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 Campbell Electronics Second Quarter Fiscal 2018 Financial Results Conference Call. All lines have been placed on listen only mode to prevent any background noise. After the Kimbell speakers' opening remarks, there will be a question and answer period where Kimbell will respond to questions from analysts analysts can ask and questions will be taken in the order that they are received.
Today's call, February 8, 2018 will be recorded and may contain forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk factors may that may influence the outcome of forward looking statements can be seen in Kimbell's annual report on Form 10 K for the year ended June 30, 2017 and in today's release. The panel for today's call is Don Charron, Chairman of the Board and Chief Executive Officer and Mike Eric Ketter, Vice President And Chief Financial Officer of Campbell Electronics. I would now like to turn the call over to Don Charron. Mr.
Charron, you may begin.
Thank you, Michelle, and welcome everyone to our second quarter conference call. Our earnings release was issued yesterday afternoon, on results of our second quarter ended December 31, 2017. We have posted a financial summary presentation to accompany this conference call. 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 find it 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. Our sales in the second quarter of fiscal year 2018 were up 2% the previous quarter and up 12% when compared to the second quarter of fiscal year 2017. Double digit year over year growth in our automotive and medical end market verticals helped us set a new quarterly sales record for the 8th consecutive quarter, and kept us on pace to exceed our long stated goal of $1,000,000,000 in annual sales in this fiscal year 2018. As we stated last quarter, our compound annual growth rate or CAGR was approximately 8% over the past 3 fiscal years, and our goal is
as we look to grow
the company beyond $1,000,000,000 in annual sales. Our margins improved slightly in the second quarter of fiscal year 2018 when compared to the first quarter of this fiscal year. However, we are still below our new operating income target of 4.5%. We expect to make sequential incremental improvement toward achieving our new goal as we continue to drive actions to improve our yields and throughput margins on recently launched new programs. Our next phase of ramp up activity in Romania is on track.
We expect from the fourth quarter of fiscal year 2017 to the fourth quarter of fiscal year 2018, and we expect to approach our operating income breakeven point by the end of fiscal year 2018. The impact of the Romania ramp up on our second quarter fiscal year 2018 operating income was relatively flat with the same period last year. While we made good progress in fiscal year 2017, we still have work to do to achieve our long term goal of 12.5 percent ROIC. Margin expansion and capital efficiency will continue to be priorities of focus for us this fiscal year. We continue to make investments that will drive further growth in sales and profits.
We invested $8,700,000 in capital expenditures the second quarter of fiscal year 2018, bringing our fiscal year 2018 total to $14,800,000. As we stated on our first quarter call due to stronger than expected forecasted 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 are focused on securing raw materials, getting through launch cycles and ramping up production to new forecasted levels. We remain focused on ensuring 2018, we also returned $3,000,000 to our share owners by purchasing 152,000 shares of our common stock, which brings our total to 40 under our board authorized share repurchase program. And finally as we stated on our last call, our has begun on the implementation of our board approved updated strategic plan.
We are committed to optimizing our EMS business by focusing on would 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 future. Now I will turn it over to Mike to discuss our second quarter results in more detail. We will then open the call
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 download have on the webcast portal. As shown on Slide 3, our 2nd quarter net sales were a record $258,200,000, which was a 12% increase Partially assisting in the increase from a year ago was a favorable exchange rate movement, which affected our net sales growth by 3%. Slide 4 represents our net sales mix by vertical market, comparing our net sales by vertical to the same quarter a year ago. Net sales in our automotive vertical were up over 20% compared to a year ago to a new quarterly record of $116,400,000.
The increase from a year ago was largely due to While our China automotive sales were down year over year, we did see a nice improvement sequentially from the prior quarter. Our medical vertical was up by double digits compared to Q2 last year, primarily from the ramp up of new programs. Our industrial vertical was up from a year ago as a result of the continued ramp up of new product launches related to smart metering devices, as well as increased demand for our climate control products. Lastly, our public safety vertical was down by double digits from the prior year second quarter as a result lower overall demand. Was 8 point from 7.7% posted in the first quarter of this fiscal year.
Our decline in gross margin in the current year quarter compared to a year ago was due in part to the impact on yields and higher costs associated with the support of new product introductions, as well as higher domestic healthcare costs during the current quarter. Selling and administrative expenses, slide 6 in the deck were $10,800,000 in the second quarter, which were up $2,500,000 in absolute dollars and up 60 compared to prior year was in part due to higher stock compensation, which accounted for a 20 basis point increase. Also contributing to the S and A increase are increases in employee salaries and related benefit costs, mostly associated with higher employee count and expense related to the normal revaluation of the supplemental employee retirement plan or liability. As a reminder, the expense related to the revaluation of the SERP liability recorded in selling and administrative expenses exactly offset by a gain serp is neutral to net income. Our operating income on Slide 7 in the deck came in at $10,200,000 or 3.9 percent of net sales.
Which compares to operating income of Other income expense net was an income of $400,000 in the fiscal year 2018 second quarter, compared to an expense of $1,000,000 in expense net includes a $300,000 gain on the fair value of investments in the SERP. The prior year second quarter other income and expense net was primarily the result of net foreign currency Our effective tax rate for the current year second quarter was significantly impacted by enactment during the quarter of the U. S. Tax Cuts and Jobs Act, the tax reform. The tax reform lowered the U.
S. Corporate federal tax rate from 35% to ultimately 21%. However, as we're at June 30 fiscal year end, our current fiscal year blended federal statutory rate will be 28.1%. With the new 21% rate kicking in for our fiscal year 2019. While we applaud this move of lowering the corporate federal tax rate and believe this is positive for U.
S. Businesses and expect in the long run, it will improve the competitiveness of U. S. Businesses in the global market did have a significant unfavorable impact for us during the current quarter. Accumulated unremitted foreign earnings of 15.5 percent for the accumulated unremitted foreign earnings held in cash and other liquid assets.
And 8% of the residual accumulated unremitted foreign $12,800,000 of tax expense for the deemed repatriation tax, which is payable over an 8 year period. In addition, as a result of tax assets as of December 31, 2017, using the new rates, which resulted in the recording of additional tax expense in the current quarter of approximately $3,800,000. These discrete tax items had a $0.62 unfavorable impact to diluted earnings per share for the quarter. $300,000 net loss as a result of the tax reform. However, our non GAAP adjusted net income for the current quarter excluding the discrete tax items related to tax reform was $8,200,000, which compares to net income of $7,800,000 recorded in the prior year second quarter.
We recognized a diluted loss per share of $0.31 in the current year second quarter, while our non GAAP adjusted diluted EPS was income of $0.31, which excludes the $0.62 impact from the discrete tax reform items. Diluted EPS $1,000,000. Operating cash flow trends are shown on Slide 11. Our cash flow from operations current year second quarter was a strong $11,600,000 as our net loss adjusted for depreciation income tax charges related to tax reform and an increase in accounts payable more than offset usage of cash related to an increase in inventory. Our cash flow from operating activities Our cash conversion days increased 1 day for the 3 months ended December 31, 2017, 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 6 days to support increased volumes, and new introductions and implementation of new inventory management program for one of our largest medical customers. Which more than offset an increase in our accounts payable days compared Slide 12 reflects our capital and depreciation trends. Capital investments in the 2nd quarter totaled $8,700,000, largely related to our investment in new manufacturing equipment to support increased manufacturing capacity and new product awards. As Don mentioned, we repurchased $3,000,000 of our common stock during the quarter. December 31, 2017, were $11,000,000, which was up $1,000,000 from June 30, 2017.
Our short term liquidity available representative's cash and cash equivalents plus the unused amount of our credit facilities totaled $96,000,000, at December 31, 2017. I would like to conclude by saying our balance sheet is very strong and we're well positioned to support our continued growth. With that, I would like to open up today's call to questions from our analysts. Michelle, do we have any analysts with questions in the queue?
You. Up your headset before asking your question. One moment for questions. I am showing we have a question from Hindi Susanto with Gabelli And Company. Your line is open.
Please go ahead.
Good morning, Don and Michael. First question, it's good to see strengths in automotive. And you mentioned there's some ramp up of new product introductions. Where are we in terms of the ramp up? Do you do we still have some lag for further ramp up for the next several quarters or the wrap up may have reached some kind of the final stage?
We have programs that are launching for the remainder of this fiscal year, Hendi. So we're quite busy in launch mode. I would say though pretty similar activity level as we've had over the last 4 or 5 quarters. So we still have or 3 quarters ahead of us. It would look a lot like the last 4 or 5 quarters in terms of ramp up activity in automotive.
So will that imply that further sequential growth every quarter?
Well, Henry, we don't give guidance, as you know, on our sales projections. But certainly, as we ramp up new programs in automotive and we launch those programs. There's a certain amount of visibility and predictability that we do have. Given just the characteristics of that end market vertical. So yes, we expect continued strength in automotive because of our existing base.
Combined with the new program launches that we have going on ahead of us yet.
Okay. And then Mike, you mentioned that the 21 percent tax rate will kick in 2019. Is that fiscal year 2019 or calendar year 2019?
The fiscal year 2019, Hendi.
Okay. So Q4 we'll still see the same tax rate as in Q3?
Similar, yes.
Okay. And then how much of a drag now to ramp up of your Romania facility?
How much was the impact?
Yes, on the operating margin.
It's been running around 40 to 50 basis points on our operating income line, Hendi. As I said today in the webcast, we believe our the phase of ramp up that we're in is on track and that we will be approaching our breakeven on the operating income line in the fourth quarter of this fiscal year.
And then would you be able to tie up, when you said breakeven, how much utilization let's say like a qualitative fee?
Can you repeat that handy? I don't know if I caught your question.
When you said that, you are targeting breakeven in in your Romania facility by the end of fiscal year 2018, how should we relate that to, let's say, the utilizations?
The utilization of the operation? Yes. Yes. So, yes, we would put our utilization somewhere in the fifty 5% to 65% range, at that point in time. And again, that would be for the phase 1 of the Romanian facility.
So we would still have our further expansion plans available to us which is important to our European customer base, but the current structure, would be somewhere between 55% 65% utilized as we exit the fourth quarter of this fiscal year.
Okay. And then, Don, can you share what kind of business insights for every ethical that you're expecting for the March quarter?
Can you ask that again, Hendi? I'll make sure I understood your question.
Okay. Like the business environment for your different verticals for the March quarter?
Yes. I think we exited Q2 with obviously some pretty good momentum with 12% overall growth. And of course, automotive and medical both together leading the way with very strong growth. We feel that momentum coming with us into the third quarter of our fiscal year. So yeah, I would say across all four end market verticals, we are seeing some good momentum.
Maybe with the exception of public safety, which is a little bit lumpier for us, it's our smallest vertical. When we look at Automotive Medical And Industrial, we were we carried some good momentum with us out of the second quarter of our fiscal year 2018 into this quarter that we're currently in.
Okay. And then last question for me. How should we think about share buyback in fiscal year 2018? You did a lot of show share buyback of like 22,000,000 fiscal year 2017, should we expect like a similar magnitude?
Well, there's a number of factors that play into the buyback program, obviously, the market conditions, other options of investments that we have available to us our current operating environment, a number of factors that will weigh into it. We have approximately $19,000,000 left on the board authorized buyback program. And so we certainly will continue to keep, return to our share owners through the buyback as part of our short list of priorities for capital allocation as we go forward. As I mentioned in my closing, we're really excited about our board approved updated strategic plan. And We do see ourselves looking at making future investments to support that updated strategic plan.
And so, certainly, as we think about capital allocation and priorities going forward, some of the things we want to do relative to our updated strategic plan will be priority items on that list.
Thank you. And our next question comes from the line of Chase Vesta with AWH Capital. Your line is open. Please go ahead.
Good morning guys. Thanks for taking my questions.
Good morning.
Good morning, Jake.
Can you help us understand the cash implications of the deemed repatriation tax charge?
Sure. I can talk a little bit to that. The deemed repatriation calculation, as we mentioned, that it was a pretty significant expense that we booked in the quarter. But the payment schedule on that to the government is over an 8 year period. So the 1st 5 years, 8% of the balance is due.
And then in the last 3 years, it goes to 15, 20 and then 25%. So it's kind of a backloaded effect. And so we'll see that effect in our cash flow over the next 8 years.
Okay. That's helpful. And then you guys, you mentioned that the Romania headwind in terms of its impact on gross margin was around 40 to 50 basis points a quarter. What needs to happen to get to breakeven? Do you need new customer customer wins or is the order book built?
Or I mean, what needs to happen along the way to kind of ramp to breakeven in Q4?
Yes, it's top line growth. And, I think the good news we had report there is that we feel like we've got good visibility to that growth in Q3 and Q4 this fiscal year. As you may recall from previous orders. We talked about how critical it was to get customer approvals and to get through validation protocols and therefore have a predictable ramp ahead of us. We've done that for the most part.
We've got a very predictable ramp ahead of us. That's what gives us confidence and to say that we're on track as we ramp up Q3 and Q4 to approach our breakeven point on the operating income line in the fourth quarter of this fiscal year.
Okay. So you hit breakeven in Q4. So remaining of those from being a negative 40 to 50 basis impact on operating margin. But how should we think about how, additive that could be kind of once you're on the other side of breakeven?
Yes, it's hard to say because on the other side of that, we've got more work to do to secure more business wins. And can you continue to ramp up in Romania. But as we look at the quarter, we just finished at 3.9% operating income. We feel like with the work we're doing, getting Romania to operating income breakeven in the fourth quarter of this fiscal year, basically holding serve everywhere else in our company, in our footprint that we could be approaching our goal of four point 5% operating income at the same time we get Romania to breakeven.
Thank I'm showing no further questions at this time. And I'd like to turn the conference back over to Mr. Don Sharon for any closing remarks.
Thank you, Michelle. 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.
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