PARK AEROSPACE CORP Discussion and analysis by management of the financial position and operating results. (form 10-Q)


General:



Park Aerospace Corp. ("Park" or the "Company") 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 development) 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
proprietary composite SigmaStrutTM and AlphaStrutTM product lines) are, among
others, prototype and development aircraft, special mission aircraft, spares for
legacy military and civilian aircraft and exotic spacecraft.



Financial Overview



The Company's total net sales from continuing operations in the 13 weeks and 39
weeks ended November 28, 2021 were $13.9 million and $41.1 million,
respectively, compared to $10.4 million and $31.8 million, respectively, in the
13 weeks and 39 weeks ended November 29, 2020. The increases in sales were
primarily due to improving sales for the commercial and business aircraft
markets.



The Company's gross profit margins from continuing operations, measured as
percentages of sales, were 27.7% and 33.4%, respectively, in the 13 weeks and 39
weeks ended November 28, 2021 compared to 24.6% and 27.8%, respectively, in the
13 weeks and 39 weeks ended November 29, 2020. The higher gross profit margin
for the 13 and 39 weeks ended November 28, 2021 was primarily due to the higher
sales compared to last year's comparable periods and the partially fixed nature
of overhead expenses.



The Company's earnings from continuing operations before income taxes and net
earnings from continuing operations increased 64.3% and 67.9%, respectively, in
the 13 weeks ended November 28, 2021 compared to the 13 weeks ended November 29,
2020 primarily as a result of higher sales partially offset by lower interest
income compared to last year's comparable period.



The Company's earnings from continuing operations before income taxes and net
earnings from continuing operations increased 58.8% and 56.4%, respectively, in
the 39 weeks ended November 28, 2021 compared to the 39 weeks ended November 29,
2020 primarily as a result of higher sales and a favorable sales mix of high
margin products in the first quarter of the current fiscal year, partially
offset by lower interest income compared to last year's comparable period.



The Company is experiencing inflation in raw material and other costs. The
impact of inflation on the Company's profits has been partially mitigated by the
Company's ability to adjust pricing for a large portion of its sales to pass the
impact of inflation through to its customers.



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With the recovery of the aerospace markets, some companies in the aerospace
supply chain may not be fully prepared to ramp up their production as quickly as
needed, which may create a risk to the Company of not getting enough raw
materials on a timely basis to fully support the Company's customers' demands.
Additionally, some shipments from overseas suppliers are experiencing
transportation delays due to a lack of available containers and a backlog at
incoming ports of entry. Delays of overseas shipments of raw materials are
having an impact on the Company's production levels. Delays in raw material
shipments continue to represent a risk to the Company.



The Company has a long-term contract pursuant to which one of its customers,
which represents a substantial portion of the Company's revenue, places orders.
The long-term contract with the customer is requirements based and does not
guarantee quantities. An order forecast and pricing were agreed upon in the
contract. However, this order forecast is updated periodically during the term
of the contract. Purchase orders generally are received by the Company in excess
of three months in advance of delivery by the Company to the customer.



In December 2019, a novel strain of coronavirus was reported in Wuhan, China and
has since spread worldwide, including to the United States, 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 13 weeks
and 39 weeks ended November 29, 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 had
experienced significant reductions in sales and backlog during those periods.
The Company continues to experience the impacts related to raw material
availability and costs.



Even after the end of the COVID-19 pandemic, the Company may continue to experience negative effects on its business due to the lingering potential impact of the economic crisis on the markets served by the Company.

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Results of Operations:



The following table sets forth the components of the consolidated statements of
operations:



                                       13 Weeks Ended                                       39 Weeks Ended

(amounts in thousands,
except per share amounts)      November 28,       November 29,          %           November 28,       November 29,          %
                                   2021               2020           Change             2021               2020           Change

Net sales                     $       13,864     $       10,372            34 %    $       41,076     $       31,835            29 %
Cost of sales                         10,028              7,819            28 %            27,357             22,970            19 %
Gross profit                           3,836              2,553            50 %            13,719              8,865            55 %
Selling, general and
administrative expenses                1,593              1,536             4 %             4,729              4,718             0 %
Restructuring charges                     13                  -             0 %               197                  -             0 %
Earnings from continuing
operations                             2,230              1,017           119 %             8,793              4,147           112 %
Interest and other income                 80                389           (79 )%              286              1,570           (82 )%
Earnings from continuing
operations before income
taxes                                  2,310              1,406            64 %             9,079              5,717            59 %
Income tax provision                     569                369            54 %             2,571              1,557            65 %
Net earnings from
continuing operations                  1,741              1,037            68 %             6,508              4,160            56 %
Loss from discontinued
operations, net of tax                     -               (116 )        (100 )%                -               (328 )        (100 )%
Net earnings                  $        1,741     $          921            89 %    $        6,508     $        3,832            70 %

Earnings per share:
Basic:
Continuing operations         $         0.09     $         0.05            80 %    $         0.32     $         0.20            60 %
Discontinued operations                    -                  -             0 %                 -              (0.01 )        (100 )%
Basic earnings per share      $         0.09     $         0.05            80 %    $         0.32     $         0.19            68 %

Diluted:

Continuing operations         $         0.08     $         0.05            60 %    $         0.32     $         0.20            60 %
Discontinued operations                    -                  -             0 %                 -              (0.01 )        (100 )%
Diluted earnings per share    $         0.08     $         0.05            60 %    $         0.32     $         0.19            68 %




Net Sales



The Company's total net sales from continuing operations worldwide in the 13
weeks and 39 weeks ended November 28, 2021 increased to $13.9 million and $41.1
million, respectively, from $10.4 million and $31.8 million, respectively, in
the 13 weeks and 39 weeks ended November 29, 2020. The increases in sales were
principally due to the higher sales to customers servicing the commercial and
business aircraft markets.



Gross Profit



The Company's gross profits from continuing operations in the 13 weeks and 39
weeks ended November 28, 2021 were higher than its gross profits from continuing
operations in the prior year's comparable periods, and the gross profits from
continuing operations as percentages of sales for the Company's worldwide
operations in the 13 weeks and 39 weeks ended November 28, 2021 increased to
27.7% and 33.4%, respectively, from 24.6% and 27.8%, respectively, in the 13
weeks and 39 weeks ended November 29, 2020. The higher gross profit margin from
continuing operations for the 13 and 39 weeks ended November 28, 2021 was
primarily due to the higher sales compared to last year's comparable periods and
the partially fixed nature of overhead expenses.



Selling, general and administrative expenses



Selling, general and administrative expenses from continuing operations
increased by $57,000 and $11,000, respectively, during the 13 weeks and 39 weeks
ended November 28, 2021, or by 3.7% and 0.2%, respectively, compared to the
prior year's comparable periods, and these expenses, measured as percentages of
sales from continuing operations, were 11.5% and 11.5%, respectively, in the 13
weeks and 39 weeks ended November 28, 2021 compared to 14.8% and 14.8%,
respectively, in the 13 weeks and 39 weeks ended November 29, 2020.



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Selling, general and administrative expenses from continuing operations included
stock option expenses of $73,000 and $211,000, respectively, for the 13 weeks
and 39 weeks ended November 28, 2021, compared to stock option expenses of
$49,000 and $142,000, respectively, for the 13 weeks and 39 weeks ended November
29, 2020.



Restructuring Charges


Within the 13 weeks and 39 weeks completed November 28, 2021, the Company recorded pre-tax restructuring charges of $ 13,000 and $ 197,000, respectively, in connection with the closure of the company Park Aerospace Technologies Asia Pte. Ltd. facility located in Singapore.

Profit from continuing operations



For the reasons set forth above, the Company's earnings from continuing
operations were $2.2 million and $8.8 million, respectively, for the 13 weeks
and 39 weeks ended November 28, 2021 compared to $1.0 million and $4.1 million,
respectively, for the 13 weeks and 39 weeks ended November 29, 2020.



Interest and Other Income



Interest and other income from continuing operations was $80,000 and $286,000,
respectively, for the 13 weeks and 39 weeks ended November 28, 2021, compared to
$389,000 and $1.6 million, respectively, for the prior year's comparable
periods. Interest income decreased 79.4% and 81.8%, respectively, for the 13
weeks and 39 weeks ended November 28, 2021 primarily as a result of lower
average balances of marketable securities held by the Company in the 13 weeks
and 39 weeks ended November 28, 2021, compared to the prior year's comparable
periods, and lower weighted average interest rates. During the 13 weeks and 39
weeks ended November 28, 2021, the Company earned interest income principally
from its investments, which consisted primarily of short-term instruments and
money market funds.



Income Tax Provision



For the 13 weeks and 39 weeks ended November 28, 2021, the Company recorded
income tax provisions from continuing operations of $569,000 and $2.6 million,
respectively, which included discrete income tax provisions of $27,000 and
$175,000, respectively, for the write-off of deferred tax assets and liabilities
related to a change in the tax filing basis of the Company's Singapore entity
and the accrual of interest related to unrecognized tax benefits. For the 13
weeks and 39 weeks ended November 29, 2020, the Company recorded income tax
provisions from continuing operations of $369,000 and $1.6 million,
respectively, which included discrete income tax provisions of $44,000 and
$127,000, respectively, pertaining to the accrual of interest related to
unrecognized tax benefits.



The Company's effective tax rates for the 13 weeks and 39 weeks ended November
28, 2021 were 24.6% and 28.3%, respectively, compared to 26.3% and 27.2%,
respectively, in the prior year's comparable periods. The effective tax rates
for the 13 weeks and 39 weeks ended November 28, 2021 were higher than the U.S.
statutory rate of 21% primarily due to state and local taxes, the write-off of
deferred tax assets and liabilities and the accrual of interest related to
unrecognized tax benefits. The effective rates for the 13 weeks and 39 weeks
ended November 29, 2020 were higher than the U.S. statutory rate of 21%
primarily due to state and local taxes and the accrual of interest related to
unrecognized tax benefits.



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Net profit from continuing operations



For the reasons set forth above, the Company's net earnings from continuing
operations for the 13 weeks and 39 weeks ended November 28, 2021 were $1.7
million and $6.5 million, respectively, compared to net earnings from continuing
operations of $1.0 million and $4.2 million, respectively, for the 13 weeks and
39 weeks ended November 29, 2020.



Discontinued Operations


At July 25, 2018, the Company has entered into a definitive agreement to sell its electronic business for $ 145.0 million in liquid. The Company completed this transaction on December 4, 2018.



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



The Company's net earnings from discontinued operations included expenses
pertaining to the sale transaction and costs related to the Company's vacated
facility in Fullerton, California in the 13 weeks and 39 weeks ended November
29, 2020. The Company vacated the Fullerton facility in the third quarter of the
2021 fiscal year and is no longer incurring these discontinued operations costs.



Basic and diluted earnings per share

Within 13 weeks completed November 28, 2021, basic earnings per share from continuing operations was $ 0.09 and diluted earnings per share from continuing operations was $ 0.08 compared to basic and diluted earnings per share from continuing operations of $ 0.05 within 13 completed weeks November 29, 2020.



In the 39 weeks ended November 28, 2021, basic and diluted earnings per share
from continuing operations were $0.32 compared to basic and diluted earnings per
share from continuing operations of $0.19 in the 39 weeks ended November 29,
2020.


Liquidity and capital resources – Continuing operations:


(amounts in thousands)                    November 28,       February 28,
                                              2021               2021             Change

Cash and cash equivalents and
marketable securities                    $      109,628     $      116,542     $     (6,914 )
Working capital                                 121,257            124,348           (3,091 )




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                                                              39 Weeks Ended
(amounts in thousands)                       November 28,       November 29,
                                                 2021               2020             Change

Net cash flow generated by operating activities $ 3,256 $ 8,610 $ (5,354)
Net cash used in investing activities

              (25,505 )           (2,145 )        (23,360 )
Net cash used in financing activities               (5,386 )           (7,758 )          2,372



Cash and negotiable instruments



Of the $109.6 million of cash and cash equivalents and marketable securities at
November 28, 2021, $29.5 million was owned by one of the Company's wholly owned
foreign subsidiaries.



The change in cash and cash equivalents and marketable securities at November
28, 2021 compared to February 28, 2021 was the result of capital expenditures
and dividends paid to shareholders, partially offset by cash provided by
operating activities, stock option exercises and a number of additional factors.
The significant change in cash provided by operating activities was as follows:



? accounts receivable increased by 27% to November 28, 2021 compared to February

    28, 2021 primarily due to timing of sales;



? stocks increased by 8% to November 28, 2021 compared to February 28, 2021

    primarily due to the timing of raw material purchases;



? Prepaid assets and other current assets decreased by 5% to November 28, 2021 compared

    to February 28, 2021 primarily due to receipt of tax refunds;



? accounts payable decreased by 32% to November 28, 2021 compared to February

    28, 2021 primarily due to timing of vendor payments; and




  ? income taxes payable decreased by 16% at November 28, 2021 compared to
    February 28, 2021 primarily due to estimated tax payments.



In addition, the Company paid $ 6.1 million in cash dividends during each of the 39-week periods ended November 28, 2021 and November 29, 2020.


Working Capital



The decrease in working capital at November 28, 2021 compared to February 28,
2021 was due principally to the decrease in cash and cash equivalents,
marketable securities and prepaid and other current assets, partially offset by
an increases in accounts receivable and inventories and decreases in accounts
payable and income taxes payable.



The Company's current ratio (the ratio of current assets to current liabilities)
was 19.8 to 1.0 at November 28, 2021 compared to 16.6 to 1.0 at February 28,
2021.



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Cash Flows



During the 39 weeks ended November 28, 2021, the Company's net earnings, before
depreciation and amortization, deferred income taxes, stock-based compensation,
amortization of bond premium and changes in operating assets and liabilities,
were $3.3 million. During the same 39-week period, the Company expended $3.6
million for the purchase of property, plant and equipment, compared with $5.3
million during the 39 weeks ended November 29, 2020. The Company paid $6.1
million in cash dividends in each of the 39-week periods ended November 28, 2021
and November 29, 2020.



Other Liquidity Factors



The Company believes its financial resources will be sufficient, through the 12
months following the filing of this Form 10-Q Quarterly 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, cash dividend payments, appropriate acquisitions and
other expansions of the Company's business, including the expansion in Kansas.



The Company has no knowledge of circumstances or events that are reasonably likely to occur which could materially affect its liquidity. The Company further believes that its balance sheet and financial position are very strong.


Contractual Obligations:



The Company's contractual obligations and other commercial commitments to make
future payments under contracts, such as lease agreements, consist only of (i)
operating lease commitments and (ii) commitments to purchase raw materials. 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 $320,000, to secure the Company's obligations under its workers'
compensation insurance program.



Off-balance sheet provisions:



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



Critical accounting conventions and estimates:



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



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The Company's critical accounting policies that are important to the
Consolidated Financial Statements and that entail, to a significant extent, the
use of estimates and assumptions and the application of management's judgment
are described in Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2021. There have been no significant
changes to such accounting policies during the 2022 fiscal year third quarter.



Contingencies:



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.



Factors that may affect future results.



Certain portions of this Report which do not relate to historical financial
information may be deemed to constitute forward-looking statements that are
subject to various factors which could cause actual results to differ materially
from the Company's expectations or from results which might be projected,
forecasted, estimated or budgeted by the Company in forward-looking statements.
Such factors include, but are not limited to, general conditions in the
aerospace industry, the Company's competitive position, the status of the
Company's relationships with its customers, economic conditions in international
markets, the cost and availability of raw materials, transportation and
utilities, and the various factors set forth under the caption "Factors That May
Affect Future Results" in Item 1 and in Item 1A "Risk Factors" of the Company's
Annual Report on Form 10-K for the fiscal year ended February 28, 2021.

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