Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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General:
Park Electrochemical Corp. (“Park” or the “Company”) is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives (undergoing qualification) and lightning strike materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s patented composite SigmaStrut
TM
and AlphaStrut
TM
product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.
On December 4, 2018, Park completed the previously announced sale of its Electronics Business, including manufacturing facilities in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona, to AGC Inc. for an aggregate purchase price of $145 million in cash, subject to post-closing adjustments for changes in working capital compared to target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 11, “Discontinued Operations”, of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the Sale. As a result, the discussion below is of the Company’s continuing operations, which are comprised of the aerospace business.
Financial Overview
The Company's total net sales from continuing operations in the 13 weeks ended June 2, 2019 were $15.0 million compared to $10.4 million in the 13 weeks ended May 27, 2018.
The Company’s gross profit margins from continuing operations, measured as percentages of sales, were 32.1% in the 13 weeks ended June 2, 2019 compared to 27.4% in the 13 weeks ended May 27, 2018.
The Company’s earnings from continuing operations before income taxes and net earnings from continuing operations increased 251% and 233%, respectively, in the 13 weeks ended June 2, 2019 compared to the 13 weeks ended May 27, 2018 primarily as a result of higher sales and higher interest income, partially offset by a higher tax provision compared to last year’s comparable period.
The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders generally are received in excess of three months in advance of delivery.
Results of Operations:
The following table sets forth the components of the consolidated statements of operations:
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13 Weeks Ended
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(amounts in thousands, except per share amounts)
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June 2,
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May 27,
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%
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2019
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2018
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Change
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Net sales
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$
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14,950
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$
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10,393
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44
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%
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Cost of sales
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10,146
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7,541
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35
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%
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Gross profit
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4,804
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2,852
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68
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%
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Selling, general and administrative expenses
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1,922
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2,101
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(9
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)%
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Earnings from continuing operations
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2,882
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751
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284
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%
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Interest and other income
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948
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340
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179
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%
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Earnings from continuing operations before income taxes
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3,830
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1,091
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251
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%
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Income tax provision
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1,116
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275
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306
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%
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Net earnings from continuing operations
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2,714
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816
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233
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%
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(Loss) earnings from discontinued operations, net of tax
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(127
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)
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2,352
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(105
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)%
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Net earnings
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$
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2,587
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$
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3,168
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(18
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)%
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Earnings per share:
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Basic:
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Continuing operations
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$
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0.13
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$
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0.04
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225
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%
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Discontinued operations
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-
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0.12
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(100
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)%
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Basic earnings per share
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$
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0.13
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$
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0.16
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(19
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)%
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Diluted:
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Continuing operations
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$
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0.13
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$
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0.04
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225
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%
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Discontinued operations
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-
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0.12
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(100
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)%
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Diluted earnings per share
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$
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0.13
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$
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0.16
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(19
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)%
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Net Sales
The Company’s total net sales from continuing operations worldwide in the 13 weeks ended June 2, 2019 increased to $15.0 million from $10.4 million in the 13 weeks ended May 27, 2018. The increase in sales was due to the ramping up of programs on which the Company’s materials are qualified.
Gross Profit
The Company’s gross profit from continuing operations in the 13 weeks ended June 2, 2019 was higher than its gross profit from continuing operations in the prior year’s comparable period, and the gross profit from continuing operations as a percentage of sales for the Company’s worldwide operations in the 13 weeks ended June 2, 2019 increased to 32.1% from 27.4% in the 13 weeks ended May 27, 2018. The higher gross profit margin from continuing operations for the 13 weeks ended June 2, 2019 compared to the 13 weeks ended May 27, 2018 was principally a result of higher sales and the partially fixed nature of overhead expenses in the 13 weeks ended June 2, 2019 compared to the 13 weeks ended May 27, 2018, partially offset by increased direct labor and supplies expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations decreased by $179,000 during the 13 weeks ended June 2, 2019, or by 9%, compared to last fiscal year's comparable period, and these expenses, measured as a percentage of sales from continuing operations, were 12.9% in the 13 weeks ended June 2, 2019 compared to 20.2% in the 13 weeks ended May 27, 2018. The decrease in such expenses during the 13 weeks ended June 2, 2019 was primarily the result of lower payroll, travel and entertainment and stock option expenses.
Selling, general and administrative expenses from continuing operations included stock option expenses of $124,000 for the 13 weeks ended June 2, 2019, compared to stock option expenses of $201,000 for the 13 weeks ended May 27, 2018.
Earnings from Continuing Operations
For the reasons set forth above, the Company’s earnings from continuing operations were $2.9 million for the 13 weeks ended June 2, 2019 compared to $0.8 million for the 13 weeks ended May 27, 2018.
Interest and Other Income
Interest and other income from continuing operations was $948,000 for the 13 weeks ended June 2, 2019, compared to $340,000 for last fiscal year's comparable period. Interest income increased 179% for the 13 weeks ended June 2, 2019 primarily as a result of higher average balances of marketable securities held by the Company in the 13 weeks ended June 2, 2019, compared to last fiscal year's comparable period, and higher weighted average interest rates. During the 13 weeks ended June 2, 2019, 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 ended June 2, 2019, the Company recorded an income tax provision from continuing operations of $1,116, which included a discrete income tax provision of $144 pertaining to expired stock options of former employees who transferred to AGC Inc. in the sale of the Company’s Electronics Business. For the 13 weeks ended May 27, 2018, the Company recorded an income tax provision from continuing operations of $275.
The Company’s effective tax rate for the 13 weeks ended June 2, 2019 was 29.1% compared to 25.2% in the comparable prior period. The effective tax rate for the 13 weeks ended June 2, 2019 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes, a discrete income tax provision for stock compensation and the accrual of interest related to unrecognized tax benefits. The effective rate for the 13 weeks ended May 27, 2018 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes.
Net Earnings from Continuing Operations
For the reasons set forth above, the Company's net earnings from continuing operations for the 13 weeks ended June 2, 2019 were $2.7 million compared to net earnings from continuing operations of $816,000 for the 13 weeks ended May 27, 2018.
Discontinued Operations
On July 25, 2018, the Company entered into a definitive agreement to sell its Electronics Business for $145.0 million in cash. The Company completed this transaction on December 4, 2018.
The operating results of the Electronics Business are classified, together with certain costs related to the transaction, as discontinued operations, net of tax, in the Consolidated Statements of Operations.
The Company’s net earnings from discontinued operations included expenses pertaining to the sale transaction and costs in connection with the vacated facility in Fullerton California in the 13 weeks ended June 2, 2019 compared full operating results of the Electronics Business for the 13 weeks ended May 27, 2018.
Basic and Diluted Earnings Per Share
In the 13 weeks ended June 2, 2019, basic and diluted earnings per share from continuing operations were $0.13, including the tax expense described above. This compared to basic and diluted earnings per share from continuing operations of $0.04 in the 13 weeks ended May 27, 2018. The net impact of the tax benefit described above decreased basic and diluted earnings per share by $0.01 for the 13 weeks ended June 2, 2019.
Liquidity and Capital Resources
- Continuing Operations
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(amounts in thousands)
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June 2,
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March 3,
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2019
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2019
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Change
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Cash and cash equivalents and marketable securities
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$
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151,057
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$
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151,624
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$
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(567
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)
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Working capital
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156,280
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156,778
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(498
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)
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13 Weeks Ended
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(amounts in thousands)
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June 2,
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May 27,
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2019
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2018
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Change
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Net cash provided by (used in) operating activities
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$
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2,775
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$
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(1,592
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)
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$
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4,367
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Net cash (used in) provided by investing activities
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(21,710
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)
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597
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(22,307
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)
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Net cash used in financing activities
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(1,978
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)
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(1,976
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)
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(2
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)
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Cash and Marketable Securities
Of the $151.1 million of cash and cash equivalents and marketable securities at June 2, 2019, $126.8 million was owned by certain of the Company’s wholly owned foreign subsidiaries.
The change in cash and cash equivalents and marketable securities at June 2, 2019 compared to March 3, 2019 was the result of capital expenditures and dividends paid to shareholders partially offset by cash provided by operating activities and a number of additional factors. The significant changes in cash provided by operating activities were as follows:
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●
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accounts receivable decreased by 5% at June 2, 2019 compared to March 3, 2019 primarily due to a lower sales in the quarter ended June 2, 2019 compared to the fourth quarter of the 2019 fiscal year;
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●
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prepaid expenses and other current assets decreased by 6% at June 2, 2019 compared to March 3, 2019 primarily due to a decrease in interest receivable on marketable securities and a decrease in a receivable from AGC Inc.;
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●
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accounts payable decreased by 38% at June 2, 2019 compared to March 3, 2019 primarily due to the timing of vendor payments and raw material purchases from suppliers;
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●
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accrued liabilities decreased by 20% at June 2, 2019 compared to March 3, 2019 primarily due to decreases in restructuring accruals and bonus accruals; and
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●
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income taxes payable increased by 19% at June 2, 2019 compared to March 3, 2019 primarily due to the income tax provision for the 13 weeks ended June 2, 2019.
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In addition, the Company paid $2.0 million in cash dividends in each of the 13-week periods ended June 2, 2019 and May 27, 2018.
Working Capital
The decrease in working capital at June 2, 2019 compared to March 3, 2019 was due principally to the decrease in accounts receivable, increase in income taxes payable and a decrease in prepaid expenses and other current assets, partially offset by the decreases in accounts payable and accrued liabilities.
The Company's current ratio (the ratio of current assets to current liabilities) was 15.8 to 1.0 at June 2, 2019 compared to 15.1 to 1.0 at March 3, 2019.
Cash Flows
During the 13 weeks ended June 2, 2019, the Company's net earnings, before depreciation and amortization, stock-based compensation, amortization of bond premium and changes in operating assets and liabilities, were $2.8 million. During the same 13-week period, the Company expended $1,860,000 for the purchase of property, plant and equipment, compared with $10,000 during the 13 weeks ended May 27, 2018. The Company paid $2.0 million in cash dividends in each of the 13-week periods ended June 2, 2019 and May 27, 2018.
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, appropriate acquisitions and other expansions of the Company's business, including the recently announced expansion in Kansas.
The Company is not aware of any circumstances or events that are reasonably likely to occur that could materially affect its liquidity.
Contractual Obligations:
The Company’s contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of (i) operating lease commitments and (ii) commitments to purchase raw materials. The Company has no other long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $320,000 to secure the Company’s obligations under its workers’ compensation insurance program.
Off-Balance Sheet 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 accounting principles generally accepted in the United States of America. 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 March 3, 2019. There have been no significant changes to such accounting policies during the 2020 fiscal year first quarter with the exception of the implementation of ASC 842 (See Note 5 under Notes to Consolidated Financial Statements in Part I, Item 1 of this Report).
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
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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 March 3, 2019.