National Presto Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 28, 2014, compared with the periods ended September 29, 2013. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $95.5 million | $100.6 million | $270.3 million | $285.2 million |
| Gross profit | $16.2 million | $19.7 million | $48.0 million | $54.3 million |
| Operating profit | $7.8 million | $13.9 million | $21.2 million | $37.0 million |
| Net earnings | $5.1 million | $9.0 million | $14.0 million | $24.2 million |
| Basic and diluted EPS | $0.74 | $1.31 | $2.02 | $3.50 |
| Operating cash flow | Not separately provided | Not separately provided | $39.5 million | $15.8 million |
- Q3 gross margin was approximately 16.9%, operating margin 8.2%, and net margin 5.4%, versus approximately 19.5%, 13.8%, and 9.0%, respectively, in the prior-year quarter.
- Nine-month gross margin was approximately 17.8%, operating margin 7.8%, and net margin 5.2%, versus approximately 19.0%, 13.0%, and 8.5% in the prior-year period.
- At September 28, 2014, cash and cash equivalents were $25.3 million and marketable securities were $20.6 million. Total current assets were $240.8 million versus current liabilities of $48.0 million, producing a 5.0-to-1 current ratio.
- Accounts receivable declined to $50.3 million from $84.3 million at December 31, 2013, while inventories increased to $113.5 million from $92.5 million.
- The filing presents no debt balance or borrowing facility drawdowns.
- Capital expenditures were $8.2 million for the first nine months, and dividends paid were $35.0 million, including the annual 2014 dividend paid during the first quarter.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 5%, gross profit declined 18%, operating profit declined 43%, and net earnings declined 43% year over year. Nine-month sales declined 5%, gross profit declined 12%, operating profit declined 43%, and net earnings declined 42%.
- Housewares/Small Appliances sales declined 4% in Q3 and 12% year to date, primarily due to lower shipments.
- Defense sales increased 1% year to date, supported by higher non-40mm ammunition sales, partly offset by lower 40mm ammunition and cartridge-case sales.
- Absorbent Products sales declined 23% in Q3 and 13% year to date. The segment reported a Q3 gross loss of $2.1 million and a nine-month gross loss of $2.9 million, compared with near break-even and a $2.1 million gross profit, respectively, in the prior-year periods.
- Absorbent Products results were affected by lower shipments, increased material costs, new equipment installation and startup costs, and the absence of a prior-year insurance settlement.
- Intangibles amortization increased by $2.5 million in Q3 and $8.0 million year to date, primarily from amortization of a customer-contract intangible related to the DSE backlog acquisition. The expense was $2.5 million in Q3 and $7.9 million for the nine months.
- Operating cash flow increased to $39.5 million from $15.8 million, principally because of collections of accounts receivable and non-cash depreciation and amortization, partly offset by higher inventories and lower payables and accruals.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific earnings or revenue guidance is provided. Management expects to continue evaluating acquisitions and making capital investments where an appropriate return is projected.
- On January 24, 2014, the company acquired substantially all assets of Chemring Energetic Devices’ Clear Lake, South Dakota business and related real property for total consideration of $10.5 million. The acquisition contributed $11.3 million of sales and $0.9 million of earnings from acquisition through September 28, 2014.
- Management states that substantial liquidity is available for capital requirements, dividends, acquisitions, and growth. Marketable securities primarily consist of tax-exempt variable-rate demand notes and municipal bonds.
- Key risks include consumer spending, major-customer relationships, product mix, competition and pricing, material and freight costs, production or shipping interruptions, product liability and recalls, labor disruptions, government and military funding, contract modifications or terminations, subcontractor performance, acquisition integration, and capital-equipment utilization.
- The company is exposed to interest-rate changes on cash and marketable securities, although management does not expect material interest-rate risk. Housewares/Small Appliances also has exposure to U.S. dollar/Renminbi fluctuations because many suppliers are in China.
- Routine litigation is pending, but management does not expect it to materially affect financial position, liquidity, or results of operations. Product-liability and health-care claims are accrued based on known and estimated incurred-but-not-reported claims; management reports no known claims beyond recorded reserves that would have a material adverse impact.
- Management disclosed no material inventory-obsolescence reserve in the current period, but new-product demand could create future excess or obsolete inventory losses.
- The company expects the impact of newly issued revenue-recognition guidance, ASU 2014-09, to be immaterial, although evaluation was ongoing.
- Management concluded that disclosure controls were effective as of September 28, 2014, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the elevated amortization associated with acquired customer contracts will continue at the current pace and how it will affect reported earnings.
- The sustainability and profitability of the Defense acquisition, including integration costs and contribution from the Clear Lake facility.
- Whether Absorbent Products can reverse its losses after customer-base changes, equipment startup costs, and higher material costs.
- Inventory levels, customer demand, and potential future obsolescence in Housewares/Small Appliances.
- The composition, liquidity, credit quality, and interest-rate exposure of the $20.6 million marketable-securities portfolio.
- The timing and sustainability of future dividends, acquisitions, and capital expenditures relative to operating cash flow.
- Government defense spending, contract awards or cancellations, major-customer concentration, product-liability claims, and supplier or labor disruptions.