Park Aerospace Corp. (PKE) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Kat 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 2016 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. Good morning everybody. Welcome to our first quarter conference call. I have with me, as usual Matt Farabaugh, our CFO. We will begin with some introductory remarks, then we will go to the questions. So 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 March 1, 2015, 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 first quarter ended March 31, 2015 P&L, which are not specifically addressed in the earnings release. During the fiscal year 2016 first quarter, North American sales were 48% of total sales, European sales were 6% of total sales and Asian sales were 46% of total sales, compared to 44%, 6%, and 50% respectively for the first quarter of 2015 fiscal year, and 48%, 5%, and 47% respectively for the 2015 fiscal year fourth quarter. Sales of Park's high performance non-FR-4 electronics materials were 93% of total electronics material sales in the first quarter of fiscal year 2016, 93% in the first quarter of the 2015 fiscal year and 91% in the 2015 fiscal year fourth quarter. Park's electronics sales were $28.1 million or 74% of total sales in the first quarter of the 2016 fiscal year, compared to $39.8 million or 82% of total sales in the first quarter of the 2015 fiscal year and $27.5 million or 76% of total sales in the 2015 fiscal year fourth quarter. Park's aerospace sales were $9.7 million or 26% of total sales in the first quarter of the 2016 fiscal year compared to $9.0 million or 18% of total sales in the first quarter of the 2015 fiscal year and $8.8 million or 24% of total sales in the 2015 fiscal year fourth quarter. Investment income, net of interest expense for the first quarter of the 2016 fiscal year was negative $104,000 compared to negative $206,000 in the first quarter of the 2015 fiscal year and negative $132,000 in the 2015 fiscal year fourth quarter. Depreciation and amortization expense for the first quarter of the 2016 fiscal year was $837,000 compared to $898,000 in the 2015 fiscal year first quarter and $906,000 in the 2015 fiscal year fourth quarter. Capital expenditures for the first quarter of the 2016 fiscal year were $176,000 compared to $53,000 in the 2015 fiscal year first quarter and $50,000 in the 2015 fiscal year fourth quarter. The effective tax rate before special items, was 10.9% in the first quarter of the 2016 fiscal year, compared to 17.4% in the 2015 fiscal year first quarter, and 10.5% in the 2015 fiscal year fourth quarter. Gross profit in the first quarter of the 2015 fiscal year was $11.4 million or 30.0% of sales, compared to $16.9 million or 34.7% of sales for the first quarter of the prior year, and $11.3 million or 31.1% of sales for the prior fiscal year fourth quarter. Before special items, selling, general and administrative expenses for the first quarter of the 2016 fiscal year were $5.8 million or 15.3% of sales, compared to $6.3 million or 13.0% of sales for the first quarter of the prior year, and $5.6 million or 15.4% of sales for the prior fiscal year fourth quarter. Before special items, earnings before income taxes for the first quarter of the 2016 fiscal year were $5.5 million or 14.4% of sales compared to $10.4 million or 21.3% of sales for the first quarter of the prior year, and $5.6 million or 15.3% of sales for the prior fiscal year fourth quarter. Before special items, net earnings for the first quarter of the 2016 fiscal year were $4.9 million or 12.9% of sales, compared to $8.6 million or 17.6% of sales for the first quarter of the prior year, and $5.0 million or 13.7% of sales for the prior fiscal year fourth quarter. For the first quarter of the 2016 fiscal year, top five customers were GE, Sanmina, TTM, Viasystems and Wus, in alphabetical order. The top-five customers totaled approximately 34% of total sales during the 2016 first quarter. Our top 10 customers totaled approximately 53% of total sales and the top 20 customers totaled approximately 69% of total sales. We want to note that on May 31, 2015 TTM announced the completion of its acquisition of Viasystems, which combines two of our top five customers for the first quarter of 2016.

Good. Thank you, Matt. This is Brian again, and I want to remind you that a transcript of Matt's comments are posted on our company web site already. This should be fairly a least commentary from us, should be fairly brief. Our last call was -- only about seven weeks ago, I believe, our fourth quarter call, and it really isn't too much new to report, in terms of news and events since that time. I guess, just a couple of things I will touch on, not really very newsworthy, even just kind of maybe some reminders. We declared our last regular dividend, I think we included a comment that we paid $331 million of cash dividends since the 2005 fiscal year, totaling about $16.10 a share. We also announced in our last quarter call, that we had bought back about $12 million of Park stock, about 560,000 somewhat shares at $21.38 a share, and that was -- our last call was on April 29, so we have not purchased any stock since then, so the number still stands. Why were the earnings not better in Q1 as compared to Q4 since the top line was up a little bit? I think the top line was -- shouldn't be of surprise to anybody, because our fourth quarter -- I think we had maybe about eight or nine weeks in the books, we gave you a run rate for the first quarter -- in our fourth quarter call I am saying, and it was pretty much what we I think predicted. But nevertheless, a little bit higher than the top line, a little bit higher than the fourth quarter. The reason that the bottom line isn't any better as we explained in our fourth quarter call; the fourth quarter had a benefit, which is somewhat meaningful of the shutdown credits. We have these planned shutdown holidays, but we -- in the fourth quarter, there is a lot of holidays for Christmas, New Years, and also the Lunar New Year in Asia, and the P&L has benefited by those credits, which are accrued during the year, and the first quarter, there really -- I think maybe one holiday, which is Memorial Day, one day, not significant by comparison. So that would -- there is a lot of other stuff, which will cancel each other out, noise level stuff, but that's the big difference in the bottom line, why we didn't see a little bit of improvement based upon the additional revenue. Just in terms of some kind of news updates, which is not really big news, but the last quarterly call, we announced that the A320, Neo with the LEAP engine was taxing around in Toulouse, well it has had its first flight, and we'd say it was a success. In their forecast, we commented the last time is really significant, but you could check that up yourself. Also, I don't know if you noticed this, but the Paris Air Show, I guess Boeing announced that they actually did a booking order for some 747-8 aircraft for cargo, so it’s a meaningful order and that helps us a little bit. The 747 is a legacy airplane, so I don't think anybody is expecting a big run up or a spike in the sales of that aircraft. But when a significant order is placed, it of course helps us a little bit. And over to electronics, I would say our new products continue to gain traction. I think Meteorwave is actually starting to take hold. We've talked about I guess 20 more recently, but I think Meteorwave is starting to take hold, which we are happy about. We now have four different versions of our Meteorwave product line, 1000, 2000, 3000, 4000, that's pretty simple. And I think that's really about it, in terms of introductory remarks. Like I said, not too much new since our last fourth quarter conference call. So operator, why don't we go right to the questions at this time?

[Operator Instructions]. And our first question comes from the line of Sean Hannan with Needham and Company. Your line is open. Please go ahead.

Hi there. David Rold on for Sean Hannan. Good morning. Just wanted to check on the run rate of revenues so far this quarter, anything you’re seeing so far?

You know what, we only have two weeks in the books. So you asked and so we will respond. As I mentioned during our fourth quarter call, I think we have either eight or nine weeks out of 13 weeks in our books, so that was a lot more meaningful. And even for normal quarters, we often have three or four weeks in the books, we got two in our books, so I will tell you that the run rate for the first two weeks in revenue is running a little bit above the average for the first quarter and the second quarter, we are talking about it of course. But I just have to really caution you, that's two weeks, and I'd be real careful about drawing too many conclusions about two weeks of revenues. We don't have our revenues until for last week, and we won't have those till tonight, so unfortunately we only have the first two weeks of the second quarter in the books.

Okay. Fair enough. And then you talked about the bottom line impact from the shutdown in credits. Was that specifically the base impact to gross margins as well?

Yes.

Okay. Switching gears to electronics side, there were some comments at the supply chain, noting some infrastructure slowdown in China. Wondering if you guys saw any of that, or if the infrastructure growth driver is still largely intact for you?

We don't see anything different up or down in the last couple of months, in terms of internet and telecom infrastructure. I don't know. I think a lot of you people are probably more plugged in than we are. But we hear that people say that maybe towards the end of the year, there will be some moving upward in the infrastructure markets industry. But we haven't seen any fall off at this point, if that's what you're asking.

Yup. Nevertheless. And just to confirm, we shouldn't expect any near term impact from the TTM-Viasystems acquisition? As they are -- two to one customers, right?

Yes. So TTM is now an even larger customer.

Yeah exactly.

I don't know about near term. I mean, obviously it’s a big thing in the industry. And my comment is we are close with both of those companies. I would say, probably even closer with TTM, and you know I think we are relatively optimistic about what they are doing, and we feel good about it, and so I guess I will leave the comments at that, it's still very-very early in the process of course.

Okay. Then on the aerospace side, you talked about kind of three or four additional OEMs you're working and qualifying. I know these are long processes, but any update there?

As you said, they are real long processes and as we spoke, I think it's about seven weeks ago. There really isn't any update. We have had that -- mentioned this so many times in the last few years, but in aerospace, I think the key thing is, the big ones especially are longer term and requires some patience. So I think the news is -- the news that'd be positive and nothing negatives occur, but we are in a process and our process will take a long time.

Okay. And then just back to the gross margin, should we be modeling up for next quarter? In your opinion, I know it's still early, but kind of given the lack of shutdown credits, revenue that should improve through the year, what's kind of the trajectory there?

In terms of shutdown credits, it's probably neutral from second quarter compared to first quarter. The big quarter is the fourth quarter of the shutdown credits. You've got Christmas, you've got New Years, you've got -- Lunar New Year is a big deal as well, so you have got a lot of holidays in the fourth quarter. First quarter and second quarter, not much of an impact in terms of shutdown credits. So the gross margin in the second quarter is going to be largely driven by the top line. So everything else being equal, it's really going to be a function of that. So if the top line is up, then we expect the gross margins to be pushed up, and if not, we expect they probably won't be driven up very much. It will always be flat.

Great. That's all for me. Thanks.

Thank you.

Thank you. Our next question comes from the line of Morris Ajzenman from Griffin Securities. Your line is open. Please go ahead.

Good morning guys.

Hi Morris.

Question on aerospace. Really the only question, I guess nothing has really changed that much since we spoke last, which is just a month or so ago. $9.7 million revenues, it was up year-over-year for $9 million I think sequentially; previous quarter was $8.8 million. Should we read anything into that improvement, is it just the timing of sales and how long will it take until a level -- as some of the awards you received the past year or two, was that [indiscernible] stepping up [ph] more materially on a quarterly basis?

Okay. I wouldn't read too much into it, these things sort of move up and down a little bit, just based on timing of orders and things like that. There is a -- I would say pretty significant effort at Park to drive aerospace revenues, but really focused on smaller accounts, smaller opportunities. The bigger ones, we just have to be patient and work with these bigger opportunities. Now the one thing we can talk about though is, GE, that's different, that's an opportunity -- I mean, we are on those programs, and the advantage of the GE situation is that, they were forecast, and those are forecasts that are being put out by Boeing and Airbus. So that gives us a lot more insight into where we see -- on the GE revenues, because these are GE engines, GE programs and Park's on those programs as well. So that gives us the ability to say, like we said recently that in calendar 2017, we think that we are going to start to see those revenues really move up aggressively. But if you look at the forecasts for these airplanes, you would be able to kind of see the patterns there as well. So that's more of a [non-quantity] [ph] in terms of aerospace growth. And the rest of it, is based upon those two factors, so as the other large accounts that we are working on, what we really can't predict will happen yet, and the second part of it is, our ability to get more business and more penetration with smaller accounts and smaller programs, which the advantage of that is, its more of a near term opportunity. The disadvantage, I don't know if you want to look at it like that, but the disadvantage is that, usually those are not -- each individual item is not a very large item. But obviously, you put them all together, and it could be meaningful.

Thank you. Just one corollary -- as a follow-up to that. You have spoken about in the past, [indiscernible] some acquisitions or alliances. Anything you can add to that at this point in time?

The M&A front? Yeah, we have been in touch with a couple of companies and the discussions are preliminary, let's say that way. We have mentioned we are interested, and do that to a couple of companies; one, that they seem to be very interested, and one is, we are just in preliminary discussions with them. So that's really all I can say at this point about acquisitions.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Judith Cooper. She is a private investor. Your line is open.

This is Leonard Cooper. Hi Brian, how are you?

Hello Len.

I have a lot of questions. One, I was looking at the prior annual report, and that's the one that came in recent weeks, but the year prior to that; automotive radar was an item that got special attention. Is anything going in that, that we are significantly involved in?

We have been very successful. We have a product that was geared toward automotive radar. We haven't given up -- I don't want to give that impression at all, but I would have liked to have seen more penetration by now. We are still working on it. There is one OEM in particular that we are working with, and we are still hopeful, we are going to get some significant traction there. But so far, that has not been a success area for Park.

How about the private plane sales and inventories? I know originally, when we went to Kansas, I think it was the idea that private planes was going to multiply as an industry?

Yes, business jets. We went to Kansas. We shopped there, because at that point, Wichita was considered to be the aerospace capital of the world, or something like that. I don't know if people there still use that term. But its not -- Wichita is not what it's used to be, I mean, it has gone through a lot of changes. And our focus -- we still work with general aviation, let's call it, both business jets and even smaller airplanes, it's an important market for us. It's probably not going to be the significant driver that we thought it was going to be. After the financial crisis in 2008, that industry was hit pretty hard, and it never really fully recovered as far as I can tell. I think, if you talk to people in the industry, which of course we do. Those side of things are getting a little bit better. But I don't think that's -- the strategy for Park has changed, and it really just needs to change; because we thought that would be the big driver for Park, I don't think its going to be the big driver any more. Not to say that we are not on some GA programs, because we are in some GA programs, biz jet programs, we are happy to be on them. But that in itself isn't enough and probably won't be the big driver for Park in aerospace.

Okay. With regard to GE, there was talking for redundant facilities and that would require big investment and so on and so forth. Is anything going on along those lines?

Yeah, that. So GE is a larger company, we know that; and things tend to move a little more slowly. But yeah, that is a very open topic and we still expect that that will happen, and the ball is really not in our court at this point, we are waiting for a couple of things from GE. But they have made it clear to us, that they need to see a redundant facility, in order to support their business and their customers. So that really hasn't changed, its just a matter if its taking really longer than we expected to kind of organize the whole thing and then come up with a plan we both agree on and go forward. But the only thing that has changed, I guess there, is taking a little longer than we expected, but that's still very much in our table, and I think still very much necessary from Park's perspective.

Okay. I am just scribbling here. Last item, my wife worked for a large corporation, so this matter came up. I am not asking for details, but does Park have a succession plan and a hit by a bus plan?

Well it depends what you're talking about, in terms of being hit by a bus. But its something, as you say, all corporations deal with and we certainly deal with it as well. And there are good people at Park other than me, that have a lot of responsibilities here. So I think I will leave it at that, but Park is not unusual in that respect, in a sense that, yes, something that is very much on our minds and something that the board is very aware of and discussed openly.

Thank you very much.

Okay. You bet.

Thank you. [Operator Instructions]. At this time, I am showing no further questions. I'd like to turn the call back over to Brian Shore, for any closing remarks.

Thank you, operator. Thank you all for listening. Not surprisingly, this might be a record in terms of our shortest call. We just didn't really have a lot to cover since our last quarter call. But I am actually traveling, you can reach me through Martina or Matt to the office today. So if you have any follow-up calls on today's earnings or conference call, please give us a call. Okay, thanks and tell you what, have a great summer and we will talk to you soon. Bye.

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