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 The Company's total net sales in the 13 weeks ended May 31, 2026 were $18.3 million compared to $15.4 million in the 13 weeks ended June 1, 2025. The increase in sales was due to higher sales in the commercial market driven by higher sales under the GE Aerospace jet engine programs and higher sales in the military market. The Company’s gross profit margins, measured as percentages of sales, were 34.8% in the 13 weeks ended May 31, 2026 compared to 30.6% in the 13 weeks ended June 1, 2025. The higher gross profit margin for the 13 weeks ended May 31, 2026 was primarily due to the higher sales volume in the quarter which allowed for improved leverage of fixed overhead costs and a more favorable product mix. The Company’s earnings from operations before income taxes and net earnings increased 73.1% and 69.9%, respectively, in the 13 weeks ended May 31, 2026 compared to the 13 weeks ended June 1, 2025, primarily as a result of the higher gross margins in the 13 weeks ended May 31, 2026 and higher interest income in the 13 weeks ended May 31, 2026 partially offset by higher selling, general and administrative expenses. While the Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses, the impact of this has been largely mitigated by the Company’s ability to adjust pricing for a large portion of its sales. The impact of global tariffs has been minimal and been largely mitigated by the Company’s ability to adjust pricing of its products. 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 affected by supply chain challenges experienced by its customers as a result of delays involving other suppliers. 16 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, place 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 (“ArianeGroup”), ArianeGroup SAS appointed Park as its 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 aggregate amount in Euros of €4,587,000 payable in three installments in 2025, 2026, and 2027. The Company has made the 2025 and 2026 advances while the 2027 advance will be made in the first quarter of fiscal year 2028. These advanced funds are being used to help fund the purchase and installation, by ArianeGroup, of additional manufacturing equipment for ArianeGroup’s production of C2®B product. In July 2026, the Company entered into a sublease agreement covering approximately 18 acres of total land in Tulsa, Oklahoma. The Company plans to build a new composites material manufacturing and development facility on the site. The facility will include full production lab facilities, office space, storage and freezer space and ancillary equipment necessary to support all planned manufacturing operations. The sublease commences on September 1, 2026, and has an initial term of 25 years with a renewal option for an additional 25 years. Annual rent under the sublease agreement for the initial five years of the sublease would be $269,469 with increases for each subsequent five-year period based upon the Consumer Price Index for All Urban Consumers, U.S., City Average All Items as published by the United States Department of Commerce. The Company expects economic development incentives to offset a significant portion of the rent expense. Results of Operations: The following table sets forth the components of the condensed consolidated statements of operations: 13 Weeks Ended May 31, June 1, % 2026 2025 Change (Amounts in thousands, except per share amounts) Net sales $ 18,312 $ 15,400 18.9 % Cost of sales 11,936 10,682 11.7 % Gross profit 6,376 4,718 35.1 % Selling, general and administrative expenses 2,361 2,299 2.7 % Earnings from operations 4,015 2,419 66.0 % Interest and other income 786 355 121.4 % Earnings from operations before income taxes 4,801 2,774 73.1 % Income tax provision 1,268 694 82.7 % Net earnings $ 3,533 $ 2,080 69.9 % Earnings per share: Basic: Basic earnings per share $ 0.17 $ 0.10 70.0 % Diluted: Diluted earnings per share $ 0.17 $ 0.10 70.0 % 17 Net Sales The Company's total net sales in the 13 weeks ended May 31, 2026 were $18.3 million compared to $15.4 million in the 13 weeks ended June 1, 2025. The increase in sales was primarily due to higher sales in the commercial and military markets reflecting increased demand in both markets. Gross Profit The Company’s gross profit margins, measured as percentages of sales, were 34.8% in the 13 weeks ended May 31, 2026 compared to 30.6% in the 13 weeks ended June 1, 2025. The higher gross profit margin for the 13 weeks ended May 31, 2026 was primarily due to the higher sales volume in the quarter which allowed for improved leverage of fixed overhead costs and a more favorable product mix, which was partially offset by higher waste in the current quarter. Selling, General and Administrative Expenses Selling, general and administrative expenses increased compared to the prior year’s comparable period in dollars but decreased as a percentage of sales. These expenses, measured as percentages of sales, were 12.9% in the 13 weeks ended May 31, 2026 compared to 14.9% in the 13 weeks ended June 1, 2025. The increase in selling, general and administrative expenses in dollars was primarily due to higher research and development costs, higher freight costs and higher shareholder expenses partially offset by lower professional and legal fees. As a percentage of sales, the decrease in selling, general and administrative expenses is due to the increase in sales in the 13 weeks ended May 31, 2026. Selling, general and administrative expenses included stock option expenses of $92,000 for the 13 weeks ended May 31, 2026, compared to stock option expenses of $88,000 in the 13 weeks ended June 1, 2025. Earnings from Operations For the reasons set forth above, the Company’s earnings from operations were $4.0 million for the 13 weeks ended May 31, 2026 compared to $2.4 million for the 13 weeks ended June 1, 2025. Interest and Other Income Interest and other income was $786,000 for the 13 weeks ended May 31, 2026, compared to $355,000 for the prior year’s comparable period. Interest income increased 121% for the 13 weeks ended May 31, 2026 primarily due to higher investment balances. Cash balances were higher in the 13 weeks ended May 31, 2026 as a result of stock sales in the prior quarter that resulted in net proceeds of $21.7 million under the Company’s at the market offering. During the 13 weeks ended May 31, 2026, the Company earned interest income principally from its cash and investments, which consisted primarily of short-term instruments and money market funds. Income Tax Provision For the 13 weeks ended May 31, 2026, the Company recorded an income tax provision of $1.3 million, which included a discrete income tax benefit of $0. 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. 18 The Company’s effective tax rate for the 13 weeks ended May 31, 2026 was 26.4% compared to 25.0% in the prior year’s comparable period. The effective tax rate for the 13 weeks ended May 31, 2026 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 1, 2025 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 May 31, 2026 were $3.5 million compared to net earnings of $2.1 million for the 13 weeks ended June 1, 2025. Basic and Diluted Earnings Per Share In the 13 weeks ended May 31, 2026, basic and diluted earnings per share were $0.17 compared to basic and diluted earnings per share of $0.10 in the 13 weeks ended June 1, 2025. Liquidity and Capital Resources: (Amounts in thousands) May 31, March 1, 2026 2026 Change Cash and cash equivalents and marketable securities $ 89,407 $ 89,368 $ 39 Working capital 101,919 102,714 (795 ) 13 Weeks Ended (Amounts in thousands) May 31, June 1, 2026 2025 Change Net cash provided by operating activities $ 2,720 $ 1,590 $ 1,130 Net cash provided by investing activities 1,876 1,999 (123 ) Net cash used in financing activities (2,609 ) (4,586 ) 1,977 Cash and Marketable Securities Of the $89.4 million of cash and cash equivalents and marketable securities at May 31, 2026, $32.7 million was owned by one of the Company’s wholly-owned foreign subsidiaries. 19 The change in cash and cash equivalents and marketable securities at May 31, 2026 compared to March 1, 2026 was the result of higher cash collections due to the increased sales mostly offset by a supplier advance of $2.2 million paid in May 2026 and dividends paid to shareholders. The significant changes in cash provided by operating activities were as follows: ● inventories increased by 5% at May 31, 2026 compared to March 1, 2026 primarily due to the timing of raw material purchases and production; ● prepaid expenses and other current assets increased by 9% at May 31, 2026 compared to March 1, 2026 primarily due to higher prepaid information technology contracts and insurance partially offset by lower prepaid taxes; ● other assets increased $2.1 million during the 13 weeks ended May 31, 2026 due to a long-term supplier advance paid during the quarter; ● accounts payable decreased by 5% at May 31, 2026 compared to March 1, 2026 primarily due to the timing of supplier payments in the quarter; ● accrued liabilities increased by 12% at May 31, 2026 compared to March 1, 2026 primarily due to higher accrued bonuses and profit sharing; and ● income taxes payable increased 182% at May 31, 2026 compared to March 1, 2026 primarily due to earnings in the 13 weeks ended May 31, 2026. In addition, the Company paid $2.6 million and $2.5 million in cash dividends in the 13-week period ended May 31, 2026 and the 13-week period ended June 1, 2025, respectively. Working Capital The decrease in working capital at May 31, 2026 compared to March 1, 2026 was due principally to the payment of a long-term advance to a supplier of $2.2 million during the period, lower marketable securities and higher current liabilities, partially offset by higher cash, inventories, and prepaid expenses at May 31, 2026. The Company's current ratio (the ratio of current assets to current liabilities) was 15.3 to 1.0 at May 31, 2026 compared to 18.2 to 1.0 at March 1, 2026. Cash Flows During the 13 weeks ended May 31, 2026, the Company had operating cash flows of $2.7 million compared to $1.6 million for the 13 weeks ended June 1, 2025. During the same 13-week period, the Company expended $113,000 for the purchase of property, plant and equipment, compared with $481,000 during the 13 weeks ended June 1, 2025. The Company paid $2.6 million in cash dividends in the 13-week period ended May 31, 2026 compared to $2.5 million in cash dividends in the 13-week period ended June 1, 2025. 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 including the Company’s plans to build a new composites material manufacturing and development facility. The Company expects construction on the new facility to begin in fiscal year 2027. 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. 20 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 primarily of operating lease commitments, commitments to purchase raw materials and remaining advance payable to ArianeGroup SAS. 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), €1,835 was paid in May 2026 (actual cost of $2,156) and €1,376 (approximately $1,575 based on July 7, 2026 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. In July 2026, the Company entered into a sublease agreement covering approximately 18 acres of total land in Tulsa, Oklahoma. The Company plans to build a new composites material manufacturing and development facility on the site. The facility will include full production lab facilities, office space, storage and freezer space and ancillary equipment necessary to support all planned manufacturing operations. The sublease commences on September 1, 2026, and has an initial term of 25 years with a renewal option for an additional 25 years. Annual rent under the sublease agreement for the initial five years of the sublease would be $269,469 with increases for each subsequent five-year period based upon the Consumer Price Index for All Urban Consumers, U.S., City Average All Items as published by the United States Department of Commerce. The Company expects economic development incentives to offset a significant portion of the rent expense. 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 1, 2026. There have been no significant changes to such accounting policies during the 2027 fiscal year first quarter. 21 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 1, 2026. Item 3 . Quantitative and Qualitative Disclosures About Market Risk . The Company’s market risk exposure at May 31, 2026 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 1, 2026.