National Presto Industries, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended April 3, 2016, compared with the three months ended April 5, 2015. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $86.497 million | $100.999 million | Down 14% |
| Gross profit | $17.781 million | $20.879 million | Down 15% |
| Gross margin | 20.6% | 20.7% | Down approximately 0.1 percentage point |
| Operating profit | $10.710 million | $12.324 million | Down 13% |
| Operating margin | 12.4% | 12.2% | Up approximately 0.2 percentage point |
| Net earnings | $7.211 million | $8.109 million | Down 11% |
| Basic and diluted EPS | $1.04 | $1.17 | Down 11% |
| Operating cash flow | $13.049 million | $22.817 million | Down 43% |
| Capital expenditures | $0.629 million | $1.553 million | Down 59% |
At April 3, 2016, cash and cash equivalents were $29.876 million and marketable securities were $36.318 million, for combined cash and marketable securities of approximately $66.2 million. Current assets were $237.519 million versus current liabilities of $48.515 million, producing working capital of $189.004 million and a current ratio of 4.9 to 1.0. The filing reports no debt balances. Stockholders’ equity was $312.051 million, down from $339.254 million at December 31, 2015.
Cash used in financing activities was $34.718 million, primarily reflecting $35.161 million of dividends paid. The dividend paid per common share increased to $5.05 from $4.05. Cash and cash equivalents declined by $26.346 million to $29.876 million at quarter-end.
Material changes versus the prior comparable period
- Sales declined $14.502 million, primarily because Defense shipments decreased. Defense sales fell 25% to $44.546 million.
- Housewares/Small Appliances sales decreased 8% to $21.396 million, while Absorbent Products sales increased 14% to $20.555 million.
- Defense operating profit declined to $8.439 million from $11.074 million, despite improved product mix and production efficiencies.
- Absorbent Products improved from an operating loss of $0.776 million to operating profit of $0.573 million, driven by higher shipments and improved operating costs.
- Intangibles amortization decreased 76% to $0.568 million, primarily because amortization of the customer contract intangible asset related to the 2013 DSE asset acquisition was lower.
- Selling and general expenses increased 6% to $6.503 million despite the lower sales base.
- Inventory increased to $107.936 million from $98.622 million, while accounts receivable declined to $55.823 million from $67.528 million.
Outlook, risks, contingencies, and unusual items
Management stated that the company has substantial liquidity to fund anticipated capital requirements, dividends, acquisitions, and future growth. It expects to continue evaluating acquisitions and making capital investments when projected returns are appropriate. No specific earnings or revenue guidance was provided.
Management identified risks involving consumer spending, major-customer relationships, defense and government funding, competitive pricing, product acceptance, material and freight costs, production or shipping interruptions, Asian suppliers, product liability and recalls, labor disruptions, subcontractor performance, capital-equipment utilization, foreign exchange, and information-technology failures or security breaches.
The company is involved in routine litigation and believes it will not materially affect consolidated financial position, liquidity, or results of operations. It is self-insured for health-care costs and maintains product-liability and other insurance; management reported no known claims expected to have a material adverse impact beyond recorded reserves.
No material inventory-obsolescence reserve was recorded during the quarter. Marketable securities were primarily tax-exempt municipal bonds and variable-rate demand notes. Management indicated that interest-rate exposure was not material and that it had experienced no issues tendering the demand notes.
Management concluded that disclosure controls and procedures were effective as of April 3, 2016, and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp decline in Defense shipments is temporary and how government contract funding and backlog are progressing.
- The sustainability of the Absorbent Products segment’s return to profitability.
- Whether elevated inventory, particularly work in process, converts to sales without margin pressure or obsolescence.
- The effect of the substantially higher dividend payment on cash balances and future capital allocation.
- The company’s liquidity and investment portfolio, including exposure to municipal securities, variable-rate demand notes, and uninsured cash balances.
- Potential product-liability, self-insurance, supplier, labor, foreign-exchange, and government-contract contingencies.
- The future amortization profile and remaining value of the DSE-related customer contract intangible asset.