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. Park's advanced composite materials include film adhesives (undergoing qualification) and lightning strike 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 in the 13 weeks and 39 weeks ended
The Company's gross profit margins, measured as percentages of sales, were 32.0% and 31.1%, respectively, in the 13 weeks and 39 weeks endedNovember 27, 2022 compared to 27.7% and 33.4%, respectively, in the 13 weeks and 39 weeks endedNovember 28, 2021 . The higher gross profit margin for the 13 weeks endedNovember 27, 2022 compared to last year's comparable period was primarily due to a favorable sales mix and higher production volumes partially offset by increases in material costs, utility costs, supplier costs, freight costs and other costs due to inflation. The lower gross profit margin for the 39 weeks endedNovember 27, 2022 compared to last year's comparable period was primarily due to a favorable sales mix in the prior year's first quarter and increases in material costs, utility costs, supplier costs, freight costs and other costs due to inflation. The Company's net earnings increased 28% in the 13 weeks endedNovember 27, 2022 compared to the 13 weeks endedNovember 28, 2021 primarily as a result of a favorable sales mix, higher production levels, recovery of a bad debt and higher interest income partially offset by increases in material costs, utility costs, supplier costs, freight costs and other costs due to inflation. The Company's net earnings decreased 7% in the 39 weeks endedNovember 27, 2022 compared to the 39 weeks endedNovember 28, 2021 primarily as a result of a less favorable sales mix and increases in material costs, utility costs, supplier costs, freight costs and other costs due to inflation, partially offset by higher interest income compared to last year's comparable period. Additionally, tax expense was negatively impacted by$153,000 in the 13 weeks and 39 weeks endedNovember 27, 2022 by tax deductions becoming unavailable due to stock options expiring unexercised.
The Company is experiencing inflation in raw material and other costs. The impact of inflation on the Company's profits has been partially mitigated by the Company's ability to adjust pricing for a portion of its sales to pass the impact of inflation through to its customers.
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With the recovery of the aerospace markets, some companies in the aerospace
supply chain may not be fully prepared to ramp up their production as quickly as
needed, which may create a risk to the Company of not getting enough raw
materials on a timely basis to fully support the Company's customers' demands.
Delays in raw material shipments continue to represent a risk to the Company.
Programs that the Company supplies into may also be experiencing supply chain issues from other suppliers to the programs. The Company's sales could be impacted by delays in its customers' production schedules caused by other suppliers in the chain.
The tight labor market has created challenges in hiring personnel. Although the Company feels very positive about its workforce, high wage inflation creates challenges in hiring to add to the Company's employee base and has made recent progress in recruiting new employees. Additionally, the Company has a "Customer Flexibility Program" whereby employees can cross train on different equipment and processes to earn extra pay for attaining the added skills. The war inUkraine has not had a material impact on the Company's results of operations, and it is not expected to have a material impact. The Company does not have any significant customers inRussia orUkraine . The Company continues to evaluate the impact the war inUkraine may have on the Company's customers and on the Company's supply chain. 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. InDecember 2019 , a novel strain of coronavirus was reported inWuhan, China and since spread worldwide, including tothe United States , posing public health risks that 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 13 weeks and 39 weeks endedNovember 27, 2022 andNovember 28, 2021 , respectively. 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 experienced significant reductions in sales and backlog during those periods. The Company continues to experience the impacts related to raw material availability and costs.
Even after the COVID-19 Pandemic subsided, the Company continues to experience adverse impacts to its business as a result of the potential impact of the economic crisis on the markets the Company serves.
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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
share November 27, November 28, % November 27, November 28, %
amounts) 2022 2021 Change 2022 2021 Change
Net sales $ 13,867 $ 13,864 0.0 % $ 40,525 $ 41,076 (1.3 )%
Cost of sales 9,423 10,028 (6.0 )% 27,903 27,357 2.0 %
Gross profit 4,444 3,836 15.8 % 12,622 13,719 (8.0 )%
Selling,
general and
administrative
expenses 1,523 1,593 (4.4 )% 4,888 4,729 3.4 %
Restructuring
charges - 13 0.0 % - 197 0.0 %
Earnings from
operations 2,921 2,230 31.0 % 7,734 8,793 (12.0 )%
Interest and
other income 299 80 273.8 % 653 286 128.3 %
Earnings from
operations
before income
taxes 3,220 2,310 39.4 % 8,387 9,079 (7.6 )%
Income tax
provision 990 569 74.0 % 2,362 2,571 (8.1 )%
Net earnings $ 2,230 $ 1,741 28.1 % $ 6,025 $ 6,508 (7.4 )%
Earnings per
share:
Basic:
Basic earnings
per share $ 0.11 $ 0.09 22 % $ 0.29 $ 0.32 (9 )%
Diluted:
Diluted
earnings per
share $ 0.11 $ 0.08 38 % $ 0.29 $ 0.32 (9 )%
Net Sales
The Company's total net sales worldwide in the 13 weeks and 39 weeks ended
November 27, 2022 were $13.9 million and $40.5 million , respectively, compared
to $13.9 million and $41.1 million , respectively, in the 13 weeks and 39 weeks
ended November 28, 2021 .
Gross Profit
The Company's gross profit in the 13 weeks ended November 27, 2022 was higher
than its gross profit in the prior year's comparable period, and the gross
profit as a percentage of sales for the Company's worldwide operations in the 13
weeks ended November 27, 2022 increased to 32.0% from 27.7% in the 13 weeks
ended November 28, 2021 . The higher gross profit margin for the 13 ended
November 27, 2022 compared to last year's comparable period was primarily due to
a favorable sales mix partially offset by increases in material costs, utility
costs, supplier costs, freight costs and other costs due to inflation.
The Company's gross profit in the 39 weeks ended November 27, 2022 was lower
than its gross profit in the prior year's comparable period, and the gross
profit as percentage of sales for the Company's worldwide operations in the 39
weeks ended November 27, 2022 decreased to 31.1% from 33.4% in the 39 weeks
ended November 28, 2021 . The lower gross profit margin for the 39 weeks ended
November 27, 2022 compared to last year's comparable period was primarily due to
a less favorable sales mix, and increases in material costs, utility costs,
supplier costs, freight costs and other costs due to inflation.
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--------------------------------------------------------------------------------Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by$70,000 during the 13 weeks endedNovember 27, 2022 , or by 4.4%, compared to the prior year's comparable period, and these expenses, measured as percentages of sales, were 11.0% in the 13 weeks endedNovember 27, 2022 compared to 11.5% in the 13 weeks endedNovember 28, 2021 . The decrease were primarily due to recovery of bad debt expense related to a customer bankruptcy. Selling, general and administrative expenses increased by$159,000 during the 39 weeks endedNovember 27, 2022 , or by 3.4%, compared to the prior year's comparable period, and these expenses, measured as percentages of sales, were 12.1% in the 39 weeks endedNovember 27, 2022 compared to 11.5% in the 39 weeks endedNovember 28, 2021 . The increases were primarily due to increased salary expense, travel and entertainment expense and freight out. Selling, general and administrative expenses included stock option expenses of$95,000 and$274,000 , respectively, for the 13 weeks and 39 weeks endedNovember 27, 2022 , compared to stock option expenses of$73,000 and$211,000 , respectively, for the 13 weeks and 39 weeks endedNovember 28, 2021 . Restructuring Charges In the 13 weeks and 39 weeks endedNovember 28, 2021 , the Company recorded no pre-tax restructuring charges in connection with the closure of the Company'sPark Aerospace Technologies Asia Pte. Ltd facility located inSingapore compared to$13,000 and$197,000 , respectively, in the prior year's comparable periods. Earnings from operations For the reasons set forth above, the Company's earnings were$2.9 million and$7.7 million , respectively, for the 13 weeks and 39 weeks endedNovember 27, 2022 compared to$2.2 million and$8.8 million , respectively, for the 13 weeks and 39 weeks endedNovember 28, 2021 . Interest and Other Income Interest and other income were$299,000 and$653,000 , respectively, for the 13 weeks and 39 weeks endedNovember 27, 2022 , compared to$80,000 and$286,000 , respectively, for the prior year's comparable periods. Interest income increased 273.8% and 128.3%, respectively, for the 13 weeks and 39 weeks endedNovember 27, 2022 primarily as a result of weighted average interest rates in the 13 weeks and 39 weeks endedNovember 27, 2022 , compared to the prior year's comparable periods. During the 13 weeks and 39 weeks endedNovember 27, 2022 , 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 27, 2022 , the Company recorded income tax provisions of$990,000 and$2.4 million , respectively, which included discrete income tax provisions of$58,000 and$133,000 , respectively, for the accrual of interest related to unrecognized tax benefits and tax deductions becoming unavailable related to stock options expiring unexercised. Additionally, tax expense was negatively impacted by$153,000 in the 13 weeks and 39 weeks endedNovember 27, 2022 by tax deductions becoming unavailable due to stock options expiring unexercised. For the 13 weeks and 39 weeks endedNovember 28, 2021 , the Company recorded income tax provisions of$569,000 and$2.6 million , respectively, which included discrete income tax provisions of$5,000 and$175,000 , respectively, for the write-off of deferred tax assets and liabilities related to a change in the tax filing basis of the Company'sSingapore entity and the accrual of interest related to unrecognized tax benefits. 20
-------------------------------------------------------------------------------- The Company's effective tax rates for the 13 weeks and 39 weeks endedNovember 27, 2022 were 30.7% and 28.2%, respectively, compared to 24.6% and 28.3%, respectively, in the prior year's comparable periods. The effective tax rates for the 13 weeks and 39 weeks endedNovember 27, 2022 were higher than theU.S. statutory rate of 21% primarily due to state and local taxes and liabilities, the accrual of interest related to unrecognized tax benefits and the tax deductions becoming unavailable due to stock options expiring unexercised . The effective rates for the 13 weeks and 39 weeks endedNovember 28, 2021 were higher than theU.S. statutory rate of 21% primarily due to state and local taxes, the write-off of deferred tax assets and the accrual of interest related to unrecognized tax benefits. Net Earnings
For the reasons set forth above, the Company's net earnings for the 13 weeks and
39 weeks ended
Basic and Diluted Earnings Per Share
In the 13 weeks and 39 weeks endedNovember 27, 2022 , basic and diluted earnings per share were$0.11 and$0.29 , respectively, compared to basic and diluted earnings per share of$0.08 and$0.09 , respectively, in the 13 weeks endedNovember 28, 2021 and basic and diluted earnings per share of$0.32 in the 39 weeks endedNovember 28, 2021 .
Liquidity and Capital Resources - Continuing Operations:
(amounts in thousands) November 27, February 27,
2022 2022 Change
Cash and cash equivalents and
marketable securities $ 103,303 $ 110,361 $ (7,058 )
Working capital 116,958 120,147 (3,189 )
39 Weeks Ended
(amounts in thousands) November 27, November 28,
2022 2021 Change
Net cash provided by operating
activities $ 2,134 $ 3,256 $ (1,122 )
Net cash used in investing
activities (4,335 ) (25,505 ) 21,170
Net cash used in
financing activities (6,000 ) (5,386 ) (614 )
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Of the$103.3 million of cash and cash equivalents and marketable securities atNovember 27, 2022 ,$28.0 million was owned by one of the Company's wholly owned foreign subsidiaries. The change in cash and cash equivalents and marketable securities atNovember 27, 2022 compared toFebruary 27, 2022 was the result of capital expenditures, dividends paid to shareholders and cash used in operating activities and a number of additional factors. The significant change in cash used in operating activities were as follows:
? accounts receivable increased by 7% at
27, 2022 primarily due to timing of sales;
? inventories increased by 46% at
2022 primarily due to timing of raw materials purchases;
? prepaid and other current assets increased by 38% at November 27, 2022
compared to
prepaid insurances;
? accounts payable decreased by 7% at
2022 primarily due to timing of vendor payments;
? accrued liabilities decreased by 15% at
27, 2022 primarily due to decreases in bonus and profit sharing accruals; and
? Income taxes payable decreased by 20% atNovember 27, 2022 compared toFebruary 27, 2022 due to the recorded tax provision.
In addition, the Company paid
Working Capital The decrease in working capital atNovember 27, 2022 compared toFebruary 27, 2022 was due principally to the decrease in cash and cash equivalents and marketable securities, partially offset by increases in accounts receivable, inventories and prepaid and other current assets, and decreases in accounts payable, accrued liabilities and income taxes payable. The Company's current ratio (the ratio of current assets to current liabilities) was 19.4 to 1.0 atNovember 27, 2022 compared to 20.1 to 1.0 atFebruary 27, 2022 . Cash Flows During the 39 weeks endedNovember 27, 2022 , the Company's net loss, before depreciation and amortization, deferred income taxes, stock-based compensation, amortization of bond premium and changes in operating assets and liabilities, was$2.1 million . During the same 39-week period, the Company expended$749,000 for the purchase of property, plant and equipment, compared with$3.6 million during the 39 weeks endedNovember 28, 2021 . The Company paid$6.1 million in cash dividends in each of the 39-week periods endedNovember 27, 2022 andNovember 28, 2021 . 22
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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.
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$140,000 , 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 US GAAP. 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 endedFebruary 27, 2022 . There have been no significant changes to such accounting policies during the 2023 fiscal year third quarter. 23
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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 endedFebruary 27, 2022 .
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