National Presto Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012, compared with the three months ended April 3, 2011. The interim financial statements are unaudited. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments.
Financial performance and position
- Net sales: $96.8 million, down 11% from $108.9 million.
- Gross profit: $20.4 million, down 7% from $22.0 million. Gross margin increased to approximately 21.0% from 20.2%.
- Operating profit: $14.6 million, down 15% from $17.1 million. Operating margin was approximately 15.1%, compared with 15.7%.
- Net earnings: $9.3 million, down 18% from $11.4 million.
- Earnings per share: Basic and diluted EPS were $1.36, compared with $1.65.
- Comprehensive income: $9.3 million, compared with $11.4 million.
- Cash flow: Operating cash flow was $11.7 million, compared with $21.7 million. Investing activities provided $0.3 million, while financing activities used $40.9 million, principally for $41.3 million of dividends.
- Liquidity: Cash and cash equivalents were $45.0 million and marketable securities were $54.6 million at April 1, 2012. Working capital was $229.5 million and the current ratio was 4.9 to 1.0.
- Debt: The filing presents no debt balance or borrowings; total current liabilities were $59.3 million, and deferred income taxes were $9.4 million.
- Capital expenditures: $4.5 million, compared with $3.1 million, primarily reflecting higher Absorbent Products spending.
- Dividends: $6.00 per common share was declared and paid, compared with $8.25 in the prior-year quarter.
Material changes versus the prior comparable period
- Housewares/Small Appliances sales declined 9% to $24.7 million, primarily because of lower unit shipments. Gross profit declined 14% to $4.7 million, reflecting lower sales and higher commodity costs.
- Defense sales declined 16% to $49.7 million, primarily because of lower unit shipments. Gross profit declined 10% to $13.9 million, partially offset by production efficiencies and a more favorable product mix.
- Absorbent Products sales were essentially flat at $22.4 million, while gross profit increased 54% to $1.8 million due to favorable product mix and lower commodity costs, partially offset by lower production efficiencies during new-equipment installation.
- Selling and general expenses increased 19% to $5.7 million. Increases included higher self-insured product-liability and employee-benefit accruals in Housewares/Small Appliances and ongoing operating costs associated with the Defense facility acquired in the fourth quarter of 2011.
- Other income decreased 79% to $0.1 million, principally because of lower interest income from reduced yields and lower invested balances, together with lower royalty income.
- Cash declined to $45.0 million from $74.0 million at December 31, 2011, primarily because of dividend payments. Marketable securities declined to $54.6 million from $59.4 million.
Outlook, risks, contingencies, and unusual items
- Management expects to continue evaluating acquisitions aligned with its business segments and to make capital investments where an appropriate return on investment is projected. No quantitative earnings or revenue guidance is provided.
- Management states that cash and short-term marketable securities provide substantial liquidity for anticipated capital requirements, dividends, acquisitions, and other growth initiatives.
- Interest income may remain pressured by low yields and changes in the composition of investments. The company’s marketable securities include tax-exempt variable-rate demand notes and municipal bonds; management states that the demand notes have historically been successfully tendered and are supported by bank letters of credit.
- Key disclosed risks include consumer spending, major-customer relationships, defense-contract funding or termination, competition and pricing, commodity and freight costs, production or shipping interruptions, product liability and recalls, labor disruptions, supplier and subcontractor performance, foreign-exchange changes, and execution of capital investments and acquisitions.
- The company is involved in routine litigation, but management does not expect the ultimate outcome to materially affect financial position, liquidity, or results of operations.
- No material inventory-obsolescence reserve was recorded in the period. New Housewares/Small Appliance products may create future excess or obsolete inventory risk.
- The company is self-insured for health care costs and accrues known and incurred-but-not-reported product-liability claims. Management reports no known claims expected to have a material adverse impact beyond recorded reserves.
- A fourth-quarter 2011 segregation-of-duties material weakness involving Defense-segment accounting-system access was remediated during the first quarter of 2012. A quarterly system-access review program was instituted. Management concluded that disclosure controls and procedures were effective as of April 1, 2012.
- The company adopted the applicable presentation provisions of ASU 2011-05 concerning comprehensive income retrospectively; management does not expect the remaining deferred provisions to have a material impact.
Important facts for investors to verify
- Whether lower Defense and Housewares unit shipments persist and how government defense spending and contract funding affect future revenue.
- Whether Absorbent Products’ improved gross profit is sustainable after completion and utilization of new equipment.
- The effect of commodity, freight, labor, and product-liability costs on margins and selling and general expenses.
- The sustainability of the company’s dividend policy and the effect of large dividend payments on cash balances.
- The credit quality, liquidity, tender features, and interest-rate sensitivity of the $54.6 million marketable-securities portfolio.
- Integration and return-on-investment performance of the Defense facility acquired in the fourth quarter of 2011, as well as any future acquisitions.
- Whether the remediated segregation-of-duties issue remains effectively controlled through the new quarterly access-review process.