ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General:
Park Electrochemical Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives (undergoing qualification) and lightning strike materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s patented composite Sigma Strut and Alpha Strut product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.
The Company’s fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2019, 2018 and 2017 fiscal years ended on March 3, 2019, February 25, 2018 and February 26, 2017, respectively. The 2019 fiscal year consisted of 53 weeks. The 2018 and 2017 fiscal years each consisted of 52 weeks.
Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.
201
9
Financial Overview
In 2019, the Company completed the sale of its electronics business, announced entering into a long-term pricing agreement with a major customer, announced a planned expansion of its operations in Newton, Kansas and declared and paid a special cash dividend of $4.25 per share.
On December 4, 2018, Park completed the previously announced sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 13, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the Sale. As a result, the discussion below is of the Company’s continuing operations, which are comprised of the aerospace business and the Company’s corporate office.
The Company paid a special cash dividend of $4.25 per share on February 26, 2019 to shareholders of record at the close of business on February 5, 2019. The special cash dividend was funded from the Company’s cash balances. This special dividend, together with the Company’s regular quarterly dividend of $0.10 per share paid February 5, 2019 to shareholders of record on January 2, 2019, brings the total amount of dividends paid to shareholders to $24.75 per share, a total of approximately $506 million, since the Company’s 2005 fiscal year.
In 2019, the Company announced the major expansion of its aerospace manufacturing, development and design facilities located at the Newton City-County Airport in Newton, Kansas. This expansion will include the construction of a redundant manufacturing facility located adjacent to Park’s existing Newton, Kansas facilities. This redundant facility, which is being constructed in part to support a major aerospace customer, will include approximately 90,000 square feet of manufacturing and office space, and will essentially double the size of Park’s existing Newton, Kansas facilities. The total cost of the expansion is expected to be approximately $20 million, and the expansion is expected to be completed in the first half of the 2020 calendar year. The expansion includes new resin mixing and delivery systems, new hot-melt film and tape manufacturing lines, space to accommodate an additional hot-melt tape line or solution treating line, space to accommodate a confidential joint development project with a major aerospace customer, additional slitting capability, significant additional freezer and storage space, an expanded production lab, a new R&D lab and additional office space.
During 2019, the Company recorded a non-cash charge of $0.5 million in connection with the modification of previously granted employee stock options resulting from the $4.25 per share special cash dividend paid by the Company in February 2019. Selling, general and administrative expenses in 2019 included $1.2 million of stock option expense.
In order to raise the approximately $87 million to fund the special cash dividend of $4.25 per share paid in February 2019, the Company liquidated marketable securities and recorded losses on the sales of marketable securities of $1.5 million.
The Company's total net sales worldwide in 2019 were 27% higher than in 2018 due primarily to the “end customer” of a major Company customer ramping up commercial jet production and the Company’s customer restocking depleted inventory, particularly in the fourth quarter, and to an increase in military sales during 2019.
The Company’s gross profit margin, measured as a percentage of sales, increased to 31.7% in 2019 from 28.1% in 2018 due primarily to higher sales and production levels combined with the fixed nature of certain overhead costs and cost reduction efforts.
The Company’s earnings from continuing operations in 2019 were 464% higher than in 2018, primarily as a result of the aforementioned increases in sales and gross profit margin and a 9% reduction in selling, general and administrative expenses, which included the additional stock option modification charge of $0.5 million. The Company’s net earnings from continuing operations in 2019 were 65% lower than in 2018, primarily due to the $17.8 million tax benefit recorded in the 2018 year resulting from the Tax Act enacted on December 22, 2017 and to a loss on sales of marketable securities of $1.5 million incurred to raise funds for the special cash dividend of $4.25 per share paid in February 2019.
The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders generally are received in excess of three months in advance of delivery.
The markets for the Company’s products continue to be strong, and the Company anticipates sales will increase in 2020 from 2019.
Results
o
f Operations
:
2019
Compared to 201
8
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 3,
|
|
|
February 25,
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
Increase / (Decrease)
|
|
Net sales
|
|
$
|
51,116
|
|
|
$
|
40,230
|
|
|
$
|
10,886
|
|
|
|
27
|
%
|
Cost of sales
|
|
|
34,932
|
|
|
|
28,942
|
|
|
|
5,990
|
|
|
|
21
|
%
|
Gross profit
|
|
|
16,184
|
|
|
|
11,288
|
|
|
|
4,896
|
|
|
|
43
|
%
|
Selling, general and administrative expenses
|
|
|
8,968
|
|
|
|
9,862
|
|
|
|
(894
|
)
|
|
|
-9
|
%
|
Restructuring charges
|
|
|
-
|
|
|
|
146
|
|
|
|
(146
|
)
|
|
|
-100
|
%
|
Earnings from continuing operations
|
|
|
7,216
|
|
|
|
1,280
|
|
|
|
5,936
|
|
|
|
464
|
%
|
Interest expense
|
|
|
-
|
|
|
|
2,269
|
|
|
|
(2,269
|
)
|
|
|
-100
|
%
|
Interest and other income
|
|
|
2,379
|
|
|
|
2,641
|
|
|
|
(262
|
)
|
|
|
-10
|
%
|
Loss on sale of marketable securities
|
|
|
(1,498
|
)
|
|
|
(1,342
|
)
|
|
|
(156
|
)
|
|
|
12
|
%
|
Earnings from continuing operations before income taxes
|
|
|
8,097
|
|
|
|
310
|
|
|
|
7,787
|
|
|
|
2512
|
%
|
Income tax (benefit) provision
|
|
|
1,791
|
|
|
|
(18,162
|
)
|
|
|
19,953
|
|
|
|
-110
|
%
|
Net earnings from continuing operations
|
|
|
6,306
|
|
|
|
18,472
|
|
|
|
(12,166
|
)
|
|
|
-66
|
%
|
Earnings from discontinued operations, net of tax
|
|
|
107,239
|
|
|
|
2,123
|
|
|
|
105,116
|
|
|
|
4951
|
%
|
Net earnings
|
|
$
|
113,545
|
|
|
$
|
20,595
|
|
|
$
|
92,950
|
|
|
|
451
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.31
|
|
|
$
|
0.91
|
|
|
$
|
(0.60
|
)
|
|
|
-66
|
%
|
Discontinued Operations
|
|
|
5.29
|
|
|
|
0.11
|
|
|
|
5.18
|
|
|
|
4709
|
%
|
Basic earnings per share
|
|
$
|
5.60
|
|
|
$
|
1.02
|
|
|
$
|
4.58
|
|
|
|
449
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.31
|
|
|
$
|
0.91
|
|
|
$
|
(0.60
|
)
|
|
|
-66
|
%
|
Discontinued Operations
|
|
|
5.26
|
|
|
|
0.11
|
|
|
|
5.15
|
|
|
|
4682
|
%
|
Diluted earnings per share
|
|
$
|
5.57
|
|
|
$
|
1.02
|
|
|
$
|
4.55
|
|
|
|
446
|
%
|
Net Sales
The Company's total net sales worldwide in 2019 were 27% higher than in 2018 due primarily to the “end customer” of a major Company customer ramping up commercial jet production and the Company’s customer restocking depleted inventory, particularly in the fourth quarter, and to an increase in military sales during 2019.
Gross Profit
The Company’s gross profit margin, measured as a percentage of sales, increased to 31.7% in 2019, from 28.1% in 2018, due primarily to higher sales and the partially fixed nature of overhead expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.9 million, or 9%, during 2019 compared to 2018. Such expenses, measured as percentages of sales, were 17.5% during 2019 compared to 24.5% during 2018. The decrease in such expenses in 2019 was due primarily to decreases in salary and related expenses, lower travel and entertainment expenses, lower legal fees and lower stock option expenses, excluding the stock option modification charges in each period.
Selling, general and administrative expenses in 2019 included $1.2 million of stock option expenses, including $0.5 million due to the modification of previously granted stock options, compared to $1.4 million of such expenses in 2018, including $0.5 million due to the modification of previously granted stock options.
Earnings from
Continuing
Operations
For the reasons set forth above, the Company’s earnings from continuing operations were $7.2 million for 2019, including a pre-tax stock option modification charge of $0.5 million resulting from the special dividend of $4.25 per share paid in February 2019. The Company’s earnings from continuing operations were $1.3 million in 2018, including a pre-tax stock option modification charge of $0.5 million resulting from the special dividend of $3.00 per share paid in February 2019.
Loss on Sales of Marketable Securities
The Company recorded losses on the sales of marketable securities of $1.5 million in connection with the liquidation of securities to fund the special cash dividend of $4.25 per share paid in February 2019. The Company recorded losses on the sales of marketable securities of $1.3 million in connection with the repatriation of cash and the prepayment of all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and the funding of a special cash dividend of $3.00 per share paid in February 2018.
Interest Expense
Interest expense in 2019 was $0, compared to $2.3 million in 2018. The decrease in interest expense in 2019 was primarily due to the termination of the Credit Agreement, dated as of January 16, 2016, between the Company and HSBC Bank USA (the “Credit Agreement”) in 2018. As previously reported, the Company voluntarily prepaid the remaining loan balance of $68.5 million with HSBC Bank and terminated the Credit Agreement. The prepayment was made with the Company’s cash and cash equivalents, marketable securities and restricted cash. In connection with the termination of the Credit Agreement, the Company expensed the remaining deferred financing costs of $0.1 million in the fourth quarter of 2018. See Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report and “Liquidity and Capital Resources” elsewhere in this Item 7 for additional information.
Interest and Other Income
Interest and other income were $2.4 million and $2.6 million for 2019 and 2018, respectively. The decrease from 2018 was primarily the result of lower average invested cash during the period, partially offset by higher weighted average interest rates. As mentioned above, the Company prepaid all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and paid a special cash dividend of $3.00 per share in February 2018. During 2019 and 2018, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.
Income Tax Provision
The Company’s effective income tax rate of 22.1% for 2019 was due primarily to the U.S. Federal rate and state income taxes partially offset by favorable adjustments to valuation allowances on state tax credits and a decrease in state apportionment percentages. The Company’s effective income tax rate was significantly different for 2018, due to the discrete tax benefit of $17.8 million recorded in the fourth quarter of 2018 pertaining to U.S. tax law changes enabling the reduction of deferred tax liabilities previously recorded, partially offset by the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. See “Results of Operations – Fiscal Year 2018 Compared to Fiscal Year 2017 – Income Tax Provision” elsewhere in this Item 7.
Net Earnings
from Continuing Operations
The Company’s net earnings from continuing operations for 2019 were $6.3 million, including the stock option modification pre-tax charge of $0.5 million in connection with the special dividend of $4.25 per share paid in February 2019 and the pre-tax loss of $1.5 million on the sales of marketable securities. The Company’s net earnings from continuing operations for 2018 were $18.5 million, including the tax benefit of $17.8 million related to the Tax Act, the stock option modification pre-tax charge of $0.5 million in connection with the special dividend of $3.00 per share paid in February 2018, the pre-tax loss of $1.3 million on the sales of marketable securities and the pre-tax deferred financing costs of $0.1 million related to the termination of the Credit Agreement in 2018. The net impact of the items described above was to decrease net earnings by $2.0 million in 2019 and to increase net earnings by $16.0 million in 2018.
Discontinued Operations
On December 4, 2018, Park completed the previously announced sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 13, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale.
The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations.
The Company’s net earnings from discontinued operations were higher in 2019 compared to 2018 primarily as a result of the gain recognized on the sale of the electronics business of $102,145 and the gain of $2,945 recognized on the sale of its New England Laminates Co., Inc. facility located in Newburgh, New York.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share from continuing operations for 2019 were $0.31, including the stock option modification charge in connection with the special dividend paid in February 2019 and the pre-tax loss on the sales of marketable securities described above, compared to basic and diluted earnings per share for 2018 of $0.91, including the tax benefit related to the Tax Act, the stock option modification charge in connection with the special dividend paid in February 2018, the pre-tax loss on the sales of marketable securities and the deferred financing costs described above. The net impact of the items described above was to increase basic and diluted earnings per share by $0.08 in 2019 and decrease basic and diluted earnings per share by $0.81 in 2018.
201
8
Compared to 201
7
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
February 25,
|
|
|
February 26,
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
Increase / (Decrease)
|
|
Net sales
|
|
$
|
40,230
|
|
|
$
|
31,837
|
|
|
$
|
8,393
|
|
|
|
26
|
%
|
Cost of sales
|
|
|
28,942
|
|
|
|
23,538
|
|
|
|
5,404
|
|
|
|
23
|
%
|
Gross profit
|
|
|
11,288
|
|
|
|
8,299
|
|
|
|
2,989
|
|
|
|
36
|
%
|
Selling, general and administrative expenses
|
|
|
9,862
|
|
|
|
10,309
|
|
|
|
(447
|
)
|
|
|
-4
|
%
|
Restructuring charges
|
|
|
146
|
|
|
|
-
|
|
|
|
146
|
|
|
|
100
|
%
|
Earnings (loss) from continuing operations
|
|
|
1,280
|
|
|
|
(2,010
|
)
|
|
|
3,290
|
|
|
|
-164
|
%
|
Interest expense
|
|
|
2,269
|
|
|
|
1,432
|
|
|
|
837
|
|
|
|
58
|
%
|
Interest and other income
|
|
|
2,641
|
|
|
|
1,637
|
|
|
|
1,004
|
|
|
|
61
|
%
|
Loss on sale of marketable securities
|
|
|
(1,342
|
)
|
|
|
-
|
|
|
|
(1,342
|
)
|
|
|
100
|
%
|
Earnings (loss) from continuing operations before income taxes
|
|
|
310
|
|
|
|
(1,805
|
)
|
|
|
2,115
|
|
|
|
-117
|
%
|
Income tax (benefit)
|
|
|
(18,162
|
)
|
|
|
(711
|
)
|
|
|
(17,451
|
)
|
|
|
2454
|
%
|
Net earnings (loss) from continuing operations
|
|
|
18,472
|
|
|
|
(1,094
|
)
|
|
|
19,566
|
|
|
|
-1788
|
%
|
Earnings from discontinued operations, net of tax
|
|
|
2,123
|
|
|
|
10,377
|
|
|
|
(8,254
|
)
|
|
|
-80
|
%
|
Net earnings
|
|
$
|
20,595
|
|
|
$
|
9,283
|
|
|
$
|
11,312
|
|
|
|
122
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.96
|
|
|
|
-1920
|
%
|
Discontinued Operations
|
|
|
0.11
|
|
|
|
0.51
|
|
|
|
(0.40
|
)
|
|
|
-78
|
%
|
Basic earnings per share
|
|
$
|
1.02
|
|
|
$
|
0.46
|
|
|
$
|
0.56
|
|
|
|
122
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.91
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.96
|
|
|
|
-1920
|
%
|
Discontinued Operations
|
|
|
0.11
|
|
|
|
0.51
|
|
|
|
(0.40
|
)
|
|
|
-78
|
%
|
Diluted earnings per share
|
|
$
|
1.02
|
|
|
$
|
0.46
|
|
|
$
|
0.56
|
|
|
|
122
|
%
|
Net Sales
Sales in 2018 increased $8.4 million, or 26%, from 2017. The increase in sales was due primarily to higher sales to a major customer following completion of that customer’s inventory correction.
Gross Profit
The Company’s gross profit margin, measured as a percentage of sales, increased to 28.1% in 2018 from 26.1% in 2017 due primarily to higher sales and production levels of the Company’s aerospace products combined with the fixed nature of certain overhead costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.4 million, or 4%, during 2018 compared to 2017. Such expenses measured as percentages of sales were 24.5% during 2018 compared to 32.3% during 2017. The decrease in such expenses in 2018 was primarily due to lower salary, incentive compensation and stock option expenses and lower professional fees.
Selling, general and administrative expenses in 2018 included $1.4 million of stock option expenses, including $0.5 million due to the modification of previously granted stock options, compared to $1.2 million of such expenses in 2017.
Earnings from
Continuing
Operations
For the reasons set forth above, the Company’s earnings from continuing operations were $1.3 million for 2018, including pre-tax charges of $0.5 million associated with the modification of stock options, compared to negative $2.0 million for 2017.
Loss on Sale
s
of Marketable Securities
The changes in the U.S. tax code, enacted by the Tax Cuts and Jobs Act enacted in December 2017 (the “Tax Act”), allowed the Company to repatriate its foreign accumulated income at a lower effective tax rate. In response to the Tax Act, the Company liquidated certain marketable securities and repatriated cash held by foreign subsidiaries during the 13-week period ended February 25, 2018. As a result, the Company recorded losses on the sales of marketable securities of $1.3 million in connection with the repatriation of cash and the prepayment of all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and the funding of a special cash dividend of $3.00 per share paid in February 2018.
Interest Expense
Interest expense in 2018 was $2.3 million, compared to $1.4 million in 2017. The increase in interest expense in 2018 was primarily due to higher average interest rates and the pre-tax deferred financing costs of $0.1 million related to the termination of the Credit Agreement in 2018, partially offset by lower average outstanding debt. As previously reported, the Company voluntarily prepaid the remaining loan balance of $68.5 million with HSBC Bank and terminated the Credit Agreement. The prepayment was made with the Company’s cash and cash equivalents, marketable securities and restricted cash. In connection with the termination of the Credit Agreement, the Company expensed the remaining deferred financing costs of $0.1 million in the fourth quarter of 2018. See Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report and “Liquidity and Capital Resources” elsewhere in this Item 7 for additional information.
Interest and Other Income
Interest and other income were $2.6 million and $1.6 million for 2018 and 2017, respectively. The 61% increase in 2018 was primarily the result of higher weighted average interest rates based on longer average maturities of marketable securities held by the Company in 2018 compared to 2017's comparable period, partially offset by lower average invested cash during the period. As mentioned above, the Company prepaid all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and paid a special cash dividend of $3.00 per share in February 2018. During 2018 and 2017, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.
Income Tax Provision
On December 22, 2017, the Tax Act was enacted and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system.
In the fourth quarter of 2018, the Company recorded a discrete tax benefit of $17.8 million due to the reduction of liabilities previously recorded, partially offset by the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This one-time transition tax and the previously recorded liabilities are based on the Company’s post-1986 earnings and profits (“E&P”) not previously subjected to U.S. taxation.
In the fourth quarter of 2018, as a result of the Tax Act, the Company recorded a discrete non-cash tax benefit of $0.2 million due to the remeasurement of U.S. deferred tax assets and liabilities. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which is generally 21% for Federal income tax purposes.
The Company’s effective income tax rate for 2018 was primarily due to the impact of the Tax Act. The Company’s effective income tax rate was 9.5% for 2017.
Net Earnings from Continuing Operations
The Company’s net earnings from continuing operations for 2018 was $18.5 million, including pre-tax charges of $0.1 million related to facility closure, compared to a loss of $1.1 million for 2017.
Discontinued Operations
Earnings from discontinued operations, net of taxes was $2.1 million in 2018 compared to $10.4 million in 2017. Earnings from discontinued operations, net of taxes were lower in 2018 compared to 2017 primarily as a result of lower sales and higher restructuring charges. During 2018, the Company recorded pre-tax restructuring charges of $5.0 million in connection with the consolidation of its electronics business units in California and Arizona, the closure, in 2009, of its facility in Newburgh, New York and the closure, in 2012, of its facility in Waterbury, Connecticut, compared to pre-tax restructuring charges of $0.3 million in 2017 in connection with the aforementioned facility closure in Newburgh, New York.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share for 2018 were $0.91, including the facility closure mentioned above, compared to basic and diluted earnings per share of negative $0.05 for 2017.
L
iquidity and Capital Resources
:
(Amounts in thousands)
|
|
March 3,
|
|
|
February 25,
|
|
|
Increase /
|
|
|
|
2019
|
|
|
2018
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities
|
|
$
|
151,624
|
|
|
$
|
108,231
|
|
|
$
|
43,393
|
|
Working capital
|
|
|
156,778
|
|
|
|
129,041
|
|
|
|
27,737
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
March 3,
|
|
|
February 25,
|
|
|
February 26,
|
|
|
Increase / (Decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019 vs. 2018
|
|
|
2018 vs. 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
8,060
|
|
|
$
|
(6,264
|
)
|
|
$
|
1,283
|
|
|
$
|
14,324
|
|
|
$
|
(7,547
|
)
|
Net cash provided by investing activities
|
|
|
8,898
|
|
|
|
42,364
|
|
|
|
2,652
|
|
|
|
(33,466
|
)
|
|
|
39,712
|
|
Net cash used in financing activities
|
|
|
(105,519
|
)
|
|
|
(130,710
|
)
|
|
|
(11,093
|
)
|
|
|
25,191
|
|
|
|
(119,617
|
)
|
Cash, Marketable Securities and Restricted Cash
The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.
The change in cash and marketable securities at March 3, 2019 compared to February 25, 2018 was primarily the result of cash proceeds from the sale of the Company’s electronics business in December 2018 partially offset by the special dividend paid by the Company to its shareholder in February 2019 and a number of additional factors. The significant changes in cash provided by operating activities were as follows:
|
●
|
accounts receivable increased by 34% at March 3, 2019 compared to February 25, 2018 due primarily to the increase in total net sales in the last month of 2019;
|
|
●
|
inventory increased 33% due primarily to raw material purchased at the end of February 2019 for use in future production;
|
|
●
|
prepaid expenses and other current assets increased 15% due primarily to increase in other receivables offset by a decrease to prepaid marketable securities;
|
|
●
|
accounts payable increased 74% due primarily to the raw material purchase at the end of February 2019;
|
|
●
|
accrued liabilities increased 186% at March 3, 2019 compared to February 25, 2018 due primarily to increased accruals for restructuring and bonuses; and
|
|
●
|
income taxes payable increased 248% at March 3, 2019 compared to February 25, 2018 due to the impacts of the Tax Act.
|
In addition, the Company received $145 million in proceeds from the sale of its Electronics Business, net of taxes and transaction expenses, and paid $95.0 million and $68.8 million in cash dividends during 2019 and 2018, respectively, including special dividends of $86.8 million and $60.7 million paid in 2019 and 2018, respectively. The Company incurred $1.5 million of losses on sales of marketable securities in order to pay the special cash dividend.
Working Capital
Working capital at March 3, 2019 was higher compared to February 25, 2018. Increases in cash and cash equivalents and marketable securities, accounts receivable and inventories were offset by increases in accounts payable, accrued liabilities and taxes payable.
The Company's current ratio (the ratio of current assets to current liabilities) was 15.1 to 1 at March 3, 2019 compared to 11.6 to 1 at February 25, 2018.
Cash Flows
During 2019, the Company's net earnings from continuing operations, before depreciation and amortization, stock-based compensation, amortization of bond premium and gain on sale of fixed assets, were $9.6 million. Such earnings reflected a loss on sales of marketable securities of $1.5 million and were decreased by changes in operating assets and liabilities of $1.6 million, resulting in an increase in accounts receivable of $2.4 million, primarily related to high sales in the last month of the fiscal year, resulting in $8.1 million of cash provided by operating activities from continuing operations. During 2019, the Company expended $2.8 million for the purchase of property, plant and equipment compared to $571,000 during 2018, and the Company paid $95.1 million and $68.8 million in cash dividends in 2019 and 2018, respectively.
Other Liquidity Factors
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 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 $20 million, and the Company expects to complete the construction of the additional facility in the first half of the 2020 calendar year.
On December 22, 2017, the Tax Act was enacted and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system. As a result of the Tax Act, the Company recorded tax payable to be paid in installments over eight years. The remaining balance of these installment payments, as of March 3, 2019, was approximately $19 million to be paid over the next seven years.
The Company believes its financial resources will be sufficient, for the 12 months from the date of the filing of this Form 10-K Annual Report 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 operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this Report. 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 $.3 million to secure the Company's obligations under its workers’ compensation insurance program.
As of March 3, 2019 the Company’s significant contractual obligations, including payments due by fiscal year, were as follows:
Contractual Obligations
(Amounts in thousands)
|
|
Total
|
|
|
2020
|
|
|
2021-2022
|
|
|
2023-2024
|
|
|
2025 and
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
1,457
|
|
|
$
|
834
|
|
|
$
|
570
|
|
|
$
|
53
|
|
|
$
|
-
|
|
Equipment purchase obligations
|
|
|
3,973
|
|
|
|
-
|
|
|
|
3,973
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
5,430
|
|
|
$
|
834
|
|
|
$
|
4,543
|
|
|
$
|
53
|
|
|
$
|
-
|
|
At March 3, 2019, the Company had unrecognized tax benefits of $1.0 million. A reasonable estimate of the timing of the payment of these liabilities is not possible.
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.
Environmental Matters:
The Company is subject to various Federal, state and local government and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations of the Company’s Electronics Business and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by government agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.
In 2019, 2018 and 2017, the Company incurred approximately $70,000, $99,000 and $84,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $68,000, $92,000 and $84,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, and may increase over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At March 3, 2019 and February 25, 2018, there were no amounts recorded in accrued liabilities for environmental matters.
Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. See Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's contingencies, including those related to environmental matters.
Critical Accounting Policies and Estimates:
The following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment.
General
The Company's Discussion and Analysis of its Financial Condition and Results of Operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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, restructurings, 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 believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.
Recently Adopted Accounting Pronouncement
See Note 16 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's recently adopted accounting pronouncements.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company’s shipping terms permit it to recognize revenue at point of shipment. Shipping and handling costs are treated as fulfillment costs.
Sales Allowances and Product Warranties
The Company records estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are recorded in the period the sale is recorded and are derived from historical trends and other relevant information. The Company’s products are made to customer specifications and tested for adherence to such specifications before shipment to customers. Composite structures and assemblies may be subject to “airworthiness” acceptance by customers after receipt at the customers’ locations. There are no future performance requirements other than the products’ meeting the agreed specifications. The Company’s basis for providing sales allowances for returns are known situations in which products may have failed due to manufacturing defects in the products supplied by the Company. The Company is focused on manufacturing the highest quality advanced composite materials, structures and assemblies and tooling possible and employs stringent manufacturing process controls and works with raw material suppliers who have dedicated themselves to complying with the Company’s specifications and technical requirements. The amounts of returns and allowances resulting from defective or damaged products have been approximately 1.0% of sales for each of the Company’s last three fiscal years.
Accounts Receivable
The Company’s accounts receivable are due from purchasers of the Company’s products. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the conditions of the general economy and the aerospace industry. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes off accounts receivable when they become uncollectible.
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.
Valuation of Long-Lived Assets
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.
Income Taxes
As part of the processes of preparing its consolidated financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in additional income tax expense in the Company's Consolidated Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.
Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.
Contingencies and Litigation
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.
Employee Benefit Programs
The Company's obligations for workers' compensation claims prior to fiscal year 2019 are effectively self-insured, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. The Company accrues its workers’ compensation liability based on estimates of the total exposure of known claims using historical experience and projected loss development factors less amounts previously paid out.
The Company and certain of its subsidiaries have a non-contributory profit sharing retirement plan covering their regular full-time employees. In addition, the Company's subsidiaries have various bonus and incentive compensation programs, most of which are determined at management's discretion.
The Company's reserves associated with these self-insured liabilities and benefit programs are reviewed by management for adequacy at the end of each reporting period.