Filing and reporting period
This filing is a Form 10-Q for Park Electrochemical Corp., not a company identified in the request as Park Aerospace Corp. It covers the 13 weeks ended June 1, 2014, the company’s fiscal 2015 first quarter, and compares with the 13 weeks ended June 2, 2013. Financial amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context and key financial metrics
Park develops and manufactures printed circuit materials for electronics markets and advanced composite materials, parts and assemblies for aerospace markets. It reports one operating segment.
| Metric | Quarter ended June 1, 2014 | Comparable 2013 quarter | Change |
|---|---|---|---|
| Net sales | $48.8 million | $43.4 million | +12% |
| Gross profit / gross margin | $16.9 million / 34.7% | $13.0 million / 29.9% | Margin +4.8 percentage points |
| Operating earnings | $10.1 million | $6.2 million | +61% |
| Net earnings | $8.2 million | $4.9 million | +67% |
| Diluted EPS | $0.39 | $0.24 | +63% |
| Operating cash flow | $9.3 million | $6.4 million | +$3.0 million |
- Sales growth was attributed mainly to aerospace products and higher printed circuit materials sales in Asia. Aerospace sales were $9.0 million, up from $6.7 million; printed circuit materials sales were $39.8 million, up from $36.7 million.
- Asia sales increased 31% to $24.5 million; North America sales rose 3% to $21.3 million; Europe sales fell 25% to $3.0 million. High-performance products represented 93% of printed circuit materials sales, versus 86% a year earlier.
- Management cited improved operating performance at its Park Aerospace Technologies Corp. unit, favorable sales mix, and partially fixed costs as drivers of the higher gross margin. SG&A was nearly flat at $6.6 million, but declined to 13.5% of sales from 15.1%.
- The effective tax rate was 16.7%, down from 19.6%, mainly because a greater share of income arose in lower-tax jurisdictions.
Balance sheet, liquidity and debt
- At June 1, 2014, cash and cash equivalents were $135.1 million and marketable securities were $142.1 million, totaling $277.2 million. Another $25.0 million was classified as restricted cash for a credit-facility covenant. Working capital was $291.8 million; the current ratio was 9.9, down from 12.8 at March 2, 2014.
- Total debt was $104.0 million, including $12.5 million current and $91.5 million long-term. The loan bore interest at 1.29% at quarter-end. Repayment includes $10.0 million due February 2015, followed by scheduled quarterly installments, with the remaining balance due February 2018.
- Cash and marketable securities increased $6.9 million from March 2. Investing activities used $5.3 million, including $5.2 million net purchases of marketable securities; capital expenditures were $0.1 million. Financing activities used $2.0 million, principally $2.1 million of dividends.
- Approximately $225.2 million of cash and marketable securities was held by foreign subsidiaries. The company said it had no current plan to repatriate Singapore subsidiary earnings and believed U.S. liquidity was sufficient for foreseeable domestic needs.
Material changes, outlook and risks
- Management said quarterly sales were higher than in any quarter since the 13 weeks ended August 28, 2011, and gross margin was the highest since the 13 weeks ended February 28, 2010.
- Results included $267,000 of restructuring charges related to closures in Zhuhai, China and Newburgh, New York, plus $260,000 of additional fiscal year-end audit fees. Management estimated these items reduced current-quarter EPS by $0.02, versus a $0.01 reduction from restructuring in the prior-year quarter. It expected no significant further charges for the Zhuhai closure.
- Management gave no numerical forecast and said printed circuit materials markets were difficult to forecast; it also could not predict the effect of global economic and financial conditions on aerospace markets.
- The credit agreement requires financial covenant compliance, including minimum domestic liquid assets of $25 million. The company reported compliance at June 1. A July 10, 2014 amendment modified the quick-ratio covenant.
- Management disclosed a material weakness in controls over accounting for complex and non-routine transactions; disclosure controls were therefore deemed ineffective as of June 1. After quarter-end, management implemented remediation measures, including enhanced controls and review and use of outside advisers, and stated that the weakness was remediated and internal control over financial reporting effective as of the report date.
- Environmental matters include potentially responsible party claims at four sites and a private-party cost recovery claim at another site. The company recorded no environmental liability at June 1 and said it did not expect the matters, including an insurance-coverage dispute, to have a material adverse effect. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is for Park Electrochemical Corp. and fiscal Q1 2015, not Park Aerospace Corp. or 2013 Q1.
- Review whether the sales and margin improvement persisted in subsequent quarters, particularly given management’s stated difficulty forecasting end markets.
- Track the location and availability of foreign-held liquidity, repatriation assumptions, and the use and repayment of debt originally raised to fund special dividends.
- Assess the effectiveness and sustained operation of the post-quarter control remediation, in light of the disclosed material weakness.
- Monitor the environmental insurance dispute, site-related costs, and any developments that could change recorded liabilities or exposure.