UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 1, 2008
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)
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated File [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,455,106 as of July 1, 2008.
2
PARK ELECTROCHEMICAL CORP.AND SUBSIDIARIES
TABLE OF CONTENTS
3
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands)
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories (Note 2)
Prepaid expenses and other current assets
Total current assets
Total assets
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
*The balance sheet at March 2, 2008 has been derived from the audited financial statements at that date, except for certain reclassifications to conform to the June 1, 2008 balance sheet.
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
PARK ELECTROCHEMICAL CORP.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share amounts)
Basic
Diluted
Basic shares
Diluted shares
5
PARK ELECTROCHEMICAL CORP.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(Amounts in thousands)
6
PARK ELECTROCHEMICAL CORP.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)
Net earnings
Depreciation and amortization
Stock-based compensation
Change in operating assets and liabilities
Purchases of property, plant and equipment, net
Purchases of marketable securities
Proceeds from sales and maturities of marketable securities
Business acquisition
Net cash (used in) provided by investing activities
Dividends paid
Proceeds from exercise of stock options
Tax benefits from stock-based compensation
Net cash provided by financing activities
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Amounts in thousands, except per share amounts)
8
The following is a summary of options for the 13 weeks ended June 1, 2008:
Granted
Exercised
9
10
Net Earnings
Weighted average common shares outstanding for basic EPS
Net effect of dilutive options
Weighted average shares outstanding for diluted EPS
Basic earnings per share
Diluted earnings per share
11
Total sales
Total long-lived assets
12
13
Total purchase price
14
15
General:
Park is a global advanced materials company which develops, manufactures and markets high technology digital and RF/microwave printed circuit materials principally for the telecommunications and internet infrastructure and high-end computing markets and advanced composite materials, structures and components principally for the aerospace markets. The Company’s core capabilities are in the areas of polymer chemistry formulation, coating technology and advanced composite structures and component design and fabrication. The Company’s manufacturing facilities are located in Singapore, China, France, Connecticut, New York, Kansas (under construction), Arizona, California and Washington. The Company’s products are marketed and sold under the Nelco®, Nelcote® and NovaTM names.
The Company’s net sales increased in the three-month period ended June 1, 2008 compared with last year’s comparable period as a result of increases in sales of the Company’s printed circuit materials products in North America, Asia and Europe and an increase in sales of the Company’s advanced composite materials products and the addition of sales of the Company’s advanced composite structures and components products as a result of the Company’s acquisition of the aircraft composite structures and components business of Nova Composites in Lynnwood, Washington in the 2009 fiscal year first quarter. The increase in sales resulted in a higher gross profit and higher earnings from operations in the 2009 fiscal year first quarter compared to the 2008 fiscal year first quarter.
The improvement in the Company’s operating performance during the 2009 fiscal year first quarter was attributable principally to increases in sales of the Company’s printed circuit materials products and advanced composite materials products, as well as higher percentages of sales of higher margin, high performance printed circuit materials products.
The markets in North America and Europe for the Company’s printed circuit materials products continued to be weak in the 2009 fiscal year first quarter. The markets for the Company’s advanced composite materials products continued to be relatively strong during the 2009 fiscal year first quarter, and, as a result of such strength and the Company’s marketing and sales efforts, sales of the Company’s advanced composite materials products increased in the first quarter of the 2009 fiscal year compared to the comparable period in the prior fiscal year.
The global markets for the Company’s printed circuit materials products continue to be very difficult to forecast, and it is not clear to the Company what the condition of the global markets for the Company’s printed circuit materials products will be in the 2009 fiscal year second quarter. The Company believes that the markets for its advanced composite materials products and its advanced composite structures and components products will continue to be relatively strong during the 2009 fiscal year second quarter.
16
As previously reported, in the first quarter of the Company’s 2009 fiscal year, the Company’s new wholly owned subsidiary, Park Aerospace Structures Corp., acquired substantially all the assets and business of Nova Composites, Inc., a designer and manufacturer of aircraft composite structures and components and the tooling for such structures and components, located in Lynnwood, Washington, for a cash purchase price of $4.5 million paid at the closing of the acquisition and up to an additional $5.5 million payable over five years depending on the achievement of specified earn-out objectives.
In addition, the Company is continuing the construction of a new development and manufacturing facility in Newton, Kansas to produce advanced composite materials principally for the general aviation aircraft segment of the aerospace industry. The Company expects to complete construction of the facility in the 2009 fiscal year second quarter and expects to complete equipment installation in the 2009 fiscal year fourth quarter. As previously reported, the Company plans to spend approximately $15 million on the facility and equipment in Kansas.
The Company is also exploring the possibility of establishing a manufacturing plant in Mexico to produce the Company’s NovaTM aircraft structures and components product line. The proposed Mexico plant would be intended to complement the Park Aerospace Structures Corp. plant in Lynnwood, Washington.
Three Months Ended June 1, 2008 Compared with Three Months Ended May 27, 2007:
The Company’s total net sales and its net sales of both its printed circuit materials products and its advanced composite materials products increased during the three-month period ended June 1, 2008 compared to the three-month period ended May 27, 2007. Sales of the Company’s advanced composite materials, structures and components products were 11% of the Company’s total net sales worldwide in the 2009 fiscal year first quarter compared to 9% in the 2008 fiscal year first quarter. The increase in sales of advanced composite materials, structures and components was attributable to an increase in sales of advanced composite materials products and the addition of sales of the Company’s advanced composite structures and components products as a result of the Company’s acquisition of the structures and components business of Nova Composites in Lynnwood, Washington in the 2009 fiscal year first quarter.
The increased sales in the three months ended June 1, 2008 resulted in higher earnings from operations and higher net earnings compared to the three months ended May 27, 2007.
Results of Operations
Net sales for the three-month period ended June 1, 2008 increased 5% to $59.8 million from $57.1 million for last fiscal year’s comparable period. The increase in net sales was principally the result of higher sales of printed circuit materials products in North America, Europe and Asia and higher sales of advanced composite materials, structures and components. The higher sales of printed circuit materials were partially attributable to selling price increases intended to offset increases in the raw materials cost associated with such products. Sales volumes increased 6% in North America, 5% in Europe and 3% in Asia during the 2009 fiscal year first quarter compared to the first quarter in the prior year.
17
The Company’s foreign operations accounted for $28.7 million of net sales, or 48% of the Company’s total net sales worldwide, during the three-month period ended June 1, 2008 compared with $27.8 million of sales, or 49% of total net sales worldwide, during last fiscal year’s comparable period. Net sales by the Company’s foreign operations during the 2009 fiscal year first quarter increased by 3% from the 2008 fiscal year comparable period as the result of higher sales in Asia and Europe.
For the three-month period ended June 1, 2008, the Company’s sales in North America, Asia and Europe were 52%, 37% and 11%, respectively, of the Company’s total net sales worldwide compared with 51%, 37% and 12%, respectively, for the three-month period ended May 27, 2007.
The overall gross profit as a percentage of net sales for the Company’s worldwide operations declined to 24.4% during the three-month period ended June 1, 2008 compared with 24.7% for last fiscal year’s comparable period. The decrease in the gross profit margin was attributable principally to increases in the costs of utilities, raw materials and freight-in during the three-month period ended June 1, 2008, which were only partially offset by higher percentages of sales of higher margin, high performance printed circuit materials products and selling price increases intended to offset the impact of higher raw materials costs.
During both the three-month periods ended June 1, 2008 and May 27, 2007, the Company’s total net sales worldwide of high temperature printed circuit materials, which include high performance materials (non-FR4 printed circuit materials), were 99% of the Company’s total net sales worldwide of printed circuit materials.
The Company’s high temperature printed circuit materials include its high performance materials (non-FR4 printed circuit materials), which consist of high-speed, low-loss materials for digital and RF/microwave applications requiring lead-free compatibility and 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.
During the three-month period ended June 1, 2008, the Company’s total net sales worldwide of high performance printed circuit materials (non-FR4 printed circuit materials) were 60% of the Company’s total net sales worldwide of printed circuit materials, compared to 50% for last fiscal year’s comparable period.
Selling, general and administrative expenses decreased by $0.2 million, or by 4%, during the three months ended June 1, 2008 compared with last fiscal year’s comparable period, and these expenses, measured as a percentage of sales, were 10.6% during the three months ended June 1, 2008 compared with 11.5% during last fiscal year’s comparable period.
For the reasons set forth above, the Company’s earnings from operations were $8.2 million for the three months ended June 1, 2008, compared to earnings from operations of $7.5 million for the three months ended May 27, 2007.
18
Interest and other income, principally investment income, was $1.7 million for the three-month period ended June 1, 2008 compared with $2.3 million for last fiscal year’s comparable period. The decrease in investment income was attributable to lower prevailing interest rates during the 2009 fiscal year first quarter than during the 2008 fiscal year first quarter. The Company’s investments were primarily short-term instruments and money market funds.
The Company’s effective income tax rate for the three-month period ended June 1, 2008 was 23.8%, compared to 24.7% for last fiscal year’s comparable period. The lower tax provision for the 2009 fiscal year first quarter was attributable principally to higher taxable income in jurisdictions with lower effective income tax rates.
The Company’s net earnings for the three months ended June 1, 2008 were $7.6 million, compared to net earnings of $7.4 million for the three months ended May 27, 2007.
Basic and diluted earnings per share were $0.37 for both the three-month period ended June 1, 2008 the three-month period ended May 27, 2007.
Liquidity and Capital Resources:
At June 1, 2008, the Company’s cash and temporary investments were $214.3 million compared with $214.0 million at March 2, 2008, the end of the Company’s 2008 fiscal year. The Company’s working capital (which includes cash and temporary investments) was $239.9 million at June 1, 2008 compared with $239.1 million at March 2, 2008. The increase in working capital at June 1, 2008 compared with March 2, 2008 was due principally to the increase in cash and temporary investments and an increase in inventories slightly offset by decreases in accounts receivable and prepaid expenses and other current assets and an increase in accrued liabilities. Inventories were 9% higher at June 1, 2008 than at March 2, 2008 primarily as a result of higher raw materials. The Company’s current ratio (the ratio of current assets to current liabilities) was 8.4 to 1 at June 1, 2008 compared to 8.5 to 1 at March 2, 2008.
During the three months ended June 1, 2008, net earnings from the Company’s operations, before depreciation and amortization, of $9.5 million reduced by a net decrease in working capital items, resulted in $11.3 million of cash provided by operating activities. During the same three-month period, the Company expended $5.8 million for the purchase of property, plant and equipment, primarily for the Company’s new development and manufacturing facility in Newton, Kansas, compared with $1.8 million for the three-month period ended May 27, 2007, and paid $1.6 million and $1.6 million, respectively, in dividends on its common stock in such three-month periods. Net expenditures for property, plant and equipment were $4.4 million in the 2008 fiscal year and $3.9 million in the 2007 fiscal year.
At June 1, 2008 and at May 27, 2007, 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.
19
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 and commitments to purchase plant and equipment for the Company’s new development and manufacturing facility currently under construction in Newton, Kansas. 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 $1.6 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 June 1, 2008, 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 March 2, 2008.
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 June 1, 2008 and May 27, 2007, 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 cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At June 1, 2008 and March 2, 2008, the amount recorded in liabilities from discontinued operations for environmental matters related to Dielektra was $2.1 million and the amounts recorded in accrued liabilities for other environmental matters were $1.0 million and $1.6 million, respectively. 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.
20
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, accounts receivable, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, restructurings, contingencies and litigation, and pensions and other employee benefit programs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
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, structures and components possible and employs stringent manufacturing process controls and works with raw material suppliers who have dedicated themselves to complying with the Company’s specifications and technical requirements. The amounts of returns and allowances resulting from defective or damaged products have been approximately 1.0% of sales for each of the Company’s last three fiscal years.
Accounts Receivable
The majority of the Company’s accounts receivable are due from purchasers of the Company’s printed circuit materials. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance
21
for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Allowances for Doubtful Accounts
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, or conversely to further reduce the existing valuation allowance resulting in less income tax expense. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly.
Restructurings
The Company recorded a one-time charge of $1.4 million in the fourth quarter of the fiscal year ended March 2, 2008 in connection with a restructuring and workforce reduction at its Neltec Europe SAS electronic materials business unit in France and a charge of $889 in connection with a workforce reduction at such business unit during the 2006 fiscal year. Such restructuring and workforce reductions are described in Note 5 of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Report.
22
Contingencies
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 had significant pension costs that were developed from actuarial valuations. Inherent in these valuations were 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, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. The Company accrues its workers’ compensation liability based on estimates of the total exposure of known claims using historical experience and projected loss development factors less amounts previously paid.
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 and aerospace industries, 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 and utilities, and the various factors set forth in Item 1A “Risk Factors” and 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 March 2, 2008.
23
The Company’s market risk exposure at June 1, 2008 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 March 2, 2008.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Vice President and Controller (the person currently performing the functions similar to those performed by a principal 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 June 1, 2008, the end of the quarterly fiscal period covered by this quarterly report. Based on such evaluation, the Company’s Chief Executive Officer and Vice President and Controller 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 Vice President and Controller, as appropriate to allow timely decisions regarding required disclosure.
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.
24
PART II. OTHER INFORMATION
None.
There have been no material changes from the risk factors as previously disclosed in the Company’s Form 10-K Annual Report for the fiscal year ended March 2, 2008.
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 2009 fiscal year first quarter ended June 1, 2008.
(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.
25
26
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.
President and Chief Executive Officer(principal executive officer)
Vice President and Controller(principal accounting officer)
27
EXHIBIT INDEX