1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 29, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to__________
Commission file Number 1-4415
PARK ELECTROCHEMICAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
New York 11-1734643
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Dakota Drive, Lake Success, N.Y. 11042
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (516)354-4100
Not Applicable
-----------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes[X] No[ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 19,897,290 as of October 4, 2004.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION: Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
August 29, 2004 (Unaudited) and February 29,
2004 3
Consolidated Statements of Earnings
13 weeks and 26 weeks ended August 29, 2004
and August 31, 2003(Unaudited) 4
Consolidated Statements of Stockholders'
Equity 13 weeks and 26 weeks ended
August 29, 2004 and August 31, 2003 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows 26 weeks ended August 29, 2004 and
August 31, 2003 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Factors That May Affect Future Results 24
Item 3. Quantitive and Qualitative Disclosures About
Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security
Holders 27
Item 5. Other Information 28
Item 6. Exhibits 28
SIGNATURES 29
EXHIBIT INDEX 30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
August 29,
2004 February 29,
(Unaudited) 2004*
ASSETS
Current assets:
Cash and cash equivalents $138,799 $129,989
Marketable securities 60,622 59,197
Accounts receivable, net 32,409 36,149
Inventories (Note 2) 14,345 11,707
Prepaid expenses and other current
assets 2,005 3,040
Total current assets 248,180 240,082
Property, plant and equipment, net 66,767 70,569
Other assets 758 419
Total assets $315,705 $311,070
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,053 $ 14,913
Accrued liabilities 22,915 24,468
Income taxes payable 6,421 3,248
Total current liabilities 42,389 42,629
Deferred income taxes 5,098 5,107
Liabilities from discontinued
operations (Note 4) 17,373 19,438
Total liabilities 64,860 67,174
Stockholders' equity:
Common stock 2,037 2,037
Additional paid-in capital 133,872 133,335
Retained earnings 115,502 108,915
Treasury stock, at cost (3,551) (4,125)
Accumulated other non-owner changes 2,985 3,734
Total stockholders' equity 250,845 243,896
Total liabilities and
stockholders'equity $315,705 $311,070
*The balance sheet at February 29, 2004 has been derived from the
audited financial statements at that date.
See accompanying Notes to the Condensed Consolidated Financial
Statements.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share amounts)
13 weeks ended 26 weeks ended
(Unaudited) (Unaudited)
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Net sales $51,098 $43,566 $109,616 $87,889
Cost of sales 41,680 37,647 86,486 77,347
Gross profit 9,418 5,919 23,130 10,542
Selling, general and
administrative expenses 6,521 6,213 14,862 12,417
Realignment and severance
charges (Note 5) - 6,504 - 8,438
Gain on Delco lawsuit (Note 10) - (33,088) - (33,088)
Operating income from continuing
operations 2,897 26,290 8,268 22,775
Interest and other income 776 744 1,427 1,488
Earnings from continuing
operations before income taxes 3,673 27,034 9,695 24,263
Income tax provision for
continuing operations 726 6,052 727 4,925
Net earnings from continuing
operations 2,947 20,982 8,968 19,338
Loss from discontinued
operations, net of taxes (Note 4) - (1,944) - (8,751)
Net earnings $ 2,947 $19,038 $ 8,968 $10,587
Basic earnings per share (Note 6):
Earnings from continuing operations $ 0.15 $ 1.06 $ 0.45 $ 0.98
Loss from discontinued operations - (0.10) - (0.44)
Basic earnings per share $ 0.15 $ 0.96 $ 0.45 $ 0.54
Diluted earnings per share (Note 6):
Earnings from continuing operations $ 0.15 $ 1.05 $ 0.45 $ 0.97
Loss from discontinued operations - (0.10) - (0.44)
Diluted earnings per share $ 0.15 $ 0.95 $ 0.45 $ 0.53
Weighted average number of common
and common equivalent shares
outstanding:
Basic shares 19,885 19,759 19,847 19,734
Diluted shares 20,112 19,943 20,090 19,856
Dividends per share $ 0.06 $ 0.06 $ 0.12 $ 0.12
See accompanying Notes to the Condensed Consolidated Financial Statements.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
13 weeks ended 26 weeks ended
(Unaudited) (Unaudited)
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Common stock and paid-in capital
Balance, beginning of period $ 135,745 $135,051 $135,372 $135,209
Stock option activity 164 32 537 (126)
Balance, end of period 135,909 135,083 135,909 135,083
Retained earnings
Balance, beginning of period 113,749 107,874 108,915 117,506
Net income 2,947 19,038 8,968 10,587
Dividends (1,194) (1,186) (2,381) (2,367)
Balance, end of period 115,502 125,726 115,502 125,726
Accumulated other non-owner changes
Balance, beginning of period 3,547 (1,332) 3,734 (2,432)
Net unrealized investment
gains (losses) 342 (657) (246) (647)
Translation adjustments (904) (1,183) (503) (93)
Balance, end of period 2,985 (3,172) 2,985 (3,172)
Treasury stock
Balance, beginning of period (3,693) (4,292) (4,125) (4,582)
Stock option activity 142 43 574 333
Balance, end of period (3,551) (4,249) (3,551) (4,249)
Total stockholders' equity $250,845 $253,388 $250,845 $253,388
See accompanying Notes to the Condensed Consolidated Financial Statements.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
26 Weeks Ended
(Unaudited)
August 29, August 31,
2004 2003
Cash flows from operating activities:
Net earnings $ 8,968 $ 10,587
Depreciation and amortization 5,124 5,962
Change in operating assets and liabilities (726) 16,480
Net cash provided by operating activities 13,366 33,029
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (1,706) (2,088)
Purchases of marketable securities (19,988) (64,677)
Proceeds from sales and maturities
of marketable securities 18,416 39,903
Net cash used in investing activities (3,278) (26,862)
Cash flows from financing activities:
Dividends paid (2,381) (2,367)
Proceeds from exercise of stock options 1,111 207
Net cash used in financing activities (1,270) (2,160)
Change in cash and cash equivalents before
exchange rate changes 8,818 4,007
Effect of exchange rate changes on cash
and cash equivalents (8) (27)
Change in cash and cash equivalents 8,810 3,980
Cash and cash equivalents, beginning
of period 129,989 111,036
Cash and cash equivalents, end of period $138,799 $115,016
Supplemental cash flow information:
Cash (received) paid during the period
for income taxes $ (1,426) $ 323
See accompanying Notes to the Condensed Consolidated Financial
Statements.
PARK ELECTROCHEMICAL CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share amounts)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of August 29,
2004, the consolidated statements of operations for the 13
weeks and 26 weeks ended August 29, 2004 and August 31,
2003, and the condensed consolidated statements of cash
flows for the 26 weeks then ended have been prepared by
the Company, without audit. In the opinion of management,
these unaudited condensed consolidated financial
statements contain all adjustments (which include only
normal recurring adjustments) necessary to present fairly
the financial position at August 29, 2004 and the results
of operations and cash flows for all periods presented.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with accounting principles generally accepted in the
United States have been condensed or omitted. It is
suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated
financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year
ended February 29, 2004.
2. INVENTORIES
Inventories consisted of the following:
August 29, February 29,
2004 2004
Raw materials $ 5,359 $ 4,088
Work-in-process 3,336 2,424
Finished goods 5,215 4,835
Manufacturing supplies 435 360
$14,345 $11,707
3. STOCK OPTIONS
As of August 29, 2004, the Company had two fixed stock
option plans. All options under the plans had an exercise
price equal to the market value of the underlying common
stock of the Company on the date of grant. The Company
continues to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25),
and related interpretations for the plans. If compensation
costs of the grants had been determined based upon the
fair market value at the grant dates consistent with the
FASB No. 123 "Accounting for Stock-Based Compensation",
the Company's net earnings and earnings per share would
have approximated the amounts shown below.
13 weeks ended 26 weeks ended
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Net earnings $2,947 $19,038 $8,968 $10,587
Deduct: Total stock-based
employee compensation
determined under fair value
based method for all awards,
net of tax effects 444 426 903 904
Pro forma net income $2,503 $18,612 $8,065 $ 9,683
EPS-basic as reported $ 0.15 $ 0.96 $ 0.45 $ 0.54
EPS-basic pro forma $ 0.13 $ 0.94 $ 0.41 $ 0.49
EPS-diluted as reported $ 0.15 $ 0.95 $ 0.45 $ 0.53
EPS-diluted pro forma $ 0.12 $ 0.93 $ 0.40 $ 0.49
4. DISCONTINUED OPERATIONS
On February 4, 2004, the Company announced that it was
discontinuing its financial support of its Dielektra GmbH
("Dielektra") subsidiary located in Cologne, Germany, due
to the continued erosion of the European market for the
Company's high technology products. Without Park's
financial support, Dielektra filed an insolvency petition,
which may result in the reorganization, sale or
liquidation of Dielektra. In accordance with SFAS No.
144, "Accounting for the Impairment of Disposal of Long-
Lived Assets", Dielektra is treated as a discontinued
operation. As a result of the discontinuation of
financial support for Dielektra, the Company recognized an
impairment charge of $22,023 for the write-off of
Dielektra assets and other costs during the fourth quarter
of the 2004 fiscal year. The liabilities from
discontinued operations are reported separately on the
consolidated balance sheet. These liabilities from
discontinued operations included $12,094 for Dielektra's
deferred pension liability. The Company expects to
recognize a gain of approximately $17 million related to
the reversal of these liabilities when the Dielektra
insolvency process is completed, although it is unclear
when the process will be completed. The $8,751 loss from
discontinued operations for the 26 weeks ended August 31,
2003, includes losses from operations of $2,609 and $6,142
for termination and other costs related to Dielektra,
recorded in the first quarter of the 2004 fiscal year. At
the time of the discontinuation of support for Dielektra,
$5,539 of the $6,142 of termination and other costs had
been paid and the remaining $603 was included in
liabilities from discontinued operations in the Condensed
Consolidated Balance Sheets as of February 29, 2004 and
August 29, 2004.
Dielektra's net sales and operating results for the 13
weeks and 26 weeks ended August 29, 2004 and August 31,
2003, and the liabilities of discontinued operations at
August 29, 2004 and February 29, 2004 were as follows:
13 weeks ended 26 weeks ended
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Net sales $ - $ 3,561 $ - $ 9,208
Operating loss $ - $(1,944) $ - $(2,609)
Restructuring and
impairment charges - - - (6,142)
Net loss $ - $(1,944) $ - $(8,751)
August 29, February 29,
2004 2004
Current and other
liabilities $ 5,279 $ 7,344
Pension liabilities 12,094 12,094
Total liabilities $17,373 $19,438
5. REALIGNMENT AND SEVERANCE CHARGES
The Company recorded pre-tax charges of $1,934 and $6,504
during the first and second quarters of fiscal year 2004,
respectively, related to the realignment of its North
America FR-4 business operations in Newburgh, New York and
Fullerton, California. During the fourth quarter of fiscal
year 2004, the Company recorded pre-tax charges of $112
related to workforce reductions in Europe. The components
of these charges and the related liability balances and
activity from the quarter ended June 1, 2003 through
August 29, 2004 are set forth below.
Charges 8/29/04
Realignment Incurred Remaining
Charges or Paid Reversals Liabilities
New York and
California and other
realignment charges:
Lease payments, taxes,
utilities and other $7,292 $ 1,065 $ - $6,227
Severance payments 1,258 1,258 - -
$8,550 $2,323 $ - $6,227
The severance payments were for the termination of hourly
and salaried, administrative, manufacturing and support
employees. Such employees were terminated during the 2004
fiscal year first, second and third quarters. The severance
payments were paid to such employees in installments during
fiscal year 2004. The lease charges cover one lease
obligation payable through December 2004 and a portion of
another lease obligation payable through September 2013. For
the 13 weeks and 26 weeks ended August 29, 2004, the Company
paid $208 and $417, respectively, for lease payments, taxes,
utilities and other, and $0 and $112, respectively, for
severance payments.
6. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net
earnings by the weighted average number of shares of
common stock outstanding during the period. Diluted
earnings per share are computed by dividing net earnings
by the sum of (a) the weighted average number of shares of
common stock outstanding during the period and (b) the
potential common stock equivalents outstanding during the
period. Stock options are the only common stock
equivalents and are computed using the treasury stock
method.
The following table sets forth the basic and diluted
weighted average number of shares of common stock and
potential common stock equivalents outstanding during the
periods specified:
13 weeks ended 26 weeks ended
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Weighted average
shares outstanding
for basic EPS 19,885 19,759 19,847 19,734
Net effect of
dilutive options 227 184 243 122
Weighted average
shares outstanding
for diluted EPS 20,112 19,943 20,090 19,856
Common stock equivalents, which were not included in the
computation of diluted earnings per share because either
the effect would have been antidilutive or the options'
exercise prices were greater than the average market price
of the common stock, were 67 and 176 for the thirteen
weeks ended August 29, 2004 and August 31, 2003,
respectively, and 62 and 258 for the twenty-six weeks
ended August 29, 2004 and August 31, 2003, respectively.
7. BUSINESS SEGMENTS
The Company considers itself to operate in one business
segment because the Company's advanced composite business
comprises less than 10% of the Company's revenues and net
earnings from continuing operation on an absolute basis.
The Company's electronic materials products are marketed
primarily to leading independent printed circuit board
fabricators, electronic manufacturing service companies,
electronic contract manufacturers and major electronic
original equipment manufacturers ("OEMs") located
throughout North America, Europe and Asia. The Company's
advanced composite materials customers, substantially all
of which are located in the United States, include OEMs,
independent firms and distributors in the electronics,
radio frequency, aerospace, rocket motor, automotive,
graphic arts and specialty industrial industries.
Sales are attributed to geographic region based upon the
region from which the materials were shipped to the
customer. Sales between geographic regions were not
significant.
Financial information concerning the Company's continuing
operations by geographic area follows:
13 weeks ended 26 weeks ended
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
Sales:
North America $29,596 $24,719 $ 61,860 $49,866
Europe 8,759 5,899 17,876 13,624
Asia 12,743 12,948 29,880 24,399
Total sales $51,098 $43,566 $109,616 $87,889
August 29, February 29,
2004 2004
Long-lived assets:
North America $35,605 $38,549
Europe 10,238 10,969
Asia 21,682 21,470
Total long-lived assets $67,525 $70,988
8. COMPREHENSIVE INCOME
Total comprehensive income for the 13 weeks ended August
29, 2004 and August 31, 2003 was $2,385 and $17,198,
respectively. Total comprehensive income for the 26 weeks
ended August 29, 2004 and August 31, 2003 was $8,219 and
$9,847, respectively. Comprehensive income consisted
primarily of net income and foreign currency translation
adjustments and unrealized gains and losses on marketable
securities.
9. SALE OF NELCO TECHNOLOGY, INC.
During the Company's 1998 fiscal year and for several
years prior thereto, more than 10% of the Company's total
worldwide sales were to Delco Electronics Corporation, a
subsidiary of General Motors Corp., and the Company's
wholly owned subsidiary, Nelco Technology, Inc. ("NTI")
located in Tempe, Arizona, had been Delco's principal
supplier of semi-finished multilayer printed circuit board
materials, commonly known as mass lamination, which were
used by Delco to produce finished multilayer printed
circuit boards. However, in March 1998, the Company was
informed by Delco that Delco planned to close its printed
circuit board fabrication plant and exit the printed
circuit board manufacturing business. As a result, the
Company's sales to Delco declined during the three-month
period ended May 31, 1998, were negligible during the
remainder of the 1999 fiscal year and have been nil in
subsequent years.
After March 1998, the business of NTI languished and its
performance was unsatisfactory due primarily to the
absence of the unique, high-volume, high-quality business
that had been provided by Delco Electronics and the
absence of any other customer in the North American
electronic materials industry with a similar demand for
the large volumes of semi-finished multilayer printed
circuit board materials that Delco purchased from NTI.
Although NTI's business experienced a resurgence in the
2001 fiscal year as the North American market for printed
circuit materials became extremely strong and demand
exceeded supply for the electronic materials manufactured
by NTI, the Company's internal expectations and
projections for the NTI business were for continuing
volatility in the business' performance over the
foreseeable future. Consequently, in April 2001, the
Company sold the assets and business of NTI and closed a
related support facility, also located in Tempe, Arizona.
As a result of this sale, the Company exited the mass
lamination business in North America.
In connection with the sale of NTI and the closure of the
related support facility, the Company recorded pre-tax
charges of $15,707 in its fiscal year 2002 first quarter
ended May 27, 2001. The components of these charges and
the related liability balances and activity from the May
27, 2001 balance sheet date to the August 29, 2004 balance
sheet date are set forth below:
Charges 8/29/04
Closure Incurred Remaining
Charges or Paid Reversals Liabilities
NTI charges:
Loss on sale of assets
and bisomess $10,580 $10,580 $ - $ -
Severance payments 387 387 - -
Medical and other costs 95 95 - -
Support facility charges:
Impairment of long
lived assets 2,058 2,058 - -
Write down of accounts
receivable 350 319 31 -
Write down of inventory 590 590 - -
Severance payments 688 688 - -
Medical and other costs 133 133 - -
Lease payments, taxes,
utilities, maintenance 781 606 - 175
Other 45 45 - -
------- ------- --- ----
$15,707 $15,501 $31 $175
======= ======= ==== ====
The severance payments and medical and other costs
incurred in connection with the sale of NTI and the
closure of the related support facility were for the
termination of hourly and salaried, administrative,
manufacturing and support employees, all of whom were
terminated during the first and second fiscal quarters
ended May 27, 2001 and August 26, 2001, respectively, and
substantially all of the severance payments and related
costs for such terminated employees (totaling $1,303) were
paid during such quarters. The lease payments were paid
through August 2004 pursuant to the related lease
agreements.
10. GAIN ON DELCO LAWSUIT
The United States District Court for the District of
Arizona entered final judgment in favor of the Company's
subsidiary, NTI, in its lawsuit against Delco Electronics
Corporation, a subsidiary of Delphi Automotive Systems
Corporation, on Nelco's claim for breach of the implied
covenant of good faith and fair dealing. As a result, the
Company received a net amount of $33,088 from Delco on
July 1, 2003 in satisfaction of the judgment.
11. SUBSEQUENT EVENT
During September 2004, the Company made adjustments to its
volume FR-4 businesses, particularly in North America,
which included workforce reductions at the Company's
operations in North America and Europe. As a result, the
Company expects to record approximately $0.6 million of
severance charges in the 2005 fiscal year third quarter.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General:
Park is a leading global designer and producer of
electronic materials used to fabricate complex multilayer
printed circuit boards and electronic interconnection systems.
Park specializes in advanced materials for high layer count
circuit boards and high-speed digital and RF/Microwave
electronic systems and also designs and manufactures advanced
composite materials for the aerospace, military and industrial
markets. The Company's customers include leading independent
printed circuit board fabricators, electronic manufacturing
service companies, electronic contract manufacturers and
electronic original equipment manufacturers in the computer,
telecommunications, transportation, aerospace and
instrumentation industries.
The Company's sales and earnings from continuing
operations before the gain on the Delco lawsuit and realignment
and severance charges increased significantly in the three-
month and six-month periods ended August 29, 2004 compared with
last year's comparable periods as a result of increases in
sales by nearly all the Company's operations, although the
improvements were attributable principally to increases in
sales of the Company's advanced technology products, sales by
the Company's operations in Asia and North America and sales by
the Company's FiberCote advanced composite materials business.
The electronics industry began to improve slightly at the
end of the 2004 fiscal year second quarter and continued to
improve in the 2004 fiscal year third and fourth quarters and
in the 2005 fiscal year first quarter. However, the global
markets for the Company's electronic materials products
continued to be mixed during the 2005 fiscal year first
quarter, and the electronic materials industry slowed down to
some extent in the 2005 fiscal year second quarter.
Consequently, sales of the Company's electronic materials
operations declined in the second quarter compared to the 2005
fiscal year first quarter.
During the first and second quarters of the 2004 fiscal
year, the Company realigned its North American FR-4 business
operations located in New York and California. As part of the
realignment, the New York operation was scaled down to a
smaller, focused operation and the California operation was
scaled up to a larger volume operation, and there were
workforce reductions at the Company's New York facility and
workforce increases at the Company's California facility, with
the end result being a net reduction in the Company's workforce
in North America. A large portion of the New York facility was
mothballed. The realignment was designed to help the Company
achieve improved operating and cost efficiencies in its North
American FR-4 business and to help the Company best service all
of its North American customers.
As a result of the Company's realignment of its North
American FR-4 business operations and related workforce
reductions, the Company recorded pre-tax charges totaling $1.9
million and $6.5 million in the Company's 2004 fiscal year
first quarter and second quarter, respectively. See Note 5 of
the Notes to Condensed Consolidated Financial Statements in
Item 1 of Part I of this Report for additional information
regarding the realignment.
In February 2004, the Company discontinued its financial
support of Dielektra GmbH, the Company's wholly owned
subsidiary located in Cologne, Germany ("Dielektra"), which
supplied electronic materials to European circuit board
manufacturers. The Company discontinued its support of
Dielektra because the market in Europe had eroded to the point
where the Company believed it would not be possible, at any
time in the foreseeable future, for the Dielektra business to
be viable. Dielektra had required substantial financial support
from the Company. The discontinuation of the Company's
financial support resulted in the filing of an insolvency
petition by Dielektra. The Company believes that the insolvency
procedure in Germany will result in the eventual
reorganization, sale or liquidation of Dielektra. The Company
continues to service the higher technology European digital and
RF circuit board markets through its Neltec Europe SAS business
located in Mirebeau, France, and its Neltec SA business located
in Lannemezan, France.
In accordance with generally accepted accounting
principles, the Company treated Dielektra as a discontinued
operation. Accordingly, the Company reclassified Dielektra's
operating losses and charges and recorded a net loss from
discontinued operations of $33.8 million in the 2004 fiscal
year, comprised of $5.6 million of operating losses incurred by
Dielektra, $6.2 million related to the closure of Dielektra's
mass lamination operation and related workforce reductions in
the 2004 fiscal year first quarter and $22.0 million for the
write-off of assets of Dielektra and other costs. Furthermore,
the Company's sales from its continuing operations did not
include sales by Dielektra of $14.4 million for the 2004 fiscal
year. The Company's sales for the 2005 fiscal year first and
second quarters did not include any sales by Dielektra, and
Dielektra had no impact on the Company's results of operations
during the 2005 fiscal year first and second quarters. See Note
4 of the Notes to Condensed Consolidated Financial Statements
in Item 1 of Part I of this Report for additional information
regarding the discontinued operations.
During the Company's 1998 fiscal year and for several
years prior thereto, more than 10% of the Company's total
worldwide sales were to Delco Electronics Corporation, a
subsidiary of General Motors Corp.("Delco"), and the Company's
wholly owned subsidiary, Nelco Technology, Inc. ("NTI") located
in Tempe, Arizona, had been Delco's principal supplier of semi-
finished multilayer printed circuit board materials, commonly
known as mass lamination, which were used by Delco to produce
finished multilayer printed circuit boards. However, in March
1998, the Company was informed by Delco that Delco planned to
close its printed circuit board fabrication plant and exit the
printed circuit board manufacturing business. As a result, the
Company's sales to Delco declined during the three-month period
ended May 31, 1998, were negligible during the remainder of the
1999 fiscal year and have been nil since that time.
In May 1998, the Company and NTI filed a complaint
against Delco and the Delphi Automotive Systems unit of General
Motors Corp. in the United States District Court for the
District of Arizona. The complaint alleged, among other things,
that Delco breached its contract to purchase semi-finished
multilayer printed circuit boards from NTI and that Delphi
interfered with NTI's contract with Delco, that Delco breached
the covenant of good faith and fair dealing implied in the
contract, that Delco engaged in negligent misrepresentation and
that Delco fraudulently induced NTI to enter into the contract.
In November 2000, a jury awarded damages to NTI in the amount
of $32.3 million, and in December 2000 the judge in the United
States District Court for the District of Arizona entered
judgment for NTI on its claim of breach of the implied covenant
of good faith and fair dealing with damages in the amount of
$32.3 million. Both parties appealed the decision to the United
States Court of Appeals for the Ninth Circuit in San Francisco;
and in May 2003, a panel of three judges in the Court of
Appeals for the Ninth Circuit rendered a unanimous decision
affirming the jury verdict. In June 2003, the United States
District Court for the District of Arizona entered final
judgment in favor of NTI; and, on July 1, 2003, NTI received a
net amount of $33.1 million in payment of such judgment. The
Company recorded a pre-tax gain of $33.1 million in the 2004
fiscal year second quarter related to such payment. See Notes 9
and 10 of the Notes to Condensed Consolidated Financial
Statements in Item 1 of Part I of this Report for additional
information regarding the sale of NTI and the gain on the
lawsuit against Delco and Item 1 of Part II of this Report for
additional information regarding the lawsuit against Delco.
The Company is not engaged in any related party
transactions involving relationships or transactions with
persons or entities that derive benefits from their non-
independent relationship with the Company or the Company's
related parties, or in any transactions with parties with whom
the Company or its related parties have a relationship that
enables the parties to negotiate terms of material transactions
that may or would not be available from other, more clearly
independent parties on an arm's-length basis, or in any trading
activities involving non-exchange traded commodity or other
contracts that are accounted for at fair value or otherwise or
in any energy trading or risk management activities, other than
certain limited foreign currency contracts intended to hedge
the Company's contractual commitments to pay certain
obligations or to realize certain receipts in foreign
currencies and certain limited energy purchase contracts
intended to protect the Company from increased utilities costs.
The Company believes that an evaluation of its ongoing
operations would be difficult if the disclosure of its
financial results were limited to generally accepted accounting
principles ("GAAP") financial measures, which include special
items, such as realignment and severance charges and the gain
on the Delco lawsuit. Accordingly, in addition to disclosing
its financial results determined in accordance with GAAP, the
Company discloses non-GAAP operating results that exclude
special items in order to assist its shareholders and other
readers in assessing the Company's operating performance, since
the Company's on-going, normal business operations do not
include such special items. Such non-GAAP financial measures
are provided to supplement the results provided in accordance
with GAAP.
Three and Six Months Ended August 29, 2004 Compared with Three
and Six Months Ended August 31, 2003:
The Company's operations continued to generate profits
during the three-month and six-month periods ended August 29,
2004, as the improved conditions that developed in the markets
for sophisticated printed circuit materials in the second half
of the 2004 fiscal year continued during the first quarter of
the 2005 fiscal year, although such conditions abated to some
extent in the 2005 fiscal year second quarter.
Despite the Company's operating losses during the three-
month and six-month periods ended August 31, 2003, the Company
reported net earnings of $19.0 million for the three months
ended August 31, 2003 after a pre-tax gain of $33.1 million
related to the payment by Delco Electronics Corporation of the
judgment against it in favor of the Company's subsidiary, Nelco
Technology, Inc., in the lawsuit against Delco and after pre-
tax charges of $6.5 million related to the realignment of the
Company's North American FR-4 business operations and related
workforce reductions and net earnings of $10.6 million for the
six months ended August 31, 2003 after such pre-tax gain of
$33.1 million and after pre-tax charges of $8.4 million related
to such realignment and related workforce reductions.
The Company's gross profits in the three-month and six-
month periods ended August 29, 2004 were significantly higher
than the gross profits in the prior year's comparable periods
primarily as a result of the improvement in the Company's
utilization of its manufacturing plants resulting from higher
sales and concomitant production volumes, higher percentages of
sales of higher technology, higher margin products and the
Company's reduction of its operating costs. Similarly, the
Company's gross profit in the 2005 fiscal year second quarter
was lower than its gross profit in the 2005 fiscal year first
quarter due to lower sales and production volumes during the
2005 fiscal year second quarter.
Operating results of the Company's advanced composite
materials business also improved during the three-month and six-
month periods ended August 29, 2004 primarily as a result of
higher sales volumes related to strength in the aircraft
manufacturing industry.
Results of Operations
Net sales for the three-month and six-month periods
ended August 29, 2004 increased 17% to $51.1 million and 25% to
$109.6 million, respectively, from $43.6 million and $87.9
million, respectively, for last fiscal year's comparable
periods. The increases in net sales were principally the result
of higher unit volumes of materials shipped by the Company's
operations in North America, Asia and Europe.
The Company's foreign operations accounted for $21.5
million and $47.8 million, respectively, of net sales, or 42%
and 44% of the Company's total net sales worldwide, during the
three-month and six-month periods ended August 29, 2004
compared with $18.8 million and $38.0 million, respectively, of
net sales, or 43% and 43%, respectively, of total net sales
worldwide, during last fiscal year's comparable periods. Net
sales by the Company's foreign operations during the three-
month and six-month periods ended August 29, 2004 increased 14%
and 26%, respectively from the 2004 fiscal year comparable
periods, as a result of increases in sales in Europe during the
three-month period and as a result of increases in sales in
both Europe and Asia during the six-month period.
For the three-month period ended August 29, 2004, the
Company's sales in North America, Asia and Europe were 58%, 25%
and 17%, respectively, of the Company's total net sales
worldwide compared with 57%, 30% and 13%, respectively, for the
three-month period ended August 31, 2003; and for the six-month
period ended August 29, 2004, the Company's sales in North
America, Asia and Europe were 57%, 27% and 16% of the Company's
total net sales worldwide compared with 57%, 28% and 15%,
respectively, for the six-month period ended August 31, 2003.
The Company's sales in North America increased 20%, its sales
in Asia decreased 2% and its sales in Europe increased 48% in
the three-month period ended August 29, 2004 over the three-
month period ended August 31, 2003, and its sales in North
America, Asia and Europe increased 24%, 31% and 25%,
respectively, in the six-month period ended August 29, 2004
over the six-month period ended August 31, 2003.
The overall gross profit as a percentage of net sales for
the Company's worldwide operations improved to 18.4% and 21.1%,
respectively, for the three months and six months ended August
29, 2004 compared with 13.6% and 12.0% for last fiscal year's
comparable periods. The significant improvements in the gross
profit margins were attributable to increased sales volumes,
higher percentages of sales of higher margin, advanced
technology products, and reductions in the Company's operating
costs from the 2004 fiscal year.
During the three-month and six-month periods ended August
29, 2004, the Company's total net sales worldwide of high
temperature electronic materials, which include high
performance (non-FR4) materials, were 94% and 93%,
respectively, of the Company's total net sales worldwide of
electronic materials, compared with 90% and 89%, respectively,
for last fiscal year's comparable periods; while the Company's
net sales of such high temperature electronic materials in
North America were 95% and 94%, respectively, of the Company's
total net sales of electronic materials in North America,
compared with 93% and 92%, respectively, for last fiscal year's
comparable periods; and the Company's net sales of such
materials in Asia and Europe combined, were 92% and 92%,
respectively, of the Company's total net sales of electronic
materials in Asia and Europe combined, compared with 86% and
85%, respectively, for last fiscal year's comparable periods.
During the three-month and six-month periods ended August
29, 2004, the Company's total net sales worldwide of high
performance (non-FR4) electronic materials were 37% and 35%,
respectively, of the Company's total net sales worldwide of
electronic materials, compared with 26% and 26%, respectively,
for last fiscal year's comparable periods; while the Company's
net sales of such high performance electronic materials in
North America were 44% and 42%, respectively, of the Company's
total net sales of electronic materials in North America,
compared with 37% and 35%, respectively, for last fiscal year's
comparable periods; and the Company's net sales of such
materials in Asia and Europe combined, were 30% and 27%,
respectively, of the Company's total net sales of electronic
materials in Asia and Europe combined, compared with 19% and
15%, respectively, for last fiscal year's comparable periods.
The Company's cost of sales increased moderately by 11%
and 12%, respectively, in the three-month and six-month periods
ended August 29, 2004 in support of higher production volumes
compared to the comparable periods in the prior fiscal year,
but the increases were less than the increases in sales as a
result of cost reduction measures implemented by the Company,
including workforce reductions and the reduction of overtime.
Selling, general and administrative expenses increased
by $0.3 million and $2.4 million, respectively, or by 5% and
20%, during the three-month period and six-month period,
respectively, ended August 29, 2004 compared with last fiscal
year's comparable periods, but these expenses, measured as a
percentage of sales, were 12.7% and 13.6%, respectively, during
the three-month and six-month periods ended August 29, 2004
compared with 14.3% and 14.1%, respectively, during last fiscal
year's comparable periods. The increases in selling, general
and administrative expenses in the 2005 fiscal year periods
were a result of proportionately higher sales compared to the
comparable periods in the last fiscal year, increased shipping
costs incurred by the Company to meet its customers' customized
manufacturing and quick-turn-around requirements and an
increase in the provision for employee performance based
incentive compensation.
The Company recorded a pre-tax gain of $33.1 million
during the 2004 fiscal year second quarter related to the
payment by Delco Electronics Corporation of the judgment
against Delco in favor of the Company's subsidiary, Nelco
Technology, Inc., in its lawsuit against Delco. The Company
also recorded pre-tax charges of $1.9 million, and after-tax
charges of $1.1 million, in the 2004 fiscal year first quarter
in connection with the realignment of its North American FR-4
business operations in New York and California and related
workforce reductions and recorded additional pre-tax charges of
$6.5 million, and after-tax charges of $4.9 million, in the
2004 fiscal year second quarter due to such realignment and
related workforce reductions.
For the reasons set forth above, the Company's operating
income from continuing operations was $2.9 million for the
three months ended August 29, 2004 compared to operating income
from continuing operations of $26.3 million for the three
months ended August 31, 2003, including the pre-tax gain of
$33.1 million described above related to the payment by Delco
Electronics Corporation of the judgment against it in favor the
Company's subsidiary, Nelco Technology, Inc., in Nelco's
lawsuit against Delco and the pre-tax charges of $6.5 million
described above related to the realignment of the Company's
North American FR-4 business operations and related workforce
reductions. Operating income from continuing operations was
$8.3 million for the six months ended August 29, 2004 compared
with operating income from continuing operations of $22.8
million for the six months ended August 31, 2003, including the
pre-tax gain described above related to the payment by Delco
and the pre-tax charges of $8.4 million described above related
to the realignment of the Company's North American FR-4
business operations and related workforce reductions. Excluding
the pre-tax gain and the pre-tax charges described above, the
Company reported losses from continuing operations of $0.3
million and $1.9 million, respectively, for the three months
and six months ended August 31, 2003.
Interest and other income, net, principally investment
income, was $0.8 million and $1.4 million, respectively, for
the three-month and six-month periods ended August 29, 2004
compared with $0.7 million and $1.5 million, respectively, for
last fiscal year's comparable periods. The Company's
investments were primarily short-term taxable instruments.
The Company's effective income tax rates for continuing
operations for the three-month and six month periods ended
August 29, 2004 were 19.8% and 7.5%, respectively, compared
with effective income tax rates for continuing operations,
including the pre-tax gain and the pre-tax charges described
above, were 22.4% and 20.3% for the three months and six months
ended August 31, 2003, which were principally a result of the
tax impact of the gain on the Delco litigation payment. The
lower tax provisions for the 2005 fiscal year periods were the
result of higher taxable income in jurisdictions with lower
income tax rates and the elimination of foreign tax provisions
that were no longer required.
The Company's net earnings for the three months ended
August 29, 2004 were $2.9 million compared to net earnings of
$19.0 million for the three months ended August 31, 2003,
including the pre-tax gain described above related to the
payment by Delco Electronics Corporation of the judgment in
favor of the Company's subsidiary, Nelco Technology, Inc., the
pre-tax charges described above related to the realignment of
the Company's North American FR-4 business operations and
related workforce reductions, and a net loss from discontinued
operations of $1.9 million. Net earnings for the six months
ended August 29, 2004 were $9.0 million compared with net
earnings of $10.6 million for the six-month period ended August
31, 2003, including the pre-tax gain described above related to
the payment by Delco, the pre-tax charges described above
related to the realignment of the Company's North American FR-4
business operations and related workforce reductions, and a net
loss from discontinued operations of $8.8 million. Excluding
the pre-tax gain and the pre-tax charges described above, the
Company reported net earnings from continuing operations of
$1.1 million and $0.5 million, respectively, for the three-
month and six-month periods ended August 31, 2003.
Basic and diluted earnings per share were $0.15 and
$0.45 for the three-month period and six-month period,
respectively, ended August 29, 2004, compared to basic and
diluted earnings per share, including the pre-tax gain and pre-
tax charges described above, of $0.96 and $0.95, respectively,
for the three-month period ended August 31, 2003, and $0.54 and
$0.53, respectively, for the six-month period ended August 31,
2003. The earnings per share for the three-month and six-month
periods ended August 31, 2003 included losses from discontinued
operations of $0.10 per share and $0.44 per share,
respectively. Basic and diluted per share earnings from
continuing operations for the three-month and six-month periods
ended August 31, 2003, excluding the pre-tax gain and the pre-
tax charges described above, were $0.06 and $0.03,
respectively.
Liquidity and Capital Resources:
At August 29, 2004, the Company's cash and temporary
investments were $199.4 million compared with $189.2 million at
February 29, 2004, the end of the Company's 2004 fiscal year.
The increase in the Company's cash and investment position at
August 29, 2004 was attributable to cash generated by operating
activities, partially offset by purchases of property, plant
and equipment and the payment of dividends. The Company's
working capital (which includes cash and temporary investments)
was $205.8 million at August 29, 2004 compared with $197.5
million at February 29, 2004. The increase in working capital
at August 29, 2004 compared with February 29, 2004 was due
principally to the increase in cash and temporary investments
and an increase in inventories and decreases in accounts
payable and accrued liabilities partially offset by decreases
in accounts receivable and prepaid expenses and other current
assets and an increase in income taxes payable. The increase in
inventories was attributable mainly to an increase in raw
material stocks, and the decrease in accounts receivable was
due to the lower level of sales in the second quarter of the
2005 fiscal year compared to the fourth quarter of the 2004
fiscal year. The decreases in accounts payable and accrued
liabilities were results of the settlements of obligations
during the second quarter, and the increase in income taxes
payable was attributable mainly to the receipt of a $3.8
million income tax refund during the first quarter of the 2005
fiscal year. The Company's current ratio (the ratio of current
assets to current liabilities) was 5.9 to 1 at August 29, 2004
compared to 5.6 to 1 at February 29, 2004.
During the six months ended August 29, 2004, net
earnings from the Company's operations, before depreciation and
amortization, of $14.1 million and a net increase in working
capital items, resulted in $13.4 million of cash provided by
operating activities. During the same six-month period, the
Company expended $1.7 million for the purchase of property,
plant and equipment, compared with $2.1 million for the six-
month period ended August 31, 2003, and paid $2.4 million in
dividends on its common stock in each of such six-month
periods. Net expenditures for property, plant and equipment
were $2.4 million in the 2004 fiscal year, $6.4 million in the
2003 fiscal year and $22.8 million in the 2002 fiscal year.
At August 29, 2004, the Company had no long-term debt.
The Company is in negotiations with Royal Sun & Alliance
Insurance (Singapore) Limited and with CNA Insurance Co. to
resolve the Company's property damage and business interruption
insurance claims relating to the explosion in a treater at the
Company's subsidiary in Singapore on November 27, 2002.
The Company believes its financial resources will be
sufficient, for the foreseeable future, to provide for
continued investment in working capital and property, plant and
equipment and for general corporate purposes. Such resources
would also be available for purchases of the Company's common
stock, appropriate acquisitions and other expansions of the
Company's business.
The Company is not aware of any circumstances or events
that are reasonably likely to occur that could materially
affect its liquidity.
The Company's contractual obligations and other
commercial commitments to make future payments under contracts,
such as lease agreements, consist only of operating lease
commitments. The Company has no long-term debt, capital lease
obligations, unconditional purchase obligations or other long-
term obligations, standby letters of credit, guarantees,
standby repurchase obligations or other commercial commitments
or contingent commitments, other than two standby letters of
credit in the total amount of $2.7 million to secure the
Company's obligations under its workers' compensation insurance
program and certain limited energy purchase contracts intended
to protect the Company from increased utilities costs.
As of August 29, 2004, there were no material changes
outside the ordinary course of the Company's business in the
Company's contractual obligations disclosed in Item 7 of Part
II of its Form 10-K Annual Report for the fiscal year ended
February 29, 2004.
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 six-month periods ended August 29, 2004 and
August 31, 2003, the Company charged less than $0.1 million
against pretax income for environmental remedial response and
voluntary cleanup costs (including legal fees). While annual
expenditures have generally been constant from year to year and
may increase over time, the Company expects it will be able to
fund such expenditures from available cash. The timing of
expenditures depends on a number of factors, including
regulatory approval of cleanup projects, remedial techniques to
be utilized and agreements with other parties. At August 29,
2004 and February 29, 2004, the recorded liability in
liabilities from discontinued operations for environmental
matters related to Dielektra was $2.1 million and the recorded
liability in accrued liabilities for environmental matters was
$2.4 million. Management does not expect that environmental
matters will have a material adverse effect on the liquidity,
capital resources, business, consolidated results of operations
or consolidated financial position of the Company.
Critical Accounting Policies and Estimates:
In response to financial reporting release, FR-60,
"Cautionary Advice Regarding Disclosure About Critical
Accounting Policies", issued by the Securities and Exchange
Commission in December 2001, the following information is
provided regarding critical accounting policies that are
important to the Consolidated Financial Statements and that
entail, to a significant extent, the use of estimates,
assumptions and the application of management's judgment.
General
The Company's discussion and analysis of its financial
condition and results of operations are based upon the
Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires the Company to make estimates,
assumptions and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related
disclosure of contingent liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to
sales allowances, bad debts, inventories, valuation of long-
lived assets, income taxes, restructuring, pensions and other
employee benefit programs, and contingencies and litigation.
The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting
policies affect its more significant judgments and estimates
used in the preparation of its consolidated financial
statements.
Sales revenue is recognized at the time product is shipped
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 and Product Warranties
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
electronic materials and other products 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.
Bad Debt
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.
Inventory
The Company writes down its inventory for estimated
obsolescence or unmarketability based upon the age of the
inventory and assumptions about future demand for the Company's
products and market conditions.
Valuation of Long-lived Assets
The Company assesses the impairment of long-lived assets
whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Important
factors that could trigger an impairment review include, but
are not limited to, significant negative industry or economic
trends and significant changes in the use of the Company's
assets or strategy of the overall business.
Income Taxes
Carrying value of the Company's net deferred tax assets
assumes that the Company will be able to generate sufficient
future taxable income in certain tax jurisdictions, based on
estimates and assumptions. If these estimates and assumptions
change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets
resulting in additional income tax expense in the Company's
consolidated statement of operations. Management evaluates the
realizability of the deferred tax assets quarterly and assesses
the need for additional valuation allowances quarterly.
Restructuring
During the fiscal years ended February 29, 2004 and March
2, 2003, the Company recorded significant charges in connection
with the realignment of its North American FR-4 business
operations and the closure of the Company's manufacturing
facility in England; and during the fiscal year ended March 3,
2002, the Company recorded significant charges in connection
with the restructuring related to the sale of Nelco Technology,
Inc. and the closure of a related support facility. Prior to
the Company's treating Dielektra GmbH as a discontinued
operation, the Company recorded significant charges in
connection with the closure of the mass lamination operation of
Dielektra and the realignment of Dielektra during the fiscal
years ended February 29, 2004, March 2, 2003 and March 3, 2002.
These charges include estimates pertaining to employee
separation costs and the settlements of contractual obligations
resulting from the Company's actions. Although the Company does
not anticipate significant changes, the actual costs incurred
by the Company may differ from these estimates.
Contingencies and Litigation
The Company is subject to a small number of proceedings,
lawsuits and other claims related to environmental, employment,
product and other matters. The Company is required to assess
the likelihood of any adverse judgments or outcomes in these
matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for
these contingencies is made after careful analysis of each
individual issue. The required reserves may change in the
future due to new developments in each matter or changes in
approach such as a change in settlement strategy in dealing
with these matters.
Pension and Other Employee Benefit Programs
Dielektra GmbH has significant pension costs that are
developed from actuarial valuations. Inherent in these
valuations are key assumptions including discount rates and
wage inflation rates. The pension liability of Dielektra has
been included in liabilities from discontinued operations on
the Company's balance sheet.
The Company's obligations for workers' compensation claims
are self-insured, and its obligations for a recently terminated
employee health care benefits program were self-insured. The
Company uses an insurance company administrator to process all
such claims and benefits. The Company accrues its workers'
compensation liability based upon the claim reserves
established by the third-party administrator and historical
experience. The Company's employee health insurance benefit
liability is based on its historical claims experience.
The Company and certain of its subsidiaries have a non-
contributory profit sharing retirement plan covering their
regular full-time employees. In addition, the Company's
subsidiaries have various bonus and incentive compensation
programs, most of which are determined at management's
discretion.
The Company's reserves associated with these self-insured
liabilities and benefit programs are reviewed by management for
adequacy at the end of each reporting period.
Factors that May Affect Future Results.
Certain portions of this Report which do not relate to
historical financial information may be deemed to constitute
forward-looking statements that are subject to various factors
which could cause actual results to differ materially from
Park's expectations or from results which might be projected,
forecast, estimated or budgeted by the Company in forward-
looking statements. Such factors include, but are not limited
to, general conditions in the electronics industry, the
Company's competitive position, the status of the Company's
relationships with its customers, economic conditions in
international markets, the cost and availability of utilities,
and the various factors set forth under the caption "Factors
That May Affect Future Results" after Item 7 of Park's Annual
Report on Form 10-K for the fiscal year ended February 29,
2004.
Item 3. Quantitative and Qualitative Disclosure About Market
Risk.
The Company's market risk exposure at August 29, 2004 is
consistent with, and not greater than, the types of market risk
and amount of exposures presented in the Annual Report on Form
10-K for the fiscal year ended February 29, 2004.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of August 29, 2004, the end of the
period covered by this quarterly report. Based on such
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are
effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting. There has not
been any change in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the fiscal quarter
to which this report relates that has materially affected, or
is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In May 1998, the Company and its Nelco Technology, Inc.
("NTI") subsidiary in Arizona filed a complaint against Delco
Electronics Corporation and the Delphi Automotive Systems unit
of General Motors Corp. in the United States District Court for
the District of Arizona. The complaint alleged, among other
things, that Delco breached its contract to purchase semi-
finished multilayer printed circuit boards from NTI and that
Delphi interfered with NTI's contract with Delco, that Delco
breached the covenant of good faith and fair dealing implied in
the contract, that Delco engaged in negligent misrepresentation
and that Delco fraudulently induced NTI to enter into the
contract.
In November 2000, after a trial in Phoenix, Arizona, a
jury awarded damages to NTI in the amount of $32.3 million, and
in December 2000 the judge in the United States District Court
entered judgment for NTI on its claim of breach of the implied
covenant of good faith and fair dealing with damages in the
amount of $32.3 million. Both parties appealed the decision to
the United States Court of Appeals for the Ninth Circuit in San
Francisco, and in May 2003, a panel of three judges in the
Court of Appeals for the Ninth Circuit rendered a unanimous
decision affirming the jury verdict. In June 2003, the United
States District Court for the District of Arizona entered final
judgment in favor of NTI, and Delco paid NTI on July 1, 2003.
NTI received a net amount of $33.1 million.
Park announced in March 1998 that it had been informed by
Delco Electronics that Delco planned to close its printed
circuit board fabrication plant and exit the printed circuit
board manufacturing business. After the plant closure, Delco
purchased all of its printed circuit boards from outside
suppliers and Delco was no longer a customer of the Company's.
As a result, the Company's sales to Delco declined
significantly during the three-month period ended May 31, 1998,
were negligible during the three-month period ended August 30,
1998 and have been nil since that time. During the Company's
1999 fiscal year first quarter and during its 1998 fiscal year
and for several years prior thereto, more than 10% of the
Company's total worldwide sales were to Delco Electronics
Corporation; and the Company had been Delco's principal
supplier of semi-finished multilayer printed circuit board
materials for more than ten years. These materials were used by
Delco to produce finished multilayer printed circuit boards.
See "Factors That May Affect Future Results" after Item 2 of
Part I of this Report.
In the first quarter of the fiscal year ended March 3,
2002, the Company sold the assets and business of NTI and
recorded pre-tax charges of approximately $15.7 million in its
2002 fiscal year first quarter ended May 27, 2001 in connection
with the sale of NTI and the closure of a related support
facility also located in Arizona. See Note 9 of the Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I
of this Report.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
The following table provides information with respect to
shares of the Company's Common Stock acquired by the Company
during each month included in the Company's 2005 fiscal year
second quarter ended August 29, 2004.
Maximum Number
Total Number (or Approximate
of Shares (or Dollar Value)
Units) of Shares (or
Total Average Purchased as Units) that May
Number of Price Part of Yet Be
Shares (or Paid per Publicly Purchased Under
Period Units) Share (or Announced the Plans or
Purchased Unit) Plans or Programs
Programs
May 31-June 30 0 - 0
July 1-31 0 - 0
August 1-29 0 - 0
Total 0 - 0 2,305,170(a)
(a) Aggregate number of shares available to be purchased by
the Company pursuant to previous share purchase authorizations
announced on June 24, 1998 and September 9, 1998. Pursuant to
such authorizations, the Company is authorized to purchase its
shares from time to time on the open market or in privately
negotiated transactions.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on July 14,
2004:
(a) the persons elected as directors of the Company and the
voting for such persons were as follows:
Authority
Name Votes For Withheld
---- -------- --------
Mark S. Ain 17,535,733 969,428
Dale Blanchfield 17,962,481 542,680
Anthony Chiesa 13,467,263 5,037,898
Lloyd Frank 17,033,920 1,471,241
Brian E. Shore 17,603,946 901,215
Steven T. Warshaw 17,572,024 933,137
(b) the matching contribution feature of the Company's
Employee Stock Purchase Plan was approved by the Shareholders.
There were 14,686,367 votes for the matching contribution
feature of the Plan, 519,560 votes against, and 600,773
abstentions.
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Park Electrochemical Corp.
--------------------------
(Registrant)
/s/Brian E. Shore
Date: October 7, 2004 -----------------------------
Brian E. Shore
President and
Chief Executive Officer
/s/Murray O. Stamer
Date: October 7, 2004 -----------------------------
Murray O. Stamer
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Name Page
----------- ---- ----
31.1 Certification of Chief Executive
Officer pursuant to Exchange Act Rule
13a-14(a) or15d-14(a) 31
31.2 Certification of Chief Financial
Officer pursuant to Exchange Act Rule
13a-14(a)or 15d-14(a) 33
32.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 35
2002
32.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 36
2002
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