Park Aerospace Corp. (PKE) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Ann, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corporation Second Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] At this time, I will turn today’s call over to Mr. Brian Shore, President and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. This is Brian Shore. I have with me as usual Matt Farabaugh, our VP and CFO. And I will begin with some introductory remarks, then we’ll go on to Q&A. Matt will start with financial commentary, I’ll add a few comments of my own. I just want to mention a couple of things. So first of all, Matt will be giving some comparisons to the prior quarter rather than just last year’s comparable quarter -- or I should say in addition to the last year’s comparable quarter is because sometimes the prior quarter comparisons are more relevant. And other thing is, I want to remind you that a transcript of Matt’s comments already posted on our website, there’s a lot of numbers and detailed information in Matt’s comments. So you may want to also refer to the transcript of his comments on the website. Go ahead, Matt.

Thank you, 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 February 26, 2012 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 would first like to summarize the financial information included in the news release for the second quarter ended August 26, 2012, and in some cases, add a comparison to the first quarter of the 2013 fiscal year. Net sales for the 2013 fiscal year second quarter ended August 26, 2012 were $46.4 million compared to net sales of $50.4 million for the prior fiscal year’s second quarter, and compared to net sales of $46.0 million for the first quarter of 2013 fiscal year. Park’s sales for the first 6 months were $92.5 million compared to sales of $102.3 million for the prior fiscal year’s first 6 months. Net earnings before special items for the 2013 fiscal year second quarter were $5.8 million compared to net earnings before special items of $6.6 million for the prior fiscal year second quarter and compared to net earnings before special items of $4.9 million in the first quarter of the 2013 fiscal year. During the current year second quarter, the company recorded a pre-tax charge of $2.5 million in connection with the planned closure of the Nelco Technology, Zhuhai facility located in the Free Trade Zone in Zhuhai, China. During the…

Thank you, Matt. this is Brian again with some additional comments on the quarter. So let’s break it down here, fairly straightforward when you compare it to Q1 especially, top line was essentially flat in Q2 versus Q1 and the bottom line, the gross margin was very similar essentially flat Q2 compared to the Q1. So the difference obviously is in SG&A and in the tax rate, tax provision. So the SG&A was lower in Q2, than in Q1, that relates to both the S line sales as well as the G&A lines. And that’s a reflection of our attempt to keep our operating costs under control and reduce them where possible. So I guess we had some little success in that regard. I did mention in our last quarter that we were unhappy with the legal expenses, and fortunately we are not very successful with bringing those down, of course, that’s in the G&A line, so we are still working on that. But legal expenses are difficult because, of course, when there are major legal matters that we dealt with that drives the expenses up, they spike up, and sometimes those matters are unpredictable. So and our tax rate is lower as Matt noted, in Q2 versus Q1. And that’s really just a function of doing the math based upon the revenue mix, more of the income being overseas than in the U.S. So let’s see, I think Matt already covered this, but in Q2 versus Q1, again revenues were up in Asia, flat in Europe, down in the U.S. and down in the U.S. mostly attributable to aerospace as Matt commented, aerospace is quite a bit down in Q2 compared to Q1. And that also drove the bottom-line quite a bit worse in Q2 versus Q1, by about…

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

So Brian and Matt, the decision to close the facility over in China, is it your way perhaps give us a little perspective around, what the drag in terms of the operating profile and the benefits we should expect to see from the closure, I’m not sure if I caught details on that?

Well we think on an annualized basis, it’s fairly a small amount, about $500,000 to $750,000 a year, positive of course, and that would be pre-tax, it’s not a significant amount. And that impact is going -- that will be fully impactive in the third quarter. That’s an annualized amount.

Right, terrific. And then when you look at the results that you had this quarter, was there anything that unique -- aside from some of the cost actions in management that you’ve been taking internally. Was there anything that was unique that may have kept SG&A down, or is this a sustainable level, how do we think about that?

There is nothing unusual about SG&A in this quarter, one thing we didn’t get burdened was those big FX loss that was much less in Q2 than Q1. We really have no control of that, that’s really a function of the Euro. They are intercompany loans to our European operations. And as the Euro bounces up and down, it affects our foreign exchange loss or gain. You know in some cases fairly significant way, so that problem was significantly reduced and that goes right to the SG&A line. In Q2, but there is nothing about the second quarter, which is unusual in terms of SG&A. As I commented we didn’t succeed in bringing our legal cost down and that’s still something we’re working on it.

Okay in the last quarter, I think you would explain that is being kind of $400,000, something like that that was incrementally above the normal spend for some of your legal costs, is that correct, that’s still what we should be thinking about.

In Q2, I think we brought it down by maybe $75,000 from Q1, so we're still in a level that we think is pretty high for a company of our size.

Okay. And then on the advanced composite side, I got a sense coming out of last quarter that you folks felt, fairly optimistic that there could be some material press releases, for that business. Now is that what we should now think about as the opportunities you’re considering that are joint ventures or are there other types of business development activities that are under way that would be in addition to that.

There is one that comes to mind that’s quite significant, it’s not a joint venture, but it just would be a very big program, and that certainly could be the level of an item we would want to announce. It could be significant. We also could require additional investment on Park’s part to service that opportunity if we're successful. Intention was supposed to be made already, but the company involved has had some delays for reasons I will not get into because if I told you, you probably would figure out who the company is, and I don’t want do that, but it’s a major OEM company.

Okay. And are we still, are we hopeful on that, or are we still very optimistic, on that activity around that business.

I think we're hopeful, I don’t believe we received anything -- any negative news, but it’s a bakeoff. So we are not the only one they are looking at, but -- from what we are told we’ve done well in the bakeoff, we put a lot of money into the screening effort it’s called, and we'll see. There is nothing else for us to do. They have all the data, they have all the information, this company just needs to make a decision with what they want to do going forward.

Okay. And then last question, if I can switch over to the electronics side. So you have some new products, which we’ve talked about for a good while and then realizing of course that takes time for there to be this material uptake. What have you continued to see in terms of feedback from potential customers? and then as kind of part B to that, are there any changes within your sales process or has there been any changes within the relationships for your sales management team with them that may impact this uptake?

Well, as far as new products are concerned, I don’t think we have anything really significant or shaping to announce the -20 product line, lots and lots of sampling activity, it seems like there’s high degree of interest in both -20 and -20 SI. So I think the news is good there, with -22 and -22 SI that’s the more esoteric product and I’ve gotten nothing but -- I mean uniformly positive feedback in terms of the testing of the product. I think a question that’s emerging in a little bit in my mind is whether that product is a little ahead of the market though, especially with the -22 SI, whether we need to lead the market catch up with that technology just a little bit, but I can't think of one negative piece of feedback we’ve received on the -20, -22 SI product line. As far as our sales organization, I don’t know what you’re really talking about or referring to, I don’t understand that question exactly, but if you’re asking if there’s any changes to organization, there is none at all, I don’t, can’t think of one change we had to our sales organization in the last 6 months or so. If there’s something else you’re asking, I’m not understanding then please let me know that’s the best way that I know to answer that question.

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

Just as a kind of follow-up on the electronics side, the printed circuit materials. clearly, worldwide lethargic environment for many economies been slowing down, I guess impacting you guys, and having some of the products out there. is there anything we could hang our hat on if we remain in this lethargic environment that things can pick up top line, any market share gains, anything out there or in that environment, should we expect the sluggish trends that we are experiencing here?

Morris, Brian here. My feeling about that is there’s 2 different factors to consider. The most significant factor especially short-term quarter-over-quarter is going to be the global economy. I think there is almost no doubt about that that’s a real driver here, the global economy. It seems like things are a little bit stronger in Asia in the last couple of months, but I don't know what to make of that, it's hard to say it’s a trend and really the markets are so global that, what would that mean, I am not sure, but if you know that our revenues are about the same in Q2 as for the Q1, but our aerospace revenues were down that was really made of by electronics in Asia. So a little bit more strength of electronics in Asia, but I have no idea why that it is, could just be some kind of blip that it doesn't mean anything. So there's going to be the global economy melt down, and then the other factor is going to be technology changes, technology advancement, technology introduction. I'm not talking about the materials, I'm talking about with the OEMs and the systems, what kind of technology levels they will require in order to support their new systems. I mentioned that in response to a prior question that, I’m starting to wonder, whether our most elegant product -22 SI, is a little ahead of the market, I'm not sure about that, I'm just starting to entertain that thought a little bit, so obviously if it is, then it will be a function of waiting for technology to catch up with it. There is no doubt in our minds that will happen as a matter of fact, the new development work that we are working on now, is one step further passed our most elegant product, so not always expecting the world to catch up with our most elegant product, if in fact it’s a little ahead of the world, we’re expecting it to surpass it at some point. That probably is going to be less in short-term quarter-over-quarter impact, but if the global economy changes in a significant way, then you see some short-term changes in Park's business, so there is 2 factors, one a little more long-term, middle-term let’s call it, the other one will be shorter-term.

And our next question comes from the line of Lynn Cooper [ph] with Park Electrochemical.

I have a few questions related to Kansas I guess. In prior conversations, you discuss the aircraft inventory that is private planes you said you could buy a used one for much less than a new one therefore considering the big inventory of planes, the business was not going well for the Kansas manufacturers, do you have any insight on what’s going on with that market?

You’re talking about the business jet, that’s one of our principal markets for general aviation.

Yes.

At this point, my feeling there has no significant recovery since -- when is it, 2008, you know since 2008 recession when things really fell off a cliff actually. Not a significant recovery, maybe clawing its way back a little bit. I’ve heard some talk about there will be 2014 before the business jet industry really recovers. Then there is all these people who say 2013, but we never know that could be wishful thinking. At this point, I think anybody you would say that there is a significant recovery in place is probably living in a world of wishful thinking. So our business model is not going to be dependent upon a significant recovery, we’re also working in military, in UAVs as well as helicopters. So we are not only focused with biz jets. Our opportunity though, because we are a new kid on the block still, is business opportunities not just based upon the market, but based upon penetration, based upon joint-ventures, based upon taking market share away from other companies that maybe they have been doing this a long time, that have more experience than us, but may also be a little complacent about their position in the world.

Okay. And this Kansas operation management would seem to me that a lot of people looking for work is it so difficult getting the managers, at least special requirements, that make it difficult to get the right management.

Yes, that’s exactly what my thinking was, our thinking was, over the last couple of years. But it’s been surprisingly difficult to find the right people for Park, there are a lot of the people that have worked in the aircraft industry, the big aircraft companies, the OEMs, may not be, in Kansas, I mean, may not be suited for our kind of business culture. So some are and some are not, and that’s been a little bit of a struggle. But we have pretty special requirements, not only in terms of technical ability, but also in terms of attitude, cultural perspective if you will. And probably in response to your product question, I commented that we may be looking to take market share away from others, based upon may be being the new kid on the block, being more responsive, having a higher sense of urgency, being more flexible. Whereas the other companies, some of our competitors have been doing it a long time, they are more experienced than we do, but they also may feel entrenched, may not be as motivated. So we need to hire people that are highly motivated, have a high sense of urgency, a strong sense of belonging, willing to be flexible, willing to work in multiple departments, based upon what the customer needs are. That is what we are looking to create, and it’s not been as easy as I thought it would be and based upon the same kind of reasoning you just expressed actually. All right, but just to complete the answer, Lynn, I think that we’ve made some good progress and we’re very happy with the guy, the Vice President of Aerospace for Park. I think he has done a wonderful job, very happy with him and we’re very lucky to have him, and we’re building a pretty good team there not too many open slots right now, not too many -- maybe look for some announcements that might be coming, could be 1 or 2 other key people are maybe joining our company from that area.

Okay. Could you refresh my memory on that legal action that’s absorbing the money?

No. we don’t really want to comment on them. we resolve a couple and there is something else that pops up, and we really don’t want to comment on the specific legal actions at this point, there are a couple we are working on, it’d be nice if we could resolve them and move on. But that is not something that is reserved to do, that’s for sure.

And our next question comes from the line of Jiwon Lee with Sidoti & Company.

Just a couple of quick questions if I may, Brian, you mentioned so far in the third quarter, the orders are tracking similar to the second quarter, given your mix change, I wanted to make sure that the mixes, the PCB versus composite are similar to second quarter as well, not just the total order.

Jiwon, we’ve been asked this question before and we’re declined to comment specifically, when we’re looking to just 3 weeks, we’re concerned about too much information, but nevertheless and we’d say that the trend between aerospace and electronics continues in Q3 as we saw in Q2.

Great. And these revenue opportunities that you highlighted, if you can sort of kind of put your arms around in terms of the joint venture, what would be - as these are required capital investment to get this revenue at least on the first page of it?

The capital investment?

Yes.

Okay. So remember, we said these are significant opportunities in a $100 million plus or minus $25 million range, so that’s what we’re talking about, and that would be everything and that would be the total investment.

Okay. That’s the investment side, okay.

Yes. So that would include doing development work that include maybe building factory, equipment, tooling, working capital, the enchilada.

So then what would be sort of kind of the revenue opportunities that come from that?

Extremely significant over a long period of time.

Okay. Terrific, any idea when we would have a little more insight into this development?

No, but I think these are at the level where we had something in hand we would announce it. And I just want to always caution you that these may or may not happen and that’s why I made the comment that these are all or nothing type opportunities, and we don’t want to bank on them. So that’s where we started also at the same time, more of a kind of formal process oriented M&A program. What we’re doing is looking at the whole universe -- and we designed a specification looking at the universe of possibilities, which probably are hundreds of companies are starting to break it down, break it down, and shorten the list and shorten the list. and at some point, we’ll be contacting companies. so we’ll do those in [parallel] and again, the reason is what, because we can’t count these all or nothing opportunities to come true, they may not.

So Brian, just for the background these...

Hey, I should say discussions are at the CEO level. These are not casual discussions.

So did you previously ever have this type of discussions with these potential joint-venture partners or is that sort of a fresh opportunities that arose as a result of your own I guess, initiative?

These are recent developments.

Okay, perfect. And for Matt, can we discuss the top 5, 10 and 20 and the makeup of it?

Sure. We have one customer for the quarter that was over 10% and it was TTM, 13.6%, the remaining top 5 are Sanmina, WUS, Viasystems and Multek, top 5 totaled 47%, almost 48% of sales. Top ten were at 65%, up 20 were 77%.

[Operator Instructions] And there being no further question, this concludes today’s question-and-answer session. I would now like to turn the call back over to Mr. Brian Shore for closing remarks.

Thank you, operator. This is Brian, thank you everybody for joining our second quarter conference call. We appreciate you taking the time to listen in. Matt and I will be around the rest of days and if you have any follow-up questions, please feel free to give us a call. So you all have a good day. Good bye now.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Have a good day.