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PART I

 

ITEM 1.         BUSINESS.

 

General

 

Park Electrochemical Corp. (“Park”), through its subsidiaries (unless the context otherwise requires, Park and its subsidiaries are hereinafter called the “Company”), is a global advanced materials company which designs, develops and manufactures advanced composite materials, primary and secondary structures and assemblies and low-volume tooling for the aerospace markets and high-technology digital and radio frequency (“RF”)/microwave printed circuit materials principally for the telecommunications and internet infrastructure, enterprise and military markets. Park’s core capabilities are in the areas of polymer chemistry formulation and coating technology.

 

Park operates through fully integrated business units in Asia, Europe and North America. The Company's manufacturing facilities are located in Kansas, Singapore, France, Arizona and California. The Company also maintains research and development facilities in Arizona, Kansas and Singapore.

 

Sales of Park’s aerospace composite materials, structures and assemblies products were 36%, 28% and 27% of the Company’s total net sales worldwide in the 2018, 2017 and 2016 fiscal years, respectively, and sales of Park’s electronics materials products were 64%, 72% and 73% of the Company’s total net sales worldwide in the 2018, 2017 and 2016 fiscal years, respectively.

 

Park was founded in 1954 by Jerry Shore, who was the Company’s Chairman of the Board until July 14, 2004.

 

The sales and long-lived assets of the Company’s operations by geographic area for the last three fiscal years are set forth in Note 13 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report. The Company’s foreign operations are conducted principally by the Company’s subsidiaries in Singapore and France. The Company’s foreign operations are subject to the impact of foreign currency fluctuations. See Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report.

 

The Company makes available free of charge on its Internet website, www.parkelectro.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. None of the information on the Company's website shall be deemed to be a part of this Report.

 

AEROGLIDE®, COREFIX®, EASYCURE E-710®, ELECTROGLIDE®, LD®, MERCURYWAVE®, METEORWAVE®, NELCO®, RTFOIL®, SI® and TIN CITY AIRCRAFT WORKS® are registered trademarks of Park Electrochemical Corp., and ALPHASTRUT™, ELECTROVUE™, EF™, EP™, M-PLY™, NELTEC™, PEELCOTE™, POWERBOND™ and SIGMASTRUT™ are common law trademarks of Park Electrochemical Corp.

 

 

Aerospace Composite Materials, Structures and Assemblies

 

Aerospace Composite Materials, Structures and Assemblies - Operations

 

The Company designs, develops and manufactures engineered, advanced composite materials and advanced composite structures and assemblies and low-volume tooling for the aerospace markets and prototype tooling for such structures and assemblies.

 

The Company’s aerospace composite materials are designed, developed and manufactured by the Company’s Park Aerospace Technologies Corp. (“PATC”) business unit located at the Newton, Kansas Airport and by the Company’s Nelco Products Pte. Ltd. business unit in Singapore. The Company’s aerospace composite structures and assemblies and low-volume tooling are also developed and manufactured by the Company’s PATC business unit.

 

PATC offers a full range of aerospace composite materials manufacturing capability, as well as composite structures design, assembly and production capability, all in its Newton facility.  PATC offers composite aircraft and space vehicle structures design and assembly services, in addition to “build-to-print” services. The Company believes that the ability of its PATC facility to offer such a wide and comprehensive array of composite materials and structures manufacturing and development technology and capability to the aircraft and space vehicle industries provides attractive benefits and advantages to those industries.

 

Aerospace Composite Materials, Structures and Assemblies – Industry Background

 

The aerospace composite materials manufactured by the Company and its competitors are used primarily to fabricate light-weight, high-strength structures with specifically designed performance characteristics. Composite materials are typically highly specified combinations of resin formulations and reinforcements. Reinforcements can be unidirectional fibers, woven fabrics, or non-woven goods such as mats or felts. Resin formulations are typically highly proprietary, and include various chemical and physical mixtures. The Company produces resin formulations using various epoxies, polyesters, phenolics, cyanate esters, polyimides and other complex matrices. The reinforcement combined with the resin is referred to as a “prepreg”. Aerospace composite materials can be broadly categorized as either thermosets or thermoplastics. While both material types require the addition of heat to form a consolidated laminate, thermoplastics can be reformed using additional heat. Once fully cured, thermoset materials cannot be further reshaped. The Company believes that the demand for thermoset advanced materials is greater than that for thermoplastics due to the fact that fabrication processes for thermoplastics require much higher temperatures and pressures and are, therefore, typically more capital intensive than the fabrication processes for thermoset materials.

 

The Company works with aerospace original equipment manufacturers (“OEMs”), such as general aviation aircraft manufacturers and commercial aircraft manufacturers, and certain tier 1 suppliers to qualify its aerospace composite materials or structures and assemblies for use on current and upcoming programs. The Company’s customers typically design and specify a material specifically to meet the needs of the structure’s end use and the customers’ processing methods. Such customers sometimes work with a supplier to develop the specific resin system and reinforcement combination to match the application. The Company’s customers’ processing, or the Company’s processing, may include hand lay-up, resin infusion or more advanced automated lay-up processes. Automated lay-up processes include automated tape lay-up, automated fiber placement and filament winding. These fabrication processes significantly alter the material form purchased. After the lay-up process is completed, the material is cured by the addition of heat and pressure. Cure processes typically include vacuum bag oven curing, high pressure autoclave, press forming and before-press curing. After the structure has been cured, final finishing and trimming, and assembly of the structure, is performed by the fabricator or the Company.

 

 

Aerospace Composite Materials, Structures and Assemblies – Products

 

The aerospace composite materials products manufactured by the Company are primarily thermoset curing prepregs. The Company has developed proprietary resin formulations to suit the needs of the markets in which it participates by analyzing the needs of the markets and working with its customers. The complex process of developing resin formulations and selecting the proper reinforcement is accomplished through a collaborative effort of the Company’s research and development and technical sales and marketing resources working with the customers’ technical staff. The Company focuses on developing a thorough understanding of its customers’ businesses, product lines, processes and technical challenges. The Company develops innovative solutions which utilize technologically advanced materials and concepts for its customers.

 

The Company’s aerospace composite materials products include prepregs manufactured from proprietary formulations using modified epoxies, phenolics, polyesters, cyanate esters and polyimides combined with woven, non-woven and unidirectional reinforcements. Reinforcement materials used to produce the Company’s products include polyacrylonitrile (“PAN”) based carbon fiber, E-glass (fiberglass), S2 glass, quartz, carbonized rayon, aramids, such as Kevlar® (“Kevlar” is a registered trademark of E.I. du Pont de Nemours & Co.), Twaron® (“Twaron” is a registered trademark of Teijin Twaron B.V. LLC), polyester and other synthetic materials. The Company also sells certain specialty prepregs, such as Raycarb C2, a carbonized rayon fabric produced by Airbus Safran Launchers SAS (formerly Herakles, formerly Snecma Propulsion Solide) and used mainly in the rocket motor industry, and Enka AS, a proprietary commercial rayon fabric produced by Highland Industries, Inc. and used in the aerospace industry as the base white material for carbon phenolic applications.

 

The Company’s composite structures and assemblies are manufactured with carbon, fiberglass and other reinforcements impregnated with formulated resins. Certain of these impregnated reinforcements, or prepregs, are also manufactured by PATC. The Company also provides low-volume tooling in connection with its manufacture and sale of composite structures and assemblies.

 

Aerospace Composite Materials, Structures and Assemblies – Customers and End Markets

 

The Company’s aerospace composite materials, structures and assemblies customers include manufacturers of turbofan engines, aircraft primary and secondary structures and radomes, including military aircraft, unmanned aerial vehicles (“UAVs”), business jets and turboprops, large and regional transport aircraft and helicopters, space vehicles, rocket motors and specialty industrial products. The Company’s aerospace composite materials are marketed primarily by sales personnel and, to a lesser extent, by independent distributors and independent sales representatives, and the Company’s aerospace composite structures and assemblies are marketed primarily by sales personnel.

 

During the Company’s 2018 fiscal year, 11.0% of the Company’s total worldwide sales were to General Electric Company, a leading manufacturer of aerospace engines.  During the Company’s 2017 and 2016 fiscal years, the Company did not have sales to any aerospace composite materials, structures and assemblies customer that equaled or exceeded 10% of the Company’s total worldwide sales.  During the 2018 fiscal year, sales to no other aerospace composite materials, structures and assemblies customer of the Company equaled or exceeded 10% of the Company’s total worldwide sales.

 

 

Although the Company’s aerospace composite material, structures and assemblies business is not dependent on any single customer, the loss of a major customer or of a group of customers could have a material adverse effect on the Company’s business or its consolidated results of operations or financial position.

 

The Company’s aerospace customers include fabricators of aircraft composite structures and assemblies. The Company’s aerospace composite materials are used by such fabricators and by the Company to produce primary and secondary structures, aircraft interiors and various other aircraft components. The Company’s customers for aerospace materials, and the Company itself, produce structures and assemblies for commercial aircraft and for the general aviation and business aviation, kit aircraft, special mission, UAVs and military markets. Many of the Company’s composite materials are used in the manufacture of aircraft certified by the Federal Aviation Administration (the “FAA”).

 

Customers for the Company’s rocket motor materials include United States defense prime contractors and subcontractors. These customers fabricate rocket motors for heavy lift space launchers, strategic defense weapons, tactical motors and various other applications. The Company’s materials are used to produce heat shields, exhaust gas management devices and insulative and ablative nozzle components. Rocket motors are primarily used for commercial and military space launch, and for tactical and strategic weapons. The Company also has customers for these materials outside of the United States.

 

The Company also sells composite materials for use in RF electrical applications. Customers buying these materials typically fabricate antennas and radomes engineered to preserve electrical signal integrity. A radome is a protective cover over an electrical antenna or signal generator. The radome is designed to minimize signal loss and distortion.

 

Aerospace Composite Materials, Structures and Assemblies – Manufacturing

 

The Company’s manufacturing facilities for aerospace composite materials are currently located in Newton, Kansas and in Singapore, and its manufacturing facility for composite structures and assemblies is also located in Newton, Kansas. See “Aerospace Composite Materials, Structures and Assemblies – Operations” elsewhere in this Report.

 

The process for manufacturing composite materials, structures and assemblies is capital intensive and requires sophisticated equipment, significant technical know-how and very tight process controls. The key steps used in the manufacturing process include resin mixing, resin film casting and reinforcement impregnation via hot-melt process or a solution process.

 

Prepreg is manufactured by the Company using either solvent (solution) coating methods on a treater or by hot melt impregnation. A solution treater is a roll-to-roll continuous process machine which sequences reinforcement through tension controllers and combines solvated resin with the reinforcement. The reinforcement is dipped in resin, passed through a drying oven which removes the solvent and advances (or partially cures) the resin. The prepreg material is interleafed with a carrier and cut to the roll lengths desired by the customer. The Company also manufactures prepreg using hot melt impregnation methods which use no solvent. Hot melt prepreg manufacturing is achieved by mixing a resin formulation in a heated resin vessel, casting a thin film on a carrier paper, and laminating the reinforcement with the resin film.

 

 

The Company also completes additional processing services, such as slitting, sheeting, biasing, sewing and cutting, if needed by the customer. Many of the products manufactured by the Company also undergo extensive testing of the chemical, physical and mechanical properties of the product. These testing requirements are completed in the laboratories and facilities located at the Company’s manufacturing facilities.

 

The Company’s laboratories have been approved by several aerospace OEMs, and the Company has achieved certification pursuant to the National Aerospace and Defense Contractors Accreditation Program (“NADCAP”) for both non-metallic materials manufacturing and testing and composites fabrication. After all the processing has been completed, the product is tested and packaged for shipment to the customer. The Company typically supplies final product to the customer in roll or sheet form.  The Company’s PATC facility has received accreditation by NADCAP for composite structures manufacturing and for composite materials manufacturing, and the Company believes that the PATC facility is one of the few facilities in the world with NADCAP accreditation for manufacturing both composite materials and composite structures.  The Company has also received AS9100C certification for its quality management system for the manufacture of advanced composite materials and design and manufacturing of structures for aircraft and aerospace industries.

 

Aerospace Composite Materials, Structures and Assemblies – Materials and Sources of Supply

 

The Company designs and manufactures its aerospace composite materials to its own specifications and to the specifications of its customers. Product development efforts are focused on developing prepreg materials that meet the specifications of the customers. The materials used in the manufacture of these engineered materials include graphite and carbon fibers and fabrics, aramids, such as Kevlar® ("Kevlar" is a registered trademark of E.I. du Pont de Nemours & Co.) and Twaron® (“Twaron” is a registered trademark of Teijin Twaron B.V. LLC), quartz, fiberglass, polyester, specialty chemicals, resins, films, plastics, adhesives and certain other synthetic materials. The Company purchases these materials from several suppliers. Substitutes for many of these materials are not readily available. The qualification and certification of aerospace composite materials for certain FAA certified aircraft typically include specific requirements for raw material supply and may restrict the Company’s flexibility in qualifying alternative sources of supply for certain key raw materials. The Company continues to work to determine acceptable alternatives for several raw materials.

 

The Company manufactures composite structures and assemblies primarily to its customers’ specifications using its own composite materials or composite materials supplied by third parties, based on the specific requirements of the Company’s customers. 

 

Aerospace Composite Materials, Structures and Assemblies – Competition

 

The Company has many competitors in the aerospace composite materials, structures and assemblies markets, ranging in size from large international corporations to small regional producers. Several of the Company’s largest competitors are vertically integrated, producing raw materials, such as carbon fiber and cloth, as well as composite structures and assemblies. Some of the Company’s competitors may also serve as a supplier to the Company. The Company competes for business primarily on the basis of responsiveness, product performance and consistency, product qualification, FAA data base design allowables and innovative new product development.

 

 

Electronics Materials

 

Electronics Materials - Operations

 

The Company is also a leading global designer and manufacturer of advanced electronics materials used to fabricate complex multilayer printed circuit boards and other electronic interconnection systems, such as multilayer back-planes, wireless packages, high-speed/low-loss multilayers and high density interconnects (“HDIs”). The Company’s multilayer printed circuit materials consist of copper-clad laminates and prepregs, which is an acronym for pre-impregnated material. The Company has long-term relationships with its major customers, which include leading independent printed circuit board fabricators, electronic manufacturing service companies, electronic contract manufacturers and major electronic original equipment manufacturers ("OEMs"). Multilayer printed circuit boards and interconnect systems are used in virtually all advanced electronic equipment to direct, sequence and control electronic signals between semiconductor devices (such as microprocessors and memory and logic devices), passive components (such as resistors and capacitors) and connection devices (such as infra-red couplings, fiber optics, compliant pin and surface mount connectors). Examples of end uses of the Company’s digital printed circuit materials include high speed routers and servers, telecommunications switches, storage area networks, supercomputers, satellite switching equipment and wireless local area networks ("LANs"). The Company's RF/microwave printed circuit materials are used primarily for military avionics, antennas, power amplifiers and other components for cellular telephone base stations, automotive adaptive cruise control systems and avionic communications equipment. The Company has developed long-term relationships with major customers as a result of its leading edge products, extensive technical and engineering service support and responsive manufacturing capabilities.

 

Park believes it founded the modern day printed circuit industry in 1957 by inventing a composite material consisting of an epoxy resin substrate reinforced with fiberglass cloth which was laminated together with sheets of thin copper foil. This epoxy-glass copper-clad laminate system is still used to construct the large majority of today’s advanced printed circuit products. The Company also believes that in 1962 it invented the first multilayer printed circuit materials system used to construct multilayer printed circuit boards. The Company also pioneered vacuum lamination and many other manufacturing technologies used in the industry today. The Company believes it is one of the industry’s technological leaders.

 

The Company believes that it is one of only a few significant independent manufacturers of high performance multilayer printed circuit materials in the world. The Company was the first manufacturer in the printed circuit materials industry to establish manufacturing presences in the three major global markets of North America, Europe and Asia, with facilities established in Europe in 1969 and Asia in 1986.

 

Electronics Materials – Industry Background

 

The electronics materials manufactured by the Company and its competitors are used primarily to construct and fabricate complex multilayer printed circuit boards and other advanced electronic interconnection systems. Multilayer printed circuit materials consist of prepregs and copper-clad laminates. Prepregs are chemically and electrically engineered thermosetting or thermoplastic resin systems which are impregnated into and reinforced by a specially manufactured fiberglass cloth product or other woven or non-woven reinforcing fiber. This insulating dielectric substrate generally is 0.125 inch to 0.001 inch in thickness. While these resin systems historically have been based on epoxy resin chemistry, in recent years, increasingly demanding OEM requirements have driven the industry to utilize proprietary enhanced epoxies as well as other higher performance resins, such as phenolic, bismalimide triazine ("BT"), cyanate ester, standard and enhanced non-Methylene Dianiline (“MDA”) polyimide, allylated polyphenylene ether (“APPE”) or polytetrafluoroethylene ("PTFE"). One or more plies of prepreg are laminated together to form an insulating dielectric substrate to support the copper circuitry patterns of a multilayer printed circuit board. Copper-clad laminates consist of one or more plies of prepreg with each ply laminated on the top and bottom with specialty thin copper foil. Copper foil is specially formed in thin sheets which may vary from 0.0056 inch to 0.0002 inch in thickness and normally have a thickness of 0.0014 inch or 0.0007 inch. The Company supplies both copper-clad laminates and prepregs to its customers, which use these products as a system to construct multilayer printed circuit boards.

 

 

The printed circuit board fabricator processes copper-clad laminates to form the inner layers of a multilayer printed circuit board. The fabricator photo images these laminates with a dry film or liquid photoresist. The photoresist is then developed with the circuit pattern.  The unexposed areas are stripped, leaving a cured photoresist circuit pattern protecting the copper. The copper surfaces of the laminate are etched to form the circuit pattern, and the remaining photoresist is stripped. The fabricator then assembles these etched laminates by inserting one or more plies of dielectric prepreg between each of the inner layer etched laminates and also between an inner layer etched laminate and the outer layer copper plane, and then laminating the entire assembly in a press. Prepreg serves as the insulator and bond between the multiple layers of copper circuitry patterns found in the multilayer circuit board. When the multilayer configuration is laminated, these plies of prepreg form an insulating dielectric substrate supporting and separating the multiple inner and outer planes of copper circuitry. The fabricator drills vertical through-holes or vias in the multilayer assembly and then plates the through-holes or vias to form vertical conductors between the multiple layers of circuitry patterns. These through-holes or vias combine with the conductor paths on the horizontal circuitry planes to create a three-dimensional electronic interconnect system. In specialized applications, an additional set of microvia layers may be added through a series of lamination processes to provide increased density and functionality to the design. The outer two layers of copper foil are then imaged and etched to form the finished multilayer printed circuit board. The completed multilayer board is a three-dimensional interconnect system with electronic sig-nals traveling in the horizontal planes of multiple layers of copper circuitry patterns, as well as in the vertical planes through the plated holes or vias.

 

Semiconductor manufacturers have introduced successive generations of more powerful microprocessors and memory and logic devices. Electronic equipment manufacturers have designed these advanced semiconductors into more compact products. High performance computing devices in these smaller platforms require greater reliability, faster signal speeds, closer tolerances, higher component and circuit density and increased overall complexity. As a result, the interconnect industry has developed smaller, lighter, faster and more cost-effective interconnect systems, including advanced multilayer printed circuit boards.

 

Today’s interconnect systems require advanced technology printed circuit materials to ensure the performance and reliability of the electronic system and to improve the manufacturability of the interconnect platform. Printed circuit board fabricators and electronic equipment manufacturers require advanced printed circuit materials that have increasingly higher temperature tolerances and more advanced and stable electrical properties in order to support high-speed computing in a miniaturized and often portable environment. Temperature tolerance was further emphasized by the advent of lead-free assemblies.

 

 

The uniformity, purity, consistency, performance predictability, dimensional stability and production tolerances of printed circuit materials have become successively more critical due to the very high density circuit demands of miniaturized high performance interconnect systems. High density printed circuit boards and interconnect systems often involve higher layer count multilayer circuit boards where the multiple planes of circuitry and dielectric insulating substrates are very thin (dielectric insulating substrate layers may be 0.002 inch or less) and the circuit line and space geometries in the circuitry plane are very narrow (0.002 inch or less). In addition, advanced surface mount interconnect systems are typically designed with very small pad sizes and very small plated through-holes or vias which electrically connect the multiple layers of circuitry planes, and these interconnect systems frequently make use of multiple lamination cycles and/or laser drilled vias. High density interconnect systems must utilize printed circuit materials whose dimensional characteristics and purity are consistently manufactured to very high tolerance levels in order for the printed circuit board fabricator to attain and sustain acceptable product yields.

 

Shorter product life cycles and competitive pressures have induced electronic equipment manufacturers to bring new products to market and increase production volume to commercial levels more quickly. These trends have highlighted the importance of front-end engineering of electronic products and have increased the level of collaboration among system designers, fabricators and printed circuit materials suppliers. As the complexity of electronic products increases, materials suppliers must provide greater technical support to interconnect systems fabricators on a timely basis regarding manufacturability and performance of new materials systems.

 

Electronics Materials – Products and Services

 

The Company produces a broad line of advanced electronics materials used to fabricate complex multilayer printed circuit boards and other electronic interconnect systems, including backplanes, high speed/low loss multilayers and high density interconnects (“HDIs”). The Company’s diverse advanced electronics materials product line is designed to address a wide array of end-use applications and performance requirements.

 

The Company’s electronics materials products have been developed internally and through long-term development projects with its principal suppliers and, to a lesser extent, through licensing arrangements. The Company focuses its research and development efforts on developing industry leading product technology to meet the most demanding product requirements and has designed its product line with a focus on the higher performance, higher technology end of the materials spectrum.

 

The Company’s products utilize, among other things, high-speed, low-loss, engineered formulations, high-temperature modified epoxies, phenolics, BT epoxies, MDA-free polyimides, enhanced polyimides, APPE, SI® (Signal Integrity) products, cyanate esters and PTFE formulations for RF/microwave applications.

 

The Company’s high performance electronics materials consist of high-speed, low-loss Cathodic Anodic Filament (“CAF”) resistant materials for digital and RF/microwave applications requiring lead-free compatibility and high bandwidth signal integrity, BT materials, polyimides for applications that demand extremely high thermal performance, cyanate esters, quartz reinforced materials, and PTFE and modified epoxy materials for RF/microwave systems that operate at frequencies up to at least 79 GHz.

 

The Company has developed long-term relationships with select customers through broad-based technical support and service, as well as manufacturing proximity and responsiveness at multiple levels of the customer’s organization. The Company focuses on developing a thorough understanding of its customers’ businesses, product lines, processes and technological challenges. The Company seeks customers which are industry leaders committed to maintaining and improving their industry leadership positions and which are committed to long-term relationships with their suppliers. The Company also seeks business opportunities with the more advanced printed circuit fabricators and electronic equipment manufacturers who are interested in maximizing the full value of the products and services provided by their suppliers. The Company believes its proactive and timely support in assisting its customers with the integration of advanced materials technology into new product designs further strengthens its relationships with its customers.

 

 

The Company’s emphasis on service and close relationships with its customers is reflected in its short lead times. The Company has developed its manufacturing processes and customer service organizations to provide its customers with printed circuit materials products on a just-in-time basis. The Company believes that its ability to meet its customers' customized manufacturing and quick-turn-around ("QTA") requirements is one of its unique strengths.

 

Electronics Materials – Customers and End Markets

 

The Company’s customers for its advanced electronics materials include the leading independent printed circuit board fabricators, electronic manufacturing service (“EMS”) companies, electronic contract manufacturers (“ECMs”) and major electronic OEMs in the computer, networking, telecommunications, wireless communications, aerospace, military, instrumentation and automotive industries located throughout North America, Europe and Asia. The Company seeks to align itself with the larger, more technologically-advanced and better capitalized independent printed circuit board fabricators and major electronic equipment manufacturers which are industry leaders committed to maintaining and improving their industry leadership positions and to building long-term relationships with their suppliers. The Company’s selling effort typically involves several stages and relies on the talents of Company personnel at different levels, from management to sales personnel and quality engineers. The Company augments its sales personnel with an OEM marketing team and process and product technology specialists.

 

During the Company’s 2018 fiscal year, 14.9% of the Company's total worldwide sales were to TTM Technologies, Inc., a leading manufacturer of printed circuit boards. During the Company’s 2017 fiscal year, approximately 16.2% of the Company's total worldwide sales were to TTM Technologies, Inc. During the Company’s 2016 fiscal year, approximately 13.8% of the Company's total worldwide sales were to TTM Technologies, Inc. During the Company’s 2018, 2017 and 2016 fiscal years, sales to no other electronics materials customer of the Company equaled or exceeded 10% of the Company’s total worldwide sales.

 

Although the Company’s electronics materials business is not dependent on any single customer, the loss of a major customer or of a group of customers could have a material adverse effect on the Company’s business or its consolidated results of operations or financial position.

 

The Company’s electronics materials products are marketed primarily by sales personnel and, to a lesser extent, by independent distributors and independent sales representatives in Europe and Asia.

 

Electronics Materials – Manufacturing

 

The process for manufacturing multilayer printed circuit materials is capital intensive and requires sophisticated equipment as well as clean-room environments. The key steps in the Company’s manufacturing process include: the impregnation of specially designed fiberglass cloth with a specially designed resin system and the partial curing of that resin system; the assembling of laminates consisting of single or multiple plies of prepreg and copper foil in a clean-room environment; the vacuum lamination of the copper-clad assemblies under simultaneous exposure to heat, pressure and vacuum; and the finishing of the laminates to customer specifications.

 

 

Prepreg is manufactured in a treater. A treater is a roll-to-roll continuous machine which sequences specially designed fiberglass cloth or other reinforcement fabric into a resin tank and then sequences the resin-coated cloth through a series of ovens which partially cure the resin system into the cloth. This partially cured product or prepreg is then sheeted or paneled and packaged by the Company for sale to customers, or used by the Company to construct its copper-clad laminates.

 

The Company manufactures copper-clad laminates by first setting up in a clean room an assembly of one or more plies of prepreg stacked together with a sheet of specially manufactured copper foil on the top and bottom of the assembly. This assembly, together with a large quantity of other laminate assemblies, is then inserted into a large, multiple opening vacuum lamination press. The laminate assemblies are then laminated under simultaneous exposure to heat, pressure and vacuum. After the press cycle is complete, the laminates are removed from the press and sheeted, sheared and finished to customer specifications. The product is then inspected and packaged for shipment to the customer.

 

The Company manufactures multilayer printed circuit materials at fully integrated facilities located in the United States, Europe and Southeast Asia. The Company opened its California facility in 1965, its Arizona facility in 1984, its Singapore facility in 1986 and its France facility in 1992. The Company services the North American market principally through its United States manufacturing facilities, the European market principally through its manufacturing facilities in the United States and in France, and the Asian market principally through its Singapore manufacturing facility. By maintaining technical and engineering staffs at each of its manufacturing facilities, the Company is able to deliver fully-integrated products and services on a timely basis. During the 2018 fiscal year, the Company consolidated its Nelco Products, Inc. business unit located in California and its Neltec, Inc. business unit located in Arizona, and all manufacturing at the California facilities ceased, except for treating operations, which continue as part and under the supervision of the Neltec, Inc. business unit. 

 

Electronics Materials – Materials and Sources of Supply

 

The principal materials used in the manufacture of the Company’s electronics materials products are specially manufactured copper foil, fiberglass and quartz cloth and synthetic reinforcements, and specially formulated resins and chemicals. The Company develops and maintains close working relationships with suppliers of these materials who have dedicated themselves to complying with the Company’s stringent specifications and technical requirements. While the Company’s philosophy is to work with a limited number of suppliers, the Company has identified alternate sources of supply for many, but not all, of these materials. However, there are a limited number of qualified suppliers of these materials, in some cases substitutes for these materials are not always readily available, and, in the past, the industry has experienced shortages in the market for certain of these materials. While the Company considers its relationships with its suppliers to be strong, a shortage of these materials or a disruption of the supply of materials caused by a natural disaster, such as the temporary disruption caused by the earthquake and tsunami in Japan in March 2011, or otherwise, could materially increase the Company’s cost of operations and could materially adversely affect the business and results of operations of the Company.

 

Significant increases in the cost of materials purchased by the Company could also have a material adverse effect on the Company’s business and results of operations if the Company were unable to pass such increases through to its customers. During the 2018, 2017 and 2016 fiscal years, the Company experienced significant volatility in the cost of copper foil, one of the Company’s primary raw materials. The Company generally passes changes in the costs of its raw materials through to its customers.

 

 

Electronics Materials – Competition

 

The multilayer printed circuit materials industry is characterized by intense competition and ongoing consolidation. The Company’s competitors are primarily divisions or subsidiaries of very large, diversified multinational manufacturers which are substantially larger and have greater financial resources than the Company and, to a lesser degree, smaller regional producers. Because the Company focuses on the higher technology segment of the electronics materials market, technological innovation, quality and service, as well as price, are significant competitive factors.

 

The Company believes that there are several significant multilayer printed circuit materials manufacturers in the world and many of these competitors have significant presences in the three major global markets of North America, Europe and Asia. The Company believes that it is one of only a few significant independent manufacturers of multilayer printed circuit materials in the world today.

 

The markets in which the Company’s electronics materials operations compete are characterized by rapid technological advances, and the Company’s position in these markets depends largely on its continued ability to develop technologically advanced and highly specialized products. Although the Company believes it is an industry technology leader and directs a significant amount of its time and resources toward maintaining its technological competitive advantage, there is no assurance that the Company will be technologically competitive in the future, or that the Company will continue to develop new products that are technologically competitive.

 

Electronics Materials – Strategic Evaluation

 

On January 4, 2018, the Company announced that it is conducting a strategic evaluation, including the potential sale, of its electronics materials business and that it has retained Greenhill & Co., LLC, as its financial advisor, to assist it in the strategic evaluation of the electronics business, which includes manufacturing locations in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona.  Under any strategic alternative for its electronics business, the Company would retain its aerospace manufacturing operations in Kansas, its headquarters in New York and its aerospace composite materials manufacturing facility in Singapore.  The Company expects to conclude its strategic evaluation of its electronics business in the second quarter of its 2019 fiscal year ending March 3, 2019.  However, no specific timetable has been set, and there can be no assurance that a sale or any other transaction will take place as a result of the strategic evaluation.

 

Backlog

 

The Company considers an item as backlog when it receives a purchase order specifying the number of units to be purchased, the purchase price, specifications and other customary terms and conditions. At May 1, 2018, the unfilled portion of all purchase orders received by the Company and believed by it to be firm was $18,151,314, compared to $14,642,952 at May 1, 2017. A major portion of the Company’s backlog consists of composite materials.

 

Various factors contribute to the size of the Company’s backlog. Accordingly, the foregoing information may not be indicative of the Company’s results of operations for any period subsequent to the fiscal year ended February 25, 2018.

 

Patents and Trademarks

 

The Company holds several patents and trademarks or licenses thereto. In the Company’s opinion, some of these patents and trademarks are important to its products. Generally, however, the Company does not believe that an inability to obtain new; or to defend existing, patents and trademarks would have a material adverse effect on the Company.

 

Employees

 

At February 25, 2018, the Company had 387 employees. Of these employees, 342 were engaged in the Company’s manufacturing operations, and 45 consisted of executive, sales and marketing and research and development personnel and general administrative staff.

 

 

Environmental Matters

 

The Company is subject to stringent environmental regulation of its use, storage, treatment and disposal of hazardous materials and the release of emissions into the environment. The Company believes that it currently is in substantial compliance with the applicable Federal, state and local and foreign environmental laws and regulations to which it is subject and that continuing compliance therewith will not have a material effect on its capital expenditures, earnings or competitive position. The Company does not currently anticipate making material capital expenditures for environmental control facilities for its existing manufacturing operations during the remainder of its current fiscal year or its succeeding fiscal year. However, developments, such as the enactment or adoption of even more stringent environmental laws and regulations, could conceivably result in substantial additional costs to the Company.

 

The Company and certain of its subsidiaries have been named by the Environmental Protection Agency (the “EPA”) or a comparable state agency under the Comprehensive Environmental Response, Compensation and Liability Act (the “Superfund Act”) or similar state law as potentially responsible parties in connection with alleged releases of hazardous substances at four sites.

 

Under the Superfund Act and similar state laws, all parties who may have contributed any waste to a hazardous waste disposal site or contaminated area identified by the EPA or comparable state agency may be jointly and severally liable for the cost of cleanup. Generally, these sites are locations at which numerous persons disposed of hazardous waste. In the case of the Company’s subsidiaries, generally the waste was removed from their manufacturing facilities and disposed at the waste sites by various companies which contracted with the subsidiaries to provide waste disposal services. Neither the Company nor any of its subsidiaries has been accused of or charged with any wrongdoing or illegal acts in connection with any such sites. The Company believes it maintains an effective and comprehensive environmental compliance program. Management believes the ultimate disposition of known environmental matters will not have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or financial position of the Company.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters” included in Item 7 of Part II of this Report and Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report.

 

Factors That May Affect Future Results

 

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. 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, forecasted, estimated or budgeted by the Company in forward-looking statements.

 

Generally, forward-looking statements can be identified by the use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “goal,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue” and similar expressions or the negative or other variations thereof. Such forward-looking statements are based on current expectations that involve a number of uncertainties and risks that may cause actual events or results to differ materially from the Company’s expectations.

 

The factors described under “Risk Factors” in Item 1A of this Report, as well as the following additional factors, could cause the Company's actual results to differ materially from any such results which might be projected, forecasted, estimated or budgeted by the Company in forward-looking statements.

 

	●	The Company's operating results are affected by a number of factors, including various factors beyond the Company's control. Such factors include economic conditions in the electronics materials, aerospace composite materials and composite structures and assemblies industries, the timing of customer orders, product prices, process yields, the mix of products sold and maintenance-related shutdowns of facilities. Operating results also can be influenced by development and introduction of new products, the costs associated with the start-up of new facilities.
	●	The Company, from time to time, is engaged in the expansion of certain of its manufacturing facilities. The anticipated costs of such expansions cannot be determined with precision and may vary materially from those budgeted. In addition, such expansions will increase the Company's fixed costs. The Company's future profitability depends upon its ability to utilize its manufacturing capacity in an effective manner.
	●	The Company may acquire businesses, product lines or technologies that expand or complement those of the Company. The integration and management of an acquired company or business may strain the Company's management resources and technical, financial and operating systems. In addition, implementation of acquisitions can result in large one-time charges and costs. A given acquisition, if consummated, may materially affect the Company's business, financial condition and results of operations.

 

 

	●	The Company's future success depends in part upon its intellectual property which the Company seeks to protect through a combination of contract provisions, trade secret protections, copyrights and patents.
	●	The market price of the Company’s securities can be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analyst earnings estimates, market conditions in the electronics materials, aerospace composite materials and composite structures and assemblies industries, as well as general economic conditions and other factors external to the Company.
	●	The Company’s operating results could be affected by changes in the Company’s accounting policies and practices or changes in the Company’s organization, compensation and benefit plans, or changes in the Company’s material agreements or understandings with third parties.

   

On January 4, 2018, the Company announced that it is conducting a strategic evaluation, including the potential sale, of its electronics materials business and that it has retained Greenhill & Co., LLC, as its financial advisor, to assist it in such strategic evaluation. The Company expects to conclude the strategic evaluation of its electronics business in the second quarter of the 2019 fiscal year ending March 3, 2019. However, no specific timetable has been set, and potential risks and uncertainties of the strategic evaluation include that (i) there can be no assurance that a sale or any other transaction will take place or be consummated as a result of such strategic evaluation, (ii) the announcement of a potential transaction may negatively affect the Company’s business relationships (including, without limitation, customers and suppliers) and its employees, (iii) failure to complete a potential transaction could negatively impact the market price of the Company’s common stock and the future business and financial results of the Company, (iv) significant expenses may be incurred by the Company in consideration of a potential transaction and contingent expenses may result if a potential transaction is consummated, and (v) management’s attention may be diverted from the Company’s ongoing business operations during consideration of a potential transaction. In the event that a sale of the Company’s electronics business is consummated, the Company would be subject to the following additional risks and uncertainties that may cause actual events or results to differ materially from the Company’s expectations:

 

	●	The Company would have greater exposure to the risks of the aerospace industry generally, including volume of commercial and business air travel, airline industry confidence and investment, energy and fuel costs, global military and defense budgets, global politics and trade policy, global environmental and conservation policy, aerospace OEM product life cycles and new program development, and overall perception of air travel safety, convenience, and affordability versus other modes of transportation.
	●	The Company would have a greater portion of its production concentrated in fewer manufacturing locations. Natural disasters, location specific labor issues or business or environmental regulation would have a greater impact on the operations of the overall Company.
	●	The Company’s revenue derived from its top customer would be larger as a percentage of total revenue. Factors relating to pricing and contract negotiation, timing of purchases, and the overall customer relationship would be more critical and could adversely affect the Company’s overall operations to a greater degree.
	●	The Company would have increased risk, relative to its overall operations, associated with a certain supplier, which is the sole source supplier for many of the Company’s products. Any disruption, economic changes or quality issues with this supplier could negatively affect the Company’s overall operations to a greater degree.
	●	The Company would have increased dependency on certain aircraft OEM programs. The Company has significant exposure to certain aircraft programs that are subject to market demand, manufacturing delays or issues, safety or qualification issues, and trade, tax and political issues, which could negatively affect the Company.
	●	The Company would have increased vulnerability to changes in supply chain or sourcing strategies by Tier 1 aerospace suppliers or OEMs. OEMs may decide to bring fabrication or assembly work that is currently performed by the Company’s direct customers in-house. OEMs may also demand price reductions of the Company’s direct customers, which may have an adverse effect on the Company.
	●	The Company would be increasingly dependent on the commercial success of certain jet engine programs, which are in direct competition with other jet engine programs on factors such as price, efficiency, repair and maintenance factors and timely delivery, which are outside the Company’s direct control.

  

ITEM 1A. RISK FACTORS.

 

The business of the Company faces numerous risks, including those set forth below or those described elsewhere in this Form 10-K Annual Report or in the Company's other filings with the Securities and Exchange Commission. The risks described below are not the only risks that the Company faces, nor are they necessarily listed in order of significance. Other risks and uncertainties may also affect the Company’s business. Any of these risks may have a material adverse effect on the Company's business, financial condition, results of operations or cash flow.

 

 

The industries in which the Company operates are undergoing technological changes, and the Company's business could suffer if the Company is unable to adjust to these changes.

 

The Company's operating results could be negatively affected if the Company were unable to maintain and increase its technological and manufacturing capability and expertise. Rapid technological advances in semiconductors and electronic equipment have placed rigorous demands on the electronics materials manufactured by the Company and used in printed circuit board production.

 

The industries in which the Company operates are very competitive.

 

Certain of the Company's principal competitors are substantially larger and have greater financial resources than the Company, and the Company's operating results will be affected by its ability to maintain its competitive positions in these industries. The electronics materials, aerospace composite materials and composite structures and assemblies industries are intensely competitive and the Company competes worldwide in the markets for such products.

 

The Company is vulnerable to an increase in the cost of gas or electricity.

 

Changes in the cost or availability of gas or electricity could materially increase the Company's cost of operations. The Company's production processes require the use of substantial amounts of gas and electricity, the cost and available supply of which are beyond the control of the Company.

 

The Company is vulnerable to disruptions and shortages in the supply of, and increases in the prices of, certain raw materials.

 

There are a limited number of qualified suppliers of the principal materials used by the Company in its manufacture of electronics materials, aerospace composite materials and composite structures and assemblies. The Company has qualified alternate sources of supply for many, but not all, of its raw materials, but certain raw materials are produced by only one supplier. In some cases, substitutes for certain raw materials are not always readily available, and in the past there have been shortages in the market for certain of these materials. Raw material substitutions for certain aircraft related products may require governmental (such as Federal Aviation Administration) approval. While the Company considers its relationships with its suppliers to be strong, a shortage of these materials or a disruption of the supply of these materials caused by a natural disaster, such as the earthquake and tsunami in Japan in March 2011, or otherwise could materially increase the Company’s cost of operations and could materially adversely affect the business and results of operations of the Company. Likewise, significant increases in the cost of materials purchased by the Company could also materially increase the Company’s cost of operations and could have a material adverse effect on the Company’s business and results of operations if the Company were unable to pass such increases through to its customers.

 

During the 2018, 2017 and 2016 fiscal years, the Company experienced significant volatility in the cost of copper foil, one of the Company’s primary raw materials. The Company generally passes changes in the costs of its raw materials through to its customers. See “Business—Electronics Materials—Materials and Sources of Supply” in Item 1 of Part I of this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Report.

 

 

The Company's customer base is highly concentrated, and the loss of one or more customers could adversely affect the Company's business.

 

A loss of one or more key customers could adversely affect the Company's profitability.  The Company's customer base is concentrated, in part, because the Company's business strategy has been to develop long-term relationships with a select group of customers. During the Company's fiscal years ended February 25, 2018, February 26, 2017 and February 28, 2016, the Company's ten largest customers accounted for approximately 53%, 48% and 51%, respectively, of net sales. The Company expects that sales to a relatively small number of customers will continue to account for a significant portion of its net sales for the foreseeable future. See "Business—Electronics Materials—Customers and End Markets” and “Business—Aerospace Composite Materials, Structures and Assemblies—Customers and End Markets” in Item 1 of Part I of this Report.

 

The Company's business is dependent on the electronics and aerospace industries, which are cyclical in nature.

 

The electronics and aerospace industries are cyclical and have experienced recurring cycles. The downturns can be unexpected and have often reduced demand for, and prices of, printed circuit materials and advanced composite materials, structures and assemblies. This potential reduction in demand and prices could have a negative impact on the Company’s business.

 

In addition, the Company is subject to the effects of general regional and global economic and financial conditions.

 

The Company relies on short-term orders from its customers.

 

A variety of conditions, both specific to the individual customer and generally affecting the customer’s industry, can cause a customer to reduce or delay orders previously anticipated by the Company, which could negatively impact the Company’s business. In the printed circuit materials market, the Company typically does not obtain long-term purchase orders or commitments. Instead, it relies primarily on continual communication with its customers to anticipate the future volume of purchase orders.

 

The Company’s customers may require the Company to undergo a lengthy and expensive qualification process with respect to its products, with no assurance of sales. Any delay or failure in such qualification process could negatively affect the Company’s business and operating results.

 

The Company’s customers frequently require that the Company’s products undergo an extensive qualification process, which may include testing for performance, structural integrity and reliability. This qualification process may be lengthy and does not assure any sales of the product to that customer. The Company devotes substantial resources, including design, engineering, sales, marketing and management efforts, and often substantial expense, to qualifying the Company’s products with customers in anticipation of sales. Any delay or failure in qualifying any of its products with a customer may preclude or delay sales of those products to the customer, which may impede the Company’s growth and cause its business to suffer.

 

In addition, the Company engages in product development efforts with OEMs. The Company will not recover the cost of this product development directly even if the Company actually produces and sells any resulting product. There can be no guarantee that such efforts will result in any sales.

 

 

Consolidation among the Company’s customers could negatively impact the Company’s business.

 

A number of the Company’s customers have combined in recent years and consolidation of other customers may occur. If an existing customer is not the controlling entity following a combination, the Company may not be retained as a supplier. While there is potential for increasing the Company’s position with the combined customer, the Company’s revenues may decrease if the Company is not retained as a supplier.

 

The Company faces extensive capital expenditure costs.

 

The Company’s business is capital intensive and, in addition, the introduction of new technologies could substantially increase the Company’s capital expenditures. In order to remain competitive the Company must continue to make significant investments in capital equipment and expansion of operations, which could adversely affect the Company’s results of operations.

 

The Company’s international operations are subject to different and additional risks than the Company’s domestic operations.

 

The Company’s international operations are subject to various risks, including unexpected changes in regulatory requirements, foreign currency exchange rates, tariffs and other barriers, political and economic instability, potentially adverse tax consequences, and any impact on economic and financial conditions around the world resulting from geopolitical conflicts or acts of terrorism, all of which could negatively impact the Company’s business. A portion of the sales and costs of the Company’s international operations are denominated in currencies other than the U.S. dollar and may be affected by fluctuations in currency exchange rates.

 

The Company is subject to a variety of environmental regulations.

 

The Company’s production processes require the use, storage, treatment and disposal of certain materials which are considered hazardous under applicable environmental laws, and the Company is subject to a variety of regulatory requirements relating to the handling of such materials and the release of emissions and effluents into the environment, non-compliance with which could have a negative impact on the Company’s business or consolidated results of operations. Other possible developments, such as the enactment or adoption of additional environmental laws, could result in substantial costs to the Company.

 

If the Company’s efforts to protect its trade secrets are not sufficient, the Company may be adversely affected.

 

The Company’s business relies upon proprietary information, trade secrets and know-how in its product formulations and its manufacturing and research and development activities. The Company takes steps to protect its proprietary rights and information, including the use of confidentiality and other agreements with employees and consultants and in commercial relationships, including with distributors and customers. If these steps prove to be inadequate or are violated, the Company’s competitors might gain access to the Company’s trade secrets, and there may be no adequate remedy available to the Company.

 

 

The Company depends upon the experience and expertise of its senior management team and key technical employees, and the loss of any key employee may impair the Company’s ability to operate effectively.

 

The Company’s success depends, to a certain extent, on the continued availability of its senior management team and key technical employees. Each of the Company’s executive officers, key technical personnel and other employees could terminate his or her employment at any time. The loss of any member of the Company’s senior management team might significantly delay or prevent the achievement of the Company’s business objectives and could materially harm the Company’s business and customer relationships. In addition, because of the highly technical nature of the Company’s business, the loss of any significant number of the Company’s key technical personnel could have a material adverse effect on the Company.

 

The Company competes for manufacturing and engineering talent in a competitive labor market. Personnel turnover and training costs could negatively impact the Company’s operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

Set forth below are the locations of the significant properties owned and leased by the Company, the businesses which use the properties and the size of each such property. All of such properties, except for the Melville, New York property, are used principally as manufacturing and warehouse facilities.

 

Location		Owned or Leased		Use		Size (Square Footage)
Melville, NY		Leased		Administrative Offices		8,000
Anaheim, CA		Leased		Printed Circuit Materials		26,000
Tempe, AZ		Leased		Printed Circuit Materials		81,000
Lannemezan, France		Owned		Printed Circuit Materials		29,000
Singapore		Leased		Printed Circuit Materials		88,000
Newton, KS		Leased		Advanced Composite Materials, Parts and Assemblies		89,000
Singapore		Leased		Advanced Composite Materials		21,000

 

The Company believes its facilities and equipment to be in good condition and reasonably suited and adequate for its current needs. Most of the Company’s manufacturing facilities have the capacity to substantially increase their production levels.

 

During the 2018 fiscal year, the Company consolidated its Nelco Products, Inc. business unit located in California and its Neltec, Inc. business unit located in Arizona, and all manufacturing at the California facilities ceased, except for treating operations at the Anaheim facility, which continue as part and under the supervision of the Neltec, Inc. business unit. 

 

ITEM 3. LEGAL PROCEEDINGS.

 

No material pending legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

 

Executive Officers of the Registrant.

 

Name	Title	Age
Brian E. Shore	Chief Executive Officer  and Chairman of the Board of Directors	66
Christopher T. Mastrogiacomo	President and Chief Operating Officer	60
Stephen E. Gilhuley	Executive Vice President – Administration and Secretary	73
P. Matthew Farabaugh	Senior Vice President and Chief Financial Officer	57
Benjamin W. Shore	Senior Vice President – Business Development	30
Mark A. Esquivel	Senior Vice President – Aerospace	45
Constantine Petropoulos	Vice President and General Counsel	40

 

 

Mr. Brian Shore has served as a Director of the Company since 1983 and as Chairman of the Board of Directors since July 2004. He was elected a Vice President of the Company in January 1993, Executive Vice President in May 1994, President in March 1996, and Chief Executive Officer in November 1996. He was President until July 28, 2014, when he was succeeded by Mr. Mastrogiacomo. Mr. Shore also served as General Counsel of the Company from April 1988 until April 1994.

 

Mr. Mastrogiacomo was elected President and Chief Operating Officer on July 28, 2014 after having served as Executive Vice President and Chief Operating Officer since June 1, 2011 and as Senior Vice President of Strategic Marketing since December 8, 2010. Prior to joining the Company as Vice President of Strategic Marketing in September 2010, Mr. Mastrogiacomo held senior management positions with Sanmina-SCI Corporation, a leading electronics contract manufacturing services company, and its predecessor, Hadco Corporation, a major manufacturer of advanced electronic interconnect systems. Since 2008, Mr. Mastrogiacomo was Senior Vice President, Printed Wiring Board (USA) of Sanmina-SCI Corporation; from 2004 to 2008, he was Senior Vice President of Operations, the Americas Enclosures Systems of Sanmina-SCI; and from 2000 to 2004, he was Senior Vice President, Printed Wiring Board Operations of Sanmina-SCI. During the twelve years prior to 1997, he held several management positions with Hadco Corporation.

 

Mr. Gilhuley was elected Executive Vice President – Administration on April 5, 2012, and he has been Secretary of the Company since July 1996. Prior to April 5, 2012, he had been Executive Vice President of the Company since October 2006 and Senior Vice President from March 2001 to October 2006. He also was General Counsel of the Company from April 1994 to October 2011, when he was succeeded by Stephen M. Banker, who was Vice President and General Counsel from October 2011 to May 2014 and who was succeeded by Mr. Petropoulos.

 

 

Mr. Farabaugh was elected Senior Vice President and Chief Financial Officer on March 10, 2016.  He had been Vice President and Chief Financial Officer of the Company since April 2012 and Vice President and Controller of the Company since October 2007. Prior to joining the Company, Mr. Farabaugh was Corporate Controller of American Technical Ceramics, a publicly traded international company and a manufacturer of electronic components, located in Huntington Station, New York, from 2004 to September 2007 and Assistant Controller from 2000 to 2004. Prior thereto, Mr. Farabaugh was Assistant Controller of Park Electrochemical Corp. from 1989 to 2000. Prior to joining Park in 1989, Mr. Farabaugh had been a senior accountant with KPMG. 

 

Mr. Benjamin Shore was elected Senior Vice President – Business Development of the Company in October 2017.  Prior to joining the Company, he was employed by athenahealth, Inc. located in Watertown, Massachusetts, through September 2017, where most recently he was Manager, Corporate Development, working on mergers and acquisitions, strategic partnerships and investments.  From 2011 to 2014, he was an Investment Analyst and subsequently a Senior Investment Analyst at Prudential Capital Group in New York, New York, where he invested capital in middle market companies in many different industries; and in 2010 and 2011, he was an Associate in Economic and Valuation Services at KPMG LLP in New York, New York, working on financial and tax consulting projects. He is a CFA Charterholder.

 

Mr. Esquivel was elected Senior Vice President – Aerospace of the Company in October 2017. He had been Vice President – Aerospace of the Company since April 2015 and was also appointed as President of the Company’s Park Aerospace Technologies Corp. business unit in Newton, Kansas. Mr. Esquivel has been employed by the Company and its subsidiaries in various positions since 1994. He was Vice President of Aerospace Composite Structures of PATC from March 2012 to April 2015 and President of PATC from June 2010 to March 2012. Prior to June 2010, Mr. Esquivel was Vice President and General Manager of Neltec, Inc., the Company’s high-technology circuitry materials business unit located in Tempe, Arizona, and responsible for the day-to-day operations of Neltec, Inc., since his appointment to that position in September 2008. He served as Manufacturing Manager of Neltec, Inc. from August 2004 to September 2008 and as Materials Manager from February 2001 to August 2004, and he held various positions since he originally joined Neltec, Inc. in 1994.

 

Mr. Petropoulos was elected Vice President and General Counsel on September 4, 2014. Prior to joining the Company, Mr. Petropoulos had been Managing Attorney at Scientific Games Corporation in New York City since November 2011. From September 2007 to October 2011, he was Senior Corporate Counsel, Finance & Strategic Development at Coca-Cola HBC SA in Attica, Greece; and from October 2002 to September 2007 he was an attorney at Latham & Watkins LLP in New York City.  

 

There are no family relationships between the directors or executive officers of the Company, except that Benjamin Shore is the nephew of Brian Shore.

 

Each executive officer of the Company serves at the pleasure of the Board of Directors of the Company.

 

 

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The Company’s Common Stock is listed and trades on the New York Stock Exchange (trading symbol PKE). (The Common Stock also trades on the Chicago Stock Exchange.) The following table sets forth, for each of the quarterly periods indicated, the high and low sales prices for the Common Stock as reported on the New York Stock Exchange Composite Tape and dividends declared on the Common Stock.

 

For the Fiscal Year Ended		Stock Price								Dividends
February 25, 2018		High				Low				Declared
First Quarter		$	20.24			$	16.00			$	0.10
Second Quarter			19.22				16.35				0.10
Third Quarter			19.85				17.78				0.10
Fourth Quarter			23.58				16.93				3.10	(a)

 

 

For the Fiscal Year Ended		Stock Price								Dividends
February 26, 2017		High				Low				Declared
First Quarter		$	16.82			$	14.06			$	0.10
Second Quarter			17.50				14.05				0.10
Third Quarter			18.76				13.76				0.10
Fourth Quarter			19.83				17.56				0.10

 

(a)

During the 2018 fiscal year fourth quarter, the Company declared its regular cash dividend of $0.10 per share in December 2017, payable February 6, 2018 to shareholders of record on January 2, 2018, and declared a special cash dividend of $3.00 per share in January 2018, payable February 13, 2018 to shareholders of record on January 23, 2018.

 

As of May 4, 2018, there were 539 holders of record of Common Stock.

 

The Company expects, for the foreseeable future, to continue to pay regular cash dividends.

 

 

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 2018 fiscal year fourth quarter ended February 25, 2018.

 

Period		Total Number of Shares (or Units) Purchased				Average Price Paid Per Share (or Unit)				Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
November 27 - December 25			0			$	-				0
December 26 - January 25			0			$	-				0
January 26 - February 25			0			$	-				0
Total			0			$	-				0				1,531,412	(a)

 

(a)

Aggregate number of shares available to be purchased by the Company pursuant to share purchase authorizations announced on January 8, 2015 and March 10, 2016. 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.

 

As a result of the authorizations announced on January 8, 2015 and March 10, 2016, the Company is authorized to purchase up to a total of 1,531,412 shares of its common stock, representing approximately 7.6% of the Company’s 20,241,571 total outstanding shares as of the close of business on May 4, 2018.

 

As previously announced by the Company, shares purchased by the Company will be retained as treasury stock and will be available for use under the Company’s stock option plan and for other corporate purposes.

 

Stock Performance Graph

 

The graph set forth below compares the annual cumulative total return for the Company’s five fiscal years ended February 25, 2018 among the Company, the New York Stock Exchange Market Index (the “NYSE Index”) and a Zachs Investment Research, Inc. (formerly Morningstar Inc., formerly Hemscott, Inc.) index for electronic components and accessories manufacturers (the “Group Index”) comprised of the Company and 222 other companies.  The companies in the Group Index are classified in the same three-digit industry group in the Standard Industrial Classification Code system and are described as companies primarily engaged in the manufacture of electronic components and accessories.  The returns of each company in the Group Index have been weighted according to the company’s stock market capitalization.  The graph has been prepared based on an assumed investment of $100 on March 1, 2013 and the reinvestment of dividends (where applicable).

 

 

		2013				2014				2015				2016				2017				2018
Park Electrochemical Corp		$	100.00			$	125.50			$	103.73			$	69.08			$	96.10			$	101.71
Group Index		$	100.00			$	122.93			$	162.02			$	146.70			$	211.77			$	286.93
NYSE Index		$	100.00			$	120.53			$	131.07			$	117.09			$	144.30			$	165.24

 

 

ITEM 6. SELECTED FINANCIAL DATA.

 

The following selected consolidated financial data of Park and its subsidiaries is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements, related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein. Insofar as such consolidated financial information relates to the five fiscal years ended February 25, 2018 and is as of the end of such periods, it is derived from the Consolidated Financial Statements for each of the five fiscal years in the period ended February 25, 2018 and as of such dates audited by the Company’s independent registered public accounting firms. The Consolidated Financial Statements as of February 25, 2018 and February 26, 2017 and for the three fiscal years ended February 25, 2018, February 26, 2017 and February 28, 2016, together with the report of the independent registered public accounting firm for the fiscal years ended February 25, 2018, February 26, 2017 and February 28, 2016, appear in Item 8 of Part II of this Report.

 

		Fiscal Year Ended
		(Amounts in thousands, except per share amounts)
		February 25,				February 26,				February 28,				March 1,				March 2,
		2018				2017				2016				2015				2014
STATEMENT OF EARNINGS INFORMATION
Net sales		$	111,196			$	114,609			$	145,855			$	162,086			$	165,764
Cost of sales			84,737				84,568				103,103				113,133				117,664
Gross profit			26,459				30,041				42,752				48,953				48,100
Selling, general and administative expenses			19,371				19,739				21,211				24,373				25,168
Restructuring charges			5,022				313				535				1,179				546
Earnings from operations			2,066				9,989				21,006				23,401				22,386
Interest expense			2,269				1,432				1,657				1,438				764
Interest and other income			2,675				1,704				1,149				827				460
Loss on sale of marketable securities			(1,342	)			-				-				-				-
Earnings before income taxes			1,130				10,261				20,498				22,790				22,082
Income tax (benefit) provision			(19,465	)			978				2,469				2,747				64,411
Net earnings (loss)		$	20,595			$	9,283			$	18,029			$	20,043			$	(42,329	)
Earnings per share:
Basic earnings (loss) per share		$	1.02			$	0.46			$	0.89			$	0.96			$	(2.03	)
Diluted earnings (loss) per share		$	1.02			$	0.46			$	0.89			$	0.96			$	(2.03	)
Cash dividends per common share		$	3.40			$	0.40			$	0.40			$	1.90			$	2.90
Weighted average number of common shares outstanding:
Basic			20,237				20,235				20,347				20,912				20,849
Diluted			20,267				20,239				20,352				20,986				20,849
BALANCE SHEET INFORMATION
Working capital		$	129,041			$	255,007			$	255,507			$	283,535			$	286,997
Total assets			169,023				308,578				314,777				350,682				377,093
Long-term debt			-				68,500				72,000				84,000				94,000
Shareholders' equity			135,261				182,826				180,867				181,599				200,543

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

General:

 

Park Electrochemical Corp. (“Park” or the “Company”) is a global advanced materials company which designs, develops, manufactures, markets and sells advanced composite materials, primary and secondary structures and assemblies and low-volume tooling for the aerospace markets and high-technology digital and RF/microwave printed circuit materials principally for the telecommunications and internet infrastructure, enterprise and military/aerospace markets. The Company’s manufacturing facilities are located in Kansas, Singapore, France, Arizona and California. The Company also maintains research and development facilities in Arizona, Kansas and Singapore.

 

The Company’s fiscal year is the 52 or 53 week period ending the Sunday nearest to the last day of February. The 2018, 2017 and 2016 fiscal years ended on February 25, 2018, February 26, 2017 and February 28, 2016, respectively. The 2018, 2017 and 2016 fiscal years each consisted of 52 weeks. Unless otherwise indicated in this Discussion and Analysis, all references to years and quarters in this Discussion and Analysis are to the Company’s fiscal years and fiscal quarters and all annual and quarterly information in this Discussion and Analysis is for such fiscal years and quarters, respectively.

 

2018 Financial Overview

 

In 2018, the Company consolidated its Nelco Products, Inc. Business Unit located in Fullerton, California and its Neltec, Inc. Business Unit located in Tempe, Arizona and recorded pre-tax restructuring charges of $4.4 million related to the consolidation. The Company estimates the remaining pre-tax charge related to the consolidation to be approximately $1.1 million and expects to incur this remaining charge primarily during the fiscal year ending February 28, 2021.

 

On January 3, 2018, the Company voluntarily prepaid its remaining loan balance of $68.5 million under the Credit Agreement, dated as of January 16, 2016, between the Company and HSBC Bank USA (the “Credit Agreement”) and terminated the Credit Agreement. The prepayment was made with the Company’s cash and cash equivalents, marketable securities and restricted cash. In connection with the termination of the Credit Agreement, the Company expensed the remaining deferred financing costs of $0.1 million in the fourth quarter of 2018.

 

On January 4, 2018, the Company announced that it is conducting a strategic evaluation, including the potential sale, of its electronics business and that it has retained Greenhill & Co., LLC as its financial advisor to assist it in the strategic evaluation of the electronics business, which includes manufacturing locations in Singapore, France, California and Arizona and R&D facilities in Singapore and Arizona. During 2018, the Company recorded $0.4 million of advisory fees in connection with the strategic evaluation.

 

The Company paid a special cash dividend of $3.00 per share on February 13, 2018 to shareholders of record at the close of business on January 23, 2018. The special cash dividend was funded from the Company’s cash balances. This special dividend, together with the Company’s regular quarterly dividend of $0.10 per share paid February 6, 2018 to shareholders of record on January 2, 2018, brings the total amount of dividends paid to shareholders to $20.10 per share, a total of approximately $412 million, since the Company’s 2005 fiscal year.

 

 

During 2018, the Company recorded a non-cash charge of $0.5 million in connection with the modification of previously granted employee stock options resulting from the $3.00 per share special cash dividend paid by the Company in February 2018. Selling, general and administrative expenses in 2018 included $1.4 million of stock option expense.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system.

 

In the fourth quarter of 2018, the Company recorded a discrete tax benefit of $17.8 million due to the reduction of liabilities previously recorded, partially offset by the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This one-time transition tax and the previously recorded liabilities are based on the Company’s post-1986 earnings and profits not previously subjected to U.S. taxation.

 

In the fourth quarter of 2018, as a result of the Tax Act, the Company recorded a discrete non-cash tax benefit of $0.2 million due to the re-measurement of U.S. deferred tax assets and liabilities. The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for Federal income tax purposes.

 

The changes in the U.S. tax code, enacted by the Tax Act, allowed the Company to repatriate its foreign accumulated income at a lower effective tax rate. In response to the Tax Act, the Company liquidated certain marketable securities and repatriated cash held by foreign subsidiaries during the 13-week period ended February 25, 2018. As a result, the Company recorded losses on the sales of marketable securities of $1.3 million in connection with the repatriation of cash and the prepayment of all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and the funding of a special cash dividend of $3.00 per share paid in February 2018.

 

The Company's total net sales worldwide in 2018 were 3% lower than in 2017 primarily due to lower sales of the Company’s electronics products in Asia and North America, partially offset by higher sales of the Company’s aerospace composite materials, structures and assemblies and low-volume tooling. The lower sales in Asia were primarily due to a slowdown in demand for the Company’s products which are used by original equipment manufacturers (“OEMs”) in the manufacture of equipment for the internet and telecommunications infrastructure in developing countries and certain legacy materials coming to end-of-program life at OEMs. The increase in aerospace sales was primarily due to higher sales to a major customer following completion of that customer’s inventory correction.

 

The Company’s gross profit margin, measured as a percentage of sales, decreased to 23.8% in 2018 from 26.2% in 2017 due primarily to lower sales and production levels of the Company’s electronics products in Asia and North America in 2018 and operating inefficiencies and duplicate costs in connection with the consolidation of the Company’s Nelco Products, Inc. and Neltec, Inc. electronics Business Units located in California and Arizona, respectively, combined with the fixed nature of certain overhead costs, which were partially offset by higher sales of the Company’s aerospace composite materials, structures and assemblies.

 

 

The Company’s earnings from operations in 2018 were 79% lower than in 2017, primarily as a result of the aforementioned decreases in sales and gross profit margin and the higher restructuring charges, partially offset by a 2% reduction in selling, general and administrative expenses, which included the additional stock option modification charge, the one-time litigation expense and the advisory fees. The Company’s net earnings in 2018 were 122% higher than in 2017, primarily due to the tax benefit resulting from the Tax Act, partially offset by the aforementioned decrease in net earnings, the loss on sales of marketable securities and the deferred financing costs. Earnings from operations in 2017 included pre-tax restructuring charges of $0.4 million in connection with the closure, in 2009, of the New England Laminates Co., Inc. facility in Newburgh, New York.

 

Due to changing economic characteristics of the Company’s electronics and aerospace product lines, as well as how the Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, reviewed and managed the Company’s business in the fourth quarter of 2018, the Company has divided its product lines into two reportable business segments: Aerospace and Electronics.  The Aerospace segment designs, develops and manufactures advanced composite materials, primary and secondary structures and assemblies and low-volume tooling for the aerospace markets.  The Electronics segment designs, develops and manufactures high-technology digital and RF/microwave printed circuit materials principally for the telecommunications and internet infrastructure, enterprise and military/aerospace markets.

 

The global markets for the Company’s products continue to be very difficult to forecast, and it is not clear to the Company what the demand for the Company’s products will be in 2019 or beyond.

 

Results of Operations:

 

Fiscal Year 2018 Compared to Fiscal Year 2017

 

		Fiscal Year Ended
		February 25,				February 26,
(Amounts in thousands, except per share amounts)		2018				2017				Increase / (Decrease)
Net sales		$	111,196			$	114,609			$	(3,413	)			-3	%
Cost of sales			84,737				84,568				169				0	%
Gross profit			26,459				30,041				(3,582	)			-12	%
Selling, general and administrative expenses			19,371				19,739				(368	)			-2	%
Restructuring charges			5,022				313				4,709				1504	%
Earnings from operations			2,066				9,989				(7,923	)			-79	%
Interest expense			2,269				1,432				837				58	%
Interest and other income			2,675				1,704				971				57	%
Loss on sale of marketable securities			(1,342	)			-				(1,342	)			100	%
Earnings before income taxes			1,130				10,261				(9,131	)			-89	%
Income tax (benefit) provision			(19,465	)			978				(20,443	)			-2090	%
Net earnings		$	20,595			$	9,283			$	11,312				122	%
Earnings per share:
Basic earnings per share		$	1.02			$	0.46			$	0.56				122	%
Diluted earnings per share		$	1.02			$	0.46			$	0.56				122	%

 

Net Sales

 

The Company's total net sales worldwide in 2018 were 3% lower than in 2017 primarily due to lower sales of the Company’s electronics products in Asia and North America partially offset by higher sales of the Company’s aerospace composite materials, structures and assemblies and low-volume tooling. The lower sales in Asia were primarily due to a slowdown in demand for the Company’s products which are used by OEMs in the manufacture of equipment for the internet and telecommunications infrastructure in developing countries and certain legacy materials coming to end-of-program life at OEMs. The increase in aerospace sales was primarily due to higher sales to a major customer following completion of that customer’s inventory correction.

 

The Company’s total net sales of its electronics products were $71.0 million and $82.5 million in 2018 and 2017, respectively, or 64% and 72%, respectively, of the Company’s total net sales worldwide in such periods. The Company’s total net sales of its aerospace composite materials, structures and assemblies products were $40.2 million and $32.1 million in 2018 and 2017, respectively, or 36% and 28%, respectively, of the Company’s total net sales worldwide in such periods.

 

 

The Company's foreign sales were $43.9 million, or 39% of the Company's total net sales worldwide, during 2018 compared to $53.7 million of sales, or 47% of total net sales worldwide, during 2017. The decrease in 2018 was primarily due to the lower sales in Asia for reasons described above.

 

The Company’s sales in North America, Asia and Europe were 61%, 32% and 7%, respectively, of the Company’s total net sales worldwide in 2018 compared to 53%, 39% and 8%, respectively, in 2017. The Company’s sales in North America increased 10%, while its sales in Asia decreased 20% and its sales in Europe decreased 11% in 2018 compared to 2017.

 

During both 2018 and 2017, 93% of the Company’s total net sales worldwide of electronics consisted of high performance electronics.

 

The Company’s high performance electronics (non-FR4 electronics) include high-speed, low-loss materials for digital and RF/microwave applications requiring lead-free compatibility and high bandwidth signal integrity, allylated polyphenylene ether (“APPE”) materials, bismalimide triazine (“BT”) materials, polyimides for applications that demand extremely high thermal performance and reliability, cyanate esters, quartz reinforced materials, and polytetrafluoroethylene (“PTFE”) and modified epoxy materials for RF/microwave systems that operate at frequencies up to at least 79GHz.

 

Gross Profit

 

The Company’s gross profit margin, measured as a percentage of sales, decreased to 23.8% in 2018 from 26.2% in 2017 due primarily to lower sales and production levels of the Company’s electronics products in Asia and North America in 2018, and operating inefficiencies and duplicate costs in connection with the consolidation of the Company’s Nelco Products, Inc. and Neltec, Inc. electronics Business Units located in California and Arizona, respectively, combined with the fixed nature of certain overhead costs, which were partially offset by higher sales of the Company’s aerospace products.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $0.4 million, or 2%, during 2018 compared to 2017. Such expenses, measured as percentages of sales, were 17.4% during 2018 compared to 17.2% during 2017. The decrease in such expenses in 2018 was primarily due to decreases in salary and related expenses, lower stock option expenses, excluding the stock option modification charge and favorable foreign exchange rates partially offset by unfavorable shipping expenses, advisory fees, one-time litigation expense and the stock option modification charge.

 

Selling, general and administrative expenses in 2018 included $1.4 million of stock option expenses, including $0.5 million due to the modification of previously granted stock options, compared to $1.2 million of such expenses in 2017.

 

Restructuring Charges

 

During 2018, the Company recorded pre-tax restructuring charges of $5.0 million in connection with the consolidation of its electronics Business Units in California and Arizona, the closure, in 2009, of its facility in Newburgh, New York and the closure, in 2012, of its facility in Waterbury, Connecticut, compared to pre-tax restructuring charges of $0.3 million in 2017 in connection with the aforementioned facility closure in Newburgh, New York.

 

 

Earnings from Operations

 

For the reasons set forth above, the Company’s earnings from operations were $2.1 million for 2018, including pre-tax restructuring charges of $5.0 million associated with the consolidation of its electronics Business Units in California and Arizona, the closure of its facilities in Newburgh, New York and Waterbury, Connecticut, the stock option modification charge of $0.5 million resulting from the special dividend of $3.00 per share paid in February 2018 and advisory fees of $0.4 million paid in connection with the strategic evaluation of the electronics business. The Company’s earnings from operations were $10.0 million in 2017, including pre-tax restructuring charges of $0.3 million associated with the closure, in 2009, of the facility in Newburgh, New York.

 

Loss on Sale of Marketable Securities

 

The changes in the U.S. tax code, enacted by the Tax Act, allowed the Company to repatriate its foreign accumulated income at a lower effective tax rate. In response to the Tax Act, the Company liquidated certain marketable securities and repatriated cash held by foreign subsidiaries during the 13-week period ended February 25, 2018. As a result, the Company recorded losses on the sales of marketable securities of $1.3 million in connection with the repatriation of cash and the prepayment of all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and the funding of a special cash dividend of $3.00 per share paid in February 2018.

 

Interest Expense

 

Interest expense in 2018 was $2.3 million, compared to $1.4 million in 2017. The increase in interest expense in 2018 was primarily due to higher average interest rates and the pre-tax deferred financing costs of $0.1 million related to the termination of the Credit Agreement in 2018, partially offset by lower average outstanding debt. As previously reported, the Company voluntarily prepaid the remaining loan balance of $68.5 million with HSBC Bank and terminated the Credit Agreement. The prepayment was made with the Company’s cash and cash equivalents, marketable securities and restricted cash. In connection with the termination of the Credit Agreement, the Company expensed the remaining deferred financing costs of $0.1 million in the fourth quarter of 2018. See Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report and “Liquidity and Capital Resources” elsewhere in this Item 7 for additional information.

 

Interest and Other Income

 

Interest and other income were $2.7 million and $1.7 million for 2018 and 2017, respectively. The 57% increase in 2018 was primarily the result of higher weighted average interest rates based on longer average maturities of marketable securities held by the Company in 2018 compared to last year's comparable period, partially offset by lower average invested cash during the period. As mentioned above, the Company prepaid all outstanding debt under the Credit Agreement in the amount of $68.5 million of principal and paid a special cash dividend of $3.00 per share in February 2018. During 2018 and 2017, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

 

 

Income Tax Provision

 

On December 22, 2017, the Tax Act was enacted and significantly revised U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries, and implementing a territorial tax system.

 

In the fourth quarter of 2018, the Company recorded a discrete tax benefit of $17.8 million due to the reduction of liabilities previously recorded, partially offset by the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This one-time transition tax and the previously recorded liabilities are based on the Company’s post-1986 earnings and profits (“E&P”) not previously subjected to U.S. taxation.

 

In the fourth quarter of 2018, as a result of the Tax Act, the Company recorded a discrete non-cash tax benefit of $0.2 million due to the remeasurement of U.S. deferred tax assets and liabilities. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for Federal income tax purposes.

 

The Company’s effective income tax rate of negative 1,722% for 2018 was primarily due to the impact of the Tax Act. The Company’s effective income tax rate was 9.5% for 2017.  See “Results of Operations – Fiscal Year 2017 Compared to Fiscal Year 2016 – Income Tax Provision” elsewhere in this Item 7.

 

Net Earnings

 

The Company’s net earnings for 2018 were $20.6 million, including the tax benefit of $17.8 million related to the Tax Act, the pre-tax restructuring charges of $5.0 million associated with the consolidation of its electronics Business Units in California and Arizona, the closure of its facilities in Newburgh, New York and Waterbury, Connecticut, the stock option modification charge of $0.5 million in connection with the special dividend of $3.00 per share paid in February 2018, the advisory fees of $0.4 million paid in connection with the strategic evaluation of the electronics business, the pre-tax loss of $1.3 million on the sales of marketable securities and the pre-tax deferred financing costs of $0.1 million related to the termination of the Credit Agreement in 2018, compared to $9.3 million for 2017, including the pre-tax charges of $0.3 million related to the facility closure in Newburgh, New York mentioned above. The net impact of the items described above was to increase net earnings by $16.0 million in 2018 and to reduce net earnings by $0.2 million in 2017.

 

 

Basic and Diluted Earnings Per Share

 

Basic and diluted earnings per share for 2018 were $1.02, including the tax benefit related to the Tax Act, the pre-tax restructuring charges associated with the consolidation of the Company’s electronics Business Units in California and Arizona, the closure of the facilities in Newburgh, New York and Waterbury, Connecticut, the stock option modification charge in connection with the special dividend paid in February 2018, the advisory fees paid in connection with the strategic evaluation of the Company’s electronics business, the pre-tax loss on the sales of marketable securities and the pre-tax deferred financing costs related to the early termination of the Credit Agreement in 2018, compared to basic and diluted earnings per share for 2017 of $0.46, including the facility closure mentioned above, The net impact of the items described above was to increase basic and diluted earnings per share by $0.63 and $0.01 in 2018 and 2017, respectively.

 

 

Fiscal Year 2017 Compared to Fiscal Year 2016

 

		Fiscal Year Ended
(Amounts in thousands, except per share amounts)		February 26, 2017				February 28, 2016				Increase / (Decrease)
Net sales		$	114,609			$	145,855			$	(31,246	)			-21	%
Cost of sales			84,568				103,103				(18,535	)			-18	%
Gross profit			30,041				42,752				(12,711	)			-30	%
Selling, general and administrative expenses			19,739				21,211				(1,472	)			-7	%
Restructuring charges			313				535				(222	)			-41	%
Earnings from operations			9,989				21,006				(11,017	)			-52	%
Interest expense			1,432				1,657				(225	)			-14	%
Interest and other income			1,704				1,149				555				48	%
Earnings before income taxes			10,261				20,498				(10,237	)			-50	%
Income tax provision			978				2,469				(1,491	)			-60	%
Net earnings		$	9,283			$	18,029			$	(8,746	)			-49	%
Earnings per share:
Basic earnings per share		$	0.46			$	0.89			$	(0.43	)			-48	%
Diluted earnings per share		$	0.46			$	0.89			$	(0.43	)			-48	%

 

Net Sales

 

The Company's total net sales worldwide in 2017 were 21% lower than in 2016 primarily due to lower sales of the Company’s electronics products in Asia and North America and lower sales of the Company’s aerospace composite materials, structures and assemblies and low-volume tooling. The lower sales in Asia were primarily due to a slowdown in demand for the Company’s products which are used by OEMs in the manufacture of equipment for the internet and telecommunications infrastructure in developing countries and certain legacy materials coming to end-of-program life at OEMs.

 

The Company’s total net sales of its electronics products were $82.5 million and $106.7 million in 2017 and 2016, respectively, or 72% and 73%, respectively, of the Company’s total net sales worldwide in such periods. The Company’s total net sales of its aerospace composite materials, structures and assemblies products were $32.1 million and $39.1 million in 2017 and 2016, respectively, or 28% and 27%, respectively, of the Company’s total net sales worldwide in such periods.

 

The Company's foreign sales were $53.7 million, or 47% of the Company's total net sales worldwide, during 2017 compared to $70.6 million of sales, or 48% of total net sales worldwide, during 2016. The decrease in 2017 was primarily due to the lower sales in Asia for reasons described above.

 

 

The Company’s sales in North America, Asia and Europe were 53%, 39% and 8%, respectively, of the Company’s total net sales worldwide in 2017 compared to 52%, 42% and 6%, respectively, in 2016. The Company’s sales in North America decreased 19%, while its sales in Asia decreased 27% and its sales in Europe decreased 4% in 2017 compared to 2016.

 

During both 2017 and 2016, 93% of the Company’s total net sales worldwide of electronics consisted of high performance electronics.

 

Gross Profit

 

The Company’s gross profit margin, measured as a percentage of sales, decreased to 26.2% in 2017 from 29.3% in 2016 due primarily to lower sales and production levels of the Company’s electronics products in Asia and North America in 2017 and lower sales of the Company’s aerospace products combined with the fixed nature of certain overhead costs, which were partially offset by an improvement in its electronics production processes in North America. The gross profit in 2017 also benefited from a growing percentage of sales of the Company’s more technically advanced high performance electronics products.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $1.5 million, or 7%, during 2017 compared to 2016. Such expenses measured as percentages of sales were 17.2% during 2017 compared to 14.5% during 2016. The decrease in such expenses in 2017 was primarily due to decreases in shipping expenses commensurate with the sales reduction in 2017, and lower salary expenses, incentive compensation, stock option expenses and professional fees, partially offset by unfavorable foreign exchange rates.

 

Selling, general and administrative expenses in 2017 included $1.2 million of stock option expenses compared to $1.5 million of such expenses in 2016.

 

Restructuring Charges

 

During 2017, the Company recorded pre-tax restructuring charges of $0.3 million in connection with the closure in 2009 of its facility located in Newburgh, New York, compared to pre-tax restructuring charges of $0.5 million in 2016 in connection with the aforementioned facility closure and the closure in 2013 of its facility located in Zhuhai, China.

 

Earnings from Operations

 

For the reasons set forth above, the Company’s earnings from operations were $10.0 million for 2017, including pre-tax charges of $0.3 million associated with the closure in 2009 of the facility in Newburgh, New York, compared to $21.0 million for 2016, including the pre-tax charges of $0.5 million associated with the closures in prior years of facilities in Zhuhai, China and Newburgh, New York.

 

 

 Interest Expense

 

Interest expense in 2017 was $1.4 million, compared to $1.7 million in 2016. The decrease in interest expense in 2017 was primarily due to lower average outstanding debt and the pre-tax deferred financing costs of $0.3 million related to the early termination of the PNC Bank credit agreement in 2016 that did not recur in 2017. As previously reported, the Company entered into a three-year revolving credit facility agreement with HSBC Bank USA in January 2016, which replaced the credit facility agreement that the Company entered into with PNC Bank in February 2014. See Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report and “Liquidity and Capital Resources” elsewhere in this Item 7 for additional information.

 

Interest and Other Income

 

Interest and other income were $1.7 million and $1.1 million for 2017 and 2016, respectively. The 48% increase in 2017 was primarily the result of higher weighted average interest rates based on longer average maturities of marketable securities held by the Company in 2017 compared to last year's comparable period. During 2017 and 2016, the Company earned interest income principally from its investments, which were primarily in short-term instruments and money market funds.

 

Income Tax Provision

 

The Company’s effective income tax rate of 9.5% for 2017 was lower than the statutory U.S. Federal income tax rate because portions of the Company’s taxable income in 2017 were derived in foreign jurisdictions with lower effective income tax rates. The Company’s effective income tax rate was 12.0% for 2016.  See “Results of Operations – Fiscal Year 2016 Compared to Fiscal Year 2015 – Income Tax Provision” elsewhere in this Item 7.

 

Net Earnings

 

The Company’s net earnings for 2017 were $9.3 million, including pre-tax charges of $0.3 million related to the facility closure mentioned above, compared to $18.0 million for 2016, including the pre-tax charges of $0.8 million related to deferred financing costs and the facility closures described above. The net impact of the items described above was to reduce net earnings by $0.2 million in 2017 and to reduce net earnings by $0.6 million in 2016.

 

Basic and Diluted Earnings Per Share

 

Basic and diluted earnings per share for 2017 were $0.46, including the facility closure mentioned above, compared to basic and diluted earnings per share of $0.89 for 2016, including the deferred financing costs and the facility closures described above. The net impact of the items described above was to reduce basic and diluted earnings per share by $0.01 and $0.02 in 2017 and 2016, respectively.

 

Business Segment Results of Operations:

 

The Company operates in two business segments: Electronics and Aerospace. Operating profit for each business segment includes corporate expenses that are directly allocable to such segment.

 

 

(Amounts in thousands)		Fiscal Year Ended
		February 25, 2018				February 26, 2017				February 28, 2016
Net Sales:
Electronics		$	70,966			$	82,517			$	107,009
Aerospace			40,230				32,092				38,846
Total Sales			111,196				114,609				145,855
Segment Operating Income:
Electronics		$	8,171			$	14,020			$	25,573
Aerospace			10,229				6,893				7,358
Total Segment Operating Income			18,400				20,913				32,931
Corporate and Other Expenses			(7,113	)			(7,301	)			(7,832	)
Depreciation - Electronics			(1,091	)			(1,413	)			(1,635	)
Depreciation - Aerospace			(1,764	)			(1,751	)			(1,745	)
Depreciation - Other			(104	)			(146	)			(178	)
Non-recurring Costs			(7,748	)			(313	)			(827	)
Net Interest Income (Expense)			550				272				(216	)
			(17,270	)			(10,652	)			(12,433	)
Income Before Income Taxes		$	1,130			$	10,261			$	20,498

 

Electronics:

 

The electronics segment designs, develops and manufactures high-technology digital and RF/microwave electronics materials principally for the telecommunications and internet infrastructure, enterprise and military/aerospace markets.

 

(Amounts in thousands)		Fiscal Year Ended
		February 25, 2018				February 26, 2017				February 28, 2016
Electronics
Net Sales		$	70,966			$	82,517			$	107,009
Operating Income			8,171				14,020				25,573

 

Fiscal Year 2018 Compared to Fiscal Year 2017

 

Electronics materials sales in 2018 declined $11.6 million or 14% from 2017. The decline in sales was due to a slowdown in demand for the Company’s products which are used by OEMs in the manufacture of equipment for the internet and telecommunications infrastructure in developing countries and certain legacy materials coming to end-of-program life at OEMs.

 

Electronics operating income in 2018 declined $5.8 million, or 42%, from 2017. The decline in operating profit was primarily due to lower sales.

 

Fiscal Year 2017 Compared to Fiscal Year 2016

 

Electronics materials sales in 2017 declined $24.5 million, or 23%, from 2016. The decline in sales was due to a slowdown in demand for the Company’s products which are used by OEMs in the manufacture of equipment for the internet and telecommunications infrastructure in developing countries and certain legacy materials coming to end-of-program life at OEMs.

 

 

Electronics operating income in 2017 declined $11.6 million, or 45%, from 2016. The decline in operating profit was primarily due to the lower electronics sales.

 

Aerospace:

 

The aerospace segment designs, develops and manufactures advanced composite materials, primary and secondary structures and assemblies and low-volume tooling for the aerospace markets.

 

(Amounts in thousands)		Fiscal Year Ended
		February 25, 2018				February 26, 2017				February 28, 2016
Aerospace
Net Sales		$	40,230			$	32,092			$	38,846
Operating Income			10,229				6,893				7,358

 

Fiscal Year 2018 Compared to Fiscal Year 2017

 

Aerospace composite materials, structures and assemblies sales in 2018 increased $8.1 million, or 25%, from 2017. The increase in aerospace sales was primarily due to higher sales to a major customer following completion of that customer’s inventory correction.

 

Aerospace operating income in 2018 increased $3.3 million, or 48%, from 2017. The increase in operating profit was primarily due to increased sales and a favorable product mix.

 

Fiscal Year 2017 Compared to Fiscal Year 2016

 

Aerospace composite materials, structures and assemblies sales in 2017 declined $6.8 million, or 17%, from 2016. The decline in sales was due to lower sales to a major customer in an effort by that customer to correct inventory levels.

 

Aerospace operating income in 2017 declined $0.4 million, or 6%, from 2016. The decline in operating profit was primarily due to lower sales, partially offset by production efficiencies and a more favorable product mix.

 

Liquidity and Capital Resources:

 

(Amounts in thousands)		February 25,				February 26,				Increase /
		2018				2017				(Decrease)
Cash and marketable securities		$	108,231			$	238,590			$	(130,359	)
Restricted cash			-				10,000				(10,000	)
Working capital			129,041				255,007				(125,966	)

 

 

		Fiscal Year Ended
(Amounts in thousands)		February 25,				February 26,				February 28,				Increase / (Decrease)
		2018				2017				2016				2018 vs. 2017				2017 vs. 2016
Net cash provided by operating activities		$	3,341			$	13,167			$	13,948			$	(9,826	)		$	(781	)
Net cash provided by (used in) investing activities			42,049				2,478				(8,017	)			39,571				10,495
Net cash used in financing activities			(130,710	)			(11,093	)			(49,495	)			(119,617	)			38,402

 

 

 

Cash, Marketable Securities and Restricted Cash

 

The Company believes it has sufficient liquidity to fund its operating activities for the twelve months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.

 

The change in cash, restricted cash and marketable securities at February 25, 2018 compared to February 26, 2017 was the result of lower cash provided by operating activities and a number of additional factors. The significant changes in cash provided by operating activities were as follows:

 

	●	accounts receivable increased by 15% at February 25, 2018 compared to February 26, 2017 primarily due to the increase in total net sales and production levels in the last month of 2018;

	●	accrued liabilities increased 57% at February 25, 2018 compared to February 26, 2017 primarily due to increased accruals for restructuring related to the Company’s consolidation of its electronics material business units in California and Arizona;
	●	income taxes payable increased 667% at February 25, 2018 compared to February 26, 2017 due to the impacts of the Tax Act.

 

In addition, the Company paid $68.8 million and $8.1 million in cash dividends during 2018 and 2017, respectively, including a special dividend of $60.7 million paid in 2018. During 2018, the Company made $72.0 million of principal payments on its long-term debt, representing the entire outstanding balance, and terminated the Credit Agreement. As a result the Company had no restricted cash as of February 25, 2018. The Company incurred $1.3 million of losses on sales of marketable securities in order to pay down the debt and pay the special cash dividend.

 

Working Capital

 

Working capital at February 25, 2018 was lower compared to February 26, 2017. Decreases in cash and cash equivalents and marketable securities and increases in accrued liabilities were offset by increases in accounts receivable and decreases in current portion of long-term debt.

 

            The Company's current ratio (the ratio of current assets to current liabilities) was 11.6 to 1 at February 25, 2018 compared with decreased 19.1 to 1 at February 26, 2017.

 

Cash Flows

 

During 2018, the Company's net earnings, before depreciation and amortization, stock-based compensation, amortization of bond premium and gain on sale of fixed assets, were $25.4 million. Such earnings reflected a decrease in deferred income taxes of $42.1 million and non-cash restructuring charges of $2.2 million and were increased by changes in operating assets and liabilities of $17.8 million, resulting in an increase in taxes payable of $20.2 million primarily related to the tax law change mentioned above, resulting in $3.3 million of cash provided by operating activities. During 2018, the Company expended $886,000 for the purchase of property, plant and equipment compared to $242,000 during 2017, and the Company paid $68.8 million and $8.1 million in cash dividends in 2018 and 2017, respectively.  In addition, during 2018, the Company made $72.0 million of principal payments on its long-term debt.

 

 

Long-Term Debt

 

During 2018, the Company made $72.0 million of principal payments on its long-term debt, representing the entire outstanding balance, and terminated the Credit Agreement. As a result, the Company had no outstanding debt at February 25, 2018.  At February 26, 2017, the Company had $72.0 million of bank debt. For additional information, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Report.

 

Other Liquidity Factors

 

The Company believes its financial resources will be sufficient, for the twelve months from the date of the filing of this Form 10-K Annual 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.

 

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 operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this Report. 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 $980,000 to secure the Company's obligations under its workers’ compensation insurance program.

 

As of February 25, 2018 the Company’s significant contractual obligations, including payments due by fiscal year, were as follows:

 

Contractual Obligations (Amounts in thousands)		Total				2019					2020-2021				2022-2023			2024 and Thereafter
Operating lease obligations		$	8,164			$	1,939			$	3,144			$	542			$	2,539
Total		$	8,164			$	1,939			$	3,144			$	542			$	2,539

 

 

At February 25, 2018, the Company had unrecognized tax benefits of $1.0 million. A reasonable estimate of the timing of the payment of these liabilities is not possible.

 

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:

 

The Company is subject to various Federal, state and local government and foreign government requirements relating to the protection of the environment. The Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and that its handling, manufacture, use and disposal of hazardous or toxic substances are in accord with environmental laws and regulations. However, mainly because of past operations and operations of predecessor companies, which were generally in compliance with applicable laws at the time of the operations in question, the Company, like other companies engaged in similar businesses, is a party to claims by government agencies and third parties and has incurred remedial response and voluntary cleanup costs associated with environmental matters. Additional claims and costs involving past environmental matters may continue to arise in the future. It is the Company's policy to record appropriate liabilities for such matters when remedial efforts are probable and the costs can be reasonably estimated.

 

In 2018, 2017 and 2016, the Company incurred approximately $99,000, $84,000 and $113,000, respectively, for remedial response and voluntary cleanup costs and related legal fees, and the Company received, or expects to receive, reimbursement pursuant to general liability insurance coverage for approximately $92,000, $84,000 and $111,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, and may increase over time, the Company expects it will be able to fund such expenditures from cash flow from operations. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At February 25, 2018 and February 26, 2017, there were no amounts recorded in accrued liabilities for environmental matters.

 

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. See Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report for a discussion of the Company's contingencies, including those related to environmental matters.

 

Critical Accounting Policies and Estimates:

 

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 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, restructurings, 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 believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

 

Recently Adopted Accounting Pronouncement

 

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, as part of the FASB’s Simplification Initiative to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users. The ASU simplifies the presentation of deferred income taxes under US GAAP by requiring that all deferred tax assets and liabilities be classified as non-current. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim reporting periods within those fiscal years. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company elected to early adopt this guidance retrospectively in the fourth quarter of the Company’s 2016 fiscal year, and the early adoption of this guidance did not impact the Company’s results of operations, cash flows or financial condition.

 

Revenue Recognition

 

The Company recognizes revenues when products are shipped and title has been transferred to a customer, the sales price is fixed and determinable, and collection is reasonably assured. All material sales transactions are for the shipment of the Company’s products.

 

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. Composite structures and assemblies may be subject to “airworthiness” acceptance by customers after receipt at the customers’ locations. There are no future performance requirements other than the products’ meeting the agreed specifications. The Company’s bases for providing sales allowances for returns are known situations in which products may have failed due to manufacturing defects in the products supplied by the Company. The Company is focused on manufacturing the highest quality printed circuit materials and advanced composite materials, structures and assemblies and tooling possible and employs stringent manufacturing process controls and works with raw material suppliers who have dedicated themselves to complying with the Company’s specifications and technical requirements. The amounts of returns and allowances resulting from defective or damaged products have been approximately 1.0% of sales for each of the Company’s last three fiscal years.

 

 

Accounts Receivable

 

The Company’s accounts receivable are due from purchasers of the Company’s products. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within established payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than established payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the conditions of the general economy and the electronics and aerospace industries. 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. The Company writes off accounts receivable when they become uncollectible.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company's products and market conditions.

 

Valuation of Long-Lived Assets

 

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, the Company assesses the impairment of goodwill at least annually. 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

 

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. Deferred income taxes are provided for temporary differences in the reporting of certain items, such as depreciation and undistributed earnings of foreign subsidiaries, for income tax purposes compared to financial accounting purposes. In evaluating the Company’s ability to recover the deferred tax assets within the jurisdiction from which they arise, all positive and negative evidence is considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent acquisitions. 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 Statements of Operations, or conversely to further reduce the existing valuation allowance, resulting in less income tax expense. The Company evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances quarterly.

 

 

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on the liability for unrecognized tax benefits are recorded as income tax expense.

 

Contingencies and Litigation

 

The Company is subject to a 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.

 

Employee Benefit Programs

 

The Company's obligations for workers' compensation claims are effectively self-insured, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. The Company accrues its workers’ compensation liability based on estimates of the total exposure of known claims using historical experience and projected loss development factors less amounts previously paid out.

 

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.

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

Foreign Exchange Risk - The Company's primary foreign currency exchange exposure relates to the translation of the financial statements of foreign subsidiaries using currencies other than the U.S. dollar as their functional currencies. The Company does not believe that a hypothetical 10% fluctuation in foreign exchange rates would have had a material impact on its consolidated results of operations or financial position.

 

Interest Rate Risk - The exposure to market risks for changes in interest rates relates to the Company's short-term investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company’s short-term investment portfolio is managed in accordance with guidelines issued by the Company. These guidelines are designed to establish a high quality fixed income portfolio of government and highly rated corporate debt securities with a maximum weighted maturity of less than one year. Based on the average anticipated maturity of the investment portfolio at the end of the 2018 fiscal year, the Company does not believe that a hypothetical 10% fluctuation in short-term interest rates would have had a material impact on the consolidated results of operations or financial position of the Company.

 

Commodities Risk – The Company is subject to fluctuations in the cost of raw materials used to manufacture its materials and products. In particular, the Company is exposed to market fluctuations in commodity pricing as the Company utilizes certain materials, such as copper, that are key materials in certain of its products. The Company generally passes changes in the costs of its raw material costs through to its customers.  The Company currently does not use hedging strategies to minimize the risk of price fluctuations on commodity-based raw materials; however, the Company regularly reviews such strategies on an ongoing basis. See “Business – Aerospace Composite Materials, Structures and Assemblies – Materials and Sources of Supply” and “Business – Electronics Materials – Materials and Sources of Supply” in Item 1 of this Report.

 

 

Item 8.           Financial Statements and Supplementary Data.

 

The Company's Financial Statements begin on the next page.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of
Park Electrochemical Corp.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Park Electrochemical Corp.  and subsidiaries (the “Company”) as of February 25, 2018 and February 26, 2017, and the related statements of operations, comprehensive earnings, shareholders’ equity, and cash flows for each of the years in the three-year period ended February 25, 2018 and the related notes and financial statement schedule listed in the index at item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 25, 2018 and February 26, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended February 25, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of February 25, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 11, 2018, expressed an unqualified opinion.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ CohnReznick LLP

 

We have served as the Company’s auditor since 2014.

 

Jericho, New York

May 11, 2018

 

 

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

---

 

 

See Notes to Consolidated Financial Statements.

 

 

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

---

 

 

See Notes to Consolidated Financial Statements.

 

 

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Amounts in thousands) 

---

 

  

See Notes to Consolidated Financial Statements.

 

 

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Amounts in thousands, except share and per share amounts)

---

 

 

See Notes to Consolidated Financial Statements.

 

 

PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

---