Park Aerospace Corp (PKE) 2011 Q1 法說會逐字稿

Welcome everyone and I will be your conference operator today. At this time I would like to welcome everyone to the Park Electrochemical Corp.'s first quarter 2011 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. Mr. Shore, you may begin your conference.

Thank you, operator. Good morning, everybody. This is Brian Shore. I have with me David Dahlquist, who's the Vice President and CFO of Park. As usual, we will start -- we'll begin with a few introductory remarks. We'll start with Dave, some financial perspective, I'll add a couple of remarks and then we'll go to Q&A. Go ahead, Dave.

Okay. 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 or 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 28, 2010, various factors that could affect future results. Those factors are found in item 1A and after item seven of that form 10-K. Any forward-looking statements we may make are subject to those factors.

I'd first like to summarize the financial information included in the news release for the first quarter ended May 30, 2010. Net sales for the 2011 fiscal year first quarter ended May 30, 2010, were $59.0 million compared to net sales of $36.7 million for the prior fiscal year's first quarter. Net earnings for the 2011 fiscal year first quarter were $9.9 million compared to net earnings of $3.1 million for the prior fiscal year's first quarter. Basic and diluted earnings per share for the 2011 fiscal year first quarter were $0.48 compared to basic and diluted earnings per share of $0.15 for the prior fiscal year's first quarter. Now I would like to review some of the significant items in our first quarter P&L.

The Company's sales as a percentage of total net sales worldwide were 45% in North America, 42% in Asia, and 13% in Europe for the fiscal year 2011 first quarter compared to 54%, 36% and 10%, respectively for the first quarter of the prior fiscal year. Sales of high temperature laminate and prepreg materials comprised 100% of total laminate and prepreg materials sales during both the first quarter of fiscal 2011 and the prior fiscal year's first quarter. Sales of Park's high performance non-FR-4 printed circuit materials, which are a subset of high temperature printed circuit materials, were 73% of total laminate and prepreg material sales in the first quarter of fiscal 2011 compared to 67% in the first quarter of the prior fiscal year.

Sales of Park's advanced composite materials and parts were $6.5 million in the first quarter of the 2011 fiscal year compared to $6.2 million for the first quarter of the prior fiscal year. Gross profit as a percentage of net sales for the first quarter of the fiscal 2011 year was 34.2% compared to 25.1% for the prior year first quarter. Selling general and administrative expenses as a percentage of net sales were 13.2% of net sales for the 2011 fiscal year first quarter compared to 16.1% for the prior year's comparable period.

Stock compensation expense was $289,000 for the 2011 first quarter compared to $288,000 for the prior year first quarter. Investment income for the first quarter ended May 30, 2010, was $76,000 or 0.1% of net sales compared to $688,000, or 1.8% of net sales for the first quarter of fiscal year 2010. The effective tax rate for the fiscal year 2011 first quarter was 20.9% compared to a 22.7% effective tax rate for the prior fiscal year first quarter. Earnings before income taxes were $12,477,000 or 21.1% of net sales for the fiscal year 2011 first quarter compared to $3,979,000 or 10.8% of net sales for the prior fiscal year first quarter.

Turning to Park's balance sheet, cash and marketable securities were $244.5 million at May 30, 2010, compared to $237.8 million on February 28, 2010, at the end of the prior fiscal year. We continue to invest available funds on a conservative basis in a highly rated fixed income securities and money market funds. Working capital was $270.7 million at the end of the 2011 first quarter compared to $261.0 million at the end of the prior fiscal year. Stockholders' equity was $326.2 million at May 30, 2010, compared to $316.1 million at the end of the prior fiscal year. Finally, stockholders' equity per share was $15.87 at May 30, 2010 compared to $15.40 at the end of the prior fiscal year.

Thanks, Dave. It's Brian again. I will just add a few comments. I don't think it'll be that long. So let's talk about gross margins. The gross margins are obviously up quarter-over-quarter but they are down a little bit from Q4 gross margins in Q4 were 35.1% and Q1 I think 34.2%. With the additional revenue in Q4 to Q1, we would expect the gross margins to actually have been higher than Q4. A couple of reasons -- one is, significant tooling [clause] for an aircraft OEM. Sometimes aircraft OEMs want the supplier to amortize these tooling costs over the life of the program. Sometimes they just want you to bill it up front. In that case, we basically bill it out at a cost. So the gross margin is basically zero on those revenues.

And also, there were differences in shut down credits in Q4 and Q1. Q4, of course, had Christmas as well as the Chinese New Year in Asia. And the way it works with shut down credits is that if we are busy and we're actually running through a shut down, a plant shut down, it actually drops a lot of dollars to the bottom line because basically what you're paying for is raw materials. All your other costs are covered by the shut down credit. This shut down credit is set up with an accrual on the assumption that the business -- the factories will not be operating on the day of the plant shut down.

Business was -- things were busy in Q1 as well. It's just that we didn't have as many plant shut down days in Q1. Just not as many holidays in Q1 as compared to Q4. Those two items would explain the gross margin situation to a larger extent, anyway. I've got to tell you again, unfortunately, we have another $1 million loss at -- in Kansas in Q1. So that situation continues. I think that was pretty much the operating situation in Q4. I know the analysts are always looking for perspective on the current quarter.

We have three weeks in the books of the second quarter at this point. We're in the second quarter and we have three weeks in the books, and the revenue run rate is consistent with the fourth quarter, almost identical, actually, to the revenue run rate of the fourth quarter. That's just the first three weeks. We always have to provide -- sorry. We're talking second quarter. Dave just corrected me. So let's start that again.

In the first three weeks of the second quarter, we are in the second quarter now. We're just reporting the first quarter. The revenue run rate is the same as the run rate in the first quarter. Thank you, Dave. In any event, now we covered that, I just want to always provide our usual caveat, which is that we're not forecasting or predicting anything. We're just telling you what we know, and that the question is always asked. It's a fair question. Interest income, you probably noticed that Q1-over-Q1, again, the interest -- very little interest at all. (inaudible) income in the current Q1 as compared to the prior year's Q1.

A couple of news items. We are in the process of planning the installation of another treater in Singapore. That's probably going to cost us about $2.5 million to $3.0 million. We already own the treater, the installation costs are quite expensive. And Singapore construction is very expensive. They are building casinos and everything like that, so the construction costs in Singapore are quite high. We are finishing the conversion of another treater in Singapore from what we call digital to PTFE. So we will have a second PTFE treater at Park -- the current PTFE treater, which we use in France.

And the PATC expansion, that's a Kansas expansion to make composite parts, that you know about. I think we had originally reported that maybe last August or September. We're not expecting it to be completed at the end of the calendar year. Originally, I think we said September. But during the planning process, we actually slowed it down to spend more time reviewing the layout, and it actually was a good thing because we get some input which caused us to change the layout of that expansion for the better. And for that reason, the completion is going to be more like at the end of the calendar year. And I'll tell you what, I think operator, that's all I have for now. So why don't we go to the Q&A section of the call?

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question is from Sean Hannan.

Yes, good morning.

Hi, Sean.

So in Kansas, part of the drag, I think, that you are seeing there was tied to some of the issues with the treaters. And so I was looking to see if I could get some updates around where your operations are in resolving the issue? And then separately, how you view the road map, perhaps, of transferring some production from elsewhere to Kansas and the extent that this will help margins over the course of the next one, two or three quarters if -- considering if current business levels were sustained?

Yes, it's been disappointing. Our performance has not been good. I don't think we're going to see any big improvement in the next one quarter -- the next quarter, or the second quarter, Sean. We've changed management in Kansas, we are still struggling with the treaters. We have a major modification which is supposed to be completed, actually, next week. And we are hopeful, but all we can do is hope and knock on wood here that, that will provide somewhat of a breakthrough in terms of being able to better utilize the solvent treaters -- the two identical solvent treaters. But it's been a struggle.

And our long-term perspective on Kansas hasn't changed. It's still -- for us, it's supposed to be a very, very important investment for Park for the future. But it's been a difficult year. So are we discouraged or dissuaded? Not really even a little bit, but it's been a difficult year. And we struggled. As I said, we just changed the management there. I think that was a good thing. I'm optimistic that we have the right person in Kansas now to solve and deal with the problems. And you know what? At the end of the day there are these equipment problems, Sean, and they are difficult. They are probably more difficult than a lot of people realize, and maybe right now we are getting our arms around them. I know I've said that before, so I wouldn't blame you for being skeptical.

But all I can do is tell you the truth as I feel it, as I see it, as I know it -- that is my current feeling. And the rest of the issues are just, I think, pretty straightforward blocking and tackling. Pretty straightforward operating issues and those are issues we should be able to deal with and fix. So just to summarize, a disappointing year in Kansas. But I do need to say, to make sure that we're providing a full perspective that as far as the long-term is concerned, we're not at all dissuaded or discouraged. We still have the same plans for Kansas, meaning that we plan that Kansas will be a very important location for Park for the future.

That's helpful, Brian. And then, separately, this might be a little bit more for Dave, but is it possible if we can get a little bit of color around, when I look at your SG&A levels, you are a little under $8 million a quarter. Is this sustainable? And can we maintain the dollars spent here and start getting to a point perhaps where we work your percentage back down to that 11%, 12% range if the revenue leverage comes through? Or conversely, what would prompt you to have people start thinking about the scenario where you would begin inching above that $8 million mark?

I move we both chime in on that. Yes, we are trending a little bit below that. So look. Obviously, if we see a change in top line, especially in the short-term, Sean, that's going to impact the percentage, right? The SG&A doesn't flex with the top line, not to a large extent anyway. In SG&A we'd trade-out so that would trend with shipments. But other than that, most of the SG&A costs aren't going to be affected by top line on a short-term basis. So obviously if top line is up, the percentage would go down. If the top line goes down, the percentage would go up.

As far as a fixed dollar amount, I don't see that coming down. It may even trend up a little bit, which we are adding some people capability as we go forward. We are recruiting for a couple of key positions. That can move the SG&A up a little bit, maybe inch it up. But on the other hand, I don't see it going up dramatically. We're not talking about adding a significant amount of SG&A costs.

Okay. That's helpful.

Did you want to add anything, or--?

No, I think you covered it pretty well, Brian. I think, other than the freight out component, it's relatively -- it's going to be -- the dollar value I think is going to be relatively flat until we start adding a few people down in SG&A and we are looking to beef up some capability there. We are -- I think that there will be some people costs added to that as we go forward.

It's in R&D and engineering in particular. We're not looking to add people in accounting or anything like that right now, at least I hope not. But engineering and R&D, in particular, we're looking to add some cost.

Okay, that's helpful. So this is not necessarily a near term add, but it's over the course of time.

We have been working on this for six months or so. It's not -- for us, one of the things that we struggle with always is finding the right people. We interview and interview and interview. We have a -- I don't know, maybe a peculiar culture, so it's difficult for us to find the right people. But we have been working on it. We have open requisitions that we call them for about three key people, and they would all be fairly high dollar people. We just brought in a new director of R&D. He actually came over from Singapore. He was our Director of Technology in Singapore. A very qualified guy, and very happy about him. We're looking to add maybe another a high level spot in R&D. Another polymer chemist in R&D. Maybe a person in medical marketing, maybe a person in technology as well.

That's helpful, Brian. And last question. Last quarter, Brian, you actually expressed a little bit of disappointment around where your lead times were. I just wanted to follow up and see where you feel if you've been successful in working some of those back down to comfortable levels?

Yes, good question. I think the answer is yes. I'm much happier. I think we struggled sometime during the fourth quarter. By the time we reported the fourth quarter, I think we were feeling a little bit better. But during the first quarter and through today, I think we're doing much better with our lead times and we're more comfortable as to where they are. So, the business -- you probably know the story, the uptick in business caught us off guard a little bit, so it took us a couple of months to adjust and get the lead times back down.

But I think we're pretty comfortable right now. Remember, also in the fourth quarter conference call, we indicated that in the first quarter at that point, revenues were up about 15%. So the revenue levels that we have seen in the first quarter, we have been operating at these levels for a little while now, so we are adjusted to those levels.

Okay. Very helpful. Thanks very much, Brian and Dave.

You have a good day.

You're welcome.

You too.

The next question is from Christian Schwab.

Great. Thank you for taking my question. I must have missed it earlier in the call. Did you break out the percentage of Sanmina revenue?

We can -- Dave can go through the top customers. Why don't you do that, Dave?

Sure. For the first quarter, we had actually four customers above 10% of sales. So those customers were Sanmina at 14.7%, ETM at 13.9%, Multek at 12.7%, and the ISU Petasys at 11.7%. The top five customers represented 58% of sales. Top ten customers represented 71% of sales, and the top 20 customers represented 79.6% -- 80% of sales.

Who is the fifth customer even though we don't give the percentage?

Sure. That would be [Woo's].

Woo's. Okay.

Woo's. Great. Is it -- Sanmina historically being historically your largest customers it looks like maybe they are on track to recover to levels that you haven't seen with them on a yearly basis since fiscal 2008. Is that fair? I know it's hard to get visibility from them but is that what we should be thinking that it recovers at least to the 2008 level and tries to ex back to 2007 or are things not at that level, given the macro environment yet?

Well, you put your finger on it when you talk about visibility, we don't have any visibility with any of our electronic customers anyway. Visibility with electronics is very, very difficult to have in any meaningful sense. I don't think it's really a Sanmina story, my feeling is it's an industry story. I think most of the key customers, electronic customers are up more or less by the same percentages. I don't think there's anything unusual about Sanmina, though. So, I -- and of course, I don't know what the future will hold, either in terms of the overall market or in terms of Sanmina and its plans and how they might impact us. We don't have that information.

Right, right. Well, a solid recovery there nonetheless. Great. I have no further questions. Thank you, sir.

Thank you.

Thank you for your question.

Your next question is from Jiwon Lee.

Good morning.

Good morning, Jiwon.

First off, I just wanted to ask you, Brian, about the pricing trends during the quarter, especially in conjunction with a couple (inaudible)--?

Electronics you're talking about. You know our policy. We have discussed this many times in these quarterly conference calls, which is that we adjust our selling prices based upon our raw material costs. Copper has been really a lot to manage. Because it's been bouncing around like crazy. I watch the financial news every morning, and I can't figure it out. Sometimes it trends with other metals, sometimes it doesn't. And its certainly above my pay grade to figure out where copper is going to go.

Our copper suppliers, which are Japanese mostly, they adjust their prices based upon the commodity prices. I think its a three month average of commodity prices. So often our prices are being adjusted behind the power curve. Because the current price fluctuates so much. We get an increase in the current market, the commodity price is down, and vice versa. We're always playing catch-up. I would say in the first quarter as compared to the fourth quarter, though, there was no meaningful impact. The impact, remember, is always going to be in that lag period, that catch-up period. Where our copper is up, and it takes us a month to actually adjust our selling prices, or our copper is down and the same impact. But Q4 to Q1, no meaningful impact.

Well, that's helpful. And it looks like tracking a little bit detail of your sales mix, in the May quarter, the proportion of FR-4s rose sequentially. And I wonder so far into the second quarter, whether you are seeing a similar mix and if the mix was similar to the May quarter, how should we be thinking about your gross margin remaining about mid-30% level?

Okay. So the high-performance percentage, I think Dave reported was 73% in Q1. And we don't really -- we've never discussed the percentages in a current quarter. We only have three weeks into the quarter, so I think it would be not very useful or practical. But let me just say that we don't see any change in the trend. The trend has been for the high-performance percentage to continue to increase over years. Now quarter-to-quarter, it's not going to always be that way, but over a longer period, I think the trend will continue. And quarter-over-quarter, sequentially, there could be anomalies or special things or some program that a customer is working on gets hot or doesn't get hot, and that could affect the quarter -- the sequential quarter-over-quarter comparisons. But we feel long term trends is pretty obvious and has been intact for a long time.

And Brian, the comments -- your thoughts on the gross margin side?

Yes. What about the gross margins?

Whether or not you feel that you can maintain that mid-30%.

Well, I think it's going to be same story. We're not looking at adding a lot of cost of goods sold, so it's really going to be a function of top line, especially on a short-term basis. So I think that our -- look, obviously raw material costs are going to vary with the top line. Many of the other costs, it's all labor and overhead, are not as variable as you might think. So it's going to be affected, especially short-term, by a change in the top line. So if the top line grows in the short-term, we should see our gross margin improvement. If the top line goes down short-term, we should see our gross margin getting worse. That's on a short-term basis.

And I guess I should have said it. I didn't really cover this, that there really is no big story in Q1 in terms of the top line growth as compared to Q4 except the global economy for the electronics industry. It's nothing about Park, nothing special that we did or didn't do. So to the extent the top line is up, we really don't take very much credit for it. It really is a function of the global economic condition on the electronics industry in Q1. So by the same token, whether our top line goes up or down in Q2 or Q3, is going to be very much a function of the global electronics economy. That's my opinion, anyway.

Okay, thanks. Helpful. And lastly, the cash on your balance sheet continues to grow. I just wanted to gather your thoughts on how you might spend some of the cash.

That story hasn't really changed, or the answer to that question hasn't really changed. We continue to do a lot of business development activity, a lot of M&A activity. We haven't done anything in terms of acquisitions in the last couple of years. We haven't found big uses of the funds in terms of acquisitions. But we're not dissuaded, and we haven't stopped looking. We are still hopeful that with the climate, especially with credit, that we will be in a position to consummate acquisitions that are at attractive prices to Park.

Okay. Well, that's all for me. Thank you.

Okay, Jiwon.

Your next question is from [Leonard Cooper].

Hi, Brian.

Hi, Len. How you doing today?

Okay. It's a hot day. I was wondering how much depreciation and that stuff occurred in the first quarter?

Well, maybe Dave can help us with that stuff.

You bet. We had depreciation and amortization expense of $1.7 million in the first quarter and a CapEx spend of $0.6 million in the same period.

Okay. I have a question. I don't know if you want to answer this publicly, but how and why are the treaters in Kansas different from all other Park treaters?

The technology is different. The most of the other Park treaters are used for electronics and there are similarities, but there are clear differences as well between an electronics type treater and treater used to make composites. We have two treaters in Waterbury which are our legacy treaters, and we didn't want to just copy those treaters because they are not the latest technology. So the attempt was -- the objective was to design and install treaters that would be the latest technology treaters for that product. Production of that product which we produce in Kansas.

So it's new product, new problems.

Okay, that's fair. I think that's a fair way to describe it.

Okay. Thank you.

Your next question is from Greg Weaver.

Good morning. A question on the revenue associated with the tooling pass through. How big was that, roughly?

We're not going to disclose that because we're getting into a level of detail that we normally don't want to get into. But this is something a little new for us, and it really relates to our aviation or aerospace activities. We've been doing development work with aerospace for quite a while, and now we're starting to get on some long-term programs where we actually have to do tooling on these programs for OEMs. These programs often can run for ten years. And it's possible that we may see more of this in the future.

Well, we hope to see more in the future. How its accounted for will be a different matter. As I said, some of the OEMs, actually would rather have us amortize a cost and put it into pricing over the course of the program as compared to this particular OEM, which wanted us to just invoice the tooling in what they call NRE, non-recurring engineering, up front.

Okay. I guess what I was really after anyway, as I understand why you might not want to answer that. Can you give us an apples to apples, I don't know we've -- the shut down credit and this tooling offset? If you normalize for both of those, can you give us a rough sense of what happened to margins sequentially -- gross margins?

Well, so is it bigger than a bread basket, that kind of question. The tooling is less than $1 million, and the impact of the shut down credits was less than $1 million. And I think that's as much resolution as we're going to be willing to provide. So let's say each was between $500,000 and $1 million.

Okay. So I can't do the math in my head that fast, but I guess one offset the other, so--?

No, both were negative. Because see -- what we're doing is comparing Q4 to Q1, okay? The Q4 gross margin was 35.1% The Q1 gross margin was 34.2%. So there actually were benefits in Q4 which were not realized in Q1. It's not that there was a negative in Q1. But when you compare Q4 to Q1, we had the benefits of the shut down credits where we work through them in Q4 because there were more holidays in Q4, like Christmas and Chinese New Year, right? In Q1 we're equally busy, but there just were not that many planned holidays in Q1. So that's the difference between Q4 and Q1. Now, the tooling is different because that actually was a Q1 item which we did not have in Q4.

Right. Thank you. That's helpful, so--?

So they don't offset. I just want to be clear. Both those numbers would be negative impacts in terms of the Q4 to Q1 gross margins.

Okay. So if we added the -- just to try to be consistent, then, so we added a $1 million of Park's, just to make up a number, onto the current quarter's -- just reported quarter gross profit that -- I don't know how to do the math here real-time, but that would put you at least flat through sequentially up gross margins?

I think there really isn't any other big change. The high performance percentage is another thing you would want to look at but that was really very similar to Q4. So that would not explain the difference. I just want to say again what we said just a minute ago is that each of those items is worth somewhere between $500,000 and $1 million.

Okay. Thank you.

Your next question is from Adam Peck.

Good morning. Thanks for taking my question. Brian, I guess I'm a little surprised that the Board didn't decide to pay a special dividend considering cash as a percent of current assets. It's currently in the 80% whereas probably for most of the last decade it was running in the 70%s. So is that really a function of the M&A opportunities you see out there in the market today?

I think that's partly the answer. And the other answer is it's just something that's considered, probably, a couple of times a year. And we'll probably look at it again next quarter. So we did pay a number of special dividends, as you are aware, but we never intended to set a pattern or an expectation. Every time we paid a dividend, we always would say that. And it was hard to believe because there seemed to be a pattern there.

So special dividends, that's a Board question. That's not for me to say independently. Its something that we consider really. Probably not every Board meeting, but maybe every other Board meeting, it's something that will probably be on the agenda for the next Board meeting. I really think it's inappropriate for me to speak for the Board. Because it's not my decision, it's the Board's decision.

Okay. And because the cash level is so high now, it wouldn't be out of the question that, that cash level could at a minimum generate at least $1 in earnings per share, correct?

I don't understand what you're saying.

If you were able to -- cash currently is generating maybe a $0.01 or $0.02 -- the return on those assets. If you were to go out in the market and invest in another business, the returns that you currently generate on the business today, if that was mapped over to any future potential M&A opportunities. The earnings power on that cash is certainly greater than the $0.01 or $0.02 that it's generating today, correct?

Oh, absolutely. I mean, I would hope so, anyway. We're basically making no money on our money. So it sits there as an important asset in terms of putting us in position to do acquisitions where credit -- in an environment where credit is tight. So not everybody can get money so easily through acquisitions. But in terms of generating any current returns, it's almost nil. So that bogey is not a difficult bogey to meet, and certainly any acquisition that we would do, the expectation would be that it would far exceed that bogey. Of course, long term the purpose of an acquisition is to generate more income, more bottom line for the shareholders. It has to be strategic, but consistent with that, the long-term objective of any acquisition would be to make more money for the owners of the Company.

All right. Thank you very much.

You're welcome.

(Operator Instructions) And you do have a question from [Tom Novia].

TTMI just merged with Meadville, and they're about twice the size now. I was wondering if there's more opportunity there. I heard TTM said they were sticking with their current suppliers.

Yes, Tom. It's Brian. Both TTM and Meadville were customers of Park before the merger. Although TTM was a much more significant customer then Meadville. Mostly, programs where our material was spec'ed in -- high-performance programs where our materials were spec'ed in. Meadville, being a Chinese company, also does some high-volume lower margin work. And we normally don't participate in that work. This question has been asked before, and of course we've spoken to people at TTM about it. And we just don't know to what extent this represents an opportunity or a risk to us. We haven't seen anything yet, though. There's no clear trend, or clear difference or clear pattern, especially from the -- I don't think we're going to see a difference on the TTM side, but the Meadville side, that would be the key question. But we haven't seen a difference.

Okay.

Okay?

That sounds good. Hopefully, it turns out.

Okay, thank you.

Thanks.

(Operator Instructions) There are no further questions from the phone line at this time.

Okay, operator. This is Brian again. Thank you all for listening in. Nice talking to you. Dave and I will be in the office for the rest of the day if you have any follow-up questions. Have a good summer and we will be in touch soon. Goodbye, now.

Thank you. This concludes today's teleconference. You may now disconnect.