Park Aerospace Corp (PKE) 2013 Q1 法說會逐字稿

Good morning. My name is Derrick 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 2013 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 would like to 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. Welcome, everybody, to our first-quarter conference call. I have with me Matt Farabaugh, our VP and CFO, as usual. And we will start with some introductory comments and then we will go into the Q&A.

Matt, why don't we just get started with the financial commentary and let me just also say that a transcript of Matt's remarks have already been posted on our website if you want to check that out. Go ahead, Matt.

Thank you, 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 February 26, 2012 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 27, 2012 and add some additional information.

Net sales for the 2012 fiscal year first quarter ended May 27, 2012 were $46.0 million compared to net sales of $51.8 million for the prior fiscal year first quarter and $43.7 million for the fourth quarter of fiscal year 2012.

Net earnings were $4.9 million for the 2012 fiscal year first quarter, $7.2 million for the prior fiscal year first quarter, and $3.9 million before special items for the fourth quarter of fiscal year 2012.

Basic and diluted earnings per share were $0.24 for the first quarter ended May 27, 2012, $0.35 for last year first quarter and $0.19 before special items for the fourth quarter of fiscal year 2012.

Now I would like to briefly review some of the other significant items in our first-quarter P&L.

During the fiscal year 2013 first quarter, North American sales were 47% of total sales, European sales were 11% of total sales, and Asian sales were 42% of total sales compared to 42%, 11%, and 47% respectively for the first quarter of the prior fiscal year.

Sales of Park's high performance non-FR-4 printed circuit materials were 81% of total laminate and prepreg material sales in the first quarter of fiscal year 2013, 78% in the first quarter of fiscal year 2012 and 80% in the fourth quarter of fiscal year 2012.

Sales of Park's Advanced Composite Materials and Parts were $7.6 million in the first quarter of the 2013 fiscal year compared to $5.7 million in the first quarter of the 2012 fiscal year and $6.7 million in the fourth quarter of the 2012 fiscal year.

The gross profit as a percentage of net sales for the first quarter of 2013 was 28.2% compared to 30.8% for the prior year first quarter and 25.7% for the fourth quarter of fiscal year 2012. Selling, general, and administrative expenses as a percentage of net sales were 15.3% for the 2013 fiscal year first quarter compared to 14.6% for the prior year first quarter and 15.5% for the fourth quarter of fiscal year 2012.

Investment income for the first quarter ended May 27, 2012 was $198,000 compared to $221,000 for the first quarter of fiscal year 2012.

Earnings before income taxes were $6.1 million or 13.3% of net sales for the 2013 fiscal year first quarter compared to $8.6 million before income taxes or 16.7% of net sales for the prior year first quarter and $4.6 million before income taxes and special items or 10.6% of net sales for the 2012 fiscal year fourth quarter. The effective income tax rate was 19.2% for the 2013 fiscal year first quarter compared to an effective tax rate of 16.2% for the prior fiscal year first quarter. The effective income tax rate before special items was 15.2% for the 2012 fiscal year.

Turning to Park's balance sheet, cash and marketable securities were $268.4 million at May 27, 2012 compared to $268.8 million at the end of the prior fiscal year. Working capital was $294 million at the end of the 2013 fiscal year compared to $290.1 million at the end of the prior fiscal year.

During the 2013 fiscal year first quarter, the Company had capital expenditures of $0.4 million and depreciation expense of $1.1 million compared to capital expenditures of $1.5 million and depreciation expense of $1.4 million during the prior fiscal year first quarter.

Stockholders equity was $346.6 million at May 27, 2012 compared to $343.2 million at the end of the prior fiscal year. Finally, stockholders equity per share at May 27, 2012 was $16.67 compared to $16.50 per share at the end of the prior fiscal year.

Okay. Thanks a lot, Matt. This is Brian again. I don't know if you noted but in some of Matt's commentary, we also have comparisons to the prior quarter meaning the fourth quarter. It's interesting, we often discuss those comparisons but in the prior presentations, we did refer to the actual numbers.

So let me add a few things here. So let's talk again. Here we go, first quarter versus fourth quarter of last year, the improved bottom line a little bit better, certainly not what we would like to see as compared to the fourth quarter, it is certainly partly explained by the top line. The top line is a little bit better.

Even though copper was unfavorable in Q1 versus Q4 by about $0.25 million negative impact, you know these are the timing things we talk about often. We don't expect just to cover any impact in Q2 versus Q1 from copper at this point. We expect that to be fairly neutral. There also were shut down credits which were unfavorable to the first quarter. There were a lot of shut down credits in the fourth quarter because of the Christmas holidays and also the Lunar New Year in Asia, about $600,000 comparison.

Depreciation though was favorable in Q4 -- sorry, Q1 compared to Q4 of about $350,000. Some of the assets are fully depreciated so depreciation is coming off line.

So let's talk about aerospace, something we often want to discuss. Q1 was about $300,000 better on both (technical difficulty) bottom line in Q4 partly attributed to the revenue. I think Matt said it was a $6.7 million increase and $7.6 million in Q4 versus Q1 and maybe we are getting our act together a little bit more but we certainly have a long way to go from an operational perspective in aerospace. So that could have contributed a little bit to the better company bottom line as well, I imagine.

Issues, SG&A very high and we had about $400,000 of legal costs over and above our normal accrual. Our normal accrual is about what we would expect so this is -- that's a bad -- that's a big number, about $215,000 more legal costs in Q1 versus Q4, so even in Q4, our legal costs were elevated. We have had some litigations we are dealing with which I don't know -- I used to be a lawyer back in the '80s and I guess everything has changed. The cost for anything legal these days is just quite different than anything I'm used to. But of course I am dating myself back in the early '80s.

But anyway, there is $400,000 over our normal expected level in Q1. That's over our normal accrual. That's not such a good thing.

Another comment, inventory way too high, very embarrassed about that, that's sloppy management. I mean a lot of excuses. We got new products. We got product, special product bringing in from Japan. Kansas has well contributed to it. I will give Kansas a pass because it's a new start up business and we are getting our systems in place. We're getting our act together but really there is no excuse for our electronics operations. It's really embarrassing and I don't feel happy about that.

We usually -- sometimes earnings are better than others but Park Company that runs a tight ship and you see inventory like that I think I don't know what the heck is going on. But it is just not how we do it at Park so I am embarrassed about that. Obviously that affects our cash too because the cash is being sucked up in inventory.

Comments on the closure of the Waterbury operation. We have announced three different dates on this now. Last I guess our fourth-quarter conference call which I think was maybe the beginning of May, I don't remember, we announced we were extending closure of our Waterbury Advanced Composite Material facility until the end of June and now we are pushing that to the end of October. That's an extra four months. Each one of those months will cost the bottom line about $100,000 a month, so that's about $400,000 in total to the bottom line.

And the reasons are just taking longer to get everything done to get all the transfers done, to get all the qualifications done and what we did was we skinnied back the Waterbury operations. We just would have enough to keep it going. But we did not want to lose some of the qualifications that we have had in Waterbury for a number of years. And some of it is our fault just not being as effective and executing as well as we should have and some of it just may be some OEMs are just a little more -- a little slower at these things than others in terms of approving a new facility.

In aerospace, the approvals are very difficult but tedious. So let's see, the charge I think when we originally announced the closure of Waterbury, say about a $3 million charge and last time we said it was about $2.6 million. Now we believe the charge is about $2.4 million. I don't believe there was anything significant taken at all in Q1 though, no real charge taken in Q1 a very minor number. So the rest of the charge still will be in I guess Q2 and Q3 but total of $2.4 million. Matt, I don't remember how much we have taken so far but $1.2 million?

About $1.3 million.

Okay, so we've got about $1 million to go on the charge in the next couple of quarters. That was taken in the fourth quarter I guess, the $1.3 million number Matt just referred to.

High performance continues to inch up. I guess we're at 81% now. There's nothing radical there but it's a progression. The new product, we talk a lot about them. We have N4800-20, N4800-20 SI and N6800-22 and N6800-22 SI and so the news is we recently received a provisional UL, a 130 degree MOT that is maximal operating temperature I believe for the -20 product line which is good because that's means we can go out and sell it now. It is not just for qualification now. The OEMs are actually willing to use the product. Without a provisional MOT at 130, they would not be willing to do that.

The final UL is expected for the -22 products this month and I don't know what's going to happen but that's our expectation based upon our communications from the UL. That's good as well because that way we can pull the trigger. Until we get a UL, we really are mostly in a qualification mode. There might be some military accounts that would be willing to use their product before getting a UL because you don't really need UL for military, for instance, but that's kind of unusual. Usually the market waits for the UL approvals.

You often want to know how we are doing in the coming quarter, which is Q2. We only have three weeks in the books at this point and Q2 is really tracking very similarly to Q1 from a topline perspective in terms of revenue attracting tracking very closely with Q1. In terms of bookings, I don't know, maybe a little higher but I wouldn't pay much attention to that.

So at this point from everything we know we've got three weeks in the books for Q2 and its tracking very similarly topline perspective to Q1.

We continue to work on a number let's say a few very major aerospace programs. We have discussed that before but we are continuing to work on those at high levels and we don't know whether those things will come to fruition but those are very significant opportunities for Park that we are in the middle of working on them at this point (technical difficulty)

Operator, can we take questions now?

(Operator Instructions). Sean Hannan, Needham & Co.

Thank you, good morning. Brian, it's a typical question each quarter, is there a way if you can provide us with a little bit of clarity around what you may have seen in revenue trends for each of the quarters as you progress through May? Each of the months, thank you?

March and April, were almost [bid] on and May was better, so March and April are, like I said, so close it's almost like it was -- somebody rigged it, but May was better. May was up from March and April. And in terms of the revenues for the first three weeks of Q2, they are tracking the average. The bookings are tracking May so I don't know what that means but those are the facts, anyway.

Okay, that's helpful. Then last quarter you provided a little bit of insight into the advanced composite business. Perhaps it was because we were already so late in the quarter when you reported but just in talking through the expectations that it would be up sequentially, when you think about how you are tracking for the current quarter, is there a bias? Is advanced composites, is that a business that continues to improve or is it similar to last quarter, the electronics side? What do you feel you are seeing today? Then is there a sustainable trend that we should logically be able to expect on the advanced composites side?

Sean, for aerospace as you pointed out, our fourth-quarter call we had eight weeks of the first quarter in the books already so that's quite a difference so we were more willing to talk about our expectations on that basis. Three weeks is really -- it doesn't -- it was very difficult. We give you the topline numbers because you are interested and we have those facts.

The commentary is -- I don't really know if -- I wouldn't know if electronics and aerospace or really that linked. They're obviously both dependent on the global economy. Okay, got it. The lead times, cycle times are so much -- they are very different industries. Electronics is very, very fast, moves quickly. Aerospace does not. They are almost opposite in that regard the kind of biorhythm of the different industries.

You also think that some of the gradual improvement top-line wise is partly attributable just to the fact that we put so much effort in and we're getting a little bit of traction not only the market -- I'm not sure how I would break that down but I think it's partly just because we put so much effort into it.

Now in terms of the effort though, what we've received in results is certainly not commensurate with the effort -- the results that we are looking for on some of the big programs but nevertheless there is still some kind of impact I think from just the market presence where we are getting a little more business and we are picking up I think a little bit of new market share.

The overall feeling of the aerospace industry, it's very hard to say. I would say with business jets, it depends who you talk to. Some of the companies doing better than others. Hawker Beach is in bankruptcy. Unfortunately we didn't put any attention on that company. We were concerned about their future but they are in the business jet arena and they obviously haven't done well. Some companies are doing better; the large business jet companies seem to be doing a little better than the smaller ones.

And then it's company by company. Some companies are more let's call it visionary, more willing to invest for the future and maybe some are not. But I don't know if I would see some kind of across-the-board kind of market acceleration at this point in business jets. There are companies that are investing for that but that would be down a five-year, four- or five-year time horizon based on what opening markets in Asia, the Middle East for instance and South America not just the US and Europe.

Europe, the market is pretty bad actually for business jets right now. So I don't know. Does that help at all?

That does help a little bit. Now in terms of the longer-term opportunities on that side of the business and you just referenced some major aerospace programs I think in your prepared comments, is there a way to provide at least a little bit more clarity to us when we think about how you have been putting the emphasis on building that side of your business clearly over the course of time, there have been some design wins that you have made better progress on versus others so you can see kind of some much longer-term opportunities. And then perhaps I am assuming that there are some that are much shorter term at least maybe next six to 12 months that may materialize in the topline.

Can you help us to understand when you look at that portion of your business how much you may have amassed for meaningful design wins that could start to push that topline say over the next 12 to 18 months or so? Is there enough there that we have been winning designs on?

Okay, you are asking about contracts we have already been awarded that are pretty much locked down and it's just a matter of timing as to when the revenue comes online. That's really not very significant. We continue to work -- well, we are currently working on three maybe three, four very major programs and you know what? If we were awarded one of these programs, we would probably announce it because they are so significant it would be quite -- I think it would almost be necessary to announce them. So I think that we would let you know about those wins if we had them.

You know, I also want to comment that this ends up being kind of an ongoing discussion in our conference calls and these things just go on and on and on, take a very long time and I've made the comment numerous times that we have learned quite a bit over the last few years about how this all works.

I think we kind of get it now. I think that we are in the middle of discussions now that are quite different than they were a year or two ago when we might have thought we were in serious contention for major programs but we really maybe weren't. That was part of a learning experience.

A skeptic or cynic might say, well, maybe that's the case now though. You think you're in the middle of it and you're not but I don't know-- I suspect that we are in the middle of it and especially based upon the level of discussions that we are having at some of the OEMs, the level that we are talking to at the OEMs.

Brian, that's very helpful. Just on that last part there, does it feel like any of those large programs you are still working through at this point now that you have been going through the learning curve, does it feel like some of those could be a quarter or two away or a 2012 event? What does your suspicion tell you?

Okay, if you are asking when the decisions will be made on these -- some of these programs, I think that that could be in the next -- some in the next couple of months, some in the next six months other different parts of the programs. When their revenue would occur, that's a different matter. Some are fast-track programs even the end of next year and some are the type of programs where you would be seeing significant revenue five years from now. You would prototype revenue between then and now between -- between now and then rather -- but the significant revenue is when the programs go into real production. Normally you are talking five years for a new aircraft program, that's normally what you'd expect.

I don't know if it could be done more quickly but the aerospace industry is not accustomed to getting their plane in the market on less than five years normally especially clean sheet airplanes. If it's let's say a modification of an existing type, that could be a lot quicker but a clean sheet airplane, which is the type of things we want to work on, that means that everything is open. The suppliers are not locked in. That normally isn't going to be less than five years when a program is first approved internally at the OEM.

Now the fact a program is approved doesn't mean that anybody knows about it. That doesn't mean it's an announced program. That's two different things. A lot of programs that OEMs are working on that are approved programs are not announced. They are very secret programs of course.

But it sounds like you could have some potential releases this year?

Well, I will just comment again that in some of these programs if we were successful I think we would probably let you know because they are of that magnitude that I think it would be appropriate to let you know.

That's great. Thank you so much, Brian. I will hop back in queue.

Jiwon Lee, Sidoti & Company.

Good morning. I just wanted to go back to the composites and ask about some of the potential large programs that you are working on. If and when you win any of these programs, do you typically get sole sourced or how does that supply at (inaudible), Brian?

It's different with parts and prepreg materials. Sometimes there will be dual sourcing for prepreg materials on a program. Parts, that's just not going to happen because then there would have to be duplicate tooling and it would be impossible. It would be way too expensive.

So normally with parts it's going to be a sole-source situation.

Now let me explain, though, that doesn't mean that you are given the parts for the whole airplane. An airplane could have let's say an airplane has 400 composite parts, those parts could be divvied up among different suppliers, two or three suppliers, but each part would have its own tooling and each part would be only done by one supplier. So the ability to switch from supplier to supplier, that's a different question. It's not so easy. It can happen but it's not too usual, not very common.

But at any given time any one part is usually going to be a sole-source situation.

Okay, that's good. For Matt, if I could ask you the typical questions of the top five customer list and the top 10 and 20, please.

Sure, our top customer, TTM, was 16.4% of sales. Sanmina was also just over 10% at 10.1%. Rounding out the top five, we had Multek or Flextronics, ISU Petasys and WUS. The top five totaled 47.7%. Top 10 was about 62% and the top 20 was about (inaudible)%.

Perfect. That's all from me for now. Thank you.

Morris Ajzenman, Griffin Securities.

The question on composites pretty well picked over here, so let's just go back to this past quarter. Brian, you mentioned two items specifically, inventory and SG&A. Inventory you referenced being too high, i.e., new products, the new plant in Kansas but nonetheless you clearly stated you were upset with that level that came in at $18.4 million. Where should it be and into the second quarter, are you going to consciously work to bring that down? Can you help us along with that?

We don't want to give you a number, but it really should not have escalated from the fourth quarter. Let's put it that way to start with. And yes, we're not happy about this at all and a lot of people are feeling some heat and pressure and pain about it right now. Not the kind of company Park is to do this kind of thing. We weren't paying attention. I'm very embarrassed about it and I can tell you that there are a number of people at Park that like I said, are feeling that pressure and heat right now. It's not what we want.

Obviously then I guess then your throughput, your utilization in the second quarter has to come down some if revenues are running at the same run rate for the quarter. Is that a fair supposition?

I don't understand the question.

Your utilization to bring inventories down and then coupled with -- and expectations of revenues running flattish you mentioned the first three weeks if it continues flattish throughout the quarter, then your manufacturing efficiencies versus the first quarter would have to decline somewhat. Is that fair?

This is raw material inventory. I don't know what you mean by that. We just have to manage the inventory. We have to manage our MRP. We don't want to buy stuff we already have. we don't want to buy too much stuff based upon hopes and dreams. I didn't say that the Q2 will be flat. I said that the first three weeks are flat and I want to make sure that nobody misunderstands. We don't forecast the second quarter. We would just be guessing.

But no, that's a point. We need to manage our business. What we have done on a short-term basis on a day to day, week to week basis not put together a plan and then go on autopilot for a month or two. And that's how you make a mess like this, so we need to make a correction. This is how we have always run the business. There's nothing new here. I think we just kind of weren't paying attention, got our eye off the ball here a little bit.

All right, so I didn't realize -- this is raw materials? It is not finished goods that the higher amount is?

Sorry, we don't really have finished goods at Park because -- not very much -- because most everything we do is specialty. So we can't really inventory any finished goods. Fortunately we don't do very much of that because we would really have a fiasco on our hands because we would always guess wrong.

Now our lead times are very fast and we have an average lead time three, four, five days. Electronics quick turn is 24 hours so this is an attempt to make sure we have the raw materials in house so we can provide those quick lead times but we don't provide quick lead times just by stocking up our warehouse with raw materials. We have to manage our business, work closely with our suppliers and make sure we are not over buying, under buying. We need to be on top of what we're doing.

Anybody could go ahead and have three times as much inventory and quick lead times but that's not a good solution. We have to manage the business aggressively on a day-to-day basis. That's normally what we do and we just -- yes, we made some mistakes regarding some new products and wrong assumptions. There's nothing wrong with planning, having an assumption, but you've got to check, go back every couple of weeks -- how's it going? How's it going? Do we keep going based on autopilot? I think we might have done that a little bit and I am not too happy about that actually.

Okay and the last follow-up on the SG&A, I guess is it fair, the bulk of the higher SG&A is due to the high legal costs and if it is, then is that something that will continue over the near term?

Yes, I think that's the one -- that's the element or item where we highlighted. Of course SG&A is made up of a dozen or so items and some are a little bit up, some are a little bit down but that's the one we want to bring to your attention.

I don't have a forecast for Q1 or a legal cost but I know our crack legal department is working on it. We do have some litigation type matters that are affecting our costs. We had one item that was just a Q1 item that's over but we have some other items we're still working on so we have to work very hard to manage our legal costs.

I don't want to make any -- I don't want to give you any kind of indication on that as I did on inventory when I said we needed to bring it down because somewhat -- legal costs are somewhat circumstantial based upon what the issues of the day are. If we have somebody that we feel needs to be sued, we have to deal with that. We can't allow people to abuse Park or -- we have to protect Park's rights of course and that's something it's not so predictable.

So I'm not going to be very comfortable giving you an indication as to whether we will be able to bring those costs down in Q2. I just wanted you to be aware that they are way up and we're working on it.

Thank you.

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

Okay. Thank you, operator. Thank you, everybody, for listening in on our first-quarter conference call. Matt and I will be in the office. We are both here in Melville and will be in the office the rest of the day. If you have any follow-up questions, feel free to give us a call and we'll talk to you soon. Have a great summer. Thank you.

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