Brian Shore - Chairman and Chief Executive Officer.

- :.

Sean Hannan - Needham & Company.

Good morning. My name is Christy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Fourth Quarter Full Year 2018 Earnings Release Conference Call. [Operator Instructions] At this time, I will turn today’s call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr.

Shore, you may begin your conference..

Thank you very much operator. First of all I want to apologize for the late start. We had some last minute logistics problem so we were scrambling for last half hour, but we made it at least a little bit late, so sorry about that again. I have with me of course Matt Farabaugh, our CFO and I’ll just start our fourth quarter conference call.

So Matt, why don’t you get started with the financial analysis. Matt’s going to be reading from the transcript which was already posted on our website. There’s some detailed information and Matt’s commentary which is posted on our website so I recommend you check the website for the details. Go ahead, Matt..

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 February 26, 2017 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 fiscal year 2018 fourth quarter ended February 25, 2018 P&L, which are not specifically addressed in the earnings release.

During the fiscal year 2018 fourth quarter, North American sales were 62% of total sales, European sales were 6% of total sales and Asian sales were 32% of total sales, compared to 55%, 7% and 38%, respectively, for the 2017 fiscal year fourth quarter and 63%, 9% and 28%, respectively, for the 2018 fiscal year third quarter.

Sales of Park’s high performance, non-FR-4 electronics materials were 94% of total electronics materials sales in each of the 2018 fiscal year fourth quarter and 2017 fiscal year fourth quarter and 93% of total electronics materials sales in the 2018 fiscal year third quarter.

Park’s aerospace sales were $9.9 million, or 36% of total sales, in the 2018 fiscal year fourth quarter compared to $8.2 million, or 30% of total sales, in the 2017 fiscal year fourth quarter and $10.2 million, or 39% of total sales, in the 2018 fiscal year third quarter.

Park’s electronics sales were $17.9 million, or 64% of total sales, in the 2018 fiscal year fourth quarter compared to $19.4 million, or 70% of total sales, in the 2017 fiscal year fourth quarter and $15.9 million, or 61% of total sales, in the 2018 fiscal year third quarter.

Park’s aerospace sales were $40.2 million, or 36% of total sales, in the 2018 fiscal year compared to $32.1 million, or 28% of total sales, in the 2017 fiscal year. Park’s electronics sales were $71.0 million, or 64% of total sales, in the 2018 fiscal year compared to $82.5 million, or 72% of total sales, in the 2017 fiscal year.

Gross Profit for the 2018 fiscal year fourth quarter was $6.9 million, or 24.8% of sales, compared to $7.4 million, or 26.8% of sales, for the 2017 fiscal year fourth quarter and $6.1 million, or 23.2% of sales, for the 2018 fiscal year third quarter.

Before special items, selling, general and administrative expenses for the 2018 fiscal year fourth quarter were $4.7 million, or 17.0% of sales, compared to $4.7 million, or 17.0% of sales, for the 2017 fiscal year fourth quarter and $4.6 million, or 17.6% of sales, for the 2018 fiscal year third quarter.

Before special items, investment income, net of interest expense, in the 2018 fiscal year fourth quarter was $118,000 compared to $105,000 in the 2017 fiscal year fourth quarter and $45,000 in the 2018 fiscal year third quarter.

Before special items, earnings before income taxes for the 2018 fiscal year fourth quarter were $2.3 million, or 8.2% of sales, compared to $2.8 million, or 10.2% of sales, for the 2017 fiscal year fourth quarter and $1.5 million, or 5.8% of sales, for the 2018 fiscal year third quarter.

Before special items, net earnings for the 2018 fiscal year fourth quarter were $2.0 million, or 7.1% of sales, compared to $2.5 million, or 9.2% of sales, for the 2017 fiscal year fourth quarter and $1.1 million, or 4.3% of sales, for the 2018 fiscal year third quarter.

Depreciation and amortization expense in the 2018 fiscal year fourth quarter was $755,000 compared to $733,000 in the 2017 fiscal year fourth quarter and $724,000 in the 2018 fiscal year third quarter.

Capital expenditures in the 2018 fiscal year fourth quarter were $181,000 compared to $48,000 in the 2017 fiscal year fourth quarter and $203,000 in the 2018 fiscal year third quarter The effective tax rate before special items was 13.5% in the 2018 fiscal year fourth quarter compared to 9.1% in the 2017 fiscal year fourth quarter and 25.0% in the 2018 fiscal year third quarter.

For the 2018 fiscal year fourth quarter, the top five customers were AAE Aerospace, GE including its subcontractors, Sanmina, TTM, and Wus, in alphabetical order. The top five customers totaled approximately 46% of total sales during the 2018 fourth quarter.

Our top 10 customers totaled approximately 59% of total sales and the top 20 customers totaled approximately 72% of total sales for the 2018 fiscal year fourth quarter..

Thanks, Matt okay. So, [Indiscernible] of course. We do have a few things to cover here, and I’ll try to move through them a little bit more quickly because of the late start.

First of all, let me say we are not doing a presentation at this quarter like we did at the last quarter, maybe we’ll do that next quarter, but we’ll try to give you some updates in any event.

Okay, so let’s start with the process we announced on January 4, taking place when we announced our third quarter earnings, the process recording electronics or electronics business. It’s going quite well, and we are pleased with that.

Greenhill, the investment banker that we are using through in the next chart, as we explained before, we will do what is best for shareholders, our people, our customers and OEMs and we’re just not going to sell it if it’s not right, but the process is going well and that’s the update in the process for now.

Also, let’s talk about electronics business generally. Things are going well for the electronics business and finally, it’s been maybe a year waiting for something to happen, especially rather with 5G. But 5G it looks like it’s finally starting to move a little bit.

It’s not at full ramp at all yet, but starting to move a little bit and that’s good for us. A lot of the work we’re doing with Meteorwave and new programs relates to 5G. So as 5G starts to ramp and that’s going to be good for Park. So, anyway, let me talk about the fourth quarter regarding Electronics, kind of interesting views.

We could actually see something good was happening in electronics, even back December and then January, February we could fee, we can censor a lot of anecdotal stuff, also Meteorwave continue to make good progress, again the 5G story. But what happened with December was a holiday month and January was a holiday month.

Even the first week of January was kind of slow and February was a big holiday month, these last two weeks of our fiscal February were the lunar New Year.

And actually those wasn’t good timing, those were last two weeks of our fiscal year or quarter, so that’s when we’ll be seeing a real effort to get product out of door, so we were a little I guess hampered let’s say it by the holidays, but we still could see something was going on.

Then we got to March, it was the first month without any major holidays and March was quite a strong month, probably we were talking electronics here, electronics. So that’s good. Now in electronics again, Asia.

So we understand there is a little slowdown now, starting in April and our customers and OEMs are predicting that should last a few months and recovery shouldn't be in July. At least that's what we are being told, so it’s a three month event.

It’s not a really major event, but we can see it in April and sorry, and we probably will see it in May as well. We expect to see it in May as well maybe June.

So what is it about hard to say, it kind of feels like it’s an inventory correction, short term adjustment like that, normally you think about an inventory correction, although it doesn’t seem like people are saying that.

Now the other trade issues that are, kind of hanging over the whole Asian market now and as you probably have read or heard some news there is some kind of serious trade concerns and it’s a factor, but we don’t believe that’s the whole explanation for this what seem to be a temporary slowdown, while it’s definitely factored and we have specific instances and evidence where it’s affecting our business.

So that's probably not a shock to anybody, but these trade issues are becoming seemingly more prominent this time. But nevertheless Meteorwave continues to grow which is good for at quarters, so that’s our new product which we have – many different members of family as you know. The U.S.

market for electronics, it continues at a reasonable pace, we don’t see a slowdown in the U.S. in the last month or two. Restructuring is finally coming together, we are not there yet. The bottom line for U.S.

electronics is certainly better in Q4 than it has in Q3 in the prior quarters, still somewhere to go but we are making progress, obviously working slow for which I would like to see, but the progress is clear and that’s a good thing. So back to 5G, this now deals with all electronics.

It seems like it’s ready to ramp at the end of this year and next year for infrastructure. Remember we’re infrastructure. So if you’re here it’s somebody else is working on 5G and actually production work in 5G you need to ask, “Are they doing infrastructure equipment or they are doing handsets or something else”.

We are dealing with infrastructure equipments that’s what we do.

So also I just want to point out that we have a little bit of a new initiative in RF, we’ve been in RF for a while, but that hasn’t been a major focus, but Tony and Chris and the guys are spending a lot of time in Asia meeting with our RF customers and OEMs and we feel pretty good about the reception seems to be quite good so far.

That’s something we really haven’t exported so much in the past that, that’s something we are doing now. On Aerospace, so in aerospace we have some news items. We introduced what we call Electroglide. That's our lightning strike protection material. That was developed through some joint effort doing development effort with MRAS.

That's the Middle River Aircraft Systems, a division of GE Aviation which produces nacelles and thrust reversers, and that's our main GE Aviation customer MRAS.

So our electrified materials now qualify for nacelles on the LEAP 1A engine for the 320neo and as for both AFP, Automated Fiber Placement, that’s kind of robotic methodology for doing, for laying up composite structures and also for hand layup. And we’re already starting to shift its program. This is something that’s serious volumes.

This is lighting strike material on this program, the series volume that were qualified in that program, we are just starting now, but we are talking about some serious revenue, that’s not what you call niche product.

Another joint development project with MRAS again, that’s that division of GE Aviation that we work with on a nacelles and thrust reversers, we do a lot of development work with them.

There was an MoU actually related to this project and this is a related to a product that we haven’t announced yet, but the product development was successful, so the formulation work was successful and now we’ve agreed to our commercial terms relating to this product with MRAS and we’re now investing in the equipment upgrades necessary to do the qualification or actually own a production.

In order to do the formal qualification we actually have to use the production equipment that we’re going to use for production, the manufacturing equipment we are going to use for production.

So I would think by the end of the year we should be in production on that product as well, and that’s about $1 million investment on Park’s part and then in terms of that our joint development effort. So and we’re also third item, again back to MRAS working on new MoU for another major project. That’s probably a three year project.

We’re just starting that one now. These are excellent opportunities for us to break into the market with new products, expand our footprint, very very good that we can develop our product with a partner, we get qualified in major programs right away, that’s a very special opportunity we have. So, they say Rome wasn't built in a day.

Of course, we can testify to that, but we're building our little aerospace empire brick by brick here. So Q1, I’m sure in Q1 you always are.

I mean this is our fourth quarter announcement so we actually have nine out of 13 weeks in the books already atleast a revenue part of it, not the bottom-line in terms of the second month in terms of April, we now have a closing for April, but we have the revenue numbers for 9 out of 13 weeks, so we have pretty good insight into the first quarter top line.

So aerospace should be flat with Q4 approximately $10 million. Electronics should be up considerably from Q4. In Q1 we are talking about electronics should be up considerably for Q4, so – let’s say Q4 was $17.9 million and Q1 should be up considerably from that number.

Let’s see – one other thing you probably will want to know is that we're beginning to segment our financial reporting with aerospace and electronics being the two business segments, you’ll see that in our 10-K which will be filed later on this week.

We wanted to include that in the disclosure for the fourth quarter, the news release, but we don’t have a final sign off from our auditors quite yet so we didn’t want to get ahead of the game a little bit, get the heart -- whatever, the cart before the horse.

We'd probably get that sign off today, on the segment reporting, but it’s just something I’d say that I want to look at [Indiscernible] time. Matt, before we go to questions, you want to quickly -- explain quickly the big fourth quarter adjustment related to the tax provision..

Sure. So we have very large tax benefit needs in the fourth quarter. And that relates to the tax law changes that the U.S. has enacted recently that effects pretty much everybody. We have a large accrual already on our books which we get to write-off and it in place of this new tax.

If we had repatriated our funds from overseas before the enactment of this tax, we would have incurred about $60 million of taxes in the U.S. by waiting to do anything till after the enactment of the tax. We have now a tax bill that is about $22 million and it relates to all of our offshore earnings and profits.

So that $22 million is really in place of the $60 million that we would have to incur if we had done anything before hand. So we had $40 million roughly accrued. We have about $22 million roughly tax bill on based on this new look tax law.

And that sort of is where we get the roughly $80 million tax benefit that you see going through our P&L in the fourth quarter..

Okay, thanks Matt.

I’m sorry, did you want – sorry are you done?.

Yes..

Okay, Matt and I have an understanding, staying in the same room right now, so sorry that we're not exactly technically coordinated. All right. Thanks, Matt, for that explanation. All right. Operator I think we are ready for questions. Would you please go ahead with the questions at this time..

Certainly. [Operator Instructions] Our first question is from Sean Hannan of Needham & Company. Your line is open..

Yes, thanks good morning and thanks for taking the question here. Just on to the follow up on Brian.

In terms of some of the color you had provided around aerospace a little bit earlier, just trying to understand some of these programs are all effectively included in some of the general numbers that you posted outlines that [technical difficulty] for that aerospace side? So just trying to figure out is it included in that.

And to what extent are there other programs that you're currently working on or close with that could otherwise be incremental to that. It's really just for perspectives to understand that some of the activity and the degree of the momentum that you have there, so I think it's pretty substantial. Thank..

Okay. Thanks. So the lightning strike is included in that forecast.

Can you talk about some forecast that was in the presentation that we gave during our January 4th conference call, Sean?.

Correct..

Okay. So the lightning strike that we just announced commercialized is in that forecast. That other product that I mentioned that should be in production by the end of the year. That's in the forecast.

The third product I mentioned or is it MOU, we're just entering working with MRAS on now, and that's probably a three-year project, that revenue is not included in the forecast..

Okay. That's very helpful.

And then when think about the current efforts today in new business development, working in terms of design wins et cetera, can you characterize a little bit of what you're seeing today or is there noticeable change in momentum that you're observing over the last few months of the quarter at all of how would otherwise generally characterize that?.

Are you asking about aerospace or electronics?.

Aerospace..

No. I don't think there's any major change. I think the momentum is quite strong. I think it has been for a while. Of course the way it works is that, the investors see it when there's an event report, but usually there's maybe year or two leading up to that event.

So the things that we're talking about now that didn't just happen over the last couple of months, these things have been progress for a while. So fortunately they are tracking pretty nicely in terms of schedule. The first two and the second one is just getting start on that one. But I don't know. I guess the only other comment I would make is this.

So these are major qualifications we're talking about, major programs with GE and that I'd make this comment before but I'll make it again. That gives the company tremendous credibility. We're not really considered an outsider anymore.

Maybe even a few years ago, some of our competitors were laughing at us, but they're not laughing anymore, that's for sure.

So I think what happens is that it’s not the market so much, but we gain momentum by continuing to get our new programs and new major programs with new products, interesting products that gives us tremendous credibility I mean, it gives us really nice revenue, as you see in the forecast but also tremendous credibility.

And so worst thing to do is go into a new customer and talk about a new product then you want to provide this customer. You want to get on one of their programs.

And the first question is; okay, what other programs are you on? And then well, you kind maybe shuffle your feet a little bit, do a little tap-dance, but you really don't have any substantial to tell them about. When you say you're in GE – you're qualified with GE Aviation, you're certified on these programs, that's really the end of that discussion.

They probably know it already anyway. But if they don’t that's the end of that discussion.

Is that helping you a little bit?.

It does. That's helpful. Okay. Let me see if I can switch gear at the electronic side of business. As you evaluate here, I'm not sure if I fully understand where we are in that evaluation process. Here we are where, in the general context the business has improved a little bit.

Yes we're hitting a temporary low on a relative basis versus that improvement just a few months ago, but we are seeing some generally better demand levels 5G depending on who you talk to is still year to-date, not terribly far around the corner? You have a pieces of your business that are probably going to be very specific to having to remain here U.S.

focus given some mil/aero that you might have and then some other business that's a little bit more within that comm. infrastructure area.

So just trying to understand if I can see if I get understand is a step back where -- can we get a little bit more of a refined viewpoint? Where you stand in that evaluation? How you're feeling about that business today? Or there any views you have whether perhaps even if you did ultimately decide to sell that.

Do you feel more encouraged around that? I mean just some better clarity on that would be so much more helpful? Thanks so much..

So, we're in a process, so we'll limit what we'll say, Sean, but the progress is going well. Like I said it’s a progress, so it’s not just preliminary evolution. We're involved in a process, in investment banking process regarding the sale of the business; the potential sale of the business is going quite well.

The interest that we received is high quality and good positive. I don't want to comment on what point in the process, we're specifically in at this point, but its really going according to schedule and according to plan, means good as far as process is concerned. I think we're all pleased about it.

Now as far as the business concerns, now it’s kind of funny, I mean, I guess maybe I don't know, I always believe this was a very good quality of business, but in the last year it was difficult because the results were thin. They weren't there.

We're really waiting for things to click, waiting for things to happen and it's very nice to get the validation. I didn't really have too much doubt, but it's nice to get validation rather that things are moving in the right direction. So from my perspective I don't really feel any differently about it.

Just the outside validation is more obvious, and for investors its easier for – easier for them to see numbers moving in the right direction rather than for them to just kind of listen to my perspective on the business and why I feel confident, why I feel optimistic. So I think that's the difference.

The move -- the world has kind of moved a little more in our direction, but I still -- when we announce that we're starting a process to sell the business on January 4, I think I said at that point I think its a wonderful business, wonderful people, wonderful products and I feel the same way.

Just maybe there's little more validation in the numbers which is always nice. It's nice to get the validation. But just to sum up. The process is going according to plan. It's going well. I'm very pleased with how the process is going. And the business I think is a very high quality business and I think I said this right.

I almost remember [Indiscernible] if something does buy this business I think they would be very luck to own it, very fortunate to own it. So, we'll keep you posted if there is anything to announce, you will find out right away obviously..

Okay. Thanks so much for taking my questions here this morning..

Okay. Thank you, Sean..

Thank you. [Operator Instructions]. And I'm showing no further questions at this time..

Okay. Thank you. This is a Brian again. Thank you very much. I guess if it wasn't for Sean, we wouldn't have too many – any question any more. But okay, well, thank very much for listening in. This is our fourth quarter. So we'll be talking again fairly soon. Our first quarter will probably announce maybe at the end of June something like that.

We don't have a date for it yet, but that would be in approximate timeframe. So probably less than two months from now. Thank again everybody for listening in. Have a great day. Feel free to give us a call if you have any follow-up questions. Thanks again. Bye..

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