Park Aerospace Corp (PKE) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the first-quarter 2007 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. Welcome everybody to Park's first-quarter conference call. As usual, I have Jim Kelly with me, VP of Taxes and Planning. Jim will start out with giving some financial commentary. I will offer maybe a little additional commentary, and then we will go to questions and answers. Go ahead, Jim.

Thank you, Brian. Good morning, everyone. Certain statements we may make during the course of this discussion which do not relate to historic 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 26, 2006, various factors that could affect future results. Those factors are found in item 1A and 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 the results of operations based on non-GAAP financial measures, as well as financial results determined in accordance with GAAP. We believe that the disclosure of non-GAAP operating results as a supplement to GAAP financial 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 first quarter ended May 28, 2006. Net sales for the 2007 fiscal year first quarter ended May 28, 2006, were 62.8 million compared to net sales of 55.7 million for the prior fiscal year first quarter. Net earnings for the 2007 fiscal year first quarter were 8.9 million compared to net earnings before special items of 6.4 million for the prior year first quarter.

During the prior fiscal year first quarter, the Company recorded a $1.1 million charge for employment termination benefits relating to a workforce reduction at its Neltec Europe SAS facility in Mirebeau, France. There were no tax benefits related to this charge.

Net earnings for the 2007 fiscal year first quarter were 8.9 million compared to net earnings after the employment termination benefits charge of 5.3 million for the prior year first quarter. Basic and diluted earnings per share for the 2007 fiscal year first quarter were $0.44 compared to basic and diluted earnings per share before the special item of $0.32 for the prior year first quarter. The prior fiscal year first quarter employment terminations benefits charge equated to $0.05 per share, both on a basic and diluted basis. As a result, basic and diluted earnings per share were $0.44 compared to basic and diluted earnings per share of $0.27 for the prior fiscal year first quarter.

Now I would like to review some of the significant items in our first quarter P&L. Sales volumes increased 15% in North America, were unchanged in Europe, and increased 15% in Asia during the fiscal 2007 first quarter compared to sales for the same period in the prior fiscal year. The gross profit percentage for the first quarter of fiscal 2007 was 26% compared to 21.6% for the prior year first quarter. The gross profit percentage was higher for the fiscal 2007 first quarter compared to the prior year first quarter, mainly due to the increase in sales volumes and favorable product mix.

Selling, general and administrative expenses were 10.7% of net sales for the 2007 fiscal year first quarter compared to 11.3% for the prior year's comparable period. The decrease in these operating expenses as a percentage of sales was primarily due to the increase in sales volumes. During the 2007 fiscal year first quarter, the Company recorded a pretax expense of 295,000 relating to the amortization of previously granted employee stock options pursuant to the provisions of FAS 123(R).

Earnings before income taxes increased to 18.4% of net sales for the 2007 first quarter compared to 10.8% for the prior year first quarter. Included in the prior year first quarter earnings was an employment termination benefits charge of [1.1] million. The effective tax rate for the 2007 first quarter was 23% compared to a 10% effective tax rate before special items and 11.8% after special items for the prior fiscal year's first quarter.

Turning to Park's balance sheet, cash and marketable securities increased to 203.9 million at May 28, 2006, from 199.7 million at the end of the prior fiscal year. We continue to invest the available funds on a conservative basis in highly rated fixed-income securities and money market funds. Working capital was 226.7 million at the end of the 2007 first quarter compared to 214.9 million at the end of the prior fiscal year. Capital expenditures were 0.5 million for the 2007 first quarter compared to 1.1 million for the prior year comparable period.

Depreciation expense was 2.3 million for the 2007 first quarter compared to 2.4 million for the prior year first quarter. Stockholders' equity was 255.1 million at May 28, 2006, compared to 245.4 million at the end of the prior fiscal year. Finally, stockholders' equity per share increased to $12.64 at May 28, 2006, compared to $12.20 at the end of the prior fiscal year.

Thanks a lot, Jim. We appreciate it. Let's see -- I will go through a few other things. This is Brian. Let's see if Jim and I can give you all a little more perspective on the quarter.

First of all -- Jim already covered it -- it's also covered in our press release -- it seems like a number of people out there are not really focused on this, though, that I think one of the big events for Q1 is our tax provision or tax rate of 23%. For all of last year, when you take out special items, I think the tax rate was about 11%. And of course, that will affect the earnings, the tax provision.

As far as what our tax rate is this year, every month that goes by, it becomes more and more difficult and more complicated to really try to hone in on our tax rate going forward. We don't expect that it will go up. It is possible it will go down. We don't know that, because we have to look at some circumstances and items in the second quarter that could impact our perspective on the tax rate for this year. But for the quarter ending, it was 23%, and you all can do your math and figure out how the earnings got to where they are.

The other things I do want to mention to you, though, is that, as Jim said, we have about $300,000 -- 295 to be exact -- of pretax expense in the first quarter related to the accounting for stock option rules, 123(R). We also have another $250,000 of accounting fees which we provide for in the first quarter related to last year. Even though we added a significant amount in the fourth quarter, as you remember, it still was not enough apparently. This all relates to this new environment that we live in related to Sarbanes-Oxley and the related laws.

We're looking at probably spending $1.5 million a year now with accounting fees; that is up by over $1 million from just a couple years ago. So if you look at that, plus accounting for stock options -- this is all related to new rules and laws from the government -- we have additional $2 million of expenses here that we need to deal with -- approximately. I don't know -- give or take a little bit. But that is our best guess on it. And obviously, we have no value to deliver for that $2 million; that is just cost for us.

And my comment is that a lot of people are feeling pretty good about the economy in the U.S. and we could absorb all these costs. And my feeling is that I'm a little skeptical about that. We play it out two or three years and see how the U.S. economy is doing and see whether the U.S. corporations can really absorb these costs and still stay competitive for capital with companies overseas that don't have these costs. That is just my comment, in case anybody's interested.

But I wanted you to be aware of that, that going forward we are looking at approximately $2 million of extra pretax expense that we just didn't have on our P&L previously, even though we are doing nothing differently from a business operating perspective.

There is one other meaningful item that I want to bring to your attention, which did have a big impact on our P&L, our real P&L, in the first quarter, and that is the cost of copper foil. We mentioned this, I think, in our fourth-quarter conference call that you ought to be looking at that, look at the LME, London Metal Exchange, etc.

This relates, I guess, to -- well, I'm not an expert in these kinds of things -- but if you talk to the experts, they will say there is a lot of additional copper being used in China and other countries, India, and maybe some speculation is in the price as well. But the price has -- you can look it up any day you want -- the price has escalated dramatically, and we have had significant increases in the cost of copper foil.

Now we have a couple different product lines, but the largest product line is printed circuit materials, as I think you all know that. And if you look at printed circuit materials, they're used to make printed wiring boards. What is printed wiring boards? It is just that; it is wires that are printed, wires that are made out of copper. So one of the very, very basic raw materials that is used in this industry, the electronics manufacturing and supply chain, is this is copper. All right? So what that did is that affected pretax our P&L by approximately $1 million in Q1, $1 million.

Now just so you understand our strategy and philosophy here, there are probably some in this industry that will decide to take and absorb that. I am not one of them. The supply chain in electronics anyway -- when I say this industry, I am talking about the electronic product line -- I think it has been squeezed and squeezed and squeezed to the point where there is very little left. And I think it would be foolhardy for people to assume that they can absorb these costs. But either way, if they absorb them, in my opinion, there will just be more companies going out of business, because they are not in a position to do it.

The FR-4 part of the business, my feeling is that's at best a breakeven business. And I suspect we do better than others. But I don't think that these huge cost increases are things that could be absorbed into a breakeven business. Others can do what they want; we will not do that. So we're dealing with these increases in terms of our pricing. I'm not going to go into the details, but that is being done.

Now there is a timing gap, because we haven't really been treated very nicely by our suppliers, from whom we have purchased millions and millions dollars of product over many, many years. We would typically get an e-mail on a Friday saying the prices increase is going into effect on Monday. Okay? Of course, I don't like that very much, but we don't treat our customers that way. So we normally give them a couple months to get their bearings and get organized, so we have a gap between when our costs went up and our prices would be adjusted. That gap will be closing the end of this month, at the end of June, but the June month, obviously, is in the second quarter, and the second-quarter impact we expect to be even more than that, about $1.3 million pretax.

About the third quarter, the impact will be minimal; actually by the end of the month, this month, it will be minimal. That 1.3 million, that is a June number, but of course that is part of second quarter. So I just wanted you to be aware of this; this is a real thing. And, you know, at least part of the reason for these huge escalations in copper costs relate to real fundamentals. There may be some speculation involved. I don't know if there is any abuse; I am not saying that.

But from our point of view, it has a very significant impact on our cost structure, and we don't believe that it is proper for our Company to decide that we can absorb that. We don't think we can, and we are not going to. By the way, I would not tell you this if we had not discussed this very carefully and privately with our customers first, because we don't communicate with our customers through conference calls with investors. We don't do that. We have intimate relations with our customers. We've had a lot of quiet talks with them, and our customers know exactly what our position is and what we're doing.

But I wanted you to be aware of that; that is $1 million pretax in Q1. That is not annualized. That is $1 million in Q1. And that is -- again, that is just a timing issue, because we would not do to our customers what our suppliers unfortunately in some cases have done to us, which is basically give us no notice at all. And these increases are not minor. I can tell you that much. In terms of the copper foil, they are very, very, very significant increases. But if you look at the LME, the commodities exchanges, and see what copper is doing, it's not going to surprise you. Because these are not 5 or 10% increases. These are very significant increases.

In case some of you are interested, sometimes you ask how business is going after the end of the quarter -- and we have four weeks in our books in Q2, the first four weeks of June are in the books. And the business level continues to be fairly strong through Sunday -- through two days ago. That is this current as we are. We don't have the information for yesterday. But we do have through Sunday -- those are the first four weeks of June -- business levels continue to be strong.

And of course, I will always say to you that is I'm just telling you what I know, those are facts. As far as what will happen the rest of the quarter, I don't really have a strong opinion about that. We always remind you that there is not great visibility in our business.

Also, there is a summer factor which you should think about. Whether it is going to be a factor this year, I don't know, or to the extent to which it will be, I don't know. Because again, the visibility in our industry is not really that great, so it is not really, I don't think, a productive use of your time to spend a lot of time speculating about what might happen. But I am certainly comfortable sharing with you what has happened. Those are facts that we know about.

Just to review a couple of things that we're doing, which actually were discussed in the annual report to shareholders, which just came out a couple days ago. Maybe some of you don't even have it yet. Our China factory in Zhuhai, China, which is near Hong Kong, is basically finished. And what we are doing now is we're going through the process of checking out the machines and doing dry runs with the equipment. So we should be producing -- or at least prepared to produce -- within, let's say, a couple of months, my estimate would be. That is not a hard number, but that is my best guesstimate.

I think that you know by now that we are in the process of building another facility in Singapore to produce advanced composite prepregs. This is not another business unit; it still will be part of our Singapore business unit. It just is a separate facility, a separate plant, which will be operated by current Singapore business unit. The key issue there is for advanced composite prepregs, a lot of carbon material is used. And it is very important that that carbon material be segregated from the electronic laminate area because of contamination concerns. Carbon is a conductor, as probably you all know that.

So that's something we're pretty excited about. And we are just -- we're down to basically two properties. So in the next couple of weeks, we will have decided which property to go with and we will have to either build a plant from scratch if it is one property, or do some significant modifications to the building if it's the other property. One property has a building on it.

Okay. So that's, like I said, something we're pretty excited about. Also, just ticking off some things here, you probably know about this, but we are upgrading our treating operation in Singapore, so the Singapore facility can produce the full high-tech laminate product line, including things like polyimides, cyanate esters, BTs.

We're also -- I think I even put this in the press release -- looking at putting a PTFE lamination system in Singapore. That is for the RF/microwave market. Our opinion is Asia is a growth market for microwave PTFE, so we want to have actual manufacturing capability in Asia, rather than just distributing or reselling product that is made in North America or Europe.

Let's see. I think you know we're putting another (indiscernible) dispatch treater in Singapore. I think we have already covered that. And also, we have a revitalized R&D group and we're pretty excited -- at least I am pretty excited about that. That is really critical for our Company; this is an advanced material R&D group, which will do R&D for our whole product line.

And I think that really covers it in terms of any kind of perspective we can give you on the numbers for the quarter, the numbers going forward, and also some of the key things we're doing in the Company. So operator, can we take some questions now, please?

Absolutely. (OPERATOR INSTRUCTIONS) [Donald Murphy], a shareholder.

Yes, hello. My question is this -- a couple of questions. In reference to the cost of copper, now, it appears to me that everybody that is using copper would be subject to that same cost. And wouldn't the sale price increase take care of that?

Well, see, that is really a good question, because I don't know. All I can do is tell you what our intentions are. And I tried to lay that [out]. What I am raising is the possibility that some other companies in the supply chain may decide -- and I think it would be a big mistake if they did -- that they can absorb this price -- sorry -- absorb the cost and not adjust their prices on a theory that may be looking at market share or what ever.

The reason I think that would be a very deadly mistake is that -- two things. This is not a minor increase in cost, number one. And number two, at least as far as the commodity FR-4 part of the business is concerned -- and I'm talking about up and down the supply chain -- that is on a good day a breakeven business.

So I think it would be a very foolish mistake for other people in the industry, other companies in the industry to decide that they can absorb this and be reluctant to confront their ultimate customer, [what have you].

But, you know, we have seen some foolish things done previously in the electronic supply chain I'm talking about now, so you never know. My guess is that if there are companies that decide to try to absorb these costs, that they will be putting themselves in serious jeopardy with respect to their viability.

Okay, very good. Now the other question I have is in reference to accounting cost increase. Now, what you're saying, that accounting cost increase -- is that the bad news that caused the price of the stock to fall 10% today?

I don't know why people buy and trade stock or buy and sell. I don't have any idea about that. I just wanted our investors to understand what we're dealing with, that there is a significant increase that was in last year's number -- almost, except we had one additional expense which we put through Q1 from last year -- and it is our New World order. This is the new environment that public companies operate in.

I guess you all have to decide whether you think that money is worth it, whether you think it's being well spent, whether you think you're getting some value out of it. I just wanted you to know that it's part of our real cost, it is going through our P&L. You should know that. That is my job. It is up to all of you to decide whether you think that is a good idea or not. You all vote; you have senators; you have congressmen. And you'll make that decision on your own. If anybody wants my opinion, read the annual report letter. You know what my opinion is if you read it.

But the other thing I was commenting on, just -- and again, I don't want to speculate too much about why people are buying or selling stock -- is that I think what people probably haven't really focused on very much is that tax rate. And I will leave it at that. Because there is a big difference in last year's tax rate and the first-quarter tax rate.

Now we commented during the fourth-quarter conference call that our tax provision was going to be higher -- we thought it would be, anyway -- in this fiscal year. We didn't know by how much, so we didn't say, and there is no reason for us to speculate. We just weren't there yet. My feeling is, again, without speculating too much about why people buy or sell stock, that some people are not paying attention to the very big change in the tax provision.

I understand. Okay. Thank you very much.

Jiwon Lee, Sidoti.

Good morning. A few questions. First of all, you had a more than 10% sequential jump in sales in the first quarter. Where did you see the strength in sales in terms of markets or geography, anything you can comment?

I think Jim already mentioned that it was mostly in Asia and North America. Europe is not really very much of a growth market, especially for electronics products. So we saw pretty much across-the-board growth in Asia and North America, and it's mostly driven by the electronics business rather than the advanced composite product line. And as I think you know, our Company is quite telecom oriented in terms of end markets. This would be both wired stuff and wireless stuff, high-end computing. But I think we saw some across-the-board strength in the end markets.

And I just want to remind you, Jiwon, and others, that it is not unusual to see North America -- in the electronics product line, North America and Asia move together, because in many cases the end customers are the same, whether our product is being produced in Asia or North America.

Okay. And your sequential decline in product margin, I mean it is pretty substantial, 26%. Would you still attribute this mainly to the copper cost or was there any other mix shift that was going on during the quarter?

You just look at that million dollars and do your own math, and you should maybe let us know what you think about that. But the answer is, there's nothing else that I know of in the quarter in terms of any mix shift and in terms of any kind -- anything else that would affect our gross margins.

Okay. And how have the booking trends been in the second quarter?

I'm sorry?

How have the booking trends been in the second quarter? Anything you can comment on the trend that is similar or different than your first quarter?

Yes, I think we said already, Jim and did, or at least I did, that we have four weeks in the books, both sales and bookings in Q2.

Okay. I'm sorry -- I missed that.

And that the business levels are strong during those four weeks. And we also say we don't know if it will continue into the future, but we can report the facts, the four weeks we know about, and we're happy to tell you all what we know.

Okay. And as for taxes, should we expect -- I mean, I guess you said it in numerous ways -- but should we expect this kind of level, sort of kind of sustainable?

The tax line, as you know, is very, very hard to (multiple speakers) -- an awful lot of things that drive it. In the first quarter, of course, we no longer have -- in prior years we had net operating losses, which we don't have any more in the U.S.; we have used them up. So you are seeing that in the tax rate.

So it is hard for me to sit here and really kind of predict where we are going with it. And especially when you have to take into account the accounting literature and some of the other things that are out there, the rate bounces all over.

Okay.

I agree, of course, with Jim. I think that is a realistic rate. My opinion is, I don't think there's too much chance it will end up going higher. There are things which could bring it down during the year, and those are things that we don't know enough about yet (multiple speakers) in a kind of quantified way. But I just want you to be aware there are some things that we will need to look at in the second quarter.

I don't personally believe there's, like I said, anything we know of that would cause the rate to go much higher. It could come down. My opinion is that it's not going to be at 10 or 11%, not based upon our current operating situation and where the money is being made, and, like Jim said, to what extent we have tax benefits like NOLs.

Okay. I think you enjoy tax holidays in China right now, right?

Well, China is not really the issue. It is Singapore, where the main operation is. And we don't have a tax holiday in the sense that we don't pay taxes at all. But we have a preferred tax rate in Singapore, income tax rate in Singapore. And I think we even discussed that in our fourth quarter, because we had to adjust our tax provision for the whole year in the fourth quarter. And that is why we had that wacky -- or at least one of the reasons we had that wacky negative tax provision in the fourth quarter, to bring our year rate down to the rate that was appropriate.

So are a taxpayer in Singapore, but we have a long history of making an investment in Singapore and working with the government there in a proactive way. And the government in Singapore is, you know, very pro-business and has been very helpful to us and very supportive. So we do have a preferred tax situation and rate in Singapore at this time.

Okay, and a couple of housekeeping items. Your percentage of worldwide sales of FR-4 versus non FR-4, percentage of FiberCote sales. And if you can just quickly go through your top customer concentration for the quarter.

Let's cover those in sequence, and Jim will handle some; I will handle some. We have intentionally not included the high-performance percentage this quarter, and that is because we are looking at reclassifying some of the products and we are not sure they are in the right category. So we are going to do that; then we will get back to you.

And not only what we will do is give you the current; we'll also try to give you some perspective on any change on the history based upon a reclassification.

The trend is still continuing, though, toward high-performance. We are not really pushing FR-4 very much, and the high-performance product line is where our focus area is, where our development market is, and also where our marketing work is. So I don't think that trend is going to reverse, I think that high-performance percentage is going to get higher. FR-4 will get lower.

By the way, I think we've stopped even talking about the high Tg or high-temperature materials because it ended up being over 95%, so the discussion became less meaningful. I think -- we don't call it FiberCote anymore. We call the product line the Nelcote product line. I think it was about 8% of sales -- is that correct, Jim -- in Q1?

That's correct, Brian.

And as far as the customer, top customers, Jim, do you want to chime in on that?

Yes, sure. Our top three customers in the first quarter were Sanmina, Tyco and Multek. Of course, as you know, Multek is a division of Flextronics. Rounding out the top five were [Woos] and Tapco. Overall, in terms of percentages, our top five were 50.5% of sales; top 10, almost 73%; and top 20 is around 82% Q1.

Who was the top fifth customer, again? Sorry -- I missed that.

The fifth customer is Woos. So it is actually Tapco and then Woos.

Tapco and Woos. Tapco is a distributor in the U.S.

Oh, I see. Okay.

So they're not exactly a household name unless you work in the industry.

Okay. One final question for you. Asian sales percentage during the quarter?

Do you have that, Jim?

Yes, I will pull that in a second. I have it here.

Do you have another question while Jim is looking --?

That was my final question. Thank you so much.

Richard Kugele, Needham & Company.

Sorry about that. What we will do is we will get back to you -- I don't know if Jiwon is on live anymore -- but Jiwon, if you're still listening, we will give you that answer in a minute.

Okay. Rich, how are you doing?

Yes, actually, hi. It's Sean Hannan stepping in for Rich. Going back to the tax rate, I'm sorry to beat a dead horse -- you folks had indicated that this potentially could come down from the 23%. And directionally just trying to get some better clarification around, are we talking about still something in the range of the low 20% or perhaps even lower than that as potential?

I think we probably don't want to comment on that too much because we are really getting into the realm of the speculation and unknown. I would not rule out something that is less than 20%, though, for the year. We're not prepared to say it is definitely 20 -- 20% or higher. I think that is the best way to answer the question.

Okay. And as far as other components or other pieces of your supply, can you comment around pricing and lead times for what you're seeing there?

There is really nothing significant to talk about. It is kind of business as usual. We normally don't even talk about these events at all, because they are all mature costs -- they to go up and down, they adjust a little bit, and we deal with them in the ordinary course. We don't discuss normally these things regarding our relationships with our suppliers and certainly not our relationships with our customers, either, because we keep those private.

It's just in this case, this copper thing is just so huge and had such a big impact on our business. And also, we have already have these discussions with our customers, so they are not hearing about this in an inappropriate way. We felt that the investors really need to know what this is all about and what the impact is to our business.

But as far as anything else is concerned, I would not say there were any significant issues in terms of price or lead times.

Okay, thank you very much.

Do you have the answer --?

Yes, I have the answer for the Jiwon. Asian sales were 30% of total sales in the first quarter.

She is not live anymore, but hopefully Jiwon got that answer.

Okay, operator, do we have any other questions?

Yes, sir. John Lopez with OTA Asset Management.

Thanks very much for taking the question. I apologize, because I'm going to make you repeat a bunch of stuff. But can you just walk through specifically the dynamic you're describing in copper? And I guess a couple things that I am curious about. One is copper prices have obviously been going up for a while now. And I wanted to understand better the dynamic of the timing sort of behind all this coming to a head a little bit in terms of your business.

And the second thing is, could you give rough approximations as to what your input cost increase has been over the recent period, like maybe the last one or two quarters, and what you think you are able -- going forward, going to be able to recapture in terms of increased prices?

The timing is that we had a significant increase at the beginning of the first quarter and another one at the end of the first quarter. And so there is more impact for June, actually. That's why if you think about it, I said the impact for Q1 was about 1 million and the impact for June alone, is 1.3, I think. So that is the timing of it.

We are not going to get involved in our cost structure; that is something which we keep very confidential. And again, we always have to remind our investors that we are a public company and our competitors are generally not -- our understanding is that are competitors are very interested in our cost structure. I don't know if that is a matter of -- I won't make a smartass -- sorry about that -- comment about that as to why they are interested.

But nevertheless, that is something we keep confidential. We don't disclose the details of our cost structure. But you know, we have given you some pretty detailed impact numbers to think about, and I think some of our better analysts can probably back into what is going on here. But we would rather not be more specific.

Okay. If I can maybe just come at it a slightly different way. And I'm not going to try to make you give information you don't want to give. But your gross margin profile has obviously been -- has enhanced itself pretty materially over the last couple of quarters relative to sort of a longer-term history.

Can you give us some approximation as to how much of that is mix, which I know has been more favorable for you, versus input costs or improvement to your cost structure?

In terms of quantifying that answer, it is very difficult to do that, so we won't venture. By the way, I forgot to answer one part of your prior question. You were saying how much of this copper thing we're going to make go away. A very significant portion of it, okay? And that is something that won't be resolved until -- will be resolved this quarter.

So in terms of what has caused our gross margins to improve, I think you hit on the key factors there. Certainly, the product mix is a big, big, big deal. It's almost -- and let's just talk about our electronic product line for a minute here -- it's almost like we're in two different businesses.

The FR-4 business, on a good day, it's breakeven (technical difficulty) and that is about it. The higher tech product line, that is where the Company, as far as through the electronic product line is concerned, that is where the Company makes its money. So as the mix is more weighted toward higher and higher tech, which it has been an ongoing story for several years now, that has a -- that mix change is a very significant impact to our bottom line.

The other thing that has happened to the Company -- this problem started about five years ago when the world came to an end -- and what I am talking about is that the electronics market, which we were focused on exclusively at that time, or almost exclusively, just collapsed on us. And in the course of one quarter -- Q4 of '01, our run rate was over 500 million; Q1 of '02, I think it was down like 220, 230 million. We lost no marketshare; that was all the markets just collapsing. It never really recovered to those levels.

We realized we were really in a different world and a different game, and that as far as the electronics product line was concerned, we were really working in a mature industry. So we had to tighten up our disciplines. In the '90s, in the go-go days, everybody was brilliant, everybody could do whatever they want, and learn by mistakes -- empowerment were the buzzwords. We don't believe in that anymore. Our buzzword is don't make mistakes. Don't worry about -- you don't have a chance to learn by your mistakes -- don't make the mistakes.

And the controls we have on our business are quite significant. Controls we have on pricing for instance, are absolute. Very, very few people in this whole corporation have any say-so about pricing. And in the electronics industry, the reason is that if they did, it would go down, not up.

In terms of our cost structure, of hiring people, any kind of salary changes, any capital at all, down to $500, all of that is controlled very carefully so that we don't make mistakes and we make the right decisions. So if you look at those two things, you have a product line where the mix is higher and higher margin, and the business -- it's not just the cost -- it's the whole business is under tighter and tighter control. The results is what I would expect, frankly.

Right, okay. If I could just ask one last one. Thanks for all the detail on that. The one last one is since you have already communicated to your customers, could you just give us a loose range of what you would anticipate the price increase you will be able to pass on will be?

The FR-4 side of the equation, we don't intend to absorb any of it, but I won't comment on the percentages. And I am not even suggesting that that is how we have done this price change with our customers. I don't want to give details because again, that gets to the intimate relationships we have with each customer. But it's been made very clear to our customers, in FR-4, we're not intending to absorb any of this.

Okay. But it is safe to say the price increase would have to at least be equivalent to the increase in the price of your input on the copper side. Is that a reasonable assumption?

In terms of the FR-4 business, our intention is to not absorb any of the increase. So I think the answer is yes, but I just want to be clear as to what I am saying and what I am not saying.

Okay, all right. Great. Thanks for all the detail. I appreciate it.

(OPERATOR INSTRUCTIONS) [Alvin Hoffman] of Boenning & Scattergood.

Brian, did you comment on how many treaters you have running in Nelcote -- is it -- FiberCote?

Good. Well done, Alvin. We have two treaters that are operational at Nelcote, which is in Waterbury, Connecticut. We put another -- I think -- you know this -- we installed another treater at Nelcote. Around this time last year we were doing the installation. That machine has been running for probably about nine months at this point.

And isn't there a third one -- or another one that can go in from Tempe?

Yes, there is, Alvin. There is another treater. There were two treaters which were formerly in Tempe. They both are relocated to Waterbury. One was relocated and installed -- in other words, we built a tower and a room for it and we put it right in. The other treater is in storage in Waterbury. And we have some thoughts about what we might do with that; we have not made final decisions. And it's not clear that it will go in Waterbury; it may go elsewhere.

Oh, okay.

But probably targeted for advanced composite manufacturing rather than laminate manufacturing.

All right, thank you.

Shawn Severson, Raymond James.

Hi. This is actually David Nazaret in for Shawn. Just a quick question. You guys started off here talking about the impact of stock options due to the new regulations. Did you quantify that?

Yes, we did. It's 295,000 in Q1.

295 -- okay. And then on top of that, there is another 250 in accounting fees you guys mentioned as well, right? (multiple speakers) auditing and accounting?

Right. And the reason we're mentioning that item specifically is that is actually for last year. We ended up being underaccrued. We didn't know it at the time, but we have had additional discussions, suffice it to say, with some of these people doing the accounting work for us, and we apparently are underaccrued for last year. So that 250 is going through -- went through the P&L in Q1, but it was really related to the expenses for last year.

Okay. And in terms of the stock-based compensation, is that mostly, I presume, in SG&A? Is there like maybe a little bit in COGS or is it all SG&A?

It's in SG&A.

Okay.

Yes, those items are SG&A.

Okay, great. Thanks for your help.

[Victor Beske], shareholder.

Good morning, Brian.

Victor, long time no speak. How are you doing?

I guess -- I am still looking for a job. But I am a long-term investor. And I've got to say, Brian, you and the management team, I think you have done a real good job for the first quarter. To have sales up 13% and have the pretax profit up almost 65% doesn't reflect what is going on with the market price of the stock.

Last comment -- on the amount of cash that Park carries on its books. Maybe to adjust to reflect what a long-term investor is looking at, maybe the dividend yield has got to get somewhere between 1 and 2%. But I think you guys have done a heck of a job with reinventing the Company, so keep up the good work.

Victor, it's really great to hear from you. We haven't heard from you in a while. Are you still in the Midwest somewhere?

Right, still in central Wisconsin.

It's good to know you're still out there. Thanks for the comment about the dividends, and we review our dividend policy on an ongoing basis. We've also considered some special dividends in the past. And you know, obviously, dividends are a matter which is decided by the entire Board of Directors, so I am not in a position to comment (multiple speakers).

No, I understand.

But it is something that we review on an ongoing basis, and I appreciate your input, and I will pass that onto the other Board members next time we meet.

Thanks a lot, Brian. Take care. Good job.

[Martin Sultan].

Hi, Brian. I am a long-term, long-time investor.

We know who you are, Marty.

Okay. I am wondering, over the last quite a few quarters, the percentage of sales in the composite area has been kind of steady at 8%. And you have characterized conditions as pretty good in that area. I am wondering if it is the objective of the Company and whether there is some prospect for that percentage to rise to where it is more significant.

That is really a very good question and a very good point, so let's cover that a little bit. First of all, we're not really very happy with the work we have done in Waterbury. We're disappointed, frankly. And I don't know if you read press releases, but we brought some kind of heavier hitters in there to see if we can really get that facility more tuned up. But this is an important strategic initiative for the Company and its future, that we have reinvented ourselves into an advanced material company. And one of those advanced material product lines which is very key is the advanced composite product line for aerospace.

So what we're not going to do here is allow the whole Company's future to be dependent upon the Waterbury operation. So we're doing the best we can to upgrade the operation in Waterbury. But at the same time, we're taking other important initiatives, because, like I say, we're not going to bet the farm on the Waterbury operation and how successful we are there.

One initiative you know about is the initiative in Singapore. There are a number of others that -- stay tuned to your -- read your press releases and on conference calls, etc., that we probably will be talking about in the near future. We're putting a lot of energy and effort, development work into the advanced composite product line for aerospace. And it's in North America, it's in Europe, and it's definitely in Asia as well.

So we are hoping that we can see better performance out of our Waterbury operation, and we're doing the best we can with that. But like I said, we're disappointed. We're not happy with, really, the progress there. And at this point -- and this goes back several months now -- it became obvious that we could not bet the farm on how quickly the Waterbury operation -- we can upgrade the operation.

So we have good people there, they work very hard, they care, but I am not willing to bet the farm on how successful we are in Waterbury.

Okay, thanks.

The key thing is that we have a basis to expand off of. We have the technology, or at least we have some technology and we could use it as a launching pad to expand our business. So having the little FiberCote and now Nelcote operation in Waterbury gives us a major advantage.

Just one other comment I will make and I will probably leave it at that, is that if you look at our R&D operation, we put a lot of horsepower in there recently, a lot of pretty good formulators. Those people often come from the advanced composite industry, around the laminate industry. So we're looking to put some real, like I said, some real horsepower behind our ability to grow our advanced composite product line.

Thank you.

John Lopez.

Thanks so much. I'm sorry. There's just one more quick follow-up just to get some context. The sequential rate of growth that you guys posted this morning of 10% is the fastest you guys have grown in this calendar quarter in like more than five years. And I am just curious if you guys could -- I know you talked a little bit about your sort of comfort level with demand and things like that, but anything sort of unusual or disproportionately positive for you this quarter, to put that in some sort of historical context?

Really, absolutely not. This kind of happened by itself; it is really our existing customers that are more busy, more active. You know, the high-tech product continually gets qualified on more programs, but that is kind of an ongoing process. And there is nothing really special about it. We really are not out looking for more FR-4 business, so we are certainly not interested in taking on more marketshare there.

This story really is that our existing customer base has been just more robust and more busy, especially in the high-tech area, in the last few months, I guess.

And no -- just so I'm clear -- no benefit this quarter from any pricing actions?

That is correct.

Okay. But you did communicate the pricing action is to the customer base this quarter?

Yes. We are not going to comment on when we have had our private discussions with our customers. But believe me, by now, we have had our discussions.

Terrific. Okay. Thanks for the clarification. I appreciate it.

Mr. Shore, at this time, there are no further questions. I will turn the conference back over to you for any additional or closing remarks.

Okay, very good. Thank you, everybody, for spending almost an hour with us on our first quarter. Jim and I will be here the rest of the day, so anything else, please give us a call. And we will look forward to talking to you soon.

And the other thing I want to do is wish you all a very good summer. Take care. Goodbye.

That does conclude today's conference. We would like to thank you all for your participation and have a great day.