Brian Shore - Chairman and CEO Matthew Farabaugh - CFO.

Sean Hannan - Needham & Company Morris Ajzenman - Griffin Securities Andrew Fleming - Heartland Advisors Chris Kapsch - Topeka Capital Markets.

Good morning. My name is Nichole and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. second quarter FY15 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 will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference..

Thank you, operator. This is Brian Shore. Welcome everybody; I have with me, Matt Farabaugh, our CFO. Welcome to our second quarter conference call. We’ll start with introductory remarks as usual and then I’ll go to the Q&A.

Matt, why don't you start with the financial comments?.

Okay, thanks 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 2, 2014, 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 second quarter ended August 31, 2014, P&L which are not specifically addressed in the earnings release.

During the fiscal year 2015 second quarter, North American sales were 46% of total sales, European sales were 6% of total sales and Asian sales were 48% of total sales compared to 51%, 6% and 43% respectively for the second quarter of the 2014 fiscal year and 44%, 6% and 50% respectively for the 2015 fiscal year first quarter.

Sales of Park's high performance non-FR-4 printed circuit materials were 92% of total laminate and prepreg material sales in the second quarter of fiscal year 2015, 88% in the second quarter of the 2014 fiscal year and 93% in the 2015 fiscal year first quarter.

Sales of Park's aerospace materials and parts were $8.6 million in the second quarter of the 2015 fiscal year compared to $7.5 million in the second quarter of the 2014 fiscal year and compared to $9.0 million in the 2015 fiscal year first quarter.

Investment income, net of interest expense for the second quarter of the 2015 fiscal year was negative $134,000 compared to negative $108,000 in the second quarter of the 2014 fiscal year and negative $206,000 in the 2015 fiscal year first quarter.

Depreciation and amortization expense for the second quarter of the 2015 fiscal year was $865,000 compared to $995,000 in the 2014 fiscal year second quarter and $898,000 in the 2015 fiscal year first quarter.

Capital expenditures for the second quarter of the 2015 fiscal year were $179,000 compared to $149,000 in the 2014 fiscal year second quarter and $53,000 in the 2015 fiscal year first quarter.

The effective tax rate before special items was 13.3% in the second quarter of the 2015 fiscal year compared to 19.9% in the 2014 fiscal year second quarter and compared to 17.4% in the 2015 fiscal year first quarter. During the second quarter of the 2015 fiscal year, the company had no customers that were more than 10% of total sales.

The top five customers were Dongguan Shengyi Electronics, GE, Sanmina, TTM and Viasystems, in alphabetical order. The top five customers totaled approximately 35% of total sales, top 10 customers totaled 54% of total sales and the top 20 customers totaled approximately 72% of total sales..

Okay, thank you Matt, this is Brain again. Let me go over some more commentary about the quarter and update our business activities as well.

First of all money compared to second quarter to the first quarter the revenues were off about $6.5 million in the second quarter as compared to the first quarter so revenues were fracing actually a little bit above Q1 levels in the first four weeks of the quarter of the second quarter then dropped off.

Revenues in June were a little above the Q1 averages. Actually the revenues in first four weeks were higher than even actually in May so they are going quite well until like the fifth week of quarter to the fifth week of our five week month of June and then they trended down pretty quickly.

But the average revenues in June were a little still above the average in the first quarter to put it in perspective. Then July dropped off from their and then August dropped off further from there. So what is this about, it’s really about electronics and it’s about the market and it’s about a market correction.

Now in our first quarter there was some euphoria I guess and the quarter is quite strong but I think if you go back and look at the transcript actually weren't everybody, I guess we fit in doing this for a long time, we've had a lot of experience that the electronics market in particular can turn very, very quickly without really any good advance warning and I’ve made this comment, I mean probably dozens of times in last 15 to 20 years that the electronics industry is interesting because of a lot of very intelligent people who collectively are not very intelligent in terms of predicting what’s going to happen.

In fact after the week five, is when the things started to turn down. We had our first quarter conference call after week four, then week five things turned down. So that was a good example of not being able to see what was coming very well. So I think what we have here is a pretty significant inventory correction particularly Asia.

Remember, Asia where things accelerated at least for Park in the first quarter by dramatically, and I think Asia got ahead of itself. There was overbuilt in Q1 and we’re quite sure about that now. One thing about electronic is everybody is brilliant when looking back, looking forward not so brilliant.

So over one actually for Park was artificially efficiently high based on that overbuild, then the correction in July and August is artificially low, in other words it's not based upon -- the high wasn’t based upon the fundamentals, it was higher than the fundamentals, lowers, lot lower than the fundamental as well.

So what we’ve learned, Chris Mastrogiacomo our President, has been over in Asia for the last three weeks meeting with all of our key customers and OEMs, learned something interesting about the Chinese market and we haven't heard this before.

In China controlled economy that’s not a surprise, it’s not an acquisition, it's just everybody knows that and there is an allocation system. The government allocates certain amount of business to the OEMs for in infrastructure build out of 4G LTE internet infrastructure.

But that allocation is interesting because if an OEM can demonstrate that it can handle more, then they can get a bigger allocation.

And that’s what happens, some of the OEMs were quite aggressive in building and buying, buying raw materials and building product that demonstrates they can handle more and therefore be entitled to a larger share in terms of the Chinese government’s actions. And that exacerbated things -- exacerbated the problem, obviously.

So we had inventory corrections, inventory overbuilds in the past and this is why we're exacerbated because remember in the first quarter I said the first quarter good news in electronics was largely Asian and Chinese story related to the Asia OEMs not so much the western OEMs so I think the market is probably paying for that now.

So an obvious question is okay, there is an inventory overhang when will it end? When will things get back to "normal" and I’ll just tell you what we’ve been told, and I will give you my caution after that, my caveat after that, which we’ve been told towards the end of the calendar year November, December is when things should be normalized.

Now, again I have to remind you that the industry’s ability to predict these things is usually not very good but that’s what we’re being told anyway, do the math, there's so much extra inventory is stocking the system and this is how long it will take to be absorbed.

The end market is so, so because in terms of global economy, but there still seems to be somewhat vital build-out of 4G LTE, not just in China but around the world. So, then the question is well, what level we'll return to though because normal, remember as we now know, wasn’t the first quarter.

It is probably not the second quarter, it must be something in between those levels but we just don’t know, we'll have to find out. So let’s talk about the bottom line in the first quarter, we would have focused on that a little bit as well, we talk about the top-line, obviously the bottom-line is going to be very much driven by top-line.

So if you look at quarter two compared to quarter one we had about $6.5 million loss in revenues, but actually its worse than that, with a $9 million loss of production, in other words, production in Q1 was $9 million higher than in Q2, production at sales value we’re talking about not at inventory value, production at sales value, understand production was $9 million higher in Q1 and Q2.

So we got caught up in this thing as well. We were building and building and because we had real orders in everything it wasn’t just pie in the sky stuff.

So we got even more of a double whammy there, because the P&Ls for Park is going to be driven more by production in revenues ultimately, they are both equal of course but there is mismatches from period-to-period. So our P&L have been penalize more from a production perspective than a revenue perspective.

So that hurt our P&L and of course, it also hurt our revenues, the fact we had extra production and because we had extract inventory which had to be Park inventory, I’m not talking about industry inventory which had to be double as well. So that may be single or double or even triple whammy I’m not sure.

The other reason that the P&L is as bad as it is in Q2, the addition to the production, loss of production in Q2 as compared to Q1 is it’s hard to put the brakes on spending and just regular overhead spending and things like that when things drop off so quickly it doesn’t happen that way, actually benefited from the fact that spending will lag revenues in their first quarter because revenue spiked up so quickly, they’re spending to adjust.

In the second quarter they dropped down so quickly they’re spending didn’t have time to catch up.

So if you look at the difference in just the revenues, you would say yes, there should be a significant bottom line impact, but the bottom line impact for us is even more than you could just understand by the revenues you have to look at those other two factors that spending lags a little bit behind the revenue change and that there was this difference in production which is greater than the difference in revenues if you look quarter one and quarter two.

So those are the explanations, let me just see, those are the explanations of the top line and also the bottom line in Q2 as compared to Q1.

Q3, I know everybody is always interested, we have four weeks of sales in the books, revenues in the books in September and they’re tracking at August levels in September meaning that they have not recovered, so remember first quarter June was actually at the level of the second quarter.

June was at the level of the first quarter then July dropped off from there and August dropped off further from there.

In September the first four weeks of the third quarter, our revenues are tracking at the August level in the second quarter to set back debt on the August level in the second quarter, which is lower than the averages for the second quarter because, the second quarter trends down month-over-month, right, June-July-August.

Now, we sometimes or in the past anyway we would give you some insight into bookings, as an indicator, our bookings at the beginning of the quarter but we’re not really going to do that, this is not a meaningful comparison anymore, because we have such significant bookings from GE particularly in September that the number is not meaningful, wouldn’t give you any kind of meaningful insight.

All right, so that’s the explanation of the P&L, top line, bottom line in terms of business updates. Why don’t we talk a little bit about GE, so I think I even -- no actually I haven't mentioned last time, it hadn’t happen yet. We received what was called a global RFP through 2021, that wasn’t a surprise we have been expecting it.

So, we’ve been working on the global RFP, we’re still working on a number of key development projects which are very significant potentially away for Park.

We also did receive an agreement for 2016, I think I mentioned previously that we only had agreements for ’14 and ’15 but now we have an agreement for ’16 but the key areas are going to be out there 2021 as far as I’m concerned, as I mentioned we received the number of additional POs just for recently but I don’t think we’ll go into the number now, this is not maybe that relevant.

Expansion, we talk about expansion for last couple of quarters, this company GE we’re not -- in last quarter we named the company, previous to that it was the Jet Engine Company, has asked us to do an expansion for redundancy purposes not just capacity.

A redundancy purposes, the facility which applies into the programs now is in Kansas, but the companies, the customers asked us to go to another factory so we have redundant capability for them in case of a catastrophic event, like a tornado for instance, that you people might think about in Kansas anyway. But that price tag has moved up.

I think we previously mentioned it was around 10 million, but looks like it’s closer to 15 million, also we’re not sure where it’s going to be and we’re still working with GE on that question. In other words where that factory, that expansion will be located, that’s a question and that will affect the price tag for us to some degree.

Last quarter’s call we mentioned that we’re working on some 47A program, and that the next big program to leg in would be the Leap engine for the Neo, the A320 Neo which starts next year. Electronics, the market is down, we’re still working on our new products and the reception continues to be interested and pretty good.

I think we make more and more inroads as we go. It’s funny, electronics Park has always been very conservative in introducing new products, we hold them back, we have a reputation for doing that but what we don’t actually commercialize the product until it's been tested quite thoroughly, both in-house and at special or customer locations, beta sites.

And when we introduce a product, we feel pretty good about it, that doesn’t mean there won’t be problems. One you get into a real production environment there is always going to be things have to be done but some of our competitors do it a little differently, they just seem to push products out there.

And creates a little haze and smoke in the industry because a lot of customers want to take a look and just want to take a look at these products and they do and of course it’s a little bit of like confusion sometimes since we have commercial products that are proven and then we hear that OEM or customer's looking at brand X's product and we’re excited about it, but three-four months later we’re told well that product really wasn’t ready for prime time.

So it seems like we’re kind of going through that process a little bit where maybe some of the market's coming back to us after looking at brand, X, brand Y, brand Z and I don’t want to say that brand X, Y and Z aren’t really good companies, there are some of them are very good companies and they have very good products, they do, just may be a little bit of different marketing philosophy with new products.

I've spoken to Chris every day at his trip Asia and we have actually some I think quite serious interest about the new products over there which would if things go our way, lead to significant revenue opportunities in the future. I guess the last thing I’ll comment on is our cash.

I don't know if you noticed, but our total cash which is what we call cash, marketable securities, restricted cash which is about 25 million restricted under our loan agreements about $310 million so it moved up a little bit, actually quite a bit since the beginning of the year.

So we have the $310 million, we have about $104 million of long-term, but actually there is a short term component of it, but bank debt, let’s call bank debt $104 million of bank debt, so you can do, figure the math out in terms of our net cash now. The cash is overseas largely, when we have about $50 million under U.S.

the rest is overseas, so if we repatriate that the cash would attached [being] involved and you can do the math on that as well. But I also want to remind you that in addition of having a $310 million of cash and marketable securities, that we also paid just little under $300 million of cash dividends in less than 10 years.

So I think that will cover it in terms of our introductory remarks.

Operator, can we go to questions now?.

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

Yes. Good morning.

Can you hear me?.

We hear you fine Sean. .

Okay. Thanks for taking my questions. So Brian, I’m just trying to understand a little bit more about the quarter-over-quarter change on the electronics side of the business. It looks like that was down about 16% versus May. I do realize you’re talking a little bit about the inventory corrections.

Certainly, I had a good number of conversations within the space, and it hasn’t seems like that down dynamic was as prominent, or in play for some of the other folks that I have been speaking to.

So I’m just trying to understand this a little bit better, because I think from a quarter-over-quarter standpoint, this is probably the most pronounced since about November of 2010.

So can you help to connect the dots a little bit more for us here?.

I don’t know what to connect, it’s just real. The revenues in the first quarter were real, the revenues in the second quarter were real. And I can’t really comment on other companies, they have other product lines, other focuses.

We focused on a high end and maybe that's somewhat of a difference and really this is an Asian story again, although the U.S. I think I mentioned in last quarter, was not really even doing very well in the first quarter, but certainly hasn’t done well in North America in the second quarter.

I don’t know what to say about the other companies you follow, I don’t know how to comment on that, but I do know this is real, it’s not made up, it’s not imagined, it’s not a market share situation in my opinion, a market share usually doesn’t change that quickly -- not a market share thing going up or down actually.

So I don’t know what to tell you. I mean I think we’ve been as open as we can be about into the market and where the good news is coming from the Chinese OEMs and now where the bad news is coming from and I don’t know what to say about that..

Okay. You had tipped on market share and views that you don’t feel that you’re losing any market share. Can you provide a little bit more detail? I know this is a question that I ask from time to time with you folks.

Can you provide a little bit more detail, in terms of why you feel you aren’t losing share, and what you can point to? Or is that perhaps a question that needs to be investigated maybe a little bit more?.

No, I don’t think so. First of all, you don’t gain market share in two or three months, lose in two or three months doesn’t usually happen that quickly.

But secondly we were all over in the market in the first quarter, all over the market in the second quarter, I’m not talking about in Asia but in lot of time with these people, I mentioned Chris has been our President in Asia for last three weeks, and not just Chris, lot of other peoples as well.

We’re talking to all the right people and we know these people, it’s not like these are strangers at the OEM level or customer level. So I think our facts are pretty robust and -- I’ve commented before many, many times that there has been a long term market share erosion over the last 10 years.

10 years ago we were very dominant in the high end base, now there is a lot of competitors that come in with good products and good offerings and very competitive prices, that’s kind of the longer term trend, but if you’re looking for an explanation for Q2 versus Q1, I’ll tell you in my opinion with a lot of conviction that you bark up the wrong tree..

Okay. Let me see if I can ask something a little bit different here. The inventory, not only was there an industry perceived, or what you are getting as feedback, an industry issue in terms of inventory correction.

But I think as you tried to lay out, you had to work through some of your own excess inventory through the quarter, or having to deal with that.

When does that inventory issue internally for you become resolved? Is that something that you would get resolved this quarter? And what pricing impacts do we think that we might see as a consequence of that, or did we even see some of that also within this last quarter?.

Okay, Sean we've talked about pricing for years and we haven’t changed our philosophy. First of all, answer to your first question, first part of your question, I think that’s already been deal with the Park internally. The inventory, the excess inventory if you want to call that, that we had at end of the first quarter let’s say.

We’re at the end of, it wasn’t even our first quarter, it's really at the end of June when things started to trend down, but the pricing we discussed this over the years were really don’t digest our pricing based upon market conditions, we’re not rug merchants and we’re not traders, we feel very good about our product that we have long term perspective about what we do, we think it’s not in Park’s interest to move our pricing up and down like pork bellies based upon market conditions and because again, we’re trying to protect our company for a long term and we could do things which are -- I mean look well we've seen a lot of companies go in to business doing just that, not having discipline and we don’t want to fall in to that kind of trap.

We have been for many years when there is tremendous pressure on us and the history, looking back at history we told everybody that we were right and the people that succumbed to that pressure, were wrong, didn’t help them at the end of the day.

All they did was give away the margins, they destroyed their product and the product perception in the market and got nothing for it, because the other guy came around did the same thing.

So, we’ve learned over many years to have discipline and we’re not going to -- I don’t think we’re going to give up that discipline now because we have one quarter where the market is off..

Sure. That's helpful to hear, Brian, and also that you folks are sticking with that. So that's a nice point to make there. Last question here, I will jump back in the queue.

The proposed deal between Viasystems and TTMI, have you had a chance to speak with both customers on the transaction? And can you share a little bit of your perspective on how this could impact you either in terms of volumes, or if there could ultimately be some price pressure that may come from them, to look for as a larger customer of yours? Thanks.

.

So the answer to the first question is of course we've spoken to people that Viasystems and TTM but I think it’s really too early to say how it will play out, in terms of what they’ll do. I don’t -- I mean I think, really [showing] your public company, so I think you would have talked to them about what your intentions are.

How it affects Park? I really don’t know, I don’t know how to guess even but if I just had to guess, I would say neutral.

Price pressure, we’ve been through this before obviously, if you look back over the last 15 years, there has been enormous consolidation in the industry, I can’t even remember all the names of Western circuit board companies, back in the 1990s and now there are a couple of large ones left maybe one, but that’s been the result of lots and lots and lots of these things, all right Sean.

I mean you know the story as well as I do in fact better than I do. So this is not a new experience for us, we’ve been through this before. Again, our discipline has been not to trade on price and I’ll leave at that. So if I have to guess at this point all I could say is it’s neutral.

I mean they’re very good customer, very important customers of ours, you might have noted in Matt’s comments that they’re individually in the top five both of them and we had legacy with DDI, we have legacy with Tyco, I can’t remember all the names that are now in those two groups. So, we would hope those relationships will continue..

Thank you, our next question comes from the line of Morris Ajzenman of Griffin Securities, your line is now open. .

The quarter just ended, gross margin is 28.7%. I am just trying to get a feel how that plays out. The current quarter, it looks like the run rate if there is no improvement, is going to be lower than the second quarter, only because the first month is so strong, and might not replicate itself.

Now you also said during this quarter, I think answering this past question, that you’ve got your inventories in line where you want, so from that perspective that wouldn't impact gross margins. Just give us some sort of color.

Clearly, not a number, but going to the third quarter, should we expect improvement in gross margins, with those in the background as some sort of template? I am just trying to get a handle on how gross margins play out, based on the things that happened this past quarter?.

Okay Morris, I understand it’s a struggle to figure this stuff out but your first comment is correct just as a factual statement if the revenue run rate in the third quarter continued as it has been in the first four weeks of the third quarter, the third quarter revenue would be lower than the second quarter, that's just a factually correct statement.

As far as the gross margins are concerned, I really don’t know what to say except that gross margins on a short term basis are going to be very much affected by revenues in production.

Long-term you can adjust your cost and everything but short-term if you’re revenues are moving up and down quickly and therefore your production is moving up and down quickly, that’s going to have a significant short term in fact in your gross margins and you really can’t, it’s not possible to counteract it completely on a short term basis, long-term that's something else.

Longer term, you adjust your cost and make your cost right and you do those things.

But if your revenue falls off a cliff in the course of three weeks you’re just not going to catch up with your cost and of course some of the cost are by nature fixed, depreciation as an example and a lot of the costs by nature are fixed which you can't adjust no matter what you do.

So as your revenue falls off quickly, that’s going to affect your gross margins.

We can’t predict what our gross margins will be more in the third quarter, sorry that I'll have leave up to you do that math, that’s why being an analyst is a difficult job, but again your first question is -- the answer as a factual matter is correct that if the run rate in the first four weeks continues through the third quarter, third quarter revenues would actually be lower than the second quarter.

Your comment also about the inventory being kind of inline in our internal inventory is correct as well. .

All right. Let’s just move on to the composite side.

As GE is playing out, and other ventures potentially work out, the revenue, quarterly revenue run rate, what was it, 8.5 million, 9 million this quarter? I forgot the number that you had mentioned, but --?.

That’s about right 8.6 maybe..

The question is, are we to stay at this rate for several quarters, and then start to really lift? How does that play out? I mean, how many quarters at this sort of level before you think it starts lifting on a quarterly run rate?.

Well, are you asking about GE or are you about the aerospace run rate generally?.

I started talking about GE, but really it’s leading towards the composite overall, like the aerospace division?.

Okay. Well, of course it’s going to be very much driven by GE. So let’s put that GE separately. The forecast keeps changing and that’s not a function of how much share we have, it’s a function of GE's planning and their end market and how they’re servicing their customers and that’s the dynamic thing.

But if you look at the longer-term forecast where programs are on, the ramps if there is a spike up in ‘16 and ‘17 I’m talking about calendar years now, a pre-dramatic spike up. So we’re probably going to be more or less at this rate I would say for next few quarters within the range, I’m talking about exactly this rate.

But the longer term forecast would indicate us at fairly significant spike, actually pretty dramatic, quite dramatic. If you know about these programs, you might kind of think about yourself a little. There is also three other programs that were on that we haven’t mentioned yet, we maybe -- I don’t we’ll talk about those as time goes on.

So as far as aerospace generally, GE is the big dog in the aerospace tent. There are top five customers as Matt mentioned already. So aerospace at this point is going to be driven by GE in terms of revenues, but having said that it would be very wrong for Park to sit back and be a GE only company.

GE consumes and absorbs a lot of our recourses in terms of engineering resources, technical resources, account management resources, program management resources, it’s quite demanding, but demanding in a good way, it gives us so many opportunities. So it does take away a little from our ability to sell in market to other customers.

But that really I’ll say that as a factual statement but that shouldn’t be used by Park as an excuse, and actually I’m pretty unhappy about our revenues outside of GE.

I mean I don’t think we’re doing very well and we have a lot to offer I think and I think we need to do a lot better in terms of getting penetration to other parts of the aerospace industry. There may never be, never meaning the next five years, another GE for Park.

But maybe there is 20 other companies that have to be that we need to get business with if you will, that together would total up to like a GE situation. In aerospace I said this before and I’ll just say it again, there are more opportunities than we can handle, electronics is the opposite.

We’re always looking for opportunities in aerospace more than we can handle. So it’s a matter of Park managing its resources better and being effective, we’re taking on new business and it’s not going to be -- I don’t think there is going to be one big customer anytime soon that’s like a GE, I’m not sure there is one that exists actually.

GE has a very, very special opportunity relationship with Park, but lot of other customers out there, there are hundreds of them. I think we have a lot to offer that they just need to get to know us better and I think they’d be very happy to do business with us.

I think our way of doing business in case anybody is interested is different than some of our competitors and competitor is a very good company and we respect him but our way of doing business is a little different than the way our competitors do business are very much interested in being responsive, having a lot of urgency, trying to do everything to satisfy the customers' needs, quick lead times, this is our objective that we bring it over from electronics, I've explained that before.

And I think there is actually a real need for that kind of capability in the aerospace industry. So, yes I think we’ve not done a very good job outside of GE and not just telling you that obviously we were discussing at seriously internally and taking action and putting steps in place to improve that part of the story..

Let me ask just one quick follow-up, and I will get back in queue on this ramp-up you discussed in calendar 2016, 2017. You used the word, a meaningful ramp-up.

Can you give us some sort of color? Does that mean the revenue run rate doubles, up 50%, up 100%? I am -- can you just give us some sort of broad picture what an aggressive ramp-up by 2016 means, versus what the rate is now, the $8.5 million, $9 million run rate now?.

Yes, Morris, I think I’m not able to quantify it because to some extent I have be respectful of GE as well, we don’t want to be doing GE's disclosure for them since it’s becoming a GE separate story or is a GE separate story.

I wish I could come up with a better way to describe it, very significant, not kind of growth top line, it’s quite dramatic, the numbers are quite large, what did you say 50%?.

I said 50% or 100%..

Yes, 50 is not it..

Okay.

Was 100% or -- completely delusional?.

I just said 50 is not it and I think that's as much as we can say at this point..

Okay. Thank you..

Thank you, our next question comes from the line of Andrew Fleming of Heartland Advisors, your line is now open..

Just wanted to discuss the breakdown within printed circuit materials between high performance and non-high performance. So my thought is that the non-high performance side of PCM probably performed in line with your expectations, where you are purposefully looking to walk away from the commodity, low margin business.

Is that accurate?.

Andy, I just wouldn’t want to say it that way because we’re not turning down -- we’re not turning away from any existing customers.

I don’t remember the last time we got any new business in non-high performance but it’s probably long time ago, but I wouldn’t want any customer, current customer to believe that we would just walk from them, not support them on non-high performance products and generally speaking we have customers that -- we don’t have any customers that I know that buy only non-high performance, so that non-high performance stuff is being bought by existing customers that buy a lot of high performance.

So, we wouldn’t tell them okay, we’re not going to support this product line anymore. You statement is correct except I just wouldn’t say it that way..

All I am trying to do is just isolate the two buckets, and focus in on high performance.

And actually how did high performance perform this quarter relative to your expectations?.

So the thing is that, that's a share that we -- I mean I don’t mean our market share, the market decline that we talked about in the introductory remarks Andy, was mostly Asia, and almost all high performance. That’s where the build was. Would strange for there to be a series build to non-high performance right.

The build was in a leading edge materials for 4G LTE, so the build in the first quarter Andy. So the fall off reciprocated, the fall off was in a high performance area. We just wouldn’t have a build to non-high performance, so you would expect that there is a dramatic fall off but that would be in a high performance area.

That’s why the percentage went down a little bit. I think it went from 93% to 92%, not dramatic but that’s why it went down a little bit, but I think the first time the percentage went down in a while..

But I am wondering if that number is kind of diluted by the fact that non-high performance is going down very fast? So wondering if high performance is only down modestly?.

Well, you can do the math. I mean we know what the electronic revenues were in the first quarter and second quarter and we know what the high performance percentage was. So, I think the numbers are pretty straight forward. I don’t know how to answer that.

I guess non-high performance went down a little bit as well, but the story was high performance, but as I said, unless we’re really missing something really significant, we’re not aware of any market share situation in the second quarter.

We think there is a pretty dramatic and pretty abrupt inventory adjustment where the OEMs particularly in Asia, maybe China, over bought, over built because of this desire to gain market share in China with the Chinese government and now they have to digest that inventory and make sure the inventory is normalized correctly consistent with the end market demand..

Okay. And then, you have previously commented that if the four -- the first four weeks of the quarter continue with that same cadence, revenue would be down versus the second quarter.

But do you expect that cadence that was demonstrated in the first four weeks to continue for the rest of the quarter?.

Okay. Andy, I don’t know what to expect but remember we had this input just very recently in the last week we’re talking about over in Asia from the key OEMs and customers that this inventory correction would probably resolve itself, work itself out by the end of the calendar year, we’ve heard November or December.

Now, I got to always given you a caveat that the industry could be wrong about that and we’re talking about the right people, the key people, the right senior people at OEMs that we’re talking to but sometimes you're just wrong.

But they do the math and look at the end market demand and look at how much excess inventory they believe is there and they can do the math, they can figure out okay, it takes X weeks or X months to get to a point where the inventory is more normalized and that’s what they’ve done.

So there is some science in this opinion we’ve received although I wouldn’t take it to the bank, that’s what we’ve been told that is probably end of a year thing before things get back to "normal".

If that’s true then you might be right, you might right that our revenues would kind of languish along at a level they’ve been operating, that they’ve been generating that for the first four weeks of the quarter..

Okay.

So it sounds like third quarter PCM revenues likely be stable, perhaps could tick-up versus second quarter if things improve later on in the quarter? And then we should expect a nice uptick in the fourth quarter versus the --?.

Yes, because [we’re in third quarter] Andy in November. .

Right..

So, if there is an uptick, by time it gets the system and the POs start coming through, if what they’re saying is correct I just make sure we qualify the statement, if what we’re being told is correct, it probably is going to be a fourth quarter event for us when things return to "normal"..

Okay. And then just switching to the aero side of things, I think in previous calls, we had talked about between 9 million and 11 million per quarter as a decent run rate to think of for 2015.

Is that still true? So would you expect aero to pick up a bit in the second half versus the first half?.

I hope so. Like I said in respond to some other question Andy I’m not very happy, not about the GE portion of it, there is usually not too much we can do to impact the GE schedule, that’s up to them to decide, it’s not our share with GE, in other words we can’t really ask for more -- be careful here, but more business with them.

It’s that’s not what’s driving it as well as the other customers and I think we haven’t done a very good job and I’m not happy about it. I think there is a lot of business out there that we need to go get.

I get it, we’re very tied up with handling GE, we're a small company and this is enormous opportunity, some people would say it’s a long term lifetime opportunity for Park. So we got to make sure that we put the right resources on it.

I mean Matt here spent a lifetime in GE, he is our CFO, I spent a lot of time with GE, but we can't just kind of use that as an excuse to not go ahead and take advantage of the opportunities we have in the rest of the market.

So your question I think that’s probably correct, that’s not going to top 11 million a quarter, but when I say that I say that with reluctant because I don’t really like that. I think that’s very disappointing and I like to see us doing better..

Okay.

And then, just as we think about the inventory correction that we discussed earlier, and trying to laser that gross profit margins for the coming quarter -- if revenue was -- if revenue mirrored the second quarter, would you expect gross profit margins to be up?.

I would but remember is that in response to Morris’s question, we indicated that if the revenue run rate continues as it is in the first four weeks of the third quarter, the total revenues in the third quarter would be less than the second quarter. As we pointed out in question, June was in the second quarter and that was a very strong month.

So we’re saying that September is following along the pattern of August not the average of the second quarter.

So if that’s correct, if the third quarter ends up to being a continuation of the first four weeks of the third quarter and this is a factual statement, do the math, it's not a forecast or anything else Andy, the third quarter revenue will just be lower than the second quarter revenue.

I’m not saying what’s going to happen, but if we continue with the run rate we had in the first four weeks of the third quarter, that would be a result and that would affect the gross margin. If the revenues were the same in the third quarter and second quarter, yes I would hope that the gross margins would tick up in the third quarter..

Then final question is back to the aero side of the business.

Would you be -- and I’m not asking for guidance here, just I’m wondering if you would be disappointed if your aero revenue was not up at least 25% next year over this year?.

Next fiscal year you mean, right?.

Correct. .

Yes, I would be disappointed..

Okay. I am sorry, I do have one more question. I lied. Just looking at the stock price today, it's at $22, and it is $15 in cash per share.

What's preventing you from being a little more aggressive on a buyback at these levels?.

Well Andy, may be the market's going to make us an offer we can’t refuse. The stock was spreading over $30 just a couple of months ago and it’s kind of interesting that it moved down so quickly because the only -- there hasn’t been any news until today that was trading down below $24 even before we announced the results today.

So, it’s something we always are evaluating/ I made a comment that we paid approximately $300 million close to in the last 10 years dividends, cash dividends, but we haven’t done a lot with buybacks because in terms of doing kind of just in-market purchases, we’re somewhat limited, but those two things are always things we look at and the considerations are various, how much cash do we have? What kind of capital needs are we expecting? What is the stock price? What’s the market doing? So there is a lot of different factors that have to go into our thinking in equation but certainly when the stock price goes down, I mean it's not rocket science to say that it makes a buyback something we would consider more interesting..

I mean, as we look at the printed circuit materials business, it should be improved next year, and then the aero side of the business should be markedly improved. Yet the stock price is at $22 today, and we are sitting on $15 in cash. So it looks like a pretty nice opportunity..

Right, I mean obviously cash continues to be a discussion topic we cover the cash in the introductory remarks. But this is kind of a new event for us actually just in the last week the stock really started to plummet and like I say down to $22, I think it traded below $20 there for a little while. I’m kind of puzzled by that.

I don’t really think the company is fundamentally different than it was, had been in the first quarter, but I’m not really the person to understand or judge how the market reacts to different events, different news events let’s call it.

But going back to my comment, the stock price, this is the reality ,that’s something very new for us and we really hadn’t consider that part of our calculus, because it’s such a new event, so we’re going to have to go back and take a look..

Okay.

But just to sum things up, you will look at a buyback more seriously, given the stock levels today?.

Yes, but that’s a comment that would be true in any event. The interest in the buyback is going to be somewhat a function of stock price and those all other factors right, so that the answer would be almost invariability yes, the stock really goes down a lot..

Thank you. Our next question comes from the line of Sean Hannan of Needham & Company, your line is now open..

Yes, thanks for the follow-up here. Brian, just want to see if you could help to remind us how much of your electronics business you suspect is related to data com or communications? I realize you don't have a precise number.

You are not sure exactly where your materials will always end up, but I think you have a fair sense based on the SKUs that are sold.

Could you help us to understand some type of a general characterization there?.

Yes, I would say a large majority, there is -- probably if you look at it describe it as communications and data com, that’s a very broad category which would capture a large majority of our revenues.

I would guess that the next largest category would be military aerospace but a lot less smaller than you called it, what is it data com and communications or something like that.

That’s a very, very big category and you’re right, we haven’t given percentages in the past but I think we’re very exposed if you want to look it at that way to data com and wireless communications not only in our digital product line but also our RF product line..

Okay. And when you think about that, I mean, are we talking -- and this is just really for general context.

Are we talking kind of a 50% to 60% type-ish exposure, or are we talking something far more significant than that?.

Far more significant..

Okay. And then when you think about data com and communications, there is some obvious areas, segments that come to mind.

But do you also put into play some of the enterprise, other types of enterprise infrastructure types of OEM solutions that might relate to storage servers, et cetera? Or is this purely networking, telecom?.

Yes, your answer is, yes..

Okay. Okay. All right.

So if we were more com focused, what would you think that that would be roughly?.

Meaning as compared to networking enterprise?.

If we were to pull out other elements of enterprise markets that may relate, say to storage, cloud computing that type of market, if we were to pull that out, or we’re just focused purely on coms, what's is our -- what's the sense you have there?.

When you say com you mean communications?.

Yes..

Taking solid out of that? Okay, so I guess its funny Sean, people have different ways of breaking down the market, and -- but I don’t think we can answer that question because for us it’s seems all be kind of in a very similar category, there is a lot of overlap, lot of grey area between -- I don’t think -- for us anyway there doesn’t seem to be very clear, black and white delineation.

We talk in the military, aerospace, that’s very obvious difference between communication, enterprise, networking. But I think within that broad category that you just described it’s going to be difficult for us to give you further delineation or refinement and I think we’re going to be reluctant in doing it..

The reason I ask, Brian, is there is certainly always speculation around capital spending with carriers, and investments around wireless base stations, et cetera. And I think your product ultimately ends up in a lot of those types of solutions and applications.

And as this is, in the aggregate more of a growth year, I think there is some viewpoints that could call for some contraction slightly next year. So that’s the thought process for why we’re asking the question. .

Okay, I understand your thought process but like I said, I don’t think we can give you any more refinement in terms of where our products are -- high performance electronic products end up, but yes, certainly we have a lot of exposure to base stations enterprise networking, I kind of think of that in terms of the communications market but again people break it down differently.

So we talked about 4G LTE, that’s not just the base station, that’s the infrastructure as well to handle all the data. So that’s why we kind of look at it very similarly and they’re driven often by the same end market factors..

Thank you. And our next question comes from Chris Kapsch of Topeka Capital Markets. Your line is now open..

Yes, it’s Chris Kapsch with Topeka Capital Markets.

Generally my questions have been answered, but I just did have a follow-up on the end market discussion, because in talking about the inventory correction that you experienced in this quarter, the one key driver that had been the main driver, which caused the contraction here in the supply chain was the 4G LTE build-out.

So I’m just wondering, just how important is that specific application? I know it’s tough, because like you just said it includes base stations and infrastructure behind that.

But I’m just wondering, do you feel like based on your comments about the Chinese buildup with the OEMs, and then the destocking there, was the overall destocking in your customer base exclusively related to this particular end market, or was it much more broader based than that?.

I think it’s broader base, because like I said when you talk about things like 4G LTE it really drives lot of infrastructure as well. So we’re not just talking about base stations, we’re talking about storage, we’re talking about cloud, we’re talking about routers, hub routers and a large networks servers.

I think I don’t know if it’s so easy to differentiate and I don’t think it segments that easily either because all these different aspects of the market are related and connected.

It’s hard to have more 4G LTE with that having the ability to process all the additional information that’s gone wirelessly from one phone or one portable device to another and not only processes it, store it.

I’m not an expert in the electronics industry but we’ve been in a long-time and for us it’s much more difficult to come up with clean delineations for us anyway it is..

Okay.

And then, just like in terms of your order patterns and this kind of fall off this which you attribute to sort of an inventory destocking, was that order pattern most pronounced in China specifically? Or was it really across all of Asia in your different customers and channels, and other countries as well?.

It’s most pronounced in Asia but most of our market in Asia is in China and that’s the market that really spiked up quite a bit in the first quarter, the western market, North American market, European market really was pretty flat in the first quarter, didn’t spike up very much, its soft as well in the second quarter but it didn’t have part of full..

Okay. And then just a follow-up on the cash that is overseas and the context of your repatriation challenges.

Can you talk about what sort of implications there are for repatriating cash for the purposes of either special dividends and/or stock buybacks?.

The tax bill would be quite significant, the large tax provision which we accrued to repatriate those funds but that’s just the tax provision, it's still money I am casual about giving Uncle Sam a lot of additional, paying lot of additional taxes to Uncle Sam.

I think we commented this before, but we'll mention again, we are paying attention to the upcoming election and we’ll see what happens but we’re kind of hanging in there with some of the repatriation questions to see whether the corporate tax rate goes down the U.S.

or maybe whether there is even a little bit of a repatriation holiday that we had in the past. We’ll evaluate that after the election, make a decision. All the special dividends that have been paid so far well, I should say the less two large special dividends $2.50 and $2.55 is $5 total, were funded with loans in the U.S.

These we did not want to repatriate the money overseas and pay those taxes, so that’s why we have $104 million loan balance of bank financing balance outstanding now.

We’ll see what happens after the election, then we can make a decision then but at this point if we repatriated the funds to pay those loans down, it would be a significant tax build I'd like to avoid particularly six months from now that tax build would be significantly reduced. My comment..

Thank you and I’m showing no further questions at this time. Let me hand the call back over to Mr. Brian Shore for any closing remarks. .

Thank you Operator, this is Brian again. Thank you everybody for questions and have a good day. Matt and I’ll be in the office today so if you have any follow up questions please give us a call. Thank you, bye..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect, have a great day everyone..