Good morning, ladies and gentlemen. My name is Angel and I will be your operator for today's conference call. At this time, I would like to welcome everyone to the Campbell Electronics Third Quarter Fiscal 2020 Financial Results Conference Call. All lines have been placed on listen only mode. There will be a question and answer period where Kimbell will respond to questions from analysts.
Analyst can ask questions during the question and answer segment Today's call may 5th, 2020 will be recorded and may contain forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk factors that may influence the outcome of the forward looking statements can be seen in Kimbell's annual report on Form K Ten K for the year ending June 30, 2019. And other filings with the Security And Exchange Commission, the SEC, and in today's release. The panel for today's call is Don Cherilyn, Chairman of the Board and Chief Executive Officer and Mike Surgess Getter, vice president and chief financial officer of Campbell Electronics. I would now like to turn today's call over to Don Charron.
Mister Charron, you may begin.
Thank you, Angel. Welcome everyone to our 3rd quarter conference call. Our earnings release was issued yesterday afternoon on the results of our 3rd quarter ended March 31, 2020. We have posted a financial summary presentation to accompany this conference call. The presentation 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 overall quarter, and then I will turn it over to Mike for the financial overview. After that, we will answer any questions that you may have. We are pleased with the results we delivered in the third quarter of fiscal year 2020 despite the interruptions and challenges caused by the COVID 19 pandemic. The safety and health of our employees customers, suppliers and communities are paramount. We are making every effort to keep our facilities safe following current guidelines critical medical device assemblies we manufacture around the world, our facilities are classified as essential businesses.
And so all are currently operational, but have been affected to varying degrees by COVID nineteen. We serve a diversified portfolio of markets, geographies and customers. In our third quarter, we experienced a double digit decline in sales to customers in our medical vertical, which was primarily unrelated to COVID 19. However, we are seeing a significant specifically those related to respiratory care and patient monitoring products. We have customers who products are essential to the health and safety of people around the globe.
We are proud of what we do for the world and we are proud of our people. And their extraordinary efforts and contributions during this challenging time. I feel honored and privileged that our company can play such an important role, to help in this pandemic. In our automotive vertical, we started to see the impact of COVID 19 in our third quarter results Although the severity of the impact from the extensive automotive plant shutdowns in North America and Europe will not be reflected in our results until our fiscal fourth quarter. We are, however, encouraged by the recent announcements of several of our domestic automotive customers and their plans to restart production on May 18th.
We also are pleased with the return of our production output in China to near pre COVID-nineteen run rates. We continue to ramp up of several new programs, including a large program for an existing customer who supports a vehicle OEM that specializes in fully electric vehicles. We anticipate our overall run rates for our automotive vertical will return to a new normal and when added to the ramp up of these new programs, will return us to middle single digit growth rates in the first half of fiscal year 2021. Within our medical vertical, we have been working hard to respond to the significant increases in demand, from our existing customers and our customers expect that they will continue over the next several quarters as the world deals with the pandemic and the shortages of the medical equipment in these product categories. These COVID 19 related increases when added to our base medical business will help us generate strong double digit
growth
and the first half of fiscal year 2021. We continue to gain traction in the new business opportunities pipeline for our GES business. The recent new orders for machines I mentioned on our last quarter call are on schedule to be delivered in the fourth quarter of fiscal year 2020. We are also excited about the role GES is playing in our digital and industry 4.0 strategy as we work to roll out EM tab. A GES developed software solution in all our global facilities in 2020.
We are working diligently to respond We continue our relentless pursuit to achieve our We are doubling down on execution across all of our units as we continue to drive Lean Six Sigma Projects and global supply chain initiatives to improve yield and throughput and drive improvement in our margins. Margin expansion and capital efficiency will continue to be priorities of focus for us. Our cash conversion days for the quarter ended March 31, 2020 were 81 days, up from 75 days in the quarter ended March 31, 2019 18 and from 76 days in second quarter of fiscal year 2020. While the volatility in demand has made it difficult for us to achieve our inventory objectives and thus our cash conversion days objective, we remain committed to our inventory reduction goals and actions. We invested $5,700,000 in capital expenditures The majority of these capital investments were for capacity expansion and to support the launch and ramp up of new programs.
During the third quarter of fiscal year 2020, we also returned $2,700,000 by purchasing 214,000 shares of our common stock, which brings our total to $76,700,000 and 5,100,000 shares purchased since October 2015 under our board authorized share repurchase program. As a result of the COVID-nineteen environment, our plan has been temporarily suspended until further determination by our board. And finally, as I stated earlier, I am so proud of our people around the world and our collective response to the COVID-nineteen pandemic. Our strong company culture and core values have and will continue to help us get through this together. Our number one priority will continue to be keeping our employees healthy and safe.
We will continue to deliver on our promises to our customers. The company is in a Now I will turn it over to Mike to discuss our 3rd quarter results in more detail. We will then open the call to your questions. Mike?
Thanks, Don. Before I get into my normal discussion on our financial results, I want to stress that our financial condition continues to be strong, and we believe we are in a solid position to be able to support the increased demand in the medical market relative to the COVID-nineteen pandemic and to do our part in helping to solve the shortage of critical medical devices necessary to help save lives. Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities, totaled $122,000,000 at March 31, 2020 We have the ability to request, subject to consent of the participating lenders, as well as other options to enhance our liquidity. Now regarding our Q3 results, I will be referring to the slide deck, Don mentioned, which can be found on our Investor Relations website within the Events and Presentation tab. Or if you're listening via the webcast, you can follow along by advancing the slides on the webcast portal.
As shown on Slide 3, Our 3rd quarter net sales were $293,900,000, which was a 6% decrease compared to a very strong third quarter of fiscal year 2019 with net sales of 313.5
Ladies and gentlemen, please hold.
I'll continue, with our our sales results. So shown on Slide 3, our 3rd quarter net sales were $293,900,000, which was a 6% decrease compared to a very strong third quarter of fiscal year 2019 with net sales of $313,500,000. The decline in net sales was largely the result of overall lower demand compared to the prior year, particularly in the medical vertical which was primarily unrelated to COVID 19. Foreign exchange rates reduced our consolidated net sales approximately 1% compared to the third quarter a year ago. Slide 4 represents our net sales mix by vertical market.
Comparing our net sales by vertical to the same quarter in the prior year. Our automotive vertical was down 2% compared to the same quarter a year ago, driven largely by lower demand of existing quarter, which was partially offset by the ramp up of certain programs for fully electric vehicles and new product introductions. As Don mentioned, we started to see the COVID the impact of COVID 19 on the automotive industry in our 3rd quarter results. Although the severity of the impact will not be reflected in our results until our fiscal fourth quarter. Our medical vertical was down 12% in by the ramp up of certain products.
We anticipate growth of sales to customers in the medical market in the upcoming quarters as we are currently experiencing a significant increase as a direct result of the COVID-nineteen pandemic and related global shortage of respiratory equipment. Our industrial vertical was down 3% from a year ago as lower end market demand for climate control products and the phase out of certain programs were partially offset by increased demand for smart metering products. Lastly, sales in our programs and lower overall demand. Our gross margin in the 3rd quarter reflected on Slide 5 was 6.9% was a decline of 160 basis points from the 8.5% in the third quarter of last year. However, our gross margin did improve 20 basis points sequentially from the second quarter of fiscal year 2020.
For decrease in gross margin in the current year, compared to a year ago was primarily due to lower volumes and unfavorable product mix, which partially were offset by lower profit sharing bonus expense. Selling and administrative expenses, slide 6 in the deck were $9,600,000 in the quarter, which was down approximately as a percent of net sales compared to largely due to changes in the fair value of this supplemental employee retirement plan or SERP liability which accounted for 50 basis points of the decrease compared to the prior year third quarter. The revaluation of the surplus liability is exactly offset by gains or loss is recorded in the SERP investments during the quarter, which is recorded in other income and expense net. And as a result, has no impact on net income Operating income for the 3rd quarter on Slide 7 in the deck came in at $10,600,000 or 3.6 percent of net sales. This compares to operating income of 14.5 same period a year ago, driven by the decline in our gross profit percent previously mentioned, which was partially offset by the favorable impact of the comparison to the prior year quarter relating to changes in income as a percent of sales improved by 80 basis points on the revaluation of Circiability and the improvement in gross profit.
Other income and expense net was an expense of $1,900,000 in the 3rd quarter, which compares to income of $200,000 in third quarter of fiscal year 2019. Other expense net in the current year third quarter includes $900,000 in losses on the SERP investments and $1,200,000 in interest expense, partially offset by $200,000 from of exchange rate fluctuations and other items. Other net income, net in the prior year third quarter included $800,000 from favorable exchange $2,000,000 of interest expense. The effective tax rate for the current year percent, which compares to tax rate of the mid 20 percent range, primarily due to a change in mix of earnings among our various tax jurisdictions. Prior year third quarter effective tax rate was favorably impacted by discrete tax benefits related to provision to return adjustments.
Slide 8 reflects our adjusted net income trend. Our net income in the third quarter of fiscal year 20 20 came in at $6,300,000. This compares to our quarterly net income of $11,800,000 in the third quarter of fiscal 20 19. Diluted earnings per share were $0.25 for the third quarter of this fiscal year, which compares to diluted EPS of $0.46 reported in the same quarter last year, which was also Cash and cash equivalents at March 31, 2020 were $58,300,000, Operating cash flow trends are shown on Slide 11. Our cash flow provided by operating activities during the current year third quarter was $12,000,000, which was driven by net income plus non cash items, only partially offset by changes in operating assets and liabilities.
In the prior year third quarter, operating activities used $14,600,000 of cash. Our cash conversion days or CCD was up 6 days for the 3 months ended March 31, 2020. Compared to the same period in our CCD increased 5 days, driven by an increase in our CAD or contract asset days. Slide 12 reflects our capital and depreciation trends. As Don mentioned, our capital investments in the 3rd quarter totaled $5,700,000, largely related to manufacturing equipment to support new production awards and to increase capacity.
Borrowings on our credit facilities at March 31, 2020 were $122,000,000, which were down $4,000,000 more borrowings at June 30, 2019. In conclusion, our financial condition continues to be strong, and we believe we're in a solid position to be able support the increased demand to solve the shortage of critical medical devices necessary to help stabilize. As Don mentioned, we're very proud of the work our teams are doing to support the efforts to combat this disease on a global scale. With that, I would like to open up today's call to questions from the analysts Angel, do we have any
pressing star 1 on your dial pad. On your dial pad. We ask that after you are using a speaker phone, you pick up your handset before asking your question. One moment please for the first question. And your first question comes from Please go ahead.
So, if you could first me some more color on the Alto segment. It seems like even though there might be a drop among the auto manufacturers, you're gonna be helped by new program ramps there. Is that correct?
That's correct. So maybe I can go ahead on you.
Yeah. Yeah. No. And just how, you know, if there's gonna be a more severe slowdown among the in the out in How's that going to affect your new program ramps, you think, in the next coming quarters?
Yes. So I think, as you said in the script, you. I would start with the fact that at least now we have for North America and Europe, at least our date of May 18. And that affects the majority of our customers. And so we basically have been down for the month of April.
And, yeah, for basically the first half of May. So, we but we have a restart date. That's the good news. And we expect that once the restart happens, it'll it take a few weeks for, the value chain that supports those OEMs to to crank back up to the precovid run rate. But we expect towards the end of Q4 and the month of June, we'll start to approach So, pre COVID nineteen run rate.
So, you know, q 4 to us, looks like China at something near near pre COVID 19 run rate. And North America and Europe essentially exiting the quarter somewhere around that level. But of course, the loss per and that's what's going to happen.
In the medical segment, this is like you're helped by the COVID related production, but this witness in in in in your other production and what are those and what do you see there in terms of a turnaround?
Yes, separate product categories, obviously, than respiratory care and patient monitoring. We had some of our customers that are supporting, the drug delivery device, 5 category that are going through some significant changes in their go to market strategy. And so that resulted in a year over year change if you will, that made up the majority of the shortfall. I think the good news, there is that we expect that will be successful for them and their strategy will be successful. It may take a few quarters for them to get back to the level of business.
We enjoyed with them, but I think overall it's good news, but it did impact the Q3 to Q3 comparison, because of the change going into effect before this most recent reported quarter.
So sort of that weakness from that is expected to go on for a couple of more quarters, but we offset then at least partially by the COVID-nineteen related production?
Yes. Again, I would say, you know, relative to the comments in the script, Tanya, I would say we're expecting strong double digit growth. And as I mentioned, the demand for the respiratory care and patient monitoring products is immediate. And so while we're working through while we're working through capacity and supply chain or component availability issues. We we expect a ramp up of the COVID 19 related business to occur immediately in the quarter we're in.
And, as I mentioned, over the next several quarters,
Okay. And then just in in terms of overall demand, have you seen like the sort of any and the impact from a potential prolonged economic slowdown on your order book?
You know, the demand overall that our customers are relaying onto us, has been impacted by shutdown. So in places where, government restricted, mobility and availability of workers, that clearly has been an impact. It's difficult to, to determine when, you know, those restrictions now as there lifted both here in, in North America and Latin America. And also in Europe, how fast we'll get back some run rates that, that we were at pre COVID-nineteen. But I will say that, you know, we're starting to see signs of of the value chains that we're in, the value chains that we're in.
We these restrictions are being lifted. Our customers are placing demand on us that's ramping ramping us up fairly quickly. 2 run rates we were at or near the run rate we were at pre COVID-nineteen. But definitely, I would say in the short term here, with, with the month of April seeing significant restrictions and shutdowns and other related kinds of interruptions to the normal production flow Q4 impact certainly will be there, but we're, we're optimistic, cautiously optimistic about how fast the value chain will ramp up. Once these restrictions are lifted and we get back to work.
Capacity, how what would you say you're running up now, overall?
That's a really difficult and complicated question to answer, but let me give you, it was my best shot at it. I would say our automotive line, literally in North America and Europe were shut down for the month of April and for the first half of So the utilization calculation is pretty easy for that 6 week period.
And
and then as we ramp up, in those areas, So in those auto automotive lines, we expect them to get back to the utilization run rates we were at, a pre a COVID nine team, our medical line with the increases that have been placed on us, we've been labeled on a very high utilization rate. As Mike mentioned, we even had to add some capital equipment, to meet the demand for the next several quarters And, the good news is we've been able to utilize some of the capacity freed up on our lines to support those ramp up. So it's the lower utilization in automotive is not totally at a loss at this point because we are able use a portion of that capacity to support the medical, the increase in the medical demand.
Okay. Thank you. And then some other AMS have noted the supply chain challenges. How is that affecting you?
Well, it's a challenge for us as well. You know, especially as the pandemic spread, it took it it took some time, but, you know, the value chain that includes the component suppliers who sit on the other side of of us, they were also impacting with the restrictions and the shutdown. And, and so and just availability of workers even after the restrictions were it and and people are coming back to work. And so, yeah, it it is a challenge. It's been a it's been a challenge for us to to to get to the ramp up levels.
For example, on those medical side increases, for respiratory care and patient monitoring, we're making great progress there. Our teams are working really hard. Our supply partners are working really hard and we're making great progress there. But that certainly is the challenge in the short term. On the automotive side, it was different in that there was a shutdown.
And so now we're going back to work and we're restarting here, you know, this week and next week. So, yeah, with a different kind of scenario there, we're not necessarily dealing with rapid increases. We're trying to return to run rates we were at, let's say, pre COVID nineteen. So I'm not anticipating as issues there, although, you know, our supply base for our automotive customers is global and you know, every region has responded differently in this pandemic in terms of how they dealt with the restrictions. And I would say how they're dealing with the restructure.
Okay. Thank you. And then in terms of the GS business, I know you have diversified that but but now it seems like semi cap is coming back see an improvement there in terms of the GS business and that's helping the industrial segment or?
I believe the our GES business unit supports both the smart mobile device end market, the manufacturing of the smart mobile devices. And also, as you mentioned, the semiconductor area. And, we've been getting some nice traction starting last quarter, which, we were surprised that held up in, in Q4 so far in terms of demand for those machines. We're on schedule to deliver them, as I mentioned in the script. So we'll see how that develops.
And yeah, that semiconductor guys are coming back We are seeing some signs of positive momentum forming there. So, we're in a good position to take advantage back when when that demand comes back, and we're looking forward to, you know, to to seeing a quarter year firm up with those machines we already accepted or reported. Thank you, Anya. Have a great day.
And now I'd like to turn the call back over to Don for closing remarks.
Thank you, Angel. And that brings us to the end 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.
Forward to speaking with you on our next call. At this time, listeners may simply hang up and disconnect from the call. Thank you, and have a nice day.