National Presto Industries, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
National Presto Industries, Inc. reported results for the three months ended April 4, 2021, compared with March 29, 2020. The company operates through Housewares/Small Appliances, Defense, and Safety segments. The 2021 fiscal quarter included five additional days versus the prior-year quarter. All businesses remained operational during the COVID-19 pandemic and were deemed essential.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $81.0 million | $65.6 million | +23% |
| Gross profit | $18.4 million | $16.1 million | +14% |
| Operating profit | $10.9 million | $9.3 million | +18% |
| Net earnings | $9.0 million | $8.2 million | +9% |
| Diluted EPS | $1.28 | $1.17 | +9% |
| Operating cash flow | $6.8 million | $10.6 million | -36% |
- Gross margin was approximately 22.7%, compared with 24.5% in the prior-year quarter. Operating margin was approximately 13.5%, compared with 14.1%; net margin was approximately 11.1%, compared with 12.5%.
- Housewares/Small Appliances sales increased 33.8% to $26.5 million, primarily from higher shipments. Segment operating profit improved to $1.0 million from a $0.1 million loss.
- Defense sales increased 19% to $54.5 million, primarily from higher shipments. Operating profit increased to $11.2 million from $10.7 million, despite a less favorable product mix and higher material costs.
- Safety generated $67 thousand of sales and an operating loss of $1.3 million. The segment continued to have negative gross margins because of its startup stage.
- Cash and cash equivalents were $65.1 million at April 4, 2021, compared with $86.0 million at December 31, 2020. Marketable securities were $52.1 million, producing combined cash and marketable securities of approximately $117.2 million.
- The company stated that it had no debt and adequate liquidity. Lease liabilities totaled $3.2 million, including $0.6 million current.
- Current assets were $319.6 million and current liabilities were $51.5 million, resulting in working capital of $268.1 million and a current ratio of 6.2 to 1.0.
- Investing activities provided $15.8 million, principally from $17.0 million of marketable securities maturities and sales. Capital expenditures were $1.1 million.
- Financing activities used $43.5 million, primarily for $44.1 million of dividends. The regular dividend was $1.00 per share and the extra dividend was $5.25 per share, compared with $5.00 in the prior-year quarter.
- Defense backlog was $459.4 million at April 4, 2021, compared with $320.2 million at December 31, 2020; management expected fulfillment over approximately 18 to 24 months.
Material changes versus the prior comparable period
- Sales growth reflected increased shipments in both Housewares/Small Appliances and Defense, aided in part by the longer current-year fiscal quarter.
- Gross profit benefited from higher Housewares/Small Appliances sales and improved product mix. Defense profit benefited from volume but was partly offset by product mix and material-cost pressure.
- Selling and general expenses increased 8% to $7.4 million, including higher insurance, health care, and legal and professional costs.
- Other income declined 45% to $0.7 million because of lower interest income from lower yields and lower average investments.
- Operating cash flow declined because of increased inventory and a net reduction in accounts payable and accrued liabilities, partly offset by accounts receivable collections.
- Cash declined primarily because annual dividend payments exceeded operating cash generation, partially offset by marketable securities maturities and sales.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management expects to evaluate acquisitions and continue authorized capital investments when acceptable returns are projected.
- COVID-19 continued to cause material, labor, component, finished-goods, and transportation shortages; supply-chain congestion; absenteeism; higher costs; and operating inefficiencies. The duration and future financial impact remained uncertain.
- Key disclosed risks include dependence on Defense Department funding and contracts, fixed-price Defense work, major customers, Asian suppliers, competitive pricing, product recalls and liability claims, labor disruptions, foreign-exchange effects, cybersecurity events, and changes in government requirements.
- Hinds County, Mississippi assessed approximately $2.5 million of personal property taxes relating to the subsidiary’s Free Port Warehouse filings for the prior seven years. The company intends to contest the assessment and had recorded no accrual because payment was not considered probable.
- Management stated that routine litigation was not expected to materially affect financial position, liquidity, or results of operations.
- The company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, with no material financial statement impact. Disclosure controls were evaluated as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Assess whether the 23% sales increase is sustainable after adjusting for the five additional fiscal-quarter days and shipment timing.
- Monitor gross-margin pressure from Defense product mix, material costs, labor availability, and supply-chain disruptions.
- Evaluate the quality and timing of the $459.4 million Defense backlog, including contract funding, fixed-price exposure, and potential modifications or terminations.
- Reconcile dividend policy and cash usage with operating cash flow, particularly given the substantial annual extra dividend.
- Track the Safety segment’s startup losses and capital requirements.
- Follow the $2.5 million Mississippi tax assessment and any related accrual, settlement, or legal developments.
- Verify the company’s stated absence of debt and the liquidity, credit, and interest-rate risks associated with its marketable securities.