PARK AEROSPACE CORP - Quarter Report: 2020 May (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 May 31, 2020

 

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, a smaller reporting company or an emerging growth company. See 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: 20,381,426 as of July 3, 2020.

 

 

 

 

 

		May 31, 2020 (unaudited)				March 1, 2020*
ASSETS
Current assets
Cash and cash equivalents		$	8,405			$	5,410
Marketable securities (Note 3)			112,665				116,945
Accounts receivable, less allowance for doubtful accounts of $77 and $73, respectively			6,590				10,925
Inventories (Note 4)			6,680				6,379
Prepaid expenses and other current assets			5,243				5,535
Total current assets			139,583				145,194
Property, plant and equipment, net			18,364				16,100
Operating right-of-use assets (Note 5)			387				420
Goodwill and other intangible assets			9,804				9,804
Other assets			264				268
Total assets		$	168,402			$	171,786
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable		$	2,487			$	4,735
Operating lease liability (Note 5)			142				152
Accrued liabilities			1,361				1,709
Income taxes payable			2,824				2,111
Total current liabilities			6,814				8,707
Long-term operating lease liability (Note 5)			245				268
Non-current income taxes payable (Note 9)			15,986				15,986
Deferred income taxes (Note 9)			793				834
Other liabilities			4,367				4,316
Total liabilities			28,205				30,111
Commitments and contingencies (Note 12)
Shareholders' equity (Note 8)
Common stock			2,096				2,096
Additional paid-in capital			169,905				169,862
Accumulated deficit			(21,855	)			(21,774	)
Accumulated other comprehensive earnings			872				668
			151,018				150,852
Less treasury stock, at cost			(10,821	)			(9,177	)
Total shareholders' equity			140,197				141,675
Total liabilities and shareholders' equity		$	168,402			$	171,786

 

		13 Weeks Ended (Unaudited)
		May 31,				June 2,
		2020				2019
Net sales		$	12,213			$	14,950
Cost of sales			8,539				10,146
Gross profit			3,674				4,804
Selling, general and administrative expenses			1,630				1,922
Earnings from continuing operations			2,044				2,882
Interest and other income			656				948
Earnings from continuing operations before income taxes			2,700				3,830
Income tax provision (Note 9)			728				1,116
Net earnings from continuing operations			1,972				2,714
Loss from discontinued operations, net of tax (Note 11)			(15	)			(127	)
Net earnings		$	1,957			$	2,587
Earnings per share (Note 7)
Basic:
Continuing operations		$	0.10			$	0.13
Discontinued operations			-				-
Basic earnings per share		$	0.10			$	0.13
Basic weighted average shares			20,402				20,492
Diluted:
Continuing operations		$	0.10			$	0.13
Discontinued operations			-				-
Diluted earnings per share		$	0.10			$	0.13
Diluted weighted average shares			20,460				20,586

 

		13 Weeks Ended (Unaudited)
		May 31,				June 2,
		2020				2019
Net earnings		$	1,957			$	2,587
Other comprehensive earnings, net of tax:
Unrealized gains on marketable securities:
Unrealized holding gains arising during the period			288				344
Less: reclassification adjustment for gains included in net earnings			(17	)			(8	)
Unrealized losses on marketable securities:
Unrealized holding losses arising during the period			(67	)			(3	)
Less: reclassification adjustment for losses included in net earnings			-				13
Other comprehensive earnings			204				346
Total comprehensive earnings		$	2,161			$	2,933

 

																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Accumulated				Comprehensive				Treasury Stock
		Shares				Amount				Capital				Deficit				Earnings				Shares				Amount
Balance, March 1, 2020			20,965,144			$	2,096			$	169,862			$	(21,774	)		$	668				446,321			$	(9,177	)
Net earnings			-				-				-				1,957				-				-				-
Unrealized gain on marketable securities, net of tax			-				-				-				-				204				-				-
Stock-based compensation			-				-				43				-				-				-				-
Repurchase of treasury shares			-				-				-				-				-				137,397				(1,644	)
Cash dividends ($0.10 per share)			-				-				-				(2,038	)			-				-				-
Balance, May 31, 2020			20,965,144			$	2,096			$	169,905			$	(21,855	)		$	872				583,718			$	(10,821	)

																		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	)

 

		13 Weeks Ended (Unaudited)
		May 31,				June 2,
		2020				2019
Cash flows from operating activities:
Net earnings from continuing operations		$	1,972			$	2,714
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			277				366
Stock-based compensation			43				124
Deferred income taxes			(41	)			97
Amortization of bond premium			(8	)			(56	)
Changes in operating assets and liabilities			2,498				(470	)
Net cash provided by operating activities - continuing operations			4,741				2,775
Net cash used in operating activities - discontinued operations			(15	)			(127	)
Net cash provided by operating activities			4,726				2,648
Cash flows from investing activities:
Purchase of property, plant and equipment			(2,541	)			(1,860	)
Purchases of marketable securities			(15,008	)			(34,046	)
Proceeds from sales and maturities of marketable securities			19,500				14,196
Net cash provided by (used in) investing activities - continuing operations			1,951				(21,710	)
Net cash used in investing activities - discontinued operations			-				-
Net cash provided by (used in) investing activities			1,951				(21,710	)
Cash flows from financing activities:
Dividends paid			(2,038	)			(2,049	)
Proceeds from exercise of stock options			-				71
Purchase of treasury stock			(1,644	)			-
Net cash used in financing activities - continuing operations			(3,682	)			(1,978	)
Net cash used in financing activities - discontinued operations			-				-
Net cash used in financing activities			(3,682	)			(1,978	)
Increase (decrease) in cash and cash equivalents before effect of exchange rate changes - continuing operations			3,010				(20,913	)
Decrease in cash and cash equivalents before effect of exchange rate changes - discontinued operations			(15	)			(127	)
Increase (decrease) in cash and cash equivalents before effect of exchange rate changes			2,995				(21,040	)
Effect of exchange rate changes on cash and cash equivalents - continuing operations			-				-
Effect of exchange rate changes on cash and cash equivalents - discontinued operations			-				-
Effect of exchange rate changes on cash and cash equivalents			-				-
Increase (decrease) in cash and cash equivalents:			2,995				(21,040	)
Cash and cash equivalents, beginning of period			5,410				71,007
Cash and cash equivalents, end of period		$	8,405			$	49,967
Supplemental cash flow information:
Cash paid during the period for income taxes, net of refunds		$	(323	)		$	-

 

1. CONSOLIDATED FINANCIAL STATEMENTS

 

The Condensed Consolidated Balance Sheet and the Consolidated Statements of Shareholders’ Equity as of May 31, 2020, the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Earnings for the 13 weeks ended May 31, 2020 and June 2, 2019, and the Condensed Consolidated Statements of Cash Flows for the 13 weeks then ended have been prepared by Park Aerospace 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 May 31, 2020 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 1, 2020. There have been no significant changes to such accounting policies during the 13 weeks ended May 31, 2020.

 

 

 

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, accounts payable and accrued liabilities 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).

 

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. 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 weeks ended May 31, 2020.

 

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 May 31, 2020 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 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 term 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 May 31, 2020 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 these leases on a straight line basis over the terms of the leases. The above payment schedule does not include lease payments of $136 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 three months ended May 31, 2020, the Company’s operating lease expense was $40. Cash payments of $38, pertaining to operating leases, are reflected in the 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 May 31, 2020:

 

 

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

 

 

In December 2018, the Company’s wholly-owned subsidiary Park Aerospace Technologies Corp. (“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 approximately 90,000 square feet in size 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 City/County Airport, in addition to the eight acres previously leased to PATC by the City and County.  The City and the 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 $18.0 million, and the Company expects to complete the construction of the additional facility in the second half of the 2020 calendar year. As of May 31, 2020, the Company had $960 in equipment purchase obligations and $9,968 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.

 

 

6. STOCK-BASED COMPENSATION

 

As of May 31, 2020, 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. Prior to the 2018 Plan, the Company had the 2002 Stock Option Plan (the “2002 Plan”) which had 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 the 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 expire or are 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 13 weeks ended May 31, 2020, the Company granted options under the 2018 Plan to purchase a total of 129,100 shares of common stock to its directors and certain of its employees. The future compensation expense to be recognized in earnings before income taxes is $267 and will be recorded on a straight-line basis over the requisite service period. The weighted average fair value of the granted options was $2.13 per share using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 0.23%-0.42%; expected volatility factor of 26.9%-27.2%; expected dividend yield of 3.18%; and estimated option term of 4.3-7.6 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 13 weeks ended May 31, 2020. The estimated term of the options was based on evaluations of the historical and expected future employee exercise behavior.

 

The following is a summary of option activity for the 13 weeks ended May 31, 2020:

 

 

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 426,000 and 191,000 for the 13 weeks ended May 31, 2020 and June 2, 2019, respectively.

 

8. SHAREHOLDERS’ EQUITY

 

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 1,394,015 shares of its common stock, representing approximately 6.8% of the Company’s 20,381,426 total outstanding shares as of the close of business on July 3, 2020.

 

The Company purchased 137,397 and 0 shares of its common stock during the 13 weeks ended May 31, 2020 and June 2, 2019, respectively.

 

9. INCOME TAXES

 

For the 13 weeks ended May 31, 2020, the Company recorded an income tax provision from continuing operations of $728, which included a discrete income tax provision of $41. For the 13 weeks ended June 2, 2019, the Company recorded an income tax provision from continuing operations of $1,116.

 

The Company’s effective tax rate for the 13 weeks ended May 31, 2020 was an income tax provision of 27.0%, compared to an income tax provision of 29.1% in the comparable prior period. The effective tax rate for the 13 weeks ended May 31, 2020 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes, and a discrete income tax provision for the accrual of interest related to unrecognized tax benefits. The effective rate for the 13 weeks ended June 2, 2019 was 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.

 

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.

 

 

 

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.

 

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 a definitive 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 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. The Company estimates the remaining pre-tax charge in connection with the consolidation to be approximately $74, which the Company expects to incur primarily during the fiscal year ending February 28, 2021.

 

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 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. The Company adopted this ASU in the first quarter of its 2021 fiscal year. The adoption of ASU 2018-13 did not have an impact on the Company’s consolidated financial statements and disclosures.

 

 

Recently Issued

 

In June 2018, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). For public companies that are not SEC filers, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. The adoption of ASU 2016-13 will not have an impact on the Company’s consolidated financial statements and disclosures.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The changes simplify the accounting for a number of topics, some of which are narrow. Some of the proposed amendments eliminate specific exceptions to the general principles of income tax accounting while other changes clarify a handful of narrow issues within the broad topic of income tax accounting. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the requirements are effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for: (1) public business entities for periods for which financial statements have not yet been issued, and (2) all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements and disclosures.

 

 

 

14. COVID-19 PANDEMIC

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China and has since spread worldwide, including to the United States (the “U.S.”), posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”).

 

The COVID-19 Pandemic and resultant global economic crisis had significant impacts on the Company’s results of operations and cash flow for the quarter ended May 31, 2020. The COVID-19 Pandemic and crisis had significant impacts on the markets the Company sells into, particularly the commercial and business aircraft markets. As a result, the Company has experienced a significant reduction in sales and backlog.