Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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General:
Park Aerospace Corp., formerly Park Electrochemical Corp. (“Park” or the “Company”) develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park’s advanced composite materials include film adhesives (undergoing qualification) and lightning strike materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park’s advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as “drones”), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park’s advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park’s composite parts and structures (which include Park’s proprietary composite SigmaStrutTM and AlphaStrutTM product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.
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, 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.
On July 16, 2019, the Company filed with the State of New York Department of State a Certificate of Amendment of its Restated Certificate of Incorporation, as amended, changing its name to “Park Aerospace Corp.” after the Board of Directors of the Company approved such amendment and the shareholders of the Company approved such amendment at the Annual Meeting of Shareholders. On July 16, 2019, the Company also filed with the Secretary of State of the State of Kansas, a Certificate of Ownership and Merger whereby the Company’s wholly owned subsidiary, Park Aerospace Technologies Corp. (“PATC”), located at the Newton, Kansas Airport was merged into the Company and ceased to exist.
Financial Overview
The Company's total net sales from continuing operations in the 13 weeks and 39 weeks ended December 1, 2019 were $15.8 million and $44.5 million, respectively, compared to $12.9 million and $34.5 million, respectively, in the 13 weeks and 39 weeks ended November 25, 2018.
The Company’s gross profit margins from continuing operations, measured as percentages of sales, were 31.7% and 30.6%, respectively, in the 13 weeks and 39 weeks ended December 1, 2019 compared to 33.3% and 29.8%, respectively, in the 13 weeks and 39 weeks ended November 25, 2018.
The Company’s earnings from continuing operations before income taxes and net earnings from continuing operations increased by 44% and 35%, respectively, in the 13 weeks ended December 1, 2019 compared to the 13 weeks ended November 25, 2018 and by 102% and 60%, respectively, in the 39 weeks ended December 1, 2019 compared to the 39 weeks ended November 25, 2018, in both periods, primarily as a result of higher sales and higher interest income, partially offset by a higher tax provision, in the case of net earnings, compared to the prior year’s comparable period.
The Company has a long-term contract pursuant to which one of its customers, which represents a substantial portion of the Company’s revenue, places orders. The long-term contract with the customer is requirements based and does not guarantee quantities. An order forecast and pricing were agreed upon in the contract. However, this order forecast is updated periodically during the term of the contract. Purchase orders generally are received by the Company in excess of three months in advance of delivery by the Company to the customer.
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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39 Weeks Ended
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(amounts in thousands, except per share amounts)
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December 1,
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November 25,
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%
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December 1,
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November 25,
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%
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2019
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2018
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Change
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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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15,847
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$
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12,853
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23
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%
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$
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44,520
|
|
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$
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34,457
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29
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%
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Cost of sales
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10,825
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8,569
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26
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%
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30,881
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24,176
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28
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%
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Gross profit
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5,022
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|
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4,284
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17
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%
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13,639
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|
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10,281
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|
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33
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%
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Selling, general and administrative expenses
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1,949
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1,983
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(2
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)%
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5,785
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6,200
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(7
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)%
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Earnings from continuing operations
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3,073
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2,301
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34
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%
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7,854
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4,081
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92
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%
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Interest and other income
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|
802
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393
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104
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%
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2,613
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1,090
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140
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%
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Earnings from continuing operations before income taxes
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3,875
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2,694
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44
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%
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10,467
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5,171
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102
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%
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Income tax provision
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1,069
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|
616
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74
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%
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|
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2,895
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453
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539
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%
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Net earnings from continuing operations
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2,806
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2,078
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35
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%
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7,572
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4,718
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60
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%
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(Loss) earnings from discontinued operations, net of tax
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(360
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)
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1,613
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(122
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)%
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(404
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)
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4,841
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(108
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)%
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Net earnings
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$
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2,446
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$
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3,691
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(34
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)%
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$
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7,168
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$
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9,559
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(25
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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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0.14
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$
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0.10
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40
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%
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$
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0.37
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$
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0.23
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61
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%
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Discontinued operations
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(0.02
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)
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0.08
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(125
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)%
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(0.02
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)
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0.24
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(108
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)%
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Basic earnings per share
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$
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0.12
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$
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0.18
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(33
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)%
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$
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0.35
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$
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0.47
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(26
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)%
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Diluted:
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|
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|
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|
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Continuing operations
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$
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0.14
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$
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0.10
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40
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%
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$
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0.37
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$
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0.23
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61
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%
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Discontinued operations
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(0.02
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)
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0.08
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(125
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)%
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(0.02
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)
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0.24
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(108
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)%
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Diluted earnings per share
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$
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0.12
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$
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0.18
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(33
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)%
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$
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0.35
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$
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0.47
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(26
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)%
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Net Sales
The Company's total net sales from continuing operations in the 13 weeks and 39 weeks ended December 1, 2019 were $15.8 million and $44.5 million, respectively, compared to $12.9 million and $34.5 million in the 13 weeks and 39 weeks, respectively, ended November 25, 2018. The increases in sales were 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 December 1, 2019 was higher than its gross profit from continuing operations in the prior year’s comparable period. The gross profit from continuing operations as a percentage of sales for the Company’s worldwide operations in the 13 weeks ended December 1, 2019 decreased to 31.7% from 33.3% in the 13 weeks ended November 25, 2018. The higher gross profit for the 13 weeks ended December 1, 2019 compared to the 13 weeks ended November 25, 2018 was principally a result of higher sales and the partially fixed nature of overhead expenses in the 13 weeks ended December 1, 2019 compared to the 13 weeks ended November 25, 2018, partially offset by increased direct labor and supplies expenses.
The Company’s gross profit from continuing operations in the 39 weeks ended December 1, 2019 was higher than its gross profit from continuing operations in the prior year’s comparable period. The gross profit from continuing operations as a percentage of sales for the Company’s worldwide operations in the 39 weeks ended December 1, 2019 increased to 30.6% from 29.8% in the 39 weeks ended November 25, 2018. The higher gross profit for the 39 weeks ended December 1, 2019 compared to the 39 weeks ended November 25, 2018 was principally a result of higher sales and the partially fixed nature of overhead expenses in the 39 weeks ended December 1, 2019 compared to the 39 weeks ended November 25, 2018, partially offset by increased direct labor and supplies expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations decreased by $34,000 and $415,000, respectively, during the 13 weeks and 39 weeks ended December 1, 2019, or by 2% and 7%, respectively, compared to the prior year's comparable periods, and these expenses, measured as percentages of sales from continuing operations, were 12.3% and 13.0%, respectively, in the 13 weeks and 39 weeks ended December 1, 2019 compared to 15.4% and 18.0%, respectively, in the 13 weeks and 39 weeks ended November 25, 2018. The decreases in such expenses during the 13 weeks and 39 weeks ended December 1, 2019 were primarily the results of lower legal, travel and entertainment and stock option expenses.
Selling, general and administrative expenses from continuing operations included stock option expenses of $139,000 and $404,000, respectively, for the 13 weeks and 39 weeks ended December 1, 2019, compared to stock option expenses of $194,000 and $594,000, respectively, for the 13 weeks and 39 weeks ended November 25, 2018.
Earnings from Continuing Operations
For the reasons set forth above, the Company’s earnings from continuing operations were $3.1 million and $7.9 million, respectively, for the 13 weeks and 39 weeks ended December 1, 2019 compared to $2.3 million and $4.1 million, respectively, for the 13 weeks and 39 weeks ended November 25, 2018.
Interest and Other Income
Interest and other income from continuing operations was $802,000 and $2.6 million, respectively, for the 13 weeks and 39 weeks ended December 1, 2019, compared to $393,000 and $1.1 million, respectively, for the prior year's comparable periods. Interest income increased 104% and 140%, respectively, for the 13 weeks and 39 weeks ended December 1, 2019 primarily as a result of higher average balances of marketable securities held by the Company in the 13 weeks and 39 weeks ended December 1, 2019, compared to the prior year's comparable periods, and higher weighted average interest rates. During the 13 weeks and 39 weeks ended December 1, 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 and 39 weeks ended December 1, 2019, the Company recorded income tax provisions from continuing operations of $1.1 million and $2.9 million, respectively, which included a discrete income tax provision of $223,000 for expirations of stock options, of which $144,000 pertained to employees who transferred to AGC Inc. in the sale of the Company’s Electronics Business. For the 13 weeks and 39 weeks ended November 25, 2018, the Company recorded income tax provisions from continuing operations of $616,000 and $453,000, respectively.
The Company’s effective tax rates for the 13 weeks and 39 weeks ended December 1, 2019 were 27.6% and 27.7%, respectively, compared to 22.9% and 8.8%, respectively, in the prior year’s comparable periods. The effective tax rates for the 13 weeks and 39 weeks ended December 1, 2019 and the 13 weeks ended November 25, 2018 were 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 39 weeks ended November 25, 2018 was lower than the U.S. statutory rate of 21% primarily due to a one-time benefit of $788,000 related to clarifying regulations pertaining to the Tax Cuts and Jobs Act enacted in December 2017.
Net Earnings from Continuing Operations
For the reasons set forth above, the Company's net earnings from continuing operations for the 13 weeks and 39 weeks ended December 1, 2019 were $2.8 million and $7.6 million, respectively, compared to net earnings from continuing operations of $2.1 million and $4.7 million, respectively, for the 13 weeks and 39 weeks ended November 25, 2018.
Discontinued Operations
On July 25, 2018, the Company entered into an 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 related to the vacated facility in Fullerton, California in the 13 weeks and 39 weeks ended December 1, 2019 compared to full operating results of the Electronics Business for the 13 weeks and 39 weeks ended November 25, 2018.
Basic and Diluted Earnings Per Share
In the 13 weeks and 39 weeks ended December 1, 2019, basic and diluted earnings per share from continuing operations were $0.14 and $0.37, respectively, including the tax expenses described above. This compared to basic and diluted earnings per share from continuing operations of $0.10 and $0.23, respectively, in the 13 weeks and 39 weeks ended November 25, 2018. The net impact of the tax benefit described above increased basic and diluted earnings per share by $0.04 for the 39 weeks ended November 25, 2018.
Liquidity and Capital Resources - Continuing Operations:
(amounts in thousands)
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|
December 1,
|
|
|
March 3,
|
|
|
|
|
|
|
|
2019
|
|
|
2019
|
|
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Change
|
|
|
|
|
|
|
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Cash and cash equivalents and marketable securities
|
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$
|
144,166
|
|
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$
|
151,624
|
|
|
$
|
(7,458
|
)
|
Working capital
|
|
|
154,061
|
|
|
|
156,778
|
|
|
|
(2,717
|
)
|
|
|
39 Weeks Ended
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|
(amounts in thousands)
|
|
December 1,
|
|
|
November 25,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
2,693
|
|
|
$
|
5,225
|
|
|
$
|
(2,532
|
)
|
Net cash used in investing activities
|
|
|
(60,867
|
)
|
|
|
(5,432
|
)
|
|
|
(55,435
|
)
|
Net cash used in financing activities
|
|
|
(5,749
|
)
|
|
|
(5,415
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)
|
|
|
(334
|
)
|
Cash and Marketable Securities
Of the $144.2 million of cash and cash equivalents and marketable securities at December 1, 2019, $126.7 million was owned by certain of the Company’s wholly owned foreign subsidiaries.
The change in cash and cash equivalents and marketable securities at December 1, 2019 compared to March 3, 2019 was the result of capital expenditures, dividends paid to shareholders and a number of additional factors. The significant changes in cash flow from operating activities were as follows:
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●
|
accounts receivable increased by 9% at December 1, 2019 compared to March 3, 2019 primarily due to an increase in the days sales were outstanding in the 13 weeks ended December 1, 2019 compared to the 13 weeks ended March 3, 2019;
|
|
●
|
inventories decreased by 25% at December 1, 2019 compared to March 3, 2019 primarily due to large sales and timing of raw material purchases at the end of the 13 weeks ended December 1, 2019 compared to the 13 weeks ended March 3, 2019;
|
|
●
|
accounts payable decreased by 37% at December 1, 2019 compared to March 3, 2019 primarily due to the timing of vendor payments and raw material purchases from suppliers;
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|
●
|
accrued liabilities decreased by 30% at December 1, 2019 compared to March 3, 2019 primarily due to decreases in restructuring accruals and bonus accruals; and
|
|
●
|
income taxes payable decreased by 69% at December 1, 2019 compared to March 3, 2019 primarily due to estimated tax payments, partially offset by the income tax provision for the 39 weeks ended December 1, 2019.
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In addition, the Company paid $6.2 million in cash dividends in the 39-week period ended December 1, 2019 compared to $6.1 million in the 39-week period ended November 25, 2018.
Working Capital
The decrease in working capital at December 1, 2019 compared to March 3, 2019 was due principally to the decrease in cash and cash equivalents and marketable securities resulting from capital expenditures, estimated tax payments and dividend payments.
The Company's current ratio (the ratio of current assets to current liabilities) was 27.7 to 1.0 at December 1, 2019 compared to 15.1 to 1.0 at March 3, 2019.
Cash Flows
During the 39 weeks ended December 1, 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 $2.0 million. During the same 39-week period, the Company expended $4.4 million for the purchase of property, plant and equipment, compared with $399 during the 39 weeks ended November 25, 2018. The Company paid $6.2 million in cash dividends in the 39-week period ended December 1, 2019 compared to $6.1 million in the 39-week period ended November 25, 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 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. 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 through the 2020 fiscal year third quarter with the exception of the implementation of Accounting Standards Codification 842. (See Note 5, Leases, of the 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.
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.