National Presto Industries, Inc. — 2023 Q2 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2023, compared with the periods ended July 3, 2022. The interim financial statements are unaudited. The company operates in Housewares/Small Appliances, Defense, and Safety.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $78.9 million | $77.1 million | $159.4 million | $137.9 million |
| Gross profit | $13.4 million | $15.0 million | $31.4 million | $24.7 million |
| Gross margin | 17.0% | 19.5% | 19.7% | 17.9% |
| Operating profit | $5.3 million | $7.9 million | $14.7 million | $10.9 million |
| Operating margin | 6.7% | 10.2% | 9.2% | 7.9% |
| Net earnings | $5.5 million | $6.7 million | $14.4 million | $9.6 million |
| Net margin | 7.0% | 8.7% | 9.0% | 7.0% |
| Basic and diluted EPS | $0.77 | $0.94 | $2.03 | $1.36 |
Cash flow and liquidity: Net cash provided by operating activities was $33.0 million in the first six months, compared with $2.1 million of operating cash used in the prior-year period. Capital expenditures were $0.9 million, investing cash use was $2.4 million, and dividends paid were $28.4 million. Cash and cash equivalents were $73.4 million at July 2, 2023, supplemented by $26.3 million of marketable securities.
Balance sheet and debt: Total assets were $401.8 million and stockholders’ equity was $335.3 million. Management states that the company has no debt; reported liabilities primarily comprise accounts payable, accrued liabilities, and operating lease liabilities totaling $10.7 million on a non-current and current basis. Working capital was $262.6 million, and the current ratio was 5.6 to 1.0.
Dividends: The company paid $4.00 per share during the first six months, consisting of a $1.00 regular dividend and a $3.00 extra dividend, compared with $4.50 per share in the prior-year period.
Material changes versus the prior comparable period
- Second-quarter sales increased 2%, but gross profit declined 11%, operating profit declined 33%, and net earnings declined 18%.
- Six-month sales increased 16%, gross profit increased 27%, operating profit increased 34%, and net earnings increased 50%.
- Second-quarter Housewares/Small Appliances sales declined 24% to $18.9 million, primarily because of lower unit shipments. Defense sales increased 15% to $59.7 million due mainly to higher shipments from backlog.
- For the first six months, Housewares/Small Appliances sales declined 11%, while Defense sales increased 28% to $118.6 million.
- Second-quarter Defense gross profit declined $1.0 million because of a less favorable product mix despite higher sales. Safety remained loss-making because of its startup operations.
- Interest income increased as a result of higher yields on marketable securities, contributing to a $1.1 million increase in second-quarter other income and a $2.3 million increase for the six-month period.
- Amortization increased materially because of customer-contract, customer-relationship, trademark, and safety-certification intangibles from the 2022 acquisitions of Woodlawn Manufacturing and Rely Innovations.
Outlook, risks, contingencies, and unusual items
- Defense backlog was $533.5 million at July 2, 2023, compared with $505.1 million at December 31, 2022; management expects fulfillment over approximately 18 to 36 months.
- Management expects adequate liquidity to fund operations, dividends, capital investments, and potential acquisitions. No formal earnings or revenue guidance is provided in the filing.
- Management continues to cite labor and material shortages, elevated labor and material costs, supply-chain constraints, customer and supplier disruptions, and lingering effects of COVID-19 responses.
- Key forward-looking risks include U.S. Department of Defense funding and contract changes, dependence on major customers and subcontractors, competitive pricing, product acceptance, recalls and product liability, labor disruptions, acquisition integration, startup-business performance, cybersecurity, interest rates, and foreign-exchange effects on China-sourced products.
- The company is contesting a Mississippi personal-property tax assessment of approximately $2.5 million. Management considers payment not probable, and no liability has been accrued.
- Routine litigation is not expected to materially affect financial position, liquidity, or results of operations. The filing states that no subsequent event required adjustment or additional disclosure.
- Inventory obsolescence remains a risk for new Housewares/Small Appliances and Safety products, although no other material obsolescence issue affected the six months ended July 2, 2023.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Defense backlog converts to revenue and cash flow as expected, including the effect of product mix and fixed-price contract economics.
- Whether the decline in Housewares/Small Appliances unit shipments is temporary and whether new products can offset seasonal and product-obsolescence risks.
- The operating losses and integration progress of the Safety businesses acquired through Rely Innovations.
- Whether elevated labor, material, freight, and supply-chain costs can be recovered through pricing.
- The status and potential financial exposure of the approximately $2.5 million Mississippi tax assessment.
- The sustainability of cash generation and the company’s future regular and extra dividend policy following the lower 2023 extra dividend.
- Marketable-securities liquidity and exposure to interest rates, bank counterparties, and uninsured cash balances.