Park Aerospace Corp (PKE) 2012 Q1 法說會逐字稿

Good morning. My name is Derek and I will be your conference operator for today. At this time I would like to welcome everyone to the Park Electrochemical Corporation first-quarter fiscal year 2012 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)

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. This is Brian Shore. Good morning, everybody, and welcome to our first-quarter conference call. I have with me, of course, Dave Dahlquist, who is our VP and CFO.

Dave and I will start with some introductory remarks. Then we will go to the Q&A, of course. And I want to remind you that Dave's introductory remarks are actually posted on our website. There is a lot of detail in Dave's commentary and you might want to check the website for some of the detailed information. Go ahead, Dave.

Okay. Good morning, everyone. Certain statements we may make doing the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations.

We have set forth in our most recent annual report on Form 10-K for the fiscal year ended February 27, 2011, 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 first quarter ended May 29, 2011. Net sales for the 2012 fiscal year first quarter ended May 29, 2011, were $51.8 million compared to net sales of $59 million for the prior fiscal year's first quarter.

Net earnings for the 2012 fiscal year first quarter were $7.2 million, compared to net earnings of $9.9 million for the prior fiscal year's first quarter. Basic and diluted earnings per share for the 2012 fiscal year first quarter were $0.35, compared to basic and diluted earnings per share of $0.48 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 sales worldwide were 42% in North America, 47% in Asia, and 11% in Europe for the fiscal year 2012 first quarter, compared to 45%, 42%, and 13%, respectively, for the first quarter of the prior fiscal year. Sales of Park's high performance, non-FR-4, printed circuit materials were 78% of total laminate and prepreg material sales in the first quarter of fiscal 2012 compared to 73% in the first quarter of the prior fiscal year.

Sales of Park's advanced composite materials and parts were $5.7 million in the first quarter of the 2012 fiscal year compared to $6.5 million in the first quarter of the prior fiscal year. The gross profit as a percentage of net sales for the first quarter of fiscal 2012 was 30.8% compared to 34.2% for the prior year first quarter.

Selling, general, and administrative expenses as percentages of net sales were 14.6% for the 2012 fiscal year first quarter compared to 13.2% for the prior year's comparable period. Investment income for the first quarter ended May 29, 2011, was $221,000, or 0.5% of net sales, compared to $76,000, or 0.1% of net sales, for the first quarter of fiscal year 2011.

The effective tax rate for the fiscal year 2012 first quarter was 16.2% compared to a 20.9% effective tax rate for the prior fiscal year first quarter. Earnings before income taxes were $8.64 million, or 16.7% of net sales, for the fiscal year 2012 first quarter compared to $12.477 million, or 21.1% of net sales, for the prior fiscal year first quarter.

Turning to Park's balance sheet, cash and marketable securities were $256 million at May 29, 2011, compared to $250.4 million at February 27, 2011, 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 $276 million at the end of the 2012 first quarter, compared to $271.7 million at the end of the prior fiscal year. During the 2012 fiscal year first quarter the Company had capital expenditures of $1.5 million and depreciation expense of $1.4 million, compared to capital expenditures of $0.6 million and depreciation expense of $1.7 million for the prior fiscal year's first quarter.

Stockholders' equity was $331.2 million at May 29, 2011, compared to $325.3 million at the end of the prior fiscal year. Finally, shareholders' equity -- stockholders' equity per share was $15.98 at May 29, 2011, compared to $15.77 at the end of the prior fiscal year.

Thanks a lot, Dave. It's Brian Shore again. Always nice, with the first quarter at least, we don't have a lot of multiple comparisons. Why don't I see if I can help out a little bit as well with a little bit of more explanation of our first-quarter numbers?

The comparison to the prior year's fourth quarter -- first quarter rather is not that complicated because the revenues are much less, but I think there is a more interesting comparison to last year's fourth quarter. In other words, the fourth quarter of 2011 compared to this year's first quarter of 2012.

Why is that? Because the revenues are almost the same, $51-point-something-million, but you have to ask, well, why is the profit from operations so different in the fourth quarter -- the first quarter? It's about $2 million less than the prior year's fourth quarter, the prior three months. Do you see that? About the same revenues but almost $2 million less of profit from operations.

Well, let's talk about that because there are some big factors here that will give you the $2 million if you add it up.

First of all, remember that we did donate $250,000 to the Japan relief fund in the first quarter. That was a first-quarter item which is not going to continue. There was a 340 -- about $350,000 negative in the first quarter as compared to the fourth quarter related to copper. Remember our policy with copper is we do pass through the change of cost, but there is a lag effect. There was a $340,000 impact, negative impact in the first quarter as compared to the fourth quarter.

There also was a $900,000 negative impact related to our US Aerospace activities as compared to the fourth quarter. What we are doing now is not talking only about Kansas. We are talking about Kansas, Connecticut, and a little bit about Washington, but it's mostly a Kansas/Connecticut story.

Why is that? From the Kansas perspective, we are ramping up costs to bring the business over from Connecticut, so we are bringing on people. We also have a lot of qualification costs, some of which are inside costs and much of which is actually outside testing costs. These are one-time items, but they are significant.

The Waterbury operation is also negatively impacted as we bring business over from Waterbury to Kansas. The revenues from Waterbury are less and that is obviously affecting their bottom line.

The same story is in place in Washington, although to a much lesser extent because it's smaller. So this year is going to be kind of a tough year because we are transitioning everything. As you know, our plan is to finish the transition by the end of the year and then we will have more of a normalized P&L.

We have a lot of duplicate costs during this timeframe, and also we have a lot of additional costs for qualification work doing re-sites, for instance, from Waterbury to Kansas. Those are one-time costs but they are very expensive to -- even re-site a qualification of Aerospace purposes could be very expensive. It's, yes, quite expensive.

So anyway, $900,000 worse in the US Aerospace activities in the first quarter as compared to the prior fourth quarter. All right, so that is three items.

The last one, first quarter as compared to the fourth quarter, is something we call shutdown credits. In the fourth quarter we had the Christmas holidays and also the Lunar New Year in Asia where we accrue shutdown credits during the year, and those credits are used to offset the planned holidays.

Now when business is a little bit stronger though we tend to work through those holidays, so it's kind of a double whammy in a positive sense. We are accruing for the fixed costs that are going to be incurred during the year; that has always been our practice.

If you look at the first quarter versus fourth quarter, you have the same revenue but almost no shutdown credits in the first quarter. So that same revenue number is actually a little bit deceptive, isn't it? Because you really only work maybe 11.5 or 11 weeks in the fourth quarter, at least we plan to, and we deliver the same top line. In the first quarter we worked a full 13 weeks.

You also can look at it from the perspective of manufacturing efficiency if you want to. In other words, we delivered the same top line with many fewer planned working days.

So if you add all that up -- $250,000 for Japan, $350,000 for copper, $900,000 for US Aerospace, about $600,000 for shutdown -- you get to that $2 million number, more or less.

There are a number of other things that kind of offset each other, noise level things. Like Dave mentioned, we had more high performance that is a positive; we had more freight costs that is a negative. So they kind of cancel each other out.

Well, that is how you get to the difference in the profit from operations or pretax profit, if you want, because the interest income is not significant between the fourth quarter and the first quarter with basically the same revenues. I hope that is not too complicated, but we wanted you to get some better insight into why the top line -- why the bottom line doesn't seem to fit with the top line. Again, fourth quarter versus first quarter.

So that is that explanation. I know you are interested in how things are going in Q2, but before we talk about that we should really go back and talk about Q1 a little bit more. Because the big story in Q1 was May; it was a very bad month.

I think in -- when we did our fourth-quarter conference call we had March and April on the books and we said actually it was trending pretty strongly, at little bit above even fourth quarter maybe. And that is, of course, true. But May was a pretty bad month -- it just kind of fell off a cliff a little bit -- and that is why we ended up where we are.

So we had a good -- a good March, a good April, and not a good May. If you ask me to explain that, my only explanation would be the global economy.

I am talking top line here only. I am not even getting to the bottom-line stuff. Just top line, simple straightforward top line.

Now that perspective -- we got four weeks in the books for the second quarter now so let's talk about the second quarter. I know you are always interested. Our policy is to tell you what we know and not speculate about what we don't know, so we are not speculating about what will happen for the second quarter or thereafter. But we can tell you I thought the first four weeks of this quarter.

It seems like things have recovered for some reason. The bookings and the revenues -- the bookings are actually above the level of Q1, the average revenues of Q1. And the revenues are about at the average revenues of Q1. So obviously that would indicate that it's better than the month.

In the month of June, which is our Q2 quarter so far, the first four weeks of June is better than May. What does that mean? We don't know.

Our experience with our fourth-quarter conference call is a good reminder as to why we don't speculate. Because after the first two months of the first-quarter report, yes, things are better, which they were, but then in May that kind of fell apart. And that is why we don't speculate about the future, because we really would be just guessing.

We don't have good visibility, particularly with electronics. We just never have had that kind of visibility. I think we are plugged in as much as we possibly could be, but notwithstanding that the electronics industry in particular really can turn on a dime with very little ability to anticipate.

So hopefully that helps a little bit. Hopefully, I haven't done the opposite, which is to confuse you more. But I did want to share -- we did want to share some of the background with you on the explanation of the bottom line in the first quarter and also where we are so far in the second quarter, meaning of the first four weeks of the second quarter.

Let's go on to a couple other things. Just a couple of comments about the second quarter. I think we already commented that Aerospace, even in the fourth-quarter conference call, and again a few minutes ago, Aerospace is going to be a difficult year this year.

In the second quarter we expect it will be worse than the first quarter, worse in the first quarter by about another $0.5 million bottom line. That is not annualized, that is for the quarter, the second quarter. That is because some of the costs that we had ramped up in the first quarter came on toward the end of the quarter and now they are fully impacted in the second quarter.

These things are actually consistent with our plan. I don't want to give you the impression these things are not expected, but you should be aware of these things. So from a bottom-line perspective, not going to be a good year for US Aerospace for the reasons we explained.

All right, so, let's see, what else do we got to talk about? Let's talk about the Kansas expansion for a minute. Remember we are expanding to Kansas plant to make composite parts and structures for Aerospace. That seems to be coming along nicely, according to plan.

The autoclave is installed, certified, operating; the oven, the two-zone oven, is operating. We have the laser systems in, the cutting tables in, and the five-axis routers on the way. So we are getting there.

I think that everything will be delivered -- most of the equipment is already delivered, installed, and operational, but the rest of the key equipment will be delivered in July and should be operational in August. So at that point we are going to start ramping up the parts activity and transition some of the work that is previously done -- was previously done in Washington, Lynnwood, Washington, to Kansas.

So turning over to -- going over to Singapore. Remember we are doing some capital investment, capital projects at Singapore. We are adding another new treater to that project is just about complete. I think that treater will be operational in another month or two, and we are just doing some of the fine-tuning, getting the bugs out, that kind of stuff.

We also have a project to convert one of our treaters, which has been previously used for digital product, for PTFE product, and that is also in the final stages of completion. That should be done in a couple of months. There is one other product that, PTFE type product, that will take a few more months to qualify and turn around. But that is going up more or less according to plan.

So, let's see, Japan. People ask us about Japan every now and then thinking, oh, we are out of the woods with Japan. I hate to tell you that is not the case at all.

I think Dave and a couple other senior executives will be back in Japan in a couple of weeks. We spent an enormous amount of time in Japan sorting through the difficulties. I think we have our arms around the difficulties, but we have our customers on allocation and will be on allocation for quite a while for one of our most -- for one of our very key products.

And also one of our highest margin products where there is a raw material issue, where we are back up and running but the market has, I guess, out-stripped the supply capacity of our supply chain in Japan. And that -- we don't expect more capacity to come online until later this year, maybe October/November. So (inaudible) there so we are not out of the woods at all.

I know Japan is not in the headlines anymore as it was every day for a while after the earthquake, but it's still in the headlines for us. It's still a lot of work and your management is still working overtime on the Japan problem.

So I think what we will do is leave it at that for the introductory comments. Operator, can we please go to our questions?

(Operator Instructions) Sean Hannan, Needham & Company.

Yes, good afternoon.

Hello, Sean.

Brian, thanks. You have provided little bit of an update around some of the new products under development. Was looking to see if there might be a chance if you can elaborate a little bit more.

Is there a sense that you can help to provide to us around how to think about the new products that you may be bringing to market? Or really from a market positioning standpoint, is this something that or are these something that will allow you to address and have more of a new product category, or is it just simply a refresh of what you have already talked about in terms of high speed/low loss, maybe with some low lower-cost materials on your end?

So, I am not sure what you mean by the last question. An R&D update, we just had a major review last week. We have two or three key electronic products, I think that is who you are really talking about, not Aerospace projects.

That is right.

I mean, we are knocking on wood on these. We are really at the very tail-end of the development projects and the project should be -- well, basically they are complete and we are just going through some outside testing that is required in order to introduce a product for commercial purposes.

So we are pretty -- I don't like using the word excited, but let's say feeling pretty good about it. Those two projects in particular are very -- as far as I am concerned, could be very important, critical projects and ultimately product for Park for -- that is successful for many years to come.

I realize that you probably don't want to dive too much into exactly what those products are. But I am just trying to get a sense is this really more a matter of a refresh in order to kind of continue on the technology trend for the direction and path of applications that you are supplying into today, or does this allow you to get into an adjacency for new types of electronic applications?

We didn't exactly consider the two -- the projects that we are talking about refresh projects, so I don't really know how to answer that question. I guess we will have to see.

You are right, I am reluctant, we are reluctant to discuss these things in any more detail for reasons that hopefully are obvious. We have competitors out there that, of course, would love to know what we are doing, as we would like to know what they are doing. So I think we will just leave it at that for now.

Okay. And so I think that we have heard elements of this, but I was hoping perhaps we can kind of aggregate an answer around this, and maybe this is a little bit more for David.

SG&A stepped up pretty materially quarter to quarter. Just looking to get a better understanding of the breakdown of how that stepped up, why that stepped up, and to what extent we should continue to expect that level of spending going forward?

Okay, Dave, go ahead.

Sure. Well, there is a couple different pieces to that. I think from a go-forward standpoint we talked about in the Aerospace business, the domestic Aerospace business, there is more cost that is going to be flowing through there this year. We are carrying kind of dual costs in some cases, as we have the capabilities at more than one site, the businesses and the process of being moved from one site to the other.

Is -- we are talking about from an SG&A perspective or are we talking about total cost?

It's total cost, but there is a piece of it that is related to SG&A. Certainly in terms of carrying costs in both locations at the same time.

Some of the costs associated with, for example, some of the re-siting activity that is going to fall into your selling variable, for example. Not to get too far into the weeds here, but some of that stuff is going to hit selling variable as opposed to just hitting cost of sales.

I don't think I would give guidance that the costs are going to go down in the near term in SG&A. Difficult to say exactly where we are going to end up and it's not really our pattern to put a number out there, but I would not be thinking that those costs are going to come down.

The one thing that was a one-time item is the Japan relief donation, which is a first-quarter item.

Okay. All right, that is all I have for the moment. Thanks very much.

You are welcome.

Jiwon Lee, Sidoti & Company.

Thanks and good morning.

Good morning.

Just wanted to kind of go back to, Brian, your comment about the May slowdown and how the bookings have picked up above average so far in June.

Could you give us a little more color as where did you see the slowdown in May in terms of geography or end markets? And subsequently, when the bookings picked up in June were they sort of the same area that picked up or different areas?

It's interesting, because normally -- this is a little surprising to us, but the business really fell off in North America, not so much in Asia. The reason I say it's surprising is that the customer in North America and Asia is supplying to the same markets, the same big OEMs, big electronic OEMs. But it was a little surprising to see that.

And I think the recovery is probably more North America as a result. So bookings, like I said, are actually a little ahead of the first-quarter average in those four weeks of June -- of the second quarter.

Okay, that is helpful. But within North America could you point to some relevant end-markets, whether that was networking or the telecom or perhaps related to defense or aerospace?

I don't think it was defense and aerospace; it was more commercial electronics. So why don't we leave it at that? Break it down between networking and Internet infrastructure, storage; I don't think we are in a position to do that.

Okay.

So let's say commercial electronics, okay?

Okay. And then how should we be thinking about your margin or the pricing impact of the copper costs in the second quarter?

That negative should go away. It should neutralize in the second quarter because of the -- it's kind of like cross currents of things going up and down and stuff like that. But that big negative should be reduced to pretty much a neutral number in the second quarter.

I think it was about $350,000 negative. That was a fourth quarter -- sorry, the first quarter compared to the fourth quarter, right? The prior quarter. When we talk about copper we just talk about the prior quarter, not the prior year's quarter. So in the second quarter that negative will go away.

Okay. And in the past you have, I think, given us some indication about perhaps the lost revenue as a result of the raw materials shortage. Is there some understanding about what that might be at the present time?

Well, we really don't know how to quantify that. It's very difficult. It's like a Catch-22. If you have the stuff, everybody is, oh, we will order three times as much. But then would they really?

And I am not saying anybody is saying three times as much, I am just trying to give you an example of why it's difficult to say. Clearly, our top line is affected by the shortage and the allocation that we are working with now. But to quantify it is quite difficult.

Okay. But suffice to say there probably would be somewhere in the millions of dollars on a quarterly basis, no?

I don't know. It could be significant though. We are talking about a product that is impacted -- a Park product, which is impacted, which is a product which in the last year, for instance, saw a significant amount of revenue.

Okay, that is helpful. Then just kind of wanted to get back on the composite side, the duplicate costs that you are anticipating with some of those ramp anticipated by August. When should we be sort of kind of seeing most of this cost going away?

I think by the end of the fiscal year is what we said in the past couple quarters. That we plan to get done with all these transitions by the end of fiscal year.

So I don't think the third quarter is going to be better than the second quarter in terms of the duplicate costs. And it's not just the duplicate costs or the additional cost that is important to recognize this relating to qualification work. These are one-time costs and they are quite expensive.

Okay. And then the qualification should, by and large, also end by the end of fiscal 2012 then?

That is exactly right, yes. The transition -- our plan is that the transitions will be done by the end of the year, meaning that the duplicate costs will go away and all of the qualification work will be behind us in terms of re-siting.

Any new programs we get on that is going to have ongoing qualification work. But we are talking -- the major qualification work is not for the new business, it's the re-siting of activity that is currently handling the Waterbury or in Lynnwood, re-siting it to Kansas.

So, once the qualification is done your expectation is that there are some interesting or meaningful size of new programs that could be ramped by that point? Or how should we be thinking about the revenue mix and the growth?

At the end of the fiscal year? I wouldn't think that we are going to see a big ramp by the end of fiscal year. That is just not how the Aerospace business works. Unfortunately, as I have commented and we have commented quarter after quarter, it's a very slow process.

So these are -- remember these are very long-term programs that we are looking at, 10-, 15-year programs, but they are very long ramp process and very long qualification process.

Now in terms of re-sites -- you are not talking about re-sites? That will be done by the end of the year and whatever revenue just now would just be moved from one location to another. The new programs, new business, the new things we are working on I would expect that we will see significant revenue on those programs by the end of fiscal year.

Okay, that is helpful. And lastly for Dave, could we talk a little more detail about the top five, 10, and 20 customers for the quarter and the percentage of the revenue, please?

Sure, no problem. Top -- we had two top customers that were above 10% of net sales and that was Sanmina and TTM. Top five customers represented 55% of sales, top 10 customers represented 68% of sales, top 20 customers represented 78% of sales.

Great, that is (multiple speakers)

(multiple speakers) the top five, the others (inaudible).

Yes, sure. The rest of the top five in no particular order -- Multek, [Esupedisys], and [Woos].

It seems like every quarter it's almost the same, right? Remember Multek is electronics; I think most of you know that.

That is all for me. Thank you.

(Operator Instructions) Morris Ajzenman, Griffin.

Hi, guys.

Hi.

Two follow-up questions. You touched on both of these, but SG&A, just to kind of help us along; it came in at 14.6% as a percent of revenues in the first quarter. Should we model in the 14% range for the rest of the year as you see these duplicative costs, etc., continuing?

I don't -- we couldn't recommend that. There is -- actually, Dave, there is one other comment. Last couple of quarters -- we forgot to mention this in our introductory remarks -- we have had legal costs that have been running quite a bit about the normal, which is already pretty high, if you ask me, because of two litigations.

One was settled recently; the other one is maybe a little bit on hold. We are not sure what we are doing with that. We are not sure whether we are going to prosecute that litigation.

That actually should help because I think it has been $200,000 or $300,000 a quarter, that is on an annualized above the noise level on the last few quarters. So that is another factor.

But it's -- we find it very difficult to forecast these kinds of things, even -- certainly our top wind but our cost line as well. SG&A is partly a function of top line, remember that, because some of our selling costs go -- some of our selling costs are variable affected by top line. And also some of these qualification costs, as Dave mentioned, go into SG&A as well.

And the last one. Again, you touched on composites, the outlook. I guess it's fair to -- looking forward, at the earliest fiscal 2013 is where you potentially can see some awards that could become greater than what they have been at the last couple of years. Increasing revenue run rate. Is that something that is realistic --?

Yes, I agree with that. It's not 2012, but let's just make sure we are -- we clarify that. It's not that the awards won't come until 2013; it's that the revenue from those awards could take a long time to ramp.

So, look, I mean, as I said over and over again, after we got into Aerospace it's a very slow process. I still think it's a very worthwhile process and it's a good decision for Park, but to get qualified in each program it takes a while. Then once you get qualified there is a very long ramp period as these airplanes are being brought into production.

No, I understand that. I guess what the awards then you were referring to is revenue ramp. Awards could happen before 2013 from your perspective, or is that unrealistic? Awards then.

No, awards could happen -- it could happen this month or next month, but the revenue from those awards that is what takes a long time to ramp. But I don't think we will see significant revenue from those awards this year.

The revenue that we can see from awards, as you call them, would be for prototypes. But those are small quantities, not significant.

Would you announce any of these awards should they come to fruition?

We haven't really discussed that internally. I don't know. We haven't -- I guess we would have to look at that on a case-by-case basis. It would depend on how significant it was and we would have to also consult with the OEM or customer, of course.

Thank you.

At this time I am showing no further questions in queue. I would like to turn the call back over to Mr. Brian Shore for any closing remarks.

Thank you very much, operator; Brian again. Thank you all for listening. Dave and I will be here the rest of the day if you have any follow-up questions. Feel free to give us a call.

Otherwise, we will hope to see you soon and have a very good summer. That is it. Have a nice day. Goodbye.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect. Have a great day.