Good morning, ladies and gentlemen. My name is Skylar, 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 Year 20 17 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. And questions will be taken in the order that they are received.
Today's call, February 2, 2017 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 forward looking statements can be seen in Kimbell's annual report on Form 10 K for the year ended June 30, 2016 and in today's release. The panel for today's call is Don Sharon. Sharon Chairman of the Board and Chief Executive Officer and Mike Surgessketter, Vice President and Chief Financial Officer of Kimball Electronics. I would now like to turn today's call over to Don Sharon.
Mr. Sharon, you may begin.
Thank you, Skyler. 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, 20 16. We have posted a financial summary presentation to accompany this conference call. The presentation can be found on our Investors Relations website, which in the Events and Presentations tab, or if you are listening via the webcast, you can find it in the downloads tab on the webcast portal.
I will begin by After that, we will quarter and were up significantly when compared to the second quarter of last year. Continued strength across multiple geographies automotive end market vertical and double digit growth in our industrial end market vertical helped us set a new quarterly sales record for the 4th consecutive quarter. Assisted by our Metivative and Eircom acquisitions, our medical end market vertical sales in the second quarter of fiscal year 20 were 6% higher than the same period last year. Our sales in our public safety and market vertical were essentially flat in the second quarter, fiscal year 2017 when compared to the second quarter of fiscal continue to make good progress business opportunities pipeline remains healthy and we continue to work diligently to achieve our goal of $1,000,000,000 in annual sales by fiscal year 20 team. We set this goal over 2 years ago and despite the subsequent currency exchange resets, caused by the stronger U.
S. Dollar, which believe that the goal is strong demand during the quarter. Margin expansion and capital efficiency will continue to be priorities of focus for us going forward. This is a pivotal year for us as we work through another year of significant new program launches, the ramp up of our new Romania operation, and integration of our recent Metivative And AirCOM acquisitions. We continue to make excellent progress in Romania, production for our 1st and second industrial customers continues to ramp as planned.
After receiving approvals last quarter, we production for our first automotive and public safety customers began to ramp up late during the second quarter of fiscal year 18. This positions us well to make sequential incremental improvements each quarter as we approach our breakeven point early next school year. We continue to make good progress on the integration of our recent Metivative And Aircomm acquisitions. The combination of the 2 companies adds capabilities and expertise in mechanical design, machining and metal fabrication and class projection molding to our package of value. These new capabilities have strategically positioned us to open new doors for future growth in sales and profit Since the acquisition, we have been awarded 2 new programs And finally, we continue to take advantage of the flexibility provided by our strong balance sheet, making investments that would drive future growth in sales and profits.
In addition to the $35,000,000 in capital expenditures in fiscal expenditures in the first half of fiscal year twenty seventeen. It is important to remind you that a large portion of these capital expenditures directly support new business awards. We are focused on getting through the wrapping up production and ensuring that these new programs and the newly deployed capital that supports them achieve our expected returns. During the second quarter of fiscal year 2017, we also returned $7,400,000 to our share owners by purchasing 529,000 shares of our common stock, which brings our total 2,200,000 shares purchased under the original 20,000,000 2015, and then was later increased by an additional $20,000,000 with no expiration date by an approval by our board in September of 2016. Now I'll turn it over to Mike to discuss our second quarter results in more detail.
We will then open the call to your questions. Mike? Thanks, Don.
Compared to net sales of $2,700,000 If we exclude incremental sales in the second quarter from the Metivative And AirCOM acquisitions, the net sales were still up 9% over the prior year. Comparing changes in our net sales by vertical to the same quarter last year, our automotive vertical was very strong in the second quarter, up 16% from the same quarter last year, driven by continued strong demand in all markets and new program introductions. As Don mentioned, net in our However, if we exclude sales generated from the acquisitions, then our medical vertical net sales were down slightly quarter last year. Our industrial vertical demand for our climate control products and new product launches related to smart metering. Our gross margin in the second quarter was 8.9 which was up 110 basis points from the 7.8% posted in the same quarter last year.
The increase in margins was assisted by the leverage but was also partially offset by costs related to new product introductions and the continued ramp up of the Romania operation. Selling and administrative expenses were $8,300,000 in the 2nd quarter, which were down $900,000 or 90 basis points when compared mental costs of $700,000 related to the startup of the Romania facility being included in cost in the second quarter last year. In addition to the prior year, 2nd quarter costs related to warranty claims and our supplemental retirement plan, or SERP, favorably impacted the current year comparison. As a reminder, the SERP costs are a result of the normal revaluation to fair value of the SERP liability. These costs costs are recorded in other income, and therefore, there's no impact to the company's net earnings during the period.
Other income and expense was a net expense $1,000,000 in the current year higher net foreign currency exchange losses, driven by the further strengthening of the U. S. Dollar. The effective tax rate for the second quarter increased to 30.4 percent from 28.1 percent in the prior year second quarter, largely as a result of the favorable impact in the prior year quarter, the extension of the domestic research and development credit that was made retroactive to calendar year 2015. Income in the second quarter of fiscal year 2017 was $7,800,000 compared with $4,600,000 in second quarter of fiscal 2016.
Diluted earnings per share was $0.28 in the second quarter of this fiscal year compared to $0.16 a year ago. Cash and $7,000,000. Compares to cash flow provided by operating activities of $16,800,000 in the second quarter of last year. This quarter's operating cash prior year second quarter operating cash flow also benefited from larger favorable working capital fluctuations. Borrowings on our credit facilities at December 31, 2016, remain at $9,000,000, unchanged from June 30.
Capital investment the 2nd quarter totaled $9,400,000, largely related to investments in new manufacturing equipment to support new product introductions and capacity expansion. As Don mentioned, we also repurchased $7,400,000 Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled 93 $300,000 at December 31. I would like to conclude by saying our balance sheet is very strong, and we continue to focus analyst. Skyler, do we have any analysts with questions in the queue?
And then just one moment. We have a question from Lewis Moser with Masix Investors. Your line is now open.
Yes, hi. I was wondering if your outlook for the rest of the year is in comparison to how well you did in the first quarter, the recent quarter, where your thoughts are?
Well, as I mentioned, in regards to our goal of reaching a $1,000,000,000 in annual revenue by 2018. We review that each and every quarter. Obviously, we're looking at our current book of business our planned new product introductions and of course, the outlook for, for that business based on what we're hearing from our customers. And in doing that review this past quarter, we believe we're still on track to reach $1,000,000,000 by fiscal year 2018. So obviously, this quarter, we finished at $230,000,000, we expect to continue to grow the business and have the business continue on track to that $1,000,000,000 or 2 $50,000,000 per quarter run rate as we look out over the next several quarters and actually get into fiscal year 2018.
Okay. So would you say that your next quarter would be pretty comparable then to you just reported earnings and sales?
Well, we don't provide guidance. So, no, I wouldn't have a comment on that, but I would say that, again, we expect to continue to progress on a line toward that run rate of $250,000,000 quarter, $1,000,000,000 total annual run rate in fiscal 2018. And so we're at the halfway point here in fiscal year 2017. We're just a couple of quarters away from starting fiscal year 2018. So that's the best I can give you in terms of what we feel like we're on in terms of our growth path.
I'm not sure if, you have a buying program for the stock. Did you mention that?
Yes, we do have a share repurchase program that's been active as of October of last year. When the board approved the first tranche of that repurchase program. And as I mentioned, just a little earlier, did approve an additional $20,000,000 tranche to that original plan and we're already in to that trench with our buying activity this quarter.
The quarter is, if it was undervalued, if you're going to continue to purchase additional shares?
Well, we look at that each and every board meeting. As a board, we look at how how our shares are trading relative to, let's say, companies in our peer group relative to what we think the stock should be trading at yeah, each core each, I should say, each board meeting, we have that on the agenda, we look at it and we make the next necessary decisions at that point in terms of when and how much we would be buying.
Our next question comes from Hendi Susanto with Gabelli and Company. Your line is open.
Good morning, Don and Mike. Congratulations on good results. Mike and Don, I would like to understand more about the Romanian facility ramp up. It look like this calendar year and perhaps you can share some insight where it will be at the end of the calendar year?
Yes. So I think the good news, Pendi, is that we continue to gain customer approvals, as I mentioned in the opening remarks. So we can now start to build a more predictable path. We're still working through some ramp up details. With some of the customers that have recently given us approvals.
And we are expecting 2 more approvals, yet this fiscal year. So that's still a bit of a variable to the overall plan. But what we can see now is that we expect to make sequential incremental improvements each quarter as we ramp up. And we expect that Romania will begin to approach, its breakeven point, early next fiscal year.
And then let's say once the transition is done, would you be able to share what kind of gross margin we can expect for the overall of the company?
You know, we wouldn't probably talk about gross margin expectations handy, but we will continue to talk about our expectations around sent and what we might do with our cost structure, what we might do with some of our margin improvement efforts. And we do expect to come out with an an update soon on an operating income target, that would be an update to our 4% target that we've public stated many times in return on invested capital. And so as we look at the new capital deployments we've made and we look at our current invested capital and how that continues to grow with our growth pursuits. Obviously, we're looking at both where we end up there, the capital efficiency we end up with the capital deployed and course, the margin we need then to achieve our 12.5 percent return on invested goal, return on invested capital goals. But I just want to underscore main driver for us is to get the business to 12.5 percent return on invested capital.
And then, Don, just to clarify your earlier statement about the operating in margin target of 4%. Does that include or exclude the assumption of completion of the Romanian facility transitions?
We kept that goal at 4% with the understanding that we would have somewhat of a drag to our operating income with the Romanian operation startup. Thanks, Hendi. Thank you.
Our next question comes from Austin Hopper with AWH Capital. Your line is open. Hey,
good morning guys and congrats on the quarter. Main two questions already answered about Romania and your operating margin guidance. Can you just maybe talk about the opportunity in automotive in another strong quarter kind of what you're seeing over in China and how you view that going forward? Thank you.
Well, Austin, yes, you know, automotive was again, strong, very strong for the quarter and we continue to win new programs there, in that vertical. So we're we're pretty pleased with what's happening there overall big picture in terms of our growth and our win rate and what we're doing. And I think that coupled with fact that, it's, automotive remained fairly strong in multiple geographies. So it's not just China. We also have some pretty nice things that are happening for us here in North America and in Europe.
So it's pretty widespread for us. We expect it to continue to be strong. We're always at this time of year for China. You brought that up. We're waiting for them to come back from their from their holiday, spring festival holiday.
And there's always seems to be some new market information that you can extract valuable, pieces of information from after they do get back from that important holiday there. So we're anxiously waiting maybe more market news in terms of what the automotive market in China will do. But we already know the applications that we have, running today already, what vehicle platforms we're on, what new programs are ramping. And so we've like we've got a good, a good strong path ahead of us yet as we look out over the next 4 or 5 quarters in automotive. Great.
Thank you.
And I'm showing no further questions at this time.
Thank you, Skylar. That brings us to the end of today's call. We appreciate your interest and look forward to speaking with
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