Park Aerospace Corp (PKE) 2015 Q2 法說會逐字稿

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp second quarter FY15 earnings release conference call.

(Operator Instructions)

Thank you. At this time, I will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. This is Brian Shore. Welcome, everybody. I have with me, Matt Farabaugh, our CFO. Welcome to our second quarter conference call. We will start with introductory remarks as usual, and then we will go to the Q&A. Matt, why don't you start with the financial comments?

Okay. 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 2, 2014 various factors that could affect future results. Those factors are found in Item 1-A, and after Item 7 of that Form 10-K. Any forward-looking statements we may make are subject to those factors.

I would like to briefly review some of the items in our second quarter ended August 31, 2014 P&L, which are not specifically addressed in the earnings release. During the FY15 second quarter, North American sales were 46% of total sales, European sales were 6% of total sales, and Asian sales were 48% of total sales, compared to 51%, 6% and 43%, respectively, for the second quarter of the FY14, and 44%, 6% and 50% respectively for the FY15 first quarter.

Sales of Park's high performance non-FR4 printed circuit materials were 92% of total laminate and prepreg material sales in the second quarter of FY15, 88% in the second quarter of the FY14, and 93% in the FY15 first quarter. Sales of Park aerospace materials and parts were $8.6 million in the second quarter of the FY15, compared to $7.5 million in the second quarter of the FY14, and compared to $9 million in the FY15 first quarter.

Investment income, net of interest expense for the second quarter of the FY15 was negative $134,000, compared to negative $108,000 in the second quarter of the FY14, and negative $206,000 in the FY15 first quarter. Depreciation and amortization expense for the second quarter of the FY15 was $865,000, compared to $995,000 in the FY14 second quarter, and $898,000 in the FY15 first quarter.

Capital expenditures for the second quarter of the FY15 were $179,000, compared to $149,000 in the FY14 second quarter, and $53,000 in the FY15 first quarter. The effective tax rate before special items was 13.3% in the second quarter of the FY15, compared to 19.9% in the FY14 second quarter, and compared to 17.4% in the FY15 first quarter.

During the second quarter of the FY15, the Company had no customers that were more than 10% of total sales. The top five customers were [Zhongwang Shangwei Electronics], GE, Sanmina, TTM, and Viasystems in alphabetical order.

The top five customers totaled approximately 35% of total sales. Top 10 customers totaled 54% of total sales, and the top 20 customers totaled approximately 72% of total sales.

Okay. Thank you, Matt. This is Brian again. Let me go over some more commentary about the quarter, and update on our business activities as well.

First of all, let me compare the second quarter to the first quarter. The revenues were off about $6.5 million in the second quarter, as compared to the first quarter.

So revenues were tracking at actually a little bit above Q1 levels in the first four weeks of the quarter, the second quarter, and then dropped off. Revenues in June were a little above the Q1 averages.

Actually, the revenues in the first four weeks were higher than even -- let's see, May. So they were going quite well, until like the fifth week of the quarter, the fifth week of -- or five-week month of June, and then they trended down pretty quickly.

But the average revenues in June were a little -- still a little above the average in the first quarter, to put it in perspective. Then July dropped off from there, and then August dropped off further from there.

So what is this about? It's really about electronics, and it's about the market, and it's about a market correction.

Now in our first quarter there was some euphoria, I guess, and the quarter was quite strong. But I think that if you go back and look at the transcript, I actually warned everybody, just because we have been doing this a little -- for a long time, we have had a lot of experience, that the electronics market, in particular can turn very, very quickly without really any good advanced warning.

And I have made this comment, I mean, probably dozens of times in the last 15, 20 years, that the electronics industry is interesting. Because there is lot of very intelligent people, who collectively are not very intelligent in terms of predicting what is going to happen.

In fact, after the week five, is when the thing started to turn down. We had our first quarter conference call after week four, then week five, things turned down. So that was a good example, of not being able to see what was coming very well.

So I think what we have here is a pretty significant inventory correction, particularly in Asia. Remember, Asia is where things accelerated at least for Park in the first quarter quite dramatically, and I think Asia got ahead of itself.

There was an overbuild in Q1, we are quite sure about that now -- one thing about electronics is everybody is brilliant, when looking back. Looking forward, not so brilliant.

So [over] one actually for Park was artificially high, based upon that overbuild. Then the correction in July, August is artificially low.

In other words, it is not based upon -- the high wasn't based upon the fundamentals. It was higher than the fundamentals. Lower is a lot lower than the fundamentals as well.

So what we have learned -- Chris Mastrogiacomo, our President has been over in Asia for the last three weeks meeting with all of our key customers and OEMs, learned something interesting about the Chinese market. And we hadn't heard this before.

In China, the -- China is a controlled economy, that is not a surprise. It is not an accusation, it is just everybody knows that, and there is an allocation system. The governmental allocates a certain amount of business to the OEMs for internet infrastructure, build-out of 3G LT -- sorry, 4G LTE and internet infrastructure.

But that allocation is interesting, because if an OEM can demonstrate that it can handle more, then they can get a bigger allocation. And that is what happened.

Some of the OEMs were quite aggressive in building and buying -- buying raw materials and building product to demonstrate they could handle more, and therefore be entitled to a larger share in terms of the Chinese government's actions. And that exacerbated things -- exacerbated the problem, obviously.

So we have had inventory corrections, inventory overbuilds in the past, and this is a little exacerbated. Because just remember, in the first quarter I said, that the first quarter good news in electronics was largely an Asian and Chinese story related to the Asian OEMs, not so much the Western OEMs. So I think the market is probably paying for that now.

So an obvious question is okay, there is an inventory overhang, when will it end? When will things get back to quote, unquote normal? And I will just tell you what we are -- we have been told, and I will give you my caution after that, my caveat after that, which we have been told toward the end of the calendar year, November, December, is when things should be normalized.

Now again, I have to remind you that the industry's ability to predict these things is usually not very good. But that is what we are being told anyway.

Do the math, this is how much extra inventory, destocking the system, this is how long it will take to be absorbed. The end market is so-so, I guess, in terms of the global economy, but there still seems to be somewhat vital build-out of 4G/LTE, not just in China but around the world.

So then the question is well, what level would it return to, though? Because normal, remember as we now know, wasn't the first quarter. It is probably not the second quarter. It must be something in between those levels. But we just don't know, we will have to find out.

So let's talk about the bottom line in the first quarter, because we want to focus on that a little bit as well. We talked about the top line. Obviously, the bottom line is going to be very much driven by the top line.

So if you looked at quarter two compared to quarter one, we had about a $6.5 million loss in revenues. But actually, it is worse than that. We had a $9 million loss of production. In other words production in Q1 was $9 million higher than in Q2 -- production at sales value we are talking about, not in inventory value.

Production at sales value, understand, production was $9 million higher in Q1 than Q2. So we got caught up in this thing as well. We were building and building, and because we had real orders and everything, it wasn't just pie in the sky stuff.

So we got even more of a double whammy there, because the P&L is going to be -- for Park is going to be driven more by production than revenue. Ultimately, they both equal, of course, but there is mismatches from period to period. So our P&L is going to be penalized more from a production perspective, than a revenue perspective.

So that hurt our P&L and, of course, it also hurt our revenues, the fact that we had extra production, the biggest -- that meant we had extra inventory, which had to be Park inventory. I am not talking about industry inventory, which had to be dealt with as well. So that maybe is what you call a double or even triple whammy, I am not sure.

The other reason that the P&L is as bad as it is in Q2, in addition to the production, the loss of production in Q2 as compared to Q1, is it is hard to put the brakes on spending, just regular overhead spending, and things like that when things drop off so quickly. It doesn't happen that way. Actually we benefited from the fact that spending will lag revenues in the first quarter, because revenue spiked up so quickly, that our spending didn't adjust.

In the second quarter, it dropped down so quickly, that our spending didn't have enough time to catch up. So if you look at the difference in just the revenues, you would say yes, there should be a significant bottom line impact. But the bottom line impact for us is even more, than you can just understand by the revenues. You have to look at those other two factors, that spending lag is a little bit behind the revenue change, that there was this difference in production, which is greater than the difference in the revenues, if you look at quarter one to quarter two.

So those are the explanations. Let me just see. Yes, those are the explanations of the top line, and also the bottom line in Q2, as compared to Q1.

Q3, I know everybody is always interested. The -- we have four weeks of sales in the books, revenues in the books in September, and they are tracking at August levels in September, meaning that they have not recovered. Remember, first quarter, June was actually at the level of the -- sorry, second quarter. Second quarter. June was at the level of the first quarter, then July dropped off from there, and August dropped off further from there.

In September, the first four weeks of the third quarter, our revenues are tracking at the August level in the second quarter, just about dead on the August level in the second quarter, which is lower than the averages for the second quarter because -- right. Yes, because the second quarter trended down month over month, right. Yes, June, July, August.

Now we sometimes -- or in the past anyway, would give you some insight into bookings, as an indicator, how are our bookings at the beginning of the quarter. But we are not really going to do that, because it is not a meaningful comparison anymore.

Because we have such significant bookings from GE, particularly in September that the number is not meaningful. It wouldn't give you any kind of meaningful insight. All right. So that is the explanation of the P&L, top line, bottom line.

In terms of business updates, why don't we talk a little about GE. So I think I even -- no, actually, I hadn't mentioned last time. It hadn't happened yet. We received what is called a Global RFP [through 2021]. That wasn't a surprise. We'd been expecting it, so we have been working on the global RFP.

We are still working on a number of key development projects which are very significant, potentially anyway for Park. We also did receive an agreement for 2016. I think I mentioned previously that we only had agreements for 2014 and 2015, but now we have an agreement for 2016.

But the key areas going to be out through 2021, as far as I am concerned. As I mentioned, we received a number of additional POs just very recently, but I don't think we will go into the number, the amount, because it's not maybe that relevant.

Expansion, we talked about expansion for the last couple quarters. This company, GE -- now last quarter, we named the Company. Previous to that it was the jet engine company, has asked us to do an expansion for redundancy purposes, not just capacity.

Redundancy purposes, the facility which applies into the programs, now is in Kansas. But the Company, this customer has asked us to build in our factory so we have redundant capability for them in case of a catastrophic event, like a tornado, for instance, that you people might think about in Kansas anyway.

But that price tag has moved up. I think we previously mentioned it was around $10 million, but it looks like it is closer to around $15 million. Also we are not sure where it is going to be, and we are still working with GE on that question.

In other words, where that factory, that expansion will be located. That's a question, and that will affect the price tag, of course, to some degree. Last quarter's call, we mentioned that we were working on the 747-8 program, and that the next big program to leg in would be the Leap engine for the Neo, the A320 Neo which starts next year.

Electronics, the market is down. We are still working on our new products, and the reception continues to be interested and pretty good. I think we make more and more in-roads as we go.

It's funny, electronics, Park has always been very conservative in introducing new products. We hold them back. We have a reputation for doing that.

In other words, we don't actually commercialize a product until it has been tested quite thoroughly, both in-house, at special customer locations, beta sites. And when we introduce a product, we feel pretty good about it. That doesn't mean there won't be problems.

Because once you get into a real production environment, there is always going to be things that have to be done. But some of our competitors do it a little differently, they just seem to push products out there.

And it creates a little haze and smoke in the industry, because a lot of customers want to take a look, and OEMs want to take a look at these products. And they do, and it causes a little bit of like confusion sometimes.

Because we have commercial products that are proven, and then we hear that our OEM or customer's looking at brand X's product, and they are all excited about it. But three or four months later we are told, well, that product really wasn't ready for prime time.

So it seems like we are kind of going through that process a little bit, where maybe some of the market is coming back to us, after looking at brand X, brand Y, brand Z. And I don't want to say that brand X, Y and Z aren't really good companies, because they are.

Some of them are very good companies, and they have very good products. They do, which is just maybe a little bit of different marketing philosophy with new products.

But I have spoken to Chris every day, this trip to Asia. And we have actually some -- I think quite serious interest about our new products over there, which would if things go our way, lead to significant revenue opportunities in the future.

I guess, the last thing I will comment on is our cash. I don't know if you noticed, but our total cash which is what, we call it cash, marketable securities, restricted cash which is about $25 million restricted under our loan agreements, about $310 million now. So it moved up a little bit, actually quite a bit since last -- since the beginning of the year.

So we have that $310 million. We have about $104 million of long-term debt. Well, actually there is a short-term component of it, but bank debt -- let's call it bank debt, $104 million of the long -- of bank debt. So you can do -- figure the math out, in terms of our net cash.

Now that cash is overseas largely. We only have about $50 million in the US. The rest is overseas. So if we repatriate that, that cash, would be a tax bill involved. And then you can do the math on that as well.

But I also want to remind you that in addition to having the [$300 million], [$10 million] of cash and marketable securities, that we have also paid just a little under $300 million of cash dividends in the last 10 years.

So I think that will cover it in terms of our introductory remarks. Operator, can we go to questions now?

Yes.

(Operator Instructions)

Our first question comes from the line of Sean Hannan of Needham & Company. Your line is now open.

Yes. Good morning. Can you hear me?

We can hear you fine, Sean.

Okay. Thanks for taking my questions. So Brian, I am just trying to understand a little bit more about the quarter-over-quarter change on the electronics side of the business. It looks like that was down about 16% versus May. I do realize you are talking a little bit about the inventory corrections.

Certainly, I had a good number of conversations within the space, and it hasn't seemed like that down dynamic was as prominent, or in play for some of the other folks that I have been speaking to. So I am just trying to understand this a little bit better, because I think from a quarter-over-quarter standpoint, this is probably the most pronounced since about November of 2010. So can you help to connect the dots a little bit more for us here?

Well, I don't know what to connect. It's just real. The revenues in the first quarter were real.

The revenues in the second quarter were real, and I can't really comment on other companies. They have other product lines, other focuses.

We focus on the high end, and maybe that is somewhat of a difference. And really, this is an Asian story again, although the US was -- I think I mentioned it last quarter, was not even doing really well in the first quarter, but certainly hasn't done well in North America in the second quarter.

I don't know what to say about your other -- the other companies you follow. I don't know how to comment on that. But I do know this is real. It is not made up. It is not imagined.

It is not a market share situation in my opinion. Market share usually doesn't change that quickly -- not a market share thing, going up or down, actually. So I don't know what to tell you.

I mean, I think we have been as open as we can be about the market, and where the good news is coming from, the Chinese OEMs, and now where the bad news is coming from. And I don't know what to say about that.

Okay. You had tipped on market share and viewed that you don't feel that you are losing any market share. Can you provide a little bit more detail? I know there is a question that I ask from time to time with you folks.

Can you provide a little bit more detail, in terms of why you feel you aren't losing share, and what you can point to? Or is that perhaps a question that needs to be investigated maybe a little bit more?

No, I don't think so. First of all, you don't gain market share in two or thee months. You don't lose it in two or three months, doesn't usually happen that quickly.

But secondly, we were all over the mark in the first quarter, all over the mark in the second quarter, and I am talking about in Asia, spent a lot of time with these people. I mentioned, Chris, has been over -- our President in Asia for the last three weeks, and not just Chris, a lot of other people as well.

We are talking to all the right people, and we know these people. It is not like these are strangers, at the OEM level, the customer level.

So I think our facts are pretty robust. And I have commented before many, many times that there has been a long-term market share erosion over the last 10 years. 10 years or so ago, we were very dominant in the high end space, and now there is a lot of competitors that have come in with good products and good offerings, and very competitive prices. That is kind of a longer term trend.

But if you're looking for an explanation for Q2 versus Q1, I will tell you in my opinion with a lot of conviction, that you are barking up the wrong tree.

Okay. Let me see if I can ask something a little bit different here. The inventory, not only was there an industry perceived, or what you are getting as feedback, an industry issue in terms of inventory correction. But I think as you try to lay out, you had to work through some of your own excess inventory through the quarter, or having to deal with that.

When does that inventory issue internally for you become resolved? Is that something that you would get resolved this quarter? And what pricing impacts do we think that we might see as a consequence of that, or did we even see some of that also within this last quarter?

Okay, Sean. We talked about pricing for years, and we don't -- we haven't changed our philosophy. First of all, I will answer to your first question, first part of your question, I think that has already been dealt with at Park internally, the inventory, the excess inventory if you want to call that, that we had at the end of first quarter let's say. Or at the end of -- it wasn't even the end of the first quarter. It was really at the end of June, right, yes, when things started to trend down.

But the pricing, we have discussed this over the years. We really don't adjust our pricing based upon market conditions. We are not rug merchants, and we are not traders.

We feel very good about our product. We have a long-term perspective about what we do. We think it's not in Park's interest to move our pricing up and down, like pork bellies based upon market conditions, and because again, we are trying to protect our Company for the long-term.

And we can do things which are -- I mean, look, we have seen a lot of companies go out of business doing just that, not having discipline, and we don't want to fall into that kind of trap. We haven't for many years when there was tremendous pressure on us.

And the history, looking back at history would tell everybody that we were right, and the people that succumbed to that pressure were wrong, it didn't help them at the end of the day. All they did was give away their margins. They destroyed their product, and the product perception in the market, and they got nothing for it, because the other guy came around, and did the same thing.

So we learned over many years to have discipline. And we are not going to -- I don't think we are going to give up that discipline now, because we have one quarter where the market is off.

Sure. That's helpful to hear, Brian, and also that you folks are sticking with that. So that is a nice point to make there.

Last question here, I will jump back in the queue. The proposed deal between Viasystems and TTMI, have you had a chance to speak with both customers on the transaction? And can you share a little bit of your perspective on how this could impact you either in terms of volumes, or if there could ultimately be some price pressure that may come from them, to look for as a larger customer of yours? Thanks.

So the answer to the first question is, of course, we have spoken to people at Viasystems and TTM. But I think it's really too early to say how it will play out, in terms of what they will do. I mean, I think really, Sean, they are a public Company, so I think you would have to talk to them about what their intentions are.

How it affects Park, I really don't know. I wouldn't -- I don't know how to guess even. But if I just had to guess, I would say neutral.

Price pressure, now we have been through this before. Obviously, if you look back over the last 15 years, right, there has been an enormous consolidation in the industry. I can't remember all the names of Western circuit board companies back in the 1990s, and now there is a couple large ones left, maybe one.

But that has been a result of lots and lots and lots of these things. All right, Sean? I mean, you know the story as well as I do, probably better than I do.

So this is not a new experience for us. We have been through this before. Again, our discipline is not to trade on price, and I will leave it at that.

So if I had to guess, at this point all I could say, is it's neutral. I mean, we -- they are a very good customer, very important customers of ours.

You might have noted when -- in Matt's comments that they are individually in the top five, both of them, and we had legacy with DDI. We have legacy with Tyco.

I can't remember all the names that are now in those two groups. So we would hope those relationships would continue.

Okay. Thanks very much for the comments here, Brian.

Okay. Have a good day.

Thank you. Our next question comes from the line of Morris Ajzenman of Griffin Securities. Your line is now open.

Good morning.

Hello.

Hello, Morris.

The [quarter just ended], the gross margin is 28.7%. I am just trying to get a feel how that plays out. The current quarter, it looks like the run rate if there is no improvement, it is going to be lower than the second quarter, only because the first month is so strong, and might not replicate itself.

Now you also said June this quarter, I think answering this past question, that you have got your inventories in line where you want, so from that perspective that wouldn't impact gross margins. Just give us some sort of color.

Clearly, not a number, but going to the third quarter, should we expect improvement in gross margins, with those in the background as some sort of template? I am just trying to get a handle on how gross margins play out, based on the things that happened this past quarter?

Okay, Morris. I understand it is a struggle to figure this stuff out. But your first comment is correct. Just as a factual statement, if the revenue run rate in the third quarter continued, as it has been in the first four weeks of the third quarter, the third quarter revenues would be lower than the second quarter. That is just a factually correct statement.

As far as the gross margins are concerned, I really don't know what to say, except that gross margins on a short-term basis are going to be very much affected by revenues and production. Right?

Long-term, you can adjust your costs and everything. But short-term if your revenues are moving up and down quickly and therefore your production is moving up and down quickly, that has going to have a significant short-term impact to your gross margins that you really can't -- it's not possible to counter-act it completely on a short-term basis.

Long-term that is something else. Longer term, you adjust your costs, you make your costs right, you do those things.

But if your revenue falls off a cliff in the course of three weeks, you are just not going to catch up with your costs. And, of course, some of the costs are by nature fixed, depreciation as an example. And there are a lot of other costs, which are by their nature fixed, which you can't adjust no matter what you do. So as your revenue falls off quickly, that is going to affect your gross margins.

We can't predict what our gross margins will be, Morris, in the third quarter. Sorry, that I will have to leave it up to you to do that math. That is why being an analyst is a difficult job.

But again, your first question is -- the answer as a factual matter is correct, that if the run rate in the first four weeks of the third quarter continues through the third quarter, the third quarter revenues would actually be lower than the second quarter. Your comment also, about the inventory being kind of in line, and our internal inventory is correct as well.

All right. Let's just move on to the composite side. As GE is playing out, and other ventures potentially work out, the revenue, quarterly revenue run rate, I -- what was it, $8.5 million, $9 million this quarter? I forgot the number that you had mentioned, but -- ?

Yes, I think -- that is about right, $8.6 million maybe.

The question is, are we to stay at this rate for several quarters, and then start to really lift? How does that play out? I mean, how many quarters at this sort of level before you think it starts lifting on a quarterly run rate?

Well, are you asking about GE, or are you asking about the aerospace run rate generally, what --?

I started talking about GE, but really it's leading towards the composite overall, like the aerospace division?

Okay. Well, of course, it's going to be very much driven by GE, so let's take GE separately. The forecasts keep changing, and that is not a function of how much share we have. It is a function of GE's planning and their end market, and how they are servicing their customers, and that is a dynamic thing.

But if you look at the longer term forecast for programs we are on, the ramps -- there is a spike up in 2016 and 2017. I am talking calendar years now, a pretty dramatic spike-up.

So we are probably going to be more or less at this rate, I would say for the next few quarters within a range. I am not talking about exactly this rate. But the longer-term forecast would indicate a fairly significant spike, very -- actually pretty dramatic, quite dramatic.

If you know about these programs, you might kind of think about it yourself a little bit. There is also three other programs that we are on, that I haven't -- we haven't mentioned yet. We may be, I don't know, we will talk about those as time goes on.

So as far as aerospace generally, it is -- GE is the big dog in the aerospace tent. They are a top five customer as Matt mentioned already.

So aerospace at this point, is going to be driven by GE in terms of revenues. But having said that, it would be very wrong for Park to sit back and be a GE-only Company.

GE consumes and absorbs a lot of our resources, in terms of engineering resources, technical resources, account management resources, program management resources. It is quite demanding, but demanding in a good way, because there are so many opportunities.

So it does take away a little bit from our ability to sell and market to other customers. But that really --I will say that as a factual statement, but that shouldn't be used by Park as an excuse.

And actually I am pretty unhappy about our revenues outside of GE. I mean, I don't think we are doing very well, and we have a lot to offer I think. And I think we need to do a lot better, in terms of getting penetration to other parts of the aerospace industry.

There -- may never be -- never meaning the next five years -- another GE for Park. But maybe there is 20 other companies that have to be -- that we need to -- to get business with if you will, that together would total up to like a GE situation. There in aerospace, I said this before and I will just say it again, there are more opportunities than we can handle.

Electronics is the opposite. We are always looking for opportunities, and aerospace more than we can handle. So it is a matter of Park managing its resources better, and being effective with taking on new business.

And it is not going to be -- I don't think there is going to be one big customer anytime soon that is like a GE. I am not sure there is one that exists, actually. GE is a very, very special opportunity relationship with Park.

But there is a lot of other customers out there, there is hundreds of them. I think we have a lot to offer, that they just need to get to know us better. I think they would be very happy to do business with us.

I think our way of doing business, in case anybody is interested is different than some of our competitors, and our competitors are very good companies, and we respect them. But our way of doing business is a little different, than the way our competitors do business.

We are very much interested in being responsive, having a lot of urgency, trying to do everything we can to satisfy the customer's needs, quick lead times. This is our objective, and we bring it over from electronics.

I have explained that before. I think there is actually a real need for that kind of capability in the aerospace industry.

So, yes, I think we have not done a very good job outside of GE. And I am not just telling you that. Obviously, we are discussing that seriously internally, and putting -- and taking action, and putting steps in place to improve that part of the story.

Let me ask just one quick follow-on, and I will get back in queue on this ramp-up you discussed in calendar 2016, 2017. You used the word, a meaningful ramp-up. Can you give us some sort of color?

Does that mean the revenue run rate doubles, up 50%, up 100%? I am -- can you just give us some sort of broad picture of what an aggressive ramp-up by 2016 means, versus what the rate is now, the $8.5 million, $9 million run rate now?

Yes, Morris, I think I am not able to quantify it, because to some extent I have to be respectful -- we have got to be respectful of GE as well. We don't want to be doing GE's disclosure for them, since is this becoming a GE-centric story, or is a GE-centric story.

I wish I could come up with better way to describe it, very significant, not kind of your average growth of top line. It is quite dramatic. The numbers are quite large, quite large. What did you say, 50%?

I said 50% or 100%.

Yes, 50% is not it.

Okay. Was 100% or -- completely delusional?

I just said 50% not it, and I think that is as much as we can say at this point.

Okay.

Morris?

Yes. Thank you.

Okay.

Thank you. Our next question comes from the line of Andrew Fleming of Heartland Advisors. Your line is now open.

Hello, Brian.

Hello, Andy, how you doing?

Doing well. Just wanted to discuss the breakdown within printed circuit materials between high performance and non-high performance. So my thought is that the non-high performance side of PCM probably performed in line with your expectations, where you are purposefully looking to walk away from the commodity, low margin business. Is that accurate?

Andy, I just wouldn't want to say it that way, because we are not turning down -- we are not turning away from any existing customers. I don't remember the last time we got any new business in non-high performance, but it is probably a long time ago. But I wouldn't want any customer, a current customer to believe that we would just walk away from them, and not support them on non-high performance products.

And generally speaking, we have customers that -- we don't have any customers that I know of that buy only non-high performance. So that non-high performance stuff is being bought by existing customers that buy a lot of high performance.

So we wouldn't tell them, okay, we are not going to support this product line anymore. So your statement is correct, except I just wouldn't say it that way.

All I am trying to do is just isolate the two buckets, and focus in on high performance, and actually how did high performance perform this quarter relative to your expectations?

So the thing is that, that share that we -- I mean, I don't mean our market share -- the market decline that we talked about in the introductory remarks, Andy, was mostly Asian and almost all high performance. That is where the build was. It would be strange for there to be a serious build of non-high performance, right?

The build was in the leading edge materials for 4G/LTE -- so the build in the first quarter, I mean. So the fall off reciprocated. The falloff was in the high performance area.

We just wouldn't have a build of non-high performance. So you would expect, if there is a dramatic fall off that, that would be in the high performance area.

And that is why the percentage went down a little bit. I think it went from 93% to 92%. Not dramatic, but that is why it went down a little bit. I think it is the first time the percentage went down in a while.

But I am wondering if that number is kind of diluted by the fact that non-high performance is going down very fast? So wondering if high performance is only down modestly?

Well, you can do the math. I mean, we know what the electronic revenues were in the first quarter and second quarter, and we know what the high performance percentage was. So I think the numbers are pretty straightforward. I don't -- I don't know how to answer that.

I guess, non-high performance went down a little bit as well, but the story was high performance. But as I said, unless we have -- we are really missing something really significant, we are not aware of any market share situation in the second quarter.

We think there is a pretty dramatic and pretty abrupt inventory adjustment, where the OEMs particularly in Asia, maybe China, over bought, over built because of this desire to gain market share in China with the Chinese government. And now they have to -- digest that inventory, and make sure that they -- the inventory is normalized correctly, consistent with the end market demand.

Okay. And then, you have previously commented that if the four -- the first four weeks of the quarter continue with that same cadence, revenue would be down versus the second quarter. But do you expect that cadence that was demonstrated in the first four weeks to continue for the rest of the quarter?

Okay, Andy, I don't know what to expect. But remember, we have this input -- just very recently -- in the last week we are talking about over in Asia from the key OEMs and customers, that this inventory correction would probably resolve itself, work itself out, you know what I mean, by tend of the calendar year. We have heard November. We have heard December.

Now I got to always give you a caveat, that the industry could be wrong about that. And we are talking about the right people, the key people, and the right senior people at OEMs that we are talking to. But sometimes they are just wrong.

But they do the math. They look at the end market demand, and they look at how much excess inventory they believe is there, and it is -- they can do the math.

They can figure out, okay, it takes X weeks or X months to get to a point where the inventory is more normalized. And that is what they have done. So some science in the -- in this opinion we have received, although that is -- I wouldn't take it to the bank.

That is what we have been told, that it is probably an end of the year thing, before things get back to quote, unquote normal. If that is true, then you might be right. You might be right that our revenues would kind of languish along, at the level that they have been operating -- that they have been getting generated at for their first four weeks of the quarter.

Okay. So it sounds like third quarter PCM revenues likely be stable, perhaps could tick up versus second quarter if things improve later on in the quarter? And then we should expect a nice uptick in the fourth quarter versus the -- ?

Yes, because remember, our third quarter, Andy, ends in November.

Right.

So if there is an uptick, by the time it gets in the system and the POs start coming through, if what they are saying is correct -- let's make sure we call qualify this statement -- if what we are being told is correct, it is probably is going to be a fourth quarter event for us, when things return to quote, unquote normal.

Okay. And then just switching to the aero side of things. I think in previous calls, we had talked about between $9 million and $11 million per quarter as a [decent] run rate to think of for 2015. Is that still true? Would you expect aero to pick up a bit in the second half versus the first half?

I hope so. Like I said in response to another question, Andy, I am not very happy -- not about the GE portion of it. There is really not too much we can do to impact the GE schedule. That is up to them to decide. It is not our share with GE.

That is -- in other words, we can't really ask for more -- I have to be careful here, but more business with them. That is not what driving it, it is all the other customers.

And I think we haven't done a very good job, and I am not happy about it. I think there is a lot of business out there, that we need to go get.

I get it. We are very tied up with handling GE. We are a small company, and there is enormous opportunity.

Some people would say it's a once in a lifetime opportunity for Park, so we have got to make sure that we [have] the right resources on it. I mean, Matt, here spends a lot of time with GE, [with their] CFO. I spend a lot of time with GE. But we can't just kind of use it as an excuse to not go ahead and take advantage of the opportunities we have in the rest of the market.

So your question, yes, I think that is probably correct, that it is not going to top $11 million a quarter. But when I say that, I say that with reluctance, because I don't really like that. I think that is very disappointing, and I would like to see us do better.

Okay. And then, just as we think about the inventory correction that we discussed earlier, and trying to laser in on gross profit margins for the coming quarter -- if revenue was -- if revenue mirrored the second quarter, would you expect gross profit margins to be up?

I would, but remember that in response to I think Morris's question, we indicated that if the revenue run rate continues as it is in the first four weeks of the third quarter, the total revenues in the third quarter would be less than the second quarter. Because as he pointed out in the question, June was in the second quarter, and that was a very strong month. So we are saying that September is following along the pattern of August, not the average of the second quarter.

So if that is correct, if the third quarter ends up being a continuation of the first four weeks of the third quarter -- and this is a factual statement, do the math -- it is not a forecast or anything else, Andy. The third quarter revenues would be lower than the second quarter revenues.

I am not saying that is what is going to happen. But if we continued with the run rate we had in the first four weeks of the third quarter, that would be the result and that would affect the gross margin. If the revenues were the same in the third quarter as second quarter, yes, I would hope that the gross margins would tick up in the third quarter.

Okay. Then final question is -- back to the aero side of the business. Would you be -- and I am not asking for guidance here, just I am wondering if you would be disappointed if your aero revenue was not up at least 25% next year over this year?

Next fiscal year, you mean, right?

Correct.

Yes, I would be disappointed.

Okay. I am sorry, I do have one more question. I lied. Just looking at the stock price today, it's at $22, and it is $15 in cash per share. What is preventing you from being a little more aggressive on a buyback at these levels?

Well, Andy, maybe the market is going to make us an offer we can't refuse. The stock was spreading over $30 just a couple months ago. And it is kind of interesting that it moved down so quickly, because the only -- there hasn't been any news until today. It was trading down below $24 even before we announced the results today.

So it is something we always are evaluating. And Matt commented, we paid $300 million -- approximately $300 million or close to it in the last 10 years as -- in dividends, cash dividends. We haven't done a lot with buybacks, because we are -- in terms of doing kind of just in-market purchases, we are somewhat limited.

But those two things are always things we look at, and the considerations are various. How much cash do we have? What kind of capital needs are we expecting? What is the stock price? What is the market doing?

So there is a lot of different factors that have to go into our thinking and equation. But certainly when the stock price goes down, I mean, it is not rocket science to say that makes a buyback something we would consider more interesting. (Multiple Speakers).

I mean, as we look at the printed circuit materials business, it should be improved next year, and then the aero side of the business should be markedly improved. Yet the stock price is at $22 today, and we are sitting on $15 in cash [hole]. So it looks like a pretty nice opportunity.

Right. I mean, obviously cash continues to be a discussion topic. We covered the cash in the introductory remarks. And so -- but this is kind of a new event for us actually, just in the last week the stock really started to plummet, and like I say, down to $22.

I think it traded below $20 today for a little while. I am kind of puzzled by that.

I don't really think the Company is fundamentally different than it was in the first quarter. But I am not really the person to understand, or judge how the market reacts to different events than -- different news events, let's call it.

But going back to my comment, this -- the stock price, if this is the new reality, that is something very new for us. And we really hadn't considered that as part of our calculus, because it is such a new event. So we are going to have to go back and take a look.

Okay. But just to sum things up, you will look at a buyback more seriously, given the stock levels today?

Yes, but that is a comment that would be -- that would be true in any event. The interest in a buyback is going to be somewhat a function of stock price and those other factors, right? So that the answer would be almost invariably be yes, if the stock really goes down a lot.

Okay. All right. Thank you.

Okay.

Thank you. Our next question comes from the line of Sean Hannan of Needham & Company. Your line is now open.

Yes, thanks for the follow-up here. Brian, just want to see if you could help to remind us how much of your electronics business you suspect is related to data com or communications? I realize you don't have a precise number.

You are not sure exactly where your materials will always end up, but I think you have a fair sense based on the SKUs that are sold. Could you help us to understand some type of a general characterization there?

Yes, I would say a large majority. There is -- probably if you look at -- you described it as communications and data com. That is a very broad category, which would capture a large majority of our revenues.

I would guess, that the next largest category would be military aerospace, but a lot, lot smaller than you called it -- what is it, data com and communications or something like that. That is a very, very big category.

And you are right, we haven't given percentages in the past. But I think we are very exposed if you want to look at it that way to data com and wireless communications, not only in our digital product line, but also our RF product line.

Okay. And when you think about that, I mean, are we talking -- and this is just really for general context. Are we talking kind of a 50% to 60% type-ish exposure, or are we talking something far more significant than that?

Far more significant.

Okay. And then when you think about data com and communications, there is some obvious areas, segments that come to mind. But do you also put into play some of the enterprise, other types of enterprise infrastructure types of OEM solutions that might relate to storage servers, et cetera? Or is this purely networking, telecom?

No, your answer is yes, to -- yes.

Okay. Okay. All right. So if we were more com focused, what would you think that that would be roughly?

As compared to networking enterprise?

If we were to pull out other elements of enterprise markets that may relate, say to storage, cloud computing -- sort of -- that type of -- if we were to pull that out, and we were just focused purely on coms, what is our -- what is the sense you would have there.

When you say com, you mean communications? Your --?

Yes. Yes.

Taking (inaudible) out of that? Okay. So it's funny, Sean. People have different ways of breaking down the market, and but I don't think we can answer that question. Because for us, it seems to all be kind of in a very similar category. There is a lot of overlap, a lot of gray area between.

I don't think it is so -- for us, anyway, there doesn't seem to be very clear black and white delineation. When you talk about military, aerospace, that is very obvious difference between communication, enterprise, networking.

But I think within that broad category that you just described, it is going to be difficult for us to give you further delineation or refinement. And I think we are going to be reluctant to do it.

The reason I ask, Brian, is there is certainly always speculation around capital spending with carriers, and investments around wireless base stations, et cetera. And I think your product ultimately ends up in a lot of those types of solutions and applications. And as this is, in the aggregate more of a growth year, I think that there is some viewpoints that could call for some contraction slightly next year. So that is the thought process for why we are asking the question.

Yes. Okay. I understand your thought process. But like I said, I don't think we can give you anymore refinement, in terms of where our products, our high performance electronic products end up.

But certainly, we have a lot of exposure to base stations, enterprise, networking. I kind of think of that, in terms of the communications market, but again, people break it down differently.

So we talked about 4G/LTE. And that is not just a base station. That is the infrastructure as well to handle all the data? So that is why we kind of look at it very similarly, and are driven often by the same end market factors.

Okay. All right. Thanks very much.

Okay, Sean.

Thank you. Our next question comes from the line of Chris [Schneff] of Topeka Capital Markets. Your line is now open.

Yes, it is Chris Kapsch with Topeka Capital Markets. Generally my questions have been answered, but I just did have a follow-up on the end market discussion.

Because in talking about the inventory correction that you experienced in this quarter, the one key driver that had been the main driver, which caused the contraction here in the supply chain was the 4G/LTE build-out. So I am just wondering, just how important is that specific application?

I know it is tough, because like you just said it includes base stations and infrastructure behind that. But I am just wondering, do you feel like based on your comments about the Chinese buildup with the OEMs, and then the destocking there, was the overall destocking in your customer base exclusively related to this particular end market, or was it much more broader based than that?

I think it's broader based, because like I said, when you talk about things like 4G/LTE, it really drives a lot of infrastructure as well. So we are not just talking about base stations. We are talking about storage. We are talking about cloud. We are talking about high end routers, hub routers and large network servers.

I think -- I don't know if it is so easy to differentiate. And I don't think it segments that easily either, because all these different aspects of the market are related and connected.

I mean, it is hard to have more 4G/LTE without having the ability to process all the additional information that is going wirelessly from one phone, or one portable device to another, and not only process it, to store it. So I am not an expert in the electronics industry, but we have been in it a long time. And for us, it is much more difficult to come up with clean delineations for us, anyway it is.

Okay. And then, just like in terms of the -- your order patterns and this kind of fall off this -- which you attribute to sort of an inventory destocking, was it -- was that order pattern most pronounced in China specifically? Or was it really across all of Asia and your different customers and channels, and other countries as well?

It is most pronounced in Asia, but most of our market in Asia is in China, and that is the market that really spiked up quite a bit in the first quarter. The Western market, North American market, European market really was pretty flat in the first quarter, it didn't spike up very much. It is soft as well in the second quarter, but it didn't have as far to fall.

Okay. And then just a follow-up on the cash that is overseas and the context of your repatriation challenges. Can you talk about what sort of implications there are for repatriating cash for the purposes of either special dividends and/or stock buybacks?

The tax bill is -- would be quite significant. The large tax provision which we accrued to repatriate those funds, but that is just a tax provision, it is still money. I am not casual about giving Uncle Sam a lot of additional -- paying a lot of additional taxes to Uncle Sam. I think we commented on this before, but we will mention it again.

We are paying attention to the upcoming election, and then we will see what happens. But we are kind of hanging in there with some of the repatriation questions, to see whether the corporate tax rate goes down in the US, or maybe whether there is even a little bit of repatriation holiday that we have had in the past. We will evaluate that after the election, make a decision.

The -- all the special dividends that have been paid so far -- well, I should say the last two large special dividends, $2.50 and $2.50, $5 total were funded with loans in the US, because we did not want to repatriate the money overseas and pay those taxes. So that is why we have $104 million loan balance, bank financing balance outstanding now.

We will see what happens after the election, and we can make a decision then. But at this point, if we repatriated the funds to pay those loans down, it would be significant tax bill we would like to avoid. Particularly, if six months from now, that tax bill would be significantly reduced.

Thank you very much.

You bet.

Thank you. I am showing no further questions at this time.

Okay.

I would like to hand the call back over to Mr. Brian Shore for closing remarks.

Thank you, operator. This is Brian again. Thank you everybody for your questions. Have a good day. Matt and I will be in the office today, so if you have any follow-up questions, please give us a call. Thank you. Good-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.