National Presto Industries, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. reported results for the quarter and six months ended June 28, 2020, compared with the periods ended June 30, 2019. The company operates in Housewares/Small Appliances, Defense Products, and Safety. All businesses were deemed essential and continued operating during COVID-19-related shutdowns. The Safety segment includes OneEvent Technologies, acquired in July 2019, with prior-period segment information restated accordingly.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $87.1 million | $71.7 million | $152.8 million | $135.6 million |
| Gross profit | $21.7 million | $14.7 million | $37.9 million | $27.2 million |
| Gross margin | 24.9% | 20.5% | 24.8% | 20.0% |
| Operating profit | $15.3 million | $8.6 million | $24.6 million | $14.7 million |
| Operating margin | 17.6% | 12.0% | 16.1% | 10.8% |
| Net earnings | $12.7 million | $8.2 million | $20.9 million | $14.1 million |
| Net earnings per share | $1.80 | $1.16 | $2.97 | $2.01 |
| Cash flow from operations | Not separately provided | Not separately provided | $14.6 million | $7.9 million |
Q2 effective income tax rate was approximately 22%, compared with 21% in the prior-year quarter. Six-month dividends paid were $42.2 million, or $6.00 per share, consisting of a $1.00 regular dividend and a $5.00 extra dividend.
At June 28, 2020, cash and cash equivalents were $32.4 million and marketable securities were $98.4 million, for approximately $130.7 million of cash and near-cash investments. Total current assets were $329.5 million and current liabilities were $55.2 million, resulting in working capital of $274.3 million and a current ratio of 6.0 to 1.0. The company stated that it had no debt; reported liabilities primarily consisted of operating lease liabilities and current operating obligations.
Material changes versus the prior comparable periods
- Q2 net sales increased 21% and six-month sales increased 13%, primarily due to higher shipments in Housewares/Small Appliances and Defense.
- Q2 gross profit increased 48%, while six-month gross profit increased 39%. Improved product mix, margins, and Defense operating efficiencies contributed to the improvement.
- Q2 operating profit increased 77% to $15.3 million; six-month operating profit increased 67% to $24.6 million.
- Q2 net earnings increased 55% and six-month net earnings increased 48%.
- Housewares/Small Appliances Q2 sales increased 36% to $26.0 million, and operating profit improved to $2.4 million from a $0.8 million loss.
- Defense Q2 sales increased 16% to $61.0 million, and operating profit increased to $14.3 million from $10.0 million. Six-month Defense backlog increased to $356.1 million from $310.4 million at December 31, 2019; fulfillment is expected over approximately 18 to 24 months.
- Safety remained loss-making because of its startup businesses. Q2 operating loss was $1.3 million, compared with a $0.5 million loss in the prior-year quarter, reflecting OneEvent expenses, marketing, and staffing.
- Other income declined 42% in Q2 and 32% for the six months, primarily because of lower interest income resulting from lower yields and a lower average investment balance.
- Operating cash flow increased to $14.6 million from $7.9 million. Investing activities used $20.2 million, principally because of net purchases of marketable securities, while financing activities used $41.7 million, primarily for dividends.
- Cash and cash equivalents declined to $32.4 million from $79.6 million at December 31, 2019, primarily reflecting dividend payments and investment purchases. Marketable securities increased to $98.4 million from $78.7 million.
Guidance, outlook, risks, contingencies, and unusual items
No formal quantitative earnings or revenue guidance was provided. Management stated that substantial liquidity is available to fund operations, dividends, capital requirements, acquisitions, and other growth initiatives. The company expects to continue evaluating acquisitions and capital investments.
Management reported no material adverse consolidated financial statement impact from COVID-19 during the quarter, but noted risks from absenteeism, remote-work inefficiencies, canceled trade shows, customer and supplier disruptions, shipping issues, supply-chain interruptions, changing demand, and potential future shutdowns. The company’s businesses continued operating, and management stated that materials, components, and finished goods generally continued to flow.
A Mississippi subsidiary received a $2.5 million personal property tax assessment covering seven years after the county questioned its Free Port Warehouse license. The company intends to contest the assessment, considers payment not probable, and recorded no accrual.
The company disclosed a material weakness in internal control over financial reporting related to Defense-segment revenue recognition. Controls did not operate with sufficient precision in assessing and documenting the timing of revenue recognition, alternative use, and termination clauses. Management stated that the financial statements were fairly presented and is implementing a remediation plan.
The OneEvent acquisition was completed for $6.5 million, including cash, forgiveness of a note receivable, and a potential earn-out. Acquisition-related intangible amortization was $114,000 for the first six months of 2020. The Safety segment continues to carry startup and execution risk.
Routine litigation is not expected to have a material effect. Other risks include Defense dependence on U.S. government funding and contract terms, customer concentration, competition, product liability and recalls, Asian suppliers, labor disruptions, material and freight costs, foreign exchange exposure, cybersecurity, and the uncertain effects of COVID-19.
Most important facts for investors to verify
- Progress and effectiveness of remediation for the Defense revenue-recognition material weakness.
- Resolution and potential financial impact of the $2.5 million Mississippi tax assessment.
- Conversion of the $356.1 million Defense backlog into shipments, revenue, and cash flow, including exposure to government funding or contract changes.
- Sustainability of elevated Housewares/Small Appliances margins and the effect of product mix, returns, inventory, and supplier costs.
- Operating performance, cash requirements, and potential earn-out obligations of the Safety segment and OneEvent acquisition.
- COVID-19 effects on demand, staffing, supply chains, customer collections, production, and Defense programs during the remainder of 2020.
- Dividend policy and liquidity after the $42.2 million six-month dividend payment, including the company’s continued reliance on marketable securities for liquidity and interest income.