Park Electrochemical Corp. — FY2017 Form 10-K
Period and entity: The filing is Park Electrochemical Corp.’s annual report for the 52 weeks ended February 26, 2017, filed May 12, 2017. This is not a 2015 Q4 filing, and the registrant named in the filing differs from the request metadata (“PARK AEROSPACE CORP”). The figures below follow the filing.
Business context
Park develops and manufactures advanced composite materials and aerospace parts, as well as high-performance printed circuit materials for electronics, telecommunications, internet infrastructure, military and aerospace markets. Printed circuit materials represented 72% of FY2017 sales; aerospace composites, parts and assemblies represented 28%. The company reports one operating segment.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $114.6 million | $145.9 million |
| Gross profit / margin | $30.0 million / 26.2% | $42.8 million / 29.3% |
| Operating earnings / margin | $10.0 million / 8.7% | $21.0 million / 14.4% |
| Net earnings | $9.3 million | $18.0 million |
| Diluted EPS | $0.46 | $0.89 |
| Cash from operations | $13.2 million | $13.9 million |
FY2017 cash flow from investing activities was positive $2.5 million and financing activities used $11.1 million, including $8.1 million of dividends and $3.0 million of debt principal repayments. Capital expenditures were $0.2 million.
At year-end, cash and marketable securities totaled $238.6 million; restricted cash was an additional $10.0 million. Working capital was $255.0 million and the current ratio was 19.1:1. Total assets were $308.6 million and shareholders’ equity was $182.8 million. Bank debt was $72.0 million, of which $3.5 million was current. Approximately $237.7 million of cash, marketable securities and restricted cash was held by foreign subsidiaries.
The company declared $0.40 per share in FY2017 dividends and said it expected to continue regular cash dividends in the immediate future. The filing reports no share repurchases during the FY2017 fourth quarter.
Changes versus comparable periods
- Sales fell 21% year over year. Printed circuit materials sales declined to $82.5 million from $106.7 million; aerospace sales declined to $32.1 million from $39.1 million.
- Sales decreased in North America and Asia, with the largest regional decline in Asia (27%). Management cited weaker demand for internet and telecommunications infrastructure equipment in developing countries and legacy materials reaching end-of-program life.
- Gross margin declined 3.1 percentage points, reflecting lower sales and production levels and fixed overhead. North American process improvements and a higher share of advanced high-performance materials partly offset the pressure.
- Operating earnings declined 52%, net earnings 49%, and diluted EPS fell from $0.89 to $0.46. SG&A fell 7%, but rose as a share of sales to 17.2% from 14.5%.
- Operating cash flow was $13.2 million, slightly below FY2016’s $13.9 million and substantially below FY2015’s $29.0 million.
- Fourth-quarter FY2017 sales were $27.6 million, gross profit $7.4 million and net earnings $2.5 million, versus $35.8 million, $10.7 million and $4.6 million, respectively, in FY2016’s fourth quarter.
Outlook, commentary and risks
- Management said global demand was difficult to forecast and that it was unclear what demand would be in FY2018 and beyond. No sales or earnings guidance was provided.
- After year-end, Park announced a consolidation of its California Nelco Products business and Arizona Neltec business. Completion was expected in four to six months. Management estimated a $5.0–$5.5 million pretax charge, plus $0.3 million of duplicative costs, primarily in the first nine months of FY2018; it projected ongoing annual pretax benefits of $3.0–$3.5 million after completion.
- Customer concentration is notable: TTM Technologies represented 16.2% of FY2017 sales, and the ten largest customers together represented approximately 48%. The company relies largely on short-term customer orders.
- Other principal risks include cyclical electronics and aerospace markets, competitive and technological change, raw-material supply constraints and price volatility, energy costs, foreign currency and international exposure, customer qualification delays, and dependence on key employees. Copper foil costs were volatile; the company generally passes raw-material cost changes through to customers.
- The company had $72.0 million outstanding under a variable-rate HSBC facility, due principally in 2019. The credit agreement includes financial covenants and a $10.0 million minimum domestic cash requirement; Park reported compliance at year-end. The facility amendment increased the LIBOR spread over 2017, reaching 2.65% after October 5, 2017.
- Environmental authorities named Park or subsidiaries as potentially responsible parties at four sites. No environmental liability was recorded at year-end; management believed known matters would not materially affect the company, and insurance covers certain sites. The filing also describes other claims and proceedings, with management expecting no material adverse effect.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Investor verification priorities
- Confirm the intended issuer and reporting period: the supplied filing is Park Electrochemical Corp.’s FY2017 10-K, not a 2015 Q4 report for Park Aerospace Corp.
- Assess whether the sales decline and reduced production are continuing, particularly in Asia and in legacy product programs, and whether the announced consolidation delivers its projected savings.
- Evaluate the location and practical accessibility of the large foreign-held cash and securities balance, including the restricted portion and any tax or repatriation implications.
- Review debt repayment and covenant capacity against lower earnings, variable interest rates and the substantial 2019 maturity.
- Track customer concentration, order visibility, raw-material availability and pricing pass-through, plus the status and potential cost of environmental matters.