National Presto Industries, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. operates through Housewares/Small Appliances, Defense Products, and Safety segments. This Form 10-Q covers the quarter and nine months ended September 27, 2020, compared with September 29, 2019. All businesses were deemed essential and continued operating during the COVID-19 shutdowns.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $93.9 million | $78.0 million | $246.7 million | $213.6 million |
| Gross profit | $20.7 million | $23.8 million | $58.6 million | $51.0 million |
| Gross margin | 22.1% | 30.6% | 23.7% | 23.9% |
| Operating profit | $14.5 million | $17.2 million | $39.0 million | $31.9 million |
| Operating margin | 15.4% | 22.1% | 15.8% | 14.9% |
| Net earnings | $12.1 million | $16.4 million | $33.0 million | $30.5 million |
| Net earnings per share | $1.72 | $2.33 | $4.69 | $4.35 |
| Operating cash flow | Not separately provided | Not separately provided | $8.3 million | $(3.6) million |
- Q3 sales increased 20%, but gross profit declined 13% and net earnings declined 26% because the prior-year period benefited from a $9.4 million Defense customer-termination settlement and $1.7 million of discontinued-operation earnings.
- Nine-month sales increased 16%, gross profit increased 15%, operating profit increased 22%, and continuing-operations earnings increased 15%. Net earnings increased 8% because the prior-year period included $1.7 million of discontinued-operation earnings.
- At September 27, 2020, cash and cash equivalents were $44.4 million and marketable securities were $79.1 million, for total cash and marketable securities of approximately $123.5 million.
- The company reported no debt. Total liabilities were $50.6 million, primarily current operating liabilities and lease liabilities.
- Working capital was $288.1 million, with a current ratio of 7.2 to 1.0, compared with 8.6 to 1.0 at December 31, 2019.
- Cash flow from investing activities was a use of $1.7 million, including $1.5 million of capital expenditures. Financing cash use was $41.7 million, principally the $42.2 million annual dividend.
- The company declared and paid $6.00 per share in dividends during the first nine months, consisting of a $1.00 regular dividend and a $5.00 extra dividend.
Material changes versus the prior comparable periods
- Housewares/Small Appliances Q3 sales rose 26% to $27.2 million, with operating profit improving to $2.4 million from a $0.9 million loss, driven by higher shipments, product mix, and margins.
- Defense Q3 sales rose 18% to $66.7 million, but operating profit fell to $13.4 million from $19.2 million because the prior year included the $9.4 million customer-termination settlement. Defense backlog increased to $323.5 million from $310.4 million at December 31, 2019, and management expects fulfillment over 18 to 24 months.
- Safety remained in startup mode, generating Q3 sales of only $0.1 million and an operating loss of $1.3 million. Nine-month operating loss was $4.0 million.
- Interest income declined because of lower yields and a lower average investment balance.
- Accounts receivable increased to $63.2 million from $41.5 million at year-end, while inventory increased to $136.1 million from $128.5 million.
- Cash declined by $35.2 million during the first nine months, primarily reflecting the annual dividend and working-capital needs.
Guidance, outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance.
- Management expects adequate liquidity to fund operations, dividends, capital investments, and potential acquisitions. It intends to continue evaluating acquisitions aligned with its business segments.
- COVID-19 had no material adverse impact on the current-quarter consolidated financial statements, but management states that future effects remain uncertain. Risks include absenteeism, supply-chain and shipping disruptions, customer order delays, distribution constraints, changing demand, and potential effects on government defense spending and payments.
- The company relies substantially on U.S. Department of Defense funding and fixed-price contracts. Changes in military spending, contract modifications or terminations, subcontractor performance, and government acceptance or payment timing could affect results.
- A Mississippi tax assessor issued a $2.5 million personal-property-tax assessment covering seven years. The company intends to contest it and considers payment not probable; no accrual was recorded.
- The company identified a material weakness in internal control over financial reporting related to Defense revenue recognition. Controls were redesigned and implemented September 1, 2020, with remediation testing expected in the fourth quarter of 2020. Management nevertheless concluded that the financial statements fairly present the reported results.
- The 2019 acquisition of OneEvent Technologies created the Safety segment and resulted in $0.2 million of nine-month amortization expense in 2020. The acquisition also includes a variable earn-out currently estimated at $0.1 million.
- The company adopted the expected-credit-loss standard on January 1, 2020, with no material impact reported.
Most important facts for investors to verify
- Whether the Defense revenue-recognition material weakness is successfully remediated and whether any restatement or contract-level adjustments become necessary.
- Defense backlog conversion, contract awards, customer acceptance, and exposure to U.S. government funding or termination risk.
- The sustainability of Housewares/Small Appliances demand, margins, inventory levels, returns, and customer allowances after COVID-19-related demand changes.
- Whether the Safety segment can achieve commercial scale and reduce ongoing operating losses.
- The outcome and potential cash impact of the $2.5 million Mississippi tax assessment.
- Future operating cash generation after dividends, particularly given the increase in receivables, inventory, and vendor prepayments.
- Interest-rate effects on cash and municipal securities, as well as liquidity and credit support for variable-rate demand notes.