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Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic second-quarter 2008 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, January 31, 2008.
I would now like to turn the conference over to Jack Oehlke, President and Chief Executive Officer of Key Tronic. Please go ahead, sir.
Jack Oehlke - President and CEO
Again, good afternoon, everyone. I'm Jack Oehlke, President and Chief Executive Officer of Key Tronic. I'd like to thank everyone for joining us today for our investor conference call. Ron Klawitter, our Chief Financial Officer, is here with me, and we're in El Paso today, just having concluded our Board meeting in the El Paso-Juarez area.
Today we released the results for the second quarter of fiscal year 2008, and we're pleased with our strong sequential growth in revenue and earnings in the second quarter, driven by increased demand from both new and established customer programs. Our more diversified customer portfolio, spanning a wide range of industries, represents the cornerstone of our long-term strategic plan. While there is some uncertainty regarding the overall economic environment in the coming periods, we continue to expect increased revenue and earnings as well as some improvement in our gross margins in the second half of fiscal year 2008.
Now I would like to turn the call over to Ron to review our financial performance. Then I'll come back to discuss our progress and our strategy going forward. Ron?
Ron Klawitter - CFO
Thanks, Jack. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the Company's future financial performance. Please remember that the statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the Company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs and 8-Ks.
Please note that on this call we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release, and a recorded version of this call will be available on our website.
Today we released the results for the quarter ended December 29, 2007. For the second quarter of fiscal 2008, we reported total revenues of $50.8 million. This is up 14% from the $44.6 million in the previous quarter, and it's up 2% from the $49.8 million in the same period of fiscal 2007. As Jack mentioned, we saw stronger sequential demand from a number of our established and new customers. New customers which were not contributing revenue a year ago contributed over $4.5 million in our second-quarter revenue, and we expect these new customers will contribute a growing portion of our revenue in coming periods.
Because of accelerated customer demand in December, our revenue actually exceeded our expectations for the quarter. Though we succeeded in fulfilling our customers' needs, our gross margins were adversely impacted due to overtime and expedite costs late in the month of December. For the second quarter of fiscal 2008, our gross margin was 7%, which is comparable to the previous quarter, but lower than the 8% gross margin in the second quarter of fiscal 2007. In coming quarters, we expect our overall gross margins to increase to around 8%.
In preparation for future growth, we continue to make the necessary investments to grow our business while continuing to focus on controlling our operating overhead. Our engineering costs for the second quarter were $641,000. This is down from $865,000 in the second quarter of fiscal 2007.
Our selling expenses for the quarter were $365,000, which are down from $463,000 a year ago. And our general and administrative expenses were $1.5 million, which is down from $2.1 million in the second quarter of fiscal 2007. However, you may recall that the second quarter of fiscal 2007 included a substantial one-time charge related to a specific customer bankruptcy. In coming quarters, we anticipate holding our operating expenses to around $3 million per quarter.
Our renewed revenue growth has a positive impact on our bottom line. Net income for the second quarter of fiscal 2008 was $1.6 million or $0.16 per diluted share. This is up from $300,000 or $0.03 per diluted share for the same period of fiscal 2007.
The results for the second quarter of fiscal 2008 included a gain of approximately $900,000 or $0.09 per share, which represents the balance of the payments that were due from the sale of our Las Cruces, New Mexico, facility.
Turning to the balance sheet, our trade receivables were $32.9 million at the end of the second quarter. Our DSOs were at 51 days, which is comparable to recent quarters. Inventory was $33.8 million at the end of the second quarter. This is down from $34.1 million at the end of the previous quarter. While we have tended to increase our inventory levels in recent periods in preparation for ramping up production for our new customer programs, we are pleased with our progress in improving our inventory management.
Our capital spending was $436,000 for the second quarter, and we expect our total capital spending for the fiscal year to be around $2 million.
In summary, we saw stronger sequential demand from a number of our established and new customers in the second quarter. At the same time, we have continued to make the necessary investments to support our long-term competitiveness, control our costs and maintain our strong balance sheet.
While the overall economic environment raises concern, we do expect both our established and new customer programs to drive strong revenue and earnings growth during the second half of our fiscal year. In the third quarter, we expect revenues in the range of $49 million to $51 million and earnings in the range of $0.05 to $0.08 per share. Over the longer term, we believe that we are now well positioned to profitably expand our business.
That's it for me, Jack.
Jack Oehlke - President and CEO
We're pleased with our performance in the second quarter and believe that we continue to make good progress in diversifying our business across a wide range of customers in different industries. We have maintained all of our long-standing customers, and our new customer programs continue to ramp up. We expect this to continue in the second half of fiscal year 2008.
For the last six quarters, we have won over 10 significant new customer programs involving data storage devices, networking equipment, specialty printers, industrial controllers, personal exercise equipment, industrial tools, specialty display panels, scientific instruments and security surveillance. By the end of the year, we expect to have a significantly more diversified customer portfolio and less concentrated revenue base spanning a wider range of industries.
We continue to expect these new programs to contribute over $30 million in the fiscal year and believe those programs will have a significant impact on our business over the long term. In preparation for future growth, we have continued to invest in our business and improve our asset utilization.
Therefore, in summary, we continue to execute our long-term strategic plan. We believe Key Tronic is successfully expanding its market presence and becoming more competitive in the pursuit of new business, as well as maintaining strong relationships with our existing customers.
At the same time, we continue to focus on controlling costs and maintaining our outstanding customer service and operational efficiency. Going forward, we expect to continue to broaden and diversify our customer base. While we continue to keep an eye on global economic conditions in the coming periods, our customers have not lowered their forecasts, and we have less concentrated revenue than we had in the past. We continue to be pleased with our progress and excited about the potential for our profitable growth.
Now, this concludes the formal portion of our presentation. Ron and I will be more than pleased to answer any questions you may have.
Operator
(OPERATOR INSTRUCTIONS). Sam Bergman, Bayberry Capital.
Sam Bergman - Analyst
First of all, I wanted to find out, is there a possibility or a chance that the Board would buy back stock at this price, if it's selling under book value?
Jack Oehlke - President and CEO
I don't anticipate us buying back stock. For one thing, our loan agreement prohibits us from buying back our stock. So that would be the biggest impediment to that. The other thing is, even though we've got about $10 million, $11 million of availability under our revolver, we want to make sure that we keep that for running our -- for our working capital investments and any other investments we need to make for growing the business. So I don't anticipate us buying back any stock.
Sam Bergman - Analyst
In terms of new programs, how many new programs were won this quarter, and what does the pipeline look like in bidding on other programs currently that you're working on?
Ron Klawitter - CFO
I would say that, first of all, the pipeline -- it fluctuates up and down, but we usually have about anywhere from five to 15 decent opportunities in our pipeline that we are quoting on at any point in time. And it's still in that range, as far as the opportunities in the pipeline.
The new customers won this quarter -- I believe there were two this quarter that we picked up, and they are included in that number that Jack had talked about previously, which over the last 12 months we've got over 10 new customers that we've added in the last 12 months.
Sam Bergman - Analyst
Can you name any of the new customers at this time?
Jack Oehlke - President and CEO
No, not at this point. We have confidentiality agreements with them.
Sam Bergman - Analyst
How much business can Key Tronic do in the infrastructure that you have currently, without increasing your costs?
Jack Oehlke - President and CEO
That was -- that's a good question, from the standpoint -- we were just reviewing that with the Board as they were down here. And through some of the efficiency programs we've put in place, we believe we can probably grow our revenue anywhere from 10% to 20% without any substantial increase in capital spending.
Sam Bergman - Analyst
10% to 20%, roughly? And how can you better focus on issues such as the overtime that occurred in December for future programs, if a customer comes up to you and wants a requirement or added revenue in a certain month? Is there a way that you can watch those extra costs, or that's going to happen, regardless?
Ron Klawitter - CFO
No, it's unusual. What happened is we had a lot of expedite requests from some of our customers midway through the quarter. We had to get materials in and expedite them in, and materials didn't really arrive until mid to late December, and we normally shut down our Juarez operations between Christmas and New Year. But this year, because of these expedited materials coming in late in the quarter, we had a good portion of our workforce working during that holiday period, and we were forced to pay pretty significant bonuses and overtime premiums to get those revenues out this quarter and to meet our customers' expectations. So we're able to recoup some of the expedite costs, but we did eat some of them ourselves as part of our effort to service our customers.
Sam Bergman - Analyst
Last question, and I'll let somebody else get on the line. In terms of the programs won, is it more geared to the fourth quarter, the full ramp of many of these programs, versus the third quarter? Because I know you have some type of guidance that you mentioned on the press release, revenue $49 million to $50 million, $51 million this quarter, which is roughly what you did this past quarter, even though you had an extra increase in revenue in December. So is it more geared to the fourth quarter than the third?
Ron Klawitter - CFO
Let me, first of all, addressing the second quarter, those things that hurt us on our margins in the second quarter, we did have about $2 million of our revenue in the second quarter was for tooling revenue that we're doing in conjunction with new customer programs. Tooling revenue is very, very -- we quote it at pretty low margins because our, really, effort is, our focus, is trying to get the box build and the ongoing revenue production as opposed to making a lot of money on the up-front tooling.
So if you look at from our ongoing or I'll call it profit-generating revenue, the $49 million to $51 million is actually going to be about $3 million or $4 million more than what we had in the second quarter. As far as ramping up, we do expect our fourth quarter, obviously, to be better than our third quarter because some of these new customer programs -- we have other ones starting, new ones starting in the third quarter, that would be continuing to ramp up in the fourth quarter. We do have some in the fourth quarter that are starting to ramp up. So yes, we expect to have increasing revenues for third and fourth quarter.
Sam Bergman - Analyst
Thank you very much. Continued success in the upcoming quarters.
Operator
Bill Dezellem, Tieton Capital Management.
Bill Dezellem - Analyst
We had a couple of questions. Actually, following up on the last questioner, relative to the third quarter, your guidance is basically that the roughly $50 million that you did this quarter with earnings per share roughly equal to the $0.07 that you did this quarter, excluding the gain on the Las Cruces facility, and yet you have stated that you will be replacing the low-margin tooling revenue that you had with, we'll say, normal revenue, which would be higher margin, and that you are looking to get your margins moving back up from the level that they were in the second quarter.
So with the roughly $50 million of revenue, it seems as though the earnings per share guidance of $0.05 to $0.08 is low and potentially quite low. Can you help us understand what we might be missing in that thought process?
Ron Klawitter - CFO
One of the things that we -- with the second half of the year being stronger than the first half of the year, we're anticipating having to accrue for some incentive compensation that we didn't have to accrue for in the first half. So that's going to be one of the things that's going to have an additional cost in the second half that we didn't have in the first half. So that's leading to that $0.05 to $0.08 prediction for the third quarter.
Bill Dezellem - Analyst
And then a couple other questions. The 10 or so new customers -- you had mentioned that you're expecting this fiscal year, fiscal '08, that they will contribute about $30 million, and in the second quarter they represented about $4.5 million. When you get to the fourth quarter -- well, let's not even do that. Let's just say, when those 10 customers are fully ramped, whether that's the fourth quarter or some future period, what would you say that the annual revenue run rate is for those new customers?
Jack Oehlke - President and CEO
Approximately $40 million to $50 million.
Bill Dezellem - Analyst
So you will be getting $30 million of that $40 million to $50 million in this fiscal year?
Jack Oehlke - President and CEO
That's correct.
Bill Dezellem - Analyst
And then final question -- relative to the industry in total, there over the last few years has been a fair amount of consolidation of the Tier 1 competitors. What impact, if any, has that had on your business? I guess I'm thinking of it in terms of smaller customers that were with a Tier 1 player, the Tier 1 guys consolidate and a smaller player becomes even a smaller customer and now is looking for someone else to be their contract manufacturer. If there's another aspect to think about that question, I would be happy to entertain your comments there, too, please.
Ron Klawitter - CFO
I'd say that as far as directly affecting us, the consolidation of the Tier 1s really hasn't had any direct impact on us. We very seldom go up against Tier 1s, although we have in the past, and held our own, won some and lost some.
As far as our strategy, I guess our sweet spot is anywhere from $5 million to $30 million programs. Those generally are a lot smaller, too small for the Tier 1s to really have an interest in. So I don't anticipate the consolidation of the Tier 1s to have much of an impact on what we're going after. If there are some that start -- some customers or some of their customers that feel that their service is not what they expect because of their size, obviously, we are right there to take advantage of that opportunity.
But our strategy is to provide Tier 1 costs and Tier 1 pricing for our customers, but yet Tier 3 responsiveness. I think we have been successful in getting -- it has been over 10 customers in the last 12 months, and I think we expect to see that continuing.
Bill Dezellem - Analyst
Actually, if we step it down one tier to the Tier 2 competitors, to what degree has there been consolidation there that -- and frankly, I guess, in the Tier 3 area also, so just consolidation that has created disruption and potential for prospective customer movement?
Jack Oehlke - President and CEO
I think, as we look at the Tier 2/Tier 3, there hasn't been, really, a lot of consolidation there. It has just mainly been within the Tier 1 group. So we haven't seen a lot of combinations happening at those two other levels.
Operator
(OPERATOR INSTRUCTIONS). Larry Brookes, Moloney Securities.
Larry Brookes - Analyst
In reference to your existing customers, which areas are you seeing growth in as far as the industries, and which areas have been declining?
Jack Oehlke - President and CEO
At this point, I think we're seeing that the opportunities of the new customers are pretty consistent as far as new products coming on board. One of the dynamics that probably we should point out is that, while we talk about new customers, it's not just one product that we're building for them. It ends up what we call our NPIs, our new product introductions, are usually a series as we ramp up to total revenue for that customer.
So I don't think there's one industry that's standing out or anything like that. It's pretty consistent across. But these, again, are new customers for us, and we don't have a long history of their revenue growth within the various products that we're building for them.
Larry Brookes - Analyst
What about your existing customers? Are you seeing a trail-off with that group at this point? Is that decreasing while the new customers are coming on?
Jack Oehlke - President and CEO
Some of the existing products that we've been producing for a long period of time are beginning to tail off a little bit. That's correct.
Larry Brookes - Analyst
Is that pretty typical, or is that more related to the outlook or the timing or market conditions that we're in now?
Jack Oehlke - President and CEO
No. I think it's pretty typical from the standpoint that you have customer products that are ramped up, and as they reach maturity in the marketplace, the demand starts going down.
Larry Brookes - Analyst
So it's always a question where you're always really looking out there for your new products or trying to find new companies, I guess?
Jack Oehlke - President and CEO
That's exactly right.
Larry Brookes - Analyst
What about your existing companies that you deal -- the existing customers? Do they have a different line of products where, once you're in the door, you could expand to other areas also?
Jack Oehlke - President and CEO
Yes. There's a couple customers we're working with that we have been working with one division, and as we successfully bring their product out, it allows us to have the opportunity to quote and work with the next division and that kind of thing. So that's our strategy, is to get our foot in the door and then expand it, based upon their size and the different products they produce.
Ron Klawitter - CFO
We have also had -- sometimes we will start off with just doing a printed circuit board, eventually then growing to do a full box build for a customer, and then being able to add molding, so that with the molding and printed circuit board and box build, we can increase revenues even more within that customer.
Larry Brookes - Analyst
What about your material costs and your labor costs and your headcount? How do those factors come in?
Ron Klawitter - CFO
Well, the headcount is going to be impacted by revenue. I'd say that, of our headcount, probably 70% of it is variable, either indirect or direct labor that's going to be affected directly by revenue increases or declines. So about 70% of our headcount is variable.
As far as our other costs, our material costs run typically, in the EMS industry, they will run anywhere from 50% to 80% of revenue, dependent upon the customer and the product you are building. So the material margins are generally around 30%, on the average. So your value add is anywhere from about 15% to 20% of revenues.
Although it's not a very big portion of it, the value add, when you're talking about margins at around a 3% to 4% range, operating margins, that's pretty thin margin. So you have to really be continuing getting the lower material costs, and we're continuing searching for new sources of supply over in China, particularly, to reduce our material costs.
Larry Brookes - Analyst
I guess one thing I was getting at were your material costs. Are you seeing those increase, and are you having problems getting the product for your customers?
Jack Oehlke - President and CEO
We're not seeing increases, and we are not, at this point, having problems. I think the only problems we run into is when we get demand and it ends up being substantially less than the market leadtime, and then we're chasing those parts pretty hard, just to satisfy the customer requests.
Ron Klawitter - CFO
As far as the material costs, there are some commodities that we have seen some increases on, for example plastic resins. They have gone up. They are obviously being driven by the price of oil. So there are certain commodities that go up. But generally, on this business, you have to continually get and pass along cost reductions to your customer because they are expecting cost reductions from us.
So in general, there could be some -- overall material costs generally are coming down in total, but there could be some commodities where they will blip up from time to time.
Larry Brookes - Analyst
And then what is your labor count at this point? What's the total number of staff?
Ron Klawitter - CFO
Worldwide, about 2500 employees.
Larry Brookes - Analyst
And is that stable from where it was a couple quarters ago?
Ron Klawitter - CFO
Yes, it's about the same.
Operator
(OPERATOR INSTRUCTIONS). We have no further questions at this time. I'd like to turn the conference back over to management for any closing comments.
Jack Oehlke - President and CEO
Okay, well, thank you. Again, I want to thank each one of you today for participating in our conference call. Ron and I will look forward to speaking to you again as we conclude the third quarter and get results for that. Again, have a great day, and we will be talking to you later. Thank you.
Operator
Ladies and gentlemen, this concludes the Key Tronic second-quarter conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236, passcode 11105040. (OPERATOR INSTRUCTIONS). ACT would like to thank you for your participation. You may now disconnect.