The global markets for the Company’s printed circuit materials products continue to be very difficult to forecast, and it is not clear to the Company what the condition of the global markets for the Company’s printed circuit materials products will be in the 2008 fiscal year second quarter. The Company believes that the markets for its advanced composite materials products will continue to be relatively strong during the 2008 fiscal year second quarter.
In the third quarter of the 2007 fiscal year, the Company acquired a facility in Singapore which the Company is modifying and expanding for use as a new advanced composites manufacturing plant. The Company is also in the final stages of planning the construction of a new plant in Kansas to produce advanced composite materials principally for the general aviation aircraft segment of the aerospace industry.
The Company’s total net sales and its net sales of its printed circuit materials products decreased during the three-month period ended May 27, 2007 compared to the three-month period ended May 28, 2006, as the increase in such sales in Asia was more than offset by declines in such sales in North America and Europe. The Company’s net sales of its advanced composite materials products increased during the three-month period ended May 27, 2007 compared to the three-month period ended May 28, 2006. Sales of advanced composite materials products were 9% of the Company’s total net sales worldwide in the 2008 fiscal year first quarter compared to 8% in the 2007 fiscal year first quarter.
The decreased sales in the three-month period ended May 27, 2007 resulted in a lower gross profit compared to the three months ended May 28, 2006.
Net sales for the three-month period ended May 27, 2007 declined 9% to $57.1 million from $62.8 million for last fiscal year’s comparable period. The decrease in net sales was principally the result of lower unit volumes of printed circuit materials products shipped by the Company’s operations in North America and Europe. Sales volumes declined 17% in North America and 22% in Europe and increased 12% in Asia during the 2008 fiscal year first quarter compared to the first quarter in the prior year.
The Company’s foreign operations accounted for $27.8 million of net sales, or 49% of the Company’s total net sales worldwide, during the three-month period ended May 27, 2007 compared with $27.4 million of sales, or 44% of total net sales worldwide, during last fiscal year’s comparable period. Net sales by the Company’s foreign operations during the 2008 fiscal year first quarter increased by 1% from the 2007 fiscal year comparable period as the result of higher sales in Asia.
For the three-month period ended May 27, 2007, the Company’s sales in North America, Asia and Europe were 51%, 37% and 12%, respectively, of the Company’s total net sales worldwide compared with 56%, 30% and 14%, respectively, for the three-month period ended May 28, 2006.
The overall gross profit as a percentage of net sales for the Company’s worldwide operations declined to 24.7% during the three-month period ended May 27, 2007 compared with 26.0% for last fiscal year’s comparable period. The decrease in the gross profit margin was attributable to lower production unit volumes, which were only partially offset by higher percentages of sales of higher margin, high performance printed circuit materials products and adjustments to reduce operating costs.
The Company’s cost of sales as a percentage of net sales increased to 75.3% in the three-month period ended May 27, 2007 from 74.0% in the three-month period ended May 28, 2006 resulting in a lower gross profit margin, which was attributable to lower production unit volumes.
During the three-month period ended May 27, 2007, the Company’s total net sales worldwide of high temperature printed circuit materials, which include high performance materials (non-FR4 printed circuit materials), were 99% of the Company’s total net sales worldwide of printed circuit materials, compared with 97% for last fiscal year’s comparable period.
The Company’s high temperature printed circuit materials include its high performance materials (non-FR4 printed circuit materials), which consist of high-speed, low-loss materials for digital and RF/microwave applications requiring lead-free compatibility, high bandwidth signal integrity, bismalimide triazine (“BT”) materials, polyimides for applications that demand extremely high thermal performance, cyanate esters, and polytetrafluoroethylene (“PTFE”) materials for RF/microwave systems that operate at frequencies up to 77GHz.
During the three-month period ended May 27, 2007, the Company’s total net sales worldwide of high performance printed circuit materials (non-FR4 printed circuit materials) were 50% of the Company’s total net sales worldwide of printed circuit materials, compared to 42% for last fiscal year’s comparable period.
Selling, general and administrative expenses decreased by $0.2 million, or by 3%, during the three months ended May 27, 2007 compared with last fiscal year’s comparable period, but these expenses, measured as a percentage of sales, were 11.5% during the three months ended May 27, 2007 compared with 10.7% during last fiscal year’s comparable period.
For the reasons set forth above, the Company’s earnings from operations were $7.5 million for the three months ended May 27, 2007, compared to earnings from operations of $9.6 million for the three months ended May 28, 2006.
Interest and other income, principally investment income, was $2.3 million for the three-month period ended May 27, 2007 compared with $1.9 million for last fiscal year’s comparable period. The increase in investment income was attributable to higher levels of cash available for investment and higher prevailing interest rates during the 2008 fiscal year first quarter than during the 2007 fiscal year first quarter. The Company’s investments were primarily short-term taxable and tax exempt instruments and money market funds.
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The Company’s effective income tax rate for the three-month period ended May 27, 2007 was 24.7%, compared to 23.0% for last fiscal year’s comparable period. The higher tax provision for the 2008 fiscal year first quarter was the result of higher taxable income in jurisdictions with higher effective income tax rates.
The Company’s net earnings for the three months ended May 27, 2007 were $7.4 million, compared to net earnings of $8.9 million for the three months ended May 28, 2006.
Basic and diluted earnings per share for the three-month period ended May 27, 2007 were $0.37, compared to basic and diluted earnings per share of $0.44 for the three-month period ended May 28, 2006.
Liquidity and Capital Resources:
At May 27, 2007, the Company’s cash and temporary investments were $224.6 million compared with $208.8 million at February 25, 2007, the end of the Company’s 2007 fiscal year. The increase in the Company’s cash and investment position at May 27, 2007 was attributable to cash generated by operating activities and cash received from the exercise of stock options, partially offset by the payment of dividends. The Company’s working capital (which includes cash and temporary investments) was $245.9 million at May 27, 2007 compared with $237.3 million at February 25, 2007. The increase in working capital at May 27, 2007 compared with February 25, 2007 was due principally to the increase in cash and temporary investments slightly offset by a decrease in accounts receivable and an increase in accrued liabilities. The decrease in accounts receivable was due to the lower level of sales in the first quarter of the 2008 fiscal year compared to the fourth quarter of the 2007 fiscal year and accelerated payments of certain accounts. The increase in accrued liabilities was primarily the result of increased accruals for incentive compensation programs and professional fees. The Company’s current ratio (the ratio of current assets to current liabilities) was 9.1 to 1 at May 27, 2007 compared to 9.2 to 1 at February 25, 2007.
During the three months ended May 27, 2007, net earnings from the Company’s operations, before depreciation and amortization, of $9.4 million increased by a net increase in working capital items, resulted in $16.7 million of cash provided by operating activities. During the same three-month period, the Company expended $1.8 million for the purchase of property, plant and equipment compared with $0.5 million for the three-month period ended May 28, 2006, and paid $1.6 million and $1.6 million, respectively, in dividends on its common stock in such three-month periods. Net expenditures for property, plant and equipment were $3.9 million in the 2007 fiscal year and $4.2 million in the 2006 fiscal year.
At May 27, 2007 and at February 25, 2007, the Company had no long-term debt.
The Company believes its financial resources will be sufficient, for the foreseeable future, to provide for continued investment in working capital and property, plant and equipment and for general corporate purposes. Such resources would also be available for purchases of the Company’s common stock, appropriate acquisitions and other expansions of the Company’s business.
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The Company is not aware of any circumstances or events that are reasonably likely to occur that could materially affect its liquidity.
The Company’s contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments. The Company has no long-term debt, capital lease obligations, unconditional purchase obligations or other long-term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $1.7 million to secure the Company’s obligations under its workers’ compensation insurance program and certain limited energy purchase contracts intended to protect the Company from increased utilities costs.
As of May 27, 2007, there were no material changes outside the ordinary course of the Company’s business in the Company’s contractual obligations disclosed in Item 7 of Part II of its Form 10-K Annual Report for the fiscal year ended February 25, 2007.
Off-Balance Sheet Arrangements:
The Company’s liquidity is not dependent on the use of, and the Company is not engaged in, any off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities.
Environmental Matters:
In the three-month periods ended May 27, 2007 and May 28, 2006, the Company charged less than $0.01 million against pretax income for environmental remedial response and voluntary cleanup costs (including legal fees). While annual expenditures have generally been constant from year to year and may increase over time, the Company expects it will be able to fund such expenditures from 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 May 27, 2007 and February 25, 2007, the amount recorded in liabilities from discontinued operations for environmental matters related to Dielektra was $2.1 million and the amount recorded in accrued liabilities for other environmental matters was $1.8 million. Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company.
Critical Accounting Policies and Estimates:
In response to financial reporting release, FR-60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, issued by the Securities and Exchange Commission in December 2001, the following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management’s judgment.
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General
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to sales allowances, accounts receivable, allowances for bad debts, inventories, valuation of long-lived assets, income taxes, restructurings, contingencies and litigation, and pensions and other 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.
Revenue Recognition
Sales revenue is recognized at the time title to product is transferred to a customer. All material sales transactions are for the shipment of manufactured prepreg and laminate products and advanced composite materials. The Company ships its products to customers based upon firm orders, with fixed selling prices, when collection is reasonably assured.
Sales Allowances
The Company provides for the estimated costs of sales allowances at the time such costs can be reasonably estimated. The Company’s products are made to customer specifications and tested for adherence to such specifications before shipment to customers. There are no future performance requirements other than the products’ meeting the agreed specifications. The Company’s bases for providing sales allowances for returns are known situations in which products may have failed due to manufacturing defects in the products supplied by the Company. The Company is focused on manufacturing the highest quality printed circuit materials and advanced composite materials 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 majority of the Company’s accounts receivable are due from purchasers of the Company’s printed circuit materials. 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
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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 condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Allowances for Bad Debts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company’s assets or strategy of the overall business.
Income Taxes
Carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statement of operations, or conversely to further reduce the existing valuation allowance resulting in less income tax expense. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly.
Restructurings
The Company recorded charges in connection with the realignment of its Neltec Europe SAS business in France during the three months ended May 29, 2005 and the realignment of its North American volume printed circuit materials operations during the fiscal years ended February 29, 2004 and March 2, 2003. The Company also recorded realignment charges in its North American operations during the fiscal year ended February 27, 2005. In addition, during the 2003 fiscal year, the Company recorded charges in connection with the closure of the Company’s manufacturing facility in England. Prior to the Company’s treating Dielektra GmbH as a discontinued operation, the Company recorded charges in connection with the closure of the mass lamination operation of Dielektra and the realignment of Dielektra during the fiscal years ended February 29, 2004, March 2, 2003 and March 3, 2002.
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Contingencies
The Company is subject to a small number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.
Pension and Other Employee Benefit Programs
Dielektra GmbH has significant pension costs that were developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and wage inflation rates. The pension liability of Dielektra has been included in liabilities from discontinued operations on the Company’s balance sheet.
The Company’s obligations for workers’ compensation claims are effectively self-insured, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. The Company uses an insurance company administrator to process all such claims and benefits. The Company accrues its workers’ compensation liability based upon the claim reserves established by the third-party administrator and historical experience.
The Company and certain of its subsidiaries have a non-contributory profit sharing retirement plan covering their regular full-time employees. In addition, the Company’s subsidiaries have various bonus and incentive compensation programs, most of which are determined at management’s discretion.
The Company’s reserves associated with these self-insured liabilities and benefit programs are reviewed by management for adequacy at the end of each reporting period.
Factors That May Affect Future Results.
Certain portions of this Report which do not relate to historical financial information may be deemed to constitute forward-looking statements that are subject to various factors which could cause actual results to differ materially from Park’s expectations or from results which might be projected, forecast, estimated or budgeted by the Company in forward-looking statements. Such factors include, but are not limited to, general conditions in the electronics industry, the Company’s competitive position, the status of the Company’s relationships with its customers, economic conditions in international markets, the cost and availability of raw materials and utilities, and the various factors set forth in Item 1A “Risk Factors” and under the caption “Factors That May Affect Future Results” after Item 7 of Park’s Annual Report on Form 10-K for the fiscal year ended February 25, 2007.
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Item 3. | Quantitative and Qualitative Disclosure About Market Risk. |
The Company’s market risk exposure at May 27, 2007 is consistent with, and not greater than, the types of market risk and amount of exposures presented in the Annual Report on Form 10-K for the fiscal year ended February 25, 2007.
Item 4. | Controls and Procedures. |
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of May 27, 2007, the end of the quarterly fiscal period covered by this quarterly report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting.
There has not been any change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
None.
There have been no material changes from the risk factors as previously disclosed in the Company’s Form 10-K Annual Report for the fiscal year ended February 25, 2007.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table provides information with respect to shares of the Company’s Common Stock acquired by the Company during each month included in the Company’s 2008 fiscal year first quarter ended May 27, 2007.
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 | |
| |
|
| |
|
| |
|
| |
|
| |
February 26-March 27 | | | 5 | (a) | $ | 27.46 | | | 0 | | | | |
March 28-April 27 | | | 0 | | | — | | | 0 | | | | |
April 28-May 27 | | | 0 | | | — | | | 0 | | | | |
Total | | | 5 | (a) | $ | 27.46 | | | 0 | | | 2,000,000 | (b) |
|
(a) | Acquired by the Company pursuant to privately negotiated transactions with two individual shareholders of the Company at the then current market price of the Company’s Common Stock. |
| |
(b) | Aggregate number of shares available to be purchased by the Company pursuant to a previous share purchase authorization announced on October 20, 2004. Pursuant to such authorization, the Company is authorized to purchase its shares from time to time on the open market or in privately negotiated transactions. |
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Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
None.
| 31.1 | Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
| | |
| 31.2 | Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
| | |
| 32.1 | Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 | Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Park Electrochemical Corp. |
| |
|
| | (Registrant) |
| | |
| | |
| | /s/ Brian E. Shore |
Date: July 2, 2007 | |
|
| | Brian E. Shore |
| | President and Chief Executive Officer |
| | (principal executive officer) |
| | |
| | /s/ James L. Zerby |
Date: July 2, 2007 | |
|
| | James. L. Zerby |
| | Vice President and Chief Financial Officer |
| | (principal financial officer) |
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EXHIBIT INDEX
Exhibit No. | | Name | | Page |
| |
| |
|
31.1 | | Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) | | 28 |
| | | | |
31.2 | | Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) | | 29 |
| | | | |
32.1 | | Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 30 |
| | | | |
32.2 | | Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 31 |
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