PARK AEROSPACE CORP annual report, FY2013

Business context and reporting period

Park Electrochemical Corp. (the filing’s registrant name) filed this Form 10-K for the fiscal year ended March 2, 2014. The supplied metadata says “Park Aerospace Corp., 2012 Q4,” which does not match the filing: the company name and reporting period should be verified. Fiscal 2014 had 52 weeks; fiscal 2013 had 53.

Park develops and manufactures advanced printed circuit materials for electronics markets and advanced composite materials, parts and assemblies for aerospace markets. It reports one operating segment. Printed circuit materials represented 82% of FY2014 sales; aerospace composites represented 18%.

Financial results and liquidity

Sales fell 6%, principally from lower printed circuit materials volumes across North America, Asia and Europe. Aerospace sales increased to $30.4 million from $25.9 million, partly offsetting printed circuit materials sales declining to $135.4 million from $150.6 million. High-performance materials were 88% of printed circuit materials sales, versus 82%.

Cost reductions and a more favorable product mix lifted gross margin to 29.0%. Operating earnings improved 11%, with lower restructuring charges, legal expenses and duplicate costs from aerospace consolidation. The net loss chiefly reflects a non-cash $64.0 million tax charge for U.S. deferred taxes on undistributed Singapore subsidiary earnings. Park reported no current plan to repatriate those earnings; the charge included $34.4 million associated with hypothetical repatriation to repay bank debt and $29.6 million on the remaining undistributed earnings. A $2.2 million tax benefit related to amended federal returns partly offset the charge.

At year-end, cash and marketable securities were $270.4 million, restricted cash was $25.0 million, working capital was $287.0 million, and the current ratio was 12.8 versus 19.2 a year earlier. Approximately $242.4 million of cash, marketable securities and restricted cash was held by foreign subsidiaries. Operating cash flow was $30.4 million; capital spending was $1.1 million. Cash dividends paid were $60.5 million, including a $2.50-per-share special dividend.

Debt was $104.0 million, up from $52.0 million, under a four-year PNC revolving facility bearing 1.30% at year-end. The additional borrowing funded the FY2014 special dividend; the facility also carried forward the prior $52.0 million borrowing used for the FY2013 special dividend. $10.0 million was due in FY2015, with remaining scheduled maturities through 2018. The agreement requires at least $25.0 million in domestic liquid assets, classified as restricted cash; Park reported compliance with its financial covenants at year-end.

Material changes and unusual items

• Net income swung to a loss primarily because of the $64.0 million deferred-tax accrual, not a comparable deterioration in operating earnings.
• Fiscal 2014 restructuring charges were $0.5 million, down from $3.7 million in FY2013. The company had consolidated North American aerospace activities in Kansas and closed its Connecticut and Zhuhai facilities.
• The special dividend prompted a repricing of outstanding employee options, producing $0.7 million of incremental compensation expense. A $0.3 million financial-advisory retention fee was also recorded.
• Backlog of firm purchase orders was approximately $33.8 million on April 27, 2014, versus $9.2 million a year earlier; management cautioned backlog may not predict subsequent results.

Outlook, risks and controls

Management provided no specific FY2015 earnings or revenue guidance. It said printed circuit materials markets remained difficult to forecast and it could not predict market conditions for either business in 2015 or beyond. It expects to continue regular cash dividends in the immediate future.

Risks include cyclical electronics and aerospace demand, short-notice customer orders, customer concentration (the ten largest customers generated 59% of FY2014 sales; TTM Technologies alone accounted for 15.8%), competition and technology shifts, raw-material availability and price volatility, foreign exchange exposure, and dependence on key employees and suppliers. The company identified environmental matters at five sites; management did not expect known matters to materially affect the company. It also reported no recorded environmental liabilities at year-end.

Management and Grant Thornton identified a material weakness in controls over timely and effective review of complex and non-routine transactions. Management concluded disclosure controls and internal control over financial reporting were ineffective as of March 2, 2014. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the consolidated financial statements.

Most important facts to verify

• Confirm the filing identity and period: Park Electrochemical Corp., FY ended March 2, 2014, rather than the metadata’s Park Aerospace Corp. and 2012 Q4.
• Assess the tax charge’s non-cash nature, Singapore earnings repatriation assumptions, and potential future tax consequences.
• Review debt repayment capacity, covenant headroom, restricted domestic liquidity, and the use of borrowings to fund special dividends.
• Track remediation of the material weakness in complex and non-routine transaction controls and any subsequent auditor assessment.
• Test whether backlog growth translated into orders and sales, given management’s warning that backlog is not necessarily predictive.