Good morning. My name is Esteban, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year 2014 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. Welcome, every -- this is Brian, welcome everybody to our third quarter conference call. I have with me Matt Farabaugh, our VP and CFO, as usual, and we'll start with some introductory remarks. Matt will start with financial commentary, I'll add a few comments and then we'll go into Q&A. And before we even get started, I want to remind you that a transcript of Matt's comments, the comments he's about to give you, were already posted on our website this morning. So you can go through those comments on the website if you want to go check the details. 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 March 3, 2013 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 December 1, 2013 P&L, which are not specifically addressed in the earnings release. During the fiscal year 2014 third quarter, North American sales were 51% of total sales, European sales were 6% of total sales and Asian sales were 43% of total sales, compared to 46%, 8% and 46%, respectively, for the third quarter of the prior fiscal year, and 51%, 6% and 43%, respectively, for the 2014 fiscal year second quarter. Sales of Park's high performance non-FR-4 printed circuit materials were 89% of total laminate and prepreg material sales in the third quarter of fiscal year 2014, 82% in the third quarter of the prior fiscal year, and 88% in the second quarter of the fiscal year 2014. Sales of Park's aerospace materials and parts were $8.2 million in the third quarter of the 2014 fiscal year compared to $5.5 million in the third quarter of the prior fiscal year, and compared to $7.5 million in the second quarter of the 2014 fiscal year. Investment income net of interest expense for the third quarter of the 2014 fiscal year was negative $48,000 compared…

Okay. Thanks a lot, Matt. Brian, again. Let me add a few comments here. First of all, maybe a housekeeping item. The special dividend which we paid, I think, about a year ago, $2.50 per share dividend and all of the 4 regular dividends paid this fiscal year -- one is yet to be paid, has been declared, but not yet paid, the $0.10 per share quarterly regular dividends. We believe all those dividends at this point will be return of capital. We receive return of capital treatment for federal income tax purposes. We get questions about that from time to time. We're not able to give definitive answers until the year is closed, but it's looking up pretty likely to be that kind of treatment at this point, so I just want to let you know. Q3, I think, it's pretty straightforward, the bottom line was mostly explained and driven by the weak top line. Global electronics, weak. The global industry is weak. I guess, I would say that if you guys are following some of the big electronics OEMs, the ones that we supply into in particular, I don't think you'd be too surprised based upon some of the reports and comments made by those companies recently and even comments from their CEOs about the environment and the global electronics industry and market. So I would say, thank goodness for aerospace because that was stronger for us. That continues to be stronger for us. Was better in third quarter and continues to strengthen. And that's, I guess, partly the market is pretty good, but I think it's also because of the fact that, that's a newer area for us and there is market share growth there. Like with electronics, we are one of the legacy suppliers that's probably…

[Operator Instructions] It looks like our first question comes from Sean Hannan with Needham & Company.

I was looking to see if you folks could provide a little bit more context on the December demand being a continuation of Q3. So when I think about the electronic side of the business, given that, that still is pretty much about 80% of your business. Just trying to get an understanding of how the months had performed there in this past quarter and is that continuation that you spoke about in December, is that really at the average of Q3 or is that how the months ultimately trended exiting the quarter?

Okay. So we're dealing with real hairsplitting here, and I just want to say that because I'm concerned that people will extrapolate from these comments, but during the quarter, there was declining revenues, September, October, November. September, being the highest, October being a little bit lower and November being just a little bit lower than October. And when you look at December, it sold little difference between, say, what November was and the quarter average because it wasn't that steep a decline. So if you -- and this is the thing, you have to use little bit of judgment in answering that question because you got to factor out the 2 -- for us, it was week 3 and 4 of the 5-week month, week 3 and 4, you got to have to -- you have to factor those out to some extent because of the holiday weeks. So if you consider all that, it's kind of the answer is the same, whether you're looking at the end of the quarter or the quarter average because there's just very little difference in the 2 numbers. And it's not that -- I think, to be more precise would imply that we have more precision, more clear understanding as to what the market is doing. From a subjective perspective, I couldn't tell you there's any difference in December at all. It would be very, very difficult for any of us to reach a conclusion that it's any better or any worse. So from my perspective, I would default to it's about the same. And the numbers would bear that out, too.

Brian, I actually think that's a very helpful perspective. So now, if I think about what has been reported here, it looks like that electronics piece of the business was down about 15% quarter-over-quarter. So it seems like what we're hearing is perhaps maybe there's a little bit of stabilization that's materializing here as we kind of enter the new calendar year. Of course, we've got a little bit of Chinese New Year to consider, but any additional perspective around that to add?

No. We just don't know where it's going. I wish I could tell you that, yes, we've got some good signs that things are going to start to accelerate. You know how we are, we're really supplying the capital equipment. The people are buying laptops, iPhones, iPads, Droid devices really don't affect us directly. What affects us directly is capital spending of corporations and also Internet service providers, and so that's really going to be the driving factor for us and -- I mean, it's pretty hard to figure -- sorry, it's pretty easy to figure out where we are because we supply into such big-name OEMs. So if they're reporting kind of funny stuff and concerning things, it's really almost impossible to conclude that we're going to not be touched by that in electronics because we have a pretty -- we're a legacy company. We have a pretty established market position as compared to aerospace, again, where there's a lot of upside potential for us. So the market could be weak for 6, 8 months in aerospace but that isn't going to be the whole story for us, it's really going to be market share. Electronics, on a short-term basis, quarter-to-quarter, it's really going to be the market that's going to drive things probably more than anything else, I would think. But I wish I could tell you that, yes, we see some great signs and we see great signs but I don't see anything like that yet. Maybe -- but -- maybe next week, if we were talking, I might have a different view.

Okay. That's helpful. And then, so on the aerospace side of your business, I think that you folks are executing to what you've been discussing over really a multiyear horizon and you're starting to get a little bit of traction here, so congratulations on that. The $8.2 million that you did this quarter, certainly encouraging. I think we've seen some pretty consistent growth there. When we think about the purchase orders that you had referenced earlier in the call, that will start to layer in, in calendar '14 and forward. And then, of course, everything else that's positive going on within your aerospace business, could we arguably get from this $8.2 million run rate on a quarterly basis up to the $11 million-ish level, say, by midyear '14 or would that perhaps be a little bit too aggressive?

I don't think it's too aggressive. You want -- let's just do some simple math though. So we have about $32 million run rate in Q4, right? $32.5 million. So by June, based upon the POs, we're supposed to be over $1 million a month. That's just POs, and actually, a little bit more than $1 million. So I mean, that's just math. So I don't know what you want to add to that. At that level, you want to add $13 million, $14 million, and that's based upon existing POs. We're not talking about -- that's so far, so far, I'm not telling you, I'm not quantifying anything else other than what we have, POs in our backlog. So it's pretty simple math. You start with the run rate for Q4 and you decide what to add to it. But $44 million, I think, that's pretty good math. That's a run rate, pretty, pretty easy math. I don't think that's too difficult to do that math.

Okay. So it sounds like that $11 million per quarter is pretty much in line with the logic of how you're thinking about this?

What $11 million per quarter, what is that?

$11 million per quarter, I think, that would support a $44 million run rate?

Oh, I see what you're saying. Yes, I just wanted to [indiscernible] we're doing with this jet company, not -- it wasn't -- I said $11.5 million for calendar 2014 total. I wanted to make sure we weren't confusing those 2 numbers.

Sure. Wonderful. Okay. I'm going to step out of line after this next question. M&A front, any activity or specific interest there or are you now much more focused in executing on the aerospace before becoming more active on the M&A front again?

M&A is pretty quiet. It's more kind of, let's call, an opportunistic thing, Sean. When you hear something is available, we'll look into it but I think your -- the implication of your question is correct. We're really focused more on executing on this other opportunity. And also, on executing, I don't want to just totally neglect -- we don't want to totally neglect discussion of electronics. Also on executing developing -- continuing to do the product -- introduce and develop new products for electronics.

Our next question comes from Morris Ajzenman with Griffin Securities.

Just on the electronic material side. Do you get any feedback at all from your OEMs whereas any of them can give you any sort of outlook, either optimistic or pessimistic over the next month or 2? Do they have any sort of clarity they share with you?

Well, we ask, and sometimes we get input but it's not consistent, number one. And credibility is such that I wouldn't -- I don't think we feel comfortable sharing that input. I don't know. I think the track record of predicting electronics, the electronics market is just so poor, and it's almost like a waste of time to even try. I mean, that's kind of maybe a little bit too much of a cynical, but boy, I mean, look. We've been in electronics since 1960, and why don't we just -- it seems like every time there's some change, a significant change, up or down, like nobody saw it coming. I mean, it's the opposite. It's just almost like when you get nervous when people are feeling good about things, oh yes, we're doing well, let's add -- let's go spend some more money. You add some more capital, hire people, that's when you better watch out. Or maybe the opposite is true also, people are pretty down in the dumps and not very encouraged, so maybe that's a sign that things are going to get better. That's more of the pattern actually. It's amazing. I don't know if anybody is interested in my thinking. Think of how many brilliant people there are in the electronics industry around the world. I mean, there's a lot of smart people, but boy, the ability to figure out what's going -- or going to happen is, I don't think so great if you look at the history, the track record.

Any feelings, again, reaching out to OEMs and with your sense, the inventory level out there in the pipeline. Is it thin, is it average, is it high? Any sort of guess on that?

I don't even know if I should guess. My guess is it's average. Sometimes, people, when you're -- oh, it's a little high, we're working down inventory, that's the reason for things being slow. But like I say, we've been around too long to kind of get too excited about that talk. There's so much denial. When things are good, it's always the end market -- oh or things are great, the economy is great. When things are bad, it's always an inventory adjustment. We're just adjusting inventory.

Okay. And lastly on new products, you've been talking -- you always talk about new products, but over the last couple of quarters, how is that playing out, and despite the top line, electronic deals being under pressure, is new products helping somewhat in this difficult environment?

Yes. Actually, it is a little bit, it would be -- it's good we have them because the top line would be -- wouldn't be very nice if we didn't. But I would say, though, that with this kind of malaise in electronics industry, it's frustrating for us because nobody seems to have the energy to do anything. Qualifying new products in electronics is not like aerospace. The aerospace, you better be committed to it because you better be committed to spend many, many, many millions of dollars and spend a couple of years. However, with electronics, not quite as difficult but we wish there was more energy. We're doing everything we can but the qualification has to be a joint effort with the OEM and circuit board shops, and that's frustrating for us. But it's not shocking and we've seen this before, when things are a little bit down in the dumps, the electronics industry just doesn't have that whatever -- vim and vigor or pizazz to go out and do things, make things happen. I don't know. So I wish it was better, although we have had some success and some revenues from our new products, which is pretty nice that we have them because if we didn't, it wouldn't be a good story. Of course, we [indiscernible]. Let me just say, comment, if we didn't have aerospace, that would not be a pretty picture for Park.

Okay. And last question and I'll get back in queue here. On the aerospace, on the composite side, there's 1 large customer that's still unnamed, it's a jet engine company. You gave us the purchase orders for 2014, '15. Are you expecting or hoping to continue to see that grow in the out years as far as your orders continue to [indiscernible].

Well, [indiscernible] and I don't like talking about things unless we have a -- I mean, purchase orders we're talking about because they're facts, but what I'm alluding to is that we're talking through 2021 so far. Let me maybe try to answer the question from this perspective. It takes many, many, many millions of dollars to qualify somebody like Park on programs like this. We spent some of our own money as well. It's a big, big, big deal. It would be really, really, really, a bad business proposition to do that with 2-year horizon. It would be a real bad business proposition. So there's no intention at all that this is a 2-year arrangement. That would be a real, real bad business proposition, based upon how much effort, how much involvement with the company and with the OEMs, meaning the companies which make airplanes and the amount of money that has to be spent, which is enormous to do a 2-year deal, the ROI on that, you get any first year accountant out of accounting school and they're going to laugh at you and say, you better not do that one. Maybe that helps a little bit in terms of bringing [ph] you perspective on where this is going.

Our next question comes from Andrew Fleming with Heartland Advisors.

Congrats on a great quarter in aero. Looks like it's up almost 50% year-over-year. I'm just curious, could you describe the margin profile of the aero business relative to your other business lines and I'm talking about high-performance and non-high performance printed circuit materials?

So, that's a good question and I think it's good that you separate the 2. So non-high performance, which is almost a non topic for Park because it's gotten to be such a small portion of our business, now about 11%. The margins are not really much, maybe you pay a couple of light bills and that's about it. But they're not attractive margins and I think I've made the comment over the years that it's almost like 2 different businesses, high performance, non-high performance. But then we get to the high performance, we discussed this in some of the recent quarters. All high performance is not the same in terms of product and in terms of margin, so there's a lower end of high performance and a higher end of high performance. And if you look at aerospace, it's very similar because all aerospace is not the same either. There's a lower end of the spectrum and a higher end. But if you look at the up and top and higher and lower end of the spectrum and the middle, which we spot, it's very similar, very similar. For us, it's always a struggle because we just don't buy in to this thing about, oh well, you got to do business with low margins in order to get your -- that's your cost of entry, get in the game, I can't tell you how many people tried to explain that to me for the last 20 years -- that this is how business is done, Brian. You have to understand, if you want to be in this business, you got to be willing to do it and not make very much money, but that never works for us. So it's always a struggle because we're always looking for that…

Okay. So as we grow the aero part of the business, we should see some nice margin expansion relative to the drawdown in the non-high performance printed circuit materials?

I agree, as we grow.

And I'm just trying to grasp the opportunity in aero here. I understand we're in the very early stages of this ramp. As you look out further 3 to 5 years, I mean, is it in the realm of possibilities that aero would comprise, let's say, 50% of revenue, 3 to 5 years out? I'm just trying to get a sense of how big this opportunity really is.

I don't understand how big it is. I really -- I can't quantify it. I just know it's very significant. I think, 3 years though would probably be unrealistic, but 5 years, I don't know, maybe. There's so many possibilities. So many things which could happen that are being discussed actively. As I said, we have several development projects with this company and none of them relate to small situations. They relate to -- I don't know how to describe it. I mean, these are very, very large programs that this company is working on. They're programs anybody would have heard of.

And it's safe to say, in your opinion, we've definitely hit the inflection point on the aero side of the business?

I know guys you like that term but I think that's a fair thing to say. Also, I just -- you remind me of something, Andy, I think, in the last call, we commented that there's some investment that we were probably going to make in terms of expanding our manufacturing capacity. Someone asked a question, we said it's probably around $10 million. But that has changed, it's a dynamic situation now because the requirements are dynamic and it could be more than that. It could be quite a bit more than that and we're not sure, we can't say right now because it's really up to this company to kind of decide where they're going with some of these projects and programs. But I just wanted to update that number because we did put that $10 million number out there. I don't have a new number for you because now it could be more, but it's not defined well enough for us to give you a new number.

Our next question comes from Leonard Cooper [ph], a private shareholder.

I'm sitting here, getting confused, not being an analyst and not being too good with numbers. I don't even know what year this is anymore after listening to this conference. Would there be any advantage to getting the fiscal calendar aligned with the actual chronological calendar? I would think, just in printing the quarterly reports, you'd saved enough ink to make it worthwhile.

You have to blame my -- I'll be like our current administration, blame the last guy. You got to blame the people back around 1960, but I understand that the reason we did this was because we figured we got a better deal from our accounting firms because they're not in their busy season when we're closing, but I'm not sure that reason applies anymore. That was probably 1960. Len, I'll tell you what, once everything is going great for the company, and I don't have too much to do, that will be the first project I'll work on, but that's actually -- it takes some time in doing and I don't think we have the bandwidth to work on that right now, so I apologize. You'll have to continue to struggle along. I get confused myself sometimes but just let us know and we'll try to help you out if we can clarify anything.

Okay. Well, that's the answer I expected to get. You talk about all these different projects and ventures, is there enough engineering talent available to handle all this?

No. But we're working on that. We just brought a new engineer in. We hired some new guy, I just met him on Tuesday, but we hired a new guy about 2 weeks ago, an aerospace engineer. No, we don't have enough engineering, but we have plans to deal with it, though, of course.

Okay. I think, in previous reports, we spoke about business aircraft and the big inventory of those planes, which was impeding the new sales of such aircraft. What is the situation there and does it affect Park?

It does. It's not good. I don't think. I don't really believe there's a lot of light at the end of the tunnel yet. And it's -- like anything else, of course, it's always next quarter, next year, things are going to get better, but, boy, that industry has been in a lot of trouble for a while. The business jet industry just hasn't really been very robust. And we decided to go into aerospace in a serious way, it was 2007. At that point, that was a very strong industry. We went to Wichita with our plant, at that point, the aviation capital in the world it was called, but things have changed a lot. And we still do a lot of work with the locals because we're there and we're able to respond quickly. That Scorpion prototype was produced in Wichita. If they go on to volume, it's not clear where it would be produced, but that was helpful because we just -- we'd get in our car and really drive stuff back and forth to the facility -- our parts, when they needed something quickly. But I think the opportunities in aerospace have shifted and changed. We haven't really focused on the big 2 -- with Boeing Airbus very much and that was, I think, a good decision although we're getting some pull from them because of the work with the engine company, a little bit now. But there are opportunities that we think are significant in military, UAVs. Of course, we talked about engines, rocketry. There are a lot of other aspects of aerospace, not that we're going to turn our back on biz jets but I think it would be a mistake, Len, for us to make that our focus area in the future. As it was, it really was when we started in 2007.

Okay. How about automotive parts? I know we've had bad experience in automotive parts. But now with all these automatic parking devices and look behind you and look to the side and cars that are going to drive themselves, are we involved in that or might we be?

Yes, you're talking automotive radar as an example. I think, last quarter, we commented on a new product. We call it like, what was it, 9000NL (sic) [NL9000], and that was developed by our friend, Jean-François and company in France, really specifically targeting automotive radar market and there's one OEM and -- a big OEM in Europe that we were working with. And that product was just commercialized very recently so it's a little early to say, but yes, certainly, we hope to participate in that market.

It looks like what we have 1 more question from Sean Hannan with Needham and Company.

Just an administrative question. CapEx for the quarter?

Matt, can you help us with that?

CapEx for the quarter was fairly low at about...

Oh, you don't -- you just talk about D&A, you don't...

Yes, we talked about D&A.

Let's include CapEx in the future because it's a common question.

It was only a few hundred thousand on the quarter.

Did you hear that? Small, small, small.

$200,000 to $300,000, roughly?

Yes.

All right. And it looks like we have no more questions at this time.

Okay. So thank you everybody for listening in. Happy New Year to you. Matt and I are in the office today, so if you have any follow-up questions, feel free to call us. Have a good day. Bye.

Ladies and gentlemen, that concludes today's conference. You may now disconnect. Have a great day.