Park Aerospace Corp (PKE) 2018 Q2 法說會逐字稿

Good morning. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Park Electrochemical Corp. Second Quarter Fiscal Year Earnings Results Conference Call.

(Operator Instructions)

At this time, I would like to 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. Good morning, everybody, and welcome to Park's Second Quarter Conference Call. I have with me as usual, Matt Farabaugh, our Senior Vice President, and CFO. Matt and I will begin with some introductory remarks, then we'll go to the questions.

So Matt will start with his financial commentary, and I want to remind everybody that we posted a transcript of Matt's comments on our website. So here's a little bit of detail on Matt's comments. You may want to go check it out on the website as well. Go ahead, Matt.

All right. Thanks, Brian. Certain statements we may make during the course of this discussion, which does not relate to historical financial information, may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations.

We have set forth in our most recent annual report on Form 10-K for the fiscal year ended February 26, 2017 various factors that could affect future results. Those factors are found in Item 1A and after Item 7 of that Form 10-K. Any forward-looking statements we may make are subject to those factors.

I'd like to briefly review some of the items in our 2018 fiscal year second quarter ended August 27, 2017 P&L, which are not specifically addressed in the earnings release.

During the 2018 fiscal year second quarter, North American sales were 60% of total sales, European sales were 7% of total sales and Asian sales were 33% of total sales compared to 55%, 7%, and 38%, respectively, for the 2017 fiscal year second quarter and 56%, 7% and 37%, respectively, for the 2018 fiscal year first quarter.

Sales for Park's high-performance (non-FR-4) electronics materials were 93% of total electronics material sales in the 2018 fiscal year second quarter and the 2017 fiscal year second quarter and 92% in the 2018 fiscal year first quarter.

Park's aerospace sales were $11.4 million or 38% of total sales in the 2018 fiscal year second quarter compared to $8.8 million or 30% of total sales in the 2017 fiscal year second quarter and $8.7 million or 32% of total sales in the 2018 fiscal year first quarter.

Park's electronics sales were $18.5 million or 62% of total sales in the 2018 fiscal year second quarter compared to $20.2 million or 70% of total sales in the 2017 fiscal year second quarter and $18.7 million or 68% of total sales in the 2018 fiscal year first quarter.

Gross profit for the 2018 fiscal year second quarter was $7.2 million or 24.1% of sales compared to $7.2 million or 24.9% of sales for the 2017 fiscal year second quarter and $6.3 million or 23.1% of sales for the 2018 fiscal year first quarter.

Before special items, selling, general and administrative expenses for the 2018 fiscal year second quarter were $4.4 million or 14.9% of sales compared to $5.1 million or 17.6% of sales for the 2017 fiscal year second quarter and $4.4 million or 15.9% of sales for the 2018 fiscal year first quarter.

Investment income, net of interest expense, for the 2018 fiscal year second quarter was $148,000 compared to $35,000 in the 2017 fiscal year second quarter and $239,000 in the 2018 fiscal year first quarter.

Before special items, earnings before income taxes for the 2018 fiscal year second quarter were $2.9 million or 9.7% of sales compared to $2.2 million or 7.4% of sales for the 2017 fiscal year second quarter and $2.2 million or 8.1% of sales for the 2018 fiscal year first quarter.

Before special items, net earnings for the 2018 fiscal year second quarter were $2.3 million or 7.9% of sales compared to $2.0 million or 6.9% of sales for the 2017 fiscal year second quarter and $2.5 million or 9.1% of sales for the 2018 fiscal year first quarter.

Depreciation and amortization expense in the 2018 fiscal year second quarter were $740,000 compared to $825,000 in the 2017 fiscal year second quarter and $807,000 in the 2018 fiscal year first quarter.

Capital expenditures in the 2018 fiscal year second quarter were $395,000 compared to $41,000 in the 2017 fiscal year second quarter and $105,000 in the 2018 fiscal year first quarter.

The effective tax rate before special items was 18.7% in the 2018 fiscal year second quarter compared to 7.6% in the 2017 fiscal year second quarter and negative 12.4% in the 2018 fiscal year first quarter. And the first quarter tax rate included a reversal of a reserve for certain foreign tax deductions taken in prior years. The tax rate excluding the reversal of the tax reserve would have been 18.7% in the first quarter.

For the 2018 fiscal year second quarter, the top 5 customers were AAE Aerospace, Changzhou PC Specialties, GE, including its subcontractors, TTM, and WUS, in alphabetical order.

The top 5 customers totaled approximately 41% of total sales during the 2018 second quarter. Our top 10 customers totaled approximately 55% of total sales and the top 20 customers totaled approximately 69% of total sales for the 2018 fiscal year second quarter.

Okay, Matt. Thanks for going through that for us. It's Brian here again.

So now with my commentary. First of all, let's start at a high level. So the sales were up about $2.4 million in Q2 as compared to Q1. That's all attributable to aerospace. Electronics were flat. Matt already went through the numbers, so you know them. Just making some high-level comments. So the revenue increases in aerospace story, if you will.

And the revenues drove the pretax earnings before the special items up about $700,000, again, compared to the first quarter. And that's all, again, attributable to aerospace and the additional -- or rather, the contribution from the additional aerospace revenue.

Okay. So let's see. A couple other comments before we go on to electronics and then aerospace individually.

So the tax provision, Matt mentioned, it was 18.7%. And I think he said that it would've been 18.7% in the first quarter as well except for that very large unusual item.

But we just want you to know that we think that is kind of the range where the tax rate will be going forward in the near term anyway, and that's up quite a bit from recent history. We're not saying exactly 2.7, but something in that range, of course.

The other thing is we have a question from one of our big shareholders who e-mailed it to me this morning. He asked me to comment on what we would do if this repatriation tax -- the 10% repatriation tax -- goes through. So let me discuss that. It's a little more -- it's not just a yes or no answer. It takes a little bit of discussion.

First of all, it's not clear how the tax will plan out, of course. But one possibility is that we'd be asked to pay tax, repatriation tax, and the difference more or less between the tax paid and the corporate tax rate, which is proposed to be 20%, that could result in even a lower repatriation tax. It's complicated because foreign tax credits have to be computed, but it could be less than 10% if that's the approach, which is taken. And who knows? Maybe it'll be up to the taxpayer to decide.

So if that happens, the first thing we would look at is paying off the short-term loan. There really would be no reason to maintain that loan in the future. As you probably remember, we took out that loan to pay special dividends. We had a couple of reasons for doing it. But first of all, we didn't want to repatriate money then pay a huge tax, which is -- would be -- which was in place at that point and also now. And the other reason is we wanted to provide the shareholders with a return of capital treatment on the dividend to the extent that the shareholders were taxpayers anyway. But once the tax law goes through, really, whatever it is, it would be hard for us to justify and maintain that loan, keeping the outstandings since we have so much cash overseas.

So the first thing we'd probably do is pay off the loan. We repatriate money to pay off the loan. There are also covenants and restrictions in the loan, which would prevent us from doing other things without going to the bank and negotiating amendments or modifications to the terms, which we really don't want to have to be doing that.

So then, after we paid the loan off, then the question is what do we do? I know that's what the shareholders are getting at. So we currently have about $145 million -- sorry, $245 million of cash and I think about a $70 million loan, so we'd have to repatriate a little additional money to pay our tax. So you do the math. So maybe we have then after repatriating enough money to pay off a loan, $160 million or something. That's based upon the current cash situation, $160 million, $165 million or maybe something like that. These are round numbers, but again, based upon the current cash situation.

So then the question is, what do we do? And the answer is it's going to depend. Obviously, we'd be looking at a return of capital to shareholders, and we have discussed in the past. And that will be something that would be right in the front burner. Would it be a dividend? Would it be a buyback? We don't know. We'll confer with our advisers at that time.

We discussed these things with our advisers in the past, but it would be important to get current based upon all the current considerations, not just outside considerations but also our business needs.

We are looking at acquisitions for aerospace, and that would be one of the things we would consider. So that's not a black-and-white answer, but we don't have a black-and-white answer. I pretty much told you everything we know in response to the question about what will we do if the 10% repatriation tax or some other tax went into effect, which would significantly reduce the tax we'd pay on repatriation of the foreign money. Okay. So that's the answer we have to that question.

Now let's talk about when we start electronics and aerospace. My comments may be a little bit longer than usual. Just a lot to cover here, so please bear with me.

So U.S. electronics. The main story there is the restructuring. It's been kind of messy. It wasn't really managed that well. We didn't do a very good job. I wouldn't give us more than a maybe D or maybe C minus, but we did make the changes we need to make in the last, I'd say, month. So I think we're in good shape now. We have the restructure under proper control. It's moving forward well, so I feel pretty good about that.

We probably lost a couple few months not getting our act together. That's nobody's fault except mine, but that's the truth of the matter. But I think the good news is that's behind us. And all the economics that we talked about in the past, which I'll go through with you again, are still in place.

The charges in Q1, $1.2 million. In Q2, it was about $2.8 million, or the total is going to be about $5.3 million. Q3, maybe a couple $100,000. And then we won't know when the rest of it will go through the P&L, the charge.

Benefit. The total benefit, when it's fully realized, remember, it was about $3.3 million a year. That's still the case. Q1, 0. Q2 is actually negative because we got none of the benefits from the restructuring but we had a lot of the negatives from the duplicative costs and things like that. We're still in the transition from 2 facilities to 1 facility, and we just weren't really executing very well. So we had a lot of sillies and things like that, that cost money at the end of the day.

But I would say Matt's number is $2,000 -- $200,000 negative. I think that's an optimistic number. I would think if you really look at everything, it's probably more like double that in the second quarter in terms of the negatives from the restructuring.

In the third quarter, there's still some duplicative costs, which you will -- which will occur. But in the third quarter, our net benefit, including the benefit from restructuring offset by the duplicative costs, should be about $0.75 million, $700,000 or so. Those are at annualized numbers, by the way. That's the number for the quarter. So that's good because we're on the path for that to happen at this point.

The California facility, the one that was going to be closed, was closed at the end of August, and that's the main thing that had to occur in order for the benefit from the restructuring to start to leg in.

In the fourth quarter, the benefits should be fully realized, and that's probably around $800,000 at that point per quarter. And that would be the same thing going forward.

In the U.S., I mentioned this, I think, the last time, the last call. I think we see it more as a niche business in the U.S. It's quite different in Asia. It's almost like 2 different businesses in electronics. But U.S. is looking more and more like a niche business, which is actually niche opportunities, which is good for us. That's a good thing for us because that's really the focus we want to have.

Lots of small things, but the good thing about the small things is there are things we can protect and things that aren't taken away from us so easily. With niche business, niche opportunities are harder to get and more work up front but much more difficult to take away from us. And we like that. That's -- we look at that as building one brick at a time. We build something if we have to. We don't put a brick down, but it's really not a brick. It's paper-mâché. We turn around and it's gone, and we got to start all over again. That's kind of exhausting.

We have some opportunities, which we're happy about with the Polyimide but also No Flow. Remember we announced that No Flow product just I think a couple of months ago. That's a nice product, and it's clearly, as far as we're concerned, a niche product and for rigid flex for the military. So we like the military in the U.S. That's a good market for us. I think there's an IPC report recently saying that they expect the military business for circuit boards to improve in the U.S. in the near future. Hopefully, that's true.

Electronics in Asia. It's a completely different story. It's like 2 different stories. Okay, so we've been talking for about a year now, but these OEM programs, OEM program pricing, OEM program arrangements. And from the perspective of getting qualified with these OEMs, I think it's gone quite well.

A year ago, we're talking mostly our Meteorwave product. That's a new product. We have, I guess, about 6 different versions of it now, all the same UL, which is nice.

But a year ago, we were really kind of nobody, just kind of on the outside looking in, knocking on doors with the OEMs. And now we're qualified. Our products are qualified in all the major the programs we want to be qualified on. That's the good news.

There is some Meteorwave quarter-over-quarter growth. You see that in the second quarter as compared in the first quarter. But we still haven't seen the acceleration that we're looking for in the second half, and that hasn't happened.

Also, I should tell you that September was a weak month for Asia. I'm not sure why that is. Sometimes on a short-term basis, things happen in the market that isn't really so easy to understand. We expect that to recover. But September, [taking] off to a good start in Asia. And I just want to report that to you. I know you always ask. And we don't have a good explanation for it.

The other thing is, it's our sense that the telecom infrastructure equipment market is weak at this point. But that's the input we're getting from the customers and OEMs in Asia. And I think they were a little bit coy about that, maybe because -- I'm just speculating -- they want to encourage us to really pursue the qualifications seriously. But now the story is well, they really need to wait a little bit until 4.5, at least 4.5G takes hold. I wish we had maybe Tony DiGaudio on this call to explain this to you because he's much more of an expert. But there's a 5G specification, which hasn't really been -- hasn't been finalized yet. And my understanding that's still a couple of years off. But some of the big OEMs in Asia, the ones we deal with, decided they don't want to wait for 5G, so they kind of went to 4.5G. I don't think that's a real specification. I think it's something they created, but it's obviously somewhere between 4G and 5G in terms of equipment technology. And they're saying, yes, they kind of need to wait for 4.5G to start taking hold. And the best information we're getting is that's probably next year. Of course, I asked, "What does that mean? Does that mean the beginning of the year or the end of the year?" We're not being told. But if I had to bet, I would bet the second half, not the first half of the year just because sometimes we're given information that might be a little bit more glass half-full, optimistic.

So anyway, so I guess I'm just going to note to myself here, but I think it will recover. We may need to wait for 5 -- 4.5G to get moving for these programs are qualified under ramp up. And that's the thing. When we get qualified, we're getting qualified normally on new programs, not existing programs, right, or some existing programs. But the real driver is the new programs. And once we're qualified, we can't force the OEM to move the product out more quickly than they otherwise would. I mean, that's obviously ridiculous, but that's the situation. I mean, it's the market, the overall market drivers that will impact when an OEM is going to introduce their new products and also their own development cycles.

But I have a feeling that some of the OEMs are slowing down a little bit more than we thought or maybe a little bit more than we were told waiting for 4G -- 4.5G to take hold. And after the programs are qualified on, like I said, that's a driver. They're not going to deliver revenues until those programs go into full production. And if the OEMs are holding back a little bit, that's obviously going to affect us. And obviously I'll say it again, it's kind of ridiculous, but no OEM is going to be interested in our telling them we want them to introduce their new equipment and their new programs earlier to keep us happy.

So a couple of other like detail type things. We introduced M-Ply recently. That's used for as a PTFE bond ply for RF. That seems to be getting some nice reception. We also introduced a product called 3350 recently and there are news releases on those products.

In terms of what we're working on development-wise, this applies to all electronics, not just Asia. We have in development -- this is something that we have in our roadmap, we presented to our customers and OEMs -- halogen-free material, which should be in the ultra-low loss kind of Meteorwave from a category in terms of the loss properties. We're also developing -- working on 2 next-generation high-speed products, which would be the next generation after Meteorwave. It was 3 different products that we have in R&D at this time.

Okay. Why don't we switch to aerospace? I suspect you have some questions about electronics, but I'll switch to aerospace. As I said, the news is quite good there. So the revenues were up in Q2, as I said, by about $2.6 million or net, I guess, compared to Q1.

A couple of things drove it. One is GE. Remember, we talked about this inventory overhang, which was kind of driving us crazy. I think we said in the last call it probably would be complete, if you will, by June. And I think it was complete by June. So we took that, got that monkey off our back.

And then, the other fundamentals are moving in the right direction, which is mostly the A320 starting to really ramp up, the A320neo with the LEAP engine starting to ramp up. So those 2 things combined drove our GE revenues in the right direction.

The removal of the overhang, that's a one-time benefit. But the ramping up of A320, that -- we're certainly not anywhere near the levels that are projected, so there's still quite a bit of room to move up.

The other thing that drove the aerospace revenues was ablatives. We had pretty good ablatives revenues in the second quarter. Ablatives is a nice niche product for us. That's for rocketry and mostly feeds into the Atlas V and the PAC-3 program. PAC-3 is the next generation of the Patriot missile, which you probably have heard about. So think about ablatives. It's a little bit lumpy. It's not that consistent across the year, which you might expect more from a GE, for instance. So we should have a strong second quarter, not such a strong first quarter, and then the third quarter may fall off as well. That's the nature of ablatives. It's not that we're gaining or losing market share. It's the nature of how ablatives work. So we had a good quarter in the second quarter for ablatives. In the third quarter, it won't be as good. But that's not -- like I said, that's not a surprise. That's kind of how the ablatives business works for us.

After the call, last time, I realized I created some confusion. One of our shareholders called me and I better clear it up. This relates to GE. There are 2 different things going on. There's a division of GE called MRAS -- Middle River Aircraft Systems. That's where GE produces the cells and thrust reverser structures for the engine. These are core structures. And that's what we talked about mostly. We're a sole source of those programs -- I'll just tick through them --- the 747, the A320neo, the COMAC919, the COMAC ARJ, the Embraer ERJ, Passport 20 for the Bombardier 7000, 8000. Those are programs that we talk about mostly. That's MRAS division of GE Aviation in Asia. And we have a 13-year agreement with the MRAS division of GE Aviation for these -- the cells and TRs, thrust reversers. It's a 3 plus 5 plus 5. In other words, the pricing is adjusted over 3 years and then for 5 years, 13-year agreement.

But then, last time, I talked about an RFQ with GE Aviation. And it's true, but that doesn't relate to MRAS. That relates to the other part of GE Aviation, which is an internal structure. The cells and TRs are more like external to the engine. Then there's composite structure inside the engine, internal structure. And that's what we're doing the RFQ about, and that's still ongoing. And we responded to the RFQ. There's a meeting on Friday. I guess that's up for a negotiation or something like that. But we're already qualified for a number of programs with 3 different product forms are for bidding on a little bit product forms, which is good because that means there's a big investment to qualify some of those programs even though we didn't have any kind of long-term agreement.

So we've given proposals on a number of product forms, but those 3 or 4 that we're already qualified on might, I'll say, my opinion is that the chances are -- there's very high likelihood that we'll get those programs in the RFQ process just because there's a big expense in qualifying a supplier, and we were qualified recently. But we're also shipping into most of those programs already, so to start all over again now would be a highly unusual thing.

I can't guarantee it, but I think it would be highly unusual for that to be changed. But those internal structures are for the engines, for the 747, the 787 and 777X. We are shipping into those programs in most cases.

We also -- this is still with GE. There's a new project we're just working on now for the 777X. We don't know if we'll get it or not. But it's quite a big project, so we're hoping on that one.

We also have a large part that we're working on, and that's now going to Phase 2. So we're shipping in for the prototypes and development work. So Phase 2 has been approved. That's really a pretty exciting program. It's materials and parts. So much -- it's an exciting program. And it's a little surprising that GE Aviation is working on it, but it's a very nice program and going well, and we feel good about that. I think that if it really goes into production, it's probably the end of last -- sorry, the end of next year they'll start ramping into production, the potential is quite, quite large. So let's cross our fingers on that. But so far, so good. That's not a competitive situation. It's not an RFQ. That's something that we've been working on with GE Aviation and we're very happy about it.

Remember, we talked about the joint development agreement project that's going well. We're hoping that it would go into production with that new product that's under development quite soon, maybe the beginning of next year.

There's another project, another new product that we're working on with GE that actually wasn't part of a formal agreement, but nevertheless, it's just good to us. And now it looks like it's moving into production. We hope, in the really near future as well. That would require a fairly light qualification at the second one. The first one, probably a little bit more qualification, but nothing near the qualification that we go through for our materials for structures.

Okay, that's GE. There's another major aircraft company we've spoken about. We'll just quickly update you. There's a number of material specifications that we're working on. One we're currently in qualification on. The others are under review. There are big dollars associated with them, so we feel good about that. There's also an interesting opportunity that's kind of material in part -- large part for a civilian aircraft, and that's going well. We're still doing some development work and still going through the qualification. But that's also exciting for us.

And then there's a lot of these legacy military aircraft. We're talking about the same company. It's a huge company, all right. Legacy military aircraft and we've done many, many, many coaches for parts and spares for a lot of legacy military aircraft: F/A-18, F-15 and others. And that looks like it's just about to get started now. In other words, we expect that we'll actually begin to get orders. And the potential is very large. We'll see what happens, but it's really exciting to be getting on the inside with that program.

So I guess I'll leave it at that. I think we're already at 11:30. So sorry about the very long introductory remarks.

Operator, we're done with our introductory remarks, and we'd like to take questions now if there are any.

(Operator Instructions) Our first question comes from Sean Hannan with Needham.

Can you hear me?

Yes, Sean.

Brian, just to follow up on the general trends comment that you had made. It sounds like the month of September starting off a little bit weaker. Just trying to get a little bit better context around that, how it compares to this last quarter revenue run rate, either the average or how we were exiting this past quarter. Any further color around that?

So, Sean, I think we're not going to quantify it at this time. But you could see it. I mean, look at the June, July, August, look at September. They all went down. And Tony and Chris have been in Asia for the last couple of weeks trying to understand what's going on there, and it's not really clear. Like I said, we expect that to recover in October and November. But I thought at least I reported to you that for some reason, and we haven't had that in quite a while, the revenues dropped. And it's not something we understand. I mean, no they're case-by-case, but we can't say, "Okay, there's one kind of common theme here." So I'm not sure what to say about it. And at this point, we don't want to quantify it. But like I said, just to give you some perspective if you look at June, July, August, and September, you say, yes, something happened in September. This is Asia electronics.

Okay. So just to make sure that I understand this correctly. On the average right now, we are trending for a down quarter with your expectation. In order to get back to parity quarter-on-quarter, October and November will need to pick up. That is what your expectation is, but that's what we'll have to look for.

So I don't think we're going to go that far in terms of our commentary that the quarter will be down. But you're right. I mean, it's just the math. Obviously, we'll have to kind of recover and then some little bit in October, November, to get to a, what you call, to parity or something like that, or a flat quarter as compared to the second quarter. But we're not saying that at this point that we expect the third quarter to be down in electronics. We're not going there. But we just want to report the facts that we know, which we have to do and we often do that. The expectation for the third quarter, like I said, we expect recovery based upon our internal forecast. So we'll have to see how that pans out, what happens.

Okay. And the next question here, and there's somewhat 2 parts to this because my suspicion is that these might be related. But first, looking to see if we can get a little bit more color on the nature of the softness that you're seeing in Asia. If there's some specificity that you could provide, that would be helpful. And then the second part is when I observe the customer concentration metrics you guys provide, your top customers are outpacing the aggregate growth. So I think we can make some assumptions of what some of those smaller customers are doing or really not doing. So trying to see if you could perhaps elaborate on what's going on there with some of the others within your customer base.

You're talking about the percentages for the top customers. Remember, that's combined with aerospace. And I think you're really focused on that. But I think the aerospace is kind of skewing it or confusing it because there are 2 aerospace customers in the top 5, and they're both up quite a bit in the second quarter. That other customer that you probably don't know too well was an ablatives customer. So you're asking a question that's a tough one for me to answer. I don't pinpoint any one thing, but it seems like the market that we focus on, the market we serve, which is the infrastructure market, for some reason, was a little quiet for us in September. We didn't see it coming in the forecast we had. Our internal forecast at the beginning of September did not predict this. But with electronics, it's certainly not the first time that's happened. Sometimes, the visibility is not so great. And you look back, and often it could be a short-term event. That's at least in the past our experience. And you wonder what happened. You scratch your head. And maybe sometimes, you never really know for sure. There are theories, but you don't really know for sure what really happened. So I apologize for not being able to help you more, but I'm not sure what other information that I can provide that would be helpful.

Okay. The Meteorwave line, you indicated that while you're still encouraged by the opportunities materialization, the revenue uptake has been a bit slower. What's your sense at this point, Brian? Is that something where you -- in your active conversations with your customers, you'd expect that we're still on the cusp perhaps of that uptake? Or is the picture becoming a little bit more ambiguous, whether we will truly realize the uptake that you're otherwise hoping for? How should we be thinking about this opportunity more tangibly materializing for you in some of the near quarters?

So Sean, first of all, it wasn't just hope. What we've indicated in the past quarters was based upon lots of detail-specific information we're provided by our customers and the OEMs in Asia in particular. So that's the first thing. The second thing is the Meteorwave revenues did move up in Q2 as compared to Q1, sort of moving in the right direction. Our prediction, our forecast, the internal forecast is they will continue to move up in Q3 and Q4 sequentially quarter-over-quarter. The question is, when are we going to see that real acceleration that's going to drive the top line of electronics as a whole? And that's where we're thinking that that's not going to happen as quickly as we hoped and as quickly as we were told. And this is really kind of new information, new revelation. It has nothing to do with the September numbers, by the way. It's a totally different question. I would think it would be a mistake for you to combine those 2 in your thought process. But we've been back to our customers and OEMs in Asia, especially in the last few weeks, trying to understand. And now we're being given more of this discussion about, well, it's the 4.5G is still a little off and things aren't going to really start to ramp up for telecom infrastructure equipment until 4.5G gets into high gear or full swing. The reason it's a double whammy for us, though, is because we're getting on these new programs or qualified new programs, but the new programs aren't going to turn to revenue until those new programs go into production. And what we're being told is that some of these new programs aren't going to go into production until there's a sense that 4.5G is picking up a little more momentum. We ask, "When that's going to be? And the answer is next year. When next year? The answer is we don't know."

So I think that we're getting a little gun-shy because of these OEMs, I think, they told us things in the past that they now ended up being optimistic at least in terms of timing. So maybe now they're a little reluctant to be pinned down as much as they were in the past. So I agree, and that's the purpose of my -- these introductory remarks is to explain that what we thought a year ago and 9 months ago and 6 months ago looks like the opportunities aren't any different but the timing is pushed out. And maybe, a year, I don't know, because if we went back a year ago, I think by now more or less, I have to think about that. But if we went back a year ago, Sean, by now more or less, sometime this fall, we were expecting to see the revenues really ramped up on Meteorwave and our new programs. And now we're simply told, "Well, that's maybe a next year event, not a this-year event." So I'm kind of trying to do the best I can to tell you what we know without speculating too much as to what we don't know. But I agree, and that's what I think I'm trying to get at is that there is something different here. My opinion -- our opinion based on what we're being told is not a question of if. It's a question of when. We're not aware of any programs that we lost that we're supposed to get on, but there's a timing question here and we keep hearing about this discussion about 4.5G that seems to be an important driver in the timing.

Okay. All right. I'll see if I can circle back on that topic. Last one for the moment here. The margins within the quarter were [up] a little bit off really a weak first quarter. They were a little bit lower than our model. I think that you would mention that there were still some duplicate costs, as you're addressing some of those restructuring efforts underway. Can you provide any color, either Brian or Matt, around what may have suppressed the margin progression in order of magnitude, whether if it was primarily attributed to duplicative costs? Was mix a factor within there? Any other color around that would be helpful.

Well, okay. First of all, Sean, in fairness to that, those are your numbers, not our numbers. So we're not saying we're off from what we thought was going to happen. But let's -- I'll talk about a few things. I want to make sure that you got the tax rate difference, which it could be very confusing between the first quarter and the second quarter. What we're looking at, what Matt referred to in his introductory remarks, were after tax before special items because we think that's the more valid comparison. And if you look at the difference in the top line, it kind of explains the bottom line. Now as I said, all the additional contribution to the bottom line and then a little of the extra came from aerospace. The electronic top line was flat and actually electronic contribution was down a little bit. But I think you hit it right. It's because of the U.S. situation, not the Europe -- not the Asia situation. The U.S. situation with restructuring costs was actually -- the restructuring situation actually was negative in the second quarter, right, compared to the first quarter. We didn't get the benefit of any restructuring, but we got the penalty, the negative from the duplicative -- the duplicative costs because we're running 2 facilities. And it's just a very kind of practical problem. But we had to hire a lot of people in Arizona, ramp up Arizona, but we couldn't turn California off until those people have come onboard, were trained and were ready to produce a product for our customer. So we had duplicative costs. And we also just got kind of a messy P&L. So I think if you look at electronics, which is I think you're focusing on as a stand-alone, the top line was flat, down just a tiny, tiny bit, I think, from the first quarter, maybe a couple of hundred thousand dollars, right? And the bottom line was off, but it was driven by the restructuring kind of messiness that we talked about. But there's just really nothing in the margins, no mixed story, nothing else to talk about electronics. Like I said, the improvement in the bottom line is attributable to aerospace for the company as a whole.

And I'm not showing any further questions at this time. Would you like me to repeat the instructions?

Sure.

(Operator Instructions)

We have a follow-up question from Sean Hannan with Needham.

So just coming back to the Meteorwave 4G, 5G topic. I'm a little confused, Brian, because there are other supply chain players or even materials players that are ultimately being signed in to or feeding into some of the next-gen comment with structure and going into these technologies that have in recent months or quarters, given some expectation that the transition of these technologies in some manner are suddenly accelerating versus stepping back. What I mean by that, if I were to retrench about 9 months ago, there was a more common thought, and I'll use 5G as a reference point. There is a more common thought that this would be more of a '19 to '20 type of OEM to deployment scenario time frame and that there are more indicators suggesting that this is going forward into later '18 and then '19. And again, that's been more focused around 5G. What I'm hearing -- what I believe I'm hearing from you is that we have more of a focus right now on 4.5G, which then would be more of the second half of calendar '18 perhaps uptake. And so I'm not getting consistency here for what's being suggested in kind of the market uptake. And so I'm just trying to understand this a little bit better and perhaps why this feedback or commentary you're providing today is a little bit different.

Well, I don't know really what to say about that. I'm a little surprised to hear that people are telling you that 5G is actually going to start ramping up in '18. I haven't heard that before. I'm not saying it's not true, but...

More initial activity versus in a true ramp stage, but at least the activity.

That sounds like development of the products for 5G. That's something else. The difference is there's just not a lot of revenue when you're in development, I think that's what you are talking about, anyway. So we've already had gone through a lot of development cycles for the next-generation equipment. But what drives our revenues is when those -- when an equipment goes into production. I think that's probably what you're talking about. So it's hard for me to understand those comments. But I can tell you with confidence that at least what we're being told by our key OEMs, which are the kind of who's who of OEMs in Asia, and customers as well, maybe people are getting different information. I'm just speculating here. Maybe they're referring to new programs that we're on, I don't know. But this is the information that we're being provided. And it's not just one data point. There's a mosaic of data points here that are painting the story for us. So I wish I could up you more. I don't know, obviously, what other information you're referring to and what customers you're talking -- sorry, what other companies you're talking about, what programs they're on. So it's hard for me to really respond in a meaningful way, except to emphasize, I'll say 2 things. I'm a little surprised if 5G was actually going to start ramping into production next year -- we've been told, at the end of the year. But secondly, I think this is a key thing. I can speak best and most intelligently to what we know and what we've been told about our business, and it is always good to have these kinds of [sandy] checks and understand what other people are being told to make sure that we're not being told something which is inconsistent or inaccurate. But I can't really respond very effectively to these other data points you've received at this point, Sean.

Let me see if I can ask the question in a different manner. Have you received, observed, heard any changes in time frame expectations for what you're hearing today versus what you were perhaps hearing a few months or quarters ago?

Yes, absolutely.

Okay. And so those changes would be that it would be pushing further out to the right?

Absolutely. Black and white, that's -- we've heard -- yes, that's what we're being told. And I think I kind of alluded to this but maybe I should just touch on it again. It's a little bit awkward because it's kind of now -- it's a little embarrassing for these companies to have to tell us these things because I know what they told us before. So maybe they're a little bit shy initially about coming clean. But at some point, they do. And so the answer to your question is an absolute yes.

Operator, do we have any other questions at this time?

Well, there is one other question. It's from (inaudible) with (inaudible)

I have one question related to have you begun to see a pickup in the production of the LEAP-1A engines yet? Has that started to impact your aerospace revenue?

The LEAP engine, there's -- LEAP engines, I should just maybe explain. You probably know, but the LEAP engines are in 3 different programs. One is the 737, and we're not involved with that program. The other is the A320neo, and the other is the C919. The program that's picking up right now and starting to accelerate is the A320neo with the LEAP engine. The C919 are still doing more development work. So there's some revenue for the C919, but the driver right now is, for the LEAP engine, is the A320neo.

Okay. And that is starting to impact your revenue now?

Yes.

I'm not showing any further questions at this time.

Okay. Thank you very much, operator. And thank you, everybody, for listening in. So Matt and I are in the office. If you have any follow-up questions, feel free to give us a call. Thank you again for your time. Have a good day. Goodbye.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.