Park Electrochemical Corp. (NYSE: PKE) — FY2019 Form 10-K
Filing identity: The request metadata says “PARK AEROSPACE CORP” and “2017 Q4,” but the supplied filing is for Park Electrochemical Corp. for the fiscal year ended March 3, 2019 (53 weeks). The figures below reflect that filing; prior periods are presented excluding the divested Electronics Business where applicable. Amounts are in U.S. dollars.
Business context and reporting period
Park’s continuing business develops and manufactures advanced composite materials, aerospace structures and assemblies, and low-volume tooling. Its products serve commercial, military, business aviation, space and related markets. On December 4, 2018, Park sold its Electronics Business to AGC Inc. for $145 million in cash, subject to post-closing adjustments, and reports that business as discontinued operations.
Financial performance and position
- Revenue: Continuing-operations net sales were $51.1 million, up 27% from $40.2 million in FY2018. Management attributed growth mainly to higher commercial jet production, customer inventory restocking (particularly in the fourth quarter), and increased military sales.
- Profit and margins: Gross profit was $16.2 million, with gross margin of 31.7% versus 28.1%. Continuing-operations earnings before interest and taxes were $7.2 million versus $1.3 million. Net earnings from continuing operations were $6.3 million, or $0.31 per diluted share, compared with $18.5 million, or $0.91 per diluted share, in FY2018.
- Total earnings and unusual items: Net earnings were $113.5 million, or $5.57 per diluted share. This included $107.2 million of earnings from discontinued operations, principally reflecting the $102.1 million estimated net gain on the Electronics Business sale. FY2018 continuing earnings included a $17.8 million discrete tax benefit related to U.S. tax reform, making total net income comparisons unusually affected by one-time items.
- Cash flow and investment: Cash provided by operating activities was $8.1 million from continuing operations and $7.5 million in total, including discontinued operations. Capital expenditures were $2.8 million, versus $0.6 million in FY2018. Investing cash flow included approximately $145.0 million of proceeds from the business sale in discontinued operations.
- Liquidity and debt: Cash and marketable securities totaled $151.6 million at year-end, working capital was $156.8 million, and the current ratio was 15.1:1. Long-term debt was zero; the company had repaid and terminated its credit facility in January 2018. Approximately $19 million of Tax Act transition-tax installments remained payable over seven years.
- Dividends: FY2019 dividends totaled $4.65 per share, including a $4.25 special dividend; cash dividends paid were approximately $95.1 million. Management expected regular cash dividends to continue, but gave no assurance or specific future amount.
Material changes versus the prior comparable period
- FY2019 continuing sales increased 27%, and gross margin rose 3.6 percentage points, reflecting higher production and fixed-cost absorption.
- Continuing net income fell 66% despite stronger operating results, primarily because FY2018 included the $17.8 million tax benefit; FY2019 also included a $1.5 million loss on marketable-security sales used to help fund the special dividend.
- The Electronics Business sale materially changed the company’s scale and business mix. The resulting reported FY2019 net income is not a measure of recurring aerospace earnings.
- GE represented 42.8% of FY2019 worldwide sales, up from 30.5% in FY2018. The ten largest customers represented approximately 74% of sales, versus 72%.
Outlook, risks and contingencies
- Management said markets remained strong and anticipated FY2020 sales to increase from FY2019; no specific sales, earnings or margin guidance was provided.
- Park planned an approximately $20 million, 90,000-square-foot expansion at Newton, Kansas, expected to be completed in the first half of calendar 2020. It is intended in part to support a major aerospace customer. The filing also reports $3.973 million of equipment purchase obligations related to the facility.
- Customer concentration, aerospace cyclicality, short-term requirements-based orders, lengthy customer qualification processes, and dependence on limited sources of certain raw materials could affect results. Long-term pricing agreements generally do not guarantee purchase volumes.
- Park identified itself and certain subsidiaries as potentially responsible parties at three environmental sites. Management stated that known environmental matters were not expected to have a material adverse effect. The filing reports no material pending legal proceedings.
- Of year-end cash and marketable securities, $126.2 million was held by foreign subsidiaries. Management believed liquidity was sufficient for at least the 12 months following filing. Environmental, tax, raw-material, energy-cost, cybersecurity and expansion-execution risks remain relevant.
- The audit report expressed an unqualified opinion on the financial statements and on internal control over financial reporting.
Important facts for investors to verify
- Reconcile recurring aerospace performance with discontinued-operation earnings and the sale gain; review the final working-capital adjustment and net sale proceeds.
- Assess whether the sales ramp and customer restocking that drove FY2019 growth continue, and monitor GE’s share of revenue and the top-customer concentration.
- Track the Newton expansion’s total cost, timing, customer support, equipment commitments and resulting capacity utilization.
- Review cash availability and any tax or practical constraints associated with funds held overseas, alongside the remaining transition-tax payments.
- Confirm future dividend levels and capital-allocation plans; FY2019’s special dividend was a substantial, non-recurring distribution.
- Check reported backlog, which was $24.2 million at May 1, 2019 versus $15.3 million a year earlier; the company cautioned that backlog may not predict future results.