# PARK AEROSPACE CORP (PKE) FY 2025 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PARK AEROSPACE CORP's 10-K for fiscal year 2025.

SEC filing source: https://www.sec.gov/Archives/edgar/data/76267/000143774925019023/pke20250303_10k.htm
Accession: 0001437749-25-019023
Filing date: 2025-05-30
Report date: 2025-03-02
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PKE/
All MD&A years: /company/PKE/mda/
Previous year: /company/PKE/mda/fy2024/ (FY 2024)
Next year: /company/PKE/mda/fy2026/ (FY 2026)

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 2025, 2024, and 2023 fiscal years ended on March 2, 2025, March 3, 2024, and February 26, 2023, respectively. The 2025 and 2023 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.

2025 Financial Overview

On May 19, 2024, the Company’s manufacturing facilities in Newton, Kansas were damaged by a strong storm which transitioned the area.  None of the Company’s manufacturing lines or equipment were damaged by the storm.  The roofs on the facilities were damaged along with specialty HVAC units used to control the temperature and humidity in certain manufacturing, laboratory and research and development areas. Repairs are substantially completed. The storm had limited impact on the Company’s production lines. Remaining repairs are scheduled to be completed 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.

The Company's total net sales worldwide in 2025 were 11% higher than in 2024. 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 business aircraft market, while sales to each of the other markets the Company serves were relatively even with the prior year sales levels.

The Company’s gross profit margin, measured as a percentage of sales, decreased to 28.4% in 2025 from 29.5% in 2024. A less favorable sales mix and higher labor and overhead costs due to ramping up of manufacturing capacity in anticipation of customer program volume increases as well as higher depreciation more than offset the increase in sales.

23

The Company’s earnings from operations in 2025, as a percentage of sales, were 15.1% compared to 15.0% in 2024, primarily as a result of lower selling, general and administrative expenses which offset the lower gross profit margin noted above. The lower selling, general and administrative expenses, as a percentage of sales, were due to higher legal fees in 2024 as a result of shareholder activism defense costs, costs incurred in 2024 to settle an insurance claim as a result of the bankruptcy of the insurer, lower incentive compensation expense and an additional week of expenses included in 2024. The Company’s net earnings from operations in 2025 were 7% higher than in 2024, primarily due to an 11% increase in sales, and higher interest income in 2025 offset by the $1.1 million storm damage charge, higher costs of sales referenced above, higher selling, general and administrative costs and higher tax expense in 2025 due to a provision recorded for undistributed foreign earnings. The increase in the 2025 tax rate compared to the 2024 tax rate primarily resulted from a deferred tax provision recorded in the fourth quarter of fiscal 2025 on unrepatriated foreign earnings offset by a higher benefit from the reduction in uncertain tax positions in 2025 as compared to 2024.

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 may also experience 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.

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.

24

Results of Operations:

2025 Compared to 2024

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[[/GREPCENT_TABLE]]

Net Sales

The Company’s total net sales worldwide in 2025 were 11% higher than in 2024. Higher sales in 2024 were primarily driven by increased sales in the military, commercial aerospace and business aircraft markets.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 28.4% in 2025 from 29.5% in 2024. The decrease in gross margin was primarily due to a less favorable product mix and higher labor and overhead costs due to ramping up manufacturing capacity in anticipation of customer program volume increases, as well as higher depreciation expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.1 million, or 1%, during 2025 compared to 2024. Such expenses, measured as percentages of sales, were 13.3% and 14.6% during 2025 and 2024, respectively.

The increase in selling, general and administrative expenses in 2025 was primarily due to higher salaries and fringe benefits as well as higher travel expenses, professional fees, and research and development expenses. These increases were offset by lower legal expenses in 2025 as well as lower incentive compensation and stock option expense and costs incurred in 2024 for shareholder activist defense costs and to settle an insurance claim as the result of the bankruptcy of an insurer and the additional week in 2024 compared to 2025, which resulted in higher fixed expenses in 2024.

25

Earnings from Operations         

For the reasons set forth above, the Company’s earnings from operations were $9.4 million for 2025 compared to earnings from continuing operations of $8.4 million for 2024.

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 has remediated much of the damage and is scheduled to complete 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 $1.2 million in 2025 compared to $1.1 million in 2024. Higher weighted average interest rates in 2025 were offset by lower levels of marketable securities in 2025 due partially to share repurchases of $4.2 million in 2025 as well as a transition tax installment payment of $4.2 million made in the second quarter of 2025 related to the one-time transition tax on deemed repatriated earnings of non US subsidiaries recorded in fiscal 2018. During 2025 and 2024, 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 38.1% for 2025 compared to an effective rate of 20.8% for 2024. The increased 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 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 subsidiary. This increase in rate was offset by the U.S. federal rate and state income tax reductions in uncertain tax positions. The benefits from the reductions in 2025 and 2024 were $1.1 million and $0.6 million, respectively, related to the expirations of statutes of limitations on tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore and to the expiration of statutes of limitations related to state throw-back rates.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2025 were $5.9 million compared to $7.5 million in 2024. As noted above, net earnings in 2025 included a $1.1 million charge related to storm damage incurred in May 2024 as well as a tax charge of $2.1 million for deferred taxes on undistributed foreign earnings. These charges were offset by a tax benefit from reduction in uncertain tax positions while net earnings in 2024 included shareholder activist defense costs, a charge related to the modification of previously issued stock options, legal costs stemming from the settlement of an insurance claim due to the bankruptcy of an insurance carrier and recruiting fees, partially offset by the tax benefit from the reduction in uncertain tax positions.

Basic and Diluted Earnings Per Share         

Basic and diluted earnings per share for 2025 were $0.29 compared to basic and diluted earnings per share for 2024 of $0.37. The lower earnings per share in 2025 reflects the impact of the storm damage charge as well as the tax charge related to undistributed foreign earnings. These decreases were partially offset by higher sales in 2025 and a higher tax benefit from the reduction in uncertain tax positions in 2025 compared to 2024.

26

2024 Compared to 2023

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[[/GREPCENT_TABLE]]

Net Sales

The Company’s total net sales worldwide in 2024 were 4% higher than in 2023. Higher sales in 2024 were primarily driven by increased sales in the military markets.

Gross Profit

The Company’s gross profit margin, measured as a percentage of sales, decreased to 29.5% in 2024 from 30.5% in 2023. The decrease in gross margin was primarily due to higher costs for labor, employee benefits, depreciation, utilities, property taxes and other items, partially offset by a favorable sales mix and higher pricing.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $1.6 million, or 25%, during 2024 compared to 2023. Such expenses, measured as percentages of sales, were 14.6% and 12.1% during 2024 and 2023, respectively.

The increase in selling, general and administrative expenses in 2024 was primarily due to shareholder activist defense costs in 2024, higher research and development costs, higher stock option expense due to the modification of previously granted stock options, costs to settle an insurance claim as the result of the bankruptcy of an insurer, higher recruiting fees, higher incentive compensation and the additional week in 2024 compared to 2023, which resulted in higher fixed expenses.

27

Earnings from Operations         

For the reasons set forth above, the Company’s earnings from operations were $8.4 million for 2024 compared to earnings from continuing operations of $10.0 million for 2023.

Interest and Other Income

Interest and other income were $1.1 million in both 2024 and 2023. Higher weighted average interest rates in 2024 were offset by lower levels of marketable securities in 2024 due to the payment of the special dividend in the first quarter. During 2024 and 2023, 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 20.8% for 2024 compared to an effective rate of 2.7% for 2023. The increased rate was due primarily to the U.S. federal rate and state income tax reductions in uncertain tax positions. The benefits from the reductions in 2024 and 2023 were $574,000 and $2,800,000, respectively, related to the expirations of statutes of limitations on tax positions taken in prior years regarding the taxability of funds repatriated from the Company’s subsidiary in Singapore in 2023 and to the expiration of statutes of limitations related to state throw-back rates in 2024.

Net Earnings from Operations

The Company’s net earnings from continuing operations for 2024 were $7.5 million compared to $10.7 million in 2023. As noted above, net earnings in 2024 included shareholder activist defense costs, a charge related to the modification of previously issued stock options, legal costs stemming from the settlement of an insurance claim due to the bankruptcy of an insurance carrier and recruiting fees, partially offset by the tax benefit from the reduction in uncertain tax positions. The 2023 earnings included the benefit from the reduction in uncertain tax positions of $2.8 million.

Basic and Diluted Earnings Per Share         

Basic and diluted earnings per share for 2024 were $0.37 compared to basic and diluted earnings per share for 2023 of $0.52. The lower earnings per share in 2024 reflects the impact of the higher costs in 2024 and the tax benefit from the reduction in uncertain tax positions in 2023.

28

Liquidity and Capital Resources:

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[[/GREPCENT_TABLE]]

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[[/GREPCENT_TABLE]]

Cash and Marketable Securities

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.

The change in cash and marketable securities at March 2, 2025 compared to March 3, 2024 was primarily the result of stock repurchases of $4.3 million in the second and third quarters of 2025, as well as a transition tax payment of $4.2 million made in the second quarter of 2025. The significant changes in cash provided by operating activities were as follows:

[[GREPCENT_TABLE]]
[["","\u25cf","accounts receivable increased by 4% at March 2, 2025 compared to March 3, 2024 due primarily to the increase in total net sales in the fourth quarter of 2025 compared to the fourth quarter of 2024;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","inventory increased 12% at March 2, 2025 compared to March 3, 2024 due primarily to higher finished goods inventory at March 2, 2025 to support first quarter 2026 shipments;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","prepaid expenses decreased 53% at March 2, 2025 compared to March 3, 2024 due to lower prepaid taxes as a result of utilization of prior year overpayments;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","accounts payable decreased 30% at March 2, 2025 compared to March 3, 2024 due primarily to the timing of raw material purchases in the fourth quarter of 2025 compared to 2024;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","accrued liabilities decreased 34% at March 2, 2025 compared to March 3, 2024 due primarily to a decrease in property tax accruals and lower incentive payroll accruals; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","income taxes payable (including the non-current portion) decreased 42% at March 2, 2025 compared to March 3, 2024 due to lower remaining transition tax installment payments due."]]
[[/GREPCENT_TABLE]]

In addition, the Company paid $10.1 million and $30.6 million in cash dividends during 2025 and 2024, respectively.

29

Working Capital

Working capital at March 2, 2025 decreased $8.2 million compared to March 3, 2024. Decreases in cash and cash equivalents and marketable securities and higher current income taxes payable were partially offset by higher inventories and accounts receivable, as well as lower accounts payable.

The Company's current ratio (the ratio of current assets to current liabilities) was 9.7 to 1 at March 2, 2025 compared to 10.2 to 1 at March 3, 2024.

Cash Flows

During 2025, the Company's net earnings before non-cash storm damage charges, depreciation and amortization, stock-based compensation, provision for deferred income taxes, loss on sales of marketable securities, amortization of bond premium and gain on sale of fixed assets, were $11.3 million compared to $11.1 million in fiscal 2024 and $12.6 million in fiscal 2023. Such earnings were decreased by changes in operating assets and liabilities of $6.6 million, $6.7 million and $6.1 million in fiscal 2025, 2024 and 2023, respectively. This resulted in $4.7 million, $4.4 million and $6.5 million of cash provided by operating activities from continuing operations in fiscal 2025, 2024 and 2023, respectively. During 2025, the Company expended $0.9 million for the purchase of property, plant and equipment compared to $0.6 million during 2024, and $1.0 million in 2023. Proceeds from the sale and maturities of marketable securities, net of purchases of marketable securities, were $24.9 million, $32.0 million and $(6.0) million in 2025, 2024 and 2023, respectively. The Company paid $10.1 million, $30.6 million and $8.2 million in cash dividends in 2025, 2024 and 2023, respectively. The 2024 dividends paid included a special dividend of $20.5 million paid in the first quarter of that year. 

Other Liquidity Factors         

On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA” or “Tax Act”) and significantly revised U.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 taxes payable to be paid in installments over eight years. The remaining balance of these installment payments, as of March 2, 2025, was approximately $5.3 million to be paid in the second quarter of 2026.

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 12 months from the date of the filing of this Form 10-K Annual Report. The Company further believes that its consolidated balance sheet and financial position are 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 operating lease commitments, commitments to purchase raw materials and commitments to purchase equipment, as described in Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this report. In March 2025, the Company entered into an agreement with a supplier, ArianeGroup SAS, under which the Company would advance funds against future purchases. The agreement requires payments of €4,587 over three years, of which €1,376 was paid in April 2025 (actual cost of $1,569), €1,834 (approximately $2,055 based on May 9, 2025 exchange rates) is due in the first quarter of fiscal 2027 and €1,376 (approximately $1,541 based on May 9, 2025 exchange rates) is due in the first quarter of fiscal 2028. 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 $0.1 million to secure the Company's obligations under its workers’ compensation insurance program.

30

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 2025, 2024 and 2023, the Company incurred approximately $37,000, $29,000 and $14,000, 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 $37,000, $29,000 and $14,000, respectively, of such amounts. While annual environmental remedial response and voluntary cleanup expenditures, including legal fees, have generally been constant from year to year, with increases 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 March 2, 2025 and March 3, 2024, there were no amounts recorded in accrued liabilities for environmental matters.

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 10 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.

31

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 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, inventories, valuation of long-lived assets, income taxes, restructurings, 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 13 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.

32

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.

Income Taxes

As part of the processes of preparing its consolidated financial statements, the Company is required to estimate its income taxes payable 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.

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