Key Tronic Corp (KTCC) 2020 Q2 法說會逐字稿

Good day, and welcome to the Q2 Fiscal 2020 Key Tronic Corporation Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Brett Larsen.

Please go ahead, sir.

Thank you.

Good afternoon, everyone.

I am Brett Larsen, Chief Financial Officer at Key Tronic.

I would like to thank everyone for joining us today for our investor conference call.

Joining me here in the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer.

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 such 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 our results for the quarter ended December 28, 2019.

For the second quarter of fiscal year 2020, we reported total revenue of $116.7 million compared to $123 million in the same period of fiscal year 2019.

For the first 6 months of fiscal year 2020, total revenue was $220 million compared to $250.5 million in the same period of fiscal year 2019.

However, sequentially, we did see a $12 million increase in revenue when compared to the first quarter of fiscal year 2020, and we expect revenue growth to continue into the third quarter.

For the second quarter of fiscal year 2020, net income was $0.8 million or $0.08 per share compared to $1.6 million or $0.15 per share for the same period of fiscal year 2019.

For the first 6 months of fiscal year 2020, net income was $2.4 million or $0.22 per share compared to $3.2 million or $0.29 per share for the same period of fiscal year 2019.

As previously announced in January, the lower-than-anticipated earnings for the second quarter of fiscal 2020 was primarily a result of increased factory spending in our Juarez metal fabrication department.

This spending was necessitated by both new and existing customers exiting their manufacturing arrangements in China and ramping their production in Juarez.

While near-term financial impact was significant, the long-term relationship with these customers was strengthened by the performance of the Juarez facility under extreme pressure.

Additionally, we incurred unfavorable foreign currency losses related to the unhedged portion of our Mexican labor expenses as a result of the strengthening Mexican peso over the quarter.

We anticipate -- the unanticipated increase in factory spending adversely impacted our margins.

For the second quarter of fiscal year 2020, our gross margin was 7%, and our operating margin was 1.3% compared to 8% and 2.1%, respectively, in the same period of fiscal year 2019.

Nevertheless, it is important to note that we have made significant improvements in our operating efficiencies in recent quarters through investments in new equipment.

Several of these investments were made in the metals area, and the resulting efficiencies, combined with the completion ramps of several new metals programs, lead us to expect our margins to improve in the coming periods.

Turning to the balance sheet.

We continue to maintain a strong financial position.

Despite the production delays in the second quarter and the continued ramp and transfers of new programs, we did see a sequential reduction in our inventory, including revenue recognition contract assets by $12.2 million or 8.8% from the prior quarter.

In the third quarter of fiscal year 2020, we expect to see our net inventory levels continue to come more in line with revenue levels.

At the end of the second quarter, trade receivables were up by $3.4 million from the prior period, reflecting the increased revenue, and DSOs remained about 54 days.

Total capital expenditures in the second quarter of fiscal 2020 were approximately $2.3 million.

We continue to invest in our production facilities, SMT equipment and sheet metal and plastic molding capabilities as well as improvements in our facilities.

We plan to make a total of approximately $10 million in capital expenditures during the full fiscal year 2020.

Moving into the third quarter of fiscal 2020, with the addition of new production capacity, we expect more of our new customer programs to ramp and move into production.

The workload balancing challenges and capacity issues experienced in recent quarters have been largely resolved and we expect revenue to increase.

Taking these factors into consideration, we expect that the third quarter of fiscal 2020 will have revenue in the range of $117 million to $121 million.

For the third quarter of fiscal 2020, we expect to see some drag on gross margin as we continue to invest in enabling and accelerating the successful ramp of our new Vietnam facility.

We anticipate earnings in the range of $0.13 to $0.17 per diluted share.

This assumes an effective tax rate of approximately 20%.

I would like to note that Key Tronic is working closely with its employees, customers and key suppliers to ascertain delays attributable to the recent outbreak of the coronavirus in China.

Potential delays in production and extended transit times of critical parts could significantly affect results in each of our production facilities.

In summary, while we are disappointed by the disruptions to our earnings in the first half of the year, we remain encouraged by our prospects for the future growth.

The overall financial health of the company is strong, and we believe that we are well positioned to win new EMS programs and to continue to profitably expand our business over the longer term.

That's it for me.

Craig?

Okay.

Thanks, Brett.

Moving into third quarter of fiscal 2020, the issues impeding our production efficiencies in the first half of the year diminished, and we see potential revenue and earnings growth in coming periods.

Furthermore, uncertainty over tariffs and trade tension between the U.S. and China continues to drive a number of existing and new customers to accelerate their plans to transition from China facilities to our expanding facilities in Mexico and Vietnam.

We see it as a very positive trend over the longer term, and customers see the increasing advantages of our North American and Vietnam-based production.

While this transition caused delays in production during first half of the year, many of our current customers are experiencing a positive transition of their business out of China facilities facilitated by our centralized command and control.

This centralization drastically reduces the risk and time associated with a transfer to our North American and Vietnam sites and thus allows some leeway to respond to the rapidly changing political and health landscape.

We significantly advanced the efficiencies of our Mexico and U.S.-based facilities in recent quarters, and we're increasingly well positioned for the returning tide of North American-based customers as they appropriately analyze total cost for overseas production, and as a result, push production into both Mexico and the U.S. Also, we continue to ramp up our production in Vietnam.

While our marketplace remains very competitive, we continue to win significant new businesses, both from EMS competitors and existing customers.

During the second quarter of fiscal 2020, we won new programs involving consumer medical devices, Wi-Fi-enabled signage and temperature control devices.

Our broader and more diversified customer base lowers the potential future impact of a slowdown by any one customer.

While we are carefully managing our expenses, we have been preparing for growth in coming periods.

During fiscal 2020, we have continued to invest in our facilities, including the expansion of SMT, sheet metal and plastic molding capabilities in Mexico and the U.S. With respect to integrated electronics and sheet metal centric programs, we see very strong growth and few real competitors of our size in North America.

We also deployed innovative new manufacturing equipment in each of our facilities, which has improved efficiencies and has made our production less labor intensive.

Result of this effort have been decreased manufacturing and operating expenses of approximately $3 million annually.

Moving into the third quarter.

We are continuing to ramp production in our new 86,000 square foot manufacturing facility in Vietnam, to augment our Asian footprint and reduce production cost as well as provide an additional hedge against uncertainty in a lingering or future trade war with China.

Our steady pipeline of new business opportunities continues to be boosted by our unmatched level of vertical integration, our multi-country footprint and the excellence of our manufacturing sites in comparison to other EMS competitors of our size.

As OEMs face an increasingly uncertain geopolitical landscape, we are uniquely equipped to offer risk mitigation with our vertical integration and manufacturing facilities located in Mexico, Vietnam and the U.S. While industry supply chain shortages, pandemic risks and uncertainties about tariffs continue to be a factor, we expect revenue growth in the third quarter and remain optimistic about our opportunities for growth going forward.

This concludes the formal portion of our presentation.

Brett and I will now be pleased to answer your questions.

(Operator Instructions) And our first question comes from Bill Dezellem with Tieton Capital.

I would like to start with my normal question.

You have the 3 new customers that you referenced.

What is the size of those?

And would you also share with us the timing which you're expecting production to ramp for each of those 3?

Healthcare one is about $15 million annually, should start building that sometime in June.

[Signed] , it's pretty hard to get a handle on because it's a new product, new category.

We quoted it around $5 million in the middle of the volume range.

And the third one is about $5 million also.

Let me, if I may, shift to kind of something that you've mentioned there in your remarks relative to the metal shop and reducing your cost.

I think I heard that you had installed equipment that would reduce cost by $3 million.

And if that's correct, would you talk in some more detail around that?

Well, we talked about an overall reduction of $3 million.

There was a sizable portion of that in the metal shop.

And that equipment included some new laser turret combos that are used for cutting sheet metal, and the new machines are very expensive, but they're also very fast.

So they cut a lot of labor out by how quickly they can run the lasers through the metal and make yourself part.

And would you kind of relate that to the challenges that you had this quarter, with the extra cost in the metal shop, I think that was called out.

And maybe you could actually highlight the size of the -- or the magnitude of the extra cost in the metal shop.

And then what this equipment will or won't do to help that challenge in the future?

Okay.

This is going to be a little bit of a story.

So I'm going to have to put it in context for you.

We had 3 big customers in the metal shop, one of which was completely new, one of which was a transfer out of our Chinese facility into Mexico and out of somebody else's Chinese facility into Mexico.

We had split the business in China.

And the third was an existing one that was ramping a new product.

The new one that we had never built before, it was a classic case of a company trying to move a product out of China that they had never really built themselves.

So as we tried to ramp it, starting way back in the June, July timeframe, we found that the specifications and requirements were not well understood.

So the ramp was delayed as our new customer started to analyze and understand their specifications and their market requirements for the product.

And unfortunately, even though production startup was delayed, the requirements for getting the product installed at their customer weren't delayed.

So we got squeezed in between when we could actually start to build and when we had to finish the build.

At the same time, we had the customer that was moving part of his business out of China as well as bringing us new business from our competitor out of China, trying to ramp their programs in Vietnam -- I mean in Mexico.

And then the third customer had a new product that was launching.

And all this was happening with the backdrop of the tariffs driving everyone to move, in particular, a lot of metals work back into Mexico and or as specifically.

So the competition for employees was intense, the availability of skilled employees to run some of the higher tech equipment was intense, and the demand for product was also intense and unrelenting.

So we made the decision that these 3 customers were part of our future, and had been, 2 of them part of our past for quite some time.

So we decided that we had no choice but to invest in a large amount of overtime, a large amount of hiring expenses, a large amount of training costs.

At the same time, as we are trying to buy the equipment that would allow us to decrease the amount of skilled labor required to operate the facility under this type of load.

So when we looked at what we had done when we got done with the quarter, we, indeed, had met the customers' requirements.

They were and are happy with us and continue to bring us business, but we had spent somewhere between $1.5 million and $2 million in scrap, overtime, hiring costs, training costs and the like that should not repeat in the current quarter or Q3.

So the equipment part...

Okay.

I just...

Go ahead.

No, my apologies, I interrupted.

So the equipment we bought, and is on -- which is online now, would have diminished the effects of this rush of additional business.

But it certainly would not have fully mitigated it.

And we didn't want to buy enough equipment to have managed a peak like this because the peak was largely caused by the one customer's delay in being able to start his ramp with us.

So would have partially offset, but not totally.

And if I heard you right, you said $1.5 million to $2 million of extra cost.

And if I -- just to make the math easy for myself and go with $2 million, that $0.16 of earnings impact, and so that implies you would have done $0.16 on top of $0.08 or something like $0.24 in the quarter versus the -- your range of $0.13 to $0.18.

Is that -- am I thinking about that right?

Well, it seems like that's possible.

You took the $2 million rather than the $1.5 million, so I'll say it's more like the $1.5 million.

But yes, maybe.

Okay.

So if I take the $1.5 million, then we add $0.12 to $0.08 and end up with somewhere closer to $0.20 versus your $0.13 to $0.18 range?

Yes.

Wow.

Okay.

So a big, big impact.

And what proportion of that extra cost would you have been able to offset with the new equipment had it been fully installed?

And you had this confluence of events?

Probably half.

All right.

And then I am curious, relative to your customer SkyBell that you previously talked about, have all of the ring adds over the course of the holiday season?

Did they benefit SkyBell?

Their demand and any way that's obvious to you?

Or -- and is that really not applicable for some reason?

I believe, it is applicable.

I think that the business schools talk about market creation versus a mature market.

And when you're talking about creating a new market, any add about the products that go in that market benefit every product in the market.

So I think that every ring add benefits the general category of Internet door bells.

And certainly, SkyBell demand continues to be strong.

I'll let someone else ask about SkyBells.

So I'll step back in queue and come back.

Okay.

(Operator Instructions) Our next question comes from Mike Hughes with SGF Capital.

A number of questions for you.

First, on China.

I think you said in the June quarter, the Chinese facility was responsible for generating about 6% to 7% of your revenue.

Where does that stand at this point?

It's down closer to 4% to 5% now.

Okay.

And back in June, when it was at 6% to 7% level.

I think you said the facility was basically breakeven?

Is it losing a little bit of money at this point?

No.

Continues to be breakeven.

Okay.

And where do you envision that percentage a few quarters from now?

Is it going to continue to decline?

We are aggressively looking at new opportunities there to be able to continue to keep the current workforce in China occupied and with enough capacity.

Some of the current 5% to 6% that they are building today is being transferred to Vietnam as we speak.

Okay.

And your interest in keeping that facility open, is that because you have your purchasing function there?

Yes.

Yes.

Regardless, the purchasing function will remain.

So is the purchasing function, can I think of that as wholly independent from actually manufacturing product in the facility or not?

Yes.

And in fact, they support all of our global facilities.

Okay.

And then on the Vietnam facility, I think, in the September quarter, you had some revenue.

Did that number ramp sequentially into December?

It did, but not meaningful yet.

We need to continue to accelerate and continue to invest in Vietnam.

What is the -- what are the main gating factors there?

So what's going on right now in Vietnam, again, another context for you.

The product that's coming out of China that's going into Vietnam is for 1 customer.

That customer has hundreds of different products and listings.

So the cool part about that is that customer made the decision 9 months ago that they wanted to be our partner, they wanted to pull us into Vietnam.

So they will be moving the vast majority of their business from China to Vietnam.

But it's a process that has to be deliberate as we ramp down the production of those various listings in China and ramp them up in Vietnam, we have to go through and do a qual run on each one of those listings.

So not only are we hiring people [at pace] with those qual runs.

We're also relying upon our customer to do the qualification of that product when we ship it to him and say, "Here we go, here's your first set out of Vietnam, do they match what you want?" So it's an orderly and scheduled process with this one customer that's going along at the pace we want.

So we're not seeing a big disaster in costs in China, nor are we seeing a big disaster in cost in Vietnam with having a mismatch of people in each place.

But the speed at which it goes is limited by how fast that we can create the new listings in Vietnam and get them qualified by our customer.

Okay.

And it's just the one customer that's producing at that plant now -- you're producing for at that plant?

Correct.

Okay.

And where do you envision that over the next couple of quarters?

Are you going to add customers?

Or is this going to be the principal customer for that facility?

The intention is that we will be adding customers.

There were 4 tours scheduled over there in the next 2 months for prospective customers the tour the facility and make their decisions on what they're going to do with their products.

With what's going on with the virus, those tours have been delayed.

So we're in a state of, kind of, suspended animation right now.

But the intent for sure is to ramp Vietnam with more customers.

And certainly, the interest has been very high from the day we announced it.

We had customers that toured the empty building.

So I'm confident there will be quite a bit of business and growth in Vietnam.

It's just going to be on hold until everybody gets done being sick.

Okay.

And did that facility lose a little bit of money in the December quarter?

It did.

And will that loss be larger in the March quarter?

It will be.

Materially?

Probably $0.01 or $0.02 worse than it was this last quarter.

Okay.

And then I asked this question last quarter, I'll ask it again.

I don't know.

This is, I think, the third or fourth quarter in a row where there have been issues.

And I think Bill just ran through the math on what the earnings would have been if you hadn't had the issues in Mexico, and he came up with about $0.20, and you're saying maybe there's $0.01 or $0.02 in Vietnam this quarter that gets you to $0.18.

So is there more conservatism in the guidance for the current March quarter than you've put in the guidance for the past few quarters?

We're getting sick of having to just barely squeak by.

So I hope there's more conservative.

As you say, the last 4 quarters have been one damn thing after another.

We're hoping that doesn't happen, but we've already got the coronavirus staring us in the face that we didn't plan on when we issued the guidance.

So this could be the (inaudible) -- one damn thing after another.

Right, right.

And then one last question from me.

The $3 million number that you talked about, just so I'm clear on that, are you saying kind of starting in the March quarter rather, you'll start to save $750,000 a quarter?

Is that how to think about it?

Or I'm not understanding that correctly?

We actually started to save that in the beginning of this current quarter, so October timeframe, but it got swamped out by our overtime and other expenses.

So that's -- we're expecting to get some help from that as we look at what happens in Q3 also.

Okay.

And I have one last metric that you've provided over the last couple of quarters.

What's the new customer revenue that's expected to ramp over the next 12 months?

Do you have that number handy?

I think you said it was $75 million last quarter.

I didn't recalculate it again because it's gotten bigger, and I'm happy about it.

So I forgot to calculate it, but it has improved rather than diminished.

Okay.

And any success bidding out that business at higher margins yet?

Or is it just the competitive landscape is such that, that hasn't happened?

I would say, in general, there is a little bit less pressure and a little bit less of -- you know what an eBid is, are you aware of that?

No.

No?

Okay.

Kind of like a reverse auction?

Yes.

There you go.

The same thing.

So I'd say there's less of an eBid feel to the marketplace right now as many, many people are having their CEOs and Boards make proclamations that go something like we will have 25% of our business relocated from China by this time next year.

We hear and see a lot of that going on and that that makes it a little bit less of a buyer's market and a little bit more of a seller's market.

It's not like happy days are here again and we're all running to the bank, but it is a little different than it was a year ago.

And our next question comes from George Melas with MKH Management.

I have a few questions.

And maybe that's just sort of a corollary question to one question that was just asked, if you anticipate $75 million of new revenue to ramp in the next 12 months, do you have a sense of how much revenue is going to flow out of your top line?

We have a sense of it, but we don't talk about it.

Because any time we try to make predictions that are longer than a quarter away, well, you've seen, we can't even make predictions a quarter out with one damn thing after another.

So we stay away from talking about what's going to happen in the next year.

Okay.

But can you give us sort of a sense?

I mean do you expect it to be meaningfully less than $75 million?

Or if you look at historically, what is -- and I know that historically, probably there's no real historical pattern but is there sort of an attrition rate that is something that you think is normal for you or your industry?

If you look at the history of the company and the industry, if you try to put averages on attrition rates, it doesn't really do you any good because they tend to happen lumps -- lumpily, if that's a word.

I can tell you that there have been times when you guys have asked me the question, do we see risk of a big customer leaving or significantly diminishing, and we say, yes, we're concerned about a couple.

And there have been times when you all have asked me that same question, and then I say, I don't see anything that's what I would call significant near-end risk.

So when we look out right now, we see no big customer who's had a significant competitive risk of leaving us.

I do see risks of marketplaces changing and customers failing or succeeding because some of that $75 million plus is new pieces of business that are young companies, so we can't say for sure what's going to happen with them.

But right now, I don't see any big significant piece of business that's at risk of competitive threat.

Okay.

Well, that's helpful, Craig.

Appreciate it.

Three quick questions regarding numbers and cost in particular.

And Brett, I'll just say all 3 of them, and then maybe you can answer them.

The SG&A was down quite a bit sequentially.

And I'm just wondering if that's -- if there was any sort of benefits in there?

Or if that's a good run rate going forward?

The interest expense also was down, I think, $180,000 sequentially.

So same question for that.

And then the impact of the strengthening peso, how much was that, and does that flow primarily through cost of goods sold?

And what do you expect in coming quarters?

Great.

So I think as far as SG&A, it was down slightly, sequentially, it looks like about $150,000.

I wouldn't give a lot of credence to that.

There was no really onetime offset that went through during the quarter.

I would anticipate a slight uptick back to similar levels as we did in the first quarter.

Roughly just under 5% or about $5 million, roughly for SG&A.

Interest expense, some of that is due to the fact that we're able to decrease the level of inventory that we're carrying during the quarter.

That, of course, has a direct relationship on the average amount of debt that we'll carry.

I'm hoping to continue to drive less of our dollars tied up in inventory going forward.

But I would expect, again, that this quarter, we're going to have roughly $0.5 million of interest expense.

George, you didn't really ask the question, but I kind of -- I want to say this, so everybody at least who's on the phone call hears it.

We don't know what's going to happen because China is not back from Chinese New Year.

So we already see that shipments of parts have been missed, boats that should have left the dock have not left the dock.

This could be quite troublesome, I guess, for everybody in the world, including us, because we can't get one part, we can't build all the SkyBells in the world or whatever else it is we're trying to build.

So we're in quite a bit more of a unknown situation today than we normally are during these calls based upon what's going to happen with parts and how fast all of the Chinese suppliers are going to come back online.

Okay.

Okay.

And then just maybe on -- Brett, on the higher labor cost that you mentioned due to the unhedged portion of your peso exposure.

Can you say roughly how much that was?

And is that -- I mean, if the peso remains at these levels, does that continue?

So we try to hedge a majority of our Mexican peso risk.

So happens that this last quarter, we had roughly 2/3 of those expenses hedged.

So that remaining 1/3, we ended up having to spend more for those Mexican pesos by roughly 4%.

And ended up having about a $0.02 impact on our earnings.

We're looking similarly to this third quarter, the Mexican peso has not really moved from the first of the calendar year.

So I would expect a drag on earnings of that roughly $200,000, $250,000 during the quarter -- during this quarter as well.

(Operator Instructions) Our next question comes from Bill Dezellem with Tieton Capital.

Brett, you mentioned something in your opening remarks that I didn't fully follow and it sounded like it could have been important.

But you made reference to something happening with inventory.

I thought you mentioned a $12 million number.

Would you go back and tell us what it was that you said and what the significance is of that?

Sure.

Sequentially, we were able to reduce the amount of inventory and contract assets by $12.2 million.

So contract assets are essentially finished goods that we're able to recognize the revenue on due to the fact of new revenue recognition standards that were recently passed this last year.

Really, if you look at that as just inventory, working capital that Key Tronic has invested in, we really were able to reduce that working capital by $12.2 million or 8.8% during the quarter.

Okay.

So I'm following the inventory reduction, contract asset reduction.

But then you mentioned ASC 606 revenue recognition, where does that come into play?

So that is what causes that contract asset.

So contract asset is essentially a future receivable.

It really is the amount of inventory that you have still in your possession that you've recognized as revenue.

And so if you reduce -- and I apologize for being the slow pony here, but if you reduce that contract asset, the implication on revenue is what?

It's a decrement to revenue.

Okay.

So make this easy for me, if you would, Brett.

Contract assets went down how much sequentially?

$5 million.

So am I understanding correctly that, that implies that your revenue was $5 million lower than it otherwise would have been had you -- had this -- had your contract assets been flat?

Yes, that is correct.

So hold on here.

So that means instead of having $117 million of revenue, you would have had closer to $122 million of revenue?

That is correct.

And is that revenue that we should apply a normal margin too, and meaning that you would have had earnings that would have been typical of your income statement on that extra $5 million of revenue?

You have to be careful there because of the fact that essentially, we shipped more product than what we built.

So you're not going to get the absorption -- the manufacturing absorption on that $5 million.

But, yes, a portion of the typical 8% gross margin, I'd say probably 5% incremental.

All right.

So basically, if we take 5% of $5 million, that's $250 million -- pardon me, $250,000, somewhere in that neighborhood, and if we tax effect that and divide by the 10.9 million shares, that's another couple of pennies impact on the quarter?

Yes.

Okay.

That's helpful.

And is that something that we're going to need to deal with now going forward?

Or is there something special about the initial implementation of ASC 606 that then, kind of, evens out here with time?

Unfortunately, that's probably something we're going to have to look at each and every quarter.

So it does impact the amount of recognized revenue based on the level of finished goods that you have on hand at the end of the quarter.

Understood.

Okay.

And it's only finished goods or does it include WIP?

It does include WIP.

And does it include raw materials?

It does not.

So WIP and finished goods that you have substantially completed before quarter end that you have a customer purchase order for under the new ASC 606 revenue recognition, you record the revenue.

Okay.

So you just said that if you have a purchase order for, so you're saying if you do -- if you're building inventory, whether it be WIP or finished goods, but you do not have a purchase order, you may have a handshake or some other sort of contractual agreement, but not a purchase order then it does not come into play?

That is correct.

Okay.

Well, I won't debate the wisdom of the accountants here.

Let me shift to a new line of questioning, if I may.

Relative to the announcement that you had this quarter about being named one of the top 10 metal manufacturers.

Does that -- have you seen any benefit from that yet where potential new customers are calling you, simply because they now know that you're one of the top 10, according to one survey?

No.

So it makes for a nice press release, but no business benefit?

You can't say you have no business benefit.

It just -- I can't tell you with 100-degree percent of sureness that somebody who called us didn't do it because it was -- they read it, nor can I tell you that they did do it because they read it.

Fair point.

Okay.

And then lastly, one of the earlier questioners talked about the amount of business ramping in the next 12 months.

I'd like to go further back into the prospect pipeline, how would you characterize that prospect pipeline today versus 1 year ago?

I'd say, as per my comments on pricing and competitive pressures, the prospect pipeline continues to strengthen.

Pressures on people that come out of China.

The availability of Vietnam are all adding up to an improvement in the pipeline.

Along with the additional sales expenses that we started to put in place about 1.5 years ago.

Craig, what sort of magnitude are you looking at here in terms of the increase in that pipeline?

Well, it's pretty hard to say, to give you a magnitude number.

Started trying to probability [weight] all of the open quotes, and that number keeps getting bigger.

It's probably 20%, 30% bigger than it was a year ago.

Great.

And good luck with not having the coronavirus cause a hiccup here.

Thank you.

We'll need it.

Thanks, Bill.

Our next question comes from Mike Hughes of SGF Capital.

A question for you just on your customer's demand forecast.

Could you just speak to how they look today versus maybe a few quarters ago and kind of break it out between consumer end markets and then industrial?

I'll try.

So one of our larger customers is heavily in the consumer health care market.

And they right now are looking for a massive upside, which we don't know if we can fulfill because we don't know if we can get the parts to do that.

Our industrial customers are -- you know what, I'm not even trying this, I'm going to give you the metric that I actually use to figure out what's going on.

At any given time, if you look at a couple of weeks and look at the phone calls we get and I get from our customers, I classify that as a positive week, a neutral week or a negative week.

A year ago, this time, just about every week was negative.

Everybody who called was trying to push business out, cancel orders, delay orders, slowdown ramps, try to cut their inventory back.

For the past 3 months, it's been a -- better than a neutral, I'd say, a slight positive, probably a 2 out of a scale at 10 of how positive I've seen it in terms of the incoming calls for people looking to pull stuff in, speed it up or get more.

Okay.

So you referenced the healthcare customer, I'm just curious.

You might not be able to fulfill that because of the coronavirus issue or just their expectations aren't reasonable, given the capacity you have in place?

Or what's the issue?

It's parts, and it's parts due to coronavirus issue.

So it's kind of the world's biggest ironic situation is that coronavirus has driven all this demand that the coronavirus may standing us from fulfilling the demand.

Okay.

So something like a thermometer or something like that might be driven by the coronavirus, and you can't get the parts for it?

Any kind of a consumer healthcare item, same boat.

Okay.

Okay.

And then on the operations side, can you just speak to, not by name, but is the same individual that's been running Mexico over the last few years, still in place?

I'm just wondering if there have been any operational changes there as you've ramped the business.

The person on-site has been there for almost 2 years now.

We've had our VP of Ops retired at Christmas, and we had orchestrated that change.

So it began at the beginning of the Christmas quarter.

So that guy has been around the company for 20 years, but is stepping into a new role in taking on VP of Offshore job.

Okay.

And who will fulfill his position?

He had 2 lieutenants that are both getting promoted.

Okay.

And then just last question for you.

Do you have the operating cash flow and CapEx number for the quarter?

Yes, I do.

Just one second.

CapEx was roughly $2 million for the quarter.

Cash provided, I've got a year-to-date of $8 million from operations.

Okay.

And what's the capacity on the revolver?

If revenue actually ramps here over the next few quarters, let's say, I know you're not putting this out there, but let's say it ramps to $130 million level, do you have the wherewithal on the revolver to finance that growth?

We actually were able to increase the revolver during the quarter.

So we feel confident in the amount of capital that we'll have available.

And can you say where it went from and to?

$45 million to $55 million in the revolver.

Okay.

And was that in response to what you're seeing in your pipeline?

Or what drove that decision?

With the -- expectation of some revenue growth will require some additional investments.

On the CapEx side?

No, on the working capital side.

Our next question comes from George Melas with MKH Management.

I'm just looking at the revenue decline year-to-date versus a year ago.

And Craig, as you look at that, are there areas there where you're very surprised?

And are there -- clearly, you've grown your metal shop and your metals fabrication.

Are there specific identifiable part of the business that have declined?

Or is it pretty much sort of -- or across the board?

Or there's no real pattern?

It was mainly due to 2 customers.

Both of whom have lost market share in their business.

And as we were a large part of their production, our revenue went down accordingly.

Okay.

So it's very much their -- sort of their performance that is impacting you?

Well, there's those 2. Those 2 were identifiable, but then across -- and then across the business, as I talked about before, the Gates factor of positive versus negative calls, we had across the board softness at the -- during the May through October timeframe, there was general malaise in people, our customers anyway pretty much across the board wanting to push everything out.

That turned round in terms of the calls coming in, like I said about October.

Well, what I found to be really interesting is we visited one of our largest electronic components distributor, who are in the billions of dollars of revenue per year.

And got to spend some time with their head economists and got into a real interesting discussion because he recognizes that the contract manufacturers of the world are kind of a leading indicator.

So he does a lot of modeling and data gathering on their order patterns.

And he was seeing the beginning of an upturn in October, broad-based.

And we were both pretty interested to see the Gates factor was, kind of, matching all of the economic analysis he was doing.

And so now he's giving me his analysis every month, and his analysis is kind of matching up with what we see as the calls come in positive, negative or neutral.

And we call that the Craig Gates index from now on?

I'm not sure I want my name associated with it.

So maybe we should call it something else.

Okay.

We'll call it the Brett Larsen index, right?

There we go.

Oh, I don't know about that one, George.

Okay.

So in a way -- and I'm sort of -- it seems like you are getting more competitive on the metal fabrication side, but you're not losing ground in any other areas of the business.

Or you're not shedding or deemphasizing other areas of the business, are you?

No.

No.

Not at all.

Gentlemen, there are no further questions in the queue at this time.

Okay.

Well, we thank everybody for joining us today and look forward to talking with you next quarter.

This concludes today's call.

Thank you for your participation.

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