National Presto Industries, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
National Presto Industries, Inc. reported for the fiscal year ended December 31, 2022. The company operates through three segments: Housewares/Small Appliance, Defense, and Safety. The Housewares segment is seasonal, with peak demand generally occurring in the fourth quarter; Defense and Safety are generally less seasonal.
The Defense segment manufactures ammunition, ordnance-related products, precision assemblies, cartridge cases, and energetic devices primarily for the U.S. Department of Defense and defense contractors. The Safety segment consists of startup businesses focused on fire extinguishers, environmental monitoring, and carbon monoxide alarms.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $321.6 million | $355.8 million | Down 10% |
| Gross profit | $55.1 million | $64.4 million | Down 14% |
| Gross margin | 17.1% | 18.1% | Down approximately 100 bps |
| Operating profit | $22.1 million | $30.0 million | Down 26% |
| Operating margin | 6.9% | 8.4% | Down approximately 150 bps |
| Net earnings | $20.7 million | $25.7 million | Down 19% |
| Diluted EPS | $2.92 | $3.63 | Down 20% |
| Cash flow from operations | $8.8 million | $34.7 million | Down 75% |
Net earnings included $5.3 million of noncash goodwill and intangible-asset impairments, $3.3 million of depreciation and amortization, and a $2.3 million deferred-tax benefit. The effective tax rate was 20.2%, compared with 21.0% in 2021.
At December 31, 2022, cash and cash equivalents were $70.7 million and marketable securities were $24.9 million. The company reported working capital of $273.0 million and a current ratio of 6.1 to 1.0. Management stated that the company had no debt and adequate liquidity to fund operations, dividends, acquisitions, and capital investments. The company maintained a $5.0 million unsecured line of credit with no borrowings outstanding. Lease liabilities totaled $10.7 million.
Capital expenditures were $1.0 million. Cash used in investing activities was $16.4 million, including $24.7 million spent on acquisitions. Dividends paid were $31.8 million. A regular dividend of $1.00 per share plus an extra dividend of $3.00 per share was declared in February 2023.
Segment performance and material changes
- Housewares/Small Appliance: Sales increased 2% to $118.3 million, primarily from pricing and product mix, while units shipped declined. Gross profit rose to $17.4 million, or approximately 14.7% of sales, from $10.0 million, or 8.6%, in 2021. Improvements reflected pricing, mix, lower freight costs, and lower standard costs, partly offset by lower volume and $3.6 million of obsolete or excess inventory adjustments.
- Defense: Sales declined 15% to $202.5 million because of lower units shipped. Gross profit decreased to $42.6 million, or approximately 21.1% of sales, from $61.2 million, or 25.6%. Results were affected by unfavorable mix, labor shortages, material delays, supply-chain issues, and operating inefficiencies. Defense operating profit declined to $31.6 million from $51.2 million.
- Safety: Sales increased to $0.8 million from $0.3 million, but the segment remained loss-making. Gross loss was $4.9 million and operating loss was $14.8 million. The company recognized $3.8 million of goodwill impairment and $1.5 million of technology-software impairment related to OneEvent. The segment also recorded $1.8 million of inventory and materials write-downs.
- Acquisitions: The company acquired Knox Safety, subsequently renamed Rely Innovations, for $3.1 million in cash and acquired Woodlawn Manufacturing for $21.6 million. Woodlawn added defense-related metal parts and assemblies and contributed $3.2 million of revenue and $0.1 million of net earnings from acquisition through year-end. The Woodlawn purchase-price allocation remained provisional, creating potential future adjustments to acquired assets, liabilities, depreciation, amortization, and goodwill.
- Defense backlog: Backlog increased to approximately $505.1 million at December 31, 2022, from $460.8 million. Management expected production and shipment over approximately 18 to 36 months.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects to continue evaluating acquisitions and making capital investments where acceptable returns are projected. A new five-year Army 40mm ammunition contract awarded in September 2022 had an initial value of $69.8 million and a maximum ceiling of $826.8 million; actual volumes depend on military requirements, appropriations, and government procurement decisions.
- Supply-chain congestion, labor shortages, higher material, transportation, energy, and labor costs, and potential tariffs remain significant risks. Housewares and certain Safety products rely heavily on suppliers in Asia, particularly China.
- Most Defense work is performed under fixed-price contracts, limiting the company’s ability to recover unexpected cost increases. Contracts may be modified or terminated by the government, and performance depends partly on subcontractors.
- Defense revenue depends substantially on U.S. defense budgets, congressional appropriations, government funding, and program requirements. The 2022 contract backlog is not a guarantee of revenue or profitability.
- The Safety businesses are startup operations with limited revenue, continuing losses, product-certification requirements, and impairment risk. Further investments may not produce commercial success.
- The company is exposed to product liability, recalls, customer returns, inventory obsolescence, cybersecurity incidents, foreign supplier disruptions, and consumer-spending volatility.
- The company carried a $0.9 million environmental liability reserve and stated that known environmental matters were not expected to be material absent unforeseen developments. A disputed Mississippi property-tax assessment totaled $2.5 million; management believes payment is not probable and recorded no accrual.
- The company had $277.4 million of purchase obligations at year-end, although many purchase orders can be canceled or changed and the ultimate obligation cannot be reasonably estimated.
- Internal control over financial reporting and disclosure controls were deemed effective, and the independent auditor issued unqualified opinions. Woodlawn was excluded from management’s internal-control assessment because it was acquired in the fourth quarter and represented approximately 5% of total assets and less than 1% of net income.
Most important facts for investors to verify
- Whether Defense shipment volumes, production efficiency, labor availability, and fixed-price contract margins recover after the 2022 decline.
- The timing, funding, and profitability of the 40mm ammunition contracts and the conversion of the $505.1 million Defense backlog into revenue and cash flow.
- Whether the Safety segment can reduce losses and avoid additional goodwill, intangible-asset, or inventory impairments.
- The final purchase-price allocation for Woodlawn and any resulting changes to goodwill, customer-relationship intangibles, amortization, or earnings.
- Working-capital requirements, especially inventory and accounts receivable, given the sharp decline in operating cash flow to $8.8 million.
- The sustainability of dividends and future acquisitions relative to operating cash generation and available cash and marketable securities.
- Exposure to Asian supply disruptions, tariffs, freight costs, labor costs, product recalls, cybersecurity events, environmental obligations, and the disputed $2.5 million tax assessment.