National Presto Industries, Inc. — 2019 Q3 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended September 29, 2019, compared with September 30, 2018. National Presto operates through Housewares/Small Appliances, Defense Products, and Safety segments. The former Absorbent Products business remains classified as discontinued operations.
On July 23, 2019, the company acquired substantially all assets of OneEvent Technologies for $6.855 million, creating the Safety segment alongside Rusoh. The acquisition contributed $13 thousand of revenue and a $298 thousand loss from acquisition through the reporting period.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $78.006 million | $81.653 million | $213.601 million | $237.706 million |
| Gross profit | $23.847 million | $15.697 million | $51.015 million | $55.419 million |
| Operating profit | $17.238 million | $6.842 million | $31.923 million | $32.621 million |
| Net earnings | $16.389 million | $6.371 million | $30.496 million | $28.132 million |
| Diluted EPS | $2.33 | $0.91 | $4.35 | $4.02 |
Q3 gross margin was approximately 30.6%, compared with 19.2% in the prior-year quarter. Nine-month gross margin was approximately 23.9%, compared with 23.3%. Q3 operating margin was approximately 22.1%, compared with 8.4%; nine-month operating margin was approximately 14.9%, compared with 13.7%.
- Q3 sales declined 5%, while gross profit increased 52%, operating profit increased 152%, and net earnings increased 157%.
- Nine-month sales declined 10%, gross profit declined 8%, operating profit declined 2%, and net earnings increased 8%.
- At September 29, 2019, cash and cash equivalents were $59.171 million and marketable securities were $84.781 million, totaling $143.952 million of cash and short-term investments.
- Working capital was $282.081 million, down $22.686 million from year-end 2018; the current ratio was 7.2 to 1.0.
- Operating cash flow was negative $3.570 million for the first nine months, versus positive $69.979 million in the prior-year period, primarily because of a $39.421 million increase in inventories and other working-capital uses.
- Investing activities provided $47.905 million, principally reflecting net marketable-securities maturities and sales. Capital expenditures were $4.326 million and the OneEvent acquisition used $3.733 million of cash, net of cash acquired.
- Financing activities used $42.011 million, primarily for $42.087 million of dividends. The March dividend was $1.00 per regular share plus a $5.00 special dividend.
- The company reported no borrowings or conventional long-term debt. Lease liabilities totaled $3.650 million, including $520 thousand current and $3.130 million non-current.
Material changes versus the prior comparable period
- Defense Products sales fell 4% in Q3 and 15% for the nine months because of lower unit shipments. Results included $9.412 million of revenue recognized under customer termination clauses, which materially supported Q3 Defense gross profit.
- Housewares/Small Appliances sales declined 5% in Q3 but increased 7% for the nine months. Profitability weakened because of less favorable product margins, higher allowances, and increased selling and general expenses.
- Safety remained in a startup phase and generated operating losses of $1.058 million in Q3 and $2.162 million for the nine months.
- Q3 2018 included a $3.021 million impairment of long-lived assets related to the divestiture of AMTEC Less Lethal; no comparable impairment was recorded in 2019.
- Nine-month 2019 intangibles amortization was zero versus $2.166 million in 2018, primarily because an acquired Defense customer-contract intangible was fully amortized in 2018.
- Interest income increased because of higher yields on marketable securities, partially offset by lower average invested balances.
- Discontinued operations contributed $1.677 million after tax in Q3 and $1.680 million for the nine months, versus $131 thousand and $122 thousand, respectively, in the prior-year periods. The 2019 amounts primarily reflected a breach-of-contract lawsuit settlement.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects to continue evaluating acquisitions aligned with its segments and to make capital investments when projected returns are appropriate. Management states that available cash and marketable securities are sufficient for anticipated capital requirements, dividends, acquisitions, and other growth initiatives.
- The Defense backlog was $332.810 million at September 29, 2019, compared with $333.592 million at December 31, 2018; management expects fulfillment over approximately 18 to 24 months.
- Defense revenue recognition is dependent on contract terms, customer acceptance, government funding, and termination clauses. The company disclosed a material weakness in internal control over Defense revenue recognition because controls did not sufficiently assess and document the timing of revenue recognition, alternative use, and termination-clause rights.
- Management concluded that the financial statements fairly present the company’s results despite the material weakness and established a remediation plan focused on Defense contract reviews.
- Key risks include Defense contract modification or termination, changes in military spending, customer concentration, competition and pricing, material and freight costs, tariffs, reliance on Asian suppliers, product liability and recalls, labor disruption, acquisition execution, technology failures, and cybersecurity breaches.
- Housewares inventory may be exposed to obsolescence, particularly for new and seasonal products. No material obsolescence issue was recorded in the current period.
- The OneEvent acquisition accounting remained preliminary, with valuation expected to be finalized in the first quarter of 2020. The earn-out was initially estimated at $470 thousand and may vary with seven-year earnings performance.
- The company is involved in routine litigation and states that no known matter is expected to materially affect consolidated financial position, liquidity, or results of operations.
- Interest-rate exposure is principally related to cash, variable-rate demand notes, and municipal securities. Management does not expect future interest-rate exposure to be material.
Important facts for investors to verify
- Verify the sustainability of the Q3 Defense margin improvement, including the $9.412 million customer-termination revenue and the related contract accounting.
- Assess the remediation and eventual resolution of the material weakness in Defense revenue-recognition controls.
- Monitor inventory growth, vendor prepayments, and the resulting deterioration in operating cash flow.
- Review Defense backlog conversion, government funding, customer acceptance, and termination provisions.
- Evaluate the operating trajectory, integration costs, earn-out exposure, goodwill, and intangible valuations associated with OneEvent and the Safety segment.
- Confirm the recurring nature of dividend capacity given the company’s substantial annual dividend payment and negative year-to-date operating cash flow.