PARK AEROSPACE CORP - Quarter Report: 2019 December (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended December 1, 2019

 

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 AEROSPACE CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

New York			11-1734643
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

 

1400 Old Country Road, Westbury, N.Y.		11590
(Address of Principal Executive Offices)		(Zip Code)

 

                  (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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $.10 per share	PKE	New York Stock Exchange

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

 

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

 

Large Accelerated Filer ☐

Accelerated Filer ☒

Non-Accelerated Filer ☐

Smaller Reporting Company ☐

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,518,548 as of January 6, 2020. 

 

 

 

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		December 1, 2019 (unaudited)				March 3, 2019*
ASSETS
Current assets
Cash and cash equivalents		$	6,680			$	71,007
Marketable securities (Note 3)			137,486				80,617
Accounts receivable, less allowance for doubtful accounts of $44 and $32, respectively			10,194				9,352
Inventories (Note 4)			3,936				5,267
Prepaid expenses and other current assets			1,703				1,690
Total current assets			159,999				167,933
Property, plant and equipment, net			14,011				10,791
Operating right-of-use assets (Note 5)			453				-
Goodwill and other intangible assets			9,811				9,811
Other assets			284				316
Total assets		$	184,558			$	188,851
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable		$	2,010			$	3,169
Operating lease liabilities (Note 5)			152				-
Accrued liabilities			2,039				2,920
Income taxes payable			1,737				5,066
Total current liabilities			5,938				11,155
Long-term operating lease liabilities (Note 5)			301				-
Non-current income taxes payable (Note 9)			15,986				17,669
Deferred income taxes (Note 9)			103				-
Other liabilities			1,067				1,016
Total liabilities			23,395				29,840
Commitments and contingencies (Note 12)
Shareholders' equity (Note 8)
Common stock			2,096				2,096
Additional paid-in capital			169,542				169,395
Accumulated deficit			(1,587	)			(2,605	)
Accumulated other comprehensive earnings (loss)			307				(22	)
			170,358				168,864
Less treasury stock, at cost			(9,195	)			(9,853	)
Total shareholders' equity			161,163				159,011
Total liabilities and shareholders' equity		$	184,558			$	188,851

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		13 Weeks Ended (Unaudited)								39 Weeks Ended (Unaudited)
		December 1,				November 25,				December 1,				November 25,
		2019				2018				2019				2018
Net sales		$	15,847			$	12,853			$	44,520			$	34,457
Cost of sales			10,825				8,569				30,881				24,176
Gross profit			5,022				4,284				13,639				10,281
Selling, general and administrative expenses			1,949				1,983				5,785				6,200
Earnings from continuing operations			3,073				2,301				7,854				4,081
Interest and other income			802				393				2,613				1,090
Earnings from continuing operations before income taxes			3,875				2,694				10,467				5,171
Income tax provision (Note 9)			1,069				616				2,895				453
Net earnings from continuing operations			2,806				2,078				7,572				4,718
(Loss) earnings from discontinued operations, net of tax (Note 11)			(360	)			1,613				(404	)			4,841
Net earnings		$	2,446			$	3,691			$	7,168			$	9,559
Earnings per share (Note 7)
Basic:
Continuing operations		$	0.14			$	0.10			$	0.37			$	0.23
Discontinued operations			(0.02	)			0.08				(0.02	)			0.24
Basic earnings per share		$	0.12			$	0.18			$	0.35			$	0.47
Basic weighted average shares			20,518				20,278				20,503				20,258
Diluted:
Continuing operations		$	0.14			$	0.10			$	0.37			$	0.23
Discontinued operations			(0.02	)			0.08				(0.02	)			0.24
Diluted earnings per share		$	0.12			$	0.18			$	0.35			$	0.47
Diluted weighted average shares			20,617				20,352				20,601				20,343

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		13 Weeks Ended (Unaudited)								39 Weeks Ended (Unaudited)
		December 1,				November 25,				December 1,				November 25,
		2019				2018				2019				2018
Net earnings		$	2,446			$	3,691			$	7,168			$	9,559
Other comprehensive earnings (loss), net of tax:
Foreign currency translation			-				8				-				7
Unrealized gains on marketable securities:
Unrealized holding gains arising during the period			24				-				594				-
Less: reclassification adjustment for gains included in net earnings			(1	)			-				(24	)			-
Unrealized losses on marketable securities:
Unrealized holding losses arising during the period			(248	)			(19	)			(274	)			(37	)
Less: reclassification adjustment for losses included in net earnings			15				30				33				140
Other comprehensive (loss) earnings			(210	)			19				329				110
Total comprehensive earnings		$	2,236			$	3,710			$	7,497			$	9,669

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																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Accumulated				Comprehensive				Treasury Stock
		Shares				Amount				Capital				Deficit				Earnings (Loss)				Shares				Amount
Balance, March 3, 2019			20,965,144			$	2,096			$	169,395			$	(2,605	)		$	(22	)			479,191			$	(9,853	)
Net earnings			-				-				-				2,587				-				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				346				-				-
Stock options exercised			-				-				(56	)			-				-				(6,200	)			127
Stock-based compensation			-				-				124				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,049	)			-				-				-
Balance, June 2, 2019			20,965,144				2,096				169,463				(2,067	)			324				472,991				(9,726	)
Net earnings			-				-				-				2,135				-				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				193				-				-
Stock options exercised			-				-				(179	)			-				-				(22,974	)			473
Stock-based compensation			-				-				141				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,050	)			-				-				-
Balance, September 1, 2019			20,965,144				2,096				169,425				(1,982	)			517				450,017				(9,253	)
Net earnings			-				-				-				2,446				-				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				(210	)			-				-
Stock options exercised			-				-				(22	)			-				-				(2,812	)			58
Stock-based compensation			-				-				139				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,051	)			-				-				-
Balance, December 1, 2019			20,965,144			$	2,096			$	169,542			$	(1,587	)		$	307				447,205			$	(9,195	)

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																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Accumulated				Comprehensive				Treasury Stock
		Shares				Amount				Capital				Deficit				Earnings (Loss)				Shares				Amount
Balance, February 25, 2018			20,965,144			$	2,096			$	169,011			$	(21,099	)		$	131				723,573			$	(14,878	)
Net earnings			-				-				-				3,168				-				-				-
Foreign currency translation adjustment for sale of business			-				-				-				-				(19	)			-				-
Unrealized loss on marketable securities, net of tax			-				-				-				-				(16	)			-				-
Stock options exercised			-				-				(14	)			-				-				(2,987	)			61
Stock-based compensation			-				-				201				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,023	)			-				-				-
Balance, May 27, 2018			20,965,144				2,096				169,198				(19,954	)			96				720,586				(14,817	)
Net earnings			-				-				-				2,700				-				-				-
Foreign currency translation adjustment for sale of business			-				-				-				-				18				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				108				-				-
Stock options exercised			-				-				(93	)			-				-				(32,550	)			670
Stock-based compensation			-				-				199				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,024	)			-				-				-
Balance, August 26, 2018			20,965,144				2,096				169,304				(19,278	)			222				688,036				(14,147	)
Net earnings			-				-				-				3,691				-				-				-
Foreign currency translation adjustment for sale of business			-				-				-				-				8				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				11				-				-
Stock options exercised			-				-				(10	)			-				-				(2,300	)			47
Stock-based compensation			-				-				195				-				-				-				-
Cash dividends ($0.10 per share)			-				-				-				(2,028	)			-				-				-
Balance, November 25, 2018			20,965,144			$	2,096			$	169,489			$	(17,615	)		$	241				685,736			$	(14,100	)

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		39 Weeks Ended (Unaudited)
		December 1,				November 25,
		2019				2018
Cash flows from operating activities:
Net earnings from continuing operations		$	7,572			$	4,718
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization			1,142				1,317
Stock-based compensation			404				594
Deferred income taxes			103				(940	)
Amortization of bond premium			(36	)			(34	)
Changes in operating assets and liabilities			(6,492	)			(430	)
Net cash provided by operating activities - continuing operations			2,693				5,225
Net cash (used in) provided by operating activities - discontinued operations			(404	)			5,731
Net cash provided by operating activities			2,289				10,956
Cash flows from investing activities:
Purchase of property, plant and equipment			(4,363	)			(399	)
Purchases of marketable securities			(100,454	)			(19,271	)
Proceeds from sales and maturities of marketable securities			43,950				14,238
Net cash used in investing activities - continuing operations			(60,867	)			(5,432	)
Net cash used in investing activities - discontinued operations			-				(158	)
Net cash used in investing activities			(60,867	)			(5,590	)
Cash flows from financing activities:
Dividends paid			(6,150	)			(6,076	)
Proceeds from exercise of stock options			401				661
Net cash used in financing activities - continuing operations			(5,749	)			(5,415	)
Net cash used in financing activities - discontinued operations			-				-
Net cash used in financing activities			(5,749	)			(5,415	)
Decrease in cash and cash equivalents before effect of exchange rate changes - continuing operations			(63,923	)			(5,622	)
Decrease in cash and cash equivalents before effect of exchange rate changes - discontinued operations			(404	)			5,573
Decrease in cash and cash equivalents before effect of exchange rate changes			(64,327	)			(49	)
Effect of exchange rate changes on cash and cash equivalents - continuing operations			-				(3	)
Effect of exchange rate changes on cash and cash equivalents - discontinued operations			-				(1,207	)
Effect of exchange rate changes on cash and cash equivalents			-				(1,210	)
Decrease in cash and cash equivalents			(64,327	)			(1,259	)
Cash and cash equivalents, beginning of period			71,007				18,254
Cash and cash equivalents, end of period		$	6,680			$	16,995
Supplemental cash flow information:
Cash paid during the period for income taxes, net of refunds		$	7,614			$	2,332

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1. CONSOLIDATED FINANCIAL STATEMENTS

 

The Condensed Consolidated Balance Sheet as of December 1, 2019, the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Earnings and the Consolidated Statements of Shareholders’ Equity for the 13 weeks and 39 weeks ended December 1, 2019 and November 25, 2018 and the Condensed Consolidated Statements of Cash Flows for the 39 weeks then ended have been prepared by Park Aerospace Corp., formerly Park Electrochemical Corp. (the “Company”), without audit. In the opinion of management, these unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at December 1, 2019 and the results of operations and cash flows for all periods presented. The Consolidated Statements of Operations are not necessarily indicative of the results to be expected for the full fiscal year or any subsequent interim period.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2019.  There have been no significant changes to such accounting policies during the 39 weeks ended December 1, 2019, except for adoption of Accounting Standards Codification (“ASC”) 842. (See Note 13, Accounting Pronouncements)

 

On July 25, 2018, the Company entered into an agreement to sell its Electronics Business for $145,000 in cash.  The Company completed this transaction on December 4, 2018. (See Note 11, Discontinued Operations)

 

The Company has classified the operating results of its Electronics Business, together with certain costs related to the transaction, as discontinued operations, net of tax, in the Consolidated Statements of Operations, in accordance with ASC 205-20 Discontinued Operations. (See Note 11, Discontinued Operations)

 

On July 16, 2019, the Company filed with the State of New York Department of State a Certificate of Amendment of its Restated Certificate of Incorporation, as amended, changing its name to “Park Aerospace Corp.” after the Board of Directors of the Company approved such amendment and the shareholders of the Company approved such amendment at the Annual Meeting of Shareholders. On July 16, 2019, the Company also filed with the Secretary of State of the State of Kansas, a Certificate of Ownership and Merger whereby the Company’s wholly owned subsidiary, Park Aerospace Technologies Corp. (“PATC”), located at the Newton, Kansas Airport was merged into the Company and ceased to exist.

 

2. FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

 

Fair value measurements are broken down into three levels based on the reliability of inputs as follows:

 

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlying financial instrument, as well as other relevant economic measures.

 

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

The fair value of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value due to their short-term nature. Certain assets and liabilities of the Company are required to be recorded at fair value on either a recurring or non-recurring basis. On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs. (See Note 3, Marketable Securities)

 

The Company’s non-financial assets measured at fair value on a non-recurring basis include goodwill and any long-lived assets written down to fair value. To measure fair value of such assets, the Company uses Level 3 inputs consisting of techniques including an income approach and a market approach. The income approach is based on a discounted cash flow analysis and calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the discounted cash flow analysis require the exercise of significant judgment, including judgment about appropriate discount rates, terminal values, growth rates and the amount and timing of expected future cash flows. There were no transfers between levels within the fair value hierarchy during the 39 weeks ended December 1, 2019 and November 25, 2018. With respect to goodwill, the Company first assesses qualitative factors to determine whether it is more likely than not that fair value is less than carrying value. If, based on that assessment, the Company believes it is more likely than not that fair value is less than carrying value, a goodwill impairment test is performed. There have been no changes in events or circumstances which required impairment charges to be recorded during the 13 or 39 weeks ended December 1, 2019.

 

3. MARKETABLE SECURITIES

 

All marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, included in comprehensive earnings. Realized gains and losses, amortization of premiums and discounts, and interest and dividend income are included in interest and other income in the Consolidated Statements of Operations. The costs of securities sold are based on the specific identification method.

 

 

The following is a summary of available-for-sale securities:

 

  

 

The following table shows the amortized cost basis of, and gross unrealized gains and losses on, the Company’s available-for-sale securities:

 

 

The estimated fair values of such securities at December 1, 2019 by contractual maturity are shown below:

 

 

 

 

4. INVENTORIES

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company’s products and market conditions. Work-in-process and finished goods inventories cost valuations include direct material costs as well as a portion of the Company’s labor and overhead expenses.  The Company’s overhead expenses that are applied to its finished goods inventories are based on actual expenses related to the procurement, storage, shipment and production of the finished goods. Inventories consisted of the following:

 

 

5. LEASES

 

The Company has operating leases related to land, office space, warehouse space and equipment. All of the Company’s leases have been assessed to be operating leases. Renewal options are included in the lease terms to the extent the Company is reasonably certain to exercise the option. The exercise of lease renewal options is at the Company’s sole discretion. The incremental borrowing rate represents the Company’s ability to borrow on a collateralized basis over a term similar to the lease term. The leases typically contain renewal options for periods ranging from one year to ten years and require the Company to pay real estate taxes and other operating costs. The latest land lease expiration is 2068 assuming exercise of all applicable renewal options by the Company. The Company’s existing leases are not subject to any restrictions or covenants which preclude its ability to pay dividends, obtain financing or exercise its available renewal options.

 

Future minimum lease payments under non-cancellable operating leases as of December 1, 2019 are as follows:

 

 

The above payment schedule includes renewal options that the Company is reasonably likely to exercise. Leases with an initial term of 12 months or less are not recorded on the Company’s balance sheet. The Company recognizes lease expense for leases on a straight-line basis over the terms of the leases. The above payment schedule does not include lease payments of $199 in 2020 and $463 in 2021 for the Company’s idle facility in Fullerton, California that have been accrued on the condensed consolidated balance sheets in accrued liabilities.

 

 

For the 13 weeks and 39 weeks ended December 1, 2019, the Company’s operating lease expense was $88 and $278, respectively. Cash payments of $274, pertaining to operating leases, are reflected in the condensed consolidated cash flow statement under cash flows from operating activities.

 

The following table sets forth the right-of-use assets and operating lease liabilities as of December 1, 2019:

 

 

The Company’s weighted average remaining lease term for its operating leases is 5.9 years.

 

In December 2018, PATC entered into a Development Agreement with the City of Newton, Kansas and the Board of County Commissioners of Harvey County, Kansas. Pursuant to this agreement, PATC agreed to construct and operate an additional manufacturing facility of approximately 90,000 square feet for the design, development and manufacture of advanced composite materials and parts, structures and assemblies for aerospace. PATC further agreed to equip the facility through the purchase of machinery, equipment and furnishings and to create additional new full-time employment of specified levels during a five-year period. In exchange for these agreements, the City and the County agreed to lease to PATC three acres of land at the Newton, Kansas Airport, in addition to the eight acres previously leased to PATC by the City and County. The City and County further agreed to provide financial and other assistance toward the construction of the additional facility as set forth in the Development Agreement. The Company estimates the total cost of the additional facility to be approximately $20 million, and the Company expects to complete the construction of the additional facility in the second half of the 2020 calendar year. As of December 1, 2019, the Company had $1,170 in equipment purchase obligations and $5,385 of construction-in-progress related to the additional facility. On July 16, 2019, PATC was merged into the Company and ceased to exist, and the Company assumed the rights and obligations of PATC, including the rights and obligations of PATC under the Development Agreement. (See Note 1, Consolidated Financial Statements)

 

6. STOCK-BASED COMPENSATION

 

As of December 1, 2019, the Company had a 2018 Stock Option Plan (the “2018 Plan”), and no other stock-based compensation plan. The 2018 Plan was adopted by the Board of Directors of the Company on May 8, 2018 and approved by the shareholders of the Company at the Annual Meeting of Shareholders of the Company on July 24, 2018 and provides for the grant of options to purchase up to 800,000 shares of common stock of the Company to directors, employees and consultants. Prior to the 2018 Plan, the Company had the 2002 Stock Option Plan (the “2002 Plan”) which had also been approved by the Company’s shareholders and provided for the grant of stock options to directors and key employees of the Company. All options granted under the 2018 Plan and 2002 Plan have exercise prices equal to the fair market value of the underlying common stock of the Company at the time of grant which, pursuant to the terms of such Plans, is the reported closing price of the common stock on the New York Stock Exchange on the date preceding the date the option is granted. Options granted under the Plans become exercisable 25% one year after the date of grant, with an additional 25% exercisable each succeeding anniversary of the date of grant, and expire 10 years after the date of grant. Upon termination of employment or service as a director of an optionee, all options held by the optionee that have not previously become exercisable shall terminate and all other options held by such optionee may be exercised, to the extent exercisable on the date of such termination, for a limited time after such termination. Any shares of common stock subject to an option under the 2018 Plan which expires or is terminated unexercised as to such shares shall again become available for issuance under the 2018 Plan.

 

 

The 2002 Plan terminated on May 21, 2018, and authority to grant additional options under the 2002 Plan expired on that date. All options granted under the 2002 Plan will expire in April 2028 or earlier.

 

During the 39 weeks ended December 1, 2019, the Company granted options under the 2018 Plan to purchase a total of 114,450 shares of common stock to its directors and certain of its employees. The weighted average fair value of the granted options was $3.97 per share using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 2.24%-2.26%; expected volatility factor of 30.4%-31.5%; expected dividend yield of 2.43%; and estimated option term of 4.3-5.8 years.

 

The risk-free interest rates were based on U.S. Treasury rates at the date of grant with maturity dates approximately equal to the estimated terms of the options at the date of the grant. Volatility factors were based on historical volatility of the Company’s common stock. The expected dividend yields were based on the regular quarterly cash dividend per share most recently declared by the Company and on the exercise price of the options granted during the 39 weeks ended December 1, 2019. The estimated term of the options was based on evaluations of the historical and expected future employee exercise behavior.

 

The future compensation expense to be recognized in earnings before income taxes is $486 and will be recorded on a straight-line basis over the requisite service periods.

 

The following is a summary of option activity for the 39 weeks ended December 1, 2019:

 

 

 

 

 

7. EARNINGS PER SHARE

 

Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potentially dilutive securities outstanding during the period. Stock options are the only potentially dilutive securities; and the number of dilutive options is computed using the treasury stock method.

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

 

Potentially dilutive securities, which were not included in the computation of diluted earnings per share, because either the effect would have been anti-dilutive or the options’ exercise prices were greater than the average market price of the common stock, were 76,000 and 145,000 for the 13 weeks ended December 1, 2019 and November 25, 2018, respectively, and 115,000 and 279,000 for the 39 weeks ended December 1, 2019 and November 25, 2018, respectively.

 

8. SHAREHOLDERS’ EQUITY

 

During the 39 weeks ended December 1, 2019, the Company sold 31,986 shares of the Company’s treasury stock pursuant to the exercises of employee stock options, received proceeds of $401 from such exercises and recognized stock-based compensation expense, net of recognized tax benefits, of $404. These transactions resulted in a $257 increase in additional paid-in capital during the period.

 

On January 8, 2015, the Company announced that its Board of Directors authorized the Company’s purchase, on the open market and in privately negotiated transactions, of up to 1,250,000 shares of its common stock, representing approximately 6% of the Company’s 20,945,634 total outstanding shares as of the close of business on January 7, 2015. This authorization superseded all prior Board of Directors’ authorizations to purchase shares of the Company’s common stock.

 

 

On March 10, 2016, the Company announced that its Board of Directors authorized the Company’s purchase, on the open market and in privately negotiated transactions, of up to 1,000,000 additional shares of its common stock, in addition to the unused prior authorization to purchase shares of the Company’s common stock announced on January 8, 2015. As a result, the Company is authorized to purchase up to a total of 1,531,412 shares of its common stock, representing approximately 7.5% of the Company’s 20,518,548 total outstanding shares as of the close of business on January 6, 2020.

 

The Company did not purchase any shares of its common stock during the 39 weeks ended December 1, 2019 or during the 39 weeks ended November 25, 2018.

 

9. INCOME TAXES

 

For the 13 weeks and 39 weeks ended December 1, 2019, the Company recorded an income tax provision from continuing operations of $1,069 and $2,895, respectively. The income taxes for the 39 weeks ended December 1, 2019 were impacted by a one-time tax charge of $144,000 for the write down of deferred tax assets for expirations of stock options held by employees who transferred to AGC Inc. in connection with the sale of the Electronics Business. For the 13 and 39 weeks ended November 25, 2018, the Company recorded an income tax provision from continuing operations of $616 and $453, respectively. The income taxes for the 39 weeks ended November 25, 2018 were impacted by a one-time benefit of $788 related to clarifying regulations pertaining to the Tax Cuts and Jobs Act enacted in December 2017. 

 

The Company’s effective tax rates for the 13 weeks and 39 weeks ended December 1, 2019 were income tax provisions of 27.6% and 27.7%, respectively, compared to income tax provisions of 22.9% and 8.8%, respectively, in the comparable prior periods. The effective tax rates for the 13 weeks and 39 weeks ended December 1, 2019 were higher than the U.S. statutory rate of 21% primarily due to state and local taxes, a discrete income tax provision for stock compensation and the accrual of interest related to unrecognized tax benefits. The effective rate for the 39 weeks ended November 25, 2018 was lower than the U.S. statutory rate of 21% primarily due to the one-time benefit noted above.

 

Notwithstanding the U.S. taxation of the deemed repatriated earnings as a result of the mandatory one-time transition tax on the accumulated untaxed earnings of foreign subsidiaries of U.S. shareholders included in the 2017 Tax Cuts and Jobs Act, the Company intends to indefinitely invest approximately $25 million of undistributed earnings outside of the U.S. If these future earnings are repatriated to the U.S., or if the Company determines such earnings will be remitted in the foreseeable future, the Company may be required to accrue U.S. deferred taxes. The Company repatriated $1,500, $113,600, and $135,300 in cash from the Company’s subsidiary in Singapore in the 2020, 2019 and 2018 fiscal years, respectively.

 

10. GEOGRAPHIC REGIONS

 

The Company’s products are sold to customers in North America, Asia and Europe. The Company’s manufacturing facilities are located in Kansas. Sales are attributed to geographic regions based upon the region in which the materials were delivered to the customer. Sales between geographic regions were not significant. Customer sales concentrations for the 13 weeks and 39 weeks ended December 1, 2019 are not materially different from that reported in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2019.

 

 

Financial information regarding the Company’s continuing operations by geographic region is as follows:

 

 

 

11. DISCONTINUED OPERATIONS

 

On July 25, 2018, the Company entered into an agreement to sell its Electronics Business for $145,000 in cash. The Company completed this transaction on December 4, 2018.

 

The Company has classified the operating results of its Electronics Business, together with certain costs related to the transaction, as discontinued operations, net of tax, in the Consolidated Statements of Operations.

 

 

The following table shows the summary operating results of the discontinued operations:

 

 

During the 13 weeks ended December 1, 2019, the Company received from AGC Inc. the final settlement payment for the sale of the Electronics Business of $288 for post-closing adjustments for changes in working capital compared to target net working capital as agreed in the Electronics Business Purchase Agreement with AGC Inc. Additionally, during the 39 weeks ended December 1, 2019, the Company incurred transition and tax related costs of $231 in connection with the sale of the Electronics Business. 

 

During the 2018 fiscal year, the Company consolidated its Nelco Products, Inc. Business Unit located in Fullerton, California and its Neltec, Inc. Business Unit located in Tempe, Arizona. (Both Business Units were included in the Company’s sale of its Electronics Business on December 4, 2018). The Company estimates the remaining pre-tax charge in connection with the consolidation to be approximately $300, which the Company expects to incur primarily during the fiscal year ending March 1, 2020. Current year restructuring charges primarily relate to the exit from the facility located in Fullerton, California.

 

The following table sets forth the charges and accruals related to the consolidation:

 

 

 

 

12. CONTINGENCIES

 

Litigation 

 

The Company is subject to a small number of immaterial 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. The Company believes that the ultimate disposition of such proceedings, lawsuits and claims will not have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or financial position of the Company.

 

Environmental Contingencies 

 

The Company and certain of its subsidiaries have been named by the Environmental Protection Agency (the “EPA”) or a comparable state agency under the Comprehensive Environmental Response, Compensation and Liability Act (the “Superfund Act”) or similar state law as potentially responsible parties in connection with alleged releases of hazardous substances at three sites.

 

Under the Superfund Act and similar state laws, all parties who may have contributed any waste to a hazardous waste disposal site or contaminated area identified by the EPA or comparable state agency may be jointly and severally liable for the cost of cleanup. Generally, these sites are locations at which numerous persons disposed of hazardous waste. In the case of the Company’s subsidiaries, generally the waste was removed from their manufacturing facilities and disposed at waste sites by various companies which contracted with the subsidiaries to provide waste disposal services. Neither the Company nor any of its subsidiaries have been accused of or charged with any wrongdoing or illegal acts in connection with any such sites. The Company believes it maintains an effective and comprehensive environmental compliance program.

 

The insurance carriers which provided general liability insurance coverage to the Company and its subsidiaries for the years during which the Company’s subsidiaries’ waste was disposed at these three sites have in the past reimbursed the Company and its subsidiaries for 100% of their legal defense and remediation costs associated with two of these sites.

 

The Company does not record environmental liabilities and related legal expenses for which the Company believes that it and its subsidiaries have general liability insurance coverage for the years during which the Company’s subsidiaries’ waste was disposed at two sites for which certain subsidiaries of the Company have been named as potentially responsible parties. Pursuant to such general liability insurance coverage, three insurance carriers reimburse the Company and its subsidiaries for 100% of the legal defense and remediation costs associated with the two sites.

 

Included in selling, general and administrative expenses are charges for actual expenditures and accruals, based on estimates, for certain environmental matters described above. The Company accrues estimated costs associated with known environmental matters, when such costs can be reasonably estimated and when the outcome appears probable. The Company believes that the ultimate disposition of known environmental matters will not have a material adverse effect on the Company’s results of operations, cash flows or financial position.

 

 

 

13. ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a lease (i.e., lessees and lessors). The new standard requires lessees to classify leases as either finance leases or operating leases and record a right-of-use asset and a lease liability for all leases with terms greater than 12 months regardless of their classification. An accounting policy election may be made to account for leases with a term of 12 months or less similar to existing guidance for operating leases today. ASU No. 2016-02 supersedes the existing guidance on accounting for leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an optional transition method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective approach, which applies the new lease requirements at the beginning of the earliest period presented, and the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for the Company’s fiscal year ending March 1, 2020 and the interim periods within that year. The Company adopted this standard in the first quarter of the 2020 fiscal year using the optional transition method. The optional transition method enables the Company to adopt the new standard as of the beginning of the period of adoption and does not require restatement of prior period financial information.  As a result, prior period financial information has not been restated and continues to be reported under the accounting guidance that was effective during those periods. The Company also elected the practical expedients that allow the Company to carry forward the historical lease classification. At adoption, the Company elected the following practical expedients: (1) the “package of practical expedients”, pursuant to which the Company did not need to reassess its prior conclusions about lease identification, lease classification and initial direct costs, (2) creation of an accounting policy for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term, and (3) to account separately for lease and non-lease components for all leases. The Company has established an inventory of existing leases and implemented a new process of evaluating the classification of each lease. The financial impact of the adoption of the new standard in the 2020 fiscal year increased total assets and total liabilities by approximately $551. The financial impact of the adoption primarily relates to the capitalization of right-of-use assets and recognition of lease liability related to operating leases. See Note 5, Leases, for additional information with respect to the impact of the adoption of the lease accounting guidance and the disclosures required by ASU 2016-02 and the related amendments.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for reclassification of stranded tax effects resulting from U.S. Tax Reform from accumulated other comprehensive loss to retained earnings, but it does not require this reclassification. This ASU is effective for the Company’s fiscal year ending March 1, 2020 and the interim periods within that year. The Company adopted this ASU in the first quarter of its 2020 fiscal year and elected to reclassify the stranded tax effects resulting from U.S. Tax Reform. As a result of that election, the adoption of ASU 2018-02 did not have an impact on the Company’s consolidated financial statements and disclosures.

 

 

Recently Issued

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. This ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). This ASU is effective for the Company’s fiscal year ending February 28, 2021 and for the interim periods within that year. Early adoption is permitted. ASU 2018-13 is generally required to be applied retrospectively to all periods presented upon their effective date with the exception of certain amendments, which should be applied prospectively to the most recent interim or annual period presented in the year of adoption. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements and disclosures.

 

 

 

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