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spk04: Good morning. My name is Catherine and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Park Aerospace Corp third quarter fiscal year 21 earnings release conference call and investor presentation. All lines have been on mute to prevent any background noise. After the speaker's remark, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, then the one key on your telephone keypad. If you would like to withdraw your question, press the pound key. 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.
spk02: Thank you, Catherine. This is Brian. Welcome, everybody. I have with me Matt Farabar, CFO. Happy New Year to all. So first thing is that we announced our earnings this morning. You probably know that. You want to take a look at the earnings release because there are instructions as to how to access the presentation we're about to go through. And I highly recommend you do that because it'll make the discussion much more meaningful to be able to go through the presentation with us. There's also supplemental financial data attached as Appendix 1 to the presentation. You might want to check that out. As you know, we cover this often. We're not here with these presentations to promote or hype the company. What we're trying to do is cover things we believe which would be of interest to you and provide perspective. that we think will be useful to you, our shareholders, in understanding our company and our company dynamics. We can't cover everything each quarter, unfortunately. It's not possible, so we have to be a little selective. Notwithstanding that, we have a long presentation. It could take 45, 50 minutes, so I just want you to be aware of that. Brace yourselves. There are a number of items which require a little more discussion because they're not so obvious on the surface. And then after we're done and go through the presentation, then, of course, we'll be happy to answer any questions you might have. So, why don't we get started? Why don't we go to slide two? Slide two is our forward-looking disclaimer. If you have any questions about it, just let us know. You can call us later, of course. We get right to slide three. Okay, here we go right into the numbers. A lot of stuff going on in this slide. Let's try to go through it. So, in the third quarter, sales, as you can see, were $10,372,000. Gross profit, $2,553,000. Gross margin of only 24.6%. That's low, as you can see from history, and we'll discuss that just in a minute. And we have an EBITDA of $1,380,000. If you look at the top line for the first three quarters, it certainly shows the effects of the commercial aircraft downturn and also the stocking we've been talking about for quite a while now. What do we say about this quarter Q3 during our last quarter conference call? We said our sales estimate was $10 million-ish and our EBITDA estimate was $1 million-ish. We're not trying to be cute or clever with the ish stuff. When we say ish, we're saying to you we really don't know. There's a lot of uncertainty and we don't want to give you more confidence than we have in what we're telling you. We're happy to give you our thoughts, but we want you to understand how much confidence we have in what we're telling you. It looks like we came in within the range for our top and bottom line meeting sales with EBITDA. Maybe a little bit ahead, but let's call it within the range. Remember forecast philosophy. We cover this often, but I think it's worth just going over again. is our forecast, we're not playing what we call a game to give you a little low number, so a number that's below our expectations so we can beat it. We give you a forecast. We are telling you what we think will happen. We could be wrong, but we're telling you what we think will happen. We're not rounding up, not rounding down. This is what we think is gonna happen to the best of our ability. Then let's go into the next item, certain factors affecting Q3, and it will affect Q4 as well, sales and margins. Let's talk about that. So the GE sales, we'll cover this later on in the presentation, only $1.8 million. Now this requires a little bit of a review of things we discussed in previous quarters. which we'll get to in more detail later on the presentation. Remember, we mentioned last quarter that we had reached an arrangement with MRAS, which is our main customer, or largest customer, I should say, which is a subsidiary of SC Engineering in Singapore. It used to be a subsidiary of GE Aviation. We reached an arrangement with them under which we would produce a certain minimum amount for them every month on a theory that if we went below that amount, it would severely impact our ability to ramp back up, and we need to ramp back up, and we're quite confident that need would come, that day would come, and it has come. We'll get to that as well. But that minimum amount is in units. It's not in dollars, so the dollar amount is going to change based on mix, but it's somewhere between $700,000 and $900,000 a month, a very small amount, but that's what we say we need in order to maintain that critical mass and the ability to ramp up. Remember we mentioned this last quarter that in September, though, we were not going to operate our hot melt line because we're taking it down for major maintenance that was overdue. So in Q3, we only operated two of the three months. So rather than one month times three, maybe 700 to 900 times three, 700 to 900 times two, so we had only $1.8 million left. dollars of GE programs revenue as you'll see later on the presentation in Q3 and you'll see as well that compares to Q2 of 2.9 million when we had three full months of production at that minimum level. So that affected obviously our top line and then a bottom line. So this is something else a little complicated that we need to explain to you so you have the perspective. During the third quarter We had about $2 million of sales of an essential component that's used on missile programs that are very critical missile programs. These sales were to the OEMs, the defense contractors. This component is actually produced overseas, and it's produced by an ally. It's a friendly country, but nevertheless, the OEMs, these defense contractors, a little nervous. They want to have a supply of this critical component. We have the relationship with the supplier. I know this is complicated, but bear with me. So we're asked to go buy this product, which we did, and then sell it back, or not sell it back, sell it to these OEMs, these defense contractors, so there is a safe source of supply of this critical component. And we did that. So we sold this component to these contractors. They own it now. They can do whatever they want with it. But the expectation is clearly that it will be used starting, let's say, next fiscal year to produce the composite materials for these missile programs. That's the pattern. But again, it's their product. They can do whatever they want with it. But the expectation is that it will be used by us to produce these materials for these missile programs. But there are very low margins on that $2 million because we do mark it up, we buy it, we mark it up, and we sell it to these defense contractors at a fairly low margin. Now, it's actually good news because when we actually produced the prepreg materials, the composite materials, the margins are quite good. But $2 million of revenue in Q3 that have very low margins associated with it. So we go back to that gross margin. a number of 24.6 and that's probably the big picture in terms of explaining why that number is lower. You look at the prior quarter where the revenues were 9.2 million and the gross margin is 28.6. We don't like anything below 30 but nevertheless you look at Q3 and the gross margin is even lower with higher revenues so we wanted to explain that to you. Sorry it took a little bit of extra time but I just want to make sure you understood that dynamic. Let's go on to slide four, top five customers. We always cover our top five customers for you. AAE Aerospace and Aerojet Rocketdyne, they're both related to this PAC-3 missile system. We have pictures that are associated with these top five customers. We've spoken about this PAC-3. It's the missile system before. It's a Patriot missile, the next generation, latest generation Patriot missile. GCAN, that's a contractor for Sikorsky and many other customers. But we have a picture at the bottom right of us, of course, the Seahawk, which is a program we supply into. Next item down, Kratos. They've been at our top flight quite a bit in the last year, I guess. And we have a picture of the Valkyrie. Remember that we mentioned before, we believe we're the main supplier of the composite materials for all of their drones, including their tactical drones as well as their target drones. Valkyrie, interesting, looks like they received an award from the U.S. Air Force for the Skyborg program. So that's a very nice program to be on. And the last one is Middle River Air Structure System. We call it MRAS. It has subcontractors. And, again, that's a sub of SD Engineering Aerospace, our largest customer. That's a picture of a 747-8. And I think the photography work is excellent, I must say, because I took the picture myself. And this is in Anchorage. The airplane was landing. You see it's gears down in landing position. A little over a year ago, and I think I was, that's right, all the runways except one runway was closed. They were using one runway for takeoff and landing, so I was lining up to take off after this guy landed. I want to go on to slide five. And then sharing our PIPE, these bar charts with you in the last few quarters. I think they're very interesting. Hopefully they're informative. So let's start with last fiscal year, fiscal year 2020, $60 million of revenue. You can see the breakdown here. And then we fast forward to this year, year to date, you know, the Q3 year to date. And you see the PIPE chart has moved around quite a bit. Military is now 58%, where it was 35% last year. Commercials down to 35% where it's 47% last year. Let's do a little math here just for the fun of it. If we take 60 million last year total revenue and multiply that by 35%, the military portion, that's $21 million, isn't it, approximately? Let's take this year where the revenue is 31.8 million. We multiply that by 50% and then we annualize that number. Let's just assume, I'm not saying it's true, but let's just annualize it assuming that Q4 will be similar to the first three quarters. That annualizes $24.6 million. So what's going on here? Even at a down year, you see that our aerospace business has grown and grown considerably, probably not in action and probably because we decided that we're going to focus on military. I think I said aerospace by mistake. Our military business has grown even in a down year, and we decided we're going to focus on military, as we discussed the last couple of quarters. So, okay. Why don't we move on? We'll keep hustling along here. Like I said at the beginning, we have a lot to cover. Slide six. Okay, so we're talking about our niche military airspace programs. As I just mentioned, we decided we're going to focus a lot of our attention on military, and I think so far it's going pretty well. We still have a long way to go, but so far it's going pretty well. These are some, the pictures are just some programs we're on. They're not necessarily larger or smaller. We just thought they're programs of interest. I think every quarter we discuss a few programs that we're on, military programs. The one at the top left is very interesting. That's something we're in qualification on, the standard missile three system. They're a very fast missile. I think it goes Mach 16 to 18. That's very, very fast. The SR-71, you know that airplane, the fastest airplane? I think still that it was ever built. It goes Mach 3, about 3.3. So it's a very, very fast missile. And actually, we're also in qualification. We're in qualification on a rocket system that's used on the SM-3 and the SM-6 as well. The Boeing KC-10 Extender. This is really a niche kind of thing. You see that this is kind of a special mission here because you see who the airplane is refueling. But normally it would be used to refuel B-52s and F-18s, military aircraft. This is an interesting story. I'll try to go through it quickly. It's specially material, and we also make the parts for this program. And how did we get this program? It was a legacy supplier. This is not a new airplane. They didn't want to do it anymore. It's too difficult. There was trouble. And, okay, sign us up. We're happy to do that. We love to hear those kind of things. When somebody thinks something else is in trouble, sign us up because those are the kind of programs we like. So let's keep moving the Grumman to the Hawkeye. As you can see, that's a carrier-based aircraft. Early morning, you see the big antenna on top. We do structural parts using our material for that aircraft. And we also have the Predator here. I think last quarter we showed you the Global Hawk. This is another drone, obviously used for military purposes. And our materials go into structural components as well as radome materials. And you see the pie chart. Now, this pie chart has taken a military segment for this year. Q3 year-to-date and breaking it up into these subcomponents. The common thing for us is we like the niche military programs. We're not looking to go into big ones like the F-35 structures, things like that. We'd rather do niche programs where we feel we have something different, something special, something unique to offer, and we also feel the ability to protect the business because of the fact we're doing something a little different and unique. The KC-10 is a good example of that. Why don't we keep going? Slide seven. So now we'll talk about commercial. So this quarter, as I said, we can't cover everything. We talked a little bit military, talked about commercial. We're not going to talk about business aircraft, at least in the presentation this quarter. If you have questions about it, please let us know. Let's talk about commercial. This is a slide, similar to the slide we showed you in the last quarter, so it's a little bit of a review here. We're talking about single aisle versus wide body aircraft. So trends already in place favoring single-aisle aircraft. That was before the pandemic. Why is that? Because people rather fly direct. They don't want to do the hub-and-spoke thing if they can avoid it. So these single-aisle aircraft, smaller aircraft, are able to operate out of more regional, smaller airports, whereas the wide-bodies go to the big hubs. So if you want to go from point A to point B, you have to stop at point C, I guess, where the hub is. And nobody wants to do that if not necessary. Now, with the pandemic, that accelerated the movement towards single aisle, in our opinion. Will it market for single aisle recovery for a wide body? Yeah, I think that's, we say that, we state it as a question, but I think it's clearly the case. And again, the pandemic and the economic downturn has certainly accelerated the movement towards single aisle, favoring single aisle versus wide body recovery. So our opinion, if you want to be a commercial aircraft, which we do, we never wavered on that, by the way, even though there's a lot of bad news about commercial aircraft over the last year, we felt that this is a good place for us to be. If you want to be a commercial aircraft, for us, you want to be in single aisle. That's our opinion. Now, there are three major single aisle programs, the Airbus H320 family aircraft with Leap 1A engines. This is a program we're on. This is a very, very, very big program, a very important program. It's a great program to be on. The next one, the 737 MAX, as you know, the 737 MAX is going to be certified, and it's flying again, so good luck to Boeing. I hope it works out. We're not in that program. I think no content. I shouldn't say almost. No content I'm aware of on the 737 MAX program. And then the third single aisle is COMAC 919. The airplane is still in development. COMAC says that they're going to have finished the development certification, at least in China this year, and start deliveries at the end of the year. We'll see if that happens. But we think that's a very important potential program for the future as well. So in our opinion, we check two of the three boxes. Those are the boxes we want to check. The A320, that's by far, we think, the big dog. And the A320, a lot of variants, too, that covers a lot of ground from small to large. So they have a lot of unique things to offer. Unfortunately, because of the match problems, they're way ahead of Boeing at this point, at least in our opinion. So if you want to be in single aisle aircraft, those are the two boxes you want to check, and those are the boxes we do check. Let's go on to slide eight now. So why don't we do a program highlight, Airbus A321XLR. That's part of that A320 family we're talking about. Very interesting program here. It's a single aisle, range, very good range, about 5,400 statute miles, seating capacity up to 244, you know, a lot of seating capacity and high-density configuration. Expected end of service in 2023. I mean, that's just two years from now. That's not very far from now. Will it be a game changer? Well, it's a lot of press, a lot of, you know, people writing about this. A lot of people think, yes, it will be a game changer. Why is that? Because it will replace wide bodies for many operations. For instance, you know, North America to Europe, where you expect to take a wide body, this would be a replacement for that wide body, but much lower cost. So, There's a lot of excitement about this program, and we're happy to be part of it, that's for sure. So unfortunately for Boeing, they don't really have an answer for this airplane. It's kind of like the 757, the old 757, which is a single ILO, but it's old technology, and it was a stretched kind of version of maybe a 737, if you want to look at it like that, but they can't stretch the MAX any further, so they can't use the MAX as a platform to compete with this XLR. And unfortunately, you know, Boeing had an MA airplane that was kind of targeting this market, but my understanding is, anyway, to discontinue development on that for a little while while they're focused on the MAX. We believe Park is ideally positioned, maybe partly by luck, maybe mostly by luck, in the commercial aircraft industry. But whatever reason, we think we're ideally positioned if this luck will take it. No problem for us. Slide 9, let's go to slide 9. This is a slide that we go through almost every quarter. It's just kind of a review of GA Aviation Jet Engine programs. Why we honor those programs? Because MRAS, our large customer, was until two years ago a subsidiary of GA Aviation. Now they're a subsidiary of ST Engineering in Singapore, a large Singaporean aerospace company. So let's go through this quickly. We have a firm pricing LTA through 2029 with this MRAS middle river air structure systems. We also have redundant factory, which is in progress. We'll talk about that later in the presentation. What's going on here? If you look at the next item, it says we'll sole source in all these programs. So for a large aerospace OEM, they're not going to be comfortable with a sole source relationship, long-term sole source relationship for materials like this, critical materials like this, where there's only one facility. It's too dangerous. If something happened to our facility, it would be a real problem for these OEMs because the qualification time frames for these materials is very, very long. So it'd be a real problem. So it's kind of part of our arrangement with MRAS. We signed up this long-term agreement. We said, sure, we'll build a redundant facility for you. Now, the good news is we need it for capacity anyway. I think you remember, or some of you do and you might remember, that about a little over a year ago, before the pandemic, we were talking about pushing our capacity already. in our existing facility. So that's the good news. We'll need it for capacity as well. Sole source for composite materials for engine nacelles and thrust reversers for multiple MRES programs, we have the A320 family, the first four items. The 747, we've already shown you a picture of that. That's not just for nacelles and thrust reversers, also inter-fixed structure. COMAC 919, we talked about that. COMAC ARJ21, that's a regional jet. It's doing quite well. It's sold in China mostly. And then the Global 7500 with the Passport 20 engines. Top right it says we're also making another component for that Passport 20 program, but that's through GA Aviation. The picture here is a 747-8 engine that sells. I like this picture very much because it just shows you the size of these structures. You can see the person in the background. These are very, very large structures made with our materials. So it's a very good program for a park to be on because there's a lot of content in the cell structure, a lot of park content. Slide 10. So here's an update on GE Aviation's gen engine programs. We've done this for the last couple quarters. Let's give you another update. First item, the A320neo family of aircraft, those LEAP 1A engines. What has Airbus said? Well, they were saying, you know, until recently, they're going to do 40 airplanes a month. And it was interesting. A lot of analysts were questioning, well, they could be able to sustain that. And it almost seemed like everybody was kind of getting on to the, you know, the training where so many analysts were questioning whether Airbus could sustain the 40 per month. And a lot of gloom and news about commercial aircraft in general and also this age between program. And, well, Airbus said, yeah, I guess you're right. We're not going to sustain 40 a month. We're going to 47th. I don't know if that's supposed to be in the face of the analyst position from Airbus, but they said at some point this year they'll go to 47 and increase the rate of airplanes to 47 per month. But I think maybe more importantly, we recently received a forecast from our customer, MRAS, indicating significant increases in units in calendar year 2021. Let's go on to that global 7,500 with the Passport 20 engine. Same thing. We recently received a forecast from a customer indicating significant increase in units in calendar year 2021. This also is the next program for our lighting strike materials they're qualified on. HOMAC ARJ 21, that's a regional jet that's being produced in China. Reece Parker recently received a forecast from a customer indicating indicating significant increase in units in calendar year 2021. As you see a pattern here, here's the A321, picture of the A321, a very big seller, very successful airplane for Airbus. I want to go on to slide 11, continuing with the different programs. COMAC 919 with LEAP 1C engines. COMAC has indicated the intent to certify and be in delivery of this airplane before the end of 2021. And our lightning strike materials are already being used in the program. What that means is this is an NPI, a new product introduction. So they're already producing some units, trying to get ahead on production for when the airplane is certified, and also to go through the certification programs. 747-8, yeah, it's a special airplane for me, but Boeing has announced they're going to terminate production of the Queen of the Skies next year, but no change in production rates until then. So the rates aren't being reduced. Following this thing, you're going to continue producing this airplane until the program is terminated. I have to say right, until the program is terminated. I'm a dreamer, but, you know, maybe it's unrealistic, but I kind of hold out hope that maybe somebody will come in and order maybe one of the big freight companies, cargo companies, UPS, order some more units before the production ends. But that probably might be somebody, that's what you're thinking. Slide 12. So how do we get here where we are now with GE Aviation and GE Aviation programs? Well, of course, there was a significant downturn in commercial aircraft industry in early town year 2020. We all know about that as a result of the pandemic and global economic crisis. Almost all news about the commercial aircraft industry was negative, very negative. You know, this is kind of, to me, the herd mentality that, not a lot of conviction, maybe not a lot of courage. You know, there are two or three analysts, industry analysts that start getting very, very negative, but everybody jumped on board. Okay, fine. To me, that's always a sign that look at the other side of the story. When there's that capitulation, everybody's now capitulating. It's so negative. Well, maybe somebody's missing something. So next item. So we didn't completely buy all that doom and gloom news. But, you know, for Park, it doesn't really matter too much because at Park we make adjustments on the fly. We keep pressing forward. That's really all we know how to do. As Winston Churchill, I think, once said, when you're going through hell, you keep going. You know, we're not analysts. We're not philosophers. So we keep our head down and keep moving forward and we make adjustments as we need to make them. But we never gave up commercial airplanes, commercial aircraft. We just didn't buy that. We didn't buy a lot of the news that was coming out. from industry analysts. Okay, let's keep moving on. PARCC made arrangements. I talked about this in the first slide. We made arrangements with MRAS for PARCC to maintain a minimum monthly baseline critical mass production level to preserve PARCC's ability to ramp up production when needed. This is critically important to PARCC and MRAS. This arrangement wanted to affect probably July, I think we made the arrangement in June, but probably July was the first month that we started to comply or abide with this arrangement. It ends up being about $700,000 to $900,000 a month based upon, like I said, the minimum in the arrangement is based on units, so the dollars are going to vary based upon the mix. But think of $700,000, $900,000 per month is the arrangement we entered into. And that arrangement lasted until last month, until December. Let's go on to slide 13. How did we get here? Continue. So we spoke at some length. I'm sorry, but unfortunately we have to kind of review for perspective what we covered in the last quarter or two. We spoke at some length during our Q1 and Q2 investor calls about the significant divergence from and mismatch between our agreed to minimum monthly baseline production amounts, what we just talked about, and the then current end market requirements for GE programs if PARC is on, the specific programs which we run. Again, there's all this new news about the max and how terrible it is and other programs, but we're focused on programs we're on. And let's just go through some numbers. Again, it's a little tedious to have to go back and review all this stuff, but for perspective, I think it's probably important. Fiscal 20, our GE programs revenues were 28.9 million, approximately 29 million. So just kind of doing some high-level math, that's about 7 million per quarter. We told you, I think, last quarter, well, we felt the programs we were on were probably down about 25% to 30% based upon what the end market usage was. was indicating, the programs themselves, the airplane programs themselves. So we thought, well, you know, all right, if we take the $7 million number and we reduce it by 25% or 30%, that gives us about $5 million per quarter. But we're operating at less than half that. Look at our last couple quarters, less than half that, based upon that minimum amount again. So, you know, what the heck is going on here? Of course, it's that inventory stocking. And we knew that something was up. It wasn't ending up. It didn't make any sense. We explained, again, going back, that we believe many companies in the aerospace supply chain were demoralized in survival mode, not paying attention to need to ramp up production when destocking ended. We're very concerned about that, still are. We further explained during those calls, that we believe the aerospace supply chain may be taking inventories to dangerously low levels. It's a serious concern of ours because the supply chain is very defensive, you know, in the survival mode, not thinking about the future, not thinking about, wait a minute, something's not making sense here. We're going to have to ramp up someday. It wasn't really being considered, in my opinion, by some of the members of the supply chain. So we said this last time, an abrupt and steep ramp up by supply chain could be required when the inventory destocking ends. Is this a ticking time bomb? Maybe. But one thing is for sure, I think, if you do the math, the inventory can't go below zero. There's a finite limit to how much the inventory can be produced, how much destocking can occur, right? It can't go below zero. So let's keep going here. Sorry. All right. So how do we get here? And now to compound the potential need for a steep and abrupt ramp-up, Because of that mismatch, the forecasted units for calendar year 21 for all GE aviation programs have gone up in some cases significantly, with the exception of 747, which is flat. We just went through the program-by-program discussion. We said everything's up significantly except 747. So we have the stocking ending. We have inventory being low. And then the programs move up. Do you see the dynamic? So now what? Now what is there's probably a problem that the industry has, at least our part of the industry. This is the Global 7500 that we've been talking about with the Passport 20 engines. Slide 15. So the ramp is upon us. That's our belief. The stocking has ended in most of the supply chain related to parks, GE aviation programs. Inventory has taken too low in some cases. That's our opinion. So we'll talk about this later, but the reason I say most cases is we deal with some subcontractors as well for these GA aviation programs. It's about 20% of our revenues go to subcontractors. They have a little excess inventory, maybe at a million dollars. But the main supply line to MRAS, no. We think it's actually low. So as explained, just a little review here, rates are being pushed up. The ramp is looking pretty steep. Just for perspective, GE program sales for the following periods were. Now, before we go into the numbers, I just want to point out, we're talking calendar years here. I'm sorry to have to confuse things. It's normal when we talk fiscal years, but for this purpose, we need to talk calendar year because we have a forecast from GE Aviation, sorry, from MRAS for calendar year 21. We don't have a forecast for next fiscal year. So we've got to do the calendar year comparisons. This is just for perspective anyway. Calendar year 19, 29.3 million GE aviation sales. Calendar year 20, last year, last calendar year, 15.8 million. But importantly, calendar year 20, last six months, 5 million. That's during that period we're doing the minimum production from July to December, I guess. Obviously, we can do that math. For six months, $5 million, that's a $10 million run rate, isn't it? $10 million. And that goes to that approximately $800,000 per month base line minimum. $10 million, so we got $29 million, $10 million in the last six months. Let's keep going. So now we get to the forecast. The calendar year, sorry, excuse me, 21, forecast for GEA edition program sales based on the forecasted rates we recently received from the customer, MRAS, approximately $24 million. $10 million, $24 million. Get the numbers? You see what I'm talking about in terms of the steep ramp-up? This is basically not. This is not, you know, six months from now, nine months from now, $24 million. What does this mean? Okay, so let me explain what we're talking about. What we received from our big customer is a forecast by unit and by unit number. So this money of this program, this month, that month, they don't give us, not dollars, it's okay, this month we're going to build eight of these units. We're going to build nine of those units. We're going to build 20 of those units, month to month, for 12 months. So it's a pretty detailed forecast. For us, it's very easy to convert that to dollars, because we know how much material goes into each unit very well, and we know what... What the Bureau sold for is it's very easy to convert that to dollars. It's actually, we say approximately 24 million. We have a more precise number, but it's about $24 million. That's how we take this number. What does it not mean? This is not a park forecast. We're not ready for that yet. We're not quite ready for that yet. We're sharing information with you so you have a perspective on the ramp we're talking about, but we're not providing you a park forecast at this time. and next couple pages we'll explain that. There's still some things we're not sure about, but we don't have enough confidence in to give you a forecast for the next year. So we're not doing that this time. So let's keep going. Let's talk about, let's go to slide 16. So what are the risks and factors potentially affecting that $24 million forecast? Inventory subcontractors, we talked about that. It's probably about a million dollars. And that probably would be absorbed and normalized by let's say April timeframe, May timeframe. Certainly by the end of our first fiscal quarter, this should be in a review window. This is at the subcontractors. There's no excess inventory, we believe, in our direct supply line to MRAS. Possible inventory building as a result of rent. So right now, there's very minimal inventory in our direct supply line to MRAS. We think it's probably too little, but it's the amount that was needed to support that $10 million business level, not $24 million. So it's a very real possibility that the inventory could be built up, so that's going in the other direction for us. Obviously, more inventory, that's going to drive sales up, at least while the inventory is being built up. We don't know that will happen. I'm just kind of sharing with you the considerations. Here are some negative concerns, possibility of global economic recovery stalls. That obviously will affect inventory. commercial aerospace, the global economic recovery isn't there, then people are going to be flying less. And obviously there are pandemic risks, vaccine risks, political complexities and risks, the very dynamic and complex environment right now, which, you know, we're not commenting on, we're not political analysts, except to reference that there's a lot of uncertainty and that creates risks. So we just want to flag that. We don't have an opinion about it. We're just saying those are risks. geopolitical international trade risks. Pretty dicey stuff, not just with China, with Europe, so you never know, but I just want to flag that these always are concerns and issues for the type of business we're doing, which almost in every case, except, well, maybe the 747 is a little exception. Every other case probably relies quite a bit on international trade. And export, U.S. export controls against China potentially affecting the the COMAC ARJ21 and 919. It really is potential. These are potentially affecting the forecast. It's a recent event. I think last month, December, there's some action, but it's certainly not decided, and it's just something we're flagging for you. But if the U.S. imposed very strict and stringent controls, export controls, It definitely could affect the ARJ21, the COMEC919. They use Western-made engines. So let's go on to 17. Sorry, we're taking so long. I'll try to move as quickly as possible. So the ramp is upon us. We're just continuing here. Well, these are just more factors, sorry, more risk factors, possible setbacks or issues with specific programs PARC is on. Maybe the OEMs will push out their forecast. Another possibility is the OEMs or customers will increase the forecast. I'm not just throwing stuff out here completely. There's talk, well, maybe we'll increase this program, that program. Nothing we're prepared to talk about, but there's talk on both sides of the equation. Possibility supply chain supporting the GA aviation programs, which PARC, which Park is on, struggles to ramp up. That's a real concern. Possibly the MRAS and suppliers are not able to ramp up production as quickly as needed. So there's two kind of things we're talking about here. One is suppliers that supply directly to MRAS. And then you have suppliers that will supply chain into aerospace. So for some reason, let's say there's nothing related to MRAS or Park. There are components that GE Aviation can't source or even Airbus can't source. that could affect the whole program. So it's just something to be concerned about when programs are being pushed up pretty fast, pretty aggressively, pretty steep ramp, and maybe a supply chain that isn't necessarily focused on ramping up as much as they need to be. Herd mentality, that just means that sometimes you get a herd effect where everybody's negative, sometimes everybody's positive. It seems like it's turning positive now. For us, it means we have to watch out and pay attention, not get caught up in herd mentality anymore. Okay, this is the ARJ, the regional jet that's made in China. Let's go to slide 18. Okay, how will PARCC respond to the ramp-ups, the steep ramp-ups? All of our people. That's our race as a whole. Our current head count is 107. We plan to add about 15, 20 people to accommodate the ramp-up. All new people need to be trained because we didn't lay anybody off. We got nobody to call back, so it's a process. and uh we need to do it right we say we did not lay off anybody against our religion um it is very much against our religion now when i say that i always have to say well we're not god so we can't guarantee we'll never do a layoff but it's something we're very very very much against we just don't believe in that and why is that it's because we want our people to feel and believe that they can build a future with us and you know you can whatever you can say whatever you want and then you lay off a bunch of people it's like well what happened to our future They're very important for PARC, very important for our people, and it's also a very good business, in my opinion. So we do not add people casually to PARC. When we add somebody, we're thinking, okay, we're adding this person for life. So we've got to be careful. We don't want to just go easily, go hire 20 people. Well, it doesn't work out. Well, we'll lay off 10 of them. No, we're not going to do that. So we have to be careful about how we bring people on. We just want to overdo it and not to lay people off. We hear, we see companies, they hire 1,000 and then they fire, lay off 1,000 people. That's not for us. That's not for us. Those are human beings. Those are people that really can make a difference for a company. A company that has real dedicated people, that's a company that has a lot of power. A company whose people are just kind of punching a clock, I don't know. It's not for us anyway. timing will be critical. In other words, we're not just going to hire all 15, 20 people today. We're in the process. We're hiring some people. We have to do this very intelligently. We have to pay attention just as we go. Very important. If we hired 20 people now, it would be chaos. We have to train all these people. That would just create chaos, like I said. We need to be very flexible and agile. At PARC, we make adjustments on the fly as we go and keep pressing forward. We don't stop every group. So we're not going to stop, okay, let's take a month or two to figure this out. No, we quickly come up with a plan, and we move ahead with the plan, and we make adjustments on the fly. Because no matter what we plan, the circumstances are going to change to some extent. So we have to be very agile, pay a lot of attention, make the adjustments on the fly. That's how we do things at PARC. PARC's Customer Flexibility Program, I mentioned this before, our ace in the hole, our current participation is 83%. This is just a great thing for PARCC. It's so wonderful to have this program. It's a cross-training program. Most everybody is involved with it. It gives us so much flexibility. It gives us so much better ability to respond to someone, to ramp up. So you have a career crew. Let's say it's four guys on a career crew. That's a very complex machine to run. What are you going to do? Hire four people and just say, okay, give them one week of training. Good luck. No, no, no. It doesn't work that way. You have three months. Then the new people have to be integrated into a crew that has experience. You can't just take four new people, put them in a treater, and even in three months. It doesn't work that way. So the great thing we have is the customer flexibility program. We didn't ramp up, let's say, one department. Maybe another department is not so busy. Those people are your cross-training. They can start today in that department. No training. They're already certified. They get certified. Actually, you know, people get a little bit of an increase in pay. They get a little bit of a premium in pay when they're certified to do another job function. But they have to train. They have to take a test. So those people are ready to go. It's a great program. It helps the park be very flexible, very agile. Ultimately, our great people are our races in the whole. We're very, very, very fortunate, very special, very privileged to have such great people, such dedicated people. It really makes the difference between what PARC is and what maybe some other companies might be. Let's go on to slide 19. This is our financial forecast slide. So let's start with GA Aviation. Just to review, you can look for yourself at the first three quarters and speak for themselves. Q4, We're forecasting 3.9 to 4.4 million. 3.9, that's what's booked, so we start there and say, we're not sure, but maybe it'll be a little bit more, so we're talking 3.9 to 4.4. If you look at the last couple quarters, Q2 and Q3, that was really running up at $800,000, $900,000 a month rate. Remember, Q3, only two months of production. Now, You know, it's interesting because when we did our Q2 call, we predicted about $1.5 million for Q3. It came out $1.8 million. We're not taking credit for it, just how things worked out. In our Q2 call, we predicted about $2.3 to $2.4 million for Q4. Now we're up considerably with the rest of it now, $3.9 million to $4.4 million. It's still not that $24 million level, though. $24 million, let's do the math, that's about $6 million and a quarter, right, divided by four. We're not anywhere close to the $6 million. So remember, we've got a forecast by month. It's not just for the year. So there's some ramp-up that's involved. But according to the forecast we received, we'll be at that level, that $24 million level, which is what? That's $2 million a month, right, by April. We'll see if that happens. We gave you all the risk factors. I'm not sure what's going to happen. And then there's also the subcontractor's inventory. Don't forget about that. But again, that should be pretty much normalized by the end of the first quarter, first fiscal quarter. So let's keep going here. Let's talk about our forecast for Lowell Company. We give you the history here, which we've already gone over. Our forecast for Q4, $14 million to $14.5 million. Sales, $2.3 million to $2.8 million EBITDA. So again, we've got to stop and explain. So certain factors affecting Q4 sales in EBITDA. So first of all, as you can see, the G program revenues are up quite a bit from prior quarters. We discussed that at some length. But remember we're talking about the essential component that we sold to the defense contractors for the missile programs in Q3. I think it says approximately 2 million in Q3, approximately 3.5 million in Q4. So that drives the top line up, but remember, quite low margin on those sales. We buy the product from this overseas supplier, and we sell it to the contractor, this component, at a small markup. When we actually end up producing the materials, that's where the good margins come in. So it's important to understand that. But, you know, you look at the numbers and you think, well, geez, you know, you're talking about, compared to Q1, for instance, you're talking about much more top line, but the bottom line isn't that much better or about the same. That's why we need to explain the details there. Let's go on to slide 20. Parks financial forecast estimates continued. So we withdrew, as you know, our long-term forecast, let's see, during our fourth quarter conference call, investor call last year on May 14. When we'll be able to reissue that, I'm not sure. We may be able to provide you, this is May, be able to provide you with a forecast for the next fiscal year, fiscal 22, when we announce our Q4. for earnings. I doubt we're going to be comfortable enough to give you like a three or four year forecast or maybe at least for the year. We will see. I'm not promising on that, but, you know, we're hoping to be able to get there. As far as our forecast is concerned, long-term forecast, we believe the fundamentals are still in place. It's just that things are pushed to the right. So you will go back and look at that forecast and say, well, when will you get back into those numbers? And not sure how long it's pushed to the right. But the other thing I want to mention is that the one good piece of good news is rather than just getting back to the forecast, now we have a better emphasis on military. So if you look at the, let's see, the pie chart at the bottom right just for reference, the commercial aircraft segment, that's going to grow as the commercial aircraft programs ramp up as we discussed. That'll grow. That's not really something we're driving. That's something that the end market is driving. We're just lucky we're on the right programs. Maybe some a little bit more luck, but a lot of it's luck. We're on the right programs. But the military part of it, that's something we are driving. So we intend to keep pushing that up, keep pushing it up, pushing it up. We're not looking for the big grand slam with military. We're looking for more niche programs. So it's a lot of programs, not one or two. Lots of programs that will push that number up. We feel very good about that. So I think that covers it for a long-term forecast. Let's go on to slide 21, just a quick update on, sorry that we're going so long, on our expansion. Total budget, $18 million. Spending, as at the end of Q3, $12 million, approximately $6 million to go. We expect completion during the first half of this calendar year. You see the pictures that are updated. The first time we showed you A picture of the inside of the facility, that actually is the zero-degree freezer. I think the technical term for it is huge. It's very big. Slide 22. Oh, okay, different topic here. We haven't covered this in a while. Our balance sheet cash and acquisition perspective cash dividends. So we paid a cash dividend for $30,000. Six consecutive years uninterrupted, never skipped a dividend, never reduced a dividend. Since fiscal 2005, we've paid $542 million of cash dividends, $542,026.45 per share. And I guess my opinion is that's a lot of damn money for a small company like Park. So let's go on to the next item. Remember, we did this cash math thing in the past. So we're saying, okay, we start with $117 million. That's our cash and marketable securities in Q3. We subtract $16 million, which, sorry, that's the remaining transition tax installment payments. This relates to repatriation of foreign cash, this is paid over five years, whenever the last, you know, it's something we owe the IRS, we're saying, okay, that money's spoken for, six million remaining on the Kansas expansion, so we subtract those two numbers and get to 95 million. Now, obviously, this is just kind of a conceptual analysis. This is how we think of it internally, so we're sharing with you. Obviously, there's a lot of things that affect cash on a daily basis up and down, so we're not giving you a cash flow prediction or anything like that. We're saying, this is how we look at our cash situation. Park also is long-term debt. So what about M&A? What about acquisitions? What's our perspective? So the major opportunities to buy businesses at distressed values have not really materialized in calendar 2020. We said we thought it might, but what happened? So what we're told, we think it's very much about the Fed. So why is that? Companies that were distressed companies were able to hang on. They weren't forced to sell. They were able to hang on because they were able to access money so cheaply, hang on until business got better, so if they were going to sell, they could sell at a better price. A very limited number of businesses offered through banker-led or managed processes, actually none that I can remember in the last year that we were involved with. What's the potential outlook? Sorry, what potential acquisitions did we look at in the last calendar year? We looked at a few, actually. and some pretty seriously did due diligence. None of them came through banker processes. They were all niche kind of businesses, some relatively small. They came to us either through industry contacts or maybe in one case a customer called us and gave us a lead on a company that we might want to take a look at. But nothing was right for us. Nothing panned out. So, like I said, we did some due diligence, even significant due diligence in one case, but at the end of the day, we just decided it wasn't for us, it didn't pan out, so we moved on. What about the outlook for 2021? The bankers say that there will be much more activity in 2020, but the valuations go up, so we'll have to see what happens. Let's move on to our last slide, 24, Park's reflections on the troubled world. The world has been badly damaged and is a troubled place at this time. At Park, we have had our own share of heartbreak and tragedy. But at Park, we do not quit. We do not give up. We do not relent. We continue to grind and press forward. That's really all we know how to do. Park is a strange and unusual company filled with very wonderful and special people. And we're not like the others. We're not fooling around here. We're not trying to just get by at Park. We play for keeps. And the last thing I'll quickly cover is this is our shipping and receiving crew. I think in the last quarter or so we featured one of our better crews left to right. We've got Lucas, John Moon, Raimundo, Ismael. John Moon is the supervisor. Really great crew, and what I can say about them, we're lucky to have them. If something needs to get shipped, it's going to get shipped. So I think what we'll do since we're running so late is we'll – skip the rest of the comments, and go to questions. So operator, thank you everybody for hanging in there. To the extent you have, operator, we're ready to take questions at this time.
spk04: Thank you. To ask a question, you'll need to press star 1 on your telephone. To remove your question, press the pound key. Again, to ask a question, press star 1. One moment while we compile the Q&A roster. Okay, we have a question from Brad Hathaway with Farview. Your line is open.
spk03: Hi, Brian. Thanks for the time, and thanks for all the detailed explanation. Much appreciated. Thank you, Brad. Quick question on the M&A. I'd love just to get a little more color, if you could, about why you passed on some of the things you passed on in the last year, you know, why they just weren't right for Park. I'm just understand more of some of your thought processes, how you evaluate opportunities and decide they're not a good fit.
spk02: Well, I'll talk about two of them, and there are different reasons. One was we thought it would look really interesting in the beginning because it seemed very niche-y, but as we dug into it more, we realized, we discovered that the market was very closed, very little opportunity to grow the business, and it definitely would require some investment. Maybe it I don't want to be unkind, but it maybe was neglected a little bit, which we didn't mind. We were happy to put some money and invest in it. But the thing that really got us hung up was the upside. We just didn't see it there. The market was pretty closed. Another case, a small business, interesting business, and we were concerned that the customer concentration was very high. And also, you know, the expectations of the owner were where we felt quite high, and that's the owner's right. They can decide whatever they want to decide regarding valuation, but that ended up being a big disconnect, and that's why the discussions were ended. These were not auctions. They weren't part of processes. They were both one-on-ones. There are a couple of things we continue to look at. But those are kind of examples. But in both cases, the reason we didn't continue, the reasons were different.
spk03: Understood. Great. And so you mentioned looking forward into calendar 21, you know, there's a suggestion there will be more businesses on the block, but also valuation expectations will be higher. I mean, does the combination of those two things make you more or less optimistic about finding a potential deal in 2021?
spk02: Yeah, it's an excellent question because I think it's a yes and no. Optimistic, obviously, because there's going to be more activity. That's a good thing. The concern is valuations, and we talked about the herd mentality. Now if everybody's getting on this kind of mindset that things are going to be going very well in the future, not just with aerospace, you know, let's say the economy generally, then maybe there's some of that irrational exuberance that creeps into people's thinking. We certainly felt we saw that in the past for valuation that didn't really make sense for us. So we'll have to see. We intend to be active. You know, we have the cash. We intend to be active. But for part, we always want to keep our head on straight and not get caught up in the, you know, mob mentality or herd mentality where, Everybody else is doing it, so we don't see the value, but everybody else seems to, so we need to get on board. We must be missing something. We're very reluctant to kind of buy into that thought process.
spk03: Understood. Great. Well, congrats on, I think, making it through the worst portion. I'm looking forward to seeing a better environment for you, at least in 2021. So thanks.
spk02: Thank you, Brad. Happy New Year.
spk04: Thank you. Again, if you would like to ask a question, press star 1. We have a question from Brian Glenn with Alcott SQ Investments. Your line is open.
spk01: Hey, Brian. Thanks again for the very transparent walkthrough as always, and Happy New Year.
spk02: Happy New Year, Brian.
spk01: Thank you. So you mentioned adjustments on the fly early in the presentation, and I just want to see if you could take a minute or two or three to talk about company culture as a competitive advantage. So specifically, two things that kind of came to mind when I think about it are some of the niche programs that you guys focus on. I know they have volume fluctuations month to month or quarter to quarter. And then the second thing is what you guys are doing now and over the past few years, which is, you know, earning a spot or wedging onto some of these programs that are still in development. I know the aerospace industry might be, you know, I don't know what the norm is six to eight weeks for turnarounds on prototype stuff. I know that's overly generalized and maybe it goes back to your electronics heritage, but my understanding is you guys just work on a different pace in terms of doing things like that and turning it around to a customer, whether it's a commercialized product or a development.
spk02: So that's a big question. Our culture, um, Yeah, well, so I guess we could say a lot of things about culture. We're a small company. We're not bureaucratic. There's a lot of passion among our people, a lot of dedication, commitment, and we move quickly. We're not into politics. We're not into who's right, who's wrong, or we won't have, like, clicks within a company. The whole company is really no company meaning all the people in the company are focused toward the same objective, which is better things for PARC So we do have the ability to move pretty quickly. People get lined up and focused and get to work in different directions pretty quickly. We make an adjustment, fine, we're moving in that direction. So I think it's pretty good in terms of flexibility and agility based upon our culture. We also can be relentless. I'm not sure about the six to eight weeks for aerospace. Aerospace qualification cycles are that could be quite a bit longer, but they vary. Some are much longer, some could be shorter, depending upon the situation. When I mentioned this regarding the KC-10, which is a small program, but it doesn't matter, we love it. When people, competitors, are saying they're not interested, it's too difficult, too small, too much trouble, boy, sign us up, we're there, we're there. And to me, it's amazing how Some of our larger company competitors will walk away from a program. They'll be on a program for a while. They say they don't want to support it anymore. What do you mean you don't want to support it anymore? When we take on a program or a customer, it's like an employee. We don't believe in divorce. We're married for life. We don't walk away from customers. We don't walk away from programs. We just don't do it. We've had issues where Maybe one of our components, we can't source anymore, so we have to qualify or get another component. But we don't just walk away from programs and say, well, we don't want to do it anymore. We've got bigger fish to fry or something like that. We don't have bigger fish to fry. For us, we want every customer to feel like they're the most important customer we have.
spk01: Thanks for that. Yeah, that's all. Best of luck in 2021 thereafter. Appreciate it, Brian.
spk02: Thank you very much, Brian. Happy New Year. Thank you, Etel.
spk04: Again, if you would like to ask a question, press star 1. And I'm showing no further questions on the call. I'd like to turn it back to Mr. Brian Shore for any closing remarks.
spk02: Thank you, operator. And thank you, everybody, for hanging in. I think we actually went over an hour. This probably breaks the record. So thanks for bearing with us. Happy New Year to all of you. And please give us a call anytime you'd like. Always happy to talk to our investors. Thank you. Have a good day. Goodbye.
spk04: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.
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