UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 29, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to__________ Commission file number 1-4415 PARK ELECTROCHEMICAL CORP. (Exact Name of Registrant as Specified in Its Charter) New York 11-1734643 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 48 South Service Road, Melville, N.Y. 11747 (Address of Principal Executive Offices) (Zip Code) (631) 465-3600 (Registrant's Telephone Number, Including Area Code) Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes[X] No[ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,004,885 as of July 5, 2005. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION: Number Item 1. Financial Statements Condensed Consolidated Balance Sheets May 29, 2005 (Unaudited) and February 27, 2005 3 Consolidated Statements of Operations 13 weeks ended May 29, 2005 and May 30, 2004 (Unaudited) 4 Consolidated Statements of Stockholders' Equity 13 weeks ended May 29, 2005 and May 30, 2004 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows 13 weeks ended May 29, 2005 and May 30, 2004 6 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 13 Operations Factors That May Affect Future Results 21 Item 3. Quantitive and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION: Item 1. Legal Proceedings 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits 23 SIGNATURES 25 EXHIBIT INDEX 26 PART I. FINANCIAL INFORMATION PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> May 29, 2005 February 27, (Unaudited) 2005* <s> <c> <c> ASSETS Current assets: Cash and cash equivalents $ 78,021 $ 86,071 Marketable securities 114,322 103,507 Accounts receivable, net 35,675 35,722 Inventories (Note 2) 15,292 15,418 Prepaid expenses and other current assets 3,985 2,944 -------- -------- Total current assets 247,295 243,662 Property, plant and equipment, net 61,112 63,251 Other assets 365 398 -------- -------- Total assets $308,772 $307,311 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,076 $ 15,121 Accrued liabilities 20,905 20,566 Income taxes payable 7,938 6,474 -------- -------- Total current liabilities 40,919 42,161 Deferred income taxes 4,439 5,042 Liabilities from discontinued operations (Note 4) 17,251 17,251 -------- -------- Total liabilities 62,609 64,454 Stockholders' equity: Common stock 2,037 2,037 Additional paid-in capital 134,584 134,206 Retained earnings 109,184 105,450 Treasury stock, at cost (2,968) (3,441) Accumulated other comprehensive income 3,326 4,605 -------- -------- Total stockholders' equity 246,163 242,857 -------- -------- Total liabilities and stockholders' equity $308,772 $307,311 ======== ======== <FN> *The balance sheet at February 27, 2005 has been derived from the audited financial statements at that date. </TABLE> See accompanying Notes to the Condensed Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) <TABLE> <CAPTION> 13 weeks ended (Unaudited) May 29, May 30, 2005 2004 <s> <c> <c> Net sales $55,676 $58,518 Cost of sales 43,646 44,806 -------- -------- Gross profit 12,030 13,712 Selling, general and administrative expenses 6,269 8,341 Realignment and severance charges (Note 5) 1,059 - -------- -------- Profit from operations 4,702 5,371 Interest income and other income 1,336 651 -------- -------- Earnings from operations before income taxes 6,038 6,022 Income tax provision 710 1 -------- -------- Net earnings $ 5,328 $ 6,021 ======== ======== Earnings per share (Note 6) Basic $ 0.27 $ 0.30 Diluted $ 0.27 $ 0.30 Weighted average number of common and common equivalent shares outstanding: Basic shares 19,947 19,810 Diluted shares 20,076 20,068 Dividends per share $ 0.08 $ 0.06 </TABLE> See accompanying Notes to the Condensed Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands) <TABLE> <CAPTION> 13 weeks ended (Unaudited) May 29, May 30, 2005 2004 <s> <c> <c> Common stock and paid-in capital Balance, beginning of period $136,243 $135,372 Stock option activity 378 373 -------- -------- Balance, end of period 136,621 135,745 -------- -------- Retained earnings Balance, beginning of period 105,450 108,915 Net income 5,328 6,021 Dividends (1,594) (1,187) -------- -------- Balance, end of period 109,184 13,749 -------- -------- Treasury stock Balance, beginning of period (3,441) (4,125) Stock option activity 473 432 -------- -------- Balance, end of period (2,968) (3,693) -------- -------- Accumulated other comprehensive income Balance, beginning of period 4,605 3,734 Net unrealized investment (losses) gains (3) 401 Translation adjustments (1,276) (588) -------- -------- Balance, end of period 3,326 3,547 -------- -------- Total stockholders' equity $246,163 $249,348 ======== ======== </TABLE> See accompanying Notes to the Condensed Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) <TABLE> <CAPTION> 13 Weeks Ended (Unaudited) May 29, May 30, 2005 2004 <s> <c> <c> Cash flows from operating activities: Net earnings $ 5,328 $ 6,021 Depreciation and amortization 2,428 2,549 Change in operating assets and liabilities (2,903) 4,659 -------- -------- Net cash provided by operating activities 4,853 13,229 -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment, net (1,053) (356) Purchases of marketable securities (14,767) (4,508) Proceeds from sales and maturities of marketable securities 4,000 16,650 -------- -------- Net cash (used in) provided by investing activities (11,820) 11,786 -------- -------- Cash flows from financing activities: Dividends paid (1,594) (1,187) Proceeds from exercise of stock options 851 807 -------- -------- Net cash used in financing activities (743) (380) -------- -------- Change in cash and cash equivalents before exchange rate changes (7,710) 24,635 Effect of exchange rate changes on cash and cash equivalents (340) 327 -------- -------- Change in cash and cash equivalents (8,050) 24,962 Cash and cash equivalents, beginning of Period 86,071 129,989 --------- -------- Cash and cash equivalents, end of period $78,021 $154,951 ========= ======== Supplemental cash flow information: Cash paid (refunded) during the period for income taxes $ 30 $ (3,710) </TABLE> See accompanying Notes to the Condensed Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except per share amounts) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of May 29, 2005, the consolidated statements of operations for the 13 weeks ended May 27, 2005 and May 30, 2004, the consolidated statements of stockholders' equity for the 13 weeks then ended, and the condensed consolidated statements of cash flows for the 13 weeks then ended have been prepared by the Company, without audit. In the opinion of management, these unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at May 29, 2005 and the results of operations and cash flows for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 27, 2005. <TABLE> 2. INVENTORIES Inventories consisted of the following: <CAPTION> May 29, February 27, 2005 2005 <s> <c> <c> Raw materials $ 6,212 $ 6,436 Work-in-process 3,704 3,577 Finished goods 4,931 5,068 Manufacturing supplies 445 337 ------- ------- $15,292 $15,418 ======= ======= </TABLE> 3. STOCK OPTIONS As of May 29, 2005, the Company had two fixed stock option plans. All options under the plans had exercise prices equal to the market value of the underlying common stock of the Company on the dates of grants. The Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations for the plans. If compensation costs of the grants had been determined based upon the fair market value at the grant dates consistent with FASB No. 123, "Accounting for Stock-Based Compensation", the Company's net earnings and earnings per share would have approximated the amounts shown below. <TABLE> <CAPTION> 13 weeks ended May 29, May 30, 2005 2004 <s> <c> <c> Net earnings $5,328 $6,021 Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of tax effects 439 459 ------ ------ Pro forma net income $4,889 $5,562 ====== ====== EPS-basic as reported $ 0.27 $ 0.30 ====== ====== EPS-basic pro forma $ 0.25 $ 0.28 ====== ====== EPS-diluted as reported $ 0.27 $ 0.30 ====== ====== EPS-diluted pro forma $ 0.24 $ 0.28 ====== ====== </TABLE> 4. DISCONTINUED OPERATIONS On February 4, 2004, the Company announced that it was discontinuing its financial support of its Dielektra GmbH ("Dielektra") subsidiary located in Cologne, Germany, due to the continued erosion of the European market for the Company's high technology products. Without Park's financial support, Dielektra filed an insolvency petition, which may result in the reorganization, sale or liquidation of Dielektra. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", Dielektra is treated as a discontinued operation. As a result of the discontinuation of financial support for Dielektra, the Company recognized an impairment charge of $22,023 for the write-off of Dielektra assets and other costs during the fourth quarter of the 2004 fiscal year. The liabilities from discontinued operations are reported separately on the consolidated balance sheet. These liabilities from discontinued operations included $12,094 for Dielektra's deferred pension liability. The Company expects to recognize a gain of approximately $17 million related to the reversal of these liabilities when the Dielektra insolvency process is completed, although it is unclear when the process will be completed. Liabilities for discontinued operations as of May 29, 2005 and February 27, 2005 consisted of the following: <TABLE> <CAPTION> May 29, February 27, 2005 2005 <s> <c> <c> Current and other liabilities $ 5,157 $ 5,157 Pension liabilities 12,094 12,094 ------- ------- Total liabilities $17,251 $17,251 ======= ======= </TABLE> 5. REALIGNMENT AND SEVERANCE CHARGES During the 2006 fiscal year first quarter ended May 29, 2005, the Company recorded a $1,059 charge for one-time termination benefits for workforce reductions at its Neltec Europe SAS subsidiary in Mirebeau, France. The major portion of these benefits is expected to be paid during the 2006 fiscal year second quarter. The Company recorded pre-tax charges of $1,934 and $6,504 during the first and second quarters, respectively, of fiscal year 2004, related to the realignment of its North American volume printed circuit materials operations in Newburgh, New York and Fullerton, California. During the fourth quarter of fiscal year 2004, the Company recorded pre-tax charges of $112 related to workforce reductions in Europe. The components of these charges and the related liability balances and activity through May 29, 2005 are set forth below. <TABLE> <CAPTION> 5/29/05 Realignment Charges Remaining Charges Paid Reversals Liabilities <s> <c> <c> <c> <c> New York, California and other realignment charges: Lease payments, taxes, utilities and other $7,292 $1,630 $ - $5,662 Severance payments 1,258 1,258 - - ------ ------ ------ ------- $8,550 $2,888 $ - $5,662 ====== ====== ====== ======= </TABLE> The severance payments were for the termination of hourly and salaried, administrative, manufacturing and support employees. Such employees were terminated during the 2004 fiscal year first, second and third quarters. The severance payments were paid to such employees in installments during fiscal year 2004. The lease charges covered one lease obligation payable through December 2004 and a portion of another lease obligation payable through September 2013. For the 13 weeks ended May 29, 2005, the Company applied $135 of payments against the liability. 6. EARNINGS PER SHARE Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potential common stock equivalents outstanding during the period. Stock options are the only common stock equivalents, and the number of dilutive options is computed using the treasury stock method. The following table sets forth the basic and diluted weighted average number of shares of common stock and potential common stock equivalents outstanding during the periods specified: <TABLE> <CAPTION> 13 weeks ended May 29, May 30, 2005 2004 <s> <c> <c> Weighted average shares oustanding for basic EPS 19,947 19,810 Net effect of dilutive options 129 258 ------ ------ Weighted average shares oustanding for diluted EPS 20,076 20,068 ====== ====== </TABLE> Common stock equivalents, which were not included in the computation of diluted earnings per share because either the effect would have been antidilutive or the options' exercise prices were greater than the average market price of the common stock, were 127 and 57 for the thirteen weeks ended May 29, 2005 and May 30, 2004, respectively. 7. BUSINESS SEGMENTS The Company considers itself to operate in one business segment because the Company's advanced composite materials business comprises less than 10% of the Company's assets, revenues, and profit from operations on an absolute basis. The Company's electronic materials products are marketed primarily to leading independent printed circuit board fabricators, electronic manufacturing service companies, electronic contract manufacturers and major electronic original equipment manufacturers ("OEMs") located throughout North America, Europe and Asia. The Company's advanced composite materials customers, the majority of which are located in the United States, include OEMs, independent firms and distributors in the electronics, aerospace, and industrial industries. Sales are attributed to geographic region based upon the region from which the materials were shipped to the customer. Sales between geographic regions were not significant. Financial information concerning the Company's operations by geographic area follows: <TABLE> <CAPTION> 13 weeks ended May 29, May 30, 2005 2004 <s> <c> <c> Sales: North America $30,792 $32,264 Europe 8,338 9,117 Asia 16,546 17,137 ------- ------- Total sales $55,676 $58,518 ======= ======= </TABLE> <TABLE> <CAPTION> May 29, February 27, 2005 2005 <s> <c> <c> Long-lived assets: North America $31,361 $32,610 Europe 10,072 10,856 Asia 20,044 20,183 ------- ------- Total long-lived assets $61,477 $63,649 ======= ======= </TABLE> 8. COMPREHENSIVE INCOME Total comprehensive income for the 13 weeks ended May 29, 2005 and May 30, 2004 was $4,049 and $5,834 respectively. Comprehensive income consisted primarily of net income and foreign currency translation adjustments and unrealized gains and losses on marketable securities. 9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In May 2005, the FASB issued SFAS No. 154 ("SFAS No. 154"), "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3". SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long- lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 will become effective for the Company's 2007 fiscal year. FASB Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations", was issued by the FASB in March 2005. FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. FIN 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 is not expected to have a material effect on the Company's Consolidated Financial Statements. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and supersedes Accounting Principle Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". SFAS 123R requires all share- based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values for fiscal years beginning after June 15, 2005 (as delayed by the Securities and Exchange Commission), with early adoption encouraged. For years beginning after June 15, 2005, the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS 123R, a determination must be made regarding the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. SFAS 123R permits a prospective application or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS 123. The Company is required to adopt of SFAS 123R in the first quarter of fiscal year 2007, at which time the Company will begin recognizing an expense for all unvested share-based compensation that has been issued. Under the retrospective options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The Company has not yet finalized its decision concerning the transition option it will utilize to adopt SFAS 123R and is in the process of evaluating the impact of FAS 123R on its financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General: Park is a leading global advanced materials company which develops, manufactures and markets high technology digital and RF/microwave printed circuit materials and advanced composite materials for the electronics, military, aerospace, wireless communication, specialty and industrial markets. The Company's manufacturing facilities are located in Singapore, China (currently under construction), France (two facilities), Connecticut, New York, Arizona and California. The Company operates under the FiberCoteT, Nelcor and Neltecr names. The Company's net sales decreased in the three-month period ended May 29, 2005 compared with last year's comparable period as a result of decreases in sales by the Company's printed circuit materials operations in North America, Europe and Asia, although the Company achieved higher operating profits in the 2006 fiscal year first quarter than in the 2005 fiscal year first quarter. The Company's net earnings decreased in the 2006 fiscal year first quarter compared to the prior year's first quarter due to a one-time employment termination benefits charge of $1.1 million related to a workforce reduction at its Neltec Europe SAS subsidiary in France. Although the condition of the global markets for the Company's printed circuit materials products improved somewhat in the second half of the 2004 fiscal year and the first half of the 2005 fiscal year, those markets weakened in the second half of the 2005 fiscal year and continued to be mixed in the first quarter of the 2006 fiscal year. Consequently, sales of the Company's printed circuit materials operations declined in the 2006 fiscal year first quarter compared to the 2005 fiscal year first quarter. However, the military, aerospace, wireless communication and industrial markets for the Company's advanced composite materials business were healthy during the 2006 fiscal year first quarter, and, as a result, sales of the Company's advanced composite materials increased slightly in the first quarter of the 2006 fiscal year compared to the comparable period in the prior fiscal year, and the Company's advanced composite materials business continued to operate near its full capacity. Despite mixed conditions in almost all markets for sophisticated printed circuit materials, the Company's operating profit, excluding the employment termination benefits charge, in the 2006 fiscal year first quarter was greater than its operating profit in the 2005 fiscal year firstquarter as a result of the Company's reductions of its costs and expenses and higher percentages of sales of higher margin, high temperature printed circuit materials products. While the global markets for the Company's printed circuit materials continue to be very difficult to forecast, the Company believes that the condition of the global markets for the Company's printed circuit materials in the 2006 fiscal year second quarter is similar to the condition of such markets during the 2006 fiscal year first quarter and the 2005 fiscal year third and fourth quarters, although the second quarter is a seasonally slower quarter due to summer vacations and holidays. On the other hand, the military, aerospace and specialty applications markets for the Company's advanced composite materials business continues to be healthy during the 2006 fiscal year second quarter. The Company believes that the markets for its advanced composite materials will continue to be healthy during the 2006 fiscal year second quarter. The Company continues to invest its human and financial resources in the higher technology portions of its printed circuit materials business and in its advanced composite materials business. During the 2005 fiscal year, the Company installed one of its latest generation, high technology treaters in its newly expanded facility in Singapore, and the Company is completing the installation of an additional treater at its FiberCote advanced composite materials facility in Waterbury, Connecticut, which will significantly increase FiberCote's treating capacity. While the Company continued to expand and invest in its business in Asia during the 2005 fiscal year, it made additional adjustments to its volume printed circuit materials businesses, particularly in North America, which resulted in workforce reductions at the Company's North American and European volume printed circuit materials operations as a result of which the Company recorded pre-tax charges of $0.6 million in the Company's 2005 fiscal year third quarter. In addition, in the 2006 fiscal year first quarter, the Company announced that it was reducing the size of the workforce at its Neltec Europe SAS subsidiary in Mirebeau, France, as a result of further deterioration of the European market for high technology printed circuit materials, and it recorded a one- time employment termination benefits charge of $1.1 million during the 2006 fiscal year first quarter ending May 29, 2005. The Company is not engaged in any related party transactions involving relationships or transactions with persons or entities that derive benefits from their non- independent relationship with the Company or the Company's related parties, or in any transactions with parties with whom the Company or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may or would not be available from other, more clearly independent parties on an arm's-length basis, or in any trading activities involving non-exchange traded commodity or other contracts that are accounted for at fair value or otherwise or in any energy trading or risk management activities, other than certain limited foreign currency contracts intended to hedge the Company's contractual commitments to pay certain obligations or to realize certain receipts in foreign currencies and certain limited energy purchase contracts intended to protect the Company from increased utilities costs. The Company believes that an evaluation of its ongoing operations would be difficult if the disclosure of its financial results were limited to generally accepted accounting principles ("GAAP") financial measures, which include special items, such as realignment and severance charges and the gains on the insurance claim settlement, the Delco lawsuit and the sale of real estate. Accordingly, in addition to disclosing its financial results determined in accordance with GAAP, the Company discloses non-GAAP operating results that exclude certain items in order to assist its shareholders and other readers in assessing the Company's operating performance, since the Company's on-going, normal business operations do not include such special items. Such non-GAAP financial measures are provided to supplement the results provided in accordance with GAAP. Three Months Ended May 29, 2005 Compared with Three Months Ended May 30, 2004: The Company's total net sales and its net sales of its printed circuit materials declined in all geographic regions during the three-month period ended May 29, 2005 compared to the three-month period ended May 30, 2004, although the Company's total sales of printed circuit materials during the three-month period ended May 29, 2005 were higher than such sales during during the prior year's second, third and fourth quarters, and the net sales of the Company's advanced composite materials business increased slightly during the three-month period ended May 29, 2005 compared to the three-month period ended May 30, 2004 and compared to the second and fourth quarters of the prior fiscal year. Sales of advanced composite materials increased to 8% of the Company's total net sales worldwide in the 2006 fiscal year first quarter compared to 7% of the Company's total net sales worldwide in the 2005 fiscal year first quarter. The reduced sales in the three-month period ended May 29, 2005 without a proportionate reduction in the cost of sales resulted in a lower gross profit in the three months ended May 29, 2005 compared to the three months ended May 30, 2004. A significant reduction in selling, general and administrative expenses enabled the Company to report profit from operations before realignment charges and net earnings before realignment charges for the three-month period ended May 29, 2005 in amounts that were higher than income and net earnings reported for the three-month period ended May 30, 2004, although the results for the three-month period ended May 29, 2005 were negatively affected by the $1.1 million employment termination benefits charge related to a workforce reduction at the Company's Neltec Europe SAS facility in France. Results of Operations Net sales for the three-month period ended May 29, 2005 decreased 5% to $55.7 million from $58.5 million for last fiscal year's comparable period. The decrease in net sales was principally the result of lower unit volumes of printed circuit materials shipped by the Company's operations in North America, Europe and Asia. Sales volumes decreased 5% in North America, 9% in Europe and 3% in Asia during the 2006 fiscal year first quarter compared to the sales for the same period in the prior year. Although total net sales in the 2006 fiscal year first quarter declined by 5% compared to total net sales in the prior year's first quarter, the 2006 fiscal year first quarter sales were 9%, 11% and 9% higher than the sales in the prior year's second, third and fourth quarters, respectively. The Company's foreign operations accounted for $24.9 million of net sales, or 45% of the Company's total net sales worldwide, during the three-month period ended May 29, 2005 compared with $26.3 million of sales, or 45% of total net sales worldwide, during last fiscal year's comparable period. Net sales by the Company's foreign operations during the 2006 fiscal year first quarter decreased by 5% from the 2005 fiscal year comparable period as the result of lower sales in both Europe and Asia. For the three-month period ended May 29, 2005, the Company's sales in North America, Asia and Europe were 55%, 30% and 15%, respectively, of the Company's total net sales worldwide compared with 55%, 29% and 16%, respectively, for the three-month period ended May 30, 2004. The overall gross profit as a percentage of net sales for the Company's worldwide operations declined to 21.6% during the three-month period ended May 29, 2005 compared with 23.4% for last fiscal year's comparable period. The decline in the gross profit margin was attributable to lower sales volumes, which were only partially offset by higher percentages of sales of higher margin, high performance printed circuit materials products and adjustments to reduce operating costs. The trend toward a higher percentage of sales of higher margin, high temperature and high performance printed circuit materials products continued in the 2006 fiscal year first quarter. During the three-month period ended May 29, 2005, the Company's total net sales worldwide of high temperature printed circuit materials, which included high performance (non-FR4) materials, were 96% of the Company's total net sales worldwide of printed circuit materials, compared with 93% for the three- month period ended May 30, 2004; while the Company's net sales of such high temperature printed circuit materials in North America were 97% of the Company's total net sales of printed circuit materials in North America, compared with 93% for the three-month period ended May 30, 2004; and the Company's net sales of such materials in Asia and Europe combined were 93% of the Company's total net sales of printed circuit materials in Asia and Europe combined, compared with 90% for the three-month period ended May 30, 2004. The Company's high temperature printed circuit materials include its high performance (non-FR4) materials, which consists of high-speed, low-loss materials for digital and RF/microwave applications requiring increased, high bandwidth signal integrity, bismalimide triazine ("BT") materials, polyimides for applications that demand extremely high thermal performance, cyanate esters, and polytetrafluoroethylene ("PTFE") materials for RF/microwave systems that operate at frequencies up to 77GHz. Selling, general and administrative expenses decreased by $2.1 million, or by 25%, during the three months ended May 29, 2005 compared with last fiscal year's comparable period, and these expenses, measured as a percentage of sales, were 11.3% during the three-months ended May 29, 2005 compared with 14.2% during last fiscal year's comparable period. The decrease in selling, general and administrative expenses in the 2006 fiscal year first quarter was a result of decreases in almost all categories of expenses and the absence of the high shipping costs incurred by the Company during the 2005 fiscal year first quarter to meet its customers' customized manufacturing and quick-turn-around requirements. The Company incurred a charge of $1.1 million, for which there was no tax benefit, during the 2006 fiscal year first quarter for employment termination benefits related to a workforce reduction at its Neltec Europe SAS subsidiary in Mirebeau, France. For the reasons set forth above, the Company's operating income was $4.7 million for the three months ended May 29, 2005, including the $1.1 million employment termination benefits charge described above, compared to operating income of $5.4 million for the three months ended May 30, 2004. Interest and other income, net, principally investment income, was $1.3 million for the three-month period ended May 29, 2005 compared with $0.7 million for last fiscal year's comparable period. The increase in investment income was attributable to higher prevailing interest rates during the 2006 fiscal year first quarter than during the 2005 fiscal year first quarter. The Company's investments were primarily short- term taxable instruments and money market funds. The Company's effective income tax rate for the three- month period ended May 29, 2005 was 10.0%, compared to 0.0% for last fiscal year's comparable period. The zero tax provision for the 2005 fiscal year first quarter was the result of higher taxable income in jurisdictions with lower effective income tax rates and the elimination of foreign tax provisions that were no longer required. The Company's net earnings for the three months ended May 29, 2005 were $5.3 million, including the $1.1 million employment termination benefits charge described above, compared to net earnings of $6.0 million for the three months ended May 30, 2004. Basic and diluted earnings per share for the three-month period ended May 29, 2005 were $0.27, including the employment termination benefits charge described above, compared to basic and diluted earnings per share of $0.30 for the three-month period ended May 30, 2004. Liquidity and Capital Resources: At May 29, 2005, the Company's cash and temporary investments were $192.3 million compared with $189.6 million at February 27, 2005, the end of the Company's 2005 fiscal year. The increase in the Company's cash and investment position at May 29, 2005 was attributable to cash generated by operating activities, partially offset by purchases of property, plant and equipment and the payment of dividends. The Company's working capital (which includes cash and temporary investments) was $206.4 million at May 29, 2005 compared with $201.5 million at February 27, 2005. The increase in working capital at May 29, 2005 compared with February 27, 2005 was due principally to the increase in cash and temporary investments and an increase in other current assets and a decrease in accounts payable partially offset by an increase in income taxes payable. The increase in other assets was attributable to interest receivable and prepaid insurance. The decrease in accounts payable was the result of the timing of the Company's payment of its payables. The increase in income taxes payable was attributable mainly to taxable earnings in the three-month period ended May 29, 2005. The Company's current ratio (the ratio of current assets to current liabilities) was 6.0 to 1 at May 29, 2005 compared to 5.8 to 1 at February 27, 2005. During the three months ended May 29, 2005, net earnings from the Company's operations, before depreciation and amortization, of $7.8 million and a net increase in working capital items, resulting in $4.9 million of cash provided by operating activities. During the same three-month period, the Company expended $1.1 million for the purchase of property, plant and equipment compared with $0.4 million for the three- month period ended May 30, 2004 and paid $1.6 million and $1.2 million, respectively, in dividends on its common stock in such three-month periods. Net expenditures for property, plant and equipment were $3.3 million in the 2005 fiscal year, $2.4 million in the 2004 fiscal year and $6.4 million in the 2003 fiscal year. At May 29, 2005 and at February 27, 2005, the Company had no long-term debt. The Company believes its financial resources will be sufficient, for the foreseeable future, to provide for continued investment in working capital and property, plant and equipment and for general corporate purposes. Such resources would also be 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. 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. The Company has no 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 $2.7 million to secure the Company's obligations under its workers' compensation insurance program and certain limited energy purchase contracts intended to protect the Company from increased utilities costs. As of May 29, 2005, there were no material changes outside the ordinary course of the Company's business in the Company's contractual obligations disclosed in Item 7 of Part II of its Form 10-K Annual Report for the fiscal year ended February 27, 2005. 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: In the three-month periods ended May 29, 2005 and May 30, 2004, the Company charged less than $0.01 million against pretax income for environmental remedial response and voluntary cleanup costs (including legal fees). While annual expenditures 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 available cash. 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 May 29, 2005 and February 27, 2005, the recorded liability in liabilities from discontinued operations for environmental matters related to Dielektra was $2.1 million and the recorded liability in accrued liabilities for environmental matters was $2.3 million. 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. Critical Accounting Policies and Estimates: In response to financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", issued by the Securities and Exchange Commission in December 2001, 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 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 on-going basis, the Company evaluates its estimates, including those related to sales allowances, allowances for bad debts, inventories, valuation of long-lived assets, income taxes, restructurings, pensions and other employee benefit programs, and contingencies and litigation. 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. Revenue Recognition Sales revenue is recognized at the time title to product is transferred to a customer. All material sales transactions are for the shipment of manufactured prepreg and laminate products and advanced composite materials. The Company ships its products to customers based upon firm orders, with fixed selling prices, when collection is reasonably assured. Sales Allowances The Company provides for the estimated costs of sales allowances at the time such costs can be reasonably estimated. The Company's products are made to customer specifications and tested for adherence to such specifications before shipment to customers. There are no future performance requirements other than the products' meeting the agreed specifications. The Company's bases 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 printed circuit materials and advanced composite materials 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. Allowances for Bad Debts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. 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. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. 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. 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 Carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. 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 statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly. Restructurings The Company recorded significant charges in connection with the realignment of its Neltec Europe SAS business in France during the three months ended May 29, 2005 and its North American volume printed circuit materials operations during the fiscal years ended February 29, 2004 and March 2, 2003. To a lesser extent, the Company also recorded realignment charges in its North American operations during the fiscal year ended February 27, 2005. In addition, during the 2003 fiscal year, the Company recorded charges in connection with the closure of the Company's manufacturing facility in England. Prior to the Company's treating Dielektra GmbH as a discontinued operation, the Company recorded significant charges in connection with the closure of the mass lamination operation of Dielektra and the realignment of Dielektra during the fiscal years ended February 29, 2004, March 2, 2003 and March 3, 2002. Contingencies and Litigation The Company is subject to a small 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. Pension and Other Employee Benefit Programs Dielektra GmbH has significant pension costs that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and wage inflation rates. The pension liability of Dielektra has been included in liabilities from discontinued operations on the Company's balance sheet. The Company's obligations for workers' compensation claims are effectively self-insured. The Company uses an insurance company administrator to process all such claims and benefits. The Company accrues its workers' compensation liability based upon the claim reserves established by the third-party administrator and historical experience. 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. 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 Park's expectations or from results which might be projected, forecast, estimated or budgeted by the Company in forward- looking statements. Such factors include, but are not limited to, general conditions in the electronics 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 utilities, and the various factors set forth under the caption "Factors That May Affect Future Results" after Item 7 of Park's Annual Report on Form 10-K for the fiscal year ended February 27, 2005. Item 3. Quantitative and Qualitative Disclosure About Market Risk. The Company's market risk exposure at May 29, 2005 is consistent with, and not greater than, the types of market risk and amount of exposures presented in the Annual Report on Form 10-K for the fiscal year ended February 27, 2005. Item 4. Controls and Procedures. (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of May 29, 2005, the end of the quarterly fiscal period covered by this quarterly report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting. There has not been any change in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to shares of the Company's Common Stock acquired by the Company during each month included in the Company's 2006 fiscal year first quarter ended May 29, 2005. <TABLE> <CAPTION> Total Number Maximum Number of Shares (or Approximate Units) Dollar Value) Purchased as of Shares (or Total Average Part of Units) that May Number of Price Publicly yet Be Shares (or paid per Announced Purchased Under Period Units) Share (or Plan or the Plans or Purchased Unit) Programs Programs <s> <c> <c> <c> <c> February 28- 0 - 0 March 31 April 1-30 0 - 0 May 1-29 0 - 0 Total 0 - 0 2,000,000(a) </TABLE> (a) Aggregate number of shares available to be purchased by the Company pursuant to a previous share purchase authorization announced on October 20, 2004. Pursuant to such authorization, the Company is authorized to purchase its shares from time to time on the open market or in privately negotiated transactions. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits. 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Park Electrochemical Corp. -------------------------- (Registrant) /s/Brian E. Shore Date: July 6, 2005 -------------------------- Brian E. Shore President and Chief Executive Officer /s/Murray O. Stamer Date: July 6, 2005 ------------------------- Murray O. Stamer Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit No. Name Page ----------- ---- ---- 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) 27 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) 29 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32