Good morning. My name is Abigail, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year 2016 Earnings Release Conference Call. [Operator Instructions] Thank you. At this time, I will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. Welcome, everybody, to Park's third quarter conference call and also happy new year to all of you. I have got Matt Farabaugh with me, as usual, our VP and CFO. And as usual, we'll start with some introductory remarks. Matt will take us off -- kick things off with the financial commentary. And I just want to remind you that a transcript of Matt's introductory comments are already posted on our website. Go ahead, Matt.

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 third quarter ended November 29, 2015, P&L, which are not specifically addressed in the earnings release. During the fiscal year 2016 third quarter, North American sales were 53% of total sales, European sales were 7% of total sales and Asian sales were 40% of total sales compared to 50%, 9% and 41%, respectively, for the 2015 fiscal year third quarter and 56%, 6% and 38%, respectively, for the 2016 fiscal year second quarter. Sales of Park’s high performance non-FR-4 electronic materials were 94% of total electronics materials sales in the 2016 fiscal year third quarter, 92% in the 2015 fiscal year third quarter and 93% in the 2016 fiscal year second quarter. Park's electronic sales were $25.5 million or 74% of total sales in the 2016 fiscal year third quarter compared to $25.4 million or 73% of total sales in the 2015 fiscal year third quarter and $26.2 million or 69% of total sales in the 2016 fiscal year second quarter. Park's aerospace sales were $8.9 million or 26% of total sales in the 2016 fiscal year third quarter compared to $9.3 million or 27% of total sales…

Okay, thanks, Matt. It's Brian again. And once again, a Matt -- a transcript for Matt's -- of Matt's comments are posted on our website. A lot of detail there, so maybe want to check that out. We'll just do a little bit of commentary about the third quarter P&L, and then I felt we should do something a little different this time, which is give you an update on some events of interest, at least some of you might be interested in those events. Okay. So we had 30% gross margin in Q3 -- sorry, compared to -- even though the revenues were lower than in Q2, so why is that the gross margin was lower in Q2 as well? So a few things. Remember in Q2, we told you about there was a onetime purchase of a special kind of fabric for ablatives. I think it was, what, $2.2 million, $2.3 million, which carried fairly low contribution. It was a little bit of a markup, but not much. So that was actually -- weighted down our gross margins in the second quarter. That kind of flipped a little bit in the third quarter because we're starting to use that product, and we toll coat it, so the fabric is already owned now by the customer, so we do toll coating. It's very good contribution because there's no material content. That will take over about 2 years, I think, to work off completely, but we did some of it in the third quarter. So that's a flip. That's actually a plus not a minus as we had in the second quarter the same transaction, but the flip side of the transaction. So also, our Kansas aerospace operation, it's doing better, and it's been a long haul. This is still…

[Operator Instructions] Our first question comes from the line of Sean Hannan with Needham & Company.

So there seems to be some positives and negatives coming out of this commentary that you guys have provided here this morning. Just want to make sure that I'm thinking about some of this properly. Even though we have some, I guess, immediate headwinds, where, let's say, we use the GE inventory work down as an example or perhaps not a robust -- necessarily robust environment at present on the electronics side. Sounds like both segments had some pretty material stuff in the background that either could provide or aid some pickup later this calendar year or certainly for future years. Is that a viewpoint that you share? Is that an appropriate characterization?

I think it is an appropriate characterization, Sean. And before I continue, as I said my notes were not properly sequenced. So I forgot something I'm sure you consider to be important. So normally, we talk about how we're doing in the fourth quarter. Well, December, we're not getting off to a good start. December, it's a 5-week month. Now 2 of those 5 weeks were holiday weeks. So it's hard to really extrapolate from those 5 weeks as to what it means. But I just want to comment that we haven't gotten off to a very good start revenue wise in December. But going back to your question, I think the answer is yes. I think we feel pretty good about our business. I mean, look, if you work here, you would say, my God, we've got 2,000 problems a day, sometimes 3,000. But if you look at the bigger picture, I think we feel pretty good about our business in aerospace and electronics. The immediacy of the opportunities are always going to be more quick with electronics and aerospace takes longer, but it's also more predictable. Electronics moves more quickly, less predictable. But for years now really, we've been focusing on building our business for the long term. We've gone through series transition from, I guess, the '90s when we're very much electronics company and a high-volume electronics company at that to a very different kind of company today, more of a niche company. It's been our focus. It hasn't been easy, and we're certainly very, very, very far from the finish line. I know a lot of people got discouraged with us over the last few years and became negative about us, but we had to stick to what we believe was right for the company and…

So now, Brian, separately, I think that we've been hearing for a good number of quarters, really for years, the new efforts that you've been putting around refreshing for new products on the electronics side. In -- at least in my view, there hasn't necessarily been a whole heck of a lot of momentum on that front. It sounds like from your commentary today that perhaps we are starting to really see some more tangible proof that we're going to get some momentum. You referenced also an opportunity here with Huawei. So I want to see if I can get kind of a summary view around how we should think about that? Or is that something that we should still be very cautious about, not assume too much of an uptick in contribution from these new products? And then, I guess, part B to that, just, if there's a way to get a little bit more context around the nature of what you might be doing product wise with Huawei and was that a scenario, I realize timing wise, it's still a little unclear, but is that in coming quarters or is that much longer term?

So, I guess, one thing we want to consider, Sean, is that we have legacy products, which over time are going to be in decline. So you see kind of a top line for electronics that isn't moving up. But the good thing is that the revenues that are being lost from our legacy products are being replaced by our revenues with our new products. Now I'm not saying we're where we want to be with our new products at all, and I believe there still is real upside with the new products. And I think as you indicated or implied in your question, there is some validation of that in the marketplace. The Huawei opportunity, we've asked that question only 40 times, how much and when, and we haven't received any meaningful answer, but we've been told it's big and it's going to move fast. Those, I think, 39 parts on there, some of their next-generation equipment. That's just an example. I mean, there are other examples we can mention, but we decided this call to try to give a little more color about what we're doing. So I guess those are my 2 comments. Anything else on that question I didn't address, though, Sean?

Well, I think that generally addresses it. Last question here, and then I'll hop back in the queue. You indicated the -- this current quarter as been off to a poor start. Now typically, you're always going to have holiday impacts in this quarter. So is there a way if you can help us to better understand -- the best way to characterize, I guess, your, disappointment in the start of the quarter relative to how typical fiscal fourth quarters would progress for you? But it oftentimes can be a slightly down quarter. And I don't know if you're giving an indication that it could be a little bit more than slight?

Well, we're not giving any indication. We just are looking at the facts. We have the first 5 weeks in the books. It's very difficult for us to extrapolate much from that because, as you pointed out, we have the holiday factor, which is very significant in December, really 2 of the -- 2 weeks of those 5 weeks. It's a 5 -- December is a 5-week fiscal month for us. And then you know then, of course, there's a question about, well, what happens before people actually go on holiday. Are they build -- trying to build ahead so they can cover the holiday or are they already starting to think, I'm not sure where we're going with the economy and people hold back. It was very difficult for us to get a good crystal ball on it. We're faced with this -- we're put in this situation almost every year around this time, and it usually takes some time maybe toward the end of January, unfortunately, to really understand where the quarter is going. Of course, we also have the Lunar New Year in Asia later on in the quarter and that's not new. That's something which we almost always have in our -- I think, it's always in the fourth quarter, to my recollection. But that's just a factor that we need to consider. I'm not trying to signal anything, but historically, we're asked and we do discuss the facts to-date in terms of our bookings and revenues so far in the quarter. I thought we should cover those -- that information.

Our next question comes from the line of Leonard Cooper [ph], a private investor.

Hi, Brian. Okay. I was just getting a little lost here. Actually, we were cut off earlier when Matt was speaking, and I was wondering what the depreciation and amortization was for the last quarter?

Can you help us with that, Matt?

Sure. The depreciation for the last quarter -- let just get back to the number here. Third quarter was $847,000. It was last year's, same quarter, the third quarter, was $890,000 and the second quarter was $840,000. So it's $847,000, last year $890,000, last quarter was $840,000.

Okay. Brian, I was thinking about manpower. I know that climate change and security are using up a lot of the new engineering graduates. Is manpower and engineering and marketing, are they possible problem for Park?

I guess, I'll give you my input on that, my perspective, rather. I think it's quality and not quantity. There's still a lot of people that seem to be graduating from -- with aerospace engineering degrees, and I don't think there's a short -- well, I guess, I shouldn't say that. Macro, the whole industry, I don't know. But I don't sense there's a real shortage aerospace engineers. The challenge for us is to find aerospace engineers that are aligned with our way of thinking about things. And that's more difficult. A lot of the companies that come from when we hire them have very different mindsets, very different attitudes about a whole host of things, maybe urgency might be one of them, as an example.

Okay. I think about 2 years ago, you were speaking about the need for a new facility. Has that problem been resolved?

No, it hasn't. I think, remember, we have mentioned I think a number of times that we're waiting for this long-term agreement with GE. That's our understanding with them that we'll go ahead and build the additional facility once we enter into the long-term agreement. So as I mentioned, and we, just a couple of weeks ago, we got the RFQ, which we're pretty sure is just for us. It wasn't a general RFQ, which is done with -- it's a part of a process to lead to a long-term agreement. The other thing I would add, though, is I mentioned another opportunity with a very large aerospace company, OEM. And that would require significant capital if that does come to fruition. That would require a significant additional manufacturing capacity if that opportunity comes to fruition. So that's something else to consider. Remember, at the beginning of call, I mentioned that we're a little reluctant to return much more capital to shareholders at this time. We have that in mind. We also were looking I didn't mention this, but an acquisition just about a month ago, it was in electronics, it was interesting to us, but it didn't work out. I guess, we ended up kind of late in the game. But it's a funny thing. You talk to bankers, they say, oh, don't worry about it, you always can get more money. I think that's a little dangerous attitude. When you really need the money, maybe they're not so helpful. And the other thing is when we're dealing with these large aerospace companies, for us to say don't worry, we could build an x million-dollar factory, which we'll go get the money from a banker, I don't know how much they're going to buy that. But if we could say, look, we're a public company, here's our balance sheet, we have the cash, that's a big, big advantage for Park. That's a big selling point. If we say, yes, we're going to invest in your program, don't worry about it. We're willing and we're able. There's the money that's right here in our balance sheet. We're a public company. That's quite a bit of a different story than saying to one of these companies, like the one we're talking about, that oh yeah don't worry, our banker said we can go borrow the money if we have a need for it because anybody could say that, but not everybody has the money and is willing and able to use it, invest in the business for -- obviously for our benefit. I think, that's a very big deal, especially for bigger aerospace companies, which they put in -- they have a program, they're talking 20 years. They don't want to get into bed with a -- married up to a supplier that may have financial troubles 3 years from now and doesn't have the ability to invest in additional capacity. It's a big deal for Park.

Okay, Brian, it sounds very exciting.

Thank you, Len. Happy new year, Len.

Our next question comes from the line of Morris Ajzenman with Griffin Securities.

Looking over the last several years, your gross margins have varied. I'm kind of approximating here from, let's call, from 28% to 30%, 31% on a quarterly basis. And clearly, you touched on during your call that maybe one quarter -- there's always -- there's occasionally one-off items that can negatively or positively impact gross margins. But in the first quarter this year with 30% then the last quarter you dip down, second quarter 27.3%. This quarter, I think, you said you were 30% again. On a normalized basis going forward, normalized meaning any one-offs that always does occur. And based on new product introductions and having some, I guess, optimism of electronics going forward, again, with new products, are we at a point where on a normalized basis, again, assuming revenues don't fall off the cliff, whatever that gross margins should be 30% plus on a quarterly basis going forward?

That's really an interesting question. I think, there's really 2 parts of the answer. One is what we do. We talked about improving our yield in Kansas as an example. We talked about our new products, which are higher margin products. So we have to look at the content of the revenue and also our costs, which we're always going after everywhere we can. Of course, you know the cost. There's a limit, your costs can't be less than 0. There's a limit to how much you can do with cost. But I don't think we'll ever stop looking at our cost, and obviously, as you commented the product content has a big impact upon margins as well. Having said that, in the short term, especially the top line, revenue line is going to have a big impact upon gross margins. So if revenues fell off in the fourth quarter, that's going to have an impact on gross margins, if they came up, they have an impact on gross margins. I think that if we start to see some movement up in our revenues and our long-term planning has always been consistent with revenues moving up, that, that upward trajectory of revenues will have a positive impact upon gross margins. It's just simple math. It's not rocket [indiscernible] the 2 factors are what we do in terms of our cost, in terms of our product mix, product introduction. And then on a short-term basis, what the market does in terms of ups or downs in revenues. Long term, our objective would be to have gross margins, which would be over 30%.

[Operator Instructions] And we have a follow-up from the line of Sean Hannan with Needham.

So I wanted to touch on aerospace. So since we did see some of the inventory management impacts with GE in the current -- I’m sorry, within the fiscal third quarter, should we think about the types of revenues that you've got in that segment to be roughly the general quarterly outlook as we progress through the year or are there other programs that are perhaps ramping a little bit that may provide some growth there? Or is the GE work down going to accelerate? How do we think about your viewpoints on this revenue level? And how that may progress within the aggregate to the segment?

Well, at this point, we don't think that GE is going to help us, at least not 2016 calendar year in terms of any kind of revenue growth. So we really weren't proposing that, think of it that way, but I think it's not a bad way to think of it, Sean. Look at Q3 and that might be not a bad model for 2016. Now with GE, we work in calendar years, so as I mentioned 2017 calendar. We are expected based on the forecast to see some upward movement to a level more than we were in the first part of this year. That's a forecast, we don't know whether it's going to come true or not, but that takes into account also what we're discussing regarding the inventory work down. The only point is that could have an impact upon the current -- sorry the next fiscal year because that's beginning of 2017 calendar will have an impact upon -- a little bit impact upon next fiscal year. As far as other programs, there's nothing significant that we are aware of that will have a major impact, upward impact, on revenues in the aerospace in the coming year. So that doesn't -- I just should be clear because I don't want to mislead anybody unintentionally. That doesn't mean that revenues won't move up, but it's not like we could point to a big program and say, okay, here's your forecast. This is what is expected each quarter and therefore we can predict revenues moving up, which would be the case with a larger program often, but most of what we do in aerospace is still not GE, it's of lot of small programs, which are less predicable for us. And those are the things we're going after.…

Okay, so in that $8.5 million to $9 million-ish type of range is logical to think about for the quarters this calendar year?

I would not disagree with that. I'm not recommending that. We're not forecasting that, but I don't think that's an illogical or unreasonable approach.

Very helpful, okay.

And obviously, Sean, I just want to add. It's our objective to beat that number, and we're working every day really to beat that number, beat those kind of numbers.

Okay, and then last question here, and Matt, this might be geared a little bit more towards you. But the costs from a dollar standpoint within the OpEx line, is there an ability to either maintain the dollar spend around these levels or is there even an opportunity you might have to pull down some of the costs because as a percentage of revenues here, they are a bit elevated versus some of prior periods. So just want to get an understanding here of how to think about that.

I think those costs, we're always looking at opportunities to improve our cost structure, but the level that we're at is we have some base that we're probably working off of here. So movement from that base, assuming we stay right around this revenue level, probably not going to be very significant.

Okay, but then alternatively, it doesn't sound like there are any plans, expectations or things to consider that would materially start to bring that number up either?

I can't think of anything that would materially change it in the near term.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks.

Okay. Thank you, operator. One more thing I'd like to mention, hopefully some people are still listening, is that there is a live webcast at the Needham Conference, I think, it's a week from today. And that's available to anybody, and you might want to tune in for that if you're interested. We'll be doing a presentation about Park and not just going through quarters, it's more just the history of Park and what we're doing because it's also intended for people that don't know much about our company. So I just want to mention that to you. And having said that, thank you very much for listening in our third quarter conference call. Again, I like to wish everybody in the audience a very happy new year and the best of luck in 2016 to all of you. Thank you, operator.

Ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may all disconnect. Everyone, have a great day.