PARK AEROSPACE CORP quarterly report, Q1 FY2018

Business context and reporting period

Park Electrochemical Corp. (the filing’s registrant name; not “Park Aerospace Corp.”) reported its unaudited 13-week first quarter of fiscal 2019, ended May 27, 2018, compared with the 13 weeks ended May 28, 2017. This differs from the requested “2017 Q1” period.

The company makes advanced composite materials and aerospace structures, and high-technology digital and RF/microwave printed circuit materials. It reports Electronics and Aerospace segments.

Key financial metrics

Electronics sales were $20.7 million, up 11%, with segment operating income of $3.6 million, up 49%. Aerospace sales were $10.4 million, up 19%, and segment operating income was $2.5 million, up 20%. The company declared dividends of $0.10 per share.

At May 27, 2018, cash and marketable securities totaled $106.1 million, working capital was $129.3 million, and the current ratio was 10.9:1. Total liabilities were $32.8 million, including $18.6 million of non-current income taxes payable. The company had no outstanding debt after prepaying its $68.5 million loan balance and terminating its revolving credit facility in January 2018. Cash and marketable securities included $104.4 million held by foreign subsidiaries.

Material changes versus the prior comparable period

• Sales increased 13%; management attributed the increase to higher Electronics sales across regions and higher Aerospace sales.
• Gross margin rose to 27.4% from 23.1%, reflecting higher sales and production and savings from consolidating U.S. Electronics business units.
• Operating and net earnings increased substantially, partly because prior-year restructuring charges were higher. Current-quarter operating results included $183,000 of restructuring charges and $120,000 of advisory fees; the prior period included $1.361 million of restructuring charges and a one-time $375,000 litigation expense.
• Operating cash flow changed from $2.6 million provided to $0.3 million used, mainly because operating assets and liabilities used $4.4 million of cash, including increases in receivables and inventory.
• Interest expense was zero versus $510,000, following debt repayment. Interest and other income fell to $340,000 from $749,000, which the company attributed primarily to lower average investment balances.
• The effective tax rate was 17.6%, versus negative 194.3% in the prior period, which included a $688,000 tax-reserve reversal.

Outlook, risks, contingencies and unusual items

Management said product-market demand for the remainder of fiscal 2019 and beyond was difficult to forecast. It stated that available financial resources should fund operations and planned needs for at least the next 12 months and the foreseeable future. On January 4, 2018, the company announced a strategic evaluation, including a potential sale, of its Electronics business and retained Greenhill & Co. as financial advisor; the filing gives no decision or transaction timetable.

The company estimated approximately $1.02 million of additional pre-tax costs related to the California and Arizona Electronics consolidation, expected primarily during fiscal 2021. It also disclosed proceedings and environmental matters, including potential responsibility at three sites; it reported no environmental liabilities at quarter-end and said it did not expect the matters to materially affect its financial position or results. It reported no material pending legal proceedings and no material changes to previously disclosed risk factors.

Other items to note: the company repatriated $5.75 million from a Singapore subsidiary during the quarter; its adoption of the new revenue-recognition standard had no reported impact; and it was evaluating the expected effects of the new lease-accounting standard. A new stock option plan was subject to shareholder approval.

Important facts for investors to verify

• Confirm the requested period: this filing covers the quarter ended May 27, 2018, in fiscal 2019, rather than a 2017 first quarter.
• Track progress, expected timing, and potential financial effects of the strategic review or any sale of the Electronics business.
• Assess whether higher sales and gross margins persist, especially given management’s stated demand-forecast uncertainty and Aerospace’s recovery from a customer inventory correction.
• Monitor working-capital demands and operating cash conversion, including receivables and inventory growth.
• Review the location and accessibility of overseas cash, income-tax obligations, and remaining restructuring costs.