Park Aerospace Corp (PKE) 2004 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2005 results conference call for Park Electrochemical Corporation. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Brian Shore. Please go ahead, sir.

Thank you, operator. Good morning, everybody. This is Brian Shore. I am with Murray Stamer, our CFO. I am the President and CEO of the Company as you know, and this is our third-quarter conference call. We will start as usual with introductory comments and remarks from first Murray and then some from me, and then we will go right into the question-and-answer portion of the call.

Murray, do you want to go ahead and give us some commentary on the quarter, please?

Certainly and good morning, everyone. Certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent annual report on Form 10-K for the fiscal year ended February 29, 2004 various factors that could affect future results. Those factors are found after Item 7 of that Form 10-K. Any forward-looking statements we may make are subject to those factors.

In this discussion I will describe results of operations based on non-GAAP financial measures, as well as results determined in accordance with GAAP. We believe that the disclosure of non-GAAP operating results as a supplement to GAAP results will assist the listener in assessing the Company's performance and prospects.

I would first like to summarize the financial information included in the press release for the third quarter and nine-month period ended November 28, 2004 of Park's 2005 fiscal year ending February 27, 2005.

Net sales for the third quarter ended November 28, 2004 were $50.4 million compared to net sales from continuing operations of $51.1 million for the prior fiscal year's third quarter. Net profit for the current fiscal year's third quarter were $4.2 million, excluding a pre-tax gain from an insurance recovery of $4.7 million and a pretax charge of $600,000 for realignment charges. Net profit from continuing operations for last year's third quarter was $2.4 million, excluding a pre-tax gain of $400,000 related to the sale of real estate in the UK. Diluted earnings per share, excluding special items, were 21 cents for the current fiscal year's third quarter compared to diluted earnings per share from continuing operations of 12 cents for last year's third quarter. Diluted earnings per share were 38 cents in the current year's third quarter compared with diluted earnings per share from continuing operations of 14 cents in the prior year's third quarter.

For the nine-month period ended November 28, 2004, net sales were $160 million compared to net sales from continuing operations of $138.9 million for the prior fiscal year's first nine-month period. Net profit before special items for the current fiscal year's nine-month period was $13.2 million compared with last year's first nine-month period net profit from continuing operations before special items of $2.9 million.

During the current year's first nine-month period, the Company realized a pre-tax gain from an insurance recovery of $4.7 million and a pretax charge of $600,000 for realignment charges, while during the prior year the Company realized a pre-tax gain of $33.1 million related to the Delco lawsuit, pre-tax realignment charges of $8.4 million, a pre-tax gain of $400,000 related to the sale of real estate in the UK, and $10.6 million of losses from continuing operations net of taxes.

As a result, net earnings were $16.7 million for the current fiscal year's nine-month period compared to net earnings of $11.6 million for last year's first nine-month period. Diluted earnings per share before special items were 66 cents for the current fiscal year's nine-month period compared to diluted earnings per share from continuing operations before special items of 15 cents for last year's first nine-month period. Diluted earnings per share were 83 cents in the current year's nine-month period compared with diluted earnings per share of 58 cents in the prior year's first nine-month period.

Now I would like to briefly review some of the other significant items in our third-quarter P&L. Comparing the current fiscal year's third-quarter sales to last year's third-quarter sales from continuing operations, Park's North American sales increased 5 percent, European sales decreased 11 percent, and Asian sales decreased 7 percent. During the fiscal 2005 third quarter, North American sales were 56 percent of total sales, European sales were 17 percent of total sales and Asian sales were 27 percent of total sales compared with 52 percent, 19 percent and 29 percent respectively for last year's third quarter. Sales of North American high-temperature materials increased to 96 percent of laminate and prepreg material sales for the third quarter of fiscal 2005, up from the 92 percent level in the third quarter of last year. Foreign high-temperature material sales were 93 percent of foreign sales for the current year's third quarter compared to 86 percent for last year's third quarter. On a worldwide basis, sales of high-temperature materials were 95 percent of total laminate and prepreg material sales for the current year's third quarter compared to 88 percent for the third quarter of the 2004 fiscal year. As we did last quarter, we also would like to comment on Park sales of high-performance non-FR-4 materials, which is a subset of materials classified as high-temperature materials.

Sales of North American high-performance materials increased to 47 percent of laminate and prepeg material sales for the third quarter of fiscal 2005, up sequentially from 40 percent and 44 percent in the fiscal 2005 first and second quarters respectively, and also up from the 36 percent level in the third quarter of last year. Foreign high-performance materials sales were 27 percent of foreign sales for the current year's third quarter, up from 22 percent in the third quarter of last year. On a worldwide basis, sales of high-performance materials were 37 percent of total laminate and prepreg material sales for the current year's third quarter, up from 27 percent in the third quarter of last year.

FiberCote's advanced composite materials sales comprised 9 percent of the Company's total sales for the fiscal 2005 third quarter compared to 6 percent for the prior year's third quarter. For the current fiscal year's first nine-month period, advanced composite materials sales were 8 percent of total sales compared to 6 percent for the same period in the prior year. The gross profit for the third quarter of the fiscal 2005 year was 19.5 percent versus 19.1 percent for last year's comparable period. This increase in gross profit was attributable to the effect of the Company's cost reductions during the quarter and the improved sales mix of high-performance products and advanced composite materials. Selling, general and administrative expenses decreased by $1.6 million compared to last year's third quarter and decreased as a percentage of net sales to 12.4 percent for the current year's third quarter from 15.3 percent for last year's third quarter. A decrease in SG&A expenses as a percentage of sales in the current quarter compared to last year's comparable period is mainly due to the reduction in selling expenses, especially freight costs, attributable to the realignment of the Company's business that occurred during the prior year's third quarter. SG&A expenses spiked during last year's third quarter due to additional costs incurred to transition a portion of the business from the Company's New York manufacturing operation to its California manufacturing operations. As a result, pre-tax operating profit from continuing operations before special items was 9 percent of net sales for the current year's third quarter compared to 5.2 percent for the comparable period in the prior year. The effective tax rate for continuing operations was 7.5 percent for the current year's nine-month period compared to a tax benefit for the prior year's comparable nine-month period. The prior year's tax benefit was a result of several factors, including the reclassification of the Dielektra GmbH losses to discontinued operations and the gain on the Delco lawsuit.

Moving to the balance sheet, Park's working capital at November 28, 2004 at the end of the third quarter for 2005 fiscal year was $194.8 million compared to $197.5 million at February 29, 2004, the end of our 2004 fiscal year. The working capital at November 28, 2004 includes $21.5 million of dividends payable as a result of the declaration by Park's board of a special dividend of $1.00 per share totaling $19.9 million and an increased quarterly dividend of 8 cents per share totaling $1.6 million payable in the fourth quarter of the current fiscal year. Cash and temporary investments amounted to $204.9 million at the end of the current fiscal year's third quarter compared to $189.2 million at the end of the prior fiscal year. At the end of the third quarter on December 15, 2004, the Company paid the special dividend of $19.9 million. As we have in the past, we invest the available funds on a conservative basis and short-term fixed-income securities in money market funds. During the current fiscal year's first nine months, the Company had capital expenditures of $2.4 million and depreciation of $7.7 million.

Finally, stockholders equity was $238 million at November 28, 2004 compared to $243.9 million at the end of the prior fiscal year. This decrease in stockholders equity was the result of the declaration of the special dividend partially offset by the Company's net earnings during the current fiscal year's first nine-month period. Accordingly, stockholders equity per share decreased to $11.95 per share from $12.33 per share at the end of the prior fiscal year.

Okay. Thanks, Murray. This is Brian again, and I will offer a few comments as well. Most of you have received a press release by now announcing the third-quarter results. For those of you who read carefully, you probably noticed two things which are different. One is our address, and I just want to make sure everybody has this, so I will read it to you now. Our new address as we just moved our office about two days ago is 4848 South Service Road, Melville, New York, 11747. Our main phone number is 631-465-3600, and our main fax number is 631-465-3100. Okay. And believe me we have boxes everywhere, and it's a miracle that we are even able to do this call right now. Our phone system is on and off seemingly every half-hour or so. But we will get through it.

The other thing that you might have noticed if you read carefully is that I think it is called a tagline, the way we describe of our company kind of toward the end of the press release. That is totally different now. We are describing our company as an advanced material company, and obviously that is not just casual. If you remember, there is actually a thread here. You go back to the annual report, 2004 annual report, there was some discussion about the Company's desire and interest in reinventing itself into a technology company. That actually was a prerequisite for our reinvention of our Company into an advanced material company. So let me describe very briefly what that means and what it does not mean because it is certainly very significant to our Company and our future.

Let's cover what it does not mean. It does not mean we're getting out of the laminate business. As a matter-of-fact, we continue to make serious investment, human and financial investment, in the laminate business, including a lot of our R&D projects relate to the laminate business.

What it does relate to is elevating how we define ourselves. In the past we defined ourselves as a laminate business. We are now defining ourselves as an advanced material business, which develops and manufactures products which are sold into several markets, one of which, of course, is the electronic laminate market. But there are other markets as well, and those relate currently to our FiberCote business, principally to -- currently and principally to our FiberCote business, which is the advanced composite business which sells into the Aerospace markets, the military markets, the industrial markets, and the wireless communication markets, and it is our intent and our intention to emphasize that aspect of our business in the future much more than it has been in the past. And I think there's even a comment in the press release that we are installing an additional treater at this time at FiberCote, which will increase FiberCote's capacity.

But FiberCote has been a nice business. We have owned it for awhile. It is our intention to emphasize the FiberCote business more, and not in the sense that we would be deemphasizing the laminate business. That is not -- that is why I want to be clear what this means and what it does not mean. It is not a deemphasis on the laminate business, but it is an enhanced emphasis on the FiberCote advanced composite business, selling into markets other than just the electronic printed circuit material markets.

And I think those are the big events for now. I don't really have a lot more to say about the quarter. I think Murray's comments in the press release probably at least summarize the quarter pretty well. I think I commented on the markets for the two segments of our business, one of which is the electronic segment was a little bit better in September, and I think during our second-quarter conference call, I may even have suggested maybe things are a little bit better. If you look at the three months of our third quarter, September was better, but then October and November were pretty anemic. It is really too early as I commented in the press release for us to have any kind of meaningful opinion about the fourth quarter on the electronic side.

December is a wacky month because of the holidays, so sometimes people order a little bit in advance. The bookings in the first few weeks of December are a little bit up from the third quarter, but that does not necessarily mean anything, again because December is always an anomalous month. We will have to wait and see what happens in January in terms of the short-term outlook for the electronic side of the business.

On the advanced composite side of the business, those markets are quite healthy as we commented in the press release, and as far as we can tell anyway, it looks like they will continue to be healthy during the fourth quarter. So we're feeling good about that. We feel there are a lot of opportunities there.

I also wanted to just mention, highlight to you that in Murray's introductory remarks, he once again broke out -- this is on the electronics, the printed circuit material side -- he broke out the percentage of high performance, not just high-temperature but high-performance. I think that is really a key indicator for us. We used to talk just about high-temperature, but almost all of our business as you can see from Murray's comments is high-temperature now. I know fortunately -- well, I don't know with just the way it is -- some of that is becoming more commoditized as well. So we continue to focus our intention on high-technology, high-technology, high-technology, and we don't consider high-temperature to be high-technology necessarily anymore. Well, it doesn't matter what we consider. It is a market, and you can see that a lot of the attitudes are becoming more commodity-type attitudes. So our focus is on the high-performance products, and you can see that we are bringing our percentage of high-performance products up and that is our intention. That is where we can make some money in our opinion anyway. I doubt that we will make very much money for the rest of our life in the FR-4 side of the business.

I guess that really covers it. I don't have a lot of other really remarks to offer by way of introduction. So, operator, why don't we go to the question-and-answer portion of the call, please?

(OPERATOR INSTRUCTIONS). John McManus. Needham & Co.

Good morning. Could you give us some idea of the number of production days in the fourth quarter compared to the November quarter?

That is kind of tough. It is a good point though because we have -- it is different for each factory. Now a number of our factories will be closed for three or four days next week, and even that is not just an installment. We will play it by ear, and then we get last minute orders, that kind of thing.

The other thing that is really significant is that with the Chinese New Year, the Asian New Year holiday, is I think in what, January or February. It is definitely in the fourth quarter. Is it the beginning of February? I forget. At the end of January. It is definitely in the fourth quarter. It is a full week, and then it carries into second week (inaudible) holiday people, they travel back from visiting their relatives or whatever. And that is a big impact on us in the Asian part of the business. You know the Asian part of the business continues to be one of the more robust areas at least in the electronic side. So that is the major factor.

The last two weeks of December though, John, are not normal weeks. You know we made the operating this week. We are operating everywhere in the U.S.. Next week I would like to say that we have a few days off in a couple plants. But even though we are operating, we may be operating at a little bit lower levels.

Last week was still a pretty, let's call it, good week. But like I said in the introductory remarks, some people may have been ordering for the next few weeks on the theory that people won't be around whenever they want to get stuff in place for January 1 or January 3 or whenever it is at the beginning of the new year.

I guess really what I am saying is it appears that it is unlikely that the sales in the fiscal fourth quarter can exceed those in the fiscal third quarter.

It really depends upon the market because the fiscal third quarter you know the sales were pretty anemic as you know is obvious. I think they are same or about the same as the second quarter. The second quarter obviously is also a slow quarter because of the summer holidays. The third quarter would normally be a stronger quarter, so that just is a comment during the market.

On the electronic side, actually pretty weak in October and November I would say. Like I said, maybe a little bit better in December, but it is hard to figure out what that means.

We cannot tell you that the fourth quarter will not exceed the third quarter. It is really going to depend upon this thing with the market after January. Like just to give you an example when we had the third -- sorry, the second-quarter conference call, that would have been toward the end of September, we were saying yes, things look a little bit better. In fact, they were in September, but we had no idea that October and November would be slow. And just the same thing, our visibility into January and February you know it is anybody's role of the dice.

Now on the advanced composite side, I think we say we feel a little more confident. There is more visibility on that side of the business. The lead times are longer. Those tend to supply into military aerospace programs, not as compared to electronics programs.

Rogers today just today there put out a press release saying that the high frequency printed circuit material sales into the wireless infrastructure market will be much lower than they had expected. Are you seeing the same type of phenomenon in your business?

No, I would not say so. I don't know when to expect it, so I'm not going to comment on Rogers. Obviously an excellent company, but other than that I am not going to comment on their quarters.

I can't compare what to Rogers. Maybe our expectations were not as high. Also, our microwave business is quite a bit smaller than Rogers, so that may be a factor as well.

Just so you know though when I mentioned wireless communication markets, I'm not just talking about the art of microwave, I'm talking also about the advanced composite side of the business with radio (inaudible) and things like that. So that -- when we talk about wireless communication, we are really talking about both sides of our business.

And can you give us some idea of the CapEx going forward in the sense there that as you have pretty much there spent most of the CapEx there for the treater in Singapore, you have got some buildout in China. Could you give us some idea of your CapEx there for you know maybe fiscal '06?

I don't -- we don't -- I could not help you with that too much. Murray, I don't know if you have any opinions. We're just doing our business planning now. We really won't get serious with that until mid-January in terms of all our business planning. I think our business planning is bottom-up. So we received the business plans from different units, and then we (inaudible) and pushing back and that kind of stuff. So the wish list is not usually meaningful reflection on what will actually happen because we have got all the wish lists. But I do not know. Murray, do you have anyway to help us with that?

John, what I would say is that in the fourth quarter we have about $1 million that we anticipate spending on the China construction project, and then we have $4 million that will go over into the '06 year. And then as Brian said, other than that the planning process or capital expenditures for the '06 year is taking place now.

Yes. We are going to be focusing where we think we can make money, and that would be in the composite side, the advanced composite side of the business, and also the high-technology electronics side of the business.

As people remind us, I am sure they remind us quite often, we do have a little bit of cash. So we are lucky in the sense that is not the restriction. We need to find opportunities, and we want to look for them. I am pretty optimistic that we will find them.

On the other hand, you know very well from our history we don't just go waste money and spend money because we have it. That is not our style.

One last question there. Could you give us to headcount in this quarter compared to the quarter before?

Do you have that information, Murray? I think you know we laid off about 80 people in California.

The headcount from the fourth quarter to third quarter is about the same. About 1100.

1100 people. And that is one of the reasons, by the way, why the third-quarter bottom-line was as good as it was because you see the top line was not really very different from the second quarter. But that cost reduction in California had a big impact upon the bottom-line here.

John Roberts. Buckingham Research.

I'm less familiar with the FiberCote business. Are all of the FiberCote sales in the non-FR-4 performance high-performance percentage that you talked about? Is that 100 percent overlap there, or is kind of spread between high-temperature and high-performance?

They are not included in the electronics sales at all. The advanced composite sales were totally separate.

Okay. But you have got 95 percent that is high-temperature, and you've got --

95 percent of the electronic material -- (multiple speakers)

Electronics, okay. Not of total. Sorry. And then in FiberCote, is at all glass fiber, or is it carbon fiber as well that they work with?

Well, we work with a number of different reinforcements at FiberCote. The two you mentioned are correct, but there is probably more than a dozen different kind of reinforcements that we use there. You know fiberized rayon, Kevlar, all kind of different glass, carbon. We use reinforcements that are appropriate or suitable for radome applications, which means they have to have certain electrical properties we call quartzes.

There are -- I mean I could not count them, but I'm sure there are more than a dozen types of reinforcements that are used in the fiber.

Since radome has come up many times, is that the largest application within FiberCote?

No, it is not at this time. I think that airframes and rocket motors are probably the largest. But the radome part of the business is a nice niche that FiberCote has. We have some nice knowledge there.

And lastly, who are the closest peers or competitors if we wanted to compare your business to?

The big companies that you might want to look up are Hexel and Cytech.

Okay. So you are similar to their businesses?

Except you have to check if their size is quite a bit different.

And they are more integrated aren't they?

More vertically integrated?

I thought they were?

Yes, they are.

Okay.

They are backwards integrated and forward integrated, too. They make parts. We don't make parts.

(OPERATOR INSTRUCTIONS). Alvin Hoffman. Boenning & Scattergood.

Your FiberCote treater, is that significantly different than say the treater you have put into Singapore?

A treater is a treater. Okay? We could use a treater that was used let's say in the laminate business for FiberCote and vice versa after making certain modifications to the units. Basically the same principle.

The FiberCote one is substantially larger?

No. We have two treaters of FiberCote currently. One is a horizontal treater, and that is different. That is necessary for very heavy weighted products that would not be used on the electronic side. We have a vertical treater. We are installing another vertical treater at FiberCote at this time.

Is it as big as the one in Singapore?

Which one in Singapore?

The latest one.

No, it is not. That would not be a great idea for that kind of product. But it is similar to the smaller treaters in Singapore.

All right. Is the treater in Singapore substantially in place and operating?

The new one you mean? The treater is completely installed at this point. We're doing qualification samples and that kind of thing. Frankly, we are taking a little more time with it. If we wanted to have into production, we could do that essentially next week. We just need to get all the customers on board. They would have to approve it. But we are taking a little extra time to do enhancements and optimization because we can. We don't absolutely need the capacity for it right this minute.

But like I said, if we needed it, we could really get into production with it in a week or two. I guess we probably will be looking more you know February time frame.

In other words, you could use more business there.

Yes, we could. In Singapore?

Not always. There was a time when you needed the treater.

Yes. We always got away with the treaters we had there. It is the lamination capacity that really is where we have a lot of extra capacity.

China, is there anything you can say about that?

I don't understand the question. You mean from a treater capacity perspective or --?

In general how far along are you on the plant?

Well, we have the piles going in. It is more or less on track, and I think we are scheduled to have the thing, the plant done -- I don't rememeber -- we said August/September timeframe, and at this point, we're still sticking with that. We just have to always give people a caveat. This is China after all, and however many things go wrong building a plant in Pennsylvania or Kentucky, you have got to multiple it by 100 in China. But so far so good.

Okay. Thank you very much. And thank you for the dividend. It was very timely.

You noticed that?

I had a few people even notice it who never comment on things. It was noticeable, yes.

It is nice to be noticed every now and then.

I hope you don't feel poor because of it.

Not yet.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). John McManus. Needham & Co.

Yes, the tax rate there in the last quarter was 7.5 percent, which I assume there is the tax rate you lose in the fourth quarter. Can you again -- have you relooked there at what the tax rate could be for the fiscal '06 year?

We look at the tax rate and we do our projections all the time. When you're at these levels, there relatively small movements in profitability that can move the tax rate around pretty substantially. So it's very difficult to project the tax rate, and you know I really could not add to what we have discussed before.

So you still feel that the tax rate there next year would be more like 15 percent or twice there the tax rate this year?

As I said you know, the forces that move that rate around -- we are talking about relatively small numbers. So that is -- that is the best we can make at this point.

Could you comment again about your customers, top five customers, the percentage of top five customers and maybe top 10 customers? Any customers there who were over 10 percent who they might be?

The top five customers, again are about 48 percent, and these percentages are very consistent. So in that top five we have Sanmina, which is 14 percent of our total sales, Tyco is 12 percent of sales, and Multek is 10 percent of sales.

Multek is part of Flextronics.

Thank you, Brian. As you heard, Multek is a division of Flextronics. Our top 10 customers, they make up 68 percent of our total sales, and our top 20 make up 80 percent of our total sales.

And if you look at these, the fourth and fifth top customer could you give us those?

Sure. Number four, this on a year-to-date basis is Petasis and number five is Woos.

Do these percentages change there in the last quarter? You gave me nine-month numbers.

They moved around very very slightly. For example, Sanmina, Tyco, Multek, which is a division of Flextronics, those are exactly the same actually for the quarter as they were for the nine months. And actually even Petasis and Woos round to the same numbers.

Okay. Thank you very much.

Paul Krieger (ph). Situs Investment Management (ph).

I'm sorry if I missed it earlier. How much stock was repurchased during the quarter?

There was no stock that was repurchased during the quarter.

But the authorization is still roughly 10 percent of the shares outstanding?

That is correct. It is 2 million shares.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. We will turn the conference back over to Mr. Shore for any additional or closing remarks.

Okay, thanks, operator. Short and sweet, right? But thank you all for joining us especially on a holiday week where I am sure you've got a lot of other things to be attending to, and it is nice to talk to you all as usual as always. And on behalf of Murray and me and everybody here digging through the boxes, I want to wish you all the very very best of New Year's, lots of luck and hopefully whatever you wish for will come through. Thank you for listening. Good-bye.

And that concludes today's conference call. We thank you for your participation and have a nice day.