National Presto Industries, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with comparative annual results for 2017 and 2016. National Presto operates through two continuing segments: Housewares/Small Appliance and Defense. The former Absorbent Products business was sold in January 2017 and is presented as a discontinued operation. The Company’s common stock trades on the NYSE under the symbol NPK.
- Housewares/Small Appliance: consumer housewares and small electrical appliances, primarily sold in the United States and Canada.
- Defense: ammunition, ordnance components, energetic devices, and load, assemble and pack services, primarily for the U.S. Department of Defense and defense contractors.
- Employees at December 31, 2018: 949, compared with 982 at December 31, 2017.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $323.317 million | $333.633 million | Down 3% |
| Gross profit | $75.883 million | $87.234 million | Down 13% |
| Gross margin | 23.5% | 26.1% | Down 2.6 percentage points |
| Operating profit | $47.902 million | $61.704 million | Down 22% |
| Pre-tax earnings from continuing operations | $52.339 million | $65.285 million | Down 20% |
| Earnings from continuing operations | $39.889 million | $43.314 million | Down 8% |
| Net earnings | $39.940 million | $52.959 million | Down 25% |
| Continuing-operations EPS | $5.69 | $6.20 | Down 8% |
| Net EPS | $5.70 | $7.58 | Down 25% |
| Effective tax rate on continuing operations | 23.8% | 33.7% | Lower primarily due to U.S. tax reform |
| Cash flow from operating activities | $76.248 million | $24.278 million | Up $51.970 million |
| Capital expenditures | $8.686 million | $7.396 million | Up $1.290 million |
Housewares/Small Appliance sales were $93.771 million, down 4%, and segment operating profit was $2.991 million, down from $6.264 million. Defense sales were $229.546 million, down 3%, and segment operating profit was $44.911 million, down from $55.440 million. Defense gross margin declined to 27% from 30%, reflecting lower volume, less favorable product mix, and less efficient operations on certain programs.
Fourth-quarter 2018 net sales were $85.611 million, gross profit was $20.464 million, earnings from continuing operations were $11.879 million, and net earnings were $11.808 million, or $1.68 per share. Fourth-quarter 2017 net sales were $115.604 million and net earnings were $16.760 million, or $2.40 per share. The comparison was affected by the seasonal timing of Housewares/Small Appliance sales and the 2017 discontinued-operation gain.
Cash flow, liquidity, debt and capital allocation
- Cash and cash equivalents increased to $56.847 million from $11.222 million.
- Marketable securities totaled $134.598 million, including $94.416 million of variable-rate demand notes that management considers highly liquid and tenderable within seven days.
- Total current assets were $352.262 million and current liabilities were $47.495 million; working capital was $304.767 million and the current ratio was 7.4 to 1.0.
- The Company had no borrowings under its $5.0 million unsecured line of credit at year-end. Commercial letters of credit totaled $1.247 million and had not been drawn.
- Debt is not reported as a material financing source; the balance sheet primarily reflects equity financing and liquid investments.
- Dividends paid during 2018 totaled $41.989 million, or $6.00 per share, consisting of a $1.00 regular dividend and a $5.00 extra dividend.
- On February 15, 2019, the Board declared another $1.00 regular dividend plus a $5.00 extra dividend; $42.087 million was paid on March 15, 2019.
Material changes versus the prior comparable period
- Consolidated sales decreased $10.316 million, primarily due to lower shipments in both segments.
- Gross profit decreased $11.351 million, with higher Housewares product costs and weaker Defense mix and operating efficiency.
- Operating profit declined $13.802 million, including a $2.528 million net loss on the divestiture of the less lethal business.
- Interest income increased as marketable securities balances and yields rose; other income increased $856,000 to $4.437 million.
- The 2018 tax rate benefited from the reduction in the U.S. federal corporate tax rate from 35% to 21%.
- Discontinued-operation earnings fell to $51,000 from $9.645 million in 2017, when the Absorbent Products sale generated a substantial gain.
- Cash from operations improved materially because of lower accounts receivable and inventory balances, lower vendor deposits, and higher payables.
Guidance, outlook, risks and unusual items
- No formal quantitative earnings or sales guidance was provided.
- Defense backlog was approximately $333.592 million at December 31, 2018, up from $308.173 million. Management expected fulfillment over approximately 18 to 24 months.
- The Defense segment’s FY16 40mm contract had approximately $82 million delivered through 2018, with additional shipments expected in 2019. The FY17-21 contract had an approximate value of $199 million for FY17 and FY18, with deliveries scheduled to continue in 2019.
- The Company expects continued capital investment and evaluation of acquisition opportunities and states that existing liquidity is sufficient for anticipated capital requirements, dividends, and potential growth initiatives.
- In October 2018, the Company sold AMTEC Less Lethal Systems for cash and promissory notes totaling $10.636 million. It recorded a $3.021 million impairment charge and a $2.528 million pre-tax net loss on divestiture. Approximately $4.913 million of related notes and accrued interest were current at year-end and due in the fourth quarter of 2019.
- Key risks include dependence on Wal-Mart, seasonal consumer demand, competition and pricing pressure, Asian supplier concentration, potential tariffs on Chinese imports, product liability and recalls, fixed-price Defense contracts, government funding and contract termination, subcontractor performance, labor disruptions, environmental remediation, and cybersecurity incidents.
- The Company is self-insured to specified levels for product liability and health costs. Product recall insurance is not maintained.
- Environmental liabilities accrued at year-end were $1.120 million. Management considered the reserve adequate for known obligations but noted that additional studies, monitoring, or remediation could require further costs.
- Purchase obligations totaled $219.689 million, substantially all due within one year, although many orders may be cancellable or modifiable and the ultimate obligation cannot be estimated with certainty.
- The Company adopted ASC 606 in 2018 without a change in its revenue-recognition pattern. It expected the 2019 lease standard adoption to add approximately $4 million of right-of-use assets and corresponding lease liabilities.
- BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of Defense backlog conversion, contract funding, fixed-price margins, and the timing of 40mm shipments.
- Assess the impact of Chinese tariffs, supplier concentration, freight costs, and raw-material inflation on Housewares margins.
- Review customer concentration, particularly Wal-Mart’s 10% share of consolidated sales and the absence of long-term supply commitments.
- Confirm collectability and repayment timing for the $4.913 million of divestiture-related notes and other notes receivable.
- Reconcile reported cash with the $134.598 million marketable-securities portfolio and evaluate liquidity, duration, and credit exposure.
- Evaluate the recurring nature of the $6.00 per-share dividend and the Company’s capacity to fund dividends alongside capital expenditures and acquisitions.
- Review environmental, product-liability, recall, contract-termination, subcontractor, and cybersecurity contingencies beyond recorded reserves.