National Presto Industries, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
National Presto Industries, Inc. reported results for the three and nine months ended October 2, 2022, compared with October 3, 2021. The company operates through Housewares/Small Appliances, Defense, and Safety segments. Interim financial statements are unaudited, and management notes that quarterly results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $69.7 million | $87.2 million | $207.6 million | $255.4 million |
| Gross profit | $17.1 million | $11.2 million | $41.8 million | $47.3 million |
| Gross margin | 24.5% | 12.9% | 20.1% | 18.5% |
| Operating profit | $10.5 million | $4.6 million | $21.4 million | $26.9 million |
| Operating margin | 15.1% | 5.3% | 10.3% | 10.5% |
| Net earnings | $8.9 million | $4.1 million | $18.5 million | $22.4 million |
| Basic and diluted EPS | $1.26 | $0.58 | $2.62 | $3.18 |
- Q3 sales declined 20%, while gross profit increased 52%, operating profit increased 126%, and net earnings increased 116%.
- Nine-month sales declined 19%, gross profit declined 12%, operating profit declined 20%, and net earnings declined 17%.
- At October 2, 2022, cash and cash equivalents were $61.8 million and marketable securities were $43.7 million. Total current assets were $336.6 million versus current liabilities of $51.6 million, producing a current ratio of 6.5 to 1.0.
- The company reported no debt, other than operating lease liabilities of $11.0 million, including current and non-current amounts.
- Working capital was $285.0 million, down $9.9 million from December 31, 2021. Total assets were $407.4 million and stockholders’ equity was $345.5 million.
- Cash flow from operations was negative $3.3 million in the first nine months of 2022, compared with $14.6 million of cash provided in the prior-year period. Inventory growth of $32.0 million was the principal use of operating cash.
- Investing cash flow was negative $13.3 million, including $9.7 million of net purchases of marketable securities and $3.1 million for the Knox Safety acquisition.
- Financing cash flow was negative $31.4 million, primarily reflecting $31.8 million of dividends paid. The March 2022 dividend included a regular dividend of $1.00 per share and an extra dividend of $3.50 per share.
- Defense backlog was $497.9 million at October 2, 2022, compared with $460.8 million at December 31, 2021; the company expects fulfillment over approximately 18 to 36 months.
Material changes versus the prior comparable period
- Housewares/Small Appliances Q3 sales decreased 2% to $27.1 million, but gross profit improved from a $3.2 million loss to $8.8 million of profit. Pricing, product mix, and lower freight costs more than offset lower unit shipments.
- Defense Q3 sales declined 29% to $42.3 million. Gross profit decreased 39% to $8.8 million due to lower shipments, less favorable mix, labor shortages, supply-chain issues, and reduced efficiencies.
- Safety remained a small startup business with negative gross margins. Q3 Safety sales were $0.2 million and operating loss was $1.9 million.
- For the first nine months, Housewares/Small Appliances operating profit improved to $5.2 million from a $6.9 million loss, while Defense operating profit declined to $20.9 million from $37.5 million. Safety’s operating loss increased to $4.6 million from $3.6 million.
- The Q3 effective tax rate was approximately 23%, compared with 22% in the prior-year quarter. The nine-month effective tax rate was also approximately 23%, compared with 22% in 2021.
- Inventory increased to $176.7 million from $143.9 million at year-end 2021, while cash declined by $48.0 million. Marketable securities increased by $9.5 million.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects to continue evaluating acquisitions and making capital investments when projected returns are appropriate.
- Management states that liquidity is sufficient to fund operations, dividends, capital requirements, and future acquisitions. The company intends to maintain a conservative investment strategy focused on safety and short-term liquidity.
- COVID-19 after-effects continue to cause material, labor, component, transportation, and finished-goods shortages, supply-chain congestion, delays, absenteeism, and higher costs. The duration and severity of these effects remain uncertain.
- On July 29, 2022, the company acquired assets and assumed liabilities of Knox Safety, a startup carbon-monoxide-detector business, for $3.1 million in cash and a $0.5 million vendor deposit. The transaction generated a $0.5 million bargain-purchase gain; the acquired business contributed $0.1 million of revenue and a $0.2 million loss through October 2, 2022. Purchase accounting remained subject to final fair-value adjustments.
- On October 26, 2022, after the reporting date, the company acquired Woodlawn Manufacturing, a defense and aerospace precision-parts manufacturer with recently reported annual sales of approximately $18 million. Initial purchase accounting was incomplete at the filing date.
- The company is contesting a $2.5 million Mississippi personal-property-tax assessment covering seven years. Management considers payment not probable and has recorded no accrual.
- Key disclosed risks include customer concentration and demand, defense funding and contract modification or termination, fixed-price contract exposure, supply-chain disruption, labor shortages, material and freight inflation, product liability and recalls, startup execution, acquisitions, cybersecurity, foreign suppliers, exchange rates, and interest-rate changes.
- Management concluded that disclosure controls and procedures were effective as of October 2, 2022, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Defense shipment volumes, labor availability, supply-chain efficiency, and product mix improve sufficiently to support margins and backlog conversion.
- Whether elevated Housewares/Small Appliances inventories result in future discounts, returns, obsolescence, or write-downs.
- The sustainability of operating cash flow given inventory investment and the company’s substantial dividend policy.
- The final purchase accounting, integration progress, and operating performance of Knox Safety and Woodlawn Manufacturing.
- The outcome of the $2.5 million Mississippi tax assessment and any changes in litigation or contingent-liability exposure.
- The company’s ability to maintain pricing and gross margins amid labor, material, freight, supplier, and broader supply-chain pressures.