PARK AEROSPACE CORP Management report and analysis of the financial situation 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 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
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 in the 13 weeks and 26 weeks ended August 28, 2022
were $13.9 million and $26.7 million, respectively, compared to $13.6 million
and $27.2 million, respectively, in the 13 weeks and 26 weeks ended August 29,
2021.



The Company's gross profit margins, measured as percentages of sales, were 29.4%
and 30.7%, respectively, in the 13 weeks and 26 weeks ended August 28, 2022
compared to 32.4% and 36.3%, respectively, in the 13 weeks and 26 weeks ended
August 29, 2021. The lower gross profit margin for the 13 and 26 weeks ended
August 28, 2022 compared to last year's comparable periods was primarily due to
less favorable sales mix and increases in material costs, utility expense,
freight costs and other costs due to inflation.



The Company's earnings before income taxes and net earnings decreased 9.4% and
6.8%, respectively, in the 13 weeks ended August 28, 2022 compared to the 13
weeks ended August 29, 2021 and decreased 23.7% and 20.4%, respectively, in the
26 weeks ended August 28, 2022 compared to the 26 weeks ended August 29, 2021
primarily as a result of a less favorable sales mix, and increases in material
costs, utility expense, freight costs and other costs due to inflation and bad
debt expense related to a customer bankruptcy, partially offset by higher
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.



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.



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Programs that the Company supplies into may also be experiencing supply chain
issues from other suppliers to the programs. The Company's sales could be
impacted by delays and reductions in its customers' production schedules caused
by other suppliers in the chain.



The tight labor market has created challenges in hiring personnel. Although the
Company feels very positive about its workforce, high wage inflation creates
challenges in hiring to add to the Company's employee base. The Company is
making adjustments to pay levels and benefits to stay competitive with the labor
market. Additionally, the Company has a "Customer Flexibility Program" whereby
employees can cross train on different equipment and processes to earn extra pay
for attaining the added skills.



The war in Ukraine has not had a material impact on the Company's results of
operations, and it is not expected to have a material impact. The Company does
not have any significant customers in Russia or Ukraine. The Company continues
to evaluate the impact the war in Ukraine may have on the Company's customers
and on the Company's supply chain.



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 26 weeks ended August 28, 2022 and August 29, 2021. 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 impacts on its business due to the potential continued impact of the economic crisis on the markets the Company serves.

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Results of Operations:



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



                                      13 Weeks Ended                                 26 Weeks Ended
   (amounts in thousands,
 except per share amounts)      August 28,       August 29,         %      

   August 28,       August 29,         %
                                   2022             2021         Change           2022             2021         Change

Net sales                      $     13,875     $     13,618         1.9 %    $     26,658     $     27,212        (2.0 )%
Cost of sales                         9,789            9,207         6.3 %          18,480           17,329         6.6 %
Gross profit                          4,086            4,411        (7.4 )%          8,178            9,883       (17.3 )%
Selling, general and
administrative expenses               1,732            1,488        16.4 %           3,365            3,136         7.3 %
Restructuring charges                     -              170         0.0 %               -              184         0.0 %
Earnings from operations              2,354            2,753       (14.5 )%          4,813            6,563       (26.7 )%
Interest and other income               221               89       148.3 %             354              206        71.8 %
Earnings from operations
before income taxes                   2,575            2,842        (9.4 )%          5,167            6,769       (23.7 )%
Income tax provision                    690              820       (15.9 )%          1,372            2,002       (31.5 )%
Net earnings                   $      1,885     $      2,022        (6.8 )%   $      3,795     $      4,767       (20.4 )%

Earnings per share:
Basic:
Basic earnings per share       $       0.09     $       0.10       (10.0 )% 

$0.19 $0.23 (17.4)%

Diluted:

Diluted earnings per share $0.09 $0.10 (10.0)%

  $       0.19     $       0.23       (17.4 )%




Net Sales

The company’s total net sales worldwide for the 13 weeks and 26 weeks ended
August 28, 2022 increased to $13.9 million and $26.7 millionrespectively, of
$13.6 million and $27.2 millionrespectively, in the 13 weeks and 26 weeks ended August 29, 2021.

Gross Profit



The Company's gross profits in the 13 weeks and 26 weeks ended August 28, 2022
were lower than its gross profits in the prior year's comparable periods, and
the gross profits as percentages of sales for the Company's worldwide operations
in the 13 weeks and 26 weeks ended August 28, 2022 decreased to 29.4% and 30.7%,
respectively, from 32.4% and 36.3%, respectively, in the 13 weeks and 26 weeks
ended August 29, 2021. The lower gross profit margin for the 13 and 26 weeks
ended August 28, 2022 compared to last year's comparable periods was primarily
due to a less favorable sales mix, and increases in material costs, utility
expense, freight costs and other costs due to inflation.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $244,000 and $229,000,
respectively, during the 13 weeks and 26 weeks ended August 28, 2022, or by
16.4% and 7.3%, respectively, compared to the prior year's comparable periods,
and these expenses, measured as percentages of sales, were 12.5% and 12.6%,
respectively, in the 13 weeks and 26 weeks ended August 28, 2022 compared to
10.9% and 11.5%, respectively, in the 13 weeks and 26 weeks ended August 29,
2021. The increase was, in part, due to increased bad debt expense related to a
customer bankruptcy.



Selling, general and administrative expenses included stock option expenses of
$94,000 and $179,000, respectively, for the 13 weeks and 26 weeks ended August
28, 2022, compared to stock option expenses of $74,000 and $138,000,
respectively, for the 13 weeks and 26 weeks ended August 29, 2021.



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Restructuring Charges



In the 13 weeks and 26 weeks ended August 29, 2021, the Company recorded no
pre-tax restructuring charges in connection with the closure of the Company's
Park Aerospace Technologies Asia Pte. Ltd facility located in Singapore compared
to $170,000 and $184,000, respectively, in the prior year's comparable periods.



Earnings from operations



For the reasons set forth above, the Company's earnings were $2.4 million and
$4.8 million, respectively, for the 13 weeks and 26 weeks ended August 28, 2022
compared to $2.8 million and $6.6 million, respectively, for the 13 weeks and 26
weeks ended August 29, 2021.



Interest and Other Income



Interest and other income was $221,000 and $354,000, respectively, for the 13
weeks and 26 weeks ended August 28, 2022, compared to $89,000 and $206,000,
respectively, for the prior year's comparable periods. Interest income increased
148.3% and 71.8%, respectively, for the 13 weeks and 26 weeks ended August 28,
2022 primarily as a result of weighted average interest rates in the 13 weeks
and 26 weeks ended August 28, 2022, compared to the prior year's comparable
periods. During the 13 weeks and 26 weeks ended August 28, 2022, 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 26 weeks ended August 28, 2022, the Company recorded income
tax provisions of $690,000 and $1.4 million, respectively, which included
discrete income tax provisions of $48,000 and $75,000, respectively, for the
accrual of interest related to unrecognized tax benefits. For the 13 weeks and
26 weeks ended August 29, 2021, the Company recorded income tax provisions of
$820,000 and $2.0 million, respectively, which included discrete income tax
provisions of $27,000 and $170,000, 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.



The Company's effective tax rates for the 13 weeks and 26 weeks ended August 28,
2022 were 26.8% and 26.6%, respectively, compared to 28.8% and 29.6%,
respectively, in the prior year's comparable periods. The effective tax rates
for the 13 weeks and 26 weeks ended August 28, 2022 were higher than the U.S.
statutory rate of 21% primarily due to state and local taxes and liabilities and
the accrual of interest related to unrecognized tax benefits. The effective
rates for the 13 weeks and 26 weeks ended August 29, 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 the accrual of interest related to unrecognized tax
benefits.



Net Earnings



For the reasons set forth above, the Company's net earnings for the 13 weeks and
26 weeks ended August 28, 2022 were $1.9 million and $3.8 million, respectively,
compared to net earnings of $2.0 million and $4.8 million, respectively, for the
13 weeks and 26 weeks ended August 29, 2021.



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Basic and diluted earnings per share

In the 13 weeks and 26 weeks ended August 28, 2022basic and diluted earnings per share were $0.09 and $0.19respectively, to basic and diluted earnings per share of $0.10 and $0.23respectively, in the 13 weeks and 26 weeks ended August 29, 2021.

Cash and capital resources – Continuing operations:

(amounts in thousands)                      August 28,        February 27,
                                               2022               2022             Change

Cash and cash equivalents and
marketable securities                     $      102,466     $      110,361     $      (7,895 )
Working capital                                  117,091            120,147            (3,056 )




                                                            26 Weeks Ended
(amounts in thousands)                      August 28,         August 29,
                                               2022               2021             Change

Net cash (used in) provided by
operating activities                      $       (1,703 )   $        2,976     $      (4,679 )
Net cash used in investing activities             (3,319 )          (21,251 )          17,932
Net cash used in financing activities             (3,953 )           (3,619 )            (334 )

Cash and negotiable securities

Of the $102.5 million of cash and cash equivalents and marketable securities at
August 28, 2022, $29.7 million was owned by one of the Company's wholly owned
foreign subsidiaries.



The change in cash and cash equivalents and marketable securities at August 28,
2022 compared to February 27, 2022 was the result of capital expenditures,
dividends paid to shareholders and cash used in operating activities and a
number of additional factors. The significant change in cash used in operating
activities was as follows:

? trade receivables increased by 19% to August 28, 2022 compared to February

    27, 2022 primarily due to timing of sales;

? inventories increased by 69% to August 28, 2022 compared to February 27, 2022

    primarily due to timing of raw materials purchases;

? prepaid and other current assets increased by 29% to August 28, 2022 compared

    to February 27, 2022 primarily due to marketable securities and prepaid
    insurances;

? trade payables increased by 10% to August 28, 2022 compared to February 27,

    2022 primarily due to timing of vendor payments;

? accrued expenses decreased by 28% to August 28, 2022 compared to February

27 2022 mainly due to the decrease in bonuses and profit sharing payable; and

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? Income taxes payable increased by 45% to August 28, 2022 compared to February

    27, 2022 due to the recorded tax provision.

In addition, the Company paid $4.1 million in cash dividends during each of the 26-week periods ended August 28, 2022 and August 29, 2021.

Working Capital



The decrease in working capital at August 28, 2022 compared to February 27, 2022
was due principally to the decrease in cash and cash equivalents, marketable
securities and prepaid and other current assets, partially offset by an increase
in accounts receivable and decreases in accounts payable, accrued liabilities
and income taxes payable.

The Company’s general liquidity ratio (the ratio of current assets to current liabilities) was 17.4 at 1.0 at August 28, 2022 versus 20.1 to 1.0 to February 27, 2022.

Cash Flows



During the 26 weeks ended August 28, 2022, the Company's net loss, before
depreciation and amortization, deferred income taxes, stock-based compensation,
amortization of bond premium and changes in operating assets and liabilities,
were $1.7 million. During the same 26-week period, the Company expended $644 for
the purchase of property, plant and equipment, compared with $2.5 million during
the 26 weeks ended August 29, 2021. The Company paid $4.1 million in cash
dividends in each of the 26-week periods ended August 28, 2022 and August 29,
2021.



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 is not aware of any circumstance or event reasonably likely to occur that could have a material impact on 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 $190,000, to secure the Company's obligations under its workers'
compensation insurance program.



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Off-balance sheet arrangements:

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

Critical accounting policies and estimates:

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



The Company's critical accounting policies that are important to the
Consolidated Financial Statements and that entail, to a significant extent, the
use of estimates and assumptions and the application of management's judgment
are described in Item 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 27, 2022. There have been no significant
changes to such accounting policies during the 2023 fiscal year second 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 27, 2022.



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