PARK AEROSPACE CORP. General:
Park Aerospace Corp. ("Park" or the "Company") develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. These materials include lightning strike protection materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement ("AFP") manufacturing applications. Park's advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as "drones"), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park's advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park's composite parts and structures (which include Park's proprietary composite SigmaStrutTM and AlphaStrutTM product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft. Financial Overview The Company's total net sales from continuing operations in the 13 weeks and 39 weeks endedNovember 29, 2020 were$10.4 million and$31.8 million , respectively, compared to$15.8 million and$44.5 million , respectively, in the 13 weeks and 39 weeks endedDecember 1, 2019 . The Company's gross profit margins from continuing operations, measured as percentages of sales, were 24.6% and 27.8%, respectively, in the 13 weeks and 39 weeks endedNovember 29, 2020 compared to 31.7% and 30.6%, respectively, in the 13 weeks and 39 weeks endedDecember 1, 2019 . The Company's earnings from continuing operations before income taxes and net earnings from continuing operations decreased 63.7% and 63.0%, respectively, in the 13 weeks endedNovember 29, 2020 compared to the 13 weeks endedDecember 1, 2019 primarily as a result of lower sales and lower interest income, partially offset by lower selling, general and administrative expenses and a lower tax provision compared to last year's comparable period. The Company's earnings from continuing operations before income taxes and net earnings from continuing operations decreased 45.4% and 45.1%, respectively, in the 39 weeks endedNovember 29, 2020 compared to the 39 weeks endedDecember 1, 2019 primarily as a result of lower sales and lower interest income, partially offset by lower selling, general and administrative expenses and a lower tax provision compared to last year's comparable period. The Company has a long-term contract pursuant to which one of its customers, which represents a substantial portion of the Company's revenue, places orders. The long-term contract with the customer is requirements based and does not guarantee quantities. An order forecast and pricing were agreed upon in the contract. However, this order forecast is updated periodically during the term of the contract. Purchase orders generally are received by the Company in excess of three months in advance of delivery by the Company to the customer. 19 -------------------------------------------------------------------------------- InDecember 2019 , a novel strain of coronavirus was reported inWuhan, China and has since spread worldwide, including tothe United States , posing public health risks that have reached pandemic proportions (the "COVID-19 Pandemic"). The COVID-19 Pandemic and resultant global economic crisis had significant impacts on the Company's results of operations and cash flow for the quarter endedNovember 29, 2020 . The COVID-19 Pandemic and crisis had significant impacts on the markets the Company sells into, particularly the commercial and business aircraft markets. As a result, the Company has experienced a significant reduction in sales and backlog.
Even after the COVID-19 Pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of the potential continuing impact of the economic crisis on the markets the Company serves.
Results of Operations:
The following table sets forth the components of the Consolidated Statements of
Operations:
13 Weeks Ended 39 Weeks Ended
(amounts in
thousands,
except per November 29, December 1, % November 29, December 1, %
share amounts) 2020 2019 Change 2020 2019 Change
Net sales $ 10,372 $ 15,847 (35 )% $ 31,835 $ 44,520 (28 )%
Cost of sales 7,819 10,825 (28 )% 22,970 30,881 (26 )%
Gross profit 2,553 5,022 (49 )% 8,865 13,639 (35 )%
Selling,
general and
administrative
expenses 1,536 1,949 (21 )% 4,718 5,785 (18 )%
Earnings from
continuing
operations 1,017 3,073 (67 )% 4,147 7,854 (47 )%
Interest and
other income 389 802 (51 )% 1,570 2,613 (40 )%
Earnings from
continuing
operations
before income
taxes 1,406 3,875 (64 )% 5,717 10,467 (45 )%
Income tax
provision 369 1,069 (65 )% 1,557 2,895 (46 )%
Net earnings
from continuing
operations 1,037 2,806 (63 )% 4,160 7,572 (45 )%
Loss from
discontinued
operations, net
of tax (116 ) (360 ) (68 )% (328 ) (404 ) (19 )%
Net earnings $ 921 $ 2,446 (62 )% $ 3,832 $ 7,168 (47 )%
Earnings (loss)
per share:
Basic:
Continuing
operations $ 0.05 $ 0.14 (64 )% $ 0.20 $ 0.37 (46 )%
Discontinued
operations - (0.02 ) (100 )% (0.01 ) (0.02 ) (50 )%
Basic earnings
per share $ 0.05 $ 0.12 (58 )% $ 0.19 $ 0.35 (46 )%
Diluted:
Continuing
operations $ 0.05 $ 0.14 (64 )% $ 0.20 $ 0.37 (46 )%
Discontinued
operations - (0.02 ) (100 )% (0.01 ) (0.02 ) (50 )%
Diluted
earnings per
share $ 0.05 $ 0.12 (58 )% $ 0.19 $ 0.35 (46 )%
Net Sales
The Company's total net sales from continuing operations worldwide in the 13
weeks and 39 weeks ended November 29, 2020 decreased to $10.4 million and $31.8
million , respectively, from $15.8 million and $44.5 million , respectively, in
the 13 weeks and 39 weeks ended December 1, 2019 . The decrease in sales was
principally due to the lower sales to customers servicing the commercial and
business aircraft markets.
20-------------------------------------------------------------------------------- The sharp decrease in air travel due to the COVID-19 Pandemic has significantly impacted both the commercial airline manufacturers and business aircraft manufacturers. As a result, the Company's customers are experiencing order delays and cancellations from their commercial airline and business aircraft customers. Consequently, the programs the Company's materials feed into have experienced reduced manufacturing rates and the Company has also experienced order push-outs and cancellations. Gross Profit The Company's gross profit from continuing operations in the 13 weeks endedNovember 29, 2020 was lower than its gross profit from continuing operations in the prior year's comparable period. The Company's gross profit from continuing operations as a percentage of sales for the Company's worldwide operations in the 13 weeks endedNovember 29, 2020 decreased to 24.6% from 31.7% in the 13 weeks endedDecember 1, 2019 . The lower gross profit margin from continuing operations for the 13 weeks endedNovember 29, 2020 compared to the 13 weeks endedDecember 1, 2019 was principally a result of lower sales, an unfavorable sales mix and the partially fixed nature of overhead expenses in the 13 weeks endedNovember 29, 2020 compared to the 13 weeks endedDecember 1, 2019 . The Company's gross profit from continuing operations in the 39 weeks endedNovember 29, 2020 was lower than its gross profit from continuing operations in the prior year's comparable period, and gross profit from continuing operations as a percentage of sales of the Company's worldwide operations in the 39 weeks endedNovember 29, 2020 decreased to 27.8% from 30.6%, in the 39 weeks endedDecember 1, 2019 . The lower gross profit margin from continuing operations for the 39 weeks endedNovember 29, 2020 compared to the 39 weeks endedDecember 1, 2019 was principally a result of lower sales, and the partially fixed nature of overhead expenses in the 39 weeks endedNovember 29, 2020 compared to the 39 weeks endedDecember 1, 2019 , partially offset by decreased direct labor and supplies expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations decreased by$413,000 and$1.1 million , respectively, during the 13 weeks and 39 weeks endedNovember 29, 2020 , or by 21.2% and 18.4%, respectively, compared to last fiscal year's comparable periods, and these expenses, measured as a percentage of sales from continuing operations, were 14.8% in both the 13 weeks and 39 weeks endedNovember 29, 2020 compared to 12.3% and 13.0%, respectively, in the 13 weeks and 39 weeks endedDecember 1, 2019 . The decreases in such expenses during the 13 weeks and 39 weeks endedNovember 29, 2020 were primarily the result of lower payroll, travel and entertainment, tradeshow and stock option expenses. Selling, general and administrative expenses from continuing operations included stock option expenses of$49,000 and$142,000 , respectively, for the 13 weeks and 39 weeks endedNovember 29, 2020 compared to stock option expenses of$139,000 and$404,000 , respectively, for the 13 weeks and 39 weeks endedDecember 1, 2019 .
Earnings from Continuing Operations
For the reasons set forth above, the Company's earnings from continuing operations were$1.0 million and$4.1 million , respectively, for the 13 weeks and 39 weeks endedNovember 29, 2020 compared to$3.1 million and$7.9 million , respectively, for the 13 weeks and 39 weeks endedDecember 1, 2019 . 21 --------------------------------------------------------------------------------
Interest and Other Income Interest and other income from continuing operations was$389,000 and$1.6 million , respectively, for the 13 weeks and 39 weeks endedNovember 29, 2020 compared to$802,000 and$2.6 million , respectively, for last fiscal year's comparable periods. Interest income decreased 51.5% and 39.9%, respectively, for the 13 weeks and 39 weeks endedNovember 29, 2020 primarily as a result of lower average balances of marketable securities held by the Company in the 13 weeks and 39 weeks endedNovember 29, 2020 compared to last fiscal year's comparable periods, and lower weighted average interest rates. During the 13 weeks and 39 weeks endedNovember 29, 2020 , the Company earned interest income principally from its investments, which consisted primarily of short-term instruments and money market funds. Income Tax Provision For the 13 weeks and 39 weeks endedNovember 29, 2020 , the Company recorded income tax provisions from continuing operations of$369,000 and$1.6 million , respectively, which included a discrete income tax provision of$126,000 pertaining to the accrual of interest related to unrecognized tax benefits. For the 13 weeks and 39 weeks endedDecember 1, 2019 , the Company recorded income tax provisions from continuing operations of$1.1 million and$2.9 million , respectively, which included a discrete income tax provision of$223,000 pertaining to expired stock options of former employees who transferred to AGC Inc. in the sale of the Company's Electronics Business. The Company's effective tax rates for the 13 weeks and 39 weeks endedNovember 29, 2020 were 26.3% and 27.2%, respectively, compared to 27.6% and 27.7%, respectively, in the comparable prior year periods. The effective tax rates for the 13 weeks and 39 weeks endedNovember 29, 2020 were higher than theU.S. statutory rate of 21% primarily due to state and local taxes and the accrual of interest related to unrecognized tax benefits. The effective tax rates for the 13 weeks and 39 weeks endedDecember 1, 2019 were higher than theU.S. statutory rate of 21% primarily due to state and local taxes, discrete income tax provisions for stock compensation and the accrual of interest related to unrecognized tax benefits.
Net Earnings from Continuing Operations
For the reasons set forth above, the Company's net earnings from continuing operations for the 13 weeks and 39 weeks endedNovember 29, 2020 were$1.0 million and$4.1 million , respectively, compared to net earnings from continuing operations of$2.8 million and$7.6 million , respectively, for the 13 weeks and 39 weeks endedDecember 1, 2019 . Discontinued Operations
On
The operating results of the Electronics Business are classified, together with certain costs related to the transaction, as discontinued operations, net of tax, in the Consolidated Statements of Operations. The Company's net earnings from discontinued operations included costs in connection with the Company's vacated facility inFullerton, California in the 13 weeks and 39 weeks endedNovember 29, 2020 . The Company's net earnings from discontinued operations included expenses pertaining to the sale transaction and costs related to the Company's vacated facility inFullerton, California in the 13 weeks and 39 weeks endedDecember 1, 2019 . 22 --------------------------------------------------------------------------------
Basic and Diluted Earnings Per Share
In the 13 weeks and 39 weeks endedNovember 29, 2020 , basic and diluted earnings per share from continuing operations were$0.05 and$0.20 , respectively. This compared to basic and diluted earnings per share from continuing operations of$0.14 and$0.37 , respectively, in the 13 weeks and 39 weeks endedDecember 1, 2019 . The net impact of the tax benefit described above decreased basic and diluted earnings per share by$0.02 for the 39 weeks endedDecember 1, 2019 .
Liquidity and Capital Resources - Continuing Operations:
(amounts in thousands) November 29, March 1,
2020 2020 Change
Cash and cash equivalents and marketable
securities $ 116,966 $ 122,355 $ (5,389 )
Working capital 126,689 136,487 (9,798 )
39 Weeks Ended
(amounts in thousands) November 29, December 1,
2020 2019 Change
Net cash provided by operating activities
(2,145 ) (60,867 ) 58,722
Net cash used in financing activities (7,758 ) (5,749 ) (2,009 )
Of the$117.0 million of cash and cash equivalents and marketable securities atNovember 29, 2020 ,$29.7 million was owned by one of the Company's wholly owned foreign subsidiaries. The change in cash and cash equivalents and marketable securities atNovember 29, 2020 compared toMarch 1, 2020 was the result of capital expenditures and dividends paid to shareholders partially offset by cash provided by operating activities and a number of additional factors. The significant changes in cash provided by operating activities were as follows:
? accounts receivable decreased by 23% at
2020 primarily due to lower sales in the quarter ended
compared to the fourth quarter of the 2020 fiscal year;
? inventories decreased by 26% at
primarily due to lower sales and the timing of raw material purchases;
? prepaid expenses and other current assets decreased by 31% at
2020 compared to
23
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? accounts payable decreased by 30% at
2020 primarily due to the timing of vendor payments, raw material purchases
from suppliers and lower construction in progress;
? accrued liabilities decreased by 12% at
2020 primarily due to decreases in restructuring accruals and bonus accruals;
and
? income taxes payable increased by 6% at
2020 primarily due to the income tax provision for the 39 weeks ended November
29, 2020.
In addition, the Company paid
Working Capital The decrease in working capital atNovember 29, 2020 compared toMarch 1, 2020 was due principally to the decreases in accounts receivable, inventories, and prepaid expenses and other current assets, an increase in income taxes payable and a decrease in cash and cash equivalents and marketable securities, partially offset by the decrease in accounts payable.
The Company's current ratio (the ratio of current assets to current liabilities)
was 18.6 to 1.0 at
Cash Flows During the 39 weeks endedNovember 29, 2020 , the Company's net earnings, before depreciation and amortization, stock-based compensation, amortization of bond premium and changes in operating assets and liabilities, were$8.6 million . During the same 39-week period, the Company expended$5.3 million for the purchase of property, plant and equipment, compared with$4.4 million during the 39 weeks endedDecember 1, 2019 . The Company paid$6.1 million in cash dividends in each of the 39-week periods endedNovember 29, 2020 andDecember 1, 2019 . Other Liquidity Factors The Company believes its financial resources will be sufficient, through the 12 months following the filing of this Form 10-Q Quarterly Report and for the foreseeable future thereafter, to provide for continued investment in working capital and property, plant and equipment and for general corporate purposes. The Company's financial resources are also available for purchases of the Company's common stock, cash dividend payments, appropriate acquisitions and other expansions of the Company's business, including the expansion inKansas . The Company is not aware of any circumstances or events that are reasonably likely to occur that could materially affect its liquidity. The Company further believes its balance sheet and financial position to be very strong, and the Company believes it is well positioned to not only withstand the impact of the COVID-19 Pandemic on its business, but also to take advantage of the opportunities presented by it. 24 --------------------------------------------------------------------------------
Contractual Obligations: The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of (i) operating lease commitments and (ii) commitments to purchase raw materials. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of$170,000 , to secure the Company's obligations under its workers' compensation insurance program.
Off-Balance Sheet Arrangements:
The Company's liquidity is not dependent on the use of, and the Company is not engaged in, any off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities.
Critical Accounting Policies and Estimates:
The foregoing Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, contingencies and litigation, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates and assumptions and the application of management's judgment are described in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in the Company's Annual Report on Form 10-K for the fiscal year endedMarch 1, 2020 . There have been no significant changes to such accounting policies during the 2021 fiscal year third quarter. Contingencies: The Company is subject to a small number of immaterial proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.
Factors That May Affect Future Results.
Certain portions of this Report which do not relate to historical financial information may be deemed to constitute forward-looking statements that are subject to various factors which could cause actual results to differ materially from the Company's expectations or from results which might be projected, forecasted, estimated or budgeted by the Company in forward-looking statements. Such factors include, but are not limited to, general conditions in the aerospace industry, the Company's competitive position, the status of the Company's relationships with its customers, economic conditions in international markets, the cost and availability of raw materials, transportation and utilities, and the various factors set forth under the caption "Factors That May Affect Future Results" in Item 1 and in Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year endedMarch 1, 2020 . 25
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