Park Aerospace Corp (PKE) 2016 Q3 法說會逐字稿

Good morning my name is Abigail, and I will be your conference operator today. At this time I'd like to welcome everyone to the Park Electrochemical Corp. third-quarter fiscal year 2016 earnings release conference call.

(Operator Instructions)

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. Welcome, everybody, to Park's third-quarter conference call, and also happy new year to all of you. I have Matt Farabaugh with me as usual, our VP and CFO, and as usual we will start with some introductory remarks. And Matt will kick things off with the financial commentary, and I just want to remind you that a transcript of Matt's introductory comments are already posted on our website.

Go ahead, Matt.

Thanks, Brian. Certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent annual report on Form 10-K for the fiscal year ended March 1, 2015, various factors that could affect the 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'd like to briefly review some of the items in our third quarter ended November 29, 2015 P&L which are not specifically addressed in the earnings release.

During the fiscal year 2016 third quarter, North American sales were 83% of total sales, European sales were 7% of total sales, and Asian sales were 40% of total sales compared to 50%, 9% and 41% respectively for 2015 fiscal year third quarter and 56%, 6% and 38% respectively for the 2016 fiscal year second quarter.

Sales of Park's high performance non-F-4 electronic materials were 94% of total electronics material sales in the 2016 fiscal year third quarter, 92% in the 2015 fiscal year third quarter and 93% in the 2016 fiscal year second quarter.

Park's electronic sales were $25.5 million or 74% of total sales in the 2016 fiscal year third quarter compared to $25.4 million or 73% of total sales in the 2015 fiscal year third quarter and $26.2 million or 69% of total sales in the 2016 fiscal year second quarter.

Park's aerospace sales were $8.9 million or 26% of total sales in the 2016 fiscal year third quarter compared to $9.3 million or 27% of total sales in the 2015 fiscal year third quarter and $11.8 million or 31% of total sales in the 2016 fiscal year second quarter.

Investment income net of interest expense in the 2016 fiscal year third quarter was negative $128,000 compared to negative $139,000 in the 2015 fiscal year third quarter and negative $39,000 in the 2016 fiscal year second quarter. Depreciation and amortization expense in the 2016 fiscal year third quarter was $847,000 compared to $890,000 in the 2015 fiscal year third quarter and $840,000 in the 2016 fiscal year second quarter.

Capital expenditures for the 2016 fiscal year third quarter were $92,000 compared to $149,000 in the 2015 fiscal year third quarter and $52,000 in the 2016 fiscal year second quarter. The effective tax rate before special items was 14.2% in the 2016 fiscal year third quarter compared to 10.1% in the 2015 fiscal year third quarter and 12.7% in the 2016 fiscal year second quarter. Gross profit for the 2016 fiscal year third quarter was $10.3 million or 30.0% of sales compared to $8.6 million or 24.8% of sales for the 2015 fiscal year third quarter and $10.4 million or 27.3% of sales for the 2016 fiscal year second quarter.

Before special items, selling, general and administrative expenses for the 2016 fiscal year third quarter were $5.3 million or 15.3% of sales compared to $5.8 million or 16.6% of sales for the 2015 fiscal year third quarter and $5.0 million or 13.2% of sales for the 2016 fiscal year second quarter.

Before special items, earnings before income taxes for the 2016 fiscal year third quarter were $4.9 million or 14.3% of sales compared to $2.7 million or 7.8% of sales for the 2015 fiscal year third quarter and $5.3 million or 14.0% of sales for the 2016 fiscal year second quarter. Before special items, net earnings for the 2016 fiscal year third quarter were $4.2 million or 12.3% of sales compared to $2.4 million or 7.0% of sales for the 2015 fiscal year third quarter and $4.6 million or 12.2% of sales for the 2016 fiscal year second quarter.

For the 2016 fiscal year third quarter, the top five customers were GE, Sanmina, Shennan Circuits, TTM and WUS, in alphabetical order. The top five customers totaled approximately 42% of total sales during the 2016 third quarter. Our top 10 customers totaled approximately 54% of total sales, and the top 20 customers totaled approximately 70% of total sales for the 2016 fiscal year third quarter.

Since the share repurchase authorization announced on January 8, 2015, the Company has purchased an aggregate of 699,788 shares at a weighted average purchase price of $20.71, totaling $14,491,000, leaving 550,212 shares that may be purchased by the Company pursuant to such authorization. The Company purchased an aggregate of 118,756 shares at a weighted average purchase price per share of $21.61 and an aggregate purchase price of $2,566,000 during the 2015 fiscal year fourth quarter, an aggregate 444,834 shares at a weighted average purchase price per share of $21.32 and an aggregate purchase price of $9,484,000 during the 2016 fiscal year first quarter and an aggregate 136,198 shares at a weighted average purchase price of $17.92 and an aggregate purchase price of $2,441,000 during the 2016 fiscal year second quarter.

Okay. Thanks, Matt. It's Brian again, and once again Matt -- a transcript of Matt's comments are posted on our website. All that detail there, if somebody wanted to check that out.

We'll just do a little bit of commentary about the third quarter P&L, and then I thought we would do something a little different this time, which is give you an update on some events of interest -- at least some of you might be interested in those events.

Okay. So we had 30% gross margin in Q3 compared to -- even though the revenues were lower than in Q2. So why is that? The gross margin was lower in Q2 as well. So a few things. Remember in Q2 we told you about there was a one-time purchase of a special kind of fabric for ablatives -- I think it was $2.2 million, $2.3 million -- which carried real low contribution. There was a little bit of a markup but not much. So that was actually a -- weighted down our gross margins in the second quarter. That kind of slipped a little bit in the third quarter because we are starting to use that product, and we toll coat it so the fabric is already owned now by the customer. So we do toll coating. It is a very good contribution because there's no material content. That will take over about two years, I think, to work off completely, but we did some of it in the third quarter. So that's a flip. That's actually a plus not a minus as we had in the second quarter the same transaction but, you know, the flipside of the transaction.

So also our Kansas aerospace operation is doing better, and it has been a long haul. It's still not quite out of the startup mode but I think coming a long way. So our performance is better there. Our waste is better. Just general overall operating improvements that helps contribute to a better gross margin, of course.

Maybe a little bit of a mix, but I think it is mostly just better operating performance out of Kansas. There was a little bit of an inventory issue in Singapore, which actually weighed down in Q2. Meaning, our revenues were higher than our production working down inventory. That normalized in Q3. Q3 is a normal quarter. In other words, reduction in revenue about equal, so that is just back to normal. That's a benefit for the gross margin in Q3 versus Q2.

High performance, that continues to move up. Higher performance percentage, and of course, that is always going to be a contributor to better gross margin performance. And as we've mentioned numerous times, we are oversimplifying things by talking about high performance being 94% because the rest is not that significant.

But what is significant is that what's in at high-performance revenue percentage, and there's a big variety -- a large variety of products which fall within high performance. All of them I would say are good margin, but some are better than others. So that would help us as well.

SG&A, let's move to that. That is up in Q3, but remember that Q2 was unsustainable, the SG&A level because we did some special adjustments in Q2. What we did was actually we significantly reduced the accruals for bonuses and profit sharing for the prior fiscal year which hadn't been decided until that point. At that point we made the adjustments based upon the bonuses and profit sharing actually being paid, and that was a one-time benefit for Q2.

A lot of people took significant reductions, or actually many people didn't get any bonus at all. But that's how Park operates. So I don't know. There's a lot of other things that go up and down, which I think sometimes we get into the weeds so much on these calls that I'm surprised anybody wants to listen at all.

Net interest expense, as Matt indicated, it was a negative in Q3 versus Q2. But we think that as interest rates actually go up, that will benefit us because of the way that our loan interest is structured, and also we have more cash than loans. So that actually will benefit us to some extent.

Let's see -- the buyback -- Matt gave a lot of detail about that. We didn't buy any stock in the third quarter. A couple of things going on there. First of all, as he mentioned, in the second-quarter call, we have loan covenants which restrict our ability to buy back stock. But the other side of the equation is that since 2005, we've done cash dividends of $330 million, and as Matt indicated, we bought about $15 million of stock in this last authorization. And we are at a level where we are starting to think we want to use our cash to invest in our business rather than to continue to just pay dividends and buy stock even at these stock prices. Maybe somebody else will jump in and buy stock at this point rather than the Company.

So we feel a little bit more reluctant to use the cash for that purpose. We have other things that we've like to use the cash for. So let me see, those are some introductory remarks. Now let's go to some discussion about what's going on in our Company.

Sorry. My notes are a little bit out of sequence here, so bear with me. Why don't we start with electronics? News on electronics. So we are in the final stages of a joint development agreement with a major electronics OEM, a household name, to develop a next generation product. We've been working on that agreement for, I guess, a few months, but I think we're pretty much at the finish line. So that's an exciting opportunity for Park, and we're looking forward to doing that. Hopefully it will happen. I think in the next couple of weeks that agreement will be signed, but I just want you to be aware of it because we think it's important for us.

The penetration of our new products in Asia continues to be encouraging. We have Meteorwave 1000, 2000, 3000, 4000. Huawei, which is a major Chinese OEM, has put Meteorwave 2000 on 39 of its new parts for its next-generation equipment, so we're pretty happy about that. That hasn't really ramped yet. We're told it will ramp hard and fast when it does, so be ready.

The Meteorwave 3000, 4000 introduced recently seems to be getting a lot of good attention and penetration in Asia. -20 I think the story there is that we're seeing interest and activity, I should say more than interest in -20, in a broader application, not just for a chip test. So that's a good thing. Because -20 is really considered intended rather to be the ultimate replacement for -13, and -13 sells into the broader infrastructure market, not just chip test. That's was intended for -20 as well.

All right. So let's talk about aerospace. We get a lot of things to talk about regarding aerospace, which might be interesting.

Let's start with GE, the big dog in aerospace. We just entered into a development agreement with GE, which we're pretty excited about for a new product. We're not going to talk about what the product is, but that's a done deal. That agreement was signed last month, and this will bring to bear the resources of GE research, which are, of course, considerable.

This is not for a niche product. This is for a product which would have very wide applications if it's successful. Significant potential and very significant revenues. So we're very pleased about that.

We've been talking for a while about the long-term agreement with GE. Just a couple of weeks ago we finally got the 10-year RFQ, which was, as far as we can tell, it is just for Park. It's not an RFQ for others. And it goes from 2017 to 2026 -- those years -- 2017 to 2026.

So that's good news, and we will work through that. I suspect it will take a few months to work through the RFQ, and the result would be a long-term agreement. We're not going to talk about the revenue numbers, but you can only imagine they are pretty big numbers in that 10-year period, of course.

There is a short-term issue, though, I need to tell you about or I want to tell you about regarding GE. The transition from Brand X to Park, there ended up with access Park inventory at GE, and we're just recovering from that now. So this coming year, 2016, the revenues will be off because in the transition, it turns out that GE has more inventory than they thought they wanted to. So we are trying to regroup now and working together on how we are going to work down -- burned down that inventory for GE. That doesn't have -- that's not a factor of GE's end-market. That's a function of inventory planning and purchasing and particularly related to the transition from Brand X, which is the legacy company that we replaced to Park. So these things happen, and we're working through them.

So the revenue actually in Q3 for GE was down from Q1 to Q2. We don't talk specifics, but it's already down. We look at the forecast that we've been provided with in connection with the 10-year RFQ. So we have 2016 -- and I'm talking calendar year as I'm sure -- I should clarify that. 2016 will be a down year from 2015. 2017 was up quite nicely. 2018, up from there. By 2019 we are at the peak level, at least in the forecast related to the RFQ.

So you saw actually that the revenue in aerospace was down in Q3 versus Q2. That was partly related to that one-time purchase and sale we talked about of the fabric inventory, but also GE had a little role, as I mentioned. The GE revenue was down in Q3 because we are already starting the process of working down the excess inventory -- excess Park inventory, which GE has on hand.

So -- oh yeah -- one more thing about GE. I think in March we commercialized our product, which we call E-752-LT, and that's for AFP applications -- automated fiber placement. That's an automated robotic way of making composite parts that many companies are using now. It provides many advantages. It provides the consistency of automation as compared to hand layout. It also provides better precision, rather, and it also reduces costs in terms of labor.

In any event, we've been going through about a qualification of this product for GE was actually partly developed for them actually for about the last year, and we're just about finishing up the qualification with GE subject to LT. And that's, again, for AFP applications, so that's good.

Going out to some other news in aerospace, we are being looked at. We're going through what's called screening for a very major program with another very large aerospace company. We just responded to another -- actually 12-year RFQ, which I don't remember the years, but I think it goes through maybe 2029 or something like that. And the revenue is very considerable. Very considerable. I suspect that the reason we are -- well, I shouldn't say looked at. The reason we're being considered is probably in part because of the credibility we have in working with GE, which is considered to be a very premier aerospace OEM and one that has very exacting standards. Not easy to qualify with GE.

So, as I said, we are going through screening, which means that this company has purchased our materials and is going through a screening process, developing some preliminary data to determine whether or not to go forward with Park and qualify Park. That -- I'm not going to give the number, but revenue is quite, quite significant.

Other items of interest, just for people interested in aerospace, I guess, or interested in Park, we're working with a spaceship company, you know them, and building struts for the current generation SpaceShipTwo, I guess it's called. A very critical component, I guess, that forms a structure between the two main units.

I think you already know we are working with James Webb on that space telescope. Scorpion -- remember, Scorpion? That's the aircraft being developed by Textron Airland. They are now building the second unit. I think it's more of a conforming prototype, and we are already working on that unit as well.

What's interesting this time is every part we produce, we've also been asked to produce the tooling. So it seems like maybe Park is developing a little bit of a specialty there. And it really helps the customer a lot because it allows the customer to get a very fast response time because a composite shop can move quickly. But if the tooling isn't available, it doesn't really help if it takes six months to get the tooling. So we are able to do the tooling, do the part very quickly. And when you are in the prototype game, speed is what really matters the most. So that's interesting for us and good news for us.

There's something called the Flying Pentagon -- E4B; that's a 747 modified. The Pentagon in the air -- I think they are doing about four of them, and we've been producing parts for that program as well.

And another piece of news which I think is good news is we kind of got back into the Atlas V program for ablatives. Ablatives is a focus for Park, but we dropped the ball, I think, a little bit in the last few years. We weren't paying as much attention to it as we should have, but I think we're getting back in the game. We're back on the Atlas V program, which is really good for us. It's with a different kind of reinforcement. It's all carbonized rayon with a phenolic resin, but it's a different product form than the product form we supplied previously for the Atlas V. And actually that was one of the problems we had with the legacy program is that the supplier of the reinforcement with the prior product form wasn't working out for the ultimate OEM, which I think is Lockheed.

So that's good news I think, at least I think it is. I know there are so many interesting updates I thought I'd share with you, so Matt and I decided that rather than just spending a long time focusing on the P&L, we would discuss some more interesting news items with you. The P&L, most of the analysts this morning or anyone can figure out the P&L better than we can.

All right, operator. I think that does it for our introductory remarks. Why don't we go to questions now?

(Operator Instructions) Sean Hannan, Needham & Company.

Yes. Thanks, folks. Thanks for taking my question here and good morning.

So there seems to be some positives and negatives coming out of the commentary that you guys have provided here this morning. Just want to make sure that I'm thinking about some of this properly. Even though we have some, I guess, immediate headwinds where, let's say, we use the GE inventory work down as an example or perhaps not as robust -- necessarily robust environment at present on the electronics side, it sounds like both segments have some pretty material stuff in the background that either could provide or aid some pickup later this calendar year or certainly for future years? Is that a viewpoint that you share? Is that an appropriate characterization?

I think it is an appropriate characterization, Sean. And before I continue, as I said, my notes were not properly sequenced, so I forgot something I'm sure you consider to be important. So normally we talk about how are we doing in the fourth quarter. Well, December we're not getting off to a good start. December, it's a five-week month. Two of those weeks were holiday weeks, so it's hard to really extrapolate from those five weeks as to what it means. But I just want to comment that we haven't gotten off to a very good start revenue wise in December.

But going back to your question, I think the answer is yes. I think we feel pretty good about our business. I mean look, if you work here, you would say, my God, we've got 2000 problems a day, sometimes 3000. But if you look at the bigger picture, I think we feel pretty good about our business in aerospace and electronics. The immediacy of the opportunities are always going to be more quick with electronics. And aerospace takes longer, but it's also more predictable.

Electronics moves more quickly, less predictable. But for years now really, we've been focusing on building our business for the long-term. We've gone through a serious transition from, I guess, the 1990s when we were very much an electronics company and a high volume electronics company at that, to a very different kind of company today, more of a niche company. It's been our focus, it hasn't been easy, and we're certainly very, very, very, very far from the finish line. I know a lot of people got discouraged with us over the last few years and became negative about us, but we had to stick to what we believe is right for the Company and our future.

We've never been short-term people. We never will be. And if people -- if investors are interested in management with short-term mentality, we're not the right company for you. So we've been building and building and building, and we've got plenty of scars to show for it. It's not easy sometimes when you just have to be determined and stick to your guns, even though you are not getting much instant reaction or response.

But I agree with that comment. I think in electronics, Sean, we are maybe perceived as a company that's -- I don't like to use the word stable. That's a funny word. But it's consistent, committed. We haven't changed our strategy really in many, many years. Some people don't like it, but they know what it is, and I think that's in some cases a comfort as compared to some of the other choices available.

So maybe that's working to our advantage. The Park you see is very visible, very transparent. I'm talking about the customers, and it hasn't changed in the last six or eight months. So maybe I'm going to go on a little bit too much here, but we're always very willing and able -- sorry, willing to admit our mistakes, and we've made mistakes, and we make them quite often. But there is a consistency there, and there's a commitment, I think, that maybe is becoming recognized.

Aerospace, of course, is a completely different story because we're the new kid on the block, and they are still taking some time to get fully recognized. But as I commented with GE, I think that really helped a lot in terms of our credibility. But our strategy there is really the same, and it's too build things for the long-term.

There are plenty of short-term opportunities -- quickfix opportunities, instant gratification opportunities which we turned down which we just don't accept, and it takes discipline not to do that, but it's part of who we are.

So, like I said, Sean, maybe that's a little bit more than you were bargaining for in terms of response, but those are my comments. I agree with your statements. This year is electronics, but particularly long-term I agree with those statements.

So now, Brian, separately, I think that we've been hearing for a good number of quarters really to years the new efforts that you've been putting around refreshing for new products on the electronics side. At least in my view, there hasn't necessarily been a whole heck of a lot of momentum on that front. It sounds like from your commentary today that perhaps we are starting to really see some more tangible proof that we're going to get some momentum.

You had referenced also an opportunity here with Huawei. So I want to see if I can get kind of a summary view around how we should think about that, or is that something that we should still be very cautious about? Not assume too much of an uptick in contribution from these new products.

And then I guess Part B to that, if there's a way to get a little bit more context around the nature of what you might be doing product-wise with Huawei, and is that a scenario -- I realize timing wise, it's still a little unclear, but is that in coming quarters or is that much longer term? Thanks.

So I guess one thing we want to consider, Sean, is that we have legacy products which over time are going to be in decline. So you see kind of a topline for electronics that isn't moving up.

But the good thing is that the revenues that are being lost from our legacy products are being replaced by revenues with our new products.

Now I'm not saying where we want to be with the new products at all. I believe there still is real upside with the new products, and I think as you indicated or implied with your question, there is some validation of that in the marketplace. The Huawei opportunity -- we've asked that question only 40 times, how much and when, and we haven't received any meaningful answer. But we've been told it's big, and it's going to move fast -- those I think 39 parts on there and some of their next generation equipment.

That's just an example. I mean there are other examples we can mention, but we decided this call to try to give a bit more color about what we're doing. So I guess those are my two comments. Anything else to that question I didn't address though, Sean?

I think that generally addresses it. Last question here and then I'll hop back into queue. You indicated this current quarter as being off to a poor start. Now typically you are always going to have holiday impacts in this quarter. So is there a way if you can help us to better understand the best way to characterize I guess your disappointment in the start of the quarter relative to how typical fiscal fourth quarters would progress for you? It oftentimes can be a slightly down quarter. I don't know if you are giving an indication that it could be a little bit more than slight?

Well, we are not giving any indication. We just are looking at the facts. We have the first five weeks in the books. It's very difficult for us to extrapolate much from that because, as you pointed out, when we have the holiday factor, which is very significant in December -- really two weeks of those five weeks -- December is a five-week fiscal month for us. Then, of course, there's the question about, well, what happens before people actually go on holiday? Are they trying to build ahead so they can cover the holiday, or are they already starting to think, geez, I'm not sure we are going with the economy and people hold back.

It was very difficult for us to get a good crystal ball on it. We are faced with this -- we are put in this situation almost every year around this time, and it usually takes some time maybe toward the end of January unfortunately to really understand where the quarter is going. Of course, we also have the lunar new year in Asia later on in the quarter, and that's not new. That's something which we almost always have, and I think it's always in the fourth quarter to my recollection. But that's just a factor that we need to consider.

I'm not trying to signal anything, but historically we are asked and we do discuss the facts to date in terms of our bookings and revenues so far in the quarter, and I thought we should cover that information.

That's helpful. Thanks, Brian.

[Leonard Cooper], private investor.

Actually we were cut off earlier when Matt was speaking, and I was wondering what the depreciation and amortization was for the last quarter?

Can you help with that, Matt?

Sure. The depreciation for the last quarter -- let me just get back to the number here -- the third quarter was $847,000. It was last year same quarter -- the third quarter was $890,000 and the second quarter was $840,000. So it's $847,000 last year or $890,000 -- last quarter it was $840,000.

Okay. Brian, I was thinking about manpower. I know that climate change and security are using up a lot of the new engineering graduates. Is manpower and engineering and marketing a possible problem for Park?

I guess I'll give you my opinion on that -- my perspective, rather. I think it's quality and not quantity. There's still a lot of people that seem to be graduating from -- with aerospace engineering degrees, and I don't think there's a shortage. I guess I shouldn't say that -- macro, the whole industry, I don't know. But I don't sense there's a real shortage of aerospace engineers.

The challenge for us is to find aerospace engineers that are aligned with our way of thinking about things, and that's more difficult. A lot of the companies they come from, we hire them. They have very different mindsets, very different attitudes about a whole host of things. Maybe urgency might be one of them, as an example.

Okay. Thank you for that answer. I think about two years ago you were speaking about the need for a new facility. Has that problem been resolved?

No, it hasn't. I think -- remember, we have mentioned I think a number of times that we are waiting for this long-term agreement with GE. That's our understanding with them that we will go ahead and build the additional facility once we enter into the long-term agreement.

So as I mentioned, we just a couple of weeks ago got the RFQ, which we are pretty sure is just for us. It's wasn't a general RFQ, which is done, and it is part of our process to lead to the long-term agreement.

The other thing I would add, though, is I mentioned another opportunity with a very large aerospace company OEM, and that would require significant capital if that does come to fruition. That would require significant additional manufacturing capacity if that opportunity comes to fruition. So that's something else to consider.

Remember at the beginning of the call, I mentioned that we are a little reluctant to return much more capital to shareholders at this time because we have that in mind.

We also were looking -- I didn't mention this -- but in acquisitions just about a month ago. It was in electronics. It was interesting to us, but it didn't work out, and I guess we ended up being kind of late in the game.

But, you know, it's a funny thing. When you talk to bankers, they say, oh, don't worry about it, you can always get more money. I think that's a little dangerous attitude. When you really need the money, maybe they are not so helpful.

And the other thing is when we are dealing with these large aerospace companies, for us to say, oh, don't worry we can build an X million-dollar factory, which we will go get the money from a banker. I don't know how much they are going to buy that. But if we can say, look, we are a public company. Here is our balance sheet. We have the cash. That's a big, big advantage for Park. That's a big selling point. We say, yes, we are willing to invest in your program. Don't worry about it. We are willing or able -- here's the money. It's right here in our balance sheet. We are a public company. That's quite a bit of a different story than saying to one of these companies like the one we're talking about that, oh, yeah, don't worry, our banker said we can go borrow the money if we have a need for it. Because anybody can say that. Not everybody has the money and is willing and able to use it to invest in the business for obviously our benefit. I think that's a very big deal, especially for big aerospace companies which -- they have a program, they are talking 20 years. They don't want to get into bed married up to a supplier that may have financial troubles three years from now and doesn't have the ability to invest in additional capacity. It's a big deal for Park.

Okay, Brian. Thank you. It sounds very exciting.

Thank you. Happy new year.

Happy new year.

Morris Ajzenman, Griffin Securities.

Hi, guys. Happy new year.

Happy new year, Morris.

Looking over the last several years, your gross margins are very -- I'm kind of approximating here -- this goes from 28% to 30%, 31% on a quarterly basis. And clearly you touched on during the call that in any one quarter there's always -- occasionally one-off items that can negatively or positively affect gross margins. But first quarter this year was 30%, and the last quarter you did -- same quarter 27.3%. This quarter I think you said you were 30% again.

On a normalized basis going forward -- normalized meaning any one-offs that occur -- and based on new product introductions and having some optimism of electronics going forward again with new products, are we at a point where on a normalized basis -- again, assuming revenues don't fall off a cliff, whatever, that gross margins should be 30% plus on a quarterly basis going forward?

That's really an interesting question, I think, and there's really two parts to the answer. One is what we do -- we talked about improving our yields in Kansas as an example. We talked about our new products, which are higher-margin products. So we have to look at the content of the revenue and also our costs, which we were always going after however we can.

Of course, we are dealing with costs. There's a limit. Your costs can't be less than zero. There's a limit to how much you can do with costs, but I don't think we will ever stop looking at our costs. And obviously as you commented, the product content has a big impact on margins as well. And having said that in the short-term, especially the topline revenue line is going to have a big impact on gross margins. So if revenues fell off in the fourth quarter, that's going to have an impact on gross margins. If they came up, they have an impact on gross margins.

I think that if we start to see some movement up in our revenues and our long-term planning has always been consistent with revenues moving up, that that upward trajectory of revenues will have a positive impact on gross margins. It's just simple math. (technical difficulty).

On the two factors are what we do in terms of our cost, in terms of our product mix, product introduction. And then on a short-term basis, what the market does in terms of ups or downs in revenues. Long-term our objective would be to have gross margins, which would be over 30%.

Thank you.

(Operator Instructions) Sean Hannan, Needham.

Thanks for taking the follow-up here, so I wanted to touch on aerospace. So since we did see some of the inventory management impacts with GE in the current -- I'm sorry, within the fiscal third quarter, should we think about the types of revenues that you got in that segment through roughly the general quarterly outlook as we progressed through the year? Or are there other programs that are perhaps ramping a little bit that may provide some growth there, or is the GE work down going to accelerate? How do we think about your viewpoints on this revenue level and how that may progress within the aggregate for the segment? Thanks.

Well, at this point, we don't think that GE is going to help us, not in the 2016 calendar year in terms of any kind of revenue growth. So we really weren't proposing that if you figure it that way. But I think it's not a bad way to think of it, Sean, for Q3, and that might be not a bad model for 2016.

Now with GE, we are working calendar years. So, as I mentioned, 2017 calendar, we are expected based on the forecast to see some upward movement to a level more than we were for the first part of this year. As a forecast, we don't know whether it's going to come true or not, but that takes into account also what we are discussing regarding the inventory work down. The only point is that that could have an impact upon the next fiscal year because that's the beginning of 2017 calendar will have a little bit of an impact upon the next fiscal year.

As far as other programs, there's nothing significant that we are aware of that will have a major impact -- upward impact on revenues in the -- or aerospace in the coming year. So that doesn't -- I guess I should be clear because I don't want to mislead anybody intentionally -- that doesn't mean that revenues won't move up, but it's not like we could point to a big program and say, okay, here's your forecast. This is what's expected each quarter, and therefore, we can predict revenues moving up, which would be the case with a larger program often, but most of what we do in aerospace is still not GE. It's a lot of smaller programs which are less predictable for us, and those are the things we're going after.

We also -- I guess I should add that we talked about GE as if it's a zero-sum game, but it's really not true. We are almost in a constant state of being qualified for other GE programs outside of the cells and thrust reversers. That's where we started -- in the GE facility in Baltimore that produces those products, and that's where we are pretty much sole-source. But there are very significant opportunities with GE Aviation for the engine itself, the fixed structure of the engine itself, and we seem to be in a constant state of being qualified on those opportunities.

So that's a factor that we really can't quantify too well at this point. It's a little bit of a wildcard, but it's all positive. What we're talking about is the baseline -- what we know, what is ours, what we have. There is upside even this year with GE, but that's more difficult to quantify.

I know that's a rambling answer, but I'm not suggesting what you do because you are smarter than I am as an analyst. But I don't think it's a bad idea to look at Q3 a little bit and think, well, this might be something I could use as a basis for a model for the coming year.

Okay. So that $8.5 million to $9 million-ish range is logical to think about for the quarter this calendar year?

I would not disagree with that. I'm not recommending that. We're not forecasting that, but I don't think that's an illogical or unreasonable approach.

That is very helpful. Okay.

And obviously, Sean, I just want to add, it's our objective to beat that number, and that's what we are working on every day, to beat that number. Beat those kind of numbers.

Okay. And then last question here. Matt, this might be geared a little bit more toward you, but the costs from a dollar standpoint within the OpEx line, is there an ability to either maintain the dollar spend around these levels, or is there even an opportunity you might have to pull down some of the costs because of the percentage of revenues here, they are a bit elevated versus some of the prior periods. So just want to get an understanding here of how to think about that?

I think those costs, we are always looking at opportunities to improve our cost structure. But the level that we're at is we have some base that we are probably working off of here. So movement from that base, assuming we stay right around this revenue level, is probably not going to be very significant.

Okay. But then alternatively it doesn't sound like there are any plans, expectations or things to consider that would materially start to bring that number up either?

I can't think of anything that would materially change it in the near-term?

Okay. Very good. Thanks, folks.

You're welcome.

I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks.

Thank you, operator. One more thing I'd like to mention -- hopefully some people are still listening -- is that there is a live webcast at the Needham conference. I think it's a week from today, and that's available to anybody, and you might want to tune in for that if you are interested. We will be doing a presentation about Park -- and not just going through quarters, it's more just the history of Park and what we're doing because it's also intended for people that don't know much about our Company. So I just want to mention that to you.

And having said that, thank you very much for listening in on our third-quarter conference call. And again, I'd like to wish everybody in the audience a very happy new year and the best of luck in 2016 to all of you. Thank you, operator.

Ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may all disconnect. Everyone have a great day.