Good morning. My Name is Sammy, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year 2015 Earnings Release Conference Call. [Operator Instructions].

At this time, I'd like to turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference. .

Thank you, operator. Good morning. This is Brian Shore. Happy New Year, everybody. I have with me Matt Farabaugh, our Vice President and CFO, as usual. And we'll begin our Third Quarter Conference Call with our introductory remarks, and then we'll go to questions.

Why don't we get started, Matt?.

Okay, 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 third quarter ended November 30, 2014, P&L, which are not specifically addressed in the earnings release..

During the fiscal year 2015 third quarter, North American sales were 50% of total sales, European sales were 9% of total sales and Asian sales were 41% of total sales compared to 51%, 6% and 43%, respectively, for the third quarter of the 2014 fiscal year; and 46%, 6% and 48%, respectively, for the 2015 fiscal year second quarter..

Sales of Park's high-performance non-FR-4 printed circuit materials were 92% of total laminate and prepreg material sales in the third quarter of the fiscal year 2015, 89% in the third quarter of the 2014 fiscal year and 92% in 2015 fiscal year second quarter.

Sales of Park's electronic materials were $25.4 million or 73% of total sales in the third quarter of the 2015 fiscal year, compared to $31.5 million or 79% of total sales in the third quarter of the 2014 fiscal year and compared to $33.7 million or 80% of total sales in the 2015 fiscal year second quarter..

Sales of Park's aerospace materials and parts were $9.3 million or 27% of total sales in the third quarter of the 2015 fiscal year, compared to $8.2 million or 21% of total sales in the third quarter of the 2014 fiscal year and compared to $8.6 million or 20% of total sales in the 2015 fiscal year second quarter..

Investment income, net of interest expense, for the third quarter of the 2015 fiscal year was negative $139,000 compared to negative $48,000 in the third quarter of the 2014 fiscal year and negative $134,000 in the 2015 fiscal year second quarter.

Depreciation and amortization expense for the third quarter of the 2015 fiscal year was $890,000, compared to $1,012,000 in the 2014 fiscal year third quarter and $865,000 in the 2015 fiscal year second quarter..

Capital expenditures for the third quarter of the 2015 fiscal year were $148,000, compared to $161,000 in the 2014 fiscal year third quarter and $179,000 in the 2015 fiscal year second quarter..

The effective tax rate before special items was 10.1% in the third quarter of the 2015 fiscal year, compared to 3.3% in the 2014 fiscal year third quarter and compared to 13.3% in the 2015 fiscal year second quarter..

During the second quarter of the 2015 fiscal year, the company had no customers that were more than 10% of total sales. Top 5 customers were GE, ISU Petasys, Sanmina, TTM and Viasystems, in alphabetical order. The top 5 customers totaled approximately 39% of total sales. Our top 10 customers totaled approximately 53% of total sales.

And the top 20 customers totaled approximately 67% of total sales. .

Okay, thanks, Matt. This is Brian again. And a transcript of Matt -- Mike's -- Matt's remarks are going to be posted on our website, in case you want to check it out..

So I have a few things I'd like to cover this morning, before we go to questions. First of all, let's talk about the numbers for Q3..

I think the bottom line doesn't require much discussion. It's really the top line because the bottom line is driven by the top line and, in this case, with no -- nothing unusual about the bottom line, except the revenues, which are way off..

So let's talk about the revenues in the third quarter. Let's back up a little bit to the Second Quarter Call because, based upon the comments we made in the Second Quarter Call, the revenues really should not be a surprise, and let's go through that..

Okay, so remember, when we discussed that in the first quarter and also including -- the first quarter, including as well as the first month of the second quarter, which is June, the revenues were quite strong, but we feel that was really the inventory build that was artificial, based mostly in Asia.

And we commented that, in July, the revenues fell off further and then, in August, even further than that, but also we explained that, in June, the June revenues were at the level of the first quarter. So we knew what the June revenues were. We knew what the total was for the second quarter. We knew that July was the middle month.

August was a down month, so it would have been pretty easy to figure out within a small range what the August revenues were..

Then we said in the Second Quarter Call that the first 4 weeks of September, at least we have 4 weeks in our books, were tracking August. We also said that, we don't know.

We always could just caveat about the electronics industry, probably in the last 20 years and probably 100 times now, how unpredictable it is and how it can turn on a dime and how a lot of smart people get fooled by the changes in the patterns in the electronics industry.

But we were talking about going through that inventory correction, and we're at that low level in August and September. We also said that we don't know, but this is the unpredictability part about it, the caveat part about it.

We said that we, of course, ask and ask and ask what people in the industry think in terms of customers and OEMs, and they were talking about maybe a recovery by the end of the calendar year. The recovery meant that the inventory would have been normalized. We'd be back to normal levels.

Now at that time, I think we said, which I still believe to be correct, that normal is somewhere between the levels of the first quarter and the levels of the third quarter. The first quarter was artificially inflated. The third quarter is artificially depressed, because of the inventory workoff or work-down..

So we pretty much knew what the revenues were in September, and we also indicated we didn't see any recovery until the end of the year. At least, that's based among what people were telling us, with the caveat that we could have been wrong.

So I think it would've been pretty straightforward to get a pretty good feel for the revenue levels in Q3, based upon our Q2 call. And yet, the bottom line is really driven very much -- in Q3, the bottom line is really driven very much by the revenues, which were quite a bit off..

So let's take -- so I'm just going through my notes. I just want to make sure that I don't miss anything important. I want to -- oh, here is something else you should know, that it's often something you ask. If you look at August, September, October, November, it's uncanny how flat it is. It's very -- there's very, very flat month-over-month-over-month.

Those 4 months are very similar. I've never seen anything like that. It's uncanny. So if you take August and you take September, you extrapolate October and November, you have the third quarter..

Now remember I said that people were telling us -- in the second quarter, I said that people were telling -- during our Second Quarter Call, rather, I said that people were telling us that maybe there will be a recovery by the end of the year. Maybe the inventory will be worked out. And we don't know that yet. What I can tell you is the facts.

And I always am very careful to explain. We don't forecast. We just give you the facts that we know. So often, we tell you what we have in the books for the current quarter..

So as far as the fourth quarter is concerned, we got to look at the month of December, which unfortunately is the difficult month to draw conclusions from, but what I can tell you is the last week of November and the first 2 weeks of December were up, as compared to that pattern for the last -- the prior 4 months, which is so flat.

Those 3 weeks, last week of November, first 2 weeks of December, which is a 5-week month, were up. The last 3 weeks of December go down.

Now why is that?.

A lot of people would say, "Well, we had the holiday weeks." Christmas and new year is in the pattern, would be consistent with that, that during those weeks, things fall off. So it's hard to read what's going on, I think because we're trying to figure out what's going on in the context of these holiday weeks.

What I can tell you is that last week of November, first 2 weeks of December were up; then the last 3 weeks, weeks 3, 4 and 5 of December, our fiscal weeks of December, were down, but that I don't think it's surprising. And it could be explained by the holiday situation. We just don't know that..

So at this point, we have very little visibility because the confusion of the holiday situation. And we have no books so far in the 4 weeks -- sorry, the 5 weeks of December, our 5 fiscal weeks of December.

So as usual, we're not making any predictions or forecasting, but we thought you'd be interested in that information, which is the most current information we have in terms of our revenues.

As I indicated in the last few quarters, we don't really talk about bookings anymore because we have such lumpy books within aerospace that they could be misleading, so not helpful often to talk about bookings. And we don't want to give information, even though it would be factually correct, which could cause us to reach the wrong conclusions..

All right, let me just see. Okay, so I guess, that covers that. And then there's a couple other things I want to go over with you..

And last quarter, one of our analysts was asking about electronics and how our market broke down. And it's a question that's come up from time to time, so we decided to provide some information. This is our market. This is not the electronics market.

This is our revenue, how did -- our revenues in electronics, nothing to do with aerospace; how they break down..

Internet, telecom service providers, sometimes called infrastructure. That would be somewhere around 50% to 60%. That's the biggest segment for us. Now normally, people include base stations in that segment, but we separate it because, for us, base stations is RF only, and that might be 10% to 15%..

Enterprise. That's something that's talked about quite a bit, but for us, it's a small portion of our revenues. It's only 10% to 15%. Semiconductor, small, maybe 5% or more. Aerospace and defense, that's 10% to 15%. That's going to be mostly in the U.S.

And there's a small portion of other things like medical, instrumentation, industrial, which is we all lump in one category, not significant. But we thought it would be helpful for you to understand those dynamics, because it's a question that comes up from time to time..

The big driver for us is service providers, Internet service providers, and that's where you're going to see the highest-end materials, the highest-tech product. And we're talking often about very large backplanes, which go into service providers. We used to call it Internet service providers, but now it's just service providers, I guess.

This is also sometimes referred to as infrastructure, talking about core hub routers, high-speed switches and base stations. But we separate base stations because, for us, it's an RF story..

Enterprise, servers and networking equipment, which is a smaller portion for us and although a lot of high-end product, not quite as high end as the service provider market, where we're talking about probably how [ph] sensitive is Q-sensitive back panels and backplanes, for instance; "highest data transfer rate" servers and switches.

This is the highest-end product with the highest-performance requirements..

So sometimes, people ask about comparables, and it's confusing because they talk about a company that's really an RF company. And RF is actually an area where things have grown for us a little bit, but unfortunately it's a small piece of our pie, as I said, maybe 10% to 15%.

So it's not going to drive our top line as much as the Internet service provider or the infrastructure market will. So when -- there isn't really a good comparable for Park in electronics, not -- no public one, anyway. And even the private companies are not good comparables to use. Park is very unusual in terms of its market focus.

If you look at the -- our competitors, they're going to have -- they have large exposure to markets that we just really don't spend much time in and then for good reason. That's not an action [ph]. And it is part of our strategy. We try to focus only on the high-end area, where we could distinguish ourselves and protect ourselves a little bit..

Okay, hopefully, that was helpful because we haven't done that before. And I should say, I want to say, that these are estimates. It's important that I explain that, maybe even a little bit guesstimates.

And why is that? Because often when we sell to a circuit board company, we don't know every sale where it's going, who the end market is, who the OEM is or what application or program it's on. So this is based upon a lot of work with the OEMs, where we can't tie it to POs.

So there are some estimation and guesstimation involved here, but we never less -- as long as you accept the information without understanding, felt that it would be useful information in trying to understand Park and why Park might be different than other companies..

Okay, let me give you a little bit of an update on General Electric, which is a top 5 customer of ours. We commented, in the last couple of quarters, we're on the 747-8 program. And revenues for the 747 programs should be a function of how many 747s Boeing sells, and that's through GE Aviation, I should say. These are engine programs for the 747-8.

And right now, it doesn't seem like 747s are a real hot seller but we cross our fingers that maybe Boeing will get a big order for 747s made for cargo. We don't know..

A320neo -- the lead engine for the A320neo, we discussed that, I think, in our last call. That's just ramping up now. That's a very big program. That's a new program, and we're going to be starting to supplying to that program this year. And that is a new program and quite a large program..

Let me share with you a little news that we haven't discussed before. It's actually been in the news recently, a couple things. I don't know if you noticed, but the ARJ21 regional airline -- an airliner made by the Chinese aviation company called Comac, recently received its type certification in China.

And the airplane uses a CF34-10A engine, I think, yes, that's right, which is a GE engine. We are on that program..

There's other news that you might be interested in, which is that GE Aviation is flight-testing what they call their Passport engine, and that's used for -- on Bombardier aircraft, 7000, 8000 global aircraft. And actually, they put it on a test with a 747 test bed. That's being flight-tested now. We are on that program..

There's another airplane that this Comac company is working on and hopefully will certify soon. That's a big deal that the airplane we did -- that we just certified is a regional jet. The next one is a COMAC919, and that's a competitor, I believe, to the single-aisler aircraft made by Boeing and Airbus.

That's a LEAP engine that will go on that program, similar to the LEAP engine that's used on the A320neo. We are on that program..

the -- sorry, the Passport program; as well as the ARJ, what they call the -- this is the Chinese regional jet ARJ21 with the CF34-10A GE engines..

1 in electronics, 1 in aerospace. And these are significant products, both of them, both, I would say, quite high-end, new-technology-type products. So watch out for announcements on our new products. Like I said, they're scheduled to be commercialized, that means announced, this month. And hopefully, we'll make that target.

I'm not promising, but that's our schedule now..

I think I've mentioned this to you before, but Park has a little bit of a different philosophy about commercializing products than maybe some other companies. We hold back products much more than others probably would. When we commercialize a product, we feel very confident in the product, as we tested and tested and tested it and it's ready to go.

That means, the day it's commercialized, our customer can call our customer service and order the product, and we'll say, "Okay, fine, we'll have it for you next week." It's not like, "Well, we don't really have that product yet." And that's what commercializing means to us..

Okay, so those are some updates, and that's all I have for now.

Operator, can we go to some questions, please?.

[Operator Instructions] Our first question comes from Sean Hannan of Needham & Company. .

So Brian, your top 5 customers seem to be down maybe 9% quarter-over-quarter. It looks like everybody else was down, closer to 20% or so. I think you did a good job in terms of referencing what you've seen as dynamics on the electronics side of the business.

If I make the right assumptions, it looks like GE really was the only perhaps closer-to-growth customer, certainly being on the aerospace side there. So I just wanted to verify that force, the magnitude perhaps, that GE was a grower for you. We've certainly heard some positive comments around them, from you just a moment ago.

And then if we could also get a little bit more of a sense of how you expect they could contribute sequentially or through the course of this year. It seems that they would be on track for getting to be, perhaps, a 10% customer at some point down the road. .

Not quite 10%. GE was up a little bit, but like you pointed out already, aerospace is quite a different story than electronics. Electronics is a special story for us, especially in the third quarter. Aerospace, I think Matt indicated aerospace is up a little bit as a whole. GE was kind of flat, as compared to the second quarter.

There were -- difference with a company like -- a customer like GE, as compared to an electronics customer, is there's significant visibility over many years, based upon the nature of the business. It's not the electronics OEMs don't want to tell us. They just really don't know. It doesn't work that way. It's a very different dynamic.

So when we talk optimistically about GE, we're not talking about the next month. We're talking about 3 years, 4 years, 5 years, 6 years down the road. And ironically, those expectations are probably more hard and firm than the expectation we might have from an electronics company 3 months down the road.

But again, it's because of the nature of the business. The nature of the business is such that these -- they are long-term contracts and the production schedules and cycles, rather, for aircraft are quite long. The order patterns are quite long. The backlogs are quite large.

So you could reference Boeing and Airbus and the other aircraft companies, just as an example. But I would say that GE, just to answer your question, was kind of -- was more or less flat in Q3, as compared to Q2.

They're not quite at the 10% level, but the expectations and forecast that we have for GE are, well, they're quite encouraging, if you let me put it that way. Although, we're talking about a longer-term time frame than we would be if we're talking electronics. .

Sure. Well, Brian, if we were to look really at the rest of -- or here at calendar 2015, I believe that there have been some prior thoughts that we should see growth with them, as well as within aerospace, as we progress through the course of the year. So I wanted to check on that assumption, if that still stands to be relatively valid.

And any color you could perhaps provide around that?.

So GE, like I said, is more predictable. So we're expecting some growth in calendar 2015. The big spikes will come maybe '17. So we'd see some growth in '15 and some growth in '16, then we see, let's call, spikes in '17, '18 and '19. That's based upon programs that are in place. These are meaningful forecasts, I would say.

As far as aerospace in general is concerned, yes, Sean, I would very much hope that we can see some real revenue growth in aerospace outside GE. There are hundreds and hundreds of other customers out there that we're calling on.

And I think maybe you or somebody asked this question last quarter about -- they asked me if I would be disappointed if we didn't see significant growth in aerospace this coming year, and I certainly would be. And we all have a lot of pressure on us, I mean internal pressure, but it's proper pressure.

We paid a lot of dues over the last 5, 6 years in aerospace. We've made major investments. And my feeling is that we should see some really meaningful growth in aerospace is coming here. And if we don't, then I would say we failed. Give us an F. .

Okay, all right, that's helpful color. Next question I have or topic is really more related to SG&A. This was a fairly contains number that came through in the quarter. Wanted to get a sense from you or Matt, the degree that this level is able to be maintained.

Or how should we think about movements versus that November quarter number?.

Correct. It was contained. A number of people took salary cuts during the quarter, so -- and we were careful. Now we didn't compromise Park's future. We don't cut back on R&D and that kind of thing, for instance.

We're still pretty active with our marketing efforts, but we did try to control our SG&A, especially in the U.S., where business levels are very poor, in electronics anyway, not in aerospace, in electronics. So I would say that there's some level of growth in SG&A in the coming quarters, but not significant.

We're not saying it's going to spike up, but maybe the third quarter level is not totally sustainable. And then maybe it shouldn't be. Maybe it's not healthy for Park to try to make it sustainable. .

Okay, that's helpful. Last question here, and then I'll jump back in the queue.

Can you talk a little bit, Brian, about the cost environment, both on the electronics side as well as on the aerospace side? Are there any variables that are impacting the business today? And to what degree can they be mitigated, managed? Or is there -- are there even some positives that may be helping you as well?.

Sean, when you say costs, you're talking about raw material costs, or something else. .

That's correct, raw material costs. .

Okay. Raw material costs, really not much of an issue in electronics, nothing to write home about. Obviously, copper is our big story but right now nothing special, no impact copper-wise Q3 versus Q2, for instance. We'll have to see where copper goes, but right now, no significant impact out of copper.

And the rest of raw materials, I think, are not really -- nothing significant to talk about. And aerospace is quite a bit more dynamic. We use -- even though the revenues are explored [ph] aerospace, electronics, we probably source, I don't know, maybe 5x or 10x more raw materials from different suppliers. It's a very different kind of business.

And that's a -- that's definitely a dynamic situation, which requires a lot of management on a day-to-day basis. And that's something, you know what, we need to do better at. And I'm hoping that's an opportunity for us in the future, to do better at it. And when we -- our pricing with aerospace is different than electronics.

Electronics pricing is really stuck in place for a long time. We don't move it. Aerospace, we get all these requotes all the time, so we tend to adjust our prices, but I think it's a bad pattern we're in. We really need to focus more on our raw material costs and our input costs.

They just assume that, whatever they are, we're going to reprice our product accordingly. I think it's a lazy and not a good pattern for Park and mindset for Park to be in, so we need to work on that. And I do believe there is some opportunity for improvement there, too.

The rest of the costs, the non-raw material costs, especially in electronics, I think we try to be screwed down pretty tight, I mean not to the point where it would compromise Park's ability to be an effective supplier for our customers, but we have our cost screwed on pretty tight.

Although, we're always looking in at ways to optimize, especially out West, by -- what we've done out West, even though we have 2 locations for electronics, Arizona and California, we've really combined the operations. There are 2 locations, but it's 1 operation, with basically 1 overhead, 1 stay-out [ph] that covers the 2 locations.

And there are opportunities to do more of that, we believe. .

Our next question comes from Morris Ajzenman of Griffin Securities. .

Question back on composites. You kind of spoke about the trend during the quarter, and you mentioned GE being flat sequentially.

Can you just give us any color if there's any change in the purchase orders, either for GE or composites overall, in this quarter versus the past quarter?.

Okay, Morris, go check out the transcript of Matt's comments. They're out posted on our website. But Matt did explain what our aerospace revenues were for the quarter. And I think they were $9.3 million, which was up a little bit from the prior quarter. So there's some movement in the right direction. GE, we already commented on.

We have a lot of visibility with GE. That's kind of a long-term situation. And the rest of the opportunities, we certainly -- let me say this. I think our sales guys and even some of our folks in Kansas have gotten the message, so they're out there hitting the pavement pretty hard.

And we're doing, just from a quoting perspective, I see all the quotes, actually. The volume is quite a bit higher. This is anecdotal. It's not a scientific report for you, but the volume of quoting is quite a bit higher than it had been.

So that would normally be an indication and function of the sales guys out there in the market pretty aggressively, looking for business. And that's why, in response to Sean's question, I'd say, yes, I'd be pretty disappointed if we don't see a meaningful up in the current calendar year in aerospace. I think the opportunities are there.

The opportunities for GE are long term and more definable, more predictable. There are opportunities for the hundreds of other customers, and some are small. It's not all the big OEMs. Some are small, but there are opportunities with them.

They are there, and I think that we just haven't done an effective job in the past of going after those opportunities. Now if we want to be -- look, we want to be fair to ourselves and say, okay, fine, until about a year ago, we were still going through a transition startup and we're working through those difficulties, but that's all behind us.

We don't have that excuse anymore, so it's time for us to go out and get the business. I don't have any quantification for you. I just have that anecdotal input, which hopefully is a little helpful. .

[Operator Instructions] Our next question is from Leonard Cooper [ph], a private investor. .

I hope all is well. You sound good. I have a question.

Does GE presently have the facilities and personnel to provide the projected growth in businesses that you speak of? Will big investments be required by Park for facilities?.

For Park. So Len [ph], we had spoken for several quarters about discussions we're having regarding building a redundant facility, based upon GE's request. This is really not only capacity, but redundancy because some of the big aerospace OEMs are a little uncomfortable being sole-sourced with a supplier that only has one location.

For obvious reasons, there's a lot at stake. And the qualification process is very complex and time consuming.

So if there is a supplier that an aircraft OEM is working with and they're a sole-source basis and that supplier is one facility and their building burns down or something like that, it's a real serious issue because it could take up to 2 years to qualify a new supplier, in some cases.

In our case, it takes a long time because we're building these really complex materials that require very extensive testing. It's not something that can be qualified overnight. So that's the reason for the request for redundancy. But we're still waiting to hear back. We're prepared to proceed.

And we've been going through a site selection process, but we're waiting to hear back. We need some more information from GE before we could proceed, before we can make a decision and move forward. I think it's highly likely that we'll do that.

I thought the worry would have been started, but really the ball's -- we're kind of waiting for more information. Let me put it that way. .

Does 3D printing affect Park?.

Well, you've asked us before this. You're a smart person. I don't really think it does directly at this point, except to the extent that it might require more infrastructure, more data being processed, just like when you talk about the cloud.

Well, maybe we're not directly working on a cloud equipment, but it requires more bandwidth in terms of the Internet service providers, and that would indirectly impact Park. It can be a benefit to Park's business. .

[Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back to management for any further remarks. .

Okay, well, thank you, operator. And thank you, everybody, for listening to our Third Quarter Conference Call. Again, I wish you all the very best in the new year..

Matt and I are here today, so if you have any follow-up questions, please feel free to give us a call..

Thank you. Have a good day. .

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