Hey,
Good morning, ladies and gentlemen. My name is Norma and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kembo Electronics Third Quarter Fiscal 2018 Financial Results Conference Call. After the Kimbell speakers opening remarks, there will be a question and answer period where Kimbell will respond to questions from analysts. Analysts can and questions will be taken in the order that they are received.
Today's call, May 3, 2018, 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 outcome of forward looking statements can be seen in Kemple's annual report on Form 10 K for the year end June 30, 2017, and today's release. The panel for today's call is Don Charron, Chairman of the Board and Chief Executive Officer and Mike Sir Getter, Vice President And Chief Financial Officer of Campbell Electronics. I would now like to turn the call over to John Sharon. You may begin, sir.
Thank you, Norma, and welcome everyone to our third quarter conference call. Our earnings release was issued yesterday afternoon on the results of our third quarter ended March 31, 2018. 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're listening via the webcast, you can find it in the Downloads tab on the webcast portal. I will begin by making a few remarks on the overall quarter, and then I'll turn it over to Mike for the financial overview After that, we will answer any questions that you may have.
Our sales in the third quarter of fiscal year 2018 were up 10% sequentially from the previous quarter and up 22% when compared to third quarter of fiscal year 2017. Very strong growth in our automotive and medical end market verticals helped us set a new quarterly sales record for the 9th consecutive quarter. We are now on a pace to significantly exceed our goal set almost 3 years ago of $1,000,000,000 in annual sales in fiscal year 2018. As we stated last quarter, our compound annual growth rate or CAGR was approximately 8% over the past 3 years. Our goal is to sustain this growth rate over the next few years as we look to grow the company beyond $1,000,000,000 in annual sales.
We are pleased to have set new The fourth quarter of fiscal year 2018 will be a pivotal quarter for our margin expansion efforts as we continue to focus on yield and throughput improvements on recently launched new programs. Further progress on the ramp up in Romania to help us achieve our goal of 4.5% operating income. Our next phase of ramp up activity in Romania is on track. We expect our sales run rate to more than double from the fourth quarter of fiscal year 2017 to the fourth quarter of fiscal year 2018, and we expect to approach our breakeven point for operating income by the end of this next fiscal quarter. The impact of So reaching this important milestone will have a measurable effect on our consolidated operating income margin.
While we have made progress toward our long term goal of 12.5 percent ROIC, we still have work to do to achieve this important goal. Margin expansion and capital efficiency will continue to be priorities of focus for us. We continue to leverage our strong balance sheet and cash flow to make investments that would drive further growth in sales and profits. We invested $7,200,000 in capital expenditures in the third quarter of fiscal year 2018, bringing our fiscal year 2018 total to $22,000,000. As we stated during our first and second quarter calls, due to stronger than expected demand from several of our existing customers, we expect fiscal year 2018 capital expenditures to approximate the fiscal year 2017 level of $34,000,000.
We remain focused on doing what's necessary to secure the raw materials in this tight supply market so that we can ramp up production to the new order levels. And finally, as we stated on our last call, our work has begun on the implementation of our board approved updated strategic plan. We are committed to optimizing our EMS business by focusing on capital efficiency margin expansion and high quality revenue growth, and we are committed to making new investments that will help us develop our sales beyond EMS, to a multi faceted manufacturing solutions company. We are also exploring opportunities that would establish new platforms, create optionality for us in the near future. Now I'll turn it over to Mike to discuss
Mike? Thanks, Don. During my comments, I will be referring to the slide deck, Don mentioned, which can be found on our Investor Relations website within the Event and Presentations tab, or if you're listening via webcast, you can find it in the downloads tab on the webcast portal. As shown on Slide 3, our 3rd quarter net sales were a record $283,900,000, which was a 22% increase, compared to net sales of $232,900,000 favorable exchange rate movements, which accounted for 7% of our net sales growth. Slide 4 represents our net sales mix by vertical market.
Comparing our net sales by vertical to the same quarter a year ago, our automotive vertical was up over 40% compared to a year ago to a new quarterly record of $136,200,000. The increase from a year ago was largely due to the ramp up of new program introductions as well as strong demand in all three of our geographic markets. Our medical vertical was up 30% in the current quarter compared to Q3 of last year from both increased demand for existing programs from the continued ramp up of new product launches and softer demand in from the prior year third quarter as a result of overall demand and programs reaching end of life. Our gross margin in the 3rd quarter reflected on Slide 5 was 8.1%, which was up slightly from 8% in the same quarter last year, and was flat sequentially from the second quarter of this fiscal year. Our increase in the gross margin in the current year quarter compared to a year ago was result of leverage from the higher sales, which was partially offset by the impact of costs associated with the support of new product introductions and a less favorable product mix.
Selling and administrative expenses, slide 6 in the deck, were $11,700,000 in the third quarter, which were up $2,500,000 in absolute dollars and up 30 dollars compared to the prior and incentive compensation costs, including non cash stock compensation expense, which accounted for a 20 basis point increase. Partially offsetting the increased S and A costs were lower expenses related to the normal revaluation of this supplemental employee retirement plan or SERP liability. Our operating income for the third quarter on Slide 7 in the deck came in at $11,200,000 or 3.9 percent of sales, which compares to operating income of $9,500,000 or 4.1 year 2018 third quarter compared to income of $300,000 in the third quarter of fiscal year 2017. Other income net in the current year third quarter was primarily the result of $2,100,000 in net foreign currency exchange gains, driven by strengthening of the currencies in our foreign locations a $400,000 gain on the fair value of the investments in our supplemental employee retirement plan, and less than $100,000 in net foreign currency exchange gains. The effective tax rate for the current year third quarter was 17.5% compared $200,000 of discrete tax benefits, including $100,000 related to a measurement period adjustment in the revaluation of the deferred tax assets associated with tax reform.
In the prior year third quarter, we recognized approximately 5 $1000 of discrete tax fiscal year 2018 did not have a significant impact on our effective tax rate for the current quarter. Slide 8 reflects our adjusted net income trend. Our reported GAAP net income in the third quarter of fiscal year 2018 came in with a new quarterly recorded in the third quarter of fiscal year 2017. Excluding the tax reform measurement period adjustment I mentioned previously. Diluted earnings per share ended up at a quarterly record of $0.40 for the third quarter of this fiscal year, which compares to $0.30 for the same quarter last year.
Cash and cash equivalents at March 31, 20 18 were $44,200,000. Operating cash flow trends are shown on Slide 11. Our cash flow from operations during the current year third quarter was $9,500,000 as our net income plus non cash items more than offset usage of cash related to Our cash flow from operating Our cash conversion days increased 1 day from the 3 for the 3 months ended March 31, 2018, when compared to the same period in the prior year as our PDSOH, our production days sales on hand, which is our inventory metric, increased by 5 days to support increased volumes and the implementation of a new inventory management program for one of our largest medical customers, which more than offset a 4 day decline in our DSO or days sales outstanding, which is our receivables metric, partly from higher volumes and faster payments from customers utilizing factoring programs. Slide 12 reflects our capital and depreciation trends. Capital investments in the 3rd quarter totaled $7,200,000, largely related to our investment in new manufacturing equipment to support new production awards and increased manufacturing capacity.
Borrowings on our credit facilities at March 31, 2018, were $16,300,000, which was up $6,300,000 from June 30, 2017. Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities total $99,000,000 sheet continues to be strong, and I believe we're well positioned for continued growth. With that, I would like to open up today's call to questions from the analysts. Norma, do we have any analysts with questions in the queue?
Our first question comes from Cindy Susanto of Gabelli And Company. Your line is open.
Good morning and thank you for taking my questions. First question is for Don. Don, we are seeing 44% positive growth in automotive. How sustainable is the high growth in automotive we are seeing in Q3 going into Q4 and possibly next fiscal year?
Well, we certainly had strong demand this past quarter and, and it was unexpected demand in terms of programs that we had, the visibility, the ramp up programs that we had in that period were pretty significant, but also as Mike mentioned, the growth that we experienced really was from all three regions of the world, fairly strong demand I really can't comment on the outlook from there. But I would certainly say that we were very surprised at how strong the demand was during the quarter.
And then is it fair to assume that there are still more new design wins in Q4 will not realize?
Well, we do still have a pretty healthy launch schedule ahead of us As we've mentioned in past calls, we've been running at what we would consider to be something near a 2x or a double sort of rate of launches. And again, looking at our CapEx is a pretty good proxy for the launch activity we're supporting because most of that CapEx, as Mike mentioned, is to support new equipment for those new programs. But we don't see, as we look out in the future, that that sort of 2x run rate would continue on for several years. We've been through a really, I would say an unusual period of time in the last now coming on 3 years where we've been at somewhat of a 2x normal rate of, let's say, new product introduction activity We do see that renormalizing to something more similar to a run rate that we've had when our CapEx approximated depreciation
Okay. And then, Don, you mentioned that you want chemo electronics to go beyond EMS to multi faceted services company. Can you share more colors in terms of organic versus organic toward that goal?
Yes, we would see most of our work there, here in the early stages of launching our new platform strategy to be to be in acquisitions versus organic development. We are very interested in working our way in the ecosystems of companies that are servicing the needs of the smart factory of the future. So we like areas like automation test and measurement. And those are the areas that we're looking to make investments in for the future. Those are areas by the way that we know in our own factories, we know the megatrends.
We have a lot of those investments going on in our own factories. So So we also are keenly interested in being in a good position to service ourselves as a high-tech manufacturer in the future.
Got it. And then, Mike, I have questions about the Romanian facility. So you set a goal of Romania facility reaching breakeven by fiscal year 2018. What will the RAM gross margin boost or anything that you can share like post reaching the breakeven by June this year?
Well, as Don stated in his comments, about a 50 basis point impact we saw in operating income. In the quarter. And what we've been communicating, we expect to reach breakeven run rate by Q4 of this year within the quarter. And so I think maybe a good way to look at it is in terms of that 50 basis points is something that we would expect to see some improvement on going forward as that facility gets up to operating speed. And and gets to breakeven.
So, is it reasonable to assume that 50 basis point boost may on a quarterly basis may take place in the next fiscal year?
Well, certainly, Hendi, as we look at our our current business, our goal we've set for the consolidated line for the company is 4.5 Obviously, this quarter all in, we ended at 3.9% on the operating income line. So as we look forward, if the current business can let's say hold serve and stay at that 3.9 level, we would look to have the improvement we make in Romania add to it at the consolidated level.
Okay. And then what does raw menu facility running at breakeven in term, I mean, like, how does it correlate to the factor utilizations? Can you share what kind of factor utilizations range that will correspond to breakeven run rate?
Yes, it'll be some idea.
Yes, it'll be somewhere around a 60% utilization of the phase 1 construction at that point.
Okay. Got it. Okay. Thank you.
Our next question comes from Chase Fasta of AWH Capital. Your line is open.
Good morning guys. Thanks for taking my questions. Just following up on the automotive vertical strength, Was there a concerted effort to grow here? Or is this kind of just a result of meeting demand?
I'd say it's our strategy in terms of the this end market vertical has been pretty steady Chase. I mean, it's an important part of our our overall plan for growth. We do have portfolio targets, long term portfolio targets that we're sort of aiming for, but we're not going to turn away any organic growth that we think is growth that we can meet our capital. We goals on. So we've been, as I've stated in past calls, we've been fortunate in winning new programs and launching those new programs.
And, really, the strong growth that we saw this past quarter is really the result of the ramp up of those programs. And just stronger than expected growth in terms of where our content, where we build electronics and what cars those go on around the world. And I think that's also something for us we're very fortunate about because if there's a lot of variables there that kind of factor into your ultimate growth rate, you're having the right content on the right vehicles in the right regions of the world, is not something just happens by itself. So we feel pretty good about the quarter we just finished. The growth rate was higher than we had a expected.
One good thing is we've got those same programs that contributed to Q3 are going to be in production going forward and we still have some ramp up activity ahead of us, but certainly we can't predict like anyone can hardly predict on what the total SARs will end up for the full year.
Okay. I think you guys called out a mix as having a slight negative impact on margins in the quarter. Is that kind of the result of growth in the automotive vertical or is it more a result of higher mix new business ramping up or what kind of drove that?
Well, as we said also in the past calls, base. It'd be more about the MPI activity. When we look at sort of the product life cycle of a program, like an automotive, for pool, maybe 2 years in development, 7 years in production. The midpoint in production is probably our sweet spot most challenged we are is in the launch time frame because we're deploying capital to hiring resources in ahead of that launch. And then typically those programs take maybe as much as 3, 4, 5 quarters to ramp up to their full production and you'll maybe go on a vehicle platform at a time and that ramp up phase.
So we're most challenged at the front end of these programs when we get them into production. So when we talk about yield and throughput improvements on programs. Usually that 1st 12 months, we're really putting our shoulder into it because that's where we're trying to that those programs to their quoted rates and margins and return on invested capital. So we're we this next quarter coming up Q4, we stated, we called it a pivotal quarter, and it is just that for us, not only for Romania, reaching our long stated goal of breakeven on the OI line, operating income line, I should say, for Q4. But we also have some new program launches that occurred over 12 months that we expect to start to approach their quoted run rates.
And the combination of those 2, we think, should get us to our stated goal of 4.5% operating income.
Okay. And just to make sure I understand on Romania, okay. So it's a 50 basis point headwind this quarter, are you guys saying that goes to 0 for the whole next quarter, or is that like a exiting the quarter at 0?
We expect to approach our breakeven by the end of the quarter.
Okay. Okay. And then you guys have been pretty steady buyers of your stock at prices considerably higher than it's traded out in recent months. And I didn't see any commentary on buybacks in the press release despite pretty nice operating flow and a lot of cash on the balance sheet. Just kind of curious what the thought process is there.
Are there other opportunities imminent in the pipeline that you're kind of holding that cash aside for or just kind of what's the thought process there?
Well, our standard answer is to a same answer Chase. The timing actual number of shares that we repurchase, it depends on, a number of factors. And you're right. Other investment opportunities would be one of those factors. The market, our price, all of those are key factors in our decision.
And we have each quarter in our board meeting, we with our Board of Directors, we have in meeting, we decide what those priorities are. And then of course, as I mentioned in my commentary on our new platform strategy, we do expect that investment stream to be primarily acquisitions as we launch ourselves into that new strategy. And so as we work on those projects, we have to follow the rules that govern buyback programs, when you're when you're stating that you're going to be acquisitive in the market. So all of that has to be balanced and rules have to be followed. And yes, you're correct.
We didn't buy any shares during the quarter. And it's for all those reasons I just mentioned.
Okay. Makes sense. And my final question is you guys plan to hit your fiscal 2018 targets next quarter in terms of both annual sales and operating margin goals. You you plan on updating those goals for fiscal 2019 or some period going forward?
That's part of our process. So we're going through, updating our operating plans now for the upcoming fiscal year 2019. And as we close out 2018, we'll look at those goals. We'll look at our progress. And yeah, as we've done in the past years when we make our fourth quarter release, we'll do our best to provide in the outlook section of our Q4 press release an update to those targets.
Thank you. At this time, I'd like to turn the call back to Don Charron for closing comments.
Thank you, Norma. 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.
Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.