Park Aerospace Corp. (PKE) Q1 2019 Earnings Report, Transcript and Summary

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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session [Operator Instructions]. Thank you. 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. I have with me as usual Matt Farabaugh, our CFO. This is our first quarter conference call of course. And Matt, why don’t you start with the financial commentary. I want to remind you of course that a transcript of Matt’s commentary is already posted on our Web site, it was as usual quite a bit of detail on Matt's commentary, so you might want to check our Web site for some of the detail as well. After Matt and I are done with our introductory comments, we go to the questions. Okay, Matt, why don't you 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, maybe 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 Item 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 in 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 electronics sales were $20.7 million or 67% of total sales in the 2019 fiscal year first quarter compared to $18.7 million or 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 the sales for the 2018 fiscal year first quarter, and $4.7 million or 17% of sales of 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 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 1048 tax reserve, and the tax rate excluding the reversal would have been 18.7%. For the 2019 fiscal year first quarter, the top five customers were AAE aerospace, GE including its subcontractors, Shennan Circuits, TTM, and WUS, in alphabetical order. The top five 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 six weeks ago, there is not really a lot by way of updating, so some of my comments will be little more brief. I think the one thing we announced since our last call was introduction of Meteorwave 8000. I don’t have out of pocket, or don’t have note in front of me. But I believe the loss is 0.016 measured at 10 GHz. I think it's open resonator or Split Post Cavity technology. And that's part of our Meteorwave family, a new member of 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 pricing parameters. Just to give you perspective on properties Meteorwave 4000, which until now is our lowest loss product with 0.028, so significant enhancement in terms of the lost properties. And this is a product that we are very -- have high hopes for already I understand from Chris and Tony that perception is good, even though it's been out there for two or three weeks. So that's a really 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, we’re now pretty into this strategic evaluation and potential or self process for electronics business this has ongoing. We announced originally, I think in January 4, so it’s been ongoing for a little while now. But the process is going well. I think we announced we retained 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 discontinuation of process sometime this quarter, the second quarter, we want to bring this process to a close here. And at the end of 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, I’ll just -- 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 will do what's best for company, and we’ll only sell it 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 electronics business at this time. And it just doesn't really make any sense for us to do that. So you’re going to have to bear with this in terms of any future comments about how electronics business is doing. Again, we’re very deep into this process. And we will see what happens, and so it may happen or 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 soon as that happens. Switching to Aerospace, really not much to update as we said. It’s only been six weeks since last call. For Q2, we’re estimating approximate $11 million of revenue for aerospace. Also, I want to let you know that some of the key engine programs were on and we’re on sole source are ramping slower than predicted, and that's not 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, if the engines will be built and deliver its forecast -- these engines will be built and delivered as forecasted, the air plans are built and delivered as forecasted. In other words, it’ll all be there ultimately, although we’re not sure about the timing sometime. We convay to you the information we have and that’s subject to some change. It’s a very dynamic situation and aerospace company is ramping up new programs with lots of new technology. A little good news, so for our engine company, our engine customer, our major customer, the introduction of their new platforms is going pretty well and smoothly, only with minor hiccups. And I’m just going on public information, I’m not sharing with you anything that is confidential or off the record, you could read this stuff yourself. But what also was pretty much public record is that their competitors are having some real technical problems, not just ramp a little slower but the major type of problems with your new engine roll outs, and we’ll see what happens. But this could present more of an opportunity for our engine customer, which is the aviation as you know and for us ultimately. Okay, so like I said, short and sweet with the introductory comments. Operator, we are ready for questions at this time.

[Operator Instructions] Our first question is from the line of Sean Hannan of Needham. Your line is now open.

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

You’re talking about the major new programs of our major engine customer GE. And I think the programs are ramping very well, it’s just like I said if you -- we've been around aerospace for a little while. We’re not a 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 next few quarters, we’re not going to forecast anything there to 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 announce the sale or not and then maybe we could give more meaningful help in terms of -- we don’t normally give guidance. But more even help in terms of understanding the future.

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 results in both segments and certainly looking at the electronics side, it looks like we have some nice bounce here where there’s some double digit performance, revenues coming back here. So just want 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 a next stage of growth coming through 5G early activity within a few quarters down the road. So any perspective would be great. Thanks.

So I am not sure most people are thinking. I guess, we’re thinking that it’s probably 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, or middle -- I am talking calendar year, middle next year. We’re thinking more middle next year. And obviously, that’s giong to be a good thing for a company like Park that’s focused at that end of the technology spectrum. Other than that though Sean we’re not going to really want to comment on the current trends in electronics. I think what I could do is refer you back to the comments we made in our last quarter, about six weeks ago. I don’t think things have changed dramatically since then in terms of our high level observations about the trends in 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 in 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 what I am getting at. So we’re going to decline to really give any more color or flavor about electronics, other than that I’ll 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.

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 in differentiated versus what you’ve seen out in the market place? 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 am really very happy with it. And I think people at Park would say the same thing. It’s really very much in a leading edge for high speed low loss materials. So this is -- the extreme low loss material, I don’t think that’s how much categorized based upon its loss numbers. So this is cutting edge, leading edge, maybe 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 0.028, I think that’s we publicize was very much leading edge. So this quite a few quantum steps ahead of even Meteorwave 4000 in terms of its lost properties, which is really the most critical property for next generation equipment, infrastructure equipment. Rest of the properties are very similar, it's the loss that's enhanced very similar to the rest of Meteorwave family, like the thermal properties for instance, so very similar.

last question, and I'll hop out of the way. Just from a modeling standpoint or looking at some results that came through operationally. As I look at what came through within COGS and within SG&A, is 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 a favorable impact within the quarter, or I know you've have 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?

Sean, there's nothing unusual or out of the ordinary in terms of our cost -- cost structure in the first quarter. So no, there's nothing special or unusual or nothing that's going to move the numbers up or down. I would comment, though, that because special electronics we've been transitioning, this is my perspective on anyway. From the old technology like S13 to the new technology, and there has been a gap. We’re all waiting for the new technology to ramp up. And we just run our company we try to run it real responsibly, and that means that we kept our cost down during that period. And I'm glad we did that, I don't have any regrets as we start to be more confident that things are coming back. We're going to loosen up the cost a little bit, in particular of cost related to people and raises, bonuses and 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 just don't run our business that way, we have different culture. But nevertheless, in the last I guess two or three years, we screwed 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, how to get through this transition we thought 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 was different than the prior quarters. But if you look at three or four quarters down the road, especially we feel encouraged about the direction things are going in, we'll probably start to loosen up our cost structure a little bit.

Very helpful, Brian. Thanks so much, and best wishes with continued efforts.

Thank you. Our next question comes from the line of Leonard Cooper, a shareholder. Your line is open.

Very interesting report. I was wondering, there's a lot of talk about tariffs. How will that affect Park if tariffs are put in?

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

On my list of questions, Scorpian. I believe that was a Textron aircraft?

You’ re right.

Is that program still going, I mean we…

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 are out there trying to sell these airplanes. And I think that’s the next step is to sell the airplanes. But in terms of the development work, I think that's pretty much completed for now. So we’re just sitting tight hanging in there and hopefully we’ll find programs for this aircraft and customers. And I suspect if and when they do that we’ll all find out together, because I suspect Textron will announce it publicly.

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

But which airplanes, just in general?

The small general…

You mean the business jets. Yes, I don't know, not so great. Business jets, that market is really has 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 bigger air planes, 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. But we still do work with some several other business jets, but it's not an exciting part of our business right now.

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. I will 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.