Financial Overview

Park Aerospace Corp. is a manufacturer of advanced composite materials and structures for the global aerospace markets. The company reported its financial results for the 13 and 26 weeks ended September 1, 2024.

Storm Damage Charge

On May 19, 2024, the company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm. While the building structures are secure, the roofs on two of the three buildings will need significant repairs and the roof on one building will need to be replaced. Additionally, multiple specialty HVAC units were damaged or destroyed, which are necessary for the company’s manufacturing processes.

The company has recorded a charge of $1.1 million in the 26 weeks ended September 1, 2024 related to the storm damage, including asset damage, emergency services, rental of temporary HVAC units, and employee downtime. The company has insurance coverage for wind damage with a deductible of $2.5 million and expects to recover all costs and damages in excess of the deductible.

Sales Performance

The company’s net sales in the 13 weeks and 26 weeks ended September 1, 2024 were $16.7 million and $30.7 million, respectively, compared to $12.5 million and $28.0 million in the same periods of the prior year. The increase in sales was primarily due to higher demand from the commercial aerospace and military markets.

Gross Profit

The company’s gross profit in the 13 weeks ended September 1, 2024 was higher than the prior year’s comparable period due to the higher sales levels, partially offset by a less favorable product mix, higher depreciation and maintenance costs related to a new production line, and higher costs for raw materials, supplies, freight, and labor due to inflationary pressures.

In the 26 weeks ended September 1, 2024, the company’s gross profit was similar to the prior year’s comparable period despite the higher sales, primarily due to the less favorable sales mix and the higher costs mentioned above.

The company’s gross profit margins, as a percentage of sales, were 28.5% and 28.9% in the 13 and 26 weeks ended September 1, 2024, respectively, compared to 32.7% and 31.8% in the same periods of the prior year. The lower gross margins were mainly attributable to the ramp-up in capacity, less favorable sales mix, higher depreciation and maintenance costs, and inflationary pressures on costs.

Earnings Performance

The company’s earnings before income taxes and net earnings increased 19.1% and 18.3%, respectively, in the 13 weeks ended September 1, 2024 compared to the prior year’s period, primarily due to the higher sales, partially offset by the unfavorable sales mix and higher costs.

In the 26 weeks ended September 1, 2024, the company’s earnings before income taxes and net earnings decreased 14.7% and 15.0%, respectively, compared to the prior year’s period. This was primarily due to the $1.1 million charge related to the storm damage and the higher costs, partially offset by the higher sales.

Inflationary Pressures

The company continues to experience inflation in the costs of raw materials, supplies, freight, and other expenses. The impact on profits has been partially mitigated by the company’s ability to adjust pricing to pass through the inflationary costs to customers.

Supply Chain Challenges

Some of the company’s customers are experiencing supply chain issues from other suppliers, which could result in delays in production and impact the company’s sales. The company may also experience increases in raw material costs from overseas suppliers due to the impacts of the wars in Ukraine and the Middle East.

Long-term Customer Contract

The company has a long-term contract with a major customer that represents a substantial portion of its revenue. The contract is requirements-based and does not guarantee quantities, but the company generally receives purchase orders in excess of three months in advance of delivery.

Stock-based Compensation

As of September 1, 2024, the company had a 2018 Stock Option Plan that provided for the grant of options to purchase up to 1,550,000 shares of common stock. During the 26 weeks ended September 1, 2024, the company granted options to purchase 135,100 shares, with a future compensation expense of $434 to be recognized over the requisite service period.

The company also recorded a non-cash charge of $109 related to the modification of previously granted employee stock options resulting from a $1.00 per share special cash dividend paid in April 2023.

Earnings per Share

The company reported basic and diluted earnings per share of $0.10 and $0.10, respectively, for the 13 weeks ended September 1, 2024, compared to $0.09 and $0.09 in the prior year’s period. For the 26 weeks ended September 1, 2024, basic and diluted earnings per share were $0.15 and $0.15, respectively, compared to $0.18 and $0.18 in the prior year’s period.

Shareholders’ Equity

The company’s Board of Directors authorized the purchase of up to 1,500,000 additional shares of its common stock on the open market and in privately negotiated transactions. As of October 7, 2024, the company is authorized to purchase up to a total of 1,129,268 shares, representing approximately 5.7% of the company’s total outstanding shares.

Income Taxes

The company’s effective tax rates for the 13 and 26 weeks ended September 1, 2024 were 26.6% and 26.9%, respectively, compared to 26.2% and 26.6% in the prior year’s periods. The higher effective rates were primarily due to state and local taxes and a discrete income tax provision for the accrual of interest related to unrecognized tax benefits.

The company intends to indefinitely invest approximately $25 million of undistributed earnings outside of the U.S. If these earnings are repatriated or determined to be remitted in the foreseeable future, the company may be required to accrue U.S. deferred taxes.

Geographic Regions

The company’s products are sold to customers in North America, Asia, and Europe. All of the company’s long-lived assets are located in North America. Sales in the 13 and 26 weeks ended September 1, 2024 were higher in North America and Europe compared to the prior year’s periods, while sales in Asia were lower.

Contingencies

The company is subject to a small number of immaterial proceedings, lawsuits, and other claims related to environmental, employment, product, and other matters. The company believes the ultimate disposition of these matters will not have a material adverse effect on its financial position or results of operations.

The company and certain subsidiaries have been named by the Environmental Protection Agency as potentially responsible parties in connection with alleged releases of hazardous substances at three sites. The company has general liability insurance coverage for the costs associated with two of these sites, and the insurance carriers have reimbursed the company for 100% of the legal defense and remediation costs.

Outlook

The company does not anticipate any loss of sales for the 2025 fiscal year due to the storm damage. While the wars in Ukraine and the Middle East have had a negative impact on the company’s results, the company may experience an increase in future sales due to increased spending on missile defense systems and other defense programs.

The company continues to face inflationary pressures on costs and supply chain challenges from its customers, which could impact its sales and profitability. However, the company’s long-term contract with a major customer provides some stability and visibility into future demand.

Overall, the company’s financial performance in the 13 and 26 weeks ended September 1, 2024 was mixed, with higher sales but lower profitability due to the storm damage charge and inflationary pressures. The company’s ability to manage these challenges and continue to serve its aerospace customers will be crucial for its future success.