National Presto Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013, compared with the quarter and six months ended July 1, 2012. The interim financial statements are unaudited.
Business Context and Reporting Period
National Presto operates through three segments: Housewares/Small Appliances, Defense Products, and Absorbent Products. The company reported 6,898,251 common shares outstanding as of August 1, 2013.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $101.4 million | $117.1 million | $184.6 million | $213.9 million |
| Gross profit | $18.4 million | $19.6 million | $34.6 million | $39.9 million |
| Gross margin | 18.2% | 16.7% | 18.8% | 18.7% |
| Operating profit | $12.8 million | $13.3 million | $23.2 million | $27.8 million |
| Operating margin | 12.6% | 11.4% | 12.6% | 13.0% |
| Net earnings | $8.3 million | $8.7 million | $15.2 million | $18.0 million |
| Basic and diluted EPS | $1.20 | $1.26 | $2.20 | $2.62 |
| Operating cash flow | Not separately provided | Not separately provided | $1.1 million | $37.0 million |
At June 30, 2013, cash and cash equivalents were $35.6 million and marketable securities were $45.1 million. Total current assets were $278.1 million versus current liabilities of $56.8 million, producing working capital of $221.3 million and a current ratio of 4.9 to 1.0. The filing does not report outstanding debt; the balance sheet presents no borrowings as a separate liability. Stockholders’ equity was $306.1 million.
Capital expenditures were $13.4 million during the first six months, compared with $6.8 million in the prior-year period. Cash used in investing activities was $2.9 million. No dividends were paid during the first six months of 2013 because the annual 2013 dividend was paid on an accelerated basis in December 2012; the prior-year period included $41.3 million of dividend payments.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 13%, primarily because Defense Products shipments decreased 21% and Absorbent Products shipments decreased 9%. Housewares/Small Appliances sales increased 5%.
- Six-month sales declined 14%, with Defense Products down 21% and Absorbent Products down 11%; Housewares/Small Appliances increased 3%.
- Second-quarter net earnings decreased 5% to $8.3 million. Six-month net earnings decreased 16% to $15.2 million.
- Second-quarter gross margin improved to 18.2% from 16.7%, despite lower gross profit. The improvement reflected product mix and the absence of a prior-year Absorbent Products revenue-recognition deferral.
- Six-month operating margin decreased to 12.6% from 13.0%, while selling and general expenses declined 6%.
- Operating cash flow fell sharply to $1.1 million from $37.0 million, primarily because inventories increased by $20.3 million and deposits with raw-material suppliers increased. Inventory rose to $103.6 million at June 30, 2013 from $83.4 million at year-end 2012.
- Absorbent Products returned to profitability, reporting second-quarter operating profit of $0.3 million versus a $2.1 million loss in the prior-year quarter, and six-month operating profit of $1.0 million versus a $1.0 million loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific earnings or revenue guidance. Management expects to continue evaluating acquisitions, making capital investments, paying dividends, and using its substantial liquidity to fund growth. It stated that cash and short-term marketable securities are sufficient for anticipated capital requirements and acquisitions.
On July 1, 2013, wholly owned AMTEC Corporation agreed to purchase substantially all assets of DSE, Inc., a defense contractor supplying 40MM ammunition to the U.S. Government. Closing is conditioned on government, DSE, and company agreement to novate DSE’s government contract to National Presto.
Reported risks include changes in military spending and government contract funding, contract modification or termination, customer concentration, competitive pricing, material and freight costs, production or shipping disruptions, product liability and recalls, labor disruptions, acquisition execution, capital-equipment utilization, interest rates, and foreign-exchange effects on products sourced from China. The company also identifies potential inventory obsolescence for new Housewares/Small Appliance products.
The company is involved in routine litigation, which management does not expect to materially affect financial position, liquidity, or results of operations. An Absorbent Products insurance settlement of $553,000 contributed to the six-month gross-profit increase.
Management concluded that disclosure controls and procedures were effective as of June 30, 2013, and reported no material changes to internal control over financial reporting during the quarter.
Investor Verification Points
- Verify the timing, contract novation, purchase price, and financial impact of the proposed DSE asset acquisition.
- Monitor Defense Products shipment levels, government funding, contract awards, and customer concentration.
- Assess whether the substantial increase in inventory and supplier deposits converts into sales and operating cash flow.
- Review the sustainability of Absorbent Products’ improved profitability, including the effect of the insurance settlement and customer manufacturing decisions.
- Confirm future dividend timing and amount, given the accelerated December 2012 payment and the absence of payments in the first six months of 2013.
- Evaluate interest-rate and liquidity risks associated with municipal bonds and variable-rate demand notes.