Park Aerospace Corp Q3 FY2020 Earnings Call

Good morning, my name is Sherrie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp. Third Quarter Fiscal Year 2020 Earnings Release Conference Call and Investor Presentation. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. 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, operator. Good morning, everybody. This is Brian. I'm with Matt Farabaugh, of course, our CFO, as usual, and welcome to our third quarter conference call. Also, Happy New Year to all. So I want to mention to you that we have a presentation that’s been posted on our website and it's also on a live webcast. It will be beneficial for you to get it up on your screen or your iPhone because we're going to be going through that; it will make the call significantly better for you if you don't have it up already. And there are instructions in Paragraph 2 of the earnings release on how to access the presentation if you haven't done that already. I also want to mention that there is some supplemental financial information, which is attached to the presentation as Appendix 1. So you may want to check that out at some point. And a couple of other introductory comments before we get started with the presentation. We try to cover things that we think are meaningful, interesting, and relevant, but let us know if there are other things you would like us to cover during these calls. These calls are for you. We're not here to promote or hype up our company. This is your time, not our time. So we’ll go ahead now and go through the presentation. Matt and I will do that for you. At the end of the presentation, we will take questions, alright? So why don't we skip over to Page 2 of the presentation. That's our forward-looking disclaimer language, so let us know if you have any questions about that later on. And Matt will take over for a few minutes to cover slides 3 and 4. So, go ahead, Matt. The ball is in your court.

Okay. Thanks, Brian. On January 8, the Board of Directors declared a special dividend of $1 per share payable to our shareholders on February 20, 2020, for our shareholders of record on January 21. The total amount of the special dividend is approximately $20.5 million. Including this special dividend and the regular quarterly dividend of $0.10 per share payable on February 4 to shareholders of record on January 2, Park will have paid approximately $536 million or $26.15 per share of cash dividends since the beginning of our fiscal year '05. Park's regular cash dividend has been paid every year since 1985 and has never skipped or reduced that regular dividend. Moving on to Slide 4. I just want to walk through with you how we kind of think of our cash balance. Although our balance sheet shows $144.2 million at the end of our third quarter, some of that cash is really committed for future use. When we had the tax law change back in December of '17, there was a transition tax that has to be paid over eight years. We're a couple of years into that. The remaining installment payments on that transition tax is $17.7 million that has to be paid over the next six years. The Newton expansion that we've discussed in the past has begun. The remaining payments here for that expansion, although not legally committed, are our best estimate of how much we will have to pay out to complete that expansion. Of course, there is this $20.5 million that we just talked about for the special dividend payment. So, while our balance sheet shows $144 million in cash, it's really roughly $91 million that we see remaining and available for any purposes that we see going forward. Alright. I think I've covered what I needed to cover here.

Thank you, Matt. Very good. Alright, so I would just add to comment, I guess that -- so what is it? What did Matt tell us? $536 million of cash dividends since the 2005 fiscal year, and we have no debt and $144 million of cash. That's a substantial amount paid out in my opinion by a small company like Park that was started by two guys with I think about $50,000 to $60,000 back in 1954. Just my opinion, but I thought you should know that. So, why don't we move on to Slide 5? Matt was referring to Newton, Kansas expansion, and it's certainly in progress. The picture on the top right is actually about a month old so we couldn't get a more current aerial photo. A lot more has been done in the last month. The original budget was $20.5 million, and as Matt indicated, the spending left to be spent is $15.1 million, which means we have spent about $5.4 million so far. The completion is now expected by the end of this calendar year, which is a delay of about four to five months due to several major things, governmental approvals, a process that was more complex and time-consuming than anticipated. The governmental approval is particularly from the FAA. You may be surprised to hear this, but if you build a factory near an airport, you need to get FAA approval for it, and that process was more complex than we anticipated. There was additional time required to finalize contracts and other arrangements related to construction. We thought we could manage it better, but we learned that in this case, we were surprised by the complexities. The completion is now expected to provide $55 million to $60 million of additional hot-melt composite material manufacturing capacity. We'll talk about capacity a little later on because we think there is some confusion about our capacity. We did push that number up; the last time we spoke to you, we indicated it might be $50 million, but we raised that number due to increased uptime assumptions realistically, which we nevertheless felt were necessary.

Let’s move on to Slide 6, estimated manufacturing capacity. After our second quarter call, we received some questions and comments that made it clear there was confusion about our manufacturing capacity. So we wanted to lay it out for you in more detail and provide a deeper explanation. First, let's discuss hot-melt treated composite materials. The 60-inch film and tape line is the main line we use to produce hot-melt materials. Last quarter we mentioned we had $45 million of capacity with that line. There are also 24-inch film and tape lines, with $8 million of capacity. It is important to note that manufacturing capacity is highly variable and significantly impacted by product mix. This must be emphasized as our capacity is subject to more than just minor changes, but can be affected by substantial variations. Now focusing on the 24-inch film and tape line, we assume it is being exclusively used for the GE9X Containment Wrap Program that we’ve discussed previously. We have orders for that program by the end of this year, but we have not yet been awarded this program. This is a GE Aviation program, not an MRAS program. For this analysis, we will say we're only using the 24-inch line for case containment wrap production with $8 million, ensuring that the 60-inch line will have available capacity for other productions.

Let me go to Slide 7. This slide discusses the short-term variability of our manufacturing capacity. Given the peak demands of the GE programs business, it may be challenging to handle the peaks with the current capacity levels. We aim to increase our manufacturing capacity from $45 million to $55 million on the 60-inch film and tape line. This is achievable by moving all GE9X production to the 24-inch line, which is currently in progress, and increasing the 60-inch film and tape line's uptime by 10%. Uptime refers to the percentage of time the machine is actively producing product over a 24-hour period. This plan is realistic, and we believe can be successfully implemented to meet the increased demand.

Turning to Slide 8, we’ll look at Q3 results, where our sales were $15.847 million, gross profit was a little over $5 million, and gross margin was $31.7 million. We will discuss gross margin as it's been slightly compressed. Our EBITDA for the quarter was $3.622 million, and notably, we came in just above our previous estimates for sales and EBITDA. We reported $97,000 above the top of our sales range, and $120,000 above our EBITDA range, which are good results for Q3.

As we discuss Q3, it's important to note that supply chain issues, particularly with carbon fiber, have continued to present challenges. Our carbon fiber inventory is at historically low levels, and we have faced challenges with distorted fiber and film wrinkling that carried over into rework during Q3. This resulted in additional costs that impacted our gross margin for the quarter. The need to run our hot-melt production at an annualized rate of $45 million in October and November further strained our operations, resulting in manufacturing efficiencies challenges and additional costs. Q3 was not easy on the manufacturing front. Nonetheless, I want to recognize our manufacturing team's efforts to overcome these challenges. We hired 10 additional production and lab people during Q3, which has contributed positively to our operations. Managing our workforce carefully is a key aspect of how we operate, and we aim to maintain a stable and committed team. Our people count is at 135, which reflects the workforce that received bonuses for their hard work during Q3. Maintaining stability in our workforce is important as we plan for growth in the future.

Looking towards Q4, our forecast is for revenues of $15 million to $16 million and EBITDA of $3.1 million to $3.6 million. Currently, we’ve shipped approximately $13 million in the quarter, leaving us with a gap to fill to meet the forecast. We experienced a slow start due to lengthy maintenance shutdowns and ongoing challenges in the carbon fiber supply chain, leading to a cautious outlook for January and February. We hope to manage these challenges effectively to meet our targets.

I wanted to ask about the slowdown in the broader aerospace supply chain. Do you think that will help you with some of the supply issues that you’ve faced during 2019?

I'm not sure I follow the logic of that, and I don't anticipate that the slowdown will alleviate any existing supply chain issues. While the 737 MAX pause might affect some inputs, particularly the carbon fiber we use is not utilized on the 737 MAX. Despite the broader supply chain slowdown, the qualification of different suppliers is a long process. Long-term adjustments are possible but unlikely to provide immediate relief.

Are you seeing many opportunities for bolt-on acquisitions to grow your portfolio or increase your assets?

We are considering a few opportunities for potential acquisitions. However, many valuations still seem high, and we want to remain cautious in our investments. We are looking for ideal matches that are the right fit for Park, both in terms of culture and technology. While we are exploring options, we will not rush into acquisitions without thorough analysis and consideration. In terms of manufacturing capacity, the current plans are sufficient for what we foresee in the near term. There is space for future capacity increases as needed, but right now, we’re set to meet our existing commitments effectively.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.