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Executives

Brian E. Shore – President and Chief Executive Officer

P. Matthew Farabaugh – Vice President and Controller

Analysts

Sean Hannan - Needham & Company

[Jawan Lief] – Sidoti & Co.

Mona Eraiba – TCW

Leonard Cooper – Private Investor

Park Electrochemical Corp. (PKE) F2Q09 Earnings Call September 26, 2008 11:00 AM ET

Operator

Welcome everyone to the Park Electrochemical Corp. second quarter 2009 earnings release conference call. (Operator Instructions) At this time I would like to turn today’s conference over to Brian shore, President and Chief Executive Officer.

Brian E. Shore

I am with Matt Farabaugh. Of course, as usual, Matt is VP and Controller. Matt will start with some introductory financial remarks and then I will offer a few comments of my own and then we will go into Q&A.

P. Matthew Farabaugh

Certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent Annual Report on Form 10-K for the fiscal year ended March 2, 2008, 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 would first like to summarize the financial information included in the news release for the second quarter ended August 31, 2008.

Net sales for the 2009 fiscal year second quarter ended August 31, 2008, were $55.6 million compared to net sales of $60.5 million for the prior fiscal year’s second quarter. Park’s sales for the first six months were $115.4 million compared to sales of $117.6 million for last year’s first six months.

Net earnings for the 2009 fiscal year second quarter were $4.9 million compared to $9.2 million for the prior year’s second quarter. Park’s net earnings for the first six months were $12.5 million compared to net earnings of $16.6 million for last year’s first six months.

Park reported basic and diluted earnings per share for the 2009 fiscal year second quarter and first six months of $0.24 and $0.61, respectively, compared to basic and diluted earnings per share of $0.45 and $0.82 for the prior year’s second quarter and six-month period.

Now I’d like to briefly review some of the other significant items in our second quarter P&L.

Comparing the current fiscal year’s second quarter sales to last year’s second quarter sales, Park’s sales volumes decreased 8% in each of North America, Europe and Asia. During the fiscal year 2009 second quarter, North American sales were 51% of total sales, European sales were 11% of total sales and Asian sales were 38% of total sales, all the same as last year’s second quarter.

Sales of high temperature laminate and prepreg materials comprised 99% of total laminate and prepreg sales during the second quarter of both fiscal year 2009 and fiscal year 2008.

Sales of Park’s high performance, non-FR-4, printed circuit materials, which are a subset of high temperature printed circuit materials, were 57% of total laminate and prepreg material sales in the second quarter of fiscal year 2009 compared to 52% in the second quarter of the prior year.

Sales of Park’s advanced composite materials and parts comprised 12% of total sales in the second quarter of fiscal 2009 compared to 9% in the second quarter of the prior year.

The gross profit percentage for the second quarter of fiscal 2009 was 19.7% compared to 27.1% for the prior year second quarter. The decrease in the gross profit was attributable mainly to lower sales volumes, substantial losses at our business unit in Mirebeau, France, the impact of currency translation on costs incurred in Singapore dollars, and significant increases in raw materials and utility costs.

Selling, general, and administrative expenses were 11.1% of net sales for the 2009 fiscal year’s second quarter compared to 10.9% for the prior year’s comparable period. The increase in these operating expenses, as a percentage of sales, was primarily due to the decrease in sales volumes.

Investment income for the second quarter was $1.7 million, or 3.0% of net sales, compared to $2.5 million, or 4.0% of net sales, for the second quarter of 2008. The decrease in investment income was primarily attributable to decreases in prevailing interest rates.

As a result, pre-tax operating profit was 11.6% of net sales for the 2009 fiscal year’s second quarter compared to 20.2% for the prior year’s second quarter.

The effective tax rate was 23.75% for the 2009 fiscal year’s second quarter compared to an effective tax rate 25.2% for the prior fiscal year’s second quarter.

Turning to Park’s balance sheet, cash and marketable securities were $215.8 million at August 31, 2008, compared to $214.0 million at the end of the prior fiscal year. Working capital was $242.4 million at the end of the 2009 second quarter compared to $239.1 million at the end of the prior fiscal year.

During the current year’s first six months, the Company had capital expenditures of $8.1 million and depreciation expense of $3.9 million compared to capital expenditures of $3.6 million and depreciation expense of $4.1 million for the prior year’s first six month period.

Stockholders’ equity was $279.8 million at August 31, 2008, compared to $269.2 million at the end of the prior fiscal year. Finally, stockholders’ equity per share at August 31, 2008 was $13.67 per share compared to $13.23 per share at the end of the prior fiscal year.

Brian E. Shore

I will offer a few comments as well. Also, I just want to remind you that Matt’s comments are posted on our website as of many about two or three hours ago. There’s a lot of detail in Matt’s comments so you may want to check out the website to just make things a little easier for yourself.

As far as my comments are concerned, first of all I will say that it’s a pretty difficult environment to offer any kind of perspective in considering the financial crisis that it seems like the world is immersed in at this point in time, but we will do our best, as always.

First of all, why don’t we talk a little bit about Q2 as compared to Q1. I think a comparison to Q1 is probably more meaningful because it’s more recent. If we go back to the classic Q2-to-Q2 there are a lot of different things that have transpired during the year so it is kind of hard to track. Let’s talk Q1-to-Q2 or Q2 compared to Q1.

And let’s talk about the differences which impacted the bottom line. First of all, you know the top line is off and that’s pretty straight forward and the analyst can figure out what kind of bottom-line impact would result in the top line.

Raw material costs, you know our policy is that we pass along increases in our raw material costs in the form of selling price increases but we also have a lag effect because we give our customers a little time to figure out what to do to digest the problem and to respond itself.

This quarter was hit particularly hard because we had raw material increases that went into effect June 1 and our related selling price increases, to kind of neutralize the bottom line impact, went into effect September 1, so the whole second quarter was exposed. We didn’t recover or counteract any of the problem during the second quarter. In the third quarter the problem has been dealt with but that doesn’t help the second quarter.

The impact to the second quarter was about $700,000. That’s not annualized, just in the quarter alone. Q1 compared to Q2. That’s negative $700,000. Of course these numbers are all pre-tax. That problem should go away for Q3, unless we have additional increases and I don’t feel inclined to speculate about that kind of thing considering the environment that the global economy is immersed in right now because it’s very difficult to understand where raw material costs will go, in the short term in particular, three to six months. So I am going to pass on that one.

And then of course you were aware that we had done some restructuring recently. We did restructuring in California which essentially was a work force reduction. And that has been implemented as of a few weeks ago.

And we have also announced that we have proposed a closure of our French operation in Mirebeau, France, outside Dijon, which if heartbreaking for us. That operation has been a part of Park since the mid-80s as I recall. It’s a long time part of the Park’s family but it’s just completely not viable as far as we’re concerned. At this point we are engaged in the consultation process with the work force which is required by French law but we have proposed a closure. I think we said we believe this discussion will conclude in Q3 or Q4.

If the proposal is implemented, the facility will be closed. During Q2 the facility lost money at the rate of $5.0 million a year. That’s annualized, but during Q2 $5.0 million annualized, so you can divide by four if you want to figure out what the impact was in Q2 alone.

High-performance percentage, normally every quarter we talk about high-performance percentage of our electronic sales going up and up and up. Actually, Q2 went down. Not a lot but a little bit. And the reason, and it will be interesting to see what happens going forward, but when you read about capital investment being throttled back, and particularly in an environment where there is global financial crisis, you can expect that.

High performance sales, they go into infrastructure. That’s capital equipment. IT infrastructure, telecom infrastructure. Our sales of high performance do not go into cell phones, PCs, things like that. So when you hear talk with the Internet supply companies, the telecom infrastructure companies, about their business being off, that’s going to affect the part of the electronic sales that really drives the bottom line for Park. So just be aware of that.

There have been announcements recently by some of the big Internet infrastructure companies, IT infrastructure companies, that maybe their outlook is not so rosy. I don’t know what the outlook should be because the environment is so confusing right now, particularly with what’s going on in Washington and maybe they will clarify it in the next couple of days. And when it does clarify, the next question is what does it mean. And, again, you have to talk to people that are, that’s way above my pay scale, as they say.

But I just wanted you to be aware of that. That had an impact of probably about $0.5 million negative. That’s not annualized. That’s in the second quarter. I’m sorry, some numbers I’m giving you annualized and some I’ve giving for the quarter. That’s an impact for the quarter, just $500,000 for the quarter. The change in the mix regarding high performance.

Remember the electronic products that we said over and over again, that it’s almost like two different businesses? The high performance is where we make the money, the FR-4, or the standard product, is really what maybe pays the light bills on a good day and that’s about it. And as you know, the long-term trend is a smaller and smaller portion of our electronic product sales are going to be the commodity or standard product. It’s just the way the situation is naturally progressing, as we’ve discussed numerous times.

Utility costs. Utility costs just in Q2 compared to Q1. $500,000 impact. That’s not an annualized number, that’s the impact for Q2 compared to Q1.

So when you talk about the impact of the things that affected the bottom line in Q2 compared to Q1, we don’t have a lot of positives to talk about, we have a lot of negatives. Now, you can talk a little bit about the restructuring, as we mentioned already.

The closure in France is a proposal and we’re in the consultation process with the work force regarding that proposal. But if that is implemented the California restructuring, or work force, reduction already has been implemented, our estimated is that the impact to the bottom line going forward will be about $8.0 million to $9.0 million, annualized. That’s not per quarter and of course that’s pre-tax.

The California restructuring has been implemented. If the restructuring, or proposed closure, is implemented in France, the total impact will be about $8.0 million to $9.0 million, pre-tax, per year going forward.

So, really no big changes in terms of costs for Pioneer or Kansas, actually in Q1 or Q2 in case some of you were wondering about that. That’s not really what the story is about. Those were the main factors.

Q3, all I can tell you is factually there is no change in the first three weeks. We have three weeks of bookings and revenues and the first three weeks of Q3 are very similar in terms of bookings and sales patterns as compared to Q2. And other than that I think it would be very foolish, of me anyway, to predict what might happen in Q3 because of the uncertainty in the global environment at this point, the global economic, financial, and credit environment.

We already talked about IT, telecom infrastructure. A couple of other updates that you might be interested in. Kansas progressing on schedule so that’s some good news. We have done a number of test runs with the new white hot melt machines. These are internal test runs for qualification. One of the two solvent machines is in the process of being installed now. The building, I think we reported last time, was essentially complete. It’s certainly complete now.

There are two solvent machines that are going to be installed. One is being installed now, the next one will follow. So that’s progressing on plan.

We talked a lot about Mexico recently and we’re still working feverishly on our plan for Mexico. Mexico is a little more complicated than we thought it would be. You know, it’s funny because a lot of American companies, the first so-called overseas venture that they embark on is Mexico. We have been operating overseas since the 1960s actually, a little bit before my time, 1960s in Europe we were manufacturing, 1980s in Singapore, we have a plant in China, we have added a plant in Malaysia, Canada, so I think we’ve been around the world manufacturing for a long time.

Mexico was a little surprising because you think, well, it’s right next door. It’s a little more complicated than we thought so we have to sort through all these things. We also are watching very carefully as we analyze the Mexico opportunity, trying to size it properly based upon what we think is going to happen with the market.

Now, let’s put the recent financial events of the last couple of weeks aside. What I would say is that the aircraft market has been very, very robust. I think everybody would agree with that, for several years. I suspect that is going to change. I suspect that the aircraft market is going to change in the next year or two and that is regardless as to what happens with the financial crisis. I think it got ahead of itself, so we will see what happens.

Now, for us that’s not always a bad thing because that sometimes presents more opportunities, which leads to the balance sheet, of course. And in this kind of environment, I don’t know about you, but I am happy about our balance sheet. I am not unhappy about our balance sheet. We have a pretty clean balance sheet, I think everybody would have to agree with that. We don’t have any junk in our balance sheet. We have no long-term debt, as you know, and we have a good amount of cash.

And we’re going to be using that balance to try to find opportunities as things develop, particularly as the economy continues to seem to unravel.

M&A, we are actively looking at one situation. This situation relates to the manufacture of composite parts for aircraft. Remember, we bought a company earlier this year that is engaged in that kind of activity. We are actively looking at one other acquisition opportunity at this time.

And the other situations that we reported on over the last couple of quarters, those are not active anymore. There’s one that is active and we’re pretty interested in it. But again, we will be looking to use our balance sheet, especially over the next six to twelve months, with the financial uncertainly.

I’ve got to tell you, and I think I’ve complained about this before, that we have had cash for quite a while at Park, but it’s been frustrating because I feel that in the past it hasn’t mattered. When we’re looking to do an acquisition we are competing against companies that maybe don’t have any money but it doesn’t matter because they can get it. Their bankers line up outside their door trying to give them money. So having money really didn’t mean anything. But maybe now it does. Maybe it’s not going to be so easy to get money in the future. Maybe that’s a little bit of an advantage for Park. But believe me, to the extent that it is, we will be looking to exploit it and use it.

We’re hoping also that valuations become more realistic. In a market where everybody is kind of pie in the sky, the valuations don’t make any sense. We remember that with the electronics industry in the 90s. Everybody was right and we were wrong. The world was going to grow and grow and grow and we were wrong. It turns out, that actually it was a bit of hindsight, maybe we were a little right. Maybe we’re a little right with the aircraft industry as well because until about a week ago it was, boy, you’re never going to do anything except grow. Maybe that’s changed a little bit. So we’ll see what happens.

We are going to continue to look for opportunities. As far as the rough environment, you know what, I think you would have to say that Park knows how to operate in a rough environment. I think one would have to say that. The real question I would ask, the question I ask everyday is are we going to be able to secure our future. And I think that’s an open question. The vote is still out on that. Are we going to be able to transition aggressively into new product lines? That’s the question that I still ask myself every day. And we work as hard as we can to make the answer to that question yes, but talk is cheap.

Anyway, on that note, why don’t we go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first questions comes from Sean Hannan with Needham & Company.

Sean Hannan - Needham & Company

So I think that you folks typically have a pretty challenged outlook. Visibility is often fairly difficult for you. Can you provide a little bit of commentary for us right now for how incrementally more challenging this outlook has become for you, with the demand environment?

Brian E. Shore

I think the situation is Q2 is challenging and I think we’ve talked about some of the things we’ve done already to meet those challenges. And that was consistent with my comment that I think Park knows how to operate in a difficult environment. I think the real question is not what’s happened so far because, fine, we’ll take it, we can handle it, probably better than most.

The real question, in my mind, and maybe you should answer that question, you’re probably smarter than I am about those kinds of things, is what is going to happen over the next months, or the next month. And that’s why I opened my comments by saying this is really an interesting day on which to do a conference call and try to offer any perspective.

So the fallout from the Lehman situation and what is that, two weeks old now? Not even. We haven’t seen that yet, we don’t know where that’s going to go. The credit environment, as I said, and so far in Q3 it looks kind of like Q2, in terms of order patterns and our revenues and that sort of thing. So it’s really hard to say about the future, of course.

The existing situation, yeah, we know how to deal with those kind of things. And we will, we don’t need to be prompted, we know what our responsibility is. Of course, meanwhile, we are continuing to try to do everything we can to drive our new product lines for our future.

Sean Hannan - Needham & Company

So I suppose if I can just kind of work off of that, if the current environment, from a demand perspective, looks similar to the prior quarter, but through the course of the quarter we saw the direction of the mix change, right? With your FR-4 and non-FR-4 materials, is that trend, has that stabilized or is it possible that that trend is actually continuing, based on all the larger macro news that we’re hearing with infrastructure build-outs and at the end of the day, kind of networking, [inaudible], etc.?

Brian E. Shore

The answer is we haven’t seen it continue at this point, but let’s see what happens here. I’m not going to name names but a lot of these big Internet networking companies are saying, hey, watch out, because our customers may not be ordering big-ticket items. Whatever we have so far in the last month or last few weeks is consistent with the quarter. So we’re not seeing another step down, at this point.

I was just saying, and kind of speculating, that reading other people’s, the big Internet companies, IT companies, restructured companies, news releases and they’re saying they’re concerned, probably rightfully. So we’ll have to see what happens, but in terms of what’s impacted us so far, we haven’t seen anything over and above what we saw in Q2.

Sean Hannan - Needham & Company

So based on some of these pressures that might be out there, are you seeing any ramifications on pricing within the market place?

Brian E. Shore

Pricing meaning what?

Sean Hannan - Needham & Company

Product pricing for your customers.

Brian E. Shore

You mean our selling prices? Yeah, well, we’re not very popular right now because we’re sticking with our policies. Now, we haven’t done anything with our utility costs and utility costs have become a real factor and so far we’ve decided to just eat those. But in terms of our selling prices and raw material costs, we are sticking with our policy.

Of course, just in the electronics industry we’re talking, I think there is just so much more tension out there now. As far as I was concerned it was never a very happy place anyway, but the level of unhappiness has ratcheted up so we’re not very popular, not very liked. I do hear that there is capacity in Taiwan and China and places like that.

And I think we’re pretty unique, actually, as far as an electronic material supplier for circuit boards is concerned because I think we’re probably about the only real specialty company out there. The rest of them work commodity-oriented and I’m not knocking that but when you are a commodity-oriented operation you really trade based upon supply and demand. Capacity utilization and things like that.

So the first thing some of these guys are going to do when they get nervous about demand and they have excess capacity is they are going to start changing their prices. And we’ve heard about these things.

And you know what? We’ve said before that we are going to continue to lose market share and I suspect we will, partly because of the competition. And the competition is better, too. You know, in the old days, maybe three or four years ago, maybe they weren’t that robust. Maybe some of the OEMs weren’t willing to use the competition in Asia for their programs because of their concerns about quality, reliability, supply. But I think they’re pretty good.

So those concerns have gone away, the prices are better, to some extent anyway. To a large extent, I believe, their prices are better and there goes our full market share.

Sean Hannan - Needham & Company

You also had commented on their being a number of factors that had pushed the raw material pricing up for you, which then resulted in a lag for your price pass-through on September 1. Is there a way to either quantify or qualify the order of magnitude for what the different contributors were in raw materials, assuming that copper was probably the largest, but just wanted to see if we could get a sense from you?

Brian E. Shore

You are absolutely right, copper is the big story here. And that’s the wild card. I read things about copper still might go up, because of what’s going on in China or India, even though the economy is down, but you are absolutely right, copper is the large majority of the story. I think we quantified the impact. We told you $700,000 in the quarter. And that impact, at least as of September 1, goes away. But that doesn’t mean that there won’t be additional increases in our cost during the third quarter. We don’t know that.

Sean Hannan - Needham & Company

And then lastly, you will typically provide the names of the top five customers you had in the quarter.

P. Matthew Farabaugh

The top five customers for us were Sanmina,TTM, [Wu’s], Tapco, and [Multech].

Operator

Your next question comes from [Jawan Lief] with Sidoti & Company.

[Jawan Lief] – Sidoti & Co.

Just to be sure that I understand and are on the same page as you, what was the dollar decline of your non-FR-4 sales during the quarter?

Brian E. Shore

I think Matt has given us the percentages.

P. Matthew Farabaugh

The high performance, for the quarter, was 57% of our total electronics.

Brian E. Shore

And in Q1 it was 60%?

P. Matthew Farabaugh

Yes, it was just a hair under 60%.

Brian E. Shore

Could you just back into it, because we don’t have that in front of us. But you know what the top line is so you can kind of back in. Obviously we’re talking about the non-high performance, but I think you have enough to do that math.

[Jawan Lief] – Sidoti & Co.

So according to my calculations I get to about $4.0 million quarterly fall from the non-FR-4 side, which attributed to almost all of your sequential sales fall. Am I understanding it correctly?

Brian E. Shore

I think you’re probably right. However, as I said, we continue to lose market share with non-FR-4. Is that what you’re saying?

[Jawan Lief] – Sidoti & Co.

You continue to lose market share in the non-FR-4s or the FR-4s?

Brian E. Shore

Sorry, now I’m getting mixed up because we don’t usually say non-FR-4, we say high performance. We continue to lose market share with FR-4, however, our market share of high performance in Q2 was down because of the factors we discussed.

[Jawan Lief] – Sidoti & Co.

I thought you mentioned something about the $0.5 million sales impact on the non-FR-4 side, that’s why I was asking.

Brian E. Shore

What we were saying, let me just go back and do it again. I know it’s pretty difficult to kind of parse through all this. We are saying that the impact of the loss of high performance, the reduction of the high performance percentage of our sales, the impact of the mix, was $500,000 in Q2 for the period to Q1. It’s the high performance mix. Matt just said it was close to 60% in Q1 and in Q2 was 57%. So that 3% difference had an impact of $500,000 Q2 to Q1, which is negative in Q2.

[Jawan Lief] – Sidoti & Co.

And as for your composite material, you do have Kansas plant hopefully coming on board sometime in calendar 2009. If I go back and do the 12-month trailing sales, you are just about $25.0 million on annual run rates. Would this capacity addition, on an organic basis alone, how should we look at this business in terms of dollar increase or in terms of percentage of sales? Could you give us a little more color?

Brian E. Shore

It’s really not a capacity question so much because we currently have capacity up in Waterbury. It’s really capability and focus. The Kansas plant should be our plan, our objective, that should be the best plant in the world that makes this kind of product. It is situated in the Wichita area where a lot the aircraft companies are located. So that’s really what it’s about. It will have capability that is quite a bit in excess of the capability of the Waterbury facility.

So the capacity question is not really the issue, that’s not the right question because we actually have capacity. What we’re trying to install is capability which will attract more business.

It will be a very, very long day in the future where we will be talking to you about not having enough capacity to work America to make a dense composite prepreg materials.

[Jawan Lief] – Sidoti & Co.

On your [inaudible] building you are looking at, what else can you tell us, how would it change potentially if you are successful. I’m trying to just get to how you view this business, what do you think you can take this business to? Could you give us a little more color on how this might add to your composite business and how big this deal might be?

Brian E. Shore

We’re not going to comment on the size. You could say it’s quite a bit larger than the acquisition we did earlier this year, which was more an acquisition about capability and technology, a very small operation. This is actually quite a bit larger. But it’s a larger operation and it actually would be an operation that has much more effective and spun out manufacturing capability, whereas the smaller operation we purchased, we didn’t buy for manufacturing capability. It was, again, technology know-how.

But I think the key point here is that we decided to focus a lot of our sales and marketing effort in the parts side of composites as compared to materials. Parts is just new to us, parts structures of aircrafts can last maybe 5-6 months. Since we purchased Nova, which is Nelcote PAFC in Lynnwood.

The plant in Mexico also would be to produce parts and we decided we are going to go after parts most aggressively. We’re not backing off the materials side of the composite story but we believe that’s much more of a long-term situation, it takes a long, long time to become qualified for materials. Usually you have to wait for brand new programs to get your materials qualified. We’re the new kid on the block in the aircraft industry. I’ve told this over and over again.

It’s kind of one of my frustrations. The aircraft industry is very slow, very conservative. It’s very difficult to get it. It’s kind of like the opposite of what we have, I think, of electronics where I suspect we are the lead in high performance and other companies are trying to knock off our market share. The tables are turned when it comes to aircraft.

But we believe that with parts and structures that even though it does take some time and we have to try to be patient, we believe that our opportunity to grow that aspect of the composite product line for aircraft, that opportunity is more immediate. So that’s why we decided to focus on that. And this is all new because we weren’t even in that product line until we bought Nova, which I think was in March. Maybe four or five months.

But again, that’s what we’re emphasizing. That’s what this acquisition would be about. It’s not materials, it’s parts and structures of aircrafts. The Mexico plant that we’re researching and studying, again, composite parts and structures of the aircraft.

[Jawan Lief] – Sidoti & Co.

Matt, could you give us the percentage sales for each of your top customers, the top five?

P. Matthew Farabaugh

I can give you the percentages for Sanmina, it was 14.8%. TTM was 11.2%, [Wu’s] was 10.8%. The total top five was 50.9%. And the total top 10 was 67.2%.

[Jawan Lief] – Sidoti & Co.

And the 20 please?

P. Matthew Farabaugh

The top 20 would be 77.8%.

Operator

Your next question comes from Mona Eraiba with TCW.

Mona Eraiba – TCW

I just want to get some color about the end markets for your top line, the decline in the revenue, what was the end market that was weaker and which ones stayed stable, etc.?

Brian E. Shore

The only markets that we think were really stable were military and maybe medical. But that’s small. It’s a big margin but small. The main market for our electronic product, particularly the high end product, which is really most of our story anyway, is going to be Internet infrastructure, IT infrastructure. We’re dealing with the household name companies that lead that industry.

And again, it’s based upon capital spending, it’s not based upon consumer spending. We don’t make anything electronic-wise, if you will, that would end up being purchased by a consumer, I wouldn’t think. It doesn’t go into cars, it doesn’t go into PCs, it doesn’t go into laptops, it doesn’t go into cell phones. It goes into big installations, big infrastructures, $1.0 million to $2.0 million to $5.0 million boxes.

Mona Eraiba – TCW

But you don’t have the figures like servers, network equipment?

Brian E. Shore

No, we don’t have that broken down. They’re all going to the same place. And actually, just so you know, because we’re not being obtuse, when we sell a product to a company, using Cisco as an example, we don’t even know necessarily exactly what kind of end equipment it is. But we know generally the market it’s going into.

Mona Eraiba – TCW

You haven’t seen further deterioration? It says business similar Q3, the first three weeks.

Brian E. Shore

Exactly. I’m just telling you the facts that we know. I guess I would leave it up to you and others to decide how much you want to read into that. But we often report what we know for the first few weeks of the quarter.

Mona Eraiba – TCW

When do you think this French situation is going to be out of your numbers?

Brian E. Shore

I think we reported when we announced the proposed closure, by the way, that it would be treated as a DO if the plan is implemented. It is going to be Q3 or Q4 we suspect.

Mona Eraiba – TCW

So you’re waiting for what, an agreement, to implement the plan? What are you waiting to make it a discontinued operation?

Brian E. Shore

If you ever operate in France you will know that it’s quite difficult and there are many procedures that are required by law they want us to go through. It’s not really agreement so much, but there are a lot of very complicated and time-consuming procedures. We unfortunately had two other restructurings in the same location over the last three or four years so we’re quite familiar with the procedures. This time we’re proposing a closure.

Mona Eraiba – TCW

So you tried to restructure it, that didn’t help that much, so now you’re just shutting it down.

Brian E. Shore

Exaclty. We tried twice and the market kept moving away from us. I mean, it helped, but whatever benefit we got, the market deteriorated further and now it’s at the point where, you know, we’re at critical mass anyway so we didn’t think another structuring.

Mona Eraiba – TCW

Any other benefit out of this when you close it down? Are you going to sell land, sell anything, or is it whatever you get for that you are going to use for compensation and so forth?

Brian E. Shore

I think that when we did our announcement, I think we said $5.0 million to $6.0 million was the estimated charge. That’s a P&L charge. The cash is quite different. We expect the cash might be almost neutral, actually.

Mona Eraiba – TCW

But you don’t have a real estate benefit of selling that.

Brian E. Shore

We do. We own real estate but that is a net number that we have.

Mona Eraiba – TCW

Okay, that’s in this number.

Operator

Your next question comes from Leonard Cooper, a private investor.

Leonard Cooper – Private Investor

I was wondering about the sphere of influence that Park is having, or trying to grow, in the aircraft industry and what progress is being made along those lines.

Brian E. Shore

That’s really a key question for us. And I must say that my feeling, my opinion, is that our sphere of influence, to use your term, is coming along very nicely. We seem to be getting a lot of attention. I mentioned the last time we spoke that we had been asked to quote on probably half a dozen large RFQs for the aircraft industry, which was kind of a new event. We never saw one of those RFQs until just about four or five months ago. So I think that’s an indicator. Of course, I like to see the revenues, I like to see the top line. That’s where it’s a little frustrating for me.

And I think I mentioned before that I am counseled by my counterparts in large aircraft companies that I just need to understand that I have got to be a little patient, that the aircraft industry doesn’t move like the electronics industry. So every now and then I want to bang my head against the wall a little bit, but I think the objective and issues are that our sphere of influence is doing very nicely. And I think that the aircraft companies are recognizing that we have something a little different to bring to the table.

There are a lot of complaints about the supply chain for aircraft being quite weak, under capitalized, immature, unsophisticated. We hear this over and over again. This is what is being told to me and what they are also saying to me is we are very different so they see us as an opportunity so they see us as an opportunity. And then my next question is why don’t we have more business from you yet. Well, that’s the part that takes a long time. That’s the frustrating part for me.

But I do believe that there is a recognition and as I mentioned in my introductory remarks, I’m hoping that the fact that we have a balance sheet and cash will actually widen the gap between Park and some of our competitors in the aircraft supply chain.

Leonard Cooper – Private Investor

I think it’s rather interesting. When I was in engineering, in the 50s, there were reports coming out of aviation research saying that the wing tips should be bent up. It took about 50 years before they started to do that on airliners.

Brian E. Shore

I think you know we’ve done some parts, our composite wing tips, winglets, whatever they call it.

Leonard Cooper – Private Investor

I didn’t know that.

Brian E. Shore

I thought I had mentioned that before, but that’s one of the things we’ve done. Even with the small operation we have and with Washington.

Operator

Your next question is a follow up from Sean Hannan with Needham & Company.

Sean Hannan – Needham & Company

So this is on a separate topic but there is another materials company out there, Izola, that has begun to initiate a couple of IP protection suits basically towards some Asian players. In looking at your offering and some of the efforts that Izola is starting to move forward with in their protection, is this anything that you’ve looked into in terms of something to be concerned about and looking into the line a little bit more specifically?

Brian E. Shore

I don’t think you should be too concerned about it. We know the people at Izola pretty well and I think we have good relations with them. And let it suffice to say we’ve had our little informal discussions in which were very friendly in nature. It’s interesting what they’re doing and more power to them and I hope they do well, I wish them well.

I could be wrong, but from everything I know I wouldn’t recommend you get too concerned about that. For Park.

Operator

There are no further questions.

Brian E. Shore

Thank you all for listening on this very difficult day, very difficult time. Hopefully the next time we speak there will be a little more clarity as to the condition of the world, better, worse, or indifferent. A little more clarity, anyway. But thanks for listening, have a good day and feel free to give us a call anytime.

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Source: Park Electrochemical Corp. F2Q09 (Qtr End 08/31/08) Earnings Call Transcript
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