Bill Dezellem: All right, great, thank you. I will step back and queue and reenter, so others have an opportunity.
Operator: And our next question will come from Sheldon Grodsky with Grodsky Associates.
Sheldon Grodsky: Good afternoon, everybody.
Craig Gates: Hi.
Sheldon Grodsky: I have two questions that are unrelated. I’ll start off with that power equipment manufacturing problem. That sounds like a pretty big disaster if it’s going to be kind of held in abeyance for a year, does that relationship look like it’s intact? I know you’re not supposed to say bad things about your customers on these calls. But did they handle all the designs or do you in it together?
Craig Gates: The way that many of our programs work is that we contract to provide design services, and that was the case with this customer. And in that situation, the customer will say, I would like you to design this bracket, it needs to be this strong, and it needs to withstand this many flexes. And we say, okay, and our engineers sit down in the CAD station, and we designed that bracket to meet that load and that number of flexes, and we put it on our test equipment, and we prove that it meets that load in that many flexes and customer approves the design, and we go out and we buy tooling and we manufacture it. When the product hits the market, and it turns out that the performance specifications that our customer gave us were underrated in some way and the part begins to fail.
Usually, the situation is clear enough that we remain friends with our customer and the business goes on. And in many cases, the relationship has strengthened because as we go through the troubleshooting to determine what the problem has been and why our engineering team proves its metal under challenging and time-constrained conditions. And that’s the situation that we’re in with this customer today. I believe we are in a better position from a relationship standpoint than we were previously. And things are moving forward, and we are actually continuing to design next-generation product while this current generation product is being tweaked.
Sheldon Grodsky: I have an unrelated question.
Craig Gates: I want to tell you, Sheldon, that I never did that. I want to tell you, I never explained that that way before, and I’m pretty proud of that. That’s pretty good. So I hope that helps.
Sheldon Grodsky: It did. With regard to China, well, one little company that I follow has been having interesting problems suddenly getting export licenses, this kind of leads me to believe that the cold war between the United States and China is heating up. Have your people found situations where they either can’t export to fulfill orders because of new requirements coming from the local communist officials or anything like that where that it’s becoming a significant impediment to operations?
Craig Gates: The reason that many of our new customers are new customers is that they have run into exactly that type of problem. So the trade war, you can read about what our President has said to their President and all those kind of things. But what really matters is what’s happening to our current and prospective customers as they try to source product and do business overall. That means get new designs designed, get ramps either up or down, send engineers in there to help, all that has gotten dramatically harder in the last three, four years and continues to get worse. It’s not static. It’s actually continuing to get worse. What’s interesting to us is that it’s making the people that were more or less on the fringes of should we be in China or not.
The people who don’t have big money to throw at a problem when suddenly they can’t get parts out of there for a day or a week or a month. It’s making those people change their approach earlier than the folks who are bigger and have the wherewithal to kind of withstand the buffeting of the cold or as you call it. So that’s why we see a lot of these $8 million to $10 million to $20 million wins that are happening for us because those are the people that are on the fringes and are the most severely impacted without the financial wherewithal to manage those impacts on a timely basis.
Sheldon Grodsky: Okay. Thank you.
Operator: [Operator Instructions] And our next question will come from George Melas with MKH Management.
George Melas: Thank you. Hi Craig. Hi Brett. How’re you?
Craig Gates: We are okay.
George Melas: Good. Okay. A follow-up to those questions on the smaller customers, you were sort of suggesting or telling us that you think that from a management perspective, maybe let’s think about it from a numbers perspective. I think you’re suggesting that from a gross margin perspective, they might be a little bit better because you have a little bit more leverage. From an SG&A perspective, that may be that they are equal to their larger peers as a percentage of revenue. So first of all, is that correct? Is that the right way to interpret that?
Craig Gates: Yes. Additionally, customers that are on the very small end that have proven not to fit that model, we have been actively disengaging with. So there’s been a trade of customers, specifically in our U.S. sites where those sites were struggling to maintain the revenue base that they had where those sites are now struggling to service the new growing revenue base that they now see. And as a result, we’ve been circling around and taking the bottom of our list of customers. And some of them we are ways with because they’re just small and they have a much worse ratio of listings and overhead compared to the revenue base that we’re enjoying with them. Some of them, we walk away from because they have proven to be untrustworthy, and we don’t have to deal with it anymore.
And some of them we walk away from because we don’t see any type of future and we’re concerned about their financial health. But that’s a change. We haven’t done any systemic pruning of our customer base since I’ve been with the company. We’ve done some a little bit here and there, but nothing as overt and as what’s the right word… I don’t know. Anyway, we haven’t done…
George Melas: Purposeful, like so you really sort of have that is part of your strategy now and it’s not sort of occasional or opportunistic because somebody really business you offer. It’s just a process of pruning.
Craig Gates: George, I would never make a decision based upon how pissed off I am.
George Melas: I wouldn’t want you to because I think it can be pretty tough. So I don’t know. Okay. All right. Okay. From a working capital perspective, these small customers, you tend to do a lot for them. So you do take advantage of a lot of your capabilities. Basically, it means a lot of parts. And how does that impact you from an inventory perspective? And also from an AR perspective, are these small customers, are you able to get slightly better terms?
Craig Gates: Well, that’s the interesting part of it, or interesting aspect of it. I didn’t want to say parts because parts are coming into here. if you’ve got a customer who represents 15% of your business and that customer starts pushing you around in the sense of dumping a big forecast on us demanding that we buy into that forecast and then misses that forecast and then forces us to spend six months to a year in negotiating whether or not they’re actually going to conform to the contract they signed and pay for those aged parts. That’s a lot different than a $10 million customer who knows that they’re a $10 million customer and are going to behave out of necessity as if they are in this together with us rather than taking advantage of our neediness.
