Park Aerospace Corp. (PKE) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Tanya and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Fourth Quarter Fiscal Year ’15 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. 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, operator. This is Brian Shore. And I have with me as usual Matt Farabaugh, our VP and CFO. And we'll go ahead with some introductory comments then we’ll go into Q&A. Matt, why don't we begin with the financial commentary? Sorry, by the way we should tell you this right up front. Matt's comments are already posted on our Web site if you'd like a transcript of them, sorry Matt, go ahead.

Okay, thanks Brian. Certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent Annual Report on Form 10-K for the fiscal year ended March 2, 2014, various factors that could affect future results. Those factors are found in Item 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 the fourth quarter and fiscal year 2015 P&L which are not specifically addressed in the earnings release. During the fiscal year 2015 fourth quarter North American sales were 48% of total sales, European sales were 5% of the total sales and Asian sales were 47% of total sales compared to 48%, 7% and 45% respectively for the fourth quarter of the 2014 fiscal year and 50%, 9% and 41% respectively for the 2015 fiscal year third quarter. Sales for Park's high performance non-FR-4 electronics materials were 91% total electronics material sales in the fourth quarter of fiscal year 2015, 90% in the fourth quarter of the 2014 fiscal year and 92% in the 2015 fiscal year third quarter. Park's electronics revenues were 27.5 million or 76% of total sales in the fourth quarter of the 2015 fiscal year compared to 30.2 million or 79% of total sales in the fourth quarter of the 2014 fiscal year and 25.4 million or 73% of total sales in the 2015 fiscal year third quarter. Park's aerospace revenues were 8.8 million or 24% of total sales in the fourth quarter of the 2015 fiscal year compared to 8 million or 21% of total sales in the fourth quarter of the 2014 fiscal year and 9.3 million or 27% of total sales in the 2015 fiscal year third quarter. Park's electronics revenue is for a 126.4 million or 78% of total sales for the 2015 fiscal year compared to135.4 million or 82% of total sales for the 2014 fiscal year. Park's aerospace revenues were 35.6 million or 22% of total sales for the 2015 fiscal year compared to 30.4 million or 18% of total sales for the 2014 fiscal year. Investment income, net of interest expense for the fourth quarter of the 2015 fiscal year was negative $132,000 compared to negative $45,000 in the fourth quarter of the 2014 fiscal year and negative $139,000 in the 2015 fiscal year third quarter. Depreciation and amortization expense for the fourth quarter of the 2015 fiscal year was $906,000 compared to $782,000 in the 2014 fiscal year fourth quarter and $890,000 in the 2015 fiscal year third quarter. Capital expenditures for the fourth quarter of the 2015 fiscal year were $50,000 compared to $344,000 in the 2014 fiscal year fourth quarter and $148,000 in the 2015 fiscal year third quarter. Capital expenditures were $430,000 in the 2015 fiscal year compared to $1.1 million in the prior year. The effective tax rate before special items was 10.5% in the fourth quarter of the 2015 fiscal year compared to 11.3% in the 2014 fiscal year fourth quarter and 10.1% in the 2015 fiscal year third quarter. Gross Profit for the fourth quarter of the 2015 fiscal year was $11.3 million, or 31.1% of sales, compared to $10.5 million, or 27.4% of sales, for the fourth quarter of the prior year and $8.6 million, or 24.8% of sales, for the 2015 fiscal year third quarter. Before special items, Selling, General and Administrative Expenses for the fourth quarter of the 2015 fiscal year were $5.6 million, or 15.4% of sales, compared to $5.5 million, or 14.4% of sales, for the fourth quarter of the prior year and 5.8 million or 16.6% of sales for the 2015 fiscal year third quarter. The four special items earnings before income tax is for the fourth quarter of the 2015 fiscal year but 5.6 million or 15.3% of sales compare to 4.9 million or 12.9% of sales, for the fourth quarter of the prior year and 2.7 million, or 7.8% of sales, for the 2015 fiscal year third quarter. Before special items, Net Earnings for the fourth quarter of the 2015 fiscal year were $5.0 million, or 13.7% of sales, compared to 4.4 million, or 11.4% of sales, for the fourth quarter of the prior year and $2.4 million, or 7.0% of sales, for the 2015 fiscal year third quarter. For the fourth quarter of the 2015 fiscal year, the top-five customers were GE, Sanmina, TTM, Viasystems and Wus, in alphabetical order. The top-five customers totaled approximately 37% of total sales during the 2015 fourth quarter. Our top 10 customers totaled approximately 52% of total sales and the top-20 customers totaled approximately 68% of total sales. For the 2015 fiscal year, the top-five customers were GE, Sanmina, TTM, Viasystems and Wus, in alphabetical order. The top-five customers totaled approximately 35% of total sales during the 2015 fiscal year. Our top-10 customers totaled approximately 53% of total sales and the top-20 customers totaled approximately 69% of total sales.

Okay, thank you Matt, this is Brian again. Let me just add a few points and we'll get to the question first of all I wanted to give an update on our buyback January of 2015 of this year we announced a 1,250,000 share buyback authorization as of yesterday I guess we purchased 563,590 shares it's 563,590 shares average price of $21.38 average price $21.38 total cost $12.1 million as an update. Let's briefly talk about Q4 versus Q3 so the revenues are a little bit better in Q4 but let's comment a little bit about the bottom-line may be a little better than expected as compared to Q3. When you do these comparisons you have a list of 20 at least items that move up and down obviously we won't get into the noise level stuff, but a few things that you might be interested in. One is that, unfortunately we did have a restructuring beginning November of last year and unfortunately left out some people out West in California, Arizona. We're still struggling with business levels for electronics in the U.S it's not good. We invited everyone to apply to relocate to Kansas and only one person so far took us up in that. Our friend Leo who is over there in Kansas doing a nice job that’s kind of a heartbreaking thing but nevertheless it does have an impact quarter-to-quarter close to $400,000 Q3 to Q4 but going forward it is probably annualize I don’t would have $2.3 million or $2.2 million impact annualized going forward. And the reason it is not at that level when you look at Q3 versus Q4 is that there is some impact in Q3 as well. The other thing is the shutdown cost. We have a lot of holidays in Q4 Christmas, New Years and then also the Lunar New Year which is a big thing and we build up credits during the year and then we take those credits when a shutdown occurs. So that actually benefits the P&L by another $350,000 to $400,000 that’s something we do every year that’s kind of normal practice but I just wanted you to be aware of it. And then actually makes -- because of pressures the Q4 revenue number this is kind of apples-to-apples when you think of it that way you should thought what I mean. Because we achieved a little better of revenue in Q4 but that’s with the shutdowns included. And the last thing is Aerospace even though as Matt indicated the revenue was a little lower in Q4 compared to Q3 so the bottom-line was better may be about $1.5 million better. I'm not saying that is a trend these things go up and down based upon a lot of different considerations quarter-on-quarter I am just telling you that those are some of the factors you might want to think about. So let's see what else you do want to talk about yes in the sorry third quarter conference call I think was in January actually. In the end January I mentioned that we were planning to introduce two really important products in the near future and a few of but on your emails with your news releases you know that we have we introduced Meteorwave 3000 and 4000 that’s a well actually ultra low-loss product they call it and we feel like it's getting some pretty nice reception. We were given a target of 0030 for a loss by the OEM community as of the next-generation the futuristic in our product, and we tested an 0028 and it's a commercial product also it has a UL commercial product, so I think we're, I'm not sure who else would be able to say that but I'll leave that to others, just to what they're willing to say or not say, I know there are products to commercialized and we'd introduce a product, it goes through extensive testing and we often hold back products quite a bit longer than maybe others might, but that's that our -- how we do, how we run things at Park. The other product that we introduced was an aerospace product, that's E-752-LT and that's an AFP material that is designed for AFP, Automated Fiber Placement which is a robotic methodology for making composite parts and with the fairly cutting edge I guess in technology and the industry for making composite parts. That's a complement to our E-752 product these are both 352 or epoxy systems. E-752 is more conventional for hand layout and the system product which has to be modified for AFP applications is the 752-LT and that's a product that was just introduced I remember in the last couple of months, but I think both in the fourth quarter as we indicated would happen. So AFP would be an important technology for the future for aerospace so that product is timely for us. And we are working with some of our largest customers on AFP applications well into working with them -- actually working with them before the product was commercialized so that we're way into that program. Then just another little interesting update I don't know if you noticed but there's some news on the A320neo with a LEAP engine. They have produced the first unit with a LEAP engine. I believe that Airbus plans to fly that airplane soon, I think it's been taxing around in Toulouse, there's pictures of it out there. They also have come out come out with a new forecast for the A320neo and it's quite a big forecast for a long time. I'm not going to go into the what it is I'm not clear as to what we know because of our position of what's public so I want you to look it up yourself but I think it's a lot of public information out there rather about the forecast on the neo, A320neo. So I know sometimes you're interested in what's going on Q1. Not a dramatic departure, the revenue, so let's obviously we have eight weeks so far in Q1, which is, in our Q4 when we announced before we always have a lot more in the book for Q1, we're able to talk about Q1 more meaningfully, so that's eight out of 13 so it's more than half obviously. So Q1 revenues running just a little bit above the eight week run rate just a little bit above Q4 and you know maybe by 5% or so the run rate's a little bit over 38 million for those eight weeks, as we tell you we can -- when we do a Q4 announcement we can tell you the facts and we're not predicting what the quarter will be we're just telling you where we are so far we have eight weeks in the books. The large majority of the difference, it’s like about a couple million dollars between top-line Q1 and Q4 is Aerospace, and that's not saying anything other than, that's just a fact, it doesn't mean that's a trend or anything else. Aerospace goes up and down a little bit based upon what are patterns and programs. Electronics goes up and down but that's for, for often different reasons, that's because the often extreme cyclicality of electronics. I don't think I'd add anything else, pretty quick update. So operator I think that concludes Matt's and my introductory remarks, why don't we go to the questions at this time.

[Operator Instructions] Our first question comes from Sean Hannan of Needham & Company, your line is open.

Brian, just to follow-up on some comments you made a little bit earlier talking about some puts and takes, I think, that may have contributed to your results, it sounded like there may have been perhaps a 400K type of headwind related to the electronics group, perhaps 350K to 400K that may have benefitted in terms of shutdown costs and then maybe a 500K-ish benefit as a consequence of mix within aero. Just wanted to make sure that I captured those correctly and then, number two, as a follow-up, are there other contributors? Or what are some other variables that we should consider when we look at your gross margin results, because they were pretty strong improvement quarter over quarter? Any further color there would be helpful. Thanks.

Okay Sean, as we commented there's many-many items when you will look at all of them, a lot of were noise level a lot of them kind of cancel each other out quarter-to-quarter. But the three ones that we highlight which are the more significant are I don’t know if we could call it shutdown. But we did a restructuring so we laid out some people unfortunately in California and Arizona and if you look at Q4 compared to Q3 there is about $400,000 benefit in Q4 as compared to Q3. As we said going forward the annualized benefit is about $2.3 million we didn’t get the full back that in Q4 and the reason well let me make sure I am clear about that. As a comparative matter we didn’t get the full benefit we saw some benefit in Q3 but we got the full benefit of in Q4 just in terms of the big picture if you want to look at that way. That’s one of the component we talk about, the shutdown that’s an accounting mechanism where we proved during the year for our shutdown credits and then the new credits were taken when we have a shutdown the plant shutdown this is not some shutdown that will also happens to just some I don’t know let’s say business is bad and we shutdown the factory for their two these are planned shutdown for holidays. That’s been our normal accounting practice and procedure for many years. The benefit there was again close to $400,000 and then aerospace may be a half a million dollars and if want to go up and mix that’s fine. So those were the three items we highlighted everything else is kind of noise level there is some benefit from the additional revenue and we're striving very hard to focus on cost line whether it's SG&A cost of goods sold across the board. And especially when things aren’t going so well we have a pretty rough quarters. So we did pay attention to that.

And then to follow-up also on some of the comments you had made earlier, Brian, regarding aerospace, there are certainly a good number of programs I think that you have won and are in hand that should be ramping a little bit more so here in calendar 2015. I do realize, of course, that perhaps spikier pieces of those wraps could be in 2016 and 2017. But is there a way that you could provide for us a little bit more detail around your expectations within aerospace growing from current levels beyond just what you're seeing a little bit in the very near-term for us and some general demand? How do these larger projects start to contribute here this year and how does that trajectory move? Thanks.

We'll this year it is pretty straight forward. The benefit of aerospace was the big programs was lot of visibility and we talked about GE and we are kind of level we expect to be at this year with GE. So I wouldn’t expect a big difference in this calendar or fiscal year with GE. I think that despite in terms of the forecast it is more 17 and 18 year and that’s largely driven by the Neo program I think we are on the 747 but that’s a legacy program and it kind of goes along very nicely and as far as we know we don’t heard any reason to believe that there is going to be any kind of ramp-up or spike in the 747. And some of the other programs we talked about last time are smaller programs and they haven’t come online yet. GE is approved and therefore we are approved through GE when those programs come online. But you're less significant in terms of what you're talking about in terms of revenue drivers but the big one is going to be the neo LEAP engine for the -- the A320 with a LEAP version and that’s 17 to 18 when that would spike. Now I guess since you brought it up I guess I know that you're going for but probably I should mention that this customer has been very helpful to us and put us in touch with three, maybe four but at least three other very significant OEMs and working with them now on programs and qualifying I don’t want to mention names I think that’s not appropriate at this point. But you would know them they are household names. So we're trying very hard not to only be about GE in terms of aerospace. And as I commented before there are lots of small customers out there that we just need to do better with and we're working pretty hard and getting focus I think we have a nice sales team at this point around the world in especially in U.S. And it's job of our sales teams to go wear out that shoe leather and knock on some doors and get some of this other business from companies that you probably never heard off. But nevertheless if you know you would put 10 or 20 of those together it is meaningful. And in terms of short-term meaning this year and next year that’s really where the upside is because the other stuff the big stuff the forecast are very obvious and that the upside was a big stuff with big companies that’s where you get into development stuff and even with GE. And I mentioned before we do a lot devolvement work with them as well. But usually you are talking several years up before those things become a factor in terms of the revenues. So in terms of the top-line for aero, we really need to see business from those companies we're not familiar with in order to drive the top-line over the next several years. The rest of it would somewhat care of itself and then like I said there are these other programs with GE, but these other companies that GE's helped us, introduced us to let's say and more than that actually, more than just an introduction, where we're talking seriously about what those companies about their programs as well, including giving them more role, I'll mention that as well. That's kind of an area of interest for us that we'd like to focus on. Some of our competitors may not be interested, they'd say it's small, but we really like that idea of MRO, it's kind of a little bit of a niche we're trying to develop. And if you know who's MRO and they're household names, very large companies are doing MRO work, sorry MRO maintenance and repair operations these are big facilities that do major maintenance for their carrier type of airplanes, this is not like a place that you would -- we're not referring to a place where you'd bring a small airplane, private airplane to. So, that's, I know if that helps but at least a little more color.

So it sounds like maybe for this year we could perhaps think about operating in this $8 million to $10 million-ish type of range for some of the quarters, no drastic expectations in terms of that growth. But when we get to fiscal 2017 there are opportunities sets that would, in theory, allow us to be higher than that type of a range there?

I am glad you said that because we're using fiscal and calendar. When I talk about the big programs ramping, spiking even that's calendar '17 not fiscal '17 so that's still a couple of years out based upon the forecast that we have. The range you talked about maybe you want to talk 8 to 12 you say 8 to 10, that might be a range, you might think about that kind of range. And it's up to us really to go out and get the additional business but it's not, I don't think that we're talking about in the order $10 million of business we're going to be able to achieve in a quarter by the end of the year, that's -- even by putting together a number the smaller than our opportunities.

And then last question here before I jump back in the queue. You folks did a nice job in terms of managing SG&A there can you help summarize what other variables might have been in play that helped to keep that level down? What should we expect out of that cost containment moving forward? And would there be any type of new fiscal year cost adjustments where there's a bump up now as we move into this May quarter?

I guess you mean lowering our SG&A expense or I'm not sure what you mean by it Sean, by bump up.

That could be salary adjustments.

You mean going up or down, when you say bump up in cost or bump up in margin?

Well, I think that the question is for you. Could it be a bump up in cost?

So, I would say majorly I think, there could be significant lower SG&A for this coming fiscal year as compared to Q4. Some of us did take pay cuts in Q4 and that was really a solidarity thing with the people out West because some of our hourly people who are working short weeks, we just didn’t have enough work for them so some of the salaried people felt well it really is not fair for just the hourly people work short weeks so some of the salaried people took some pay cuts as well during Q4 and that would have affected SG&A of course in Q4 as well and those salaries have been restored, so the salary cuts are no longer in effect. So in the terms of the SG&A I don't think it's a spike, but it could trend up, I think it could trend up during this current fiscal year as compared to Q4. But it's always our objective and our effort to keep our SG&A cost under control. It's important for a company like Park because SG&A is significant when you're more of a niche company, have the SG&A to develop the niches. If you are a big volume company making widgets you don't have to have lot of SG&A for that. So SG&A is going to be more significant for Park but that's the reason we have to watch it more carefully as well and not let it get out of control. It’s important for us in order to be able to develop the opportunities, it's important for our future. But like I said we're not a big volume widget company that makes a lot of stuff, same stuff every time, where SG&A's not that significant. But because it’s more important for us we have to watch it more carefully as well. Otherwise if we let it go and don't attention to it, it will escalate too quickly.

Our next question comes from Morris Ajzenman of Griffin Securities. Your line is open Morris.

Brian, during the presentation you spoke about the first eight weeks into this current quarter and the run rate being as close, slightly over 30 million. When you look at last year's first-quarter it was just over 49 million. So I presume the shortfall, obviously, is on the electronics side. The question is just can you put some color -- is anything changing out there for the better? It looks like clearly it's under a cloud everywhere you look geographically. And secondly, in this current quarter that just ended gross margin has improved sequentially 31.1%. Last year the first quarter was 34.7%. Can you give us some sort of granularity with -- I know you don't give projections. I know you don't give projections. But what can we expect as the trend in gross margins into this current quarter we are in?

Morris you're comparing it last year's first quarter is that what you're saying? Okay so…

Initially, yes. Mostly the top-line…

Okay let me answer. As we explain numerous times last year's first quarter was very much an anomaly was one of those major inventory corrections in the electronics industry which we paid for dearly in the second quarter and third quarter as we know. Like what happened in the first quarter as compared to the third quarter that’s the electronic cycle we've discussed that it went and especially when we announced our second quarter call like we did our second quarter announcement we said the first quarter ended up being one of those inventory anomalies inventory build which led to the correction. So from electronics perspective that didn't affect aerospace, you are correct. From a electronics perspective, if you compare our first quarter this year to first quarter of last year is not meaningful because that quarter is not a meaningful quarter it wasn’t a sustainable quarter. So when I gave you my comments at the beginning we're comparing it to the history like the fourth quarter, third quarter fourth quarter and then first quarter. Because we think that’s a more meaningful comparison. So yes we said the run rate for the first eight weeks is 38 million and we heard that’s up a little bit. But as you know is not the fourth quarter number is now and fourth quarter is up a little bit from third quarter. As far as the environment in electronic, okay good question. We think it's kind of recovered but the recovery is not -- we don’t want to see Q1 level again that’s not a recovery that’s in excess. So we think things are kind of recovered and normalized actually in Asia we feel pretty good in the U.S. and even not so much. But I'm not sure we don’t believe that’s a cycle and we just think that’s more the ongoing movement in our electronics manufacturing from the Western world to Asia, that’s more of an ongoing trend rather than short-term trend relating to a cycle. So as I commented still not doing so well Western California and Arizona in electronics but as far as the industry is concerned we think it's as much as you could ever say normal it's a kind of normal. I think we also commented that we’re not sure exactly how to see through that because some of what we see in terms of maybe optimism could relate to new products more than just the industry in general. So those are my comments.

And could you just touch on gross margins; it improved sequentially, the quarter extended 31%, 31.1%? Is that sustainable? How does that play out?

Are you asking for the fourth quarter gross margins?

Yes. I am looking sequentially into this first…?

Well that should be sustainable we explained some of the things that effected Q4 as compared to Q3. But that kind of margins should be sustainable and that of course assumes that the top-line is sustainable. The top-line is sustainable then the gross margins should be in line it's nothing really unusual or extraordinary about Q4 gross margins we just want to give some color as to why they came up from Q3 more than you might have expected Morris based upon the revenue improvement.

And our last question comes from Sean Hannan of Needham & Company. Your line is open.

So in terms of the electronics side of the business, I think that as we look out there and observe some of the comments coming from some of the telecom carriers and expectations for spending, there, at least domestically, are some shifts toward more of the second half weight here. And just trying to understand if there's anything that you are hearing from your customers as that expectation or that thought process perhaps moves downstream. And are your customers commenting around any of this? And are there any aspects of anticipation or positive viewpoints that you have on the back half of this calendar year as a consequence of that? Thanks.

I'm going to be a little cynical here though. First of all as we mentioned I think the last call more than 50% of our electronics revenue is going to we call infrastructure the telecom and Internet providers. So that’s really the driver for us and I think I would agree with that statement that seems to kind of like somewhat of a common theme. But reason I will be cynical is because the electronics industry is so bad at this kind of stuff. Let's go back to Q1 we just talked about Q1 of last year and when things were very-very strong we were asking our OEMs and our customer daily really what’s going on here it is sustainable. I think we reported in our Q1 conference call last year that people say it’s going to be last and what happened probably a week later they all fell apart. So sorry for being cynical, but maybe I'm too old, but we've just been through so much, it almost -- we have to discount, let me put it that way, not -- but certainly not ignore but discount the input we're getting from the OEM community. And they're very smart people they're smarter than we are. It's not that they aren't smart it's just that there's something about electronics which is very difficult for people to really predict accurately what will happen. And particularly on the manufacturing side because you know the market's one thing and of course Sean the manufacturing side then that's get exaggerated for all the inventory practices, so, and we're in manufacturing, so it makes it even more difficult to see through to the end-market and what's going to happen. But maybe that's too long winded an answer so I guess the short answer is generally I think you know what we're hearing would be consistent with what your comment but we're only just kind of playing it week by week and trying to figure out what's going on from that perspective.

Last question here, then, perhaps this is for Matt. Sorry we haven't gotten you too involved here, Matt. Share count now -- should we assume for this next quarter roughly 20.4 or 20.5-ish? Or how do we think about that? Thanks.

I think you're in roughly the right range, like as Brian said we purchased about 563 and that was overtime so, the -- for the first quarter the average will trend down and second quarter assuming we don't have an extreme number of option exercises or something like that to drive it back up should be trend down and something in that range.

Yes, some of those buys were in Q4 and some in Q1, we don't have a breakdown for you, but you can take the Q3 number and you subtract the total, that's what it’ll be at the end of Q1 and Matt said the only thing that'll go the option way would be option exercises but we don’t think that'll be that significant.

Fair enough. Thanks so much, folks.

Oh, and I guess I should say, because I want to imply something contrary to this. We don’t know -- the authorization is still open, we're not saying whether we'll buy more or not but the authorization's still open of course and so we're not predicting that it will happen.

I'm showing no further questions at this time, I'd now like to turn the call back over to Mr. Shore.

Okay, thank you operator. Thank you everybody for listening, Matt and I are here today so if you have any follow-up questions please give us a call and we look forward to talking to you again soon, thanks again, goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.