Park Aerospace Corp (PKE) 2010 Q2 法說會逐字稿

Good morning. My name is Bonita and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. second-quarter 2010 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. At this time, I will turn today's call over to Mr. Brian Shore, President and Chief Executive Officer. And now, Mr. Shore, you may begin your conference.

Thank you, operator. This is Brian Shore. Good morning, everybody. And with me, as usual, Matt Farabaugh. We'll start with some comments from Matt, some financial commentary. I will chime in a little bit as well after Matt is done. Then we'll go right into questions and answers. Go ahead, Matt.

Thanks, Brian. 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 March 1, 2009 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.

I would first like to summarize the financial information included in the news release for the second quarter ended August 30, 2009. Net sales for the 2010 fiscal year's second quarter ended August 30, 2009 were $42.5 million compared to net sales of $55.6 million for the prior fiscal year's second quarter.

Park's sales for the first six months were $79.2 million compared to sales of $115.4 million for last year's first six months. Net earnings for the 2010 fiscal year's second quarter were $4.8 million compared to $4.9 million for the prior year's second quarter. Park's net earnings for the first six months were $7.8 million compared to net earnings of $12.5 million for last year's first six months.

Park reported basic and diluted earnings per share for the 2010 fiscal year's second quarter and first six months of $0.23 and $0.38 respectively compared to basic and diluted earnings per share of $0.24 and $0.61 for the prior year's second quarter and six-month period.

Now I'd like to briefly review some of the other significant items in our second-quarter P&L. Comparing the current fiscal year's second-quarter sales to last year's second-quarter sales, Park's sales volumes decreased 21% in North America, 36% in Europe and 23% in Asia. During the fiscal year 2010 second quarter, North American sales were 51% of total sales, European sales were 10% of total sales and Asian sales were 39% of total sales, all the same as last year's second quarter.

Sales of high-temperature laminate and prepreg materials were 100% of total laminate and prepreg sales during the second quarter of both fiscal year 2010 and fiscal year 2009. Sales of Park's high-performance non-FR-4 printed circuit materials, which are a subset of high-temperature printed circuit materials, were 64% of total laminate and prepreg material sales in the second quarter of fiscal year 2010, 58% in the second quarter of the prior fiscal year and 67% in the first quarter of the fiscal year 2010.

Sales of Park's advanced composite materials, parts and assemblies, were $6.8 million in the second quarter of fiscal year 2010, $6.6 million in the second quarter of the prior year, and $6.2 million in the first quarter of fiscal year 2010 and comprised 16% of total sales in the second quarter of fiscal year 2010, 12% in a second quarter of the prior year and 17% in the first quarter of fiscal year 2010.

The gross profit percentage in the second quarter of fiscal year 2010 was 25.7% compared to 19.7% for the prior year's second quarter. Selling, general and administrative expenses were 12.2% of net sales for the 2010 fiscal year's second quarter compared to 11.1% for the prior year's comparable period.

Investment income for the second quarter was $205,000 or 0.5% of net sales compared to $1.692 million or 3% of net sales for the second quarter of 2009. The decrease in investment income was primarily attributable to decreases in prevailing interest rates. As a result, pretax operating profit was 14% of net sales for the 2010 fiscal year's second quarter compared to 11.6% for the prior year's second quarter. The effective tax rate was 20.1% for the 2010 fiscal year's second quarter compared to an effective tax rate of 23.75% for the prior fiscal year's second quarter.

Turning to Park's balance sheet, cash and marketable securities were $233.7 million at August 30, 2009 compared to $225.3 million at the end of the prior fiscal year. Working capital was $244.8 million at the end of the 2010 second quarter compared to $239.6 million at the end of the prior fiscal year.

During the current year's first six months, the Company had capital expenditures of $1.3 million and depreciation expense of $3.4 million compared to capital expenditures of $8.1 million and depreciation expense of $3.9 million for the prior year's first six-month period.

Stockholders' equity was $300.2 million at August 30, 2009 compared to $295.7 million at the end of the prior fiscal year. Finally, stockholders' equity per share at August 30, 2009 was $14.62 per share compared to $14.45 per share at the end of the prior fiscal year.

Thank you, Matt. This is Brian Shore again. Okay, so what can we add here? Just maybe a few observations, some of which -- some of these items Matt already covered, but maybe give a little emphasis. Note the interest income is almost nil now. There is very little interest income. I think $200,000 in the second quarter. That compares to about $1.7 million in the prior year's second quarter, so that's a $1.5 million delta in terms of reduction of interest income. Let's look at it that way, and it also was even much less in Q1 when it was about $700,000, about a $500,000 Delta, a negative delta, between Q1 and Q2.

So there is a little bit of a copper impact in Q2 versus Q1. I know you sometimes are interested in that, about $250,000 negative. That should reverse in Q3, so Q3 actually will have that benefit of about $250,000 as compared to Q2, not Q1. So again from Q1 to Q2, about 250,000 negative. From Q2 to Q3, $250,000 positive.

Let's see, what else can we talk about? So we talked about interest income. PATC, that's our new plant in Kansas. We had a loss at the PATC location in Kansas in the second quarter of $850,000. I think we told you probably $700,000, so it's more than we expected. It was about $500,000 in the first quarter, and in Q3, probably about the same and of course, the issue there is we're just bringing that business online so we have all the costs in place and we're just ramping up the business and that's a pretty slow process because, of course, the market, the customers are in the aircraft industry, which is conservative.

A lot of what we're doing there is actually the transfer work from [Waterbury] to Kansas. It's not new qualifications, but even still, it's a plant qualification. It's slow and tedious. I know we reported in the past we had a lot of difficulty bringing the two solvent treaters online. Fortunately, we got that behind us and we're going through the qualification process with the solvent treaters now.

Okay. You probably noted the gross margin is still moving in the right direction. And other thing, SG&A, SG&A was a little low in Q2. We did some adjustments to some reserves. I think if you were looking for SG&A going forward, probably should think about the SG&A in Q1. I'm not talking about percentage; I'm talking absolute number. So go back to the SG&A member in Q1 if you want. Some kind of feeling as to what it might look like in Q3. All right?

Well, if you look at the top line quarter-to-quarter, Q2 to Q2, I guess it's like a $13 million reduction. Of course, last year's second quarter was before the real global economic downturn got into full force, still $55 million, $56 million of revenue in last year's second quarter; now were at $42.5 million. But the earnings from operations were actually $1 million higher than this year's Q2 as compared to last year's Q2 and, well, of course, the big story there is the restructurings, which were done last year. We closed a couple plants and we downsized others. You know about all that, but in light of the current second-quarter's results as compared to last year, I think it's pretty obvious that the impact of those restructurings.

All right, and a couple of new items that we reported recently and I just will mention them briefly here. I think we reported maybe three or four weeks ago that we're expanding our plant in Kansas. PATC stands for Park Aircraft Technologies Corp. We're expanding that plant in order to produce composite parts. Currently, the plant produces composite materials all for the aerospace industry. The plant, the existing plant, which was finished a few months ago, I guess, earlier this year, depending on how you define it finished because the plant itself was finished earlier this year, but the treaters have been on only a couple months. But in any event, that was at $15 million, 1-5, investment, about 52,000 square feet as I recall. The expansion is another $5 million investment and that's another 42,000, 43,000 square feet of manufacturing space. Again, mostly dedicated towards the production of composite parts.

So the concept here, which we feel pretty good about, is it's an integrated facility that will do materials and parts, as well as development work, and we think that's a good thing for the aircraft industry. We think we'll be able to bring more value to the aircraft and aerospace industry as a result of having all these capabilities under one roof.

And I think the timeline for that is about a year, so maybe by next August, that plant should be operational and when I say operational, that means, of course, we're going through the qualification procedures. That doesn't mean we have all the revenue yet. That means we are making samples for qualification, that kind of thing.

And the other news announcement, which is fairly recent, I think it might have even been last week, a new product called Mercurywave 9350. This is an RF microwave product, electronic product, that would be used for wireless infrastructure, base stations. That would go well with our other RF product, which is more for antennas. That's our N9000 productline, which is a PTFE-based productline, which is for antennas, principally. This is for the infrastructure that goes with the antennas, the 9350 product.

So we're feeling pretty optimistic about that. It's nice to have a clean sheet, brand-new product and we're just out there working with the OEMs and doing the communication work and the marketing work for that product now and so far, it's very early, but so far, the market reception seems to be pretty interesting. And, operator, I really don't have too much more to say by way of introductory comments, so why don't we go to the questions at this time?

Thank you. (Operator Instructions). Sean Hannan.

Yes, good morning. So just a quick follow-up, Brian and Matt, to the SG&A comments you had. So should we -- it sounds like we should assume the first quarter of your SG&A level to be going forward, is there a way if we can get an understanding of what the reserves were that you took in this quarter?

No, we're not going to get into that. These things are things we make judgments on all the time and there is nothing really unusual going on here. But I just wanted to highlight that to you in case you are interested in what the SG&A number might look going forward, especially in the third quarter and that's the only reason we made the comment. But I don't want to give you -- we don't want to give you the impression there is anything unusual going on here. We look at our reserves on an ongoing basis as we are required to do and judgments are made and the result is the comment I made about the SG&A for the third quarter looking more like the Q1 number.

Okay, well, that's fine. On demand, is there a way if we can get a sense of how that actually trended during the quarter, if there was any evidence of it being back-end-weighted, if it was smooth? And then what have you seen in the first few weeks of the current quarter?

Yes, that's a question I guess we get almost every quarter and I always have to warn people or caution them that we will tell you what we know and that's it and you could make your own judgments from there. The quarter was a little bit back-end-loaded if you will, a little bit stronger in August. I don't want to give you the impression it was dramatically stronger, but it seemed like August was stronger and that trend seems to be continuing. I shouldn't say seems to be. That trend is continuing in September as far as the three weeks of bookings of revenues are concerned. So I'm not commenting on what will happen next week or the week after, but the facts are, in the first three weeks of September, which we have in the books in terms of bookings of revenues, that trend continues.

That's fine. That's helpful. A lot of your materials for electronics goes into R&D efforts at your customers. Is there a way if you can maybe share your views on what your customers are seeing in the space today as the broader economy kind of feels out a recovery here? And do you get any sense as to whether there are any (inaudible) applications such as communications that may be trending differently from other segments?

I don't really have anything there to help you with. It seems like in Asia in particular the electronics industry is a little healthier in the last month or two. So -- but I really can't comment on industry -- electronic industry segments or where the development work is being done. I don't really -- it just seems to be a very difficult environment in which to offer meaningful comments and things like that because my own opinion is the world continues to be very nervous and what might be true today or this week may not be true next week. So maybe some of the OEMs are getting a little more confident and then that could erode or that could evaporate even in a week or two.

I think it's a pretty difficult environment in which to forecast and which to also kind of make any sense out of what's going on. The facts are what are reported and by the way, I would also comment that that improvement we were talking about in the electronics productline sales and bookings in August and September is more than not an Asian phenomenon.

Okay. Perhaps on the Advanced Composites side, you've had Nova now folded into your business for a while. And is there a way if you can maybe provide a little bit of color around how the addition of this business is really helping in the pace of getting your foot in the door for RFPs for the group overall and whether you're seeing any -- and then separately whether you're seeing any changing dynamics on the competitive front?

Yes, well, I think that's a good question and we've discussed that before, Matt and I have, I think. But yes, we bought the company, which used to be called Nova, I think in April last year, so we owned it for, what, a year and four or five months and we've seen a fairly meaningful impact from the acquisition of Nova and the addition of our composite parts productline. You're not going to see it really reflected in the bottom line because the aircraft industry is not in very good shape right now.

But we see it in terms of the programs that we're working on, the programs that we are bidding on, the programs that we have been qualified on. And we think that if it was not for the parts productline, the composite productline, that our penetration into the aircraft industry and aerospace industry, aircraft and space industries would have even been slower. So we think that was a good strategic decision. With the benefit of hindsight so far anyway, it seems to be -- it's a good thing.

Sean, I forgot, there was a second part to your question. What was it?

Sure, during this period, have you seen any changes in terms of competition?

Could you explain what you mean by that? I'm sorry, I don't really understand what you're getting at.

Sure. So as you're getting more active with the RFP process, is there anything that you're seeing either from competitors, large or small, the number of these competitors that are also competing or that are also working toward similar types of programs or even from a pricing standpoint for how they are working with your potential clients?

I don't really have any comment on that, not really. We have a -- I haven't noticed anything particularly different in terms of the patterns of the competition. The aircraft industry supply chain is quite a bit different than the electronics industry, which is dominated by large companies. There are a lot of small companies in the aircraft industry supply chain that have specialties or they serve a local market like you'd find small companies in, for example, the Wichita area that are feeding into the Wichita market. They may be less well-capitalized. They may be, some of them anyway, not in a position to invest.

We are not aware of any companies such as Park that are really investing in the aircraft or aerospace industry at this time. I'm not saying they're not out there, but we are pretty -- fairly unusual, let's say, in the Wichita area to be building plants and infrastructure, hiring people, bringing on engineers, bringing on design capabilities, things like that. I don't see that happening. I'm not saying it's not happening, I'm just not aware of it happening and the comments we received from the local community are very much consistent with what I just said.

That's helpful, and then lastly, is it possible if you can share the percentages for your top 20, 10 and 5 customers and who those top five were?

I think Matt probably has that information, right?

Yes. For the quarter, our top customers were Sanmina, TTM, ISU Petasys, Tapco and [Maltek]. The top five customers made up 49% of our sales for the quarter. The top 10 made about up 69% and the top 20 made up about 79%.

Any customers over 10%?

Yes, we had, for the quarter, there were three customers that were over 10% -- Sanmina, TTM and ISU. Sanmina was 13.1%, TTM was 10.5% and ISU Petasys was 10.3%.

Yes, ISU Petasys, for those not familiar, that's a Korean company. That's a very, very important and good customer of ours for many, many years.

Great. Thank you very much.

Jiwon Lee.

Good morning. Thanks for taking my questions.

Okay. Hi, Jiwon. Good morning.

Hi, Brian. So you commented that, during the quarter, and obviously your business with ISU Petasys during the quarter kind of confirms that a lot of the upside during the quarter that you saw came from Asia. I'm trying to dig down the North American networking, as well as the wireless market, as well as some commentary on the defense side of the business?

Defense is different. That seems to be staying in North America and that seems to be fairly good. We have a couple of -- this is for electronics. Maybe I should comment about aerospace as well. We have a couple important electronic defense -- electronic customers. They seem to be doing well. In the composite productline, also same kind of story. Seems to be some good activity there and also I think we've made some good inroads.

If you look at our absolute top line with the composite productline, even though quarter-to-quarter, second quarter-over-second quarter, our top line is off generally. I believe that the composite productline, meaning the parts and materials, is not off on an absolute number, not just a percentage number basis, and that is because of the additional penetration, I suspect, because I've got to tell you, the aerospace industry is pretty distressed right now and you'll probably read about all the layoffs and downsizings and everything else. So that's probably because of the work we've done. The electronics is really more a function of the industry health.

Jiwon, I think outside of military though, the electronics industry in terms of manufacturing, I'm not talking about design, in terms of manufacturing, is really more and more an Asian story to the point where the non-Asian story is becoming somewhat of a footnote. Look, I guess tell you my opinion, but like for wireless for instance, yes, that's really very, very important in Asia. Something that -- the company doing the design work may still be in North America and Europe, but not only is the manufacturing being done in Asia, the market is in Asia -- China, India, big, bug market for wireless, of course.

If I hear you correctly, North American defense, fairly steady at least for you, but a lot of the commercial businesses, network and wireless, Asia was really the key upside?

Yes, I think that's a fair statement.

Okay, and that's how your September quarter is tracking similarly?

I think that's actually a correct statement as well and again, the caveat, we've got three weeks of September, but what you said is factually correct.

Okay, and then I've noticed the (inaudible) laminate pricing certainly out of Asia during the summer months was rising. Did you comment how that is hurting or benefiting your businesses?

I'm not -- yes, I have really nothing to say about that, the competitors. We're really in almost a different business than many of our competitors. We are a specialty company and most of the competitors in the electronics materials, the copper-plated laminate area, are, I think, more commodity-oriented. So the pricing is almost traded as a -- it's almost like pork bellies. We just don't do that. We never have, we're not interested in that kind of market and we just haven't run our business that way. But I really don't have much to comment, much to say of any value in terms of what the competitors have been doing in Asia the last couple of months in terms of pricing.

But Brian, copper price has been rising, so how have you been responding to those material increase in your (inaudible)?

Oh, if you're asking what we are doing -- sorry. If you're asking what we are doing, Jiwon, we're doing what we always do, which we -- this is something -- a policy we have had and we've been -- we've explained this publicly for years that we pass these changes on in the form of price changes. Normally, there is a lag and that's why, remember, we reported in the second quarter there was a negative of, I think, $250,000 because the lag. We will get the increase and we will take a little while to let our customers get adjusted to the change in price before we just put it through. Sometimes I feel like our suppliers are not so -- not so high-minded as we are in that regard in terms of how much time we are given, but that's what we do, anyway.

Okay. And then did you give any guidance on how that copper foil pricing might affect your third-quarter outlook?

Well, I think we said that based upon what we know so far, it's a plus of Q2 to Q3 of about $250,000 and Jiwon, that's not a function of what we're forecasting in terms of copper -- copper clad -- I'm sorry -- copper foil price changes, cost changes, that's based upon the lag effect which -- so what happened is that our price adjustments to our customers went into effect really the beginning of this quarter, even though the cost impact was the beginning of last quarter.

Now if copper foil prices change again in this quarter, that could affect this quarter and coming quarters as well, but I really don't have visibility on that. We do track the copper commodity prices. That's something you can track every day and we do track that. I watch that with oil and everything else, but that doesn't necessarily translate on a straight-line basis and also on an immediate basis to the copper foil prices.

That's very helpful and clear, so thank you.

It is? I'm confused by myself, so --.

And onto the composite side, when do you plan to finish this doubling capacity? And also give us some colors as to the makeup of your current customers for composite materials and components, as well as the kind of targets that you are kind of aiming?

The current customers are the target customers. It took us about 3.5 years of Herculean effort to become -- get in the game, to become somebody rather than a nobody. So we are pretty much there. The future customers are the customers we're working with now and those are the aerospace companies that you would know of. We haven't focused very much on Boeing and Airbus. That's not in our strategy, but we've done a lot of work with the military contractors. You know the names of the big ones, as well as the other civilian aircraft companies. And we're working with all of them. They're all on our list and we've made pretty meaningful inroads with just about every one of them. I can't think of a big exception there, actually.

With Boeing and Airbus, it's more of a technology sale. We're not looking to be a commodity supplier to Boeing and Airbus. So for instance, we had those patented struts and that's something that we have sold to Boeing in the past and that's something where we have unique technology and that's really more what we would be interested in doing with Boeing or Airbus. We are not interested in becoming a volume, what I would call, commodity supplier to a Boeing or Airbus. It's just not our focus right now. Was there another part to that question, Jiwon?

Oh, the completion of the doubling capacity in Kansas?

Oh, okay. It's not really a doubling of capacity. It's a -- because you're talking about the operating floor space, it's not capacity, it's a totally different kind of product capability. The existing plant produces the materials, which are sometimes called prepregs. These are used to make the composite parts. These are used to put in molds to make or tools to make composite parts in ovens or autoclaves.

What the expansion relates to is it's similar to the activity currently conducted in Washington state. Washington, which is actually making the parts themselves, so taking these prepreg materials and actually making the parts themselves. We're also working on doing design work in Kansas and not only just doing what's called build-to-print. In other words, you take the design that the OEM gives you and just follow the design completely, but also do design work ourselves where the OEM will give us some kind of general guidance on what they are interested, but they say, look, we'd like you to design this part for us and we're working in that area as well. That's something really important to us.

Would we expect that to be done before year-end?

Well, that's not an equipment question. That's a capability question. We hired a gentleman recently that certainly has that capability. I think his title is Vice President of Engineering for our facility in Kansas. He certainly has done that kind of work in the past and we're also working with outside contractors and yes, that's something we are focused on. We have been for six, eight months now. We don't want to just build print work, we want to actually do our own design work and I've mentioned as well that we are looking to even develop our own productline through supplemental type certificates. We haven't really done very much with that except we're just starting to strategically think about how we would do that and where we would do that.

Great. I'll hop back into the queue for now. Thank you.

(Operator Instructions). Mr. Shore, there are no further questions.

Okay, then. All right, well thanks, everybody, for dialing in and listening and Matt and I will be here the rest of the day. If you have any questions, give us a call and we look forward to talking to you soon. Have a good day. Good-bye, everybody.

And this concludes today's conference call. Thank you for participating. You may now disconnect.