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 (“UAV”s 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. The roofs on all three buildings in the Company’s Newton, Kansas campus required repairs or replacement. Also, multiple specialty HVAC units were damaged or destroyed. The Company 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. There were no corresponding charges in the 13 weeks ended June 1, 2025. The Company's total net sales in the 13 weeks ended June 1, 2025 were $15.4 million compared to $14.0 million in the 13 weeks ended June 2, 2024. The increase in sales was primarily due to the impact on 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. The Company’s gross profit margins, measured as percentages of sales, were 30.6% in the 13 weeks ended June 1, 2025 compared to 29.3% in the 13 weeks ended June 2, 2024. The higher gross profit margin for the 13 weeks ended June 1, 2025 was primarily due to higher sales volume in the 13 weeks ended June 1, 2025 noted above and, to a lesser extent, lower waste, partially offset by the costs related to bringing up new manufacturing lines to ramp up capacity in preparation for increases in customer program volumes. The Company’s earnings from operations before income taxes and net earnings increased 102.6% and 109.5%, respectively, in the 13 weeks ended June 1, 2025 compared to the 13 weeks ended June 2, 2024, primarily as a result of the negative impact of the storm damage that occurred in the 13 weeks ended June 2, 2024. The 13 weeks ended June 1, 2025 were also negatively impacted by higher salaries, travel expenses, legal and professional fees and higher labor costs related to higher headcount. 17 The Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses. In addition, the Company has also been impacted by the increase in global tariffs. The impact of inflation and tariffs on the Company’s profits has been largely 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. The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, places orders. Long-term contracts with the Company’s customers are primarily requirements-based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the contract. Purchase orders are generally received by the Company more than three months in advance of delivery. Under a Business Partner Agreement with ArianeGroup SAS of Les Mureaux, France, Park is the exclusive North American distributor of ArianeGroup’s RAYCARB C2®B NG proprietary product. RAYCARB C2®B NG is used to produce ablative composite materials for critical rocketry and missile systems. Park is a long-term customer of ArianeGroup and uses ArianeGroup’s RAYCARB C2®B NG product in the production of many of Park’s key ablative materials, which Park supplies into critical rocket and missile programs. On March 27, 2025, Park and ArianeGroup entered into an agreement under which Park would advance funds to ArianeGroup against future purchases of C2®B product in the total amount in Euros of €4,587,000 payable in three installments in 2025, 2026, and 2027. These advanced funds are to be used to help fund the purchase and installation, by ArianeGroup, of additional manufacturing equipment for ArianeGroup’s production of C2®B product. 18 Results of Operations: The following table sets forth the components of the condensed consolidated statements of operations: 13 Weeks Ended (Amounts in thousands, except per share June 1, June 2, % amounts) 2025 2024 Change Net sales $ 15,400 $ 13,970 10.2 % Cost of sales 10,682 9,871 8.2 % Gross profit 4,718 4,099 15.1 % Selling, general and administrative expenses 2,299 2,017 14.0 % Earnings from operations 2,419 2,082 16.2 % Storm damage charge - (1,052 ) (100.0 )% Interest and other income 355 339 4.7 % Earnings from operations before income taxes 2,774 1,369 102.6 % Income tax provision 694 376 84.6 % Net earnings $ 2,080 $ 993 109.5 % Earnings per share: Basic: Basic earnings per share $ 0.10 $ 0.05 100.0 % Diluted: Diluted earnings per share $ 0.10 $ 0.05 100.0 % Net Sales The Company's total net sales in the 13 weeks ended June 1, 2025 were $15.4 million compared to $14.0 million in the 13 weeks ended June 2, 2024. The increase 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 30.6% in the 13 weeks ended June 1, 2025 compared to 29.3% in the 13 weeks ended June 2, 2024. The higher gross profit margin for the 13 weeks ended June 1, 2025 was primarily due to the negative impact in the prior fiscal year resulting from the storm damage mentioned above and, to a lesser extent, lower waste in the current fiscal year, which was partially offset by the costs related to bringing up the new manufacturing lines to ramp up capacity in preparation for increases in customer program volumes. 19 Selling, General and Administrative Expenses Selling, general and administrative expenses increased compared to the prior year’s comparable period, and these expenses, measured as percentages of sales, were 14.9% in the 13 weeks ended June 1, 2025 compared to 14.4% in the 13 weeks ended June 2, 2024. The increase in selling, general and administrative expenses was primarily due to higher salaries, travel expenses and professional and legal fees in the 13 weeks ended June 1, 2025. Selling, general and administrative expenses included stock option expenses of $88,000 for the 13 weeks ended June 1, 2025, compared to stock option expenses of $89,000 in the 13 weeks ended June 2, 2024. Earnings from Operations For the reasons set forth above, the Company’s earnings from operations were $2.4 million for the 13 weeks ended June 1, 2025 compared to $2.1 million for the 13 weeks ended June 2, 2024. 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 transited the area. None of the Company’s manufacturing lines or equipment were damaged by the storm. The roofs on all three buildings in the Company’s Newton, Kansas campus required repairs. 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 did not lose 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 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 included 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. There were no corresponding charges in fiscal 2026. Interest and Other Income Interest and other income was $355,000 for the 13 weeks ended June 1, 2025, compared to $339,000 for the prior year’s comparable period. Interest income increased 4.7% for the 13 weeks ended June 1, 2025 due to higher returns partially offset by lower invested balances. During the 13 weeks ended June 1, 2025, the Company earned interest income principally from its investments, which consisted primarily of short-term instruments and money market funds. 20 Income Tax Provision For the 13 weeks ended June 1, 2025, the Company recorded an income tax provision of $694,000, which included a discrete income tax benefit of $(28,000) for the excess tax benefits of stock option exercises in the 13 weeks ended June 1, 2025 partially offset by the accrual of interest related to unrecognized tax benefits. 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. The Company’s effective tax rate for the 13 weeks ended June 1, 2025 was 25.0% compared to 27.5% in the prior year’s comparable period. The effective tax rate for the 13 weeks ended June 1, 2025 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes. The effective 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. Net Earnings For the reasons set forth above, the Company’s net earnings for the 13 weeks ended June 1, 2025 were $2.1 million compared to net earnings of $1.0 million for the 13 weeks ended June 2, 2024. Basic and Diluted Earnings Per Share In the 13 weeks ended June 1, 2025, basic and diluted earnings per share were $0.10 compared to basic and diluted earnings per share of $0.05 in the 13 weeks ended June 2, 2024, including the storm damage charge of $1.1 million. Liquidity and Capital Resources: (Amounts in thousands) June 1, March 2, 2025 2022 Change Cash and cash equivalents and marketable securities $ 65,571 $ 68,834 $ (3,263 ) Working capital 77,204 81,033 (3,829 ) 13 Weeks Ended (Amounts in thousands) June 1, June 2, 2025 2024 Change Net cash provided by (used in) operating activities $ 1,590 $ (423 ) $ 2,013 Net cash provided by investing activities 1,999 469 1,530 Net cash used in financing activities (4,586 ) (2,532 ) (2,054 ) 21 Cash and Marketable Securities Of the $65.6 million of cash and cash equivalents and marketable securities at June 1, 2025, $31.4 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 1, 2025 compared to March 2, 2025 was the result of repurchases of treasury shares of $2.2 million in the 13 weeks ended June 1, 2025, a supplier advance of $1.6 million paid in April 2025 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: ● inventories decreased by 6% at June 1, 2025 compared to March 2, 2025 primarily due to the timing of raw material purchases; ● prepaid expenses and other current assets increased by 52% at June 1, 2025 compared to March 2, 2025 primarily due to higher prepaid taxes; ● other assets increased $1.6 million during the 13 weeks ended June 1, 2025 due to a long-term supplier advance paid during the quarter; ● accounts payable decreased by 32% at June 1, 2025 compared to March 2, 2025 primarily due to lower inventory; ● accrued liabilities increased by 22% at June 1, 2025 compared to March 2, 2025 primarily due to higher professional fees and other expenses; and ● income taxes payable increased 25% at June 1, 2025 compared to March 2, 2025 primarily due to earnings in the 13 weeks ended June 1, 2025. In addition, the Company paid $2.5 million in cash dividends in both the 13-week period ended June 1, 2025 and the 13-week period ended June 2, 2024. Working Capital The decrease in working capital at June 1, 2025 compared to March 2, 2025 was due principally to the repurchases of treasury shares of $2.2 million in the 13 weeks ended June 1, 2025, the payment of a long-term advance to a supplier of $1.6 million during the period and lower inventories offset by lower current liabilities at June 1, 2025. The Company's current ratio (the ratio of current assets to current liabilities) was 8.6 to 1.0 at June 1, 2025 compared to 9.7 to 1.0 at March 2, 2025. Cash Flows During the 13 weeks ended June 1, 2025, the Company had operating cash flows of $1.6 million. During the same 13-week period, the Company expended $481,000 for the purchase of property, plant and equipment, compared with $12,000 during the 13 weeks ended June 2, 2024. The Company paid $2.5 million in cash dividends in the 13-week period ended June 1, 2025. 22 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. In March 2025, the Company entered into an agreement with a supplier, ArianeGroup SAS, under which the Company would advance funds against future purchases. The agreement requires payments of €4,587 over three years, of which €1,376 was paid in April 2025 (actual cost of $1,564), €1,834 (approximately $2,127 based on June 24, 2025 exchange rates) is due in the first quarter of fiscal 2027 and €1,376 (approximately $1,596 based on June 24, 2025 exchange rates) is due in the first quarter of fiscal 2028. Under the agreement, the Company commits to purchase C2®B product through December 2033 at an estimated cost of €36,000. 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. 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 2, 2025. There have been no significant changes to such accounting policies during the 2026 fiscal year first quarter. 23 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 2, 2025. Item 3 . Quantitative and Qualitative Disclosures About Market Risk . The Company’s market risk exposure at June 1, 2025 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 2, 2025.