Park Aerospace Corp (PKE) 2019 Q1 法說會逐字稿

Good morning. My name is Amanda, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. First Quarter Fiscal Year 2019 Earnings Release Conference Call. (Operator Instructions)

And at this time, I would like to turn today's 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. With me, as usual, is Matt Farabaugh, our CFO. This is our first quarter conference call, of course. And Matt will start with the financial commentary. I want to remind you, of course, that Matt -- a transcript of Matt's commentary is already posted on our website. There is, as usual, quite a bit of detail on Matt's commentary, so you might want to check our website for some of that detail as well. After Matt and I are done with our introductory comments, we'll go to the questions. Okay, Matt, why don't we get started with the financial commentary?

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 25, 2018, various factors that could affect future results. Those factors are found in Items 1 and 1A 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 2019 first quarter ended May 27, 2018 P&L, which are not specifically addressed in the earnings release.

During the fiscal year 2019 first quarter, North American sales were 53% of total sales, European sales were 10% of total sales, and Asian sales were 37% of total sales; compared to 56%, 7% and 37%, respectively, for the 2018 fiscal year first quarter; and 62%, 6% and 32%, respectively, for the 2018 fiscal year fourth quarter.

Sales of Park's high-performance, non-FR-4 electronics materials were 94% of total electronic material sales in the 2019 fiscal year first quarter, 92% in the 2018 fiscal year first quarter, and 94% of total electronic material sales in the 2018 fiscal year fourth quarter. Park's aerospace sales were $10.4 million or 33% of total sales in the 2019 fiscal year first quarter, compared to $8.7 million or 32% of total sales in the 2018 fiscal year first quarter and $9.9 million or 36% of total sales in the 2018 fiscal year fourth quarter. Park's electronic sales were $20.7 million or 67% of total sales in the 2019 fiscal year first quarter compared to $18.7 million or 16 -- 68% of total sales in the 2018 fiscal year first quarter, and $17.9 million or 64% of total sales in the 2018 fiscal year fourth quarter.

Gross profit for the 2019 fiscal year first quarter was $8.5 million or 27.4% of sales, compared to $6.3 million or 23.1% of sales for the 2018 fiscal year first quarter, and $6.9 million or 24.8% of sales for the 2018 fiscal year fourth quarter. Before special items, selling, general and administrative expenses for the 2019 fiscal year first quarter were $4.7 million or 15.1% of sales compared to $4.4 million or 15.9% of sales for the 2018 fiscal year first quarter, and $4.7 million or 17% of sales for the 2018 fiscal year fourth quarter.

Investment income net of interest expense in the 2019 fiscal year first quarter was $340,000 compared to $239,000 in the 2018 fiscal year first quarter and $118,000 in the 2018 fiscal year fourth quarter. Before special items, earnings before income taxes for the 2019 fiscal year first quarter were $4.1 million or 13.3% of sales, compared to $2.2 million or 8.1% of sales for the 2018 fiscal year first quarter, and $2.3 million or 8.2% of sales for the 2018 fiscal year fourth quarter. Before special items, net earnings for the 2019 fiscal year first quarter were $3.4 million or 10.8% of sales, compared to $2.5 million or 9.1% of sales for the 2018 fiscal year first quarter, and $2.0 million or 7.1% of sales for the 2018 fiscal year fourth quarter.

Depreciation and amortization expense in the 2019 fiscal year first quarter was $704,000 compared to $807,000 in the 2018 fiscal year first quarter and $755,000 in the 2018 fiscal year fourth quarter.

Capital expenditures in the 2019 fiscal year first quarter were $13,000 compared to $105,000 in the 2018 fiscal year first quarter, and $181,000 in the 2018 fiscal year fourth quarter. The effective tax rate before special items was 18.7% in the 2019 fiscal year first quarter compared to negative 12.4% in the 2018 fiscal year first quarter and 13.5% in 2018 fiscal year fourth quarter. The fiscal year 2018 first quarter tax rate included a reversal of a 1048 tax reserve, and the tax rate excluding the reversal would have been 18.7%.

For the 2019 fiscal year first quarter, the top 5 customers were AAE Aerospace; GE, including its subcontractors; Shennan Circuits; TTM; and WUS, in alphabetical order. The top 5 customers totaled approximately 41% of total sales during the 2019 first quarter. Our top 10 customers totaled approximately 55% of total sales. And the top 20 customers totaled approximately 68% of total sales for the 2019 fiscal year first quarter.

Okay. Thank you, Matt. This is Brian, again, and I'll give you a few comments to add to Matt's. So our last call was only about 6 weeks ago. There's not really a lot by the way of updating, so some of my comments will be a little more brief. I think the one thing we announced since our last call was the introduction of Meteorwave 8000. I don't have kind of out of pocket I don't notes in front of me, but I believe the loss is 0.016 measured at 10 gigahertz. I think it's open resonator or split post cavity technology. And that's part of our Meteorwave family; a new member of the Meteorwave family uses the Meteorwave UL, which is really nice; also processes like Meteorwave, so our customers are going to be very used to the processing parameters.

Just to give you a perspective on the loss properties, Meteorwave 4000, which until now was our lowest loss product with 0.0028, so significant enhancement in terms of the loss properties. So this is a product that we've all really had high hopes for. And already, I understand from Chris and Tony, that reception is quite good. You know it's only been out there for 2 or 3 weeks, so that's a really good product. I think in our news release, we announced that it targets 5G right down the highway or freeway, whatever, 5G.

Okay. So switching gears here, we're now pretty deep into the strategic evaluation potential sale process for our electronics business. This has been ongoing. We announced it originally, I think, in January 4, so it's been ongoing for a little while now. The process is going well. I think we announced we retained Greenhill investment -- an investment banking firm to help us with the process. They're doing a nice job. So we would expect to announce a deal or a discontinuation of the process sometime this quarter, or the second quarter. We want to bring this process to a closure.

And at the end of the day, we'll do what's best for Park. And when we say Park, we mean our shareholders, our people, our customers and OEMs. As we said before, you've heard this before, but I think our electronics business is a wonderful business with wonderful people and wonderful products. And if somebody was to buy it, I think they'd be very fortunate. So again, we'll do what's best for our company, and we'll only sell it if we think it's the right thing for Park. But because we are deep into the process, we're not going to comment further in our electronics business at this time. It just doesn't really make any sense for us to do that, so you're just going to have to bear with us in terms of any future comments about how our electronics business is doing. Again, we're pretty deep into this process. And then we'll see what happens. It may happen, it may not. We'll do what's right for Park. But one way or another, we expect to bring this process to a conclusion this quarter, and we will let you know as soon as it happens.

Switching to aerospace, really not much to update. As we said, it's only been 6 weeks since our last call. For Q2, we're estimating approximately $11 million of revenue for aerospace. Also, I want to let you know that some of the key engine programs we're on, and we're on sole source, are ramping a little slower than predicted. And that's not really unusual for complex new programs in aerospace, especially with [lots of] new technology, which is what we're talking about. At the end of the day though, the engines -- if the engines will be built and delivered as forecast -- sorry, these engines will be built and delivered as forecast. If the airplanes are built and delivered as forecasted, in other words, it will all be there ultimately, although we're not sure about the timing sometimes. We convey to you the information we have, and that's subject to some change. It's a very dynamic situation, when an aerospace company is ramping up, the new programs (inaudible) new technology.

A little good news for our engine company, our engine customer, our major engine customer, the introduction of their new platforms are going pretty well and smoothly only with minor hiccups. And I'm just giving out public information. I'm not sharing with you anything that is confidential, off the record. You can read this up yourself. But what also is pretty much public record, is that their competitors are having some real technical problems, not just ramping a little slower, but some major technical problems with their new engine rollouts. And we'll see what happens, but this could present more of an opportunity for our engine customer, which is GE Aviation, as you know, and for us, ultimately.

Okay. So like I said, short and sweet with the introductory comments. Operator, we're ready for questions at this time.

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

Nice work on the results here for this past quarter. Certainly a few questions here, Brian. Just jumping to a comment you had made a moment ago on some slowness that you're seeing in some of the uptake related to aerospace. Just to see if we can extend that thought process. How do we interpret that in terms of the next few quarters versus what you did in this last quarter? Obviously, it's a temporary factor, but just trying to make sure that we understand that appropriately.

We're talking about the major new programs of our major engine customer, GE, and I think these programs are ramping very well. It's just that, like I said, if you've been around aerospace for a little while, we're not 30-year veterans, but we're learning. These programs, especially when they contain a lot of new technology, sometimes ramp a little slower than predicted by the company involved. As I said, we're looking at about $11 million for Q2 for aerospace. This is -- this comment, the comment, Sean, related only to this major engine company and their new programs, we're not making a general comment about aerospace. So we'll see. I mean, in terms of the impact the next few quarters, we're not going to forecast anything past the second quarter at this point. And let's see what happens with the sale process. I think when we do our second quarter announcement, either we'll announce a sale or not and then maybe we can give more meaningful help in terms of we don't normally give guidance, but more meaningful help in terms of understanding the future.

That's very helpful. That's a good clarification. Okay. And then you had also made a comment that there's not necessarily a lot that has changed since our last call, and we had a pretty good result in both segments. And certainly, looking at the electronic side, it looks like we have some nice bounce here where there's some double-digit performance, revenues coming back here. So I just wanted to see if we could get a little bit more perspective on what are you seeing in terms of the continuation of what you experienced in this past quarter and some of the drivers behind that. It would be certainly a valuable perspective, especially given that we're not yet in position to really generate what will be kind of a next stage of growth coming through 5G, early activity within a few quarters down the road. So any perspective would be great.

As far as the -- so I'm not sure what most people are thinking. I guess we're thinking that it's probably going to be middle of next year when it starts to really ramp. We've had some discussions internally recently about this, and really not great consensus about that. Is it going to be early next year? Middle -- I'm talking calendar year -- middle next year. And we're thinking more middle next year. And obviously, that's only going to be a good thing for a company like Park that's focused in that end of the technology spectrum. Other than that though, Sean, we're not going to really want to comment on the current trends of electronics. I think what I could do is refer you back to the comments we made in our last call, which is about 6 weeks ago. I don't think things have changed dramatically since then in terms of our high-level observations about the trends of electronics. But because we're very deep in this process, it really isn't a good -- it doesn't help us to comment in great detail about how things are going with electronics. You have to understand what the position we're in and who might be listening to this call, so we don't want to negotiate with people through investor conference calls. So I hope you understand where I'm getting at. So we're going to decline to really give any more color or flavor about electronics other than to refer you back to the last conference call. And like I said, I don't think things have changed very much since then in terms of the overall trends and patterns.

Fair enough. And certainly respect that. Okay, so...

I'm sorry. It's just how it is.

Sure. Okay. And so in mentioning the Meteorwave 8000 product, can you elaborate perhaps a little bit on what excites you most about the product? How meaningful is it in rounding out that Meteorwave family and differentiate it versus what you've seen out in the marketplace? And does it add any unique talking point element in the value prop of that [electronics] business as you're working through your various considerations?

Well, we didn't announce it because of the process. I think it's a great product. I'm really very happy with it. And I think other people at Park would say the same thing. It's really very much in a leading edge for high-speed low loss materials. This is -- a treatment of loss material, I think that's how it's categorized, based upon its loss numbers. So this is cutting-edge, leading-edge, maybe a little bleeding-edge even, in terms of today and tomorrow's 5G technology. I think that our Meteorwave 4000 product, which as I said, I'm off the top of my head. But I think the loss was measured at 0.0028. I think that's what we publicized, was very much leading edge. So this is quite a few quantum steps ahead of even Meteorwave 4000 in terms of its loss properties, which is really the most critical property for next-generation equipment -- infrastructure equipment. The rest of the properties are very similar. It's the loss that's enhanced, very similar to the rest of the Meteorwave family. Like the thermal properties, for instance, are very similar.

Very helpful. Last question, I'll hop out of the way. Just from a modeling standpoint, you're looking at some of the results that came through operationally. As I look at what came through within COGS and within SG&A, just to make sure that there's nothing I'm missing or over-interpreting, was there anything perhaps unique that may have been subtly creating kind of a favorable impact within the quarter? I know you've done a lot of cost-containment work and restructuring, we're just trying to get a sense of the degree that what we achieved in this type of a margin result, the operating line, is able to be repeatable.

Okay, Sean. There's nothing unusual or out of the ordinary in terms of our cost -- our cost structure in the first quarter. So no, there's nothing special or unusual. Nothing that's going to move the numbers up or down. I would comment though that because especially with electronics, we've been of kind transitioning -- this is my perspective on it, anyway -- from the old technology, like the [S-13], to the new technology, and there's been a gap while waiting for the new technology to ramp up. And we just run our company. We try to run it really responsibly. And that means that we kept our cost pretty much glued down during that period, and I'm glad we did that. I don't have any regrets. As we start to feel more confident that things were coming back, we're going loosen up our cost a little bit, and particularly, costs related to people, raises, bonuses, things like that. We're always conservative. We're never going to be able to compete with our competitors for people based upon throwing money at them. We don't run our business that way. We have a different kind of culture. But nevertheless, in the last, I guess, 2 or 3 years, we glued our costs down pretty tight. And it was the right thing to do. I don't have any regrets anyway because we -- like I said, had to get through this transition. We felt we would. But nevertheless, we felt we had to keep our costs down during that period. So going back to the answer, nothing special with respect to our cost in the first quarter. Nothing that was different than the prior quarters. But if you look out 3, 4 quarters down the road, especially if we continue to be encouraged about the direction things are going in, we'll probably start to loosen up our cost structure a little bit.

Our next question comes from the line of [Leonard Cooper], a shareholder.

Very interesting report. I was wondering. There's a lot of talk about [tariffs]. How will that affect Park if tariffs put in...

Well, we live in the real world. I mean, it's not just a theoretical thing. So there's a potential to have some impact, no doubt. And it really depends on how things end up, how things go. I mean, I think where it's hard to really read it for me because it seems like we're in kind of middle of a negotiation process, I guess. And when people are negotiating, sometimes they take extreme positions to get back to where they really want to be. So there's a lot of things being said, a lot of rhetoric out there, but it absolutely has a potential to have an impact. There's no doubt about it. And I don't think anybody will be surprised to hear that either. But it's too early to say. We'll just have to stay tuned and see what happens. We'll watch it very carefully, so...

Okay. My list of questions, (inaudible), I believe that was a Textron aircraft.

Correct.

Is that program still going? (inaudible)

Well, they -- so what I know -- I don't want to do disclosure for GE or Textron. They will just get mad at me. But if you read the public information, the program, I think they completed their prototypes, and they're out there trying to sell these airplanes. And I think -- and that's the next step is to sell the airplanes. But in terms of development work, I think that's pretty much completed for now. So we're just kind of sitting tight, hanging in there. And hopefully, we'll find programs for this aircraft and customers. And I suspect that if and when they do, that we'll find out together because I suspect Textron will announce it publicly.

Okay. How are the [civilian] aircraft sales going? I think we make parts for that.

For which airplanes? Just in general?

The small, general...

Oh, you mean the business jets. Yes, I don't know. Not so great. Business jets, that market has really suffered for a long time, and I think it's hanging in there, but I don't want to say that it's a real robust market right now. Our big markets for aerospace are going to be the big airplanes, the airline-type, air carrier-type aircraft, military aircraft, drones. But the business jets, we do have some work with some of the biz jet companies, but not really exciting market right now. I think one thing I would mention is that one of the GE programs called the Passport 20 is for a very large business jet. It's a Bombardier, I think they call it Global 7500 and maybe 8000. Those programs are still in development, [but] I believe they're getting pretty close to going into -- getting certified and going into production. So that would be an exception. And but we still do work with some -- several of the business jets, but it's not an exciting part of our business right now.

Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Brian Shore, Chairman and Chief Executive Officer.

Okay. Thank you, operator. This is Brian. That was a short and sweet call so everybody can get back to their -- beginning of their summer weekend. Thanks a lot for listening in. And Matt's in the office. You can reach me as well through the office if you have any follow-up questions. Have a great day. And also let me wish you a very nice summer. We'll be in touch. Thank you. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.