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 (Aeroadhere®) and lightning strike protection materials (Electroglide®). 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 SigmaStrut TM and AlphaStrut 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, the roofs on two of the three buildings in the Company’s Newton, Kansas campus will need significant repairs and the roof on one building will 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 to remediate the damage. Although the Company is still in the process of remediating the damage, 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 26 weeks ended September 1, 2024 related to the damage and related repair and downtime costs. The Company's net sales in the 13 weeks and 26 weeks ended September 1, 2024 were $16.7 million and $30.7 million, respectively, compared to $12.5 million and $28.0 million, respectively, in the 13 weeks and 26 weeks ended August 27, 2023. Sales for the 13 weeks and 26 weeks ended September 1, 2024 were higher than in the comparable periods of the prior fiscal year due to higher sales to the commercial aerospace and military markets. 18 The Company’s gross profit in the 13 weeks ended September 1, 2024 was higher than the gross profit in the prior year’s comparable period due to higher sales levels in the 13 weeks ended September 1, 2024 compared to the comparable period in the prior year partially offset by a less favorable product mix, higher depreciation, repairs and maintenance and utilities related to the use of a new production line, and higher costs for raw materials, supplies, freight and labor resulting from inflationary trends. The Company’s gross profit in the 26 weeks ended September 1, 2024 was similar to the gross profit in the prior year’s comparable period despite higher sales levels primarily due to a less favorable sales mix and the higher costs mentioned above. The Company’s gross profit margins, measured as percentages of sales, were 28.5% and 28.9%, respectively, in the 13 weeks and 26 weeks ended September 1, 2024 compared to 32.7% and 31.8%, respectively, in the 13 weeks and 26 weeks ended August 27, 2023. The lower gross profit margins for the 13 and 26 weeks ended September 1, 2024 compared to the prior year’s comparable periods were primarily due to ramping up capacity ahead of customer program volume increases, a less favorable sales mix due to fabric sales, higher depreciation, repairs and maintenance and utilities related to use of the new production line, and higher costs for raw materials, supplies, freight and labor resulting from inflationary trends, partially offset by higher sales. The Company’s earnings before income taxes and net earnings increased 19.1% and 18.3%, respectively, in the 13 weeks ended September 1, 2024, compared to the 13 weeks ended August 27, 2023, primarily as a result of higher sales, partially offset by an unfavorable sales mix due to higher fabric sales and the higher costs mentioned above. The Company’s earnings before income taxes and net earnings decreased 14.7% and 15.0%, respectively, in the 26 weeks ended September 1, 2024, compared to the 26 weeks ended August 27, 2023, primarily as a result of charges incurred related to the storm damage and the higher costs mentioned above, partially offset by higher sales. 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. 19 Results of Operations: The following table sets forth the components of the consolidated statements of operations: 13 Weeks Ended 26 Weeks Ended (Amounts in thousands, except per share amounts) September 1, 2024 August 27, 2023 % Change September 1, 2024 August 27, 2023 % Change Net sales $ 16,709 $ 12,481 33.9 % $ 30,679 $ 28,032 9.4 % Cost of sales 11,952 8,402 42.3 % 21,823 19,120 14.1 % Gross profit 4,757 4,079 16.6 % 8,856 8,912 (0.6 )% Selling, general and administrative expenses 2,140 1,853 15.5 % 4,157 4,468 (7.0 )% Earnings from operations 2,617 2,226 17.6 % 4,699 4,444 5.7 % Storm damage charge (46 ) - 100.0 % (1,098 ) - 100.0 % Interest and other income 245 139 76.3 % 584 463 26.1 % Earnings from operations before income taxes 2,816 2,365 19.1 % 4,185 4,907 (14.7 )% Income tax provision (Note 9) 750 619 21.2 % 1,126 1,307 (13.8 )% Net earnings $ 2,066 $ 1,746 18.3 % $ 3,059 $ 3,600 (15.0 )% Earnings per share: Basic: Basic earnings per share $ 0.10 $ 0.09 11.1 % $ 0.15 $ 0.18 (16.7 )% Diluted: Diluted earnings per share $ 0.10 $ 0.09 11.1 % $ 0.15 $ 0.18 (16.7 )% Net Sales The Company's net sales in the 13 weeks and 26 weeks ended September 1, 2024, were $16.7 million and $30.7 million, respectively, compared to $12.5 million and $28.0 million, respectively, in the 13 weeks and 26 weeks ended August 27, 2023. Sales for the 13 weeks and 26 weeks ended September 1, 2024 were higher than the comparable periods of the prior year, primarily due to higher sales to the commercial aerospace and military markets. Gross Profit The Company’s gross profit in the 13 weeks ended September 1, 2024 was higher than the gross profit in the prior year’s comparable period due to higher sales levels in the 13 weeks ended September 1, 2024, compared to the comparable period in the prior year partially offset by a less favorable product mix, due to higher fabric sales, higher depreciation, repairs and maintenance and utilities related to use of the new production line, and higher costs for raw materials, supplies, freight and labor resulting from inflationary trends. The Company’s gross profit in the 26 weeks ended September 1, 2024 was similar to the gross profit in the prior year’s comparable period despite higher sales levels primarily due to a less favorable sales mix, due to higher fabric sales, and the higher costs mentioned above. The Company’s gross profit margins, measured as a percentage of sales, were 28.5% and 28.9%, respectively, in the 13 weeks and 26 weeks ended September 1, 2024, compared to 32.7% and 31.8%, respectively, in the 13 weeks and 26 weeks ended August 27, 2023. The lower gross profit margins for the 13 and 26 weeks ended September 1, 2024, compared to the prior year’s comparable periods were primarily due to ramping up capacity ahead of customer program volume increases, to a less favorable sales mix, due to higher fabric sales, higher depreciation, repairs and maintenance and utilities related to the use of the new production line, and higher costs for raw materials, supplies, freight and labor resulting from inflationary trends, partially offset by higher sales. 20 Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $287,000 during the 13 weeks ended September 1, 2024, and increased by 15.5% compared to the prior year’s comparable period, and these expenses, measured as percentages of sales, were 12.8% in the 13 weeks ended September 1, 2024 compared to 14.8% in the 13 weeks ended August 27, 2023. The increase in selling, general and administrative expenses during the 13 weeks ended September 1, 2024 was primarily due to freight out, advertising and tradeshow expense, higher salaries and payroll related expenses and higher profit sharing expense mainly due to higher headcount in connection with ramping up capacity in preparation of increases in customer program volumes. Selling, general and administrative expenses decreased by $311,000 during the 26 weeks ended September 1, 2024, and decreased by 7.0% compared to the prior year’s comparable period, and these expenses, measured as a percentage of sales, were 13.5% in the 26 weeks ended September 1, 2024 compared to 15.9% in the 26 weeks ended August 27, 2023. The decrease in selling, general and administrative expenses during the 26 weeks ended September 1, 2024 was primarily due to $570,000 of activist shareholder defense costs in the prior year comparable period. Selling, general and administrative expenses included stock option expenses of $101,000 and $190,000, respectively, for the 13 weeks and 26 weeks ended September 1, 2024, compared to stock option expenses of $104,000 and $322,000, including $109,000 due to the modification of previously granted stock options, respectively, for the 13 weeks and 26 weeks ended August 27, 2023. Earnings from Operations For the reasons set forth above, the Company’s earnings from operations were $2.6 million and $4.7 million, respectively, for the 13 weeks and 26 weeks ended September 1, 2024, compared to $2.2 million and $4.4 million, respectively, for the 13 weeks and 26 weeks ended August 27, 2023. Interest and Other Income Interest and other income were $245,000 and $584,000, respectively, for the 13 weeks and 26 weeks ended September 1, 2024, compared to $139,000 and $463,000, respectively, for the prior year's comparable periods. Interest income increased 76.3% and 26.1%, respectively, for the 13 weeks and 26 weeks ended September 1, 2024, primarily as a result of higher weighted average interest rates and lower losses on the sales of marketable securities, compared to the prior year's comparable periods. During the 13 weeks and 26 weeks ended September 1, 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 and 26 weeks ended September 1, 2024, the Company recorded income tax provisions of $750,000 and $1.1 million, respectively, which included discrete income tax provisions of $22,000 and $41,000, respectively, for the accrual of interest related to unrecognized tax benefits. For the 13 weeks and 26 weeks ended August 27, 2023, the Company recorded income tax provisions of $619,000 and $1.3 million, respectively, which included discrete income tax provisions of $16,000 and $53,000, respectively, for the accrual of interest related to unrecognized tax benefits. 21 The Company’s effective tax rates for the 13 weeks and 26 weeks ended September 1, 2024 were 26.6% and 26.9%, respectively, compared to 26.2% and 26.6%, respectively, in the prior year’s comparable periods. The effective tax rates for the 13 weeks and 26 weeks ended September 1, 2024 were higher than the U.S. statutory rate of 21% primarily due to state and local taxes and liabilities and the accrual of interest related to unrecognized tax benefits. The effective rates for the 13 weeks and 26 weeks ended August 27, 2023 were 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 and 26 weeks ended September 1, 2024 were $2.1 million and $3.1 million, respectively, compared to net earnings of $1.7 million and $3.6 million, respectively, for the 13 weeks and 26 weeks ended August 27, 2023. Basic and Diluted Earnings Per Share In the 13 weeks and 26 weeks ended September 1, 2024, basic and diluted earnings per share were $0.10 and $0.15, respectively, compared to basic and diluted earnings per share of $0.09 and $0.18, respectively, in the 13 weeks and 26 weeks ended August 27, 2023. Liquidity and Capital Resources - Continuing Operations: (Amounts in thousands) September 1, March 3, 2024 2024 Change Cash and cash equivalents and marketable securities $ 71,984 $ 77,211 $ (5,227 ) Working capital 82,818 89,187 (6,369 ) 26 Weeks Ended (Amounts in thousands) September 1, August 27, 2024 2023 Change Net cash provided by (used in) operating activities $ 1,023 $ (2,645 ) $ 3,668 Net cash provided by (used in) investing activities 7,489 34,212 (26,723 ) Net cash used in financing activities (6,926 ) (28,441 ) 21,515 Cash and Marketable Securities Of the $72.0 million of cash and cash equivalents and marketable securities at September 1, 2024, $30.4 million was owned by one of the Company’s wholly-owned foreign subsidiaries. 22 The change in cash and cash equivalents and marketable securities at September 1, 2024 compared to March 3, 2024 was the result of capital expenditures, the purchase of treasury shares, dividends paid to shareholders, the Company’s transition tax installment payment, and a number of additional factors. The significant changes in cash provided by (used in) operating activities was as follows: ● accounts receivable decreased by 12% at September 1, 2024 compared to March 3, 2024 primarily due to timing of sales; ● inventories increased by 19% at September 1, 2024 compared to March 3, 2024 primarily due to timing of raw materials purchases; ● prepaid and other current assets decreased by 12% at September 1, 2024 compared to March 3, 2024 primarily due to lower prepaid tax balances; ● accounts payable increased by 5% at September 1, 2024 compared to March 3, 2024 primarily due to timing of vendor payments; ● accrued liabilities decreased by 32% at September 1, 2024 compared to March 3, 2024 primarily due to decreases in bonus, profit sharing, and property tax accruals; and ● income taxes payable decreased by 45% at September 1, 2024 compared to March 3, 2024 due to the payment of a $4.2 million transition tax installment payment in June 2024. In addition, the Company paid $5.1 million in cash dividends in the 26-week period ended September 1, 2024 compared to $25.6 million in the 26-week period ended August 27, 2023. The amount paid during the 26-week period ended August 27, 2023 included a $20.5 million special dividend. Working Capital The decrease in working capital at September 1, 2024 compared to March 3, 2024 was due principally to the decreases in marketable securities, accounts receivable and prepaid and other current assets and increased income taxes payable, partially offset by an increase in inventories and decreases in accrued liabilities. The Company's current ratio (the ratio of current assets to current liabilities) was 9.1 to 1.0 at September 1, 2024, compared to 10.2 to 1.0 at March 3, 2024. Cash Flows During the 26 weeks ended September 1, 2024, the Company's net earnings, adjusted for depreciation and amortization, deferred income taxes, stock-based compensation, amortization of bond premium and changes in operating assets and liabilities, resulted in a $1.0 million operating cash inflow. During the same 26-week period, the Company expended $206,000 for the purchase of property, plant and equipment, compared with $374,000 during the 26 weeks ended August 27, 2023. The Company paid $5.1 million in cash dividends in the 26-week period ended September 1, 2024, compared to $25.6 million in the 26-week period ended August 27, 2023. The Company purchased treasury shares of $1.9 million in the 26-week period ended September 1, 2024 compared to $2.9 million in the 26-week period ended August 27, 2023. 23 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, and 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 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 credit losses, 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 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 second 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. 24 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 September 1, 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.