Park Aerospace Corp (PKE) 2018 Q4 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Fourth Quarter and Full Year 2018 Earnings Release Conference Call. (Operator Instructions)

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

Thank you very much, operator. First of all, I want to apologize for the late start. We had some last-minute logistics problems, so we've been scrambling for the last 0.5 hour. But we made it at least a little bit late, so sorry about that again.

I have with me, of course, Matt Farabaugh, our CFO. And this is our fourth quarter conference call. So Matt, why don't you get started with the financial analysis? Matt's going to be reading from the transcript which was already posted on our website. And as you know, there's some detailed information in Matt's commentary, which is posted on our website, so I recommend you check the website for the details.

Go ahead, Matt.

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 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 fiscal year 2018 fourth quarter ended February 25, 2018, P&L, which are not specifically addressed in the earnings release. During the fiscal year 2018 fourth quarter, North American sales were 62% of sales -- of total sales, European sales were 6% of total sales and Asian sales were 32% of total sales compared to 55%, 7% and 38%, respectively, for the 2017 fiscal year fourth quarter and 63%, 9% and 28%, respectively, for the 2018 fiscal year third quarter.

Sales of Park's high-performance, non-FR-4 electronics materials were 94% of total electronic material sales in each of the 2018 fiscal year fourth quarter and 2017 fiscal year fourth quarter and 93% of total electronics materials sales in the 2018 fiscal year third quarter.

Park's aerospace sales were $9.9 million or 36% of total sales in the 2018 fiscal year fourth quarter compared to $8.2 million or 30% of total sales in the 2017 fiscal year fourth quarter and $10.2 million or 39% of total sales in the 2018 fiscal year third quarter. Park's electronics sales were $17.9 million or 64% of total sales in the 2018 fiscal year fourth quarter compared to $19.4 million or 70% of total sales in the 2017 fiscal year fourth quarter and $15.9 million or 61% of total sales in the 2018 fiscal year third quarter.

Park's aerospace sales were $40.2 million or 36% of total sales in the 2018 fiscal year compared to $32.1 million or 28% of total sales in the 2017 fiscal year. Park's electronics sales were $71.0 million or 64% of total sales in the 2018 fiscal year compared to $82.5 million or 72% of total sales in the 2017 fiscal year. Gross profit for the 2018 fiscal year fourth quarter was $6.9 million or 24.8% of sales compared to $7.4 million or 26.8% of sales for the 2017 fiscal year fourth quarter and $6.1 million or 23.2% of sales for the 2018 fiscal year third quarter.

Before special items, selling, general and administrative expenses for the 2018 fiscal year fourth quarter were $4.7 million or 17% of sales compared to $4.7 million or 17% of sales for the 2017 fiscal year fourth quarter and $4.6 million or 17.6% of sales for the 2018 fiscal year third quarter. Before special items, investment income, net of interest expense, in the 2018 fiscal year fourth quarter was $118,000 compared to $105,000 in the 2017 fiscal year fourth quarter and $45,000 in the 2018 fiscal year third quarter.

Before special items, earnings before income taxes for the 2018 fiscal year fourth quarter were $2.3 million or 8.2% of sales compared to $2.8 million or 10.2% of sales for the 2017 fiscal year fourth quarter and $1.5 million or 5.8% of sales for the 2018 fiscal year third quarter. Before special items, net earnings for the 2018 fiscal year fourth quarter were $2.0 million or 7.1% of sales compared to $2.5 million or 9.2% of sales for the 2017 fiscal year fourth quarter and $1.1 million or 4.3% of sales for the 2018 fiscal year third quarter.

Depreciation and amortization expense in the 2018 fiscal year fourth quarter was $755,000 compared to $733,000 in the 2017 fiscal year fourth quarter and $724,000 in the 2018 fiscal year third quarter. Capital expenditures for the 2018 fiscal year fourth quarter were $181,000 compared to $48,000 in the 2017 fiscal year fourth quarter and $203,000 in the 2018 fiscal year third quarter. The effective tax rate before special items was 13.5% in the 2018 fiscal year fourth quarter compared to 9.1% in the 2017 fiscal year fourth quarter and 25.0% in the 2018 fiscal year third quarter.

For the 2018 fiscal year fourth quarter, the top 5 customers were AAE Aerospace; GE, including its subcontractors; Sanmina; TTM; and WUS, in alphabetical order. The top 5 customers totaled approximately 46% of total sales during the 2018 fourth quarter. Our top 10 customers totaled approximately 59% of total sales, and the top 20 customers totaled approximately 72% of total sales for the 2018 fiscal year fourth quarter.

Thanks, Matt. Okay. So back to Brian, of course. We do have a few things to cover here, but I'll try to move through them a little bit more quickly because of the late start.

First of all, let me say, we're not doing a presentation this quarter like we did the last quarter. Maybe we'll do that next quarter, but we'll try to give you some updates in any event.

Okay. So let's start with the process we announced on January 4, I think it was, when we announced our third quarter earnings, a process regarding electronics -- our electronics business. It's going quite well, and we're pleased with that. Greenhill, the investment banker that we're using, is doing a nice job. As we explained before, we will do what is best for our shareholders, our people, our customers and OEMs, and we're just not going to sell it if it's not right. But the process is going well, and that's the update on the process for now.

Also, let's talk about the electronics business generally. Things are going well for the electronics business. And finally, it's been maybe a year of waiting for some things to happen, especially, rather, with 5G. But 5G is -- looks like it's finally starting to move a little bit. It's not at full ramp at all yet, but it's starting to move a little bit. And that's good for us. A lot of the work we're doing with Meteorwave and new programs relates to 5G. So as 5G starts to ramp, that's going to be good for Park.

So anyway, let me talk about the fourth quarter regarding electronics. It's kind of interesting because we could actually see something good was happening in electronics even back December. And then January and February, we could feel -- we can sense a lot of anecdotal stuff. Also, Meteorwave continue to make good progress, again a 5G story.

But what happened was December was a holiday month. January was a holiday month. The first week of January was kind of slow. And February was a big holiday month. The last 2 weeks of our fiscal -- February were the Lunar New Year. And actually, those -- it wasn't good timing. Those are the last 2 weeks of our fiscal year, our quarter, so that's when we'd be seeing a real effort to get product out the door.

So we were a little, I guess, hampered, let's say it, by the holidays, but we still could see something was going on. Then we got to March. It was the first month without any major holidays, and March was quite a strong month. Probably -- we're talking electronics here, electronics. So that's good.

Now in electronics again, Asia. So we understand there's a little slowdown now starting in April. And our customers and OEMs are predicting that should last a few months and recovery should be in July. At least that's what we're being told. So it's a 3-months event. It's not a really major event, but we could see it in April and -- sorry, and we probably will see it in May as well. We expect to see it in May as well, maybe June.

So what is it about? Hard to say. It kind of feels like it's an inventory correction, a short-term adjustment like that. Normally, you'd think about an inventory correction, although it doesn't seem like people are saying that.

Now there are the trade issues that are kind of hanging over the whole Asian market now. And as you probably have read or heard some news, there's some kind of serious trade concerns. And it's a factor, but we don't believe that's the whole explanation for this -- what seems to be a temporary slowdown. But it does -- it's definitely a factor, and we have specific instances and evidence where it's affecting our business. So that's probably not a shock to anybody, but these trade issues are becoming seemingly more prominent this time.

But nevertheless, Meteorwave continues to grow, which is good for us, of course. That's our new product, which we have many different -- we have many different members of the Meteorwave family, as you know.

The U.S. market for electronics, it continued at a reasonable pace. We don't see a slowdown in the U.S. in the last month or 2. Restructuring is finally coming together. We're not there yet. The bottom line for U.S. electronics is certainly better in Q4 than it had been in Q3 and the prior quarters. Still some way to go, but we're making progress. Obviously, way too slow for what -- at least what I would like to see, but the progress is clear. And that's a good thing.

So back to 5G. This now deals with all electronics. It seems like it's ready to ramp at the end of this year or next year for infrastructure. Remember, we're infrastructure. So if you hear that somebody else is working on 5G and actually doing production work in 5G, you need to ask, "Are they doing infrastructure equipment? Are they doing handsets or something else?" We're dealing with infrastructure equipment. That's what we do.

So also, I just want to point out that we have a little bit of a new initiative in RF. We've been in RF for a while, but that hasn't been our major focus. But Tony and Chris and the guys are spending a lot of time in Asia meeting with RF customers and OEMs. And we feel pretty good about it. The reception seems to be quite good so far. That's something we really haven't exploited so much in the past, but that's something we're doing now.

On aerospace, so in aerospace, we have some news items. We introduced what we call Electroglide. That's our lightning strike protection material. That was developed through some joint effort -- joint development effort with MRAS. That's the Middle River Aircraft Systems division of GE Aviation, which produces nacelles and thrust reversers, and that's our main GE Aviation customer, MRAS.

So our Electroglide material is now qualified for nacelles on the LEAP-1A engine for the A320neo. And that's for both AFP, automated fiber placement, that's kind of robotic methodology for doing -- for lining up composite structures; and also, for hand lay-up. And we're already starting to ship to this program. This is something that's serious volume. This is a lightning strike material on this program with serious volume. So we're qualified on that program. We're just starting now, but we're talking about some serious revenue here. That's not what you'd call a niche product.

Another joint development project with MRAS, again, that's that division of GE Aviation that we work with on nacelles and thrust reversers. We do a lot of development work with them. There was an MOU actually related to this project. And this is related to a product that we haven't announced yet, but the product development was successful. So the formulation work was successful.

And now we've agreed to our commercial terms relating to this product with MRAS, and we're now investing in the equipment upgrades necessary to do the qualification and actually go into production. In order to do the formal qualification, we actually have to use the production equipment that we're going to use for production -- the manufacturing equipment we're going to use for production. So I would think, by the end of the year, we should be in production on that product as well, and that's about a $1 million investment on Park's part in terms of that joint development effort.

So -- and we're also, third item, again back to MRAS, working on a new MOU for another major project. That's probably a 3-year project. We're just starting on that one now. These are excellent opportunities for us to break into the market with new products, expand our footprint. Very, very good that we can develop a product with a partner and get qualified in major programs right away. That's a very special opportunity we have.

So they say Rome wasn't built in a day. Of course, we can testify to that, but we're building our little aerospace empire brick-by-brick here.

So Q1, I'm sure you're interested in Q1, you always are now. This is our fourth quarter announcement, so we actually have 9 out of 13 weeks in the books already, at least the revenue part of it, not the bottom line in terms of the second month in terms of April. We don't have a closing for April. But we have the revenue numbers for 9 out of 13 weeks, so we have pretty good insight into the first quarter top line.

So aerospace should be flat with Q4, approximately $10 million. Electronics should be up considerably from Q4. In Q1, we're talking about, electronics should be up considerably from Q4. So Q -- let's see, Q4 was $17.9 million, and Q1 should be up considerably from that number.

Let's see. One other thing you probably will want to know is that we're beginning to segment our financial reporting with aerospace and electronics being the 2 business segments. You'll see that in our 10-K, which will be filed later on this week.

We wanted to include that in the disclosure for the fourth quarter, the news release. But we don't have a final sign-off from our auditors quite yet, so we didn't want to get ahead of the game a little bit, get the heart -- whatever, the cart before the horse. We'd probably get that sign-off today on the segment reporting, but it's just something I think you might want to look out for. Let's see how we're doing on time.

Matt, before we go to questions, you want to quickly -- explain quickly the big fourth quarter adjustment relating to the tax provision?

Sure. So we had a very large tax benefit in the fourth quarter, and that relates to the tax law changes that the U.S. has enacted recently that affects pretty much everybody. We had a large accrual already on our books, which we get to write off and just -- in place of this new tax.

If we had repatriated our funds from overseas before the enactment of this tax, we would have incurred about $60 million of taxes in the U.S. By waiting to do anything until after the enactment of the tax, we have now a tax bill that is about $22 million, and it relates to all of our offshore earnings and profits. So that $22 million is really in place of the $60 million that we would have had to incur if we had done anything beforehand.

So we had $40 million, roughly, accrued. We have about a $22 million, roughly, tax bill on -- based on this new tax law. And that sort of is where we get to the roughly $18 million tax benefit that you see going through our P&L in the fourth quarter. I think...

Okay. Thanks, Matt. Sorry, did you -- sorry, were you done?

Yes.

Okay. Matt and I are not in the same room right now, so sorry that we're not exactly particularly coordinated. All right. Thanks, Matt, for that explanation.

All right, operator. I think we're ready for questions. Would you please go ahead with questions at this time?

(Operator Instructions) Our first question is from Sean Hannan of Needham & Company.

Just something to follow up on, Brian, in terms of some of the color you had provided around aerospace a little bit earlier. Just trying to understand, are some of these programs all effectively included in some of the general numbers that you both had outlined and the thought process [in there] for revenues for that aerospace side? So just trying to figure out if that's included in that.

And to what extent are there other programs that you're currently working on or very close with that could otherwise be incremental to that? It's really just for perspective to understand some of the activity and the degree of the momentum that you have there, because I think it's pretty substantial.

Okay. Thanks. So the lightning strike is included in that forecast. You're talking about the forecast that was in the presentation that we gave on our -- during our January 4 conference call, Sean?

Correct.

Okay. So the lightning strike that we just announced commercialized is in that forecast. That other product that I mentioned that should be in production by the end of the year, that's in the forecast. The third product I mentioned where it's an MOU we're just entering, working with MRAS on now, and that's probably a 3-year project, that revenue was not included in the forecast. So 2 out of 3.

Okay, that's very helpful. And then when you think about the current efforts today in new business development and working in terms of design wins, et cetera, can you characterize a little bit of what you're seeing today? And is there any noticeable change in momentum that you're observing over the last few months to quarters at all? Or how would you otherwise generally characterize that?

Are you asking about aerospace or electronics?

Aerospace.

No, I don't think there's any major change. I think the momentum is quite strong. I think it has been for a while. Of course, the way it works is that you -- the investors see it when there's an event to report, but usually, there's maybe a year or 2 leading up to that event.

So the things that we're talking about now, they didn't just happen over the last couple of months. These things have been in progress for a while. So fortunately, they're tracking pretty nicely in terms of the schedule. The first 2 or the second one is just getting started on that one.

But I don't know. I guess the only other comment I would make is this. So these are major qualifications we're talking about, major programs with GE. And that -- I've made this comment before, but I'll make it again. That gives the company tremendous credibility. We're not really considered an outsider anymore. Maybe even a few years ago, some of our competitors were laughing at us, but they're not laughing anymore, that's for sure.

So I think what happens is that it's not the market so much, but we've gained momentum by continuing to get on new programs, on new major programs with new products, existing products. That gives us tremendous credibility. I mean, it gives us really nice revenue, as you can see from the forecast, but also tremendous credibility.

Because the worst thing to do is go into a new customer and talk about a new product that you want to provide this customer, you want to get on one of their programs. And their first question is, "Okay, what other programs are you on?" And then, well, you kind of maybe shuffle your feet a little bit, do a little tap dance, but you really don't have anything substantial to tell them about.

When you say you're on GE -- you're qualified with GE Aviation, you're certified on these programs, that's really the end of that discussion. They probably know it already anyway. But if they don't, that's the end of that discussion. Does that help you a little bit?

It does. That's helpful. Okay. Let me see if I can switch gears to the electronic side of the business. As you evaluate here, I'm not sure if I fully understand where we are in that evaluation process.

Here we are where, in a general context, the business has improved a little bit. Yes, we're hitting a temporary lull on a relative basis versus that improvement just a few months ago, but we are seeing some generally better demand levels. 5G, depending on who you talk to, is still, at the end of the day, not terribly far around the corner.

You have pieces of your business that are probably going to be very specific to having to remain here, U.S.-focused given some mil/aero that you might have and then some other business that's a little bit more within that comm infrastructure area.

So just trying to understand if I can -- see if I get an understanding as I step back, where -- can we get a little bit more of a refined viewpoint where you stand in that evaluation? How you are feeling about that business today? Or are there any views you have, whether -- perhaps even if you did ultimately decide to sell that, do you feel more encouraged around that? I mean, just some better clarity on where that stands today would be so much more helpful.

So we're in a process, so we'll limit what we'll say, Sean. But the process is going well. Like I said, it's a process. It's not just a preliminary evaluation. We're involved in a process, an investment banking process regarding the sale of a business -- the potential sale of a business.

It's going quite well. The interest that we received is high quality and good, positive. I don't want to comment on what point in the process we're specifically in at this point, but it's really going according to schedule and according to plan. Everything's good as far as the process is concerned. I think we're all pleased about it.

Now as far as the business is concerned, what's kind of funny, I mean, I guess maybe -- I don't know, I always believed this was a very good-quality business, but in the last year, it was difficult because the results were thin. They weren't there. We're really waiting for things to click, waiting for things to happen. And it's very nice to get the validation. I didn't really have too many doubts, but it's nice to get the valuation -- validation, rather, that things are moving in the right direction.

So from my perspective, I don't really feel any differently about it. Just the outside validation is more obvious, and for investors, it's easy for -- easier for them to see numbers moving in the right direction rather than for them to just kind of listen to my perspective on the business and why I feel confident, why I feel optimistic.

So I think that's the difference. The move -- the world has kind of moved a little bit more in our direction. But I still -- when we announced that we were starting a process to sell the business on January 4, I think I said at that point, I think it's a wonderful business, wonderful people, wonderful products, and I feel the same way. Just that maybe there's a little more validation in the numbers, which is always nice. It's nice to get the validation.

But just to sum up, the process is going according to plan. It's going well. I'm very pleased with how the process is going. And the business, I think, is a very high-quality business, and I think I've said this, right? I almost remember on January 4, if somebody does buy this business, I think they would be very lucky to own it, very fortunate to own it. So -- and we'll keep you posted. If there is anything to announce, you'll find out right away, obviously.

(Operator Instructions) And I'm showing no further questions at this time.

Okay. Thank you. This is Brian again. Thank you very much. I guess if it wasn't for Sean, we wouldn't have too many questions anymore.

But okay. Well, thank you very much for listening in. This is our fourth quarter, so we'll be talking again fairly soon. Our first quarter, we'll probably announce maybe at the end of June, something like that. We don't have a date for it yet, but that would be an approximate time frame, so probably less than 2 months from now.

Thank you again, everybody, for listening in. Have a great day. Feel free to give us a call if you have any follow-up questions. Thanks again. Bye.

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