Park Aerospace Corp. — Form 10-Q Summary
Period clarification: The request metadata says “2018 Q2,” but this filing covers the 13 and 26 weeks ended September 1, 2019 (fiscal 2020 second quarter), with comparisons to periods ended August 26, 2018. Amounts below are in millions of dollars unless noted.
Business context and reporting period
Park develops and manufactures advanced composite materials and parts for aerospace markets. The filing reports continuing operations, principally the aerospace business; the Electronics Business was sold on December 4, 2018, and its results are presented as discontinued operations. The company changed its name from Park Electrochemical Corp. to Park Aerospace Corp. in July 2019.
Financial performance and liquidity
| Metric | 13 weeks ended Sep. 1, 2019 | 13 weeks ended Aug. 26, 2018 | 26 weeks ended Sep. 1, 2019 | 26 weeks ended Aug. 26, 2018 |
|---|---|---|---|---|
| Continuing-operations sales | $13.7 | $11.2 | $28.7 | $21.6 |
| Gross profit margin | 27.8% | 28.1% | 30.1% | 27.8% |
| Continuing-operations earnings before tax | $2.8 | $1.4 | $6.6 | $2.5 |
| Continuing-operations net earnings | $2.1 | $1.8 | $4.8 | $2.6 |
| Total net earnings, including discontinued operations | $2.1 | $2.7 | $4.7 | $5.9 |
| Basic EPS from continuing operations | $0.10 | $0.09 | $0.23 | $0.13 |
- Operating cash flow was a use of $1.0 million for the first half of fiscal 2020, versus cash provided of $3.5 million in the prior-year period. Capital expenditures were $2.3 million, compared with $0.2 million.
- Cash and marketable securities totaled $145.4 million at September 1, 2019, down $6.3 million from March 3, 2019. Of that balance, $127.5 million was held by foreign subsidiaries. Working capital was $155.4 million; the current ratio was 30.0 to 1.0.
- The company reported no long-term debt. Total liabilities were $22.7 million, including $16.0 million of non-current income taxes payable. It had $0.3 million in standby letters of credit for workers’ compensation obligations.
- Dividends paid in the first half were $4.1 million. The company reported no share repurchases in the period.
Changes versus the prior comparable periods
- Continuing-operations sales increased 22% in the quarter and 33% in the half year, which management attributed to ramping programs for which Park’s materials are qualified.
- Half-year gross margin rose to 30.1% from 27.8%, reflecting higher sales and partially fixed overhead, partly offset by higher direct labor and supplies costs. Quarterly margin edged down to 27.8% from 28.1%.
- SG&A declined 10% for the quarter and 9% for the half year, primarily due to lower payroll, travel and entertainment, and stock-option expenses.
- Interest and other income rose to $0.9 million for the quarter and $1.8 million for the half year, mainly reflecting higher investment balances and weighted-average interest rates.
- Total net earnings fell 21% for the quarter and 20% for the half year, despite stronger continuing operations, because the prior-year comparison included earnings from the Electronics Business. The current period includes only residual sale-related items in discontinued operations.
- Tax expense increased relative to the prior-year periods, which benefited from a one-time $0.8 million tax benefit related to Tax Cuts and Jobs Act regulations. Fiscal 2020’s effective tax rates were 25.7% for the quarter and 27.7% for the half year.
Outlook, commentary, and risks
- Management said financial resources should be sufficient for at least the 12 months following filing and for the foreseeable future. No specific revenue or earnings guidance was provided.
- Park estimates the additional Kansas manufacturing facility will cost approximately $20 million and expects completion in the first half of calendar 2020. At September 1, it had $3.9 million of construction in progress and $2.2 million of equipment purchase obligations related to the project. The company expects local government assistance under a development agreement.
- A substantial portion of revenue comes from one customer under a requirements-based contract that does not guarantee order quantities. Customer forecasts are updated periodically; purchase orders are generally received more than three months before delivery.
- Management cited aerospace-industry conditions, customer relationships, competition, international markets, and the cost and availability of raw materials, transportation, and utilities as factors that could affect results.
- The company disclosed environmental matters at three sites where it or subsidiaries are potentially responsible parties. It said insurance covers defense and remediation costs at two sites and that known matters are not expected to have a material adverse effect. Other disclosed litigation was characterized as immaterial.
- ASC 842 lease adoption added approximately $0.6 million to assets and liabilities. The company recorded $0.4 million of operating lease liabilities at September 1, 2019.
Important facts for investors to verify
- Confirm the reported diluted EPS: the financial statements show $0.10 for the quarter, while one MD&A table displays $0.11; the MD&A text also states $0.10.
- Assess customer concentration and the non-guaranteed nature of the requirements-based contract against the reported sales growth.
- Track cash generation, investment maturities, and the substantial share of cash and securities held by foreign subsidiaries.
- Monitor the Kansas facility’s total cost, construction progress, purchase commitments, and expected government assistance.
- Separate continuing-operation trends from prior-year discontinued Electronics Business earnings when comparing net income and EPS.