PARK AEROSPACE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 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 and 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 Sigma Strut TM and Alpha Strut TM product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft. Financial Overview On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which transitioned the area. None of the Company’s manufacturing lines or equipment were damaged by the storm. Although the building structures are secure, it is likely that the roofs on all three buildings in the Company’s Newton, Kansas campus will ultimately need to be replaced. Also, multiple specialty HVAC units were damaged or destroyed. These specialty HVAC units are necessary to control the temperature and humidity in certain manufacturing areas, quality laboratories and R&D laboratories, as required by certain specifications and certifications the Company is subject to. The Company is currently working with multiple contractors on site in order to fully assess the damage and the remediation options. Although the Company is still in the process of assessing the situation, the Company’s production lines are all fully operational. The Company is employing certain temporary measures in order to keep its production lines operating at full service, including the use of temporary HVAC equipment, but it will take the Company several months to permanently repair or replace all the damaged facilities and infrastructure equipment. The Company has recorded a charge of $1.1 million in the 13 weeks ended June 2, 2024 related to the damage and related repair and downtime costs. The Company's total net sales in the 13 weeks ended June 2, 2024 were $14.0 million compared to $15.6 million in the 13 weeks ended May 28, 2023. The decrease in sales was primarily due to disruptions in production and shipping resulting from the storm damage that occurred late in the first quarter of the 2025 fiscal year. The Company expected to have an additional $1.8 million in sales in the 13 weeks ended June 2, 2024 that did not ship due to the disruption in operations resulting from the storm. 16 The Company’s gross profit margins, measured as percentages of sales, were 29.3% in the 13 weeks ended June 2, 2024 compared to 31.1% in the 13 weeks ended May 28, 2023. The lower gross profit margin for the 13 weeks ended June 2, 2024 was primarily due to lower sales volume resulting from the storm mentioned above and to, among other things, a higher depreciation expense and higher salaries and higher labor costs related to higher headcount. The Company’s earnings from operations before income taxes and net earnings decreased 46.1% and 46.4%, respectively, in the 13 weeks ended June 2, 2024 compared to the 13 weeks ended May 28, 2023, primarily as a result of lower sales due to the storm and the charge recorded for the storm damage that occurred in the 13 weeks ended June 2, 2024. The 13 weeks ended June 2, 2024 were also impacted by a higher depreciation expense and higher salaries and higher labor costs related to higher headcount. The 13 weeks ended May 28, 2023 included $65,000 of losses on sales of investments to fund the $1.00 per share special cash dividend paid on April 6, 2023 to shareholders of record on March 9, 2023, additional stock option expense of $109,000 due to the modification of previously granted stock options in connection with the special cash dividend mentioned above and $570,000 of activist shareholder defense costs. The Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses. The impact of inflation on the Company’s profits has been partially mitigated by the Company’s ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers. Programs in which the Company participates as a supplier are, in some cases, experiencing supply chain issues from other suppliers to the programs that could result in delays in production for certain customers of the Company. The Company’s sales may be impacted by these supply chain challenges its customers are experiencing from other suppliers. While the wars in Ukraine and the Middle East have had a negative impact on the Company’s results of operations due to delayed shipments, the Company may experience an increase in future sales due to increases in spending worldwide on missile defense systems and other defense programs. The Company does not have any significant customers in Russia or Ukraine but does have customers in Israel. The Company has experienced some increases in raw material costs from overseas suppliers due to the impacts of the wars in Ukraine and the Middle East. 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. 17 Results of Operations: The following table sets forth the components of the consolidated statements of operations: 13 Weeks Ended (Amounts in thousands, except per share amounts) June 2, 2024 May 28, 2023 % Change Net sales $ 13,970 $ 15,551 (10.2 )% Cost of sales 9,871 10,718 (7.9 )% Gross profit 4,099 4,833 (15.2 )% Selling, general and administrative expenses 2,017 2,615 (22.9 )% Earnings from operations 2,082 2,218 (6.1 )% Storm damage charge (1,052 ) - (100.0 )% Interest and other income 339 324 4.6 % Earnings from operations before income taxes 1,369 2,542 (46.1 )% Income tax provision 376 688 (45.3 )% Net earnings $ 993 $ 1,854 (46.4 )% Earnings per share: Basic: Basic earnings per share $ 0.05 $ 0.09 (44.4 )% Diluted: Diluted earnings per share $ 0.05 $ 0.09 (44.4 )% Net Sales The Company's total net sales in the 13 weeks ended June 2, 2024 were $14.0 million compared to $15.6 million in the 13 weeks ended May 28, 2023. The decrease in sales was primarily due to disruptions in production and shipping resulting from the storm damage that occurred late in the first quarter of fiscal year 2025. The Company expected to have an additional $1.8 million in sales in the 13 weeks ended June 2, 2024 that did not ship due to the disruption in operations resulting from the storm. Gross Profit The Company’s gross profit margins, measured as percentages of sales, were 29.3% in the 13 weeks ended June 2, 2024 compared to 31.1% in the 13 weeks ended May 28, 2023. The lower gross profit margin for the 13 weeks ended June 2, 2024 was primarily due to lower sales volume resulting from the storm damage mentioned above and to higher costs for raw materials, supplies and freight resulting from inflationary trends, higher depreciation expense and higher salaries and labor due to higher headcount. Selling, General and Administrative Expenses Selling, general and administrative expenses were lower compared to the prior year’s comparable period, and these expenses, measured as percentages of sales, were 14.4% in the 13 weeks ended June 2, 2024 compared to 16.8% in the 13 weeks ended May 28, 2023. The decrease in selling, general and administrative expenses was primarily due to $570,000 of activist shareholder defense costs included in the 13 weeks ended May 28, 2023. Selling, general and administrative expenses included stock option expenses of $89,000 for the 13 weeks ended June 2, 2024, compared to stock option expenses of $218,000, including $109,000 due to the modification of previously granted stock options in the 13 weeks ended May 28, 2023. 18 Earnings from Operations For the reasons set forth above, the Company’s earnings from operations were $2.1 million for the 13 weeks ended June 2, 2024 compared to $2.2 million for the 13 weeks ended May 28, 2023. Storm Damage The Company recorded a charge of $1.1 million for storm damage in the 13 weeks ended June 2, 2024. On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which transitioned the area. None of the Company’s manufacturing lines or equipment were damaged by the storm. Although the building structures are secure, the roofs on all three buildings in the Company’s Newton, Kansas campus will ultimately need to be replaced. Also, multiple specialty HVAC units were damaged or destroyed. These specialty HVAC units are necessary to control the temperature and humidity in certain manufacturing areas, quality laboratories and R&D laboratories, as required by certain specifications and certifications the Company is subject to. The Company is currently working with multiple contractors on site and the insurance company in order to fully assess the damage and the remediation options. Although the Company is still in the process of assessing the situation, the Company’s production lines were returned to full production within two weeks of the storm. The Company is employing certain temporary measures in order to return its production lines operating at full service, including the use of temporary HVAC equipment, but it will take the Company several months to permanently repair or replace all of the damaged facilities and infrastructure equipment. The Company does not anticipate the loss of any sales for the 2025 fiscal year, however, $1.8 million of sales could not be delivered before the end of the first quarter ended June 2, 2024 due to storm related delays. The Company expects these delayed shipments will be delivered during the Company’s second quarter ended September 1, 2024. The Company paid its employees for the days immediately following the storm despite many not being able to work while others worked on the clean-up of the storm damage to the facilities. The Company incurred $78,000 of payroll and related costs for lost production time and employees working on the clean-up. The $1.1 million charge recorded by the Company includes an asset damage charge, emergency services by outside contractors, rental of temporary HVAC units and the cost of employee downtime or time spent on the clean-up of the storm damage to the facilities. Additional costs will be recorded in future periods as additional work is needed and performed and for on-going rental of temporary HVAC units. The Company has insurance coverage for wind damage with a deductible of approximately $2.5 million. Under the insurance policy, the Company expects to recover all costs and damages incurred in excess of the deductible. The costs will be in part based on replacement costs, which will be in excess of the charge. 19 Interest and Other Income Interest and other income was $339,000 for the 13 weeks ended June 2, 2024, compared to $324,000 for the prior year’s comparable period. Interest income increased 4.6% for the 13 weeks ended June 2, 2024. Interest and other income for the 13 weeks ended May 28, 2023 included $65,000 of losses on sales of investments to fund the $1.00 per share special cash dividend paid on April 6, 2023 to shareholders of record on March 9, 2023. During the 13 weeks ended June 2, 2024, 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 ended June 2, 2024, the Company recorded an income tax provision of $376,000, which included a discrete income tax provision of $19,000 for the accrual of interest related to unrecognized tax benefits. For the 13 weeks ended May 28, 2023, the Company recorded an income tax provision of $688,000, which included a discrete income tax provision of $37,000 for the accrual of interest related to unrecognized tax benefits. The Company’s effective tax rate for the 13 weeks ended June 2, 2024 was 27.5% compared to 27.1% in the prior year’s comparable period. The effective tax rate for the 13 weeks ended June 2, 2024 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes and the accrual of interest related to unrecognized tax benefits. The effective rate for the 13 weeks ended May 28, 2023 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes 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 ended June 2, 2024 were $1.0 million compared to net earnings of $1.9 million for the 13 weeks ended May 28, 2023. Basic and Diluted Earnings Per Share In the 13 weeks ended June 2, 2024, basic and diluted earnings per share were $0.05, including the storm damage charge of $1.1 million, compared to basic and diluted earnings per share of $0.09 in the 13 weeks ended May 28, 2023, including the pretax charges of $570,000 related to activist shareholder defense costs, the stock option modification pretax charge of $109,000 and the $65,000 of losses on sales of investments to fund the special cash dividend. Liquidity and Capital Resources: (Amounts in thousands) June 2, March 3, 2024 2024 Change Cash and cash equivalents and marketable securities $ 74,418 $ 77,211 $ (2,793 ) Working capital 89,359 89,187 172 20 13 Weeks Ended (Amounts in thousands) June 2, May 28, 2024 2023 Change Net cash (used in) provided by operating activities $ (423 ) $ 117 $ (540 ) Net cash provided by investing activities 469 26,181 (25,712 ) Net cash used in financing activities (2,532 ) (24,699 ) 22,167 Cash and Marketable Securities Of the $74.4 million of cash and cash equivalents and marketable securities at June 2, 2024, $28.9 million was owned by one of the Company’s wholly-owned foreign subsidiaries. The change in cash and cash equivalents and marketable securities at June 2, 2024 compared to March 3, 2024 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 8% at June 2, 2024 compared to March 3, 2024 primarily due to the timing of sales; ● inventories increased by 30% at June 2, 2024 compared to March 3, 2024 primarily due to the timing of raw material purchases; ● prepaid expenses and other current assets increased by 12% at June 2, 2024 compared to March 3, 2024 primarily due to increases in marketable securities; ● accounts payable decreased by 37% at June 2, 2024 compared to March 3, 2024 primarily due to the timing of vendor payments; and ● accrued liabilities decreased by 24% at June 2, 2024 compared to March 3, 2024 primarily due to accrual of expenses related to the activist shareholder defense costs. In addition, the Company paid $2.5 million in cash dividends in the 13-week period ended June 2, 2024 and $23.0 million in cash dividends in the 13-week period ended May 28, 2023. Working Capital The increase in working capital at June 2, 2024 compared to March 3, 2024 was due principally to the increases in inventories and prepaid expenses and other current assets and a decrease in accounts payable and accrued liabilities partially offset by decreases in cash and cash equivalents and accounts receivable and a decrease in income taxes payable. The Company's current ratio (the ratio of current assets to current liabilities) was 12.3 to 1.0 at June 2, 2024 compared to 10.2 to 1.0 at March 3, 2024. 21 Cash Flows During the 13 weeks ended June 2, 2024, the Company had a negative operating cash flow of $423,000. During the same 13-week period, the Company expended $12,000 for the purchase of property, plant and equipment, compared with $167,000 during the 13 weeks ended May 28, 2023. The Company paid $2.5 million in cash dividends in the 13-week period ended June 2, 2024. 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. 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 Condensed Consolidated Financial Statements, which have been prepared in accordance with US GAAP. The preparation of these Condensed 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. 22 The Company’s critical accounting policies that are important to the Condensed 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 ended March 3, 2024. There have been no significant changes to such accounting policies during the 2025 fiscal year first 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 accrual required, if any, for these contingencies is made after careful analysis of each individual issue. The required accrual 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 ended March 3, 2024. Item 3 . Quantitative and Qualitative Disclosures About Market Risk . The Company’s market risk exposure at June 2, 2024 is consistent with, and not greater than, the types of market risk and amount of exposures presented in the Annual Report on Form 10-K for the fiscal year ended March 3, 2024.