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#Thank you, operator.
Welcome, everybody, to Park Electrochemical's first quarter conference call.
I have with me as usual, Matt <UNK>, our, I guess, Senior Vice President and CFO, and we'll kick the call off with some introductory comments and we'll go into our Q&A.
Also, remember that a transcript of Matt's comments are already posted on our website.
There are some detail in Matt's comments, so you may want to check the posting on the website.
Fill in, Matt.
All right.
Thanks, <UNK>.
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, 2017, various factors that could affect future results.
Those factors were 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 fiscal year 2018 first quarter ended May 28, 2017, P&L, which are not specifically addressed in the earnings release.
During the fiscal year of 2018 first quarter, North American sales were 56% of total sales, European sales were 7% of total sales and Asian sales were 37% of total sales compared to 53%, 8% and 39%, respectively, for the 2017 fiscal year first quarter and 55%, 7% and 38%, respectively, for the 2017 fiscal year fourth quarter.
Sales of Park's high-performance, non-FR-4 electronics materials were 92% of total electronics materials sales in the 2018 fiscal year first quarter and 94% in the 2017 fiscal year first and fourth quarters.
Park's aerospace sales were $8.7 million or 32% of total sales in the 2018 fiscal year ---+ I'm sorry, fiscal year first quarter compared to $7.7 million or 24% of total sales in the 2017 fiscal year first quarter and $8.2 million or 30% of total sales in 2017 fiscal year fourth quarter.
Park's electronics sales were $18.7 million or 68% of total sales in the 2018 fiscal year first quarter compared to $23.8 million or 76% of total sales in the 2017 fiscal year first quarter and $19.4 million or 70% of total sales in the 2017 fiscal year fourth quarter.
Gross profit for the 2018 fiscal year first quarter was $6.3 million or 23.1% of sales compared to $8.8 million or 27.9% of sales for the 2017 fiscal year first quarter and $7.4 million or 26.8% of sales for the 2017 fiscal year fourth quarter.
Before special items, selling, general and administrative expenses for the 2018 fiscal year first quarter were $4.4 million or 15.9% of sales compared to $5.3 million or 16.9% of sales for the 2017 fiscal year first quarter and $4.7 million or 17.0% of sales for the 2017 fiscal year fourth quarter.
Investment income, net of interest expense, in the 2018 fiscal year first quarter was $510,000 compared to $45,000 in the 2017 fiscal year first quarter and $422,000 in the 2017 fiscal year fourth quarter.
Before special items, earnings before income taxes for the 2018 fiscal year first quarter were $2.2 million or 8.1% of sales compared to $3.5 million or 11.1% of sales for the 2017 fiscal year first quarter and $2.8 million or 10.2% of sales for the 2017 fiscal year fourth quarter.
Before special items, net earnings for the 2018 fiscal year first quarter were $2.5 million or 9.1% of sales compared to $3.0 million or 9.5% of sales for the 2017 fiscal year first quarter and $2.5 million or 9.2% of sales for the 2017 fiscal year fourth quarter.
Depreciation and amortization expense in the 2018 fiscal year first quarter was $807,000 compared to $827,000 in the fiscal year ---+ the 2017 fiscal year first quarter and $733,000 in the 2017 fiscal year fourth quarter.
Capital expenditures in the 2018 fiscal year first quarter were $105,000 compared to $41,000 in the 2017 fiscal year first quarter and $48,000 in the 2017 fiscal year fourth quarter.
The effective tax rate before special items was negative 12.4% in the 2018 fiscal year first quarter compared to 14.4% in the 2017 fiscal year first quarter and 9.1% in the 2017 fiscal year fourth quarter.
The first quarter tax rate included a reversal of Fin48 tax reserve.
The tax rate excluding the reversal of the Fin48 tax reserve would have been 18.7%.
For the 2018 fiscal year first quarter, the top 5 customers were Aerojet, GE, including its subcontractors, Sanmina, TTM and WUS, in alphabetical order.
The top 5 customers totaled approximately 34% of the total sales during the 2018 first quarter.
Our top 10 customers totaled approximately 49% of total sales and the top 20 customers totaled approximately 66% of total sales for the 2018 fiscal year first quarter.
Okay.
Thanks a lot, Matt.
It\
So <UNK>, first of all, in terms of the first 3 weeks of the second quarter, there really is nothing to talk about, it's kind of just tracking the same trend.
The 3 months of the first quarter were kind of very flat when compared to the other, maybe March, April and May.
So no particular movement yet.
So we're talking about in the first 3 weeks of the second quarter.
As far as electronics, that's obviously the big question, and that's what we're saying when we believe that things will start moving up in the second half.
There's 2 aspects of it.
One is the bottom line, and that really relates to restructuring.
The restructuring isn't designed to get us more business; that's the refocus our business in the U.S., so our costs are lower but also we focus more on being a niche company in the U.S., a niche business in the U.S. In Asia, it's quite different.
It's like the totally different story.
That's where we are aggressively seeking revenue with these OEM ---+ with our OEM marketing program and OEM program pricing.
And we're saying, although we don't know for sure, that we're looking for the second half of the year, where the revenues would start to move up again for electronics.
You're quite correct.
So it looks like we're kind of bumping along the bottom here.
And the issue for us is, we explained this before, we have new products and we have legacy products.
The legacy products are going to get less, there's really very little we can do about that.
That's just how it is.
As programs end, those legacy product revenues for us end.
So the challenge is for our new product revenue to exceed the loss of our legacy product revenue.
So that's what we're looking for in terms of switch.
It's not that the new product revenue is not there, but it hasn't outpaced the loss of the legacy product revenue yet.
I don't agree with that at all.
I think it is doable, and it should be something we should achieve.
Yes, the gross margins, they are our core in the first quarter.
We mentioned some of the factors.
It's really an electronic story, I said that aerospace is actually up as compared to the fourth quarter, both top and bottom line.
So it's really an electronic story now, the P&L and the gross margins are being held down.
Remember, partly we talked about the shutdown credits that we had in the fourth quarter that made the fourth quarter look better as compared to the first quarter.
But also, we're still bogged down with the duplicative cost related to the restructuring; it's a messy P&L until we get through the restructuring.
Ultimately, the key driver for the top to bottom line and the gross margin electronics is going to be the revenue.
So it's really critical that we start to move the revenue up based upon the OEM marketing plans and programs that we have in place, that we've been working on, the guys have been working on very aggressively, I guess, for about 9 months now.
Which fiscal year.
This fiscal year.
So I think we mentioned, it could be up to $15 million for that factory.
And the question, it would be, what period that the money is spent on and it's really hard for us to predict that.
So it could straddle this fiscal year and next fiscal year.
It depends when we start it, and that's not totally something we can predict because that depends on when GE gets back to us with this additional information we requested.
So it's really difficult for us to predict how it would break out between this fiscal year and next fiscal year.
But if we start a project, let's say, in 3 or 4 months, there would be a straddle.
I would think that all the spending would be complete by the end of next fiscal year, though.
Yes.
So it's a similar question anyway, <UNK>.
I think we said last quarter's call, and we'll say again, we think we'll see the change in the second half of our fiscal year, right, in terms of when the new product gains will start to outstrip the legacy product losses.
That's just the best we can do to predict.
The ---+ there's a ---+ I guess, I'm not giving you very much color because we've done it before and it kind of gets to be repetitive, but there's a lot of I think very positive, very good reception to the OEM marketing program.
The activity is very high; there are a lot of arrangements that we've reached with these OEMs.
I guess, in some cases, it takes a little while for new programs to actually go into effect and for a product to actually be put in production, it's not nearly as long as aerospace, but there could be some little lag time.
So I think you're right also.
I think we expected that inflection point, to use your term, to have occurred a little earlier, maybe by now.
So if we see it in the second half, maybe we're a few months behind what we thought ---+ where we felt we would be about 6 months ago, if that makes sense, you understand what I'm saying.
But the dynamics are still in place.
That really is not different from my point of view.
There is a question of timing.
And as we said a few times now, we believe we'll see that inflection point in the second half of next year.
We're seeing a lot.
And I'm not doing a very good job of kind of conveying the sense of positive direction, and then maybe even excitement.
What we don't have is quantification.
It's something we ask 25 times every time we meet with an OEM or customer.
And in terms of quantifying the time frame, it's been really difficult for us to pin these people down.
So we do the best we can with our forecasting; we update our forecast on a pretty regular basis.
But forecasting is going to be somewhat a guess based upon information we have and we have to extrapolate, obviously, into a real forecast.
That's nothing unusual; that's how any business operates.
But the questions you're asking us, <UNK>, those questions are asked 25 times every time, I mean, it's a little bit exaggeration, but maybe half a dozen times every time we sit down in a meeting with a big OEM or a big circuit board customer in Asia with ---+ I mean, without exception.
And we'll go see them every 6 weeks or so, so we'll check again.
You said this, now we're back.
Is that still true.
You want to modify, you want to adjust it.
So I think we do the very best we can to really hone in on the timing because we know it's important, but I still think that, notwithstanding that we've done the best we can, there's some limit to our ability to really nail it to a month.
So I think we'll stick with the second half of next year.
We feel that will be the inflection point, and that's probably the best we can do.
And if I gave you anything more in terms of an answer, I think I'd be getting over the line and going into just a kind of utter speculation area, and that's really not useful.
I don't think you want me to do that.
So, so far, so good.
We have not had any supply problems yet.
Although some of the suppliers have taken the opportunity to raise prices.
We have our procedures where we've passed through these increases.
So this happens from time to time, recently.
I guess, as you said, <UNK>, there's other uses for copper in automotive and things like that, and that's the explanation anyway as to why prices need to go up, and we've had some price increases.
However, normally the price increases are tied to the LME, but this is something a little different.
Supply has not been an issue for us.
I hear the same thing ---+ we hear the same things that there are supply issues in the industry.
I think we've done a pretty good job of working over the long haul with our suppliers, and so I think that's been a good thing for us and it's probably paid dividends.
We've worked with suppliers for many, many years on a consistent basis.
It's a good question.
I think it's a first choice, which is progression should be similar.
We just heard yesterday that there is an increasing of forecast from our big customer, and that helps us.
But the big quantum improvements and increases in top line are going to be not this year.
The forecasting we have for GE Aviation in particular and MRAS is pretty precise.
It goes out 10 years and it's based upon aircraft units, so it's pretty predictable.
How many Boeings, how many airbuses the Boeing Airbus plan to produce and sell.
So the numbers get quite big, quite big, quite big, but that's ---+ it grows over time, but we get to 20 ---+ 2021, fiscal '22, calendar '21, fiscal '22, we're starting to see some significant revenues.
Now, it doesn't just go up that 1 year, <UNK>.
It's not that kind of thing; it goes up over time.
But those kind of significant revenues will not really be seen in this fiscal year, we don't believe.
So it's more the first choice, the progression rather than the large quantum leaps.
But when we get out of those '21, '22 years, then the numbers are quite significant.
So good question.
I guess the thing that\
'18.
So we're saying that we hope to see the improvement in the electronics top line in the second half of the current fiscal year, which is '18, as you said.
Glad you asked the question, because it would be unfortunate if I left that confusion out there.
So there's 3 programs that are using the LEAP engine.
The 737 is not a program we're on.
That's because MRAS is not in that program.
We're still sourced with MRAS, I think we've explained that before.
The LEAP programs that we're on are the A320neo, the COMAC919, but not the 737.
This is <UNK>, again.
Thank you, operator, and thank you, everybody, for listening in and for questions today.
Matt and I will be in the office the rest of the day.
So if you have any follow-up questions, please feel free to give us a call.
And I guess, we won't be talking to you at least in the conference call till after the summer is over, so I wish all of you a very wonderful summer, and have a nice day.
And hopefully, we'll talk to you soon.
Take care.
