PARK AEROSPACE CORP (PKE)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 and lightning strike protection 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 (“UAV”s 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 Sigma StrutTM and Alpha StrutTM 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 in the 13 weeks ended May 31, 2026 were $18.3 million compared to $15.4 million in the 13 weeks ended June 1, 2025. The increase in sales was due to higher sales in the commercial market driven by higher sales under the GE Aerospace jet engine programs and higher sales in the military market.

The Company’s gross profit margins, measured as percentages of sales, were 34.8% in the 13 weeks ended May 31, 2026 compared to 30.6% in the 13 weeks ended June 1, 2025. The higher gross profit margin for the 13 weeks ended May 31, 2026 was primarily due to the higher sales volume in the quarter which allowed for improved leverage of fixed overhead costs and a more favorable product mix.

The Company’s earnings from operations before income taxes and net earnings increased 73.1% and 69.9%, respectively, in the 13 weeks ended May 31, 2026 compared to the 13 weeks ended June 1, 2025, primarily as a result of the higher gross margins in the 13 weeks ended May 31, 2026 and higher interest income in the 13 weeks ended May 31, 2026 partially offset by higher selling, general and administrative expenses.

While the Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses, the impact of this has been largely mitigated by the Company’s ability to adjust pricing for a large portion of its sales. The impact of global tariffs has been minimal and been largely mitigated by the Company’s ability to adjust pricing of its products.

Programs in which the Company participates as a supplier are, in some cases, experiencing supply chain issues from other suppliers to the programs that could result in delays in production for certain customers of the Company. The Company’s sales may be affected by supply chain challenges experienced by its customers as a result of delays involving other suppliers.

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The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements-based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the contract. Purchase orders are generally received by the Company more than three months in advance of delivery.

Under a Business Partner Agreement with ArianeGroup SAS of Les Mureaux, France (“ArianeGroup”), ArianeGroup SAS appointed Park as its exclusive North American distributor of ArianeGroup’s RAYCARB C2®B NG proprietary product.  RAYCARB C2®B NG is used to produce ablative composite materials for critical rocketry and missile systems. Park is a long-term customer of ArianeGroup and uses ArianeGroup’s RAYCARB C2®B NG product in the production of many of Park’s key ablative materials, which Park supplies into critical rocket and missile programs. On March 27, 2025, Park and ArianeGroup entered into an agreement under which Park would advance funds to ArianeGroup against future purchases of C2®B product in the aggregate amount in Euros of €4,587,000 payable in three installments in 2025, 2026, and 2027. The Company has made the 2025 and 2026 advances while the 2027 advance will be made in the first quarter of fiscal year 2028. These advanced funds are being used to help fund the purchase and installation, by ArianeGroup, of additional manufacturing equipment for ArianeGroup’s production of C2®B product.

In July 2026, the Company entered into a sublease agreement covering approximately 18 acres of total land in Tulsa, Oklahoma. The Company plans to build a new composites material manufacturing and development facility on the site. The facility will include full production lab facilities, office space, storage and freezer space and ancillary equipment necessary to support all planned manufacturing operations. The sublease commences on September 1, 2026, and has an initial term of 25 years with a renewal option for an additional 25 years. Annual rent under the sublease agreement for the initial five years of the sublease would be $269,469 with increases for each subsequent five-year period based upon the Consumer Price Index for All Urban Consumers, U.S., City Average All Items as published by the United States Department of Commerce. The Company expects economic development incentives to offset a significant portion of the rent expense.

Results of Operations:

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

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Net Sales

The Company's total net sales in the 13 weeks ended May 31, 2026 were $18.3 million compared to $15.4 million in the 13 weeks ended June 1, 2025. The increase in sales was primarily due to higher sales in the commercial and military markets reflecting increased demand in both markets.

Gross Profit

The Company’s gross profit margins, measured as percentages of sales, were 34.8% in the 13 weeks ended May 31, 2026 compared to 30.6% in the 13 weeks ended June 1, 2025. The higher gross profit margin for the 13 weeks ended May 31, 2026 was primarily due to the higher sales volume in the quarter which allowed for improved leverage of fixed overhead costs and a more favorable product mix, which was partially offset by higher waste in the current quarter.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased compared to the prior year’s comparable period in dollars but decreased as a percentage of sales. These expenses, measured as percentages of sales, were 12.9% in the 13 weeks ended May 31, 2026 compared to 14.9% in the 13 weeks ended June 1, 2025. The increase in selling, general and administrative expenses in dollars was primarily due to higher research and development costs, higher freight costs and higher shareholder expenses partially offset by lower professional and legal fees. As a percentage of sales, the decrease in selling, general and administrative expenses is due to the increase in sales in the 13 weeks ended May 31, 2026.

Selling, general and administrative expenses included stock option expenses of $92,000 for the 13 weeks ended May 31, 2026, compared to stock option expenses of $88,000 in the 13 weeks ended June 1, 2025.

Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $4.0 million for the 13 weeks ended May 31, 2026 compared to $2.4 million for the 13 weeks ended June 1, 2025.

Interest and Other Income

Interest and other income was $786,000 for the 13 weeks ended May 31, 2026, compared to $355,000 for the prior year’s comparable period. Interest income increased 121% for the 13 weeks ended May 31, 2026 primarily due to higher investment balances. Cash balances were higher in the 13 weeks ended May 31, 2026 as a result of stock sales in the prior quarter that resulted in net proceeds of $21.7 million under the Company’s at the market offering. During the 13 weeks ended May 31, 2026, the Company earned interest income principally from its cash and investments, which consisted primarily of short-term instruments and money market funds.

Income Tax Provision

For the 13 weeks ended May 31, 2026, the Company recorded an income tax provision of $1.3 million, which included a discrete income tax benefit of $0. For the 13 weeks ended June 1, 2025, the Company recorded an income tax provision of $694,000, which included a discrete income tax benefit of $(28,000) for the excess tax benefits of stock option exercises in the 13 weeks ended June 1, 2025 partially offset by the accrual of interest related to unrecognized tax benefits.

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The Company’s effective tax rate for the 13 weeks ended May 31, 2026 was 26.4% compared to 25.0% in the prior year’s comparable period. The effective tax rate for the 13 weeks ended May 31, 2026 was higher than the U.S. statutory rate of 21% primarily due to state and local taxes. The effective rate for the 13 weeks ended June 1, 2025 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.

Net Earnings

For the reasons set forth above, the Company’s net earnings for the 13 weeks ended May 31, 2026 were $3.5 million compared to net earnings of $2.1 million for the 13 weeks ended June 1, 2025.

Basic and Diluted Earnings Per Share

In the 13 weeks ended May 31, 2026, basic and diluted earnings per share were $0.17 compared to basic and diluted earnings per share of $0.10 in the 13 weeks ended June 1, 2025.

Liquidity and Capital Resources:

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

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 and lightning strike protection 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 2026, 2025, and 2024 fiscal years ended on March 1, 2026, March 2, 2025, and March 3, 2024, respectively. The 2026 and 2025 fiscal years each consisted of 52 weeks and the 2024 fiscal year consisted of 53 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.

2026 Financial Overview

The Company's total net sales worldwide in 2026 were 18% higher than in 2025. The increase in sales was primarily driven by an increase in sales in the military and commercial aircraft markets and, to a lesser extent, higher sales in the space market, partially offset by lower sales in the Business Aircraft market.

The Company’s gross profit margin, measured as a percentage of sales, increased to 30.9% in 2026 from 28.4% in 2025. The higher gross profit margin was the result of higher sales prices, a more favorable sales mix and lower labor and overhead costs as a percentage of sales due to improved leverage of these costs.

The Company’s earnings from operations in 2026, as a percentage of sales, were 18.4% compared to 15.1% in 2025, primarily as a result of the higher sales and improved gross margin partially offset by higher selling, general and administrative expenses. The higher selling, general and administrative expenses were due to higher salaries and fringe benefits, travel expenses, professional fees, incentive compensation and research and development expenses in 2026. The Company’s net earnings in 2026 were 92% higher than in 2025, primarily due to an 18% increase in sales, higher gross margins, higher interest income in 2026 and a $1.1 million storm damage charge in 2025. These increases were offset by higher selling, general and administrative expenses in 2026 as well as higher income tax expense in 2026. While income taxes increased in whole dollars in 2026, the 2026 tax rate decreased compared to the 2025 tax rate primarily as the result of a deferred tax provision recorded in the fourth quarter of fiscal 2025 on unrepatriated foreign earnings partially offset by a higher benefit from the reduction in uncertain tax positions in 2025 as compared to 2026.

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The Company continues to experience inflation in costs of raw materials and supplies, freight costs and other costs and expenses. 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. The Company also experienced increasing costs resulting from the imposition of duties, tariffs, and similar governmental charges by the United States and certain foreign jurisdictions on the products of its customers and suppliers. The impact of these tariffs and other duties was largely mitigated by the Company’s ability to adjust pricing to pass the impact of these costs through to its customers.

Programs in which the Company participates as a supplier are, in some cases, experiencing supply chain issues from other suppliers to the programs that could result in delays in production for certain customers of the Company. These issues may be exacerbated by trade conflicts that restrict the transfer of funds or impose import and export controls on the Company’s products or supply chain inputs. The Company’s sales could also be impacted by these supply chain challenges to the extent that its customers are experiencing them from their other suppliers.

While the wars in Ukraine and the Middle East have had a negative impact on the Company’s results of operations due to delayed shipments, the Company may experience an increase in future sales due to increases in spending worldwide on missile defense systems and other defense programs. The Company does not have any significant customers in Russia or Ukraine but does have customers in Israel. The Company has experienced some increases to raw material costs from overseas suppliers due to the impacts of the wars in Ukraine and the Middle East.

The Company has a number of long-term contracts pursuant to which certain of its customers, some of which represent a substantial portion of the Company’s revenue, place orders. Long-term contracts with the Company’s customers are primarily requirements based and do not guarantee quantities. An order forecast is generally agreed concurrently with pricing for any applicable long-term contract. This order forecast is then typically updated periodically during the term of the underlying contract. Purchase orders are generally received more than three months in advance of delivery.

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Results of Operations:

2026 Compared to 2025

Net Sales

The Company’s total net sales worldwide in 2026 were 18% higher than in 2025. Higher sales in 2026 were primarily driven by increased sales in the military, commercial aerospace and space markets partially offset by decreased sales in the business aircraft market.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, increased to 30.9% in 2026 from 28.4% in 2025. The higher gross profit margin was the result of higher sales prices, a more favorable sales mix and lower labor and overhead costs as a percentage of sales due to improved leverage of these costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.9 million, or 11%, during 2026 compared to 2025. Such expenses, measured as percentages of sales, were 12.5% and 13.3% during 2026 and 2025, respectively.

The increase in selling, general and administrative expenses in 2026 was primarily due to higher salaries and fringe benefits as well as higher travel expenses, professional fees, incentive compensation and research and development expenses. These increases were offset by lower outbound freight costs in 2026.

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Earnings from Operations

For the reasons set forth above, the Company’s earnings from operations were $13.5 million for 2026 compared to earnings from continuing operations of $9.4 million for 2025.

Storm Damage Charge

On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which moved through the area.  None of the Company’s manufacturing lines or equipment were damaged by the storm.  Although the building structures are secure, the roofs on two of the three buildings in the Company’s Newton, Kansas campus needed significant repairs and the roof on one building needed to be replaced.  Also, multiple specialty HVAC units were damaged or destroyed.  These specialty HVAC units are necessary to control the temperature and humidity in certain manufacturing areas, quality laboratories and R&D laboratories, as required by certain specifications and certifications the Company is subject to.  The Company completed the repairs in the first quarter of 2026. The Company recorded a charge of $1.1 million in 2025 related to the damage and related repair and downtime costs.

Interest and Other Income/Expense

Interest and other income were $1.5 million in 2026 compared to $1.2 million in 2025. Higher weighted average interest rates in 2026 were offset by lower levels of marketable securities in 2026 due partially to share repurchases of $2.2 million in 2026, a $1.6 million advance payment made to a supplier in 2026 as well as a transition tax installment payment of $4.9 million made in the second quarter of 2026 related to the one-time transition tax on deemed repatriated earnings of non-US subsidiaries recorded in fiscal year 2018. During 2026 and 2025, 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 was 25.1% for 2026 compared to an effective rate of 38.1% for 2025. The decreased rate was due primarily to a deferred tax provision of $2.1 million recorded in the fourth quarter of fiscal 2025 on unrepatriated foreign earnings that the Company had previously considered to be indefinitely reinvested. Although the Company is currently involved in discussions with Asian industrial conglomerates regarding potential Asian based manufacturing joint ventures, the Company would consider contributing certain of its intellectual property to such joint ventures but would consider contributing only minimal capital to such joint ventures. Other than such potential joint ventures, the Company is not currently involved in any activities which would likely lead to the Company’s investment of such funds overseas. As a result, the Company has determined that it is unlikely that opportunities to invest these funds overseas will be realized in the foreseeable future, and, therefore, the Company has provided for the potential repatriation of such funds currently held by its Singapore

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