National Presto Industries, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 30, 2014, compared with the three months ended March 31, 2013. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products. Interim results are unaudited and management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $86.554 million | $83.190 million | 4% |
| Gross profit | $15.720 million | $16.209 million | (3%) |
| Operating profit | $6.982 million | $10.358 million | (33%) |
| Net earnings | $4.690 million | $6.854 million | (32%) |
| Basic and diluted EPS | $0.68 | $0.99 | (31%) |
| Operating cash flow | $24.473 million | $10.821 million | 126% |
Gross margin was approximately 18.2%, compared with 19.5% in the prior-year quarter. Operating margin was approximately 8.1%, compared with 12.5%, and net margin was approximately 5.4%, compared with 8.2%.
At March 30, 2014, cash and cash equivalents were $7.970 million and marketable securities were $27.707 million, for liquid investments of approximately $35.677 million. Working capital was $176.402 million, and the current ratio was 4.8 to 1.0. Total assets were $356.324 million and current liabilities were $46.839 million. The filing does not report borrowings or other debt; disclosed liabilities consist primarily of accounts payable, accrued liabilities, and deferred income taxes.
Cash used in investing activities was $4.864 million, including $3.868 million of capital expenditures and $10.000 million paid for an acquisition, partially offset by proceeds from marketable securities. Financing cash outflow was $34.592 million, principally reflecting the $34.954 million annual 2014 dividend payment. Cash declined from $22.953 million at year-end 2013 to $7.970 million at quarter-end.
Material changes versus the prior comparable period
- Housewares/Small Appliance sales declined 22% to $19.363 million, primarily due to lower shipments; operating profit declined to $0.944 million from $1.558 million.
- Defense sales increased 24% to $48.289 million, primarily from shipments of backlog acquired in the 2013 DSE asset acquisition. Defense operating profit declined to $6.027 million from $7.665 million, partly because of substantially higher amortization and acquisition-related operating costs.
- Absorbent Products sales declined 2% to $18.902 million, while operating profit fell to $0.011 million from $1.135 million. The decline reflected lower shipments, increased material costs, and the absence of a $0.553 million insurance settlement recognized in the prior-year quarter.
- Selling and general expenses increased 11% to $6.295 million.
- Intangibles amortization increased to $2.443 million from $0.167 million, primarily due to a $21.690 million write-down of a customer-contract intangible associated with shipment of part of the DSE-acquired backlog.
- Operating cash flow improved substantially because of collections of accounts receivable and lower inventories, despite lower earnings.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no specific quantitative earnings or revenue guidance. It expects to continue evaluating acquisitions aligned with its business segments and to fund authorized and potentially additional capital projects. Management states that cash, marketable securities, and operating liquidity are sufficient for anticipated capital requirements, dividends, and future acquisitions.
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 $10.534 million. The purchase-price allocation was preliminary as of quarter-end. The acquired business contributed $2.015 million of revenue and $0.155 million of earnings from acquisition through March 30, 2014.
Key risks include consumer spending, major-customer relationships, product mix, competitive pricing, material and freight costs, production interruptions, labor disruptions, government defense funding and contract requirements, subcontractor performance, acquisition integration, capital-equipment utilization, currency effects on Chinese-sourced products, inventory obsolescence, and product-liability or health-insurance claims. Routine litigation is not expected to have a material effect.
The company’s marketable securities include tax-exempt municipal bonds and variable-rate demand notes. Management believes interest-rate exposure is not material, although demand-note liquidity depends on remarketing mechanisms and supporting bank letters of credit. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the $21.690 million customer-contract intangible write-down and elevated amortization represent a continuing impact on Defense-segment profitability.
- The final purchase-price allocation and ongoing financial contribution of the Clear Lake acquisition.
- The sustainability of Defense backlog-driven revenue and the effect of U.S. defense cutbacks on cartridge-case shipments.
- Whether weaker Housewares and Absorbent Products demand, material costs, and customer concentration persist.
- The company’s ability to maintain dividends and acquisitions while quarter-end cash was $7.970 million after the $34.954 million dividend payment.
- Potential inventory-obsolescence, product-liability, insurance, customer-credit, and government-contract exposures.