PARK AEROSPACE CORP. General:
Park Aerospace Corp. ("Park" or the "Company") is an aerospace company which develops and manufactures solution and hot-melt advanced composite materials used to produce composite structures for the global aerospace markets. Park's advanced composite materials include film adhesives (undergoing qualification) and lightning strike materials. Park offers an array of composite materials specifically designed for hand lay-up or automated fiber placement (AFP) manufacturing applications. Park's advanced composite materials are used to produce primary and secondary structures for jet engines, large and regional transport aircraft, military aircraft, Unmanned Aerial Vehicles (UAVs commonly referred to as "drones"), business jets, general aviation aircraft and rotary wing aircraft. Park also offers specialty ablative materials for rocket motors and nozzles and specially designed materials for radome applications. As a complement to Park's advanced composite materials offering, Park designs and fabricates composite parts, structures and assemblies and low volume tooling for the aerospace industry. Target markets for Park's composite parts and structures (which include Park's proprietary composite SigmaStrut™ and AlphaStrut™ product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft. The Company's fiscal year is the 52- or 53-week period ending the Sunday nearest to the last day of February. The 2022, 2021 and 2020 fiscal years ended onFebruary 27, 2022 ,February 28, 2021 andMarch 1, 2020 , respectively. The 2022, 2021 and 2020 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. 2022 Financial Overview In 2019, the Company announced the major expansion of its aerospace manufacturing, development and design facilities located at theNewton City-County Airport inNewton, Kansas . This expansion includes the construction of a manufacturing facility located adjacent to Park's existingNewton, Kansas facilities. This facility, which was constructed in part to support a major aerospace customer, includes approximately 90,000 square feet of manufacturing and office space, and essentially doubled the size of Park's existingNewton, Kansas manufacturing footprint. The total cost of the expansion will be approximately$19.5 million . The expansion construction is complete and is undergoing customer qualifications, which are expected to be complete in the second half of the 2022 fiscal year. The expansion includes new resin mixing and delivery systems, new hot-melt film and tape manufacturing lines, space to accommodate an additional hot-melt tape line or solution treating line, space to accommodate a confidential joint development project with a major aerospace customer, additional slitting capability, significant additional freezer and storage space, an expanded production lab, a new R&D lab and additional office space. ThroughFebruary 27, 2022 , the Company had incurred$18.7 million of costs for the expansion. InDecember 2019 , a novel strain of coronavirus was reported inWuhan, China and has since spread worldwide, including tothe United States , posing public health risks that have reached pandemic proportions (the "COVID-19 Pandemic"). 23 -------------------------------------------------------------------------------- The COVID-19 Pandemic and resultant global economic crisis had significant impacts on the Company's results of operations and cash flow for 2021, and to a lesser degree for 2022. The COVID-19 Pandemic and crisis had significant impacts on the markets the Company sells into, particularly the commercial and business aircraft markets. As a result, the Company has experienced a significant reduction in sales and backlog. Even as the COVID-19 Pandemic subsides, the Company may continue to experience adverse impacts to its business as a result of the potential continuing impact of the economic crisis on the markets the Company serves.
The Company's total net sales worldwide in 2022 were 16% higher than in 2021 due primarily to the higher sales to commercial aerospace and business aircraft customers due to the decreasing impacts of the Pandemic on those markets partially offset by lower military sales during 2022.
The Company's gross profit margin, measured as a percentage of sales, increased to 33.4% in 2022 from 28.5% in 2021. Higher sales and production levels combined with the fixed nature of certain overhead costs led to higher gross margins. The Company recorded restructuring charges of$259,000 and$1.6 million in 2022 and 2021, respectively, related to the closure of the Company'sPark Aerospace Technologies Asia,Pte, Ltd. facility located inSingapore . The Company's earnings from continuing operations in 2022 were 107% higher than in 2021, primarily as a result of the aforementioned increases in sales and gross profit. The Company's net earnings from continuing operations in 2022 were 63% higher than in 2021, primarily due to higher sales and lower restructuring charges, partially offset by lower interest income. The Company is experiencing inflation in raw material and other costs. The impact of inflation on the Company's profits has been partially mitigated by the Company's ability to adjust pricing for a large portion of its sales to pass the impact of inflation through to its customers. With the recovery of the aerospace markets, some companies in the aerospace supply chain may not be fully prepared to ramp up their production as quickly as needed, which may create a risk to the Company of not getting enough raw materials on a timely basis to fully support the Company's customers' demands. Additionally, some shipments from overseas suppliers are experiencing transportation delays due to a lack of available containers and a backlog at incoming ports of entry. Delays of overseas shipments of raw materials are having an impact on the Company's production levels. Delays in raw material shipments continue to represent a risk to the Company. Programs that the Company supplies into may also be experiencing supply chain issues from other suppliers to the programs. The Company's sales could be impacted by delays and reductions in its customer's production schedules caused by other suppliers in the chain. The tight labor market has created challenges in hiring personnel. Although the Company feels very positive about its workforce, high wage inflation creates challenges in hiring to add to the Company's employee base. The Company is making adjustments to pay levels and benefits to stay competitive with the labor market. Additionally, the Company has a "Customer Flexibility Program" whereby employees can cross train on different equipment and processes to earn extra pay for attaining the added skills. The war inUkraine has not had a material impact on the Company's results of operations, and is not expected to have a material impact. The Company does not have any significant customers inRussia orUkraine . The Company continues to evaluate the impact the war inUkraine may have on the Company's customers and on the Company's supply chain. 24 -------------------------------------------------------------------------------- The war inUkraine has not had a material impact on the Company's results of operations, and is not expected to have a material impact. The Company does not have any significant customers inRussia orUkraine . The Company continues to evaluate the impact the war inUkraine may have on the Company's customers and on the Company's supply chain. Results of Operations: 2022 Compared to 2021 Year Ended February 27, February 28, (Amounts in thousands, except per share amounts) 2022 2021 Increase / (Decrease) Net sales$ 53,578 $ 46,276 $ 7,302 16 % Cost of sales 35,661 33,085 2,576 8 % Gross profit 17,917 13,191 4,726 36 % Selling, general and administrative expenses 6,249 6,113 136 2 % Restructuring charges 259 1,570 (1,311 ) -84 % Earnings from continuing operations 11,409 5,508 5,901 107 % Interest and other income 375 1,777 (1,402 ) -79 % Earnings from continuing operations before income taxes 11,784 7,285 4,499 62 % Income tax provision 3,320 2,093 1,227 59 % Net earnings from continuing operations 8,464 5,192 3,272 63 % Loss from discontinued operations, net of tax - (328 ) 328 -100 % Net earnings$ 8,464 $ 4,864 $ 3,600 74 % Earnings (loss) per share: Basic: Continuing operations $ 0.41 $ 0.25$ 0.16 64 % Discontinued operations - (0.01 ) 0.01 -100 % Basic earnings per share $ 0.41 $ 0.24$ 0.17 71 % Diluted: Continuing operations $ 0.41 $ 0.25$ 0.16 64 % Discontinued operations - (0.01 ) 0.01 -100 % Diluted earnings per share $ 0.41 $ 0.24$ 0.17 71 % Net Sales
The Company's total net sales worldwide in 2022 were 16% higher than in 2021 due primarily to the higher sales to commercial aerospace and business aircraft customers resulting from the decreasing impacts of the Pandemic on those markets, partially offset by lower military sales during 2022.
Gross Profit
The Company's gross profit margin, measured as a percentage of sales, increased
to 33.4% in 2022 from 28.5% in 2021. Higher sales and production levels combined
with the fixed nature of certain overhead costs led to higher gross margins.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
Selling, general and administrative expenses in 2022 included
Restructuring Charges
The Company recorded restructuring charges of
Earnings from Continuing Operations
For the reasons set forth above, the Company's earnings from continuing operations were$11.4 million for 2022, including the pretax charges of$259,000 for the closure of the facility located inSingapore . The Company's earnings from continuing operations were$5.5 million for 2021, including the pretax charges of$1.6 million for the closure of the facility located inSingapore . Interest and Other Income Interest and other income were$375,000 and$1.8 million for 2022 and 2021, respectively. The decrease from 2021 was due primarily to lower average invested cash during the period and lower weighted average interest rates. During 2022 and 2021, 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 28.2% for 2022 was due primarily to theU.S. Federal rate and state income taxes. The Company's effective income tax rate was higher in 2021, due to unfavorable adjustments to valuation allowances on state tax credits and a higher state effective tax rate in 2021.
Net Earnings from Continuing Operations
The Company's net earnings from continuing operations for 2022 were
Discontinued Operations OnDecember 4, 2018 , the Company completed the sale of its Electronics Business, including manufacturing facilities inSingapore ,France ,California andArizona and R&D facilities inSingapore andArizona , to AGC Inc. for an aggregate purchase price of$145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 12, "Discontinued Operations", of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale. 26 -------------------------------------------------------------------------------- The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations. The Company's loss from discontinued operations was lower in 2022 compared to 2021 primarily as a result of exiting the facility inFullerton California , previously used in the electronics operations, at the beginning of the third fiscal quarter of 2021.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share from continuing operations for 2022 were$0.41 , including the pretax charges for the closure of the facility located inSingapore , compared to basic and diluted earnings per share for 2021 of$0.25 , including the pretax charges for the closure of the facility located inSingapore . The net impact of the items described above was to decrease basic and diluted earnings per share by$0.01 in 2022 and$0.07 in 2021. 2021 Compared to 2020 Year Ended February 28, March 1, (Amounts in thousands, except per share amounts) 2021 2020 Increase / (Decrease) Net sales$ 46,276 $ 60,014 $ (13,738 ) -23 % Cost of sales 33,085 41,341 (8,256 ) -20 % Gross profit 13,191 18,673 (5,482 ) -29 % Selling, general and administrative expenses 6,113 7,932 (1,819 ) -23 % Earnings from continuing operations 5,508 10,741 (5,233 ) -49 % Interest and other income 1,777 3,330 (1,553 ) -47 % Earnings from continuing operations before income taxes 7,285 14,071 (6,786 ) -48 % Income tax provision 2,093 3,866 (1,773 ) -46 % Net earnings from continuing operations 5,192 10,205 (5,013 ) -49 % Loss from discontinued operations, net of tax (328 ) (653 ) 325 -50 % Net earnings$ 4,864 $ 9,552 $ (4,688 ) -49 % Earnings per share: Basic: Continuing operations $ 0.25$ 0.50 $ (0.25 ) -50 % Discontinued operations (0.01 ) (0.03 ) 0.02 -67 % Basic earnings per share $ 0.24$ 0.47 $ (0.23 ) -49 % Diluted: Continuing operations $ 0.25$ 0.50 $ (0.25 ) -50 % Discontinued operations (0.01 ) (0.03 ) 0.02 -67 % Diluted earnings per share $ 0.24$ 0.47 $ (0.23 ) -49 % Net Sales The Company's total net sales worldwide in 2021 were 23% lower than in 2020 due primarily to the lower sales to commercial aerospace and business aircraft customers as a result of the inverse impact of the COVID-19 Pandemic on those markets, partially offset by higher military sales during 2021. 27 --------------------------------------------------------------------------------
Gross Profit The Company's gross profit margin, measured as a percentage of sales, decreased to 28.5% in 2021 from 31.1% in 2020. Lower sales and production levels combined with the fixed nature of certain overhead costs lead to lower gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by$1.8 million , or 23%, during 2021 compared to 2020. Such expenses, measured as percentages of sales, were 13.2% during both the 2021 and 2020 fiscal years. The decrease in such expenses in 2021 was due primarily to decreased travel and entertainment, salaries and lower stock option expenses, excluding stock option modification charges in 2020.
Selling, general and administrative expenses in 2021 included
Restructuring Charges
The Company recorded restructuring charges of
Earnings from Continuing Operations
For the reasons set forth above, the Company's earnings from continuing
operations were
Interest and Other Income Interest and other income were$1.8 million and$3.3 million for 2021 and 2020, respectively. The decrease from 2020 was due primarily to lower average invested cash during the period and lower weighted average interest rates. During 2021 and 2020, 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 28.7% for 2021 was due primarily to theU.S. Federal rate and state income taxes. The Company's effective income tax rate was lower in 2020, due to favorable adjustments to valuation allowances on state tax credits and a lower state effective tax rate in 2020. 28 --------------------------------------------------------------------------------
Net Earnings from Continuing Operations
The Company's net earnings from continuing operations for 2021 were$5.2 million , including the pretax charges of$1.6 million for the closure of the facility located inSingapore . The Company's net earnings from continuing operations for 2020 were$10.2 million , including the stock option modification pre-tax charge of$0.2 million in connection with the special dividend of$1.00 per share paid inFebruary 2020 . Discontinued Operations OnDecember 4, 2018 , Park completed the previously announced sale of its Electronics Business, including manufacturing facilities inSingapore ,France ,California andArizona and R&D facilities inSingapore andArizona , to AGC Inc. for an aggregate purchase price of$145 million in cash, subject to post-closing adjustments for changes in working capital compared to the target net working capital, excluding cash in certain acquired subsidiaries and certain accrued and unpaid taxes of certain acquired subsidiaries. See Note 12, "Discontinued Operations", of the Notes to Consolidated Financial Statements elsewhere in this Report for additional information on the sale. The operating results of the Electronics Business are classified, together with certain costs related to the sale, as discontinued operations, net of tax, in the Consolidated Statements of Operations. The Company's loss from discontinued operations was lower in 2021 compared to 2020 primarily as a result of exiting the facility inFullerton California , previously used in the electronics operations, at the beginning of the Company's third fiscal quarter of 2021.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share from continuing operations for 2021 were$0.25 , including the pretax charges for the closure of the facility located inSingapore , compared to basic and diluted earnings per share for 2020 of$0.50 , including the stock option modification charge in connection with the special dividend paid inFebruary 2020 . The net impact of the items described above was to decrease basic and diluted earnings per share by$0.07 in 2021 and$0.01 in 2020.
Liquidity and Capital Resources:
(Amounts in thousands) February 27, February 28, Increase /
2022 2021 (Decrease)
Cash and marketable securities
(6,181 ) Working capital 120,147 124,348 (4,201 ) From continuing operations Fiscal Year Ended (Amounts in thousands) February 27, February 28, March 1,
Increase / (Decrease)
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net cash provided by operating activities$ 8,201 $ 13,340 $ 5,871 $ (5,139 ) $ 7,469 Net cash (used in) provided by investing activities (29,556 ) 32,958 (42,511 ) (62,514 ) 75,469 Net cash used in financing activities (7,429 ) (9,785 ) (28,304 ) 2,356 18,519
The Company believes it has sufficient liquidity to fund its operating activities for the 12 months from the date of the filing of this Form 10-K Annual Report and for the foreseeable future thereafter.
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The change in cash and marketable securities at February 27, 2022 compared to
February 28, 2021 was primarily the result of positive operating cash flow more
than offset by capital expenditures and regular quarterly dividends paid by the
Company to its shareholders during 2022 and a number of additional factors. The
significant changes in cash provided by operating activities were as follows:
? accounts receivable increased by 9% at
28, 2021 due primarily to the increase in total net sales in the last month of
2022;
? inventory decreased 3% due primarily to lower raw material purchases at the
end of February 2022 ;
? prepaid expenses and other current assets decreased 9% due primarily to the
decrease in income tax receivable;
? accounts payable decreased 23% due primarily to the lower raw material
purchases and lower capital expenditures at the end of February 2022 ;
? accrued liabilities decreased 13% due primarily to the reduction of the
restructuring accrual related to the closure of the facility in
? income taxes payable decreased 25% at
28, 2021 due to the current tax provision in excess of the tax payments.
In addition, the Company paid
Working Capital Working capital atFebruary 27, 2022 was lower compared toFebruary 28, 2021 . Decreases in cash and cash equivalents and marketable securities, decreases in inventories and decreases in prepaid expenses and other current assets were partially offset by increases in accounts receivable and decreases in accounts payable, accrued liabilities and income taxes payable.
The Company's current ratio (the ratio of current assets to current liabilities)
was 20.1 to 1 at
Cash Flows During 2022, the Company's net earnings from continuing operations, before depreciation and amortization, stock-based compensation, amortization of bond premium, gain on sale of fixed assets and non-cash restructuring, were$11.8 million . Such earnings were decreased by changes in operating assets and liabilities of$3.6 million , resulting in$8.2 million of cash provided by operating activities from continuing operations. During 2022, the Company expended$4.4 million for the purchase of property, plant and equipment compared to$7.5 million during 2021, the Company in 2021 paid$1.6 million for the repurchase of the Company's stock, and the Company paid$8.2 million in cash dividends in 2022 and 2021. 30
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Other Liquidity Factors OnDecember 22, 2017 , theU.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act ("TCJA" or "Tax Act") and significantly revisedU.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. As a result of the Tax Act, the Company recorded tax payable to be paid in installments over eight years. The remaining balance of these installment payments, as ofFebruary 27, 2022 , was approximately$14.3 million to be paid over the next four years. The Company believes that its existing cash, cash equivalents and marketable securities, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its balance sheet and financial position to be very strong, and the Company believes it is well positioned to weather the impact of the Pandemic on its business. 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 10 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$0.3 million to secure the Company's obligations under its workers' compensation insurance program. 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 of the Company's former Electronics Business 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 2022, 2021 and 2020, the Company incurred approximately$13,000 ,$9,000 and$41,000 , 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$13,000 ,$9,000 and$38,000 , 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. AtFebruary 27, 2022 andFebruary 28, 2021 , there were no amounts recorded in accrued liabilities for environmental matters. 31
-------------------------------------------------------------------------------- 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 11 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 inthe United States . The preparation of these Consolidated Financial Statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to sales allowances, allowances for doubtful accounts, inventories, valuation of long-lived assets, income taxes, 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
See Note 15 of the Notes to Consolidated Financial Statements included in Item 8
of Part II of this Report for a discussion of the Company's recently adopted
accounting pronouncements.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods
or services in an amount that reflects the consideration to which the providing
entity expects to be entitled in exchange for those goods or services. We
recognize revenue when all of the following criteria are met: (1) we have
entered into a binding agreement, (2) the performance obligations have been
identified, (3) the transaction price to the customer has been determined, (4)
the transaction price has been allocated to the performance obligations in the
contract, and (5) the performance obligations have been satisfied. The majority
of the Company's shipping terms define the performance obligation to be
satisfied upon shipment.
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Sales Allowances and Product Warranties
The Company records estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are recorded in the period the sale is recorded and are derived from historical trends and other relevant information. 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 basis 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 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 averaged approximately 1.0% of sales for 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 aerospace industry. 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 net realizable value. 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.
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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 prior to fiscal year 2019 are effectively self-insured, although the Company maintains individual and aggregate stop-loss insurance coverage for such claims. Beginning in fiscal year 2019 workers compensation claims were fully insured. 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 has a non-contributory profit sharing retirement plan covering their regular full-time employees. In addition, the Company has 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.
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