Park Aerospace Corp. (PKE) Q1 2013 Earnings Report, Transcript and Summary

At this time I would like to welcome everyone to the Park Electrochemical Corp. first quarter fiscal year 2013 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] At this time I would like to turn today’s call over to Mr. Brian Shore, President and Chief Executive Officer. Mr. Shore, you may begin your conference.

This is Brian Shore. Welcome everybody to our first quarter conference call. I have with me Matt Farabaugh, our VP and CFO as usual and we’ll start with some introductory comments and then we’ll go into the Q&A. Matt, why don’t we just get started with the financial commentary. Let me also say that a transcript of Matt’s remarks have already been posted on our website if you want to check that out.

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 10K for the fiscal year ended February 26, 2012 various factors that could affect future results. Those factors are found in Item 1A and after Item 7 of that Form 10K. Any forward-looking statements we may make are subject to those factors. I would first like to summarize the financial information included in the news release for the first quarter ended May 27, 2012 and add some additional information. Net sales for the 2012 fiscal year first quarter ended May 27, 2012 were $46.0 million compared to net sales of $51.8 million for the prior fiscal year first quarter and $43.7 million for the fourth quarter of fiscal year 2012. Net earnings were $4.9 million for the 2012 fiscal year first quarter, $7.2 million for the prior fiscal year first quarter and $3.9 million, before special items, for the fourth quarter of fiscal year 2012. Basic and diluted earnings per share were $0.24 for the first quarter ended May 27, 2012, $0.35 for last year first quarter and $0.19, before special items, for the fourth quarter of fiscal year 2012. Now I'd like to briefly review some of the other significant items in our first quarter P&L. During the fiscal year 2013 first quarter, North American sales were 47% of total sales, European sales were 11% of total sales and Asian sales were 42% of total sales, compared to 42%, 11% and 47% respectively, for the first quarter of the prior fiscal year. Sales of Park’s high performance non-FR-4 printed circuit materials were 81% of total laminate and prepreg material sales in the first quarter of fiscal year 2013, 78% in the first quarter of fiscal year 2012 and 80% in the fourth quarter of fiscal year 2012. Sales of Park’s advanced composite materials and parts were $7.6 million in the first quarter of the 2013 fiscal year compared to $5.7 million in the first quarter of the 2012 fiscal year and $6.7 million in the fourth quarter of the 2012 fiscal year. The gross profit as a percentage of net sales for the first quarter of 2013 was 28.2% compared to 30.8% for the prior year first quarter and 25.7% for the fourth quarter of fiscal year 2012. Selling, general and administrative expenses as a percentage of net sales were 15.3% for the 2013 fiscal year first quarter compared to 14.6% for the prior year first quarter and 15.5% for the fourth quarter of fiscal year 2012. Investment income for the first quarter ended May 27, 2012 was $198,000 compared to $221,000 for the first quarter of fiscal year 2012. Earnings before income taxes were $6.1 million, or 13.3% of net sales, for the 2013 fiscal year first quarter compared to $8.6 million before income taxes, or 16.7% of net sales for the prior year first quarter and $4.6 million before income taxes and special items, or 10.6% of net sales for the 2012 fiscal year fourth quarter. The effective income tax rate was 19.2% for the 2013 fiscal year first quarter compared to an effective tax rate of 16.2% for the prior fiscal year first quarter. The effective income tax rate before special items was 15.2% for the 2012 fiscal year. Turning to Park’s balance sheet, cash and marketable securities were $268.4 million at May 27, 2012 compared to $268.8 million at the end of the prior fiscal year. Working capital was $294 million at the end of the 2013 fiscal year compared to $290.1 million at the end of the prior fiscal year. During the 2013 fiscal year first quarter the Company had capital expenditures of $0.4 million and depreciation expense of $1.1 million compared to capital expenditures of $1.5 million and depreciation expense of $1.4 million during the prior fiscal year of first quarter. Stockholders' equity was $346.6 million at May 27, 2012 compared to $343.2 million at the end of the prior fiscal year. Finally, stockholders' equity per share at May 27, 2012 was $16.67 compared to $16.50 per share at the end of the prior fiscal year.

I don’t know if you noted but in some of Matt’s commentary he also had comparisons to the prior quarter, meaning the fourth quarter. It’s interesting we often discuss those comparisons but in the prior presentation we didn’t refer to the actual numbers. Let me add a few things here. Let’s talk again first quarter versus fourth quarter of last year, the improved bottom line is a little bit better, certainly not what we would like to see but as compared to the fourth quarter. It’s certainly partly explained by the top line, the top line is a little bit better even though copper was unfavorable in Q1 versus Q4 by about $250,000 negative impact. You know, these are the timing things we talk about often. We don’t expect to just cover any impact in Q2 versus Q1 from copper at this point. We expect that to be fairly neutral. There also were shut down credits which were unfavorable to the first quarter. There were a lot of shutdown credits in the fourth quarter because of the Christmas Holidays and also the Lunar New Year in Asia, about $600,000 in comparison. Depreciation though was favorable plus our Q1 compared to Q4 of about $350,000. Some of the assets are fully depreciated so depreciation is coming offline. Let’s talk about aerospace, something we often want to discuss. Q1 was about $300,000 better, I’m talking bottom line, than Q4 partly attributed to the revenue I think Matt said was $6.7 million increasing to $7.6 million Q4 versus Q1 and maybe we're getting Iraq together a little bit more. But, we certainly have a long way to go from an operational perspective in aerospace. So that could have contributed a little bit to the better company bottom line as well I would imagine. Issues, SG&A very high and we had about $400,000 of legal costs over and above our normal accrual. Our normal accrual is what we would expect so that’s a big number. About $215,000 more legal cost in Q1 versus Q4 so even in Q4 our legal costs were elevated. We’ve had some litigation we’re dealing with which I don’t know - I used to be a lawyer back in the 80s and I guess everything has changed. The cost for anything legal these days is quite different than anything I’m used to but of course I’m dating myself back in the early 80s. But anyway, there’s a $400,000 over our normal expected level in Q1 that’s over our normal accrual. That’s not such a good thing. Another comment, inventory went too high. I’m very embarrassed about that, that’s sloppy management. We have a lot of excuses, we got new products, we've got special products we're bringing in from Japan. Kansas as well contributed to it. I’ll give Kansas a pass because it’s a new start up business and we’re getting our systems in place, we’re getting our act together. But really, there’s no excuse for our electronics operations, it’s really embarrassing and I don’t feel happy about that. Usually sometimes earnings are better than others but Park runs a tight ship and you see inventory like that and I say, “I just don’t know what the heck is going on but this is not how we do it at Park.” So, I’m embarrassed about that. Obviously, that affects our cash too because the cash is just being sucked up in inventory. Comments on the closure of the Waterbury operation. We’ve announced 3 different dates on this now. I guess our fourth quarter conference call which I think was maybe the beginning of May, we announced that we were extending closure of our Waterbury Advanced Composite Material facility until the end of June and now we’re pushing that to the end of October and that’s an extra 4 months. Each one of those months will cost the bottom line about $100,000 a month so that’s about $400,000 total to the bottom line. The reasons are it’s just taking longer to get everything done, to get all the transfers done, to get all the qualifications done. What we did is we skinnied back the Waterbury operation so we just would have enough to keep it going but we didn’t want to lose some of the qualifications that we’ve had in Waterbury for a number of years. Some of it’s our fault just not being effective and executing as well as we should have and some of it it’s just maybe some OEMs are just a little slower at these things than others in terms of improving a new facility. In aerospace the approvals are very difficult and tedious. The charge, I think we originally announced the closure in Waterbury would be say about a $3 million charge and last time we said it was about $2.6 million. Now, we believe the charge is about $2.4 million. I don’t believe there was anything significant taken in Q1, not real charge taken in Q1, a very minor number so the rest of the charge still will be in I guess Q2 and Q3. But a total $2.4 million and Matt I don’t remember how much we’ve taken so far, about $1.2 million?

About $1.3 million.

About $1.3, okay so we’ve got about a million to go on the charge in the next couple of quarters. That was taken the fourth quarter I guess, that $1.3 number Matt just referred to. High performance continues to inch up, I guess we’re at 81% now. There’s nothing radical there but it’s a progression. The new product we talked a lot about them, we have N4800-20, N4800-20SII and N6800-22, and then N6800-22SI. Those are the newest. We recently received a provisional UL, a 138 degree MOT that’s maximum operating temperature I believe for the 20 product line which is good because that means we can go out and sell it now, it’s not just for qualification now the OEMs are actually willing to use the product without a provisional MOT at 138, they wouldn’t be willing to do that. The final UL is expected for the -22 products this month. I don’t know if it’s going to happen but that’s our expectation based upon our communication from the UL. That’s good as well because that way we can pull the trigger. Until we get a UL we really are mostly in the qualification mode. There might be some military accounts that would be willing to use the product before getting the UL because you don’t really need a UL for military for instance, but that’s kind of unusual. Usually the market waits for the UL approvals. You also want to know how we’re doing in the coming quarter which is Q2. We only have 3 weeks on the books at this point and Q2 is really tracking very similarly to Q1 from a top line perspective. In terms of revenues, tracking very closely with Q1. In terms of bookings, I don’t know maybe a little higher but I wouldn’t pay much attention to that. At this point from everything we know, we’ve got 3 weeks in the books for Q2 and we’re tracking very similarly top line perspective to Q1. We continue to work on a number, let’s say a few very major aerospace programs. We’ve discussed that before but we're continue to work on those at high levels and we don’t know whether those things will come to fruition but those are very significant opportunities for Park that we’re in the middle of working on them at this [BREAK IN AUDIO].

[Operator Instructions] Your first question comes from Sean Hannan - Needham & Company.

Brian, as a typical question each quarter, is there a way you can provide us with a little bit of clarity around what you may have seen in revenue trends for each of the months you progressed through May?

March and April were almost dead on and May was better. March and April are like I said, it’s so close it’s almost like somebody rigged it but May was better. May was up from March and April. In terms of the revenues for the first 3 weeks of Q2 they’re tracking average, their bookings are tracking May. I don’t know what that means but those are the facts anyway.

Last quarter you provided a little bit of insight into the advanced composite business, perhaps it was because we were already so late in the quarter when you reported, but just in talking to the expectations that it would be up sequentially. When you think about how you’re tracking for the current quarter is there a bias? Advanced composites, is that a business that continues to improve or is it similar to last quarter, the electronics side? What do you feel that you’re seeing today and then is there a sustainable trend that we should logically be able to expect on the advanced composites side?

For aerospace, as you pointed out our fourth quarter call we had 8 weeks of the first quarter on the books already so that's quite a bit different so we were more willing to talk about our expectations on that basis. Three weeks is very difficult. We gave you the top line numbers because we know you’re interested. The commentary is I don’t really know - I wouldn’t know if electronics and aerospace are really that linked - they’re obviously both dependent on the global economy. Okay, got it, the lead times, cycle times they’re very different industries. Electronics is very, very fast and moves very quickly, aerospace does not. They’re almost opposite in that regard, the kind of biorhythm of the different industries. You also think that some of the gradual improvement top line wise is partly attributable just to the fact that we put so much effort in it. We’re getting a little bit of traction. Not only the market, I’m not sure how I’d break that down but I think it’s partly just because we put so much effort to it. Now, in terms of the effort though, what we’ve already seen the results is certainly not commensurate of the effort or the results that we’re looking for with some of the big programs. But, nevertheless, there’s still some kind of impact just from market presence where we’re getting a little more business and we’re picking up, I think, a little bit of new market share. The overall feeling of the aerospace industry it’s very hard to say. I would say with business jets it depends on who you talk to. Some of the companies are doing better than others I mean, Hawker Beech is in bankruptcy. Unfortunately, we didn’t put any attention on that company we were concerned about their future. But they’re in the business jet arena and they obviously haven’t done well. Some companies are doing better. The large business jet companies seem to be doing a little better than the smaller ones. Then it’s company-by-company. Some companies are more let’s call it visionary, more willing to invest for the future and maybe some are not. But, I don’t know if I would see some kind of across the board kind of market acceleration at this point in business jets. There are companies that are investing for that but that would be for a 4 or 5 year time horizon based on opening markets in Asia, the Middle East for instance, and South America not just the US and Europe. In Europe the market is pretty bad actually for business jets right now. Does that help at all?

Now, in terms of the longer term opportunities on that side of the business and you just referenced some major aerospace programs I think, in your prepared comments. Is there a way to provide at least a little more clarity to us when we think about how you’ve been putting the emphasis on building that side of your business. Clearly over the course of time there have been some design wins that you’ve made better progress on versus others. So you can kind of see some much longer term opportunities and then perhaps I’ll assume there are some that are much shorter term, at least the next 6 to 12 months that may materialize in the top line. Can you help us to understand when you look at that portion of our business, how much you may have amassed for meaningful design wins that could start to push that top line say over the next 12 to 18 months or so? Is there enough that that we've been winning designs on?

You’re asking about contracts we’ve already been awarded that are pretty much locked down and it’s just a matter of timing as to when the revenue comes online. That’s really not very significant. We continue to work - well, we’re currently working on 3 maybe 4 very major programs and you know what, if we were awarded one of these programs we’d probably announce it because they’re so significant they would be quite - I think it would be almost necessary to announce them. I think we would let you know about those wins if we had them. I also want to comment that this ends up being an ongoing discussion on our conference calls and these things just go on, and on, and on, it takes a very long time and I’ve made a comment numerous times that we’ve learned quite a bit over the last few years about how this works. I think we kind of get it now and I think that we’re in the middle of discussions now that are quite different than they were a year or 2 ago when we might have thought we were in serious contention for major programs but we really maybe weren’t. That was part of our learning experience. A skeptic or cynic might say, “Well, yeah maybe that’s the case now. You think you’re in the middle of it and you’re not.” I don’t know, I suspect that we are in the middle of it especially based upon the level of discussions that we’re having at some of the OEMs, the level that we’re talking to at the OEMs.

On that last part there, does it feel like any of those large programs you’re still working through that at this point now that you’ve been going through the learning curve do you feel like some of those could be a quarter or 2 away or a 2012 event? I mean, what does your suspicion tell you?

Okay, now if you’re asking when the decisions will be made on some of these programs I think that that could be some in the next couple of months, some in the next 6 months. There are different parts of the programs. When the revenue would occur, that’s a different matter. Some are fast track programs, even the end of next year and some are the type programs where you’d be seeing significant revenue 5 years from now and you’d see prototype revenue between now and then but the significant revenues is when the products go into production. Normally, you’re talking 5 years for a new aircraft program that’s normally what you expect. I don’t know if it could be done more quickly but the aerospace industry is not accustomed to getting an airplane in the market in less than 5 years normally, especially clean sheet airplane. If it’s let’s say a modification of an existing type, that could be a lot quicker but a clean sheet airplane which is the type of things we want to work on, that means that everything is open the suppliers are not locked in. That normally isn’t going to be less than 5 years when a program is first approved internally at the OEM. Now, the fact that a program is approved doesn’t mean that anybody knows about it. That doesn’t mean it’s an announced program. That’s 2 different things. A lot of programs that OEMs are working on that are approved programs are not announced, they’re very secret programs of course.

But it sounds like you could have some potential releases this year?

I’ll just comment again that some of these programs if we were successful I think we would probably let you know because they’re of that magnitude that I think it would be appropriate to let you know.

Your next question comes from Jiwon Lee - Sidoti & Company.

I just wanted to go back to the composites and ask about some of the potential large programs that you’re working on. If and when you win any of these programs, do you typically get sole sourced or how does that supply dynamic work out?

It’s different with parts and prepreg materials. Sometimes they’ll be dual sourcing for prepreg materials on a program. Parts, that’s just not going to happen because then they'd have to do duplicate tooling and it would just be impossible, it would be way too expensive. So normally with parts it’s going to be a sole source situation. Okay, let me explain though, that doesn’t mean that you’re given the parts for the whole airplane, the airplane could have - let’s say the airplane has 400 composite parts, those parts could be divvied up amongst different suppliers, 2 or 3 suppliers but each part would have its own tooling and each part would be only done by one supplier. The ability to switch from supplier-to-supplier, that’s a different question. It’s not so easy. It can happen but it’s not too usual, not very common. But at any given time any one part is usually going to be a sole source situation.

For Matt if I could ask you the typical questions of the top 5 customer list, and the top 10 and 20 please?

Our top customer TTM was 16.4% of sales, EMEA was just over 10% at 10.1%. Rounding out the top five we had Multek or Flextronics, [indiscernible] and [indiscernible]. The top 5 totaled 47.7%. Top 10 was about 62% and the top 20 was about 73%.

Your next question comes from Morris Ajzenman - Griffin Securities, Inc.

The question on composites is pretty well picked over here so let’s just go back to this past quarter. Brian you mentioned 2 items specifically inventory and SG&A. Inventory you referenced being too high i.e. New products, the new plant in Kansas but nonetheless you clearly stated you’re upset with that level that came in at $18.4 million. Where should it be and in the second quarter are you going to conscientiously work to bring that down? Can you help us along with that?

Well, we don’t want to give you a number but it really shouldn’t have escalated from the fourth quarter. Let’s put it that way to start with. Yes, we’re not happy with this at all and a lot of people are feeling some heat and pressure and pain about it right now. It’s not the kind of company Park is to do this kind of thing. We weren’t paying attention and I’m very embarrassed about it and I can tell you there are a number of people at Park that like I said, are feeling that pressure and heat right now. It’s not what we want.

Obviously then I guess your throughput, your utilization in the second quarter has to come down some if revenues are running at the same run rate for the quarter. Is that a fair supposition?

I’m not understanding the question.

Your utilization, to bring the inventories down, and then coupled with expectations of revenues running flattish you mentioned in the first 3 weeks, if it continues flattish throughout the quarter then your manufacturing efficiencies versus the first quarter will have to decline somewhat. Is that fair?

This is raw material inventory, I don’t know what you mean by that. We just have to manage the inventory, we have to manage our MRP. We don’t want to buy stuff we already have, we don’t want to buy too much stuff based upon hopes and dreams. I didn’t say that Q2 would be flat, I said that the first 3 weeks are flat and I want to make sure that nobody misunderstands we don’t forecast the second quarter, we'd just be guessing. But no, that’s a point we need to manage our business. It’s what we’ve always done on a short term basis, on a day-to-day, week-to-week basis not put together a plan and then go on auto pilot for a month or 2. That’s how you make a mess like this. We need to make a correction. I mean, this is how we’ve always run the business, there’s nothing new here I think we just weren’t paying attention and dropped the ball here a little bit.

What you touched that I didn’t realize, this is raw materials not finished goods that the high amount is?

Yes. Sorry, we don’t really have finished goods at Park, not very much, because most everything we do is specialty so we can’t really inventory any finished goods. Fortunately, we don’t do very much of that because we’d really have a fiasco on our hands because we’d always guess wrong. Our lead times are very fast and we have an average lead time of 3, 4, 5 days. Electronics quick turn of 24 hours. This is an attempt to make sure we have the raw materials in house and we can provide those quick lead times. We don’t provide quick lead times just by stocking up our warehouse with raw materials, we have to manage our business, work closely with our suppliers, and make sure we’re not over buying or under buying. We have to be on top of what we’re doing. Anybody could go ahead and have 3 times as much inventory for quick lead times but that’s not a good solution. We have to manage the business aggressively on a day-to-day basis and that’s normally what we do and we just - we made some mistakes regarding some of the new products and wrong assumptions. There’s nothing wrong with planning, with having assumptions but you’ve got to check. Go back every couple of weeks, how’s it going, how’s it going? Do we keep going based on auto pilot? I think we may have done that a little bit and I’m not too happy about that actually.

The last follow up on the SG&A, I guess is it fair that the bulk of the higher SG&A is due to the high legal cost? If it is, is that something that will continue in the near term?

Yes, I think that’s the element we highlighted and of course SG&A is made up of a dozen or so items and some are a little bit up, some are a little bit down, but that’s the one we wanted to bring to your attention. I don’t have a forecast unfortunately on our legal costs but I know our crack legal department is working on it. We do have some litigation type matters that are affecting our cost. We had one item that was just a Q1 item, that’s over but we have some other items we’re still working on so we have to work very hard to manage our legal costs. I don’t want to give you any kind of indication on that as I did on inventory, I said we need to bring it down, because legal costs are somewhat circumstantial based upon what the issues of the day are. If we have somebody that we feel needs to be sued us have to deal with that. We can’t allow people to abuse Park, we have to protect Park’s rights of course and that’s something that’s not so predictable. I’m not going to be very comfortable giving you any indication as to whether we’ll be able to bring those costs down in Q2. I just wanted you to be aware they’re way up and we’re working on it.

At this time I’m showing no further questions in queue. I would like to turn the call back over to Mr. Shore for any closing remarks.

Thank you everybody for listening in on our first quarter conference call. Matt and I will be in the office. We’re both here in Melville, we’ll be in the office the rest of the day. If you have any follow up questions, feel free to give us a call. We’ll talk to you soon. Have a great summer. Thank you.

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect.