth opportunities that you see for kind of your plant the one.
Well I like what we're seeing on the climate control of side of our business.
We're seeing that part of our industrial vertical show, some promising growth and recovering quite nicely and we've got some some really successful customers in that space. So I am I am.
Looking forward to seeing how that business ramps up as.
As we go into the let's say higher part of the season for those climate controls, especially here in the U S for HVAC type applications.
Like what we're seeing now in terms of traction with Ges as I mentioned, we've got some seasonality there that.
We're working to grow and diversify our way out of but at the moment, we have some seasonality there, but we are we are seeing some nice traction around.
New orders for new machines, and we've got some really interesting developments going on there within that within that business, which again, we report those sales in our industrial vertical. So those are a couple of areas that.
I'm excited about.
I remain very excited about smart.
During I think the <unk>.
Pandemic.
Restrictions and conditions will have to subside before.
We can feel confident about the future growth there, but we have a number of customers in that space that are market leaders and when that when that market starts to recover from the pandemic and again, the restrictions and conditions, especially around installation I believe that will grow again.
For us it would be a significant part of our industrial vertical growth story.
And Don and Mike.
Look back at the medical.
The way to quantify the one time, that's kind of like Palo <unk> 19 in Q1, if I look on the compare to Q1 'twenty 'twenty one that the prior year.
All of the Delphi as the Bud Light Party 6 million.
The lightweight the.
Try to quantify that.
I think that would get you close handy it would get you close if you look at sort of an average run rate and then look at those two quarters that.
Had the COVID-19 related increases the one thing I guess I would want to bring to your attention. As you know there is a negative effect from COVID-19 that it would also be showing up so youre looking at somewhat of a net number when you take sort of our average run.
Over of say six or seven quarters, and then look at those quarters that had the higher increases of COVID-19 related gear, but we still have parts of our medical vertical that are down.
Where we would expect them to be in it and its really more related to the fact that there.
The.
They're either not critical or.
Can can wait in the whole care continuum.
With the priority being obviously on COVID-19 patients. So we have we have a fair amount of our medical vertical that is.
Is impacted on the negative side of for example people not being able to keep their normal doctors' appointments.
No.
Diagnoses being delayed treatments being delayed and so.
When we do when the pandemic subsides and people are able to go back to their normally scheduled doctor visits and and and the are diagnosed we have debt, we expect those product areas to pick back up and so.
I'd just ask you to keep that in mind as you're thinking about.
Doing the math and seeing what the COVID-19 impact was to us in our medical vertical.
Again, I would say hendi, though that we we as we said in the script today, we believe that it's the increases the COVID-19 related increases we were asked to produce we completed those and those are reflected in the prior quarters.
What we don't know as well.
When the rest of our book of business would get to sort of of pre COVID-19 expected run rate.
Got it.
And as Doug and public safety, how do you characterize the carbon business.
The phase out.
Boston and when can you start seeing design wins and new products the <unk> turnaround.
Yes, we know where we're kind of at the end of the run out with one of our larger public safety customers.
Happens in our business from time to time with us and not very often and I'm grateful for that but we did have a customer of longtime customer that phasing out and so it's kind of offsetting some of the green shoots if you will that we have in the public safety vertical.
Of some very interesting applications.
That we are developing their Hindi.
It's going to be of smaller market for us.
In terms of size, but it's one that's interesting to us and we've got some really big names in there that were really excited about.
I can't really add any more detail than that but with the applications around security for the delivery of packages for example.
The security of facilities and parameters of facilities are continued to be applications that we support and equipment for first responders.
It's all of those are applications that are in production and are developing and so.
We liked the vertical it's going to be smaller than our big three but its significant and we expect to grow there again once we work out the end of this.
Legacy program.
Don and Mike.
Are we at the point of whether you can share.
More about your capacity expansion in Thailand in the last earnings call. You mentioned that it may require by $10 million of Capex to expand like the 100000 square feet of capacity.
Ill.
Kevin can we acquire like more information about.
<unk>.
What is being planned.
Sure absolutely.
Absolutely Andy.
I heard today that.
Mike talked about approximately $8 million of Capex and we've officially kicked it off.
And it takes about 12 months for us to gain occupancy of the expanded portion of the plant.
Yeah, the ask any questions you'd like.
So although the AE.
This month as debt.
The 100 per cent for the for the new capacity the X mentioned in pilot.
8 million is the Capex number handy and the time to complete the project. So that we can take occupancy of the plant is about 12 months.
Okay.
And then.
Can you share with Beckman.
The expenses will be either Mark polak too.
But largely medicine.
That's largely a matter of today.
It's it's in Thailand has a mix of our verticals today within that business unit.
The expansion drivers.
For four of proving the project to expand in Thailand were primarily driven by new business that we that we expect from the medical vertical.
Yes.
And then.
And then back to the gross margin these content.
So I think the way I see it as debt yields than say some of it's running high now.
<unk> you are effectively Romania, and then therefore, let's say debt.
In terms of.
Have the index relative to.
Non-GAAP gross margin expansion should we expect more in terms of sustaining gross margin of the cut on that Paul instead of like boosting growth gross margin for them.
Yes, I would say that would be the right approach hendi, especially given the footprint expansion.
Spansion that we're talking about.
The favorable tailwind that we talked about.
Just keep asking you to think about the four 5% longtime stated goal of around operating income margin and we're reiterating that I realize that's lower than the last two quarters we've reported.
But we know the last two quarters.
Benefited from those tailwind I spoke about earlier and so.
We do expect that will.
We will continue our efforts around margin expansion.
You know of medium and long term and we.
We do see a point in time, when when we look at our target and wonder.
If we can if we can.
Can commit and set a goal of beyond 4.5% operating income margin.
We're not there yet we have more work to do to prove to ourselves. We can set that kind of of target, but thats certainly within our own expectations as management that we would get there.
In the not too distant future.
Got it. Thank you Don Thank you, Mike and then by the way it is great to see Kimball electronics being named as one of the stock because of the imbalance stable 2021 of them well. Thank you. Thank you Andy we're glad we were glad to see that as well.
Thank you you have a good rest of the day handy.
Thank you all of the best of all the best.
Thank you and again as a reminder, analysts may ask a question at this time by pressing Star then one on your Touchtone telephone.
We do have a follow up question from the line of on a sort of storm with Sidoti. Your line is open. Please go ahead.
Yes, hi, Thank you just a quick follow up on the Capex to $8 million that is related just to the Thailand facility right you have other capex on top of that that's yes, yes. That's correct. Yes, just that's just the capex that would be tied to the <unk>.
Footprint expansion, our square footage expansion in Thailand.
Okay. Thank you to the cell phone.
Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Don Charron for any further remarks.
Thank you Michelle. 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 day.
At this time listeners may simply hang up to disconnect from the call you and have a nice day.
Most of it.
[music].
Net.
Okay.
Okay.
The.
[music].