PARK AEROSPACE CORP - Quarter Report: 2016 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 27, 2016

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to__________

Commission file number 1-4415

PARK ELECTROCHEMICAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

                  (631) 465-3600                    

(Registrant's Telephone Number, Including Area Code)

                  Not Applicable                    

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,234,671 as of January 3, 2017.

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item I.     Financial Statements.

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

*The balance sheet at February 28, 2016 has been derived from the audited financial statements at that date. 

See Notes to Consolidated Financial Statements (Unaudited).

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts) 

See Notes to Consolidated Financial Statements (Unaudited).

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Amounts in thousands) 

See Notes to Consolidated Financial Statements (Unaudited).

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) 

See Notes to Consolidated Financial Statements (Unaudited).

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share (unless otherwise stated), per share and option amounts)

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

General:

Park Electrochemical Corp. (“Park” or the “Company”) is a global advanced materials company which develops, manufactures, markets and sells advanced composite materials, primary and secondary structures and assemblies and low-volume tooling for the aerospace markets and high-technology digital and RF/microwave printed circuit materials principally for the telecommunications and internet infrastructure, enterprise and military/aerospace markets. The Company’s manufacturing facilities are located in Kansas, Singapore, France, Arizona and California. The Company also maintains research and development facilities in Arizona, Kansas and Singapore.

Financial Overview

The Company's total net sales worldwide in the 13 weeks and 39 weeks ended November 27, 2016 were 23% and 21% lower, respectively, than in the 13 weeks and 39 weeks ended November 29, 2015 principally as a result of lower sales of the Company’s printed circuit materials products in Asia and North America and lower sales of the Company’s aerospace composite materials, structures and assemblies products. The Company’s total net sales worldwide in the 13 weeks ended November 27, 2016 were lower than such sales in the 13 weeks ended August 28, 2016 as a result of lower sales of the Company’s printed circuit materials products in Asia and North America and lower sales of the Company’s aerospace composite materials, structures and assemblies products in the 13 weeks ended November 27, 2016.

The Company’s gross profit margins, measured as percentages of sales, decreased to 25.1% and 26.0%, respectively, in the 13 weeks and 39 weeks ended November 27, 2016 from 30.0% and 29.1%, respectively, in the 13 weeks and 39 weeks ended November 29, 2015 principally as a result of lower sales and production levels of printed circuit materials products in Asia and North America. 

The Company’s earnings from operations and net earnings were 61% and 54% lower, respectively, in the 13 weeks ended November 27, 2016 than in last fiscal year’s comparable period primarily as a result of the aforementioned decrease in sales and reduction in the gross profit margin. Earnings from operations in the 13 weeks ended November 27, 2016 included pre-tax restructuring charges of $113,000 in connection with the closure in fiscal year 2009 of the New England Laminates Co., Inc. facility located in Newburgh, New York. Earnings from operations in the 13 weeks ended November 29, 2015 included pre-tax restructuring charges of $158,000 related to facility closures in prior fiscal years.

The Company’s earnings from operations and net earnings were 53% and 49% lower, respectively, in the 39 weeks ended November 27, 2016 than in last fiscal year’s comparable period primarily as a result of the aforementioned decrease in sales and reduction in the gross profit margin, partially offset by a 6% reduction in selling, general and administrative expenses. Earnings from operations in the 39 weeks ended November 27, 2016 and in the 39 weeks ended November 29, 2015 included pre-tax restructuring charges of $206,000 and $373,000, respectively, related to the aforementioned facility closures.

The global markets for the Company’s products continue to be very difficult to forecast, and it is not clear to the Company what the demand for the Company’s products will be in the remainder of the 2017 fiscal year or beyond.

Results of Operations:

The following table provides the components of the consolidated statements of operations:

Net Sales

The Company’s total net sales worldwide in the 13 weeks and 39 weeks ended November 27, 2016 decreased to $26.5 million and $87.0 million, respectively, from $34.3 million and $110.1 million in the 13 weeks and 39 weeks, respectively, ended November 29, 2015 primarily as a result of lower sales of the Company’s printed circuit materials products in Asia and North America and lower sales of the Company’s aerospace composite materials, structures and assemblies products.

The Company’s total net sales of its printed circuit materials products were $19.0 million and $63.0 million in the 13 weeks and 39 weeks, respectively, ended November 27, 2016, or 72% and 72%, respectively, of the Company’s total net sales worldwide in such periods, compared to $25.5 million and $79.8 million in the 13 weeks and 39 weeks, respectively, ended November 29, 2015, or 74% and 73%, respectively, of the Company’s total net sales worldwide in such periods. The Company’s total net sales of its aerospace composite materials, structures and assemblies products were $7.5 million and $24.0 million in the 13 weeks and 39 weeks, respectively, ended November 27, 2016, or 28% of the Company’s total net sales worldwide in both such periods, compared to $8.9 million and $30.3 million in the 13 weeks and 39 weeks, respectively, ended November 29, 2015, or 26% and 27%, respectively, of the Company’s total net sales worldwide in such periods.

The Company's foreign sales were $13.4 million and $41.1 million, respectively, in the 13 weeks and 39 weeks ended November 27, 2016, or 51% and 47%, respectively, of the Company's total net sales worldwide in such periods, compared to $16.3 million and $52.4 million, respectively, of foreign sales, or 47% and 48%, respectively, of total net sales worldwide in last fiscal year's comparable periods. The Company’s foreign sales in the 13-week and 39-week periods ended November 27, 2016 decreased 18% and 22%, respectively, from the 2016 fiscal year’s comparable periods. The decrease in the 13-week and 39-week periods was primarily due to the lower sales in Asia described above.

In the 13 weeks ended November 27, 2016, the Company’s sales in North America, Asia and Europe were 49%, 41% and 10%, respectively, of the Company’s total net sales worldwide compared to 53%, 40% and 7%, respectively, in the 13 weeks ended November 29, 2015. In the 39 weeks ended November 27, 2016, the Company’s sales in North America, Asia and Europe were 53%, 39% and 8%, respectively, of the Company’s total net sales worldwide compared to 53%, 41% and 6%, respectively, in the 39 weeks ended November 29, 2015. The Company’s sales in North America decreased 28%, its sales in Asia decreased 22% and its sales in Europe increased 4% in the 13-week period ended November 27, 2016 compared to the 13-week period ended November 29, 2015, and its sales in North America decreased 20%, its sales in Asia decreased 25% and its sales in Europe increased 3% in the 39-week period ended November 27, 2016 compared to the 39-week period ended November 29, 2015.

During the 13-week periods ended November 27, 2016 and November 29, 2015, total net sales worldwide of high performance printed circuit materials were 94% of the Company’s total net sales worldwide of printed circuit materials. During the 39-week periods ended November 27, 2016 and November 29, 2015, the Company’s total net sales worldwide of high performance printed circuit materials were 93% of the Company’s total net sales worldwide of printed circuit materials.

The Company’s high performance printed circuit materials (non-FR4 printed circuit materials) include high-speed, low-loss materials for digital and RF/microwave applications requiring lead-free compatibility and high bandwidth signal integrity, bismalimide triazine (“BT”) materials, polyimides for applications that demand extremely high thermal performance and reliability, cyanate esters, quartz reinforced materials, and polytetrafluoroethylene (“PTFE”) and modified epoxy materials for RF/microwave systems that operate at frequencies of at least 79GHz.

Gross Profit

The Company’s gross profits in the 13 weeks and 39 weeks ended November 27, 2016 were lower than its gross profits in the prior year’s comparable periods, and the gross profits as percentages of sales for the Company’s worldwide operations in the 13 weeks and 39 weeks ended November 27, 2016 decreased to 25.1% and 26.0%, respectively, from 30.0% and 29.1%, respectively, in the 13 weeks and 39 weeks ended November 29, 2015 primarily due to lower sales and production levels of the Company’s printed circuit materials products in Asia and North America. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $660,000 during the 13 weeks ended November 27, 2016, or by 13%, and decreased by $1,023,000 during the 39 weeks ended November 27, 2016, or by 6%, compared to last fiscal year's comparable periods, and these expenses, measured as percentages of sales, were 17.4% and 17.3%, respectively, in the 13 weeks and 39 weeks ended November 27, 2016 compared to 15.3% and 14.6%, respectively, in the 13 weeks and 39 weeks ended November 29, 2015.

Selling, general and administrative expenses included stock option expenses of $264,000 and $968,000, respectively, for the 13 weeks and 39 weeks ended November 27, 2016, compared to stock option expenses of $351,000 and $1,192,000, respectively, for the 13 weeks and 39 weeks ended November 29, 2015.

Restructuring Charges

In the 13 weeks and 39 weeks ended November 27, 2016, the Company recorded pre-tax restructuring charges of $113,000 and $206,000, respectively, compared to $158,000 and $373,000, respectively, in the 13 weeks and 39 weeks ended November 29, 2015, in connection with the closures in prior years of its facilities located in Zhuhai, China and Newburgh, New York.

Earnings from Operations

For the reasons set forth above, the Company's earnings from operations were $1.9 million and $7.4 million, respectively, for the 13 weeks and 39 weeks ended November 27, 2016, which included the aforementioned restructuring charges of $113,000 and $206,000, respectively, compared to $4.9 million and $15.6 million, respectively, for the 13 weeks and 39 weeks ended November 29, 2015, which included the aforementioned restructuring charges of $158,000 and $373,000, respectively.

Interest Expense

Interest expense in the 13 weeks and 39 weeks ended November 27, 2016 related to the Company’s outstanding borrowings under the three-year revolving credit facility agreement that the Company entered into with HSBC Bank in the fourth quarter of the 2016 fiscal year. The agreement provides for an interest rate on the outstanding loan balance of LIBOR plus 1.15%. Other interest rate options are available to the Company under the agreement. See “Liquidity and Capital Resources” elsewhere in this Item 2 and Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this Report for additional information.

Interest and Other Income

Interest income was $430,000 and $1,177,000, respectively, for the 13 weeks and 39 weeks ended November 27, 2016 compared to $227,000 and $809,000, respectively, for last fiscal year's comparable periods. Interest income increased 89% and 45%, respectively, for the 13 weeks and 39 weeks ended November 27, 2016 primarily as a result of higher weighted average interest rates and larger average balances of marketable securities held by the Company in the 13 weeks and 39 weeks ended November 27, 2016 compared to last fiscal year's comparable periods. During the 39 weeks ended November 27, 2016, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

Income Tax Provision 

Net Earnings

For the reasons set forth above, the Company's net earnings for the 13 weeks and 39 weeks ended November 27, 2016 were $1.9 million and $6.8 million, respectively, including the pre-tax restructuring charges described above, compared to net earnings of $4.1 million and $13.5 million for the 13 weeks and 39 weeks, respectively, ended November 29, 2015, including the pre-tax restructuring charges described above.

Basic and Diluted Earnings Per Share

In the 13 weeks and 39 weeks ended November 27, 2016, basic and diluted earnings per share were $0.09 and $0.34, respectively, including, in both such periods, the restructuring charges described above. This compared to basic and diluted earnings per share of $0.20 and $0.66 in the 13 weeks and 39 weeks, respectively, ended November 29, 2015, including, in both such periods, the restructuring charges described above. The net impact of the restructuring charges described above reduced basic and diluted earnings per share by $0.01 in each of the 13-week periods ended November 27, 2016 and November 29, 2015 and reduced basic and diluted earnings per share by $0.01 in the 39 weeks ended November 29, 2015.

Liquidity and Capital Resources:

Cash and Marketable Securities

Of the $248.8 million of cash and marketable securities and restricted cash at November 27, 2016, $238.0 million was owned by certain of the Company’s wholly owned foreign subsidiaries. The Company believes it has sufficient liquidity to fund its operating activities through the end of the 2017 fiscal year and for the foreseeable future thereafter.

The change in cash, marketable securities and restricted cash at November 27, 2016 compared to February 28, 2016 was the result of cash used in operating activities and a number of additional factors. The significant changes in cash flows from operating activities were as follows:

In addition, the Company paid $6.1 million in cash dividends in each of the 39-week periods ended November 27, 2016 and November 29, 2015. During the 39 weeks ended November 27, 2016, the Company also made $2.3 million of principal payments on its long-term debt. During the 39 weeks ended November 29, 2015, the Company also received $2.0 million of proceeds from the sale of the Nelco Zhuhai building in Zhuhai, China, made $7.5 million of principal payments on its long-term debt and purchased shares of its common stock at an aggregate cost of $11.9 million.

Working Capital

Working capital did not change significantly at November 27, 2016 compared to February 28, 2016.

The Company's current ratio (the ratio of current assets to current liabilities) was 19.8 to 1 at November 27, 2016 compared to 16.3 to 1 at February 28, 2016.

Cash Flows

During the 39 weeks ended November 27, 2016, the Company's cash flow provided by operating activities were $10.7 million. During the same 39-week period, the Company expended $194,000 for the purchase of property, plant and equipment, compared with $320,000 during the 39-weeks ended November 29, 2015.  The Company paid $6.1 million in cash dividends in each of the 39-week periods ended November 27, 2016 and November 29, 2015, respectively.  In addition, during the 39 week period ended November 29, 2015, the Company received $2.0 million in proceeds from the sale of the Nelco Zhuhai building in Zhuhai, China, made $7.5 million of principal payments on its long-term debt and purchased shares of its common stock at an aggregate cost of $11.9 million.

Debt

At November 27, 2016 and February 28, 2016, the Company had $72.8 million and $75.0 million of bank debt, respectively. In the fourth quarter of 2016, the Company entered into a three-year revolving credit facility agreement (the “Credit Agreement”) with HSBC Bank. The Credit Agreement provides for loans up to $75.0 million to the Company and letters of credit up to $2.0 million for the account of the Company, and subject to the terms and conditions of the Credit Agreement, an interest rate on the outstanding loan balance of LIBOR plus 1.15%. The Credit Agreement contains certain customary affirmative and negative covenants and customary financial covenants. In the event that the Company breaches a covenant that is deemed to be a default under the Credit Agreement requiring prepayment of the outstanding borrowings, the Company has sufficient liquidity to prepay the outstanding amount, as well as any related income taxes for potentially repatriated funds, at any time, and such prepayment would not have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial position. For additional information, see Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this Report.

Other Liquidity Factors

The Company believes its financial resources will be sufficient, through the end of the 2017 fiscal year and for the foreseeable future thereafter, to provide for continued investment in working capital and property, plant and equipment and for general corporate purposes. The Company’s financial resources are also available for purchases of the Company's common stock, appropriate acquisitions and other expansions of the Company's business.

The Company is not aware of any circumstances or events that are reasonably likely to occur that could materially affect its liquidity.

Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of (i) operating lease commitments and commitments to purchase raw materials and (ii) the bank debt described above. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $1.0 million to secure the Company's obligations under its workers' compensation insurance program.

Off-Balance Sheet Arrangements:

The Company's liquidity is not dependent on the use of, and the Company is not engaged in, any off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities.

Critical Accounting Policies and Estimates:

The foregoing Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, contingencies and litigation, and employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates and assumptions and the application of management’s judgment are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2016. There have been no significant changes to such accounting policies during the 2017 fiscal year third quarter.

Contingencies:

The Company is subject to a number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

Factors That May Affect Future Results.

Certain portions of this Report which do not relate to historical financial information may be deemed to constitute forward-looking statements that are subject to various factors which could cause actual results to differ materially from the Company’s expectations or from results which might be projected, forecast, estimated or budgeted by the Company in forward-looking statements. Such factors include, but are not limited to, general conditions in the electronics and aerospace industries, the Company's competitive position, the status of the Company's relationships with its customers, economic conditions in international markets, the cost and availability of raw materials, transportation and utilities, and the various factors set forth in Item 1A “Risk Factors” and under the caption "Factors That May Affect Future Results" after Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2016.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

The Company's market risk exposure at November 27, 2016 is consistent with, and not greater than, the types of market risk and amount of exposures presented in the Annual Report on Form 10-K for the fiscal year ended February 28, 2016.

Item 4.     Controls and Procedures.

(a)     Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of November 27, 2016, the end of the quarterly fiscal period covered by this quarterly report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b)     Changes in Internal Control Over Financial Reporting.

There has not been any change in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Report relates that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.     Legal Proceedings.

None.

Item 1A.    Risk Factors.

There have been no material changes in the risk factors as previously disclosed in the Company’s Form 10-K Annual Report for the fiscal year ended February 28, 2016.

The following table provides information with respect to shares of the Company's Common Stock acquired by the Company during each month included in the Company’s 2017 fiscal year third quarter ended November 27, 2016.

Item 3.     Defaults Upon Senior Securities.

None.

Item 4.     Mine Safety Disclosures.

None.

Item 5.     Other Information.

None.

Item 6.     Exhibits.

*      Filed electronically herewith.

+      Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

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