General:

Park Aerospace Corp. ("Park" or the "Company") 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 SigmaStrutTM and AlphaStrutTM product lines) are, among others, prototype and development aircraft, special mission aircraft, spares for legacy military and civilian aircraft and exotic spacecraft.





Financial Overview

The Company's total net sales from continuing operations in the 13 weeks ended May 30, 2021 were $13.6 million compared to $12.2 million in the 13 weeks ended May 31, 2020. The increase in sales is primarily due to improving sales for the commercial and business aircraft markets.

The Company's gross profit margins from continuing operations, measured as percentages of sales, were 40.3% in the 13 weeks ended May 30, 2021 compared to 30.1% in the 13 weeks ended May 31, 2020. Gross profit margins for the 13 weeks ended May 30, 2021 benefitted from a favorable sales mix of high margin products.

The Company's earnings from continuing operations before income taxes and net earnings from continuing operations increased 45.4% and 39.2%, respectively, in the 13 weeks ended May 30, 2021 compared to the 13 weeks ended May 31, 2020 primarily as a result of higher sales and a favorable sales mix of high margin products, partially offset by lower interest income compared to last year's comparable period.

The Company is experiencing inflation in raw material and other costs. The impact of inflation on the Company's profits has been mitigated by the Company's ability to adjust pricing for most of its sales to pass the impact of inflation through to its customers.

Additionally, the Company is experiencing challenges in finding and retaining employees as it ramps up production to meet customers' increasing demand. The Company has been able to meet its production needs through overtime due to the benefit of the Company's "Customer Flexibility Program", which is a cross training program that enables employees to move between production processes as needed. Additionally, the Company did not layoff any of its workforce during the pandemic helping it to be better prepared for a rebound in production levels.

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 potential risk to the Company of getting enough raw materials on a timely basis to fully support our 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. The Company has put safety stocks in place for many components, but potential delays of overseas shipments of raw materials still represent a risk to the Company.

The Company has a long-term contract pursuant to which one of its customers, which represents a substantial portion of the Company's revenue, places orders. The long-term contract with the customer is requirements based and does not guarantee quantities. An order forecast and pricing were agreed upon in the contract. However, this order forecast is updated periodically during the term of the contract. Purchase orders generally are received by the Company in excess of three months in advance of delivery by the Company to the customer.





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In December 2019, a novel strain of coronavirus was reported in Wuhan, China and has since spread worldwide, including to the United States (the "U.S."), posing public health risks that have reached pandemic proportions (the "COVID-19 Pandemic").

The COVID-19 Pandemic and resultant global economic crisis had significant impacts on the Company's results of operations and cash flow for the quarter ended May 31, 2020. 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 had experienced significant reductions in sales and backlog.

Even after the COVID-19 Pandemic has subsided, 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.





Results of Operations:



The following table sets forth the components of the consolidated statements of
operations:



                                                   13 Weeks Ended
                                              May 30,          May 31,             %

(amounts in thousands, except per share


                amounts)                        2021             2020            Change

Net sales                                   $     13,594     $     12,213             11.3 %
Cost of sales                                      8,122            8,539             (4.9 )%
Gross profit                                       5,472            3,674             48.9 %
Selling, general and administrative
expenses                                           1,648            1,630              1.1 %
Restructuring charges                                 14                -              0.0 %
Earnings from continuing operations                3,810            2,044             86.4 %
Interest and other income                            117              656            (82.2 )%
Earnings from continuing operations
before income taxes                                3,927            2,700             45.4 %
Income tax provision                               1,182              728             62.4 %
Net earnings from continuing operations            2,745            1,972             39.2 %
Loss from discontinued operations, net of
tax                                                    -              (15 )         (100.0 )%
Net earnings                                $      2,745     $      1,957             40.3 %

Earnings per share:
Basic:
Continuing operations                       $       0.13     $       0.10               30 %
Discontinued operations                                -                -                0 %
Basic earnings per share                    $       0.13     $       0.10               30 %

Diluted:
Continuing operations                       $       0.13     $       0.10               30 %
Discontinued operations                                -                -                0 %
Diluted earnings per share                  $       0.13     $       0.10               30 %

The Company's total net sales from continuing operations worldwide in the 13 weeks ended May 30, 2021 increased to $13.6 million from $12.2 million in the 13 weeks ended May 31, 2020. The increase in sales was principally due to the higher sales to customers servicing the commercial and business aircraft markets.





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Gross Profit

The Company's gross profit from continuing operations in the 13 weeks ended May 30, 2021 was higher than its gross profit from continuing operations in the prior year's comparable period, and the gross profit from continuing operations as a percentage of sales for the Company's worldwide operations in the 13 weeks ended May 30, 2021 increased to 40.3% from 30.1% in the 13 weeks ended May 31, 2020. The higher gross profit margin from continuing operations for the 13 weeks ended May 30, 2021 compared to the 13 weeks ended May 31, 2020 was a result of higher sales, a favorable mix of higher margin sales and the partially fixed nature of overhead expenses in the 13 weeks ended May 30, 2021 compared to the 13 weeks ended May 31, 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses from continuing operations increased by $18,000 during the 13 weeks ended May 30, 2021, or by 1.1%, compared to the prior year's comparable period, and these expenses, measured as a percentage of sales from continuing operations, were 12.1% in the 13 weeks ended May 30, 2021 compared to 13.3% in the 13 weeks ended May 31, 2020.

Selling, general and administrative expenses from continuing operations included stock option expenses of $64,000 for the 13 weeks ended May 30, 2021, compared to stock option expenses of $43,000 for the 13 weeks ended May 31, 2020.

Earnings from Continuing Operations

For the reasons set forth above, the Company's earnings from continuing operations were $3.8 million for the 13 weeks ended May 30, 2021 compared to $2.0 million for the 13 weeks ended May 31, 2020.





Interest and Other Income

Interest and other income from continuing operations was $117,000 for the 13 weeks ended May 30, 2021, compared to $656,000 for the prior year's comparable period. Interest income decreased 82.2% for the 13 weeks ended May 30, 2021 primarily as a result of lower average balances of marketable securities held by the Company in the 13 weeks ended May 30, 2021, compared to the prior year's comparable period, and lower weighted average interest rates. During the 13 weeks ended May 30, 2021, the Company earned interest income principally from its investments, which consisted primarily of short-term instruments and money market funds.





Income Tax Provision

For the 13 weeks ended May 30, 2021, the Company recorded an income tax provision from continuing operations of $1.2 million, which included a discrete income tax provision of $143,000 for the write-off of deferred tax assets and liabilities related to a change in the tax filing basis of the Company's Singapore entity and the accrual of interest related to unrecognized tax benefits. For the 13 weeks ended May 31, 2020, the Company recorded an income tax provision from continuing operations of $728,000, which included a discrete income tax provision of $41,000 pertaining to the accrual of interest related to unrecognized tax benefits.

The Company's effective tax rate for the 13 weeks ended May 30, 2021 was 30.0% compared to 27.0% in the prior year's comparable period. The effective tax rate for the 13 weeks ended May 30, 2021 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes, the write-off of deferred tax assets and liabilities and the accrual of interest related to unrecognized tax benefits. The effective rate for the 13 weeks ended May 31, 2020 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes and the accrual of interest related to unrecognized tax benefits.





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Net Earnings from Continuing Operations

For the reasons set forth above, the Company's net earnings from continuing operations for the 13 weeks ended May 30, 2021 were $2.7 million compared to net earnings from continuing operations of $2.0 million for the 13 weeks ended May 31, 2020.





Discontinued Operations

On July 25, 2018, the Company entered into a definitive agreement to sell its Electronics Business for $145.0 million in cash. The Company completed this transaction on December 4, 2018.

The operating results of the Electronics Business are classified, together with certain costs related to the transaction, as discontinued operations, net of tax, in the Consolidated Statements of Operations.

The Company's net earnings from discontinued operations included expenses pertaining to the sale transaction and costs related to the Company's vacated facility in Fullerton, California in the 13 weeks ended May 31, 2020. The Company vacated the Fullerton facility in the third quarter of the 2021 fiscal year and is no longer incurring these discontinued operations costs.

Basic and Diluted Earnings Per Share

In the 13 weeks ended May 30, 2021, basic and diluted earnings per share from continuing operations were $0.13 compared to basic and diluted earnings per share from continuing operations of $0.10 in the 13 weeks ended May 31, 2020.

Liquidity and Capital Resources - Continuing Operations:





(amounts in thousands)                        May 30,         February 28,
                                                2021              2021             Change

Cash and cash equivalents and marketable
securities                                  $    116,818     $      116,542     $        276
Working capital                                  122,306            124,348           (2,042 )




                                                                13 Weeks Ended
(amounts in thousands)                                May 30,      May 31,
                                                        2021         2020        Change

Net cash provided by operating activities             $  4,133     $  4,741     $   (608 )

Net cash (used in) provided by investing activities (4,391 ) 1,951 (6,342 ) Net cash used in financing activities

                   (2,038 )     (3,682 )      1,644




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Cash and Marketable Securities

Of the $116.8 million of cash and cash equivalents and marketable securities at May 30, 2021, $29.4 million was owned by one of the Company's wholly owned foreign subsidiaries.

The change in cash and cash equivalents and marketable securities at May 30, 2021 compared to February 28, 2021 was the result of capital expenditures and dividends paid to shareholders partially offset by cash provided by operating activities and a number of additional factors. The significant change in cash provided by operating activities was as follows:





  ? income taxes payable increased by 94% at May 30, 2021 compared to February 28,
    2021 primarily due to the income tax provision for the 13 weeks ended May 30,
    2021.

In addition, the Company paid $2.0 million in cash dividends in each of the 13-week periods ended May 30, 2021 and May 31, 2020.





Working Capital

The decrease in working capital at May 30, 2021 compared to February 28, 2021 was due principally to the increase in income taxes payable.

The Company's current ratio (the ratio of current assets to current liabilities) was 12.5 to 1.0 at May 30, 2021 compared to 16.6 to 1.0 at February 28, 2021.





Cash Flows

During the 13 weeks ended May 30, 2021, the Company's net earnings, before depreciation and amortization, deferred income taxes, stock-based compensation, amortization of bond premium and changes in operating assets and liabilities, were $4.1 million. During the same 13-week period, the Company expended $1.6 million for the purchase of property, plant and equipment, compared with $2.5 million during the 13 weeks ended May 31, 2020. The Company paid $2.0 million in cash dividends in each of the 13-week periods ended May 30, 2021 and May 31, 2020.





Other Liquidity Factors

The Company believes its financial resources will be sufficient, through the 12 months following the filing of this Form 10-Q Quarterly 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, cash dividend payments, appropriate acquisitions and other expansions of the Company's business, including the expansion in Kansas.





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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 further believes its balance sheet and financial position to be very strong.





Contractual Obligations:

The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of (i) operating lease commitments and (ii) commitments to purchase raw materials. 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 $320,000, to secure the Company's obligations under its workers' compensation insurance program.

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.

Critical Accounting Policies and Estimates:

The foregoing Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, 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's critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates and assumptions and the application of management's judgment are described in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021. There have been no significant changes to such accounting policies during the 2022 fiscal year first quarter.





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 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.





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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 the Company's expectations or from results which might be projected, forecasted, estimated or budgeted by the Company in forward-looking statements. Such factors include, but are not limited to, general conditions in the aerospace 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, transportation and utilities, and the various factors set forth under the caption "Factors That May Affect Future Results" in Item 1 and in Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021.

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