Park Electrochemical Corp. — Form 10-Q Summary
Period clarification: The supplied filing is Park Electrochemical Corp.’s unaudited Form 10-Q for the 13 and 39 weeks ended November 25, 2018, not a 2017 Q3 filing for Park Aerospace Corp. The company described its continuing business as an aerospace advanced-composites business.
Business context and reporting period
Park had agreed to sell its Electronics Business to AGC Inc. for $145.0 million in cash. The transaction closed December 4, 2018, after the quarter-end; the Electronics Business’s results are presented as discontinued operations. The sale price was subject to customary post-closing adjustments.
Financial performance and liquidity
- Continuing-operations revenue: $12.853 million for the quarter, up 26% year over year; $34.457 million for the 39-week period, up 14%. Management attributed growth to production ramp-ups on qualified programs.
- Continuing-operations gross margin: 33.3% for the quarter versus 29.0%; 29.8% year to date versus 27.9%. Management cited higher sales, lower salaried headcount, and partially fixed overhead.
- Continuing-operations earnings: Operating earnings were $2.301 million for the quarter and $4.081 million year to date. Net earnings were $2.078 million and $4.718 million, respectively; diluted EPS was $0.10 and $0.23.
- Total net earnings: $3.691 million for the quarter and $9.559 million year to date, including discontinued-operations earnings of $1.613 million and $4.841 million. Total diluted EPS was $0.18 for the quarter and $0.47 year to date.
- Cash flow: For the 39 weeks, operating cash flow was $10.956 million total ($5.225 million continuing and $5.731 million discontinued). Capital spending was $0.399 million continuing and $0.158 million discontinued. Dividends paid were $6.076 million.
- Liquidity and debt: At November 25, cash and cash equivalents were $16.995 million and marketable securities were $95.391 million. Continuing-operations cash, equivalents and securities totaled $112.386 million; continuing working capital was $119.621 million. The company had no outstanding debt; it had repaid and terminated its revolving credit facility in January 2018.
- Tax: The continuing-operations effective tax rate was 22.9% for the quarter and 8.8% year to date, versus 31.3% and 25.6%. The year-to-date rate benefited from a $0.788 million tax benefit related to regulations under the Tax Cuts and Jobs Act.
Material changes and unusual items
- Continuing-operations sales and margins improved, while SG&A fell 21% for the quarter and 14% year to date, primarily due to lower payroll, travel and entertainment, and stock-option expenses.
- Interest expense was zero versus $0.689 million for the prior-year quarter and $1.802 million year to date, following debt repayment. Lower average marketable-securities balances reduced interest and other income.
- Discontinued operations included a $2.945 million gain on the November 15, 2018 sale of a New York facility. The Electronics Business reported year-to-date sales of $55.232 million and net earnings of $4.841 million, including transaction-related and restructuring effects.
- The Electronics Business sale generated approximately $122.561 million in estimated net proceeds after transaction costs and taxes of approximately $22.439 million; the estimated net gain was $101.568 million.
- After quarter-end, the board declared a special cash dividend of $4.25 per share, payable February 26, 2019 to shareholders of record February 5, 2019. The company also disclosed a planned approximately $19 million Kansas manufacturing facility, expected to be completed in the first half of calendar 2020.
Outlook, risks and contingencies
Management said financial resources should be sufficient for working capital, capital spending and general corporate purposes for at least the next 12 months. It gave no specific revenue or earnings guidance. Customer contracts are primarily requirements-based and do not guarantee purchase quantities; some customers represent a substantial portion of revenue. Management cited industry conditions, customer relationships, international markets, and raw-material, transportation and utility costs among factors that could affect results.
The company disclosed litigation and environmental matters, including potential responsibility at three sites. It stated that it did not expect the matters to materially affect its business or financial position; insurance carriers reimburse 100% of defense and remediation costs at two sites. The company estimated approximately $0.840 million of remaining pre-tax costs for a prior Electronics Business consolidation, expected primarily in fiscal 2021. Management reported disclosure controls were effective and no material change in internal control, apart from controls related to discontinued-operations presentation.
Important facts for investors to verify
- Final sale proceeds and gain after working-capital, cash and tax adjustments, and the effect of the completed Electronics Business divestiture on future reported results.
- Whether aerospace program ramp-ups continue and how customer concentration and non-guaranteed order forecasts affect revenue visibility.
- Execution, total cost and public assistance terms for the planned Kansas facility, as well as the company’s capital allocation following the special dividend.
- Tax-rate sustainability, remaining restructuring costs, and developments in environmental, litigation and other contingencies.