Park Electrochemical Corp. — Form 10-Q summary
Reporting period: 13 and 26 weeks ended August 26, 2018 (fiscal 2019 second quarter and first half); comparative periods ended August 27, 2017. The request metadata identifies Park Aerospace Corp. and 2017 Q2, but the supplied filing is for Park Electrochemical Corp. for 2018 Q2.
Business context and major transaction
Park’s continuing business is aerospace advanced materials, structures, assemblies and tooling. Its Electronics Business is reported as discontinued operations after Park agreed on July 25, 2018 to sell it to AGC Inc. for $145 million cash. Closing was expected in fiscal 2019’s fourth quarter; it had not closed by the reporting date.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages. Continuing-operations figures exclude the Electronics Business.
| Metric | 13 weeks ended Aug. 26, 2018 | 13 weeks ended Aug. 27, 2017 | 26 weeks ended Aug. 26, 2018 | 26 weeks ended Aug. 27, 2017 |
|---|---|---|---|---|
| Continuing-operations sales | $11.211 | $11.355 | $21.604 | $20.081 |
| Continuing-operations gross profit | $3.145 | $3.208 | $5.997 | $5.505 |
| Gross margin | 28.1% | 28.3% | 27.8% | 27.4% |
| Continuing-operations net earnings | $1.824 | $0.859 | $2.640 | $0.931 |
| Discontinued-operations net earnings (loss) | $0.876 | $(0.339) | $3.228 | $0.983 |
| Total net earnings | $2.700 | $0.520 | $5.868 | $1.914 |
| Diluted EPS | $0.13 | $0.03 | $0.29 | $0.09 |
- First-half continuing sales rose 8%, gross profit rose 9%, and SG&A fell 10%. Second-quarter sales declined 1% and gross margin eased 0.2 percentage points.
- Continuing operating earnings were $1.029 million for the quarter and $1.780 million for the half. No interest expense was recorded in 2018 after the company prepaid its $68.5 million debt balance in January 2018 and terminated its revolving credit facility.
- Continuing interest and other income declined to $0.357 million for the quarter and $0.697 million for the half, mainly because average marketable-securities balances were lower.
- A $0.788 million tax benefit tied to clarifying regulations under the Tax Cuts and Jobs Act produced negative effective tax rates of 31.6% for the quarter and 6.6% for the half. Management said the benefit added $0.04 to EPS in each period.
Cash flow, liquidity and debt
- First-half operating cash flow was $1.637 million from continuing operations and $1.845 million from discontinued operations, or $3.482 million total. Continuing investing activities provided $2.499 million, largely reflecting marketable-security transactions; continuing financing used $3.424 million, including $4.048 million of dividends.
- At August 26, 2018, cash and cash equivalents were $20.854 million and marketable securities were $87.456 million. Continuing-operations cash and securities totaled $108.310 million; $107.0 million was held by foreign subsidiaries.
- Working capital from continuing operations was $116.094 million, with a 32.7:1 current ratio. The company reported no long-term debt. Management said resources should cover operating and capital needs for at least the next 12 months and the foreseeable future.
- Capital spending was $0.170 million in continuing operations during the first half. The company declared $0.20 per share in dividends for the half.
Outlook, risks and unusual items
- The expected $145 million cash sale of the Electronics Business is a significant pending transaction; the filing gives an expected closing quarter but does not provide a firm closing date or net proceeds after costs and taxes.
- Electronics discontinued-operations sales were $17.843 million for the quarter and $38.552 million for the half. The half-year earnings improvement reflected lower restructuring charges, higher sales, and a prior-year $0.375 million litigation expense.
- Restructuring charges for the Electronics consolidation were $0.169 million in the first half of 2018 versus $4.063 million in the comparable 2017 period. Approximately $1.020 million of additional pretax consolidation charges were estimated, primarily during the fiscal year ending February 28, 2021.
- The company cited industry conditions, competition, customer relationships, international economic conditions, and raw-material, transportation and utility costs as factors that could affect results. It reported proceedings and environmental matters involving three sites, but said these were not expected to materially affect its business or financial position; insurers cover defense and remediation costs at two sites.
- Management reported effective disclosure controls and no material changes in risk factors from its prior annual report. The filing provided no specific sales or earnings guidance.
Important facts for investors to verify
- Whether the AGC sale closes as expected, and the transaction’s final proceeds, costs, tax consequences and any required approvals.
- How much of reported earnings and EPS reflects the one-time $0.788 million tax benefit and discontinued operations.
- The sustainability of aerospace sales, gross margins and SG&A reductions, given short order lead times and limited long-term contracts.
- Availability and potential repatriation of the substantial cash and securities held by foreign subsidiaries.
- Remaining restructuring costs, environmental contingencies and other litigation exposure.