National Presto Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended July 4, 2021, compared with June 28, 2020. The interim financial statements are unaudited, and management states that interim results are not necessarily indicative of full-year results. The company operates in Housewares/Small Appliances, Defense, and Safety.
Financial performance and position
| Metric | Three months ended July 4, 2021 | Three months ended June 28, 2020 | Six months ended July 4, 2021 | Six months ended June 28, 2020 |
|---|---|---|---|---|
| Net sales | $87.1 million | $87.1 million | $168.1 million | $152.8 million |
| Gross profit | $17.7 million | $21.7 million | $36.0 million | $37.9 million |
| Gross margin | 20.3% | 25.0% | 21.4% | 24.8% |
| Operating profit | $11.3 million | $15.3 million | $22.3 million | $24.6 million |
| Operating margin | 13.0% | 17.6% | 13.2% | 16.1% |
| Net earnings | $9.3 million | $12.7 million | $18.3 million | $20.9 million |
| Basic and diluted EPS | $1.32 | $1.80 | $2.59 | $2.97 |
Second-quarter sales were essentially flat year over year, while net earnings fell 27%. For the six-month period, sales increased 10%, but net earnings declined 12%. The company attributed weaker profitability principally to higher product, freight, labor, and other costs, together with lower interest income.
At July 4, 2021, cash and cash equivalents were $73.1 million and marketable securities were $42.5 million, compared with $86.0 million and $69.0 million, respectively, at December 31, 2020. Total current assets were $323.8 million and current liabilities were $46.0 million, producing a reported current ratio of 7.0 to 1.0. The company states that it has no debt and substantial liquidity to fund operations, dividends, capital investments, acquisitions, and other growth initiatives. Total lease liabilities were $10.4 million.
Operating cash flow for the first six months was $6.1 million, down from $14.6 million in the prior-year period. Investing activities provided $24.5 million, primarily because of maturities and sales of marketable securities, while financing activities used $43.5 million, principally for dividends. Capital expenditures were $2.0 million versus $0.7 million in the prior-year period. The company paid $44.1 million in dividends, including a regular dividend of $1.00 per share and an extra dividend of $5.25 per share.
Segment results
| Segment | Q2 2021 sales | Q2 2021 operating profit/(loss) | Six-month 2021 sales | Six-month 2021 operating profit/(loss) |
|---|---|---|---|---|
| Housewares/Small Appliances | $23.2 million | $(1.6) million | $49.7 million | $(0.6) million |
| Defense | $63.8 million | $14.1 million | $118.3 million | $25.4 million |
| Safety | $0.1 million | $(1.2) million | $0.2 million | $(2.5) million |
Housewares/Small Appliances sales declined 10.9% in the second quarter because of lower shipments, and operating profit fell to a loss as higher product and freight costs compressed margins. Six-month sales rose 8%, but operating profit also declined because of cost increases. Defense sales rose 4.5% in the quarter and 11% for the six-month period, primarily from higher units shipped; operating profit was broadly stable in the quarter and increased modestly for the six-month period. Safety remained a startup business with limited revenue and negative gross margins.
Defense backlog was $424.7 million at July 4, 2021, compared with $320.2 million at December 31, 2020. The company expects the backlog to be fulfilled over approximately 18 to 24 months.
Material changes, outlook, and risks
- COVID-19-related labor and material shortages, absenteeism, supply-chain congestion, transportation challenges, and higher costs continued to affect all segments. The company’s businesses remained operational because they were deemed essential.
- Management expects to continue evaluating acquisitions and making capital investments when projected returns are appropriate. No specific earnings or sales guidance was provided.
- The company identifies risks from consumer spending, major-customer relationships, competition and pricing, material and freight inflation, third-party Asian suppliers, product defects and recalls, labor disruptions, government defense funding, subcontractor performance, technology security, and foreign-exchange movements affecting purchases from China.
- The company reported a $2.506 million Mississippi property-tax assessment related to a Free Port Warehouse. Management intends to contest the assessment and believes payment is not probable; no accrual was recorded.
- The company revised its April 4, 2021 interim balance sheet after identifying a lease-accounting misstatement. Right-of-use assets, lease liabilities, total assets, and total liabilities were each increased by $7.430 million.
- On August 10, 2021, severe weather damaged a building, inventory, equipment, and tooling at the Janesville, Wisconsin facility. The company was assessing the damage and pursuing insurance claims; the filing does not provide a clear estimate of the financial impact.
- Management concluded that disclosure controls were effective as of July 4, 2021 and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether supply-chain, labor, freight, and material-cost pressures continue to reduce Housewares/Small Appliances margins.
- The conversion rate and timing of the $424.7 million Defense backlog, including exposure to U.S. Department of Defense funding, fixed-price contracts, and contract modifications or termination.
- The ultimate resolution and potential exposure from the $2.506 million Mississippi tax assessment.
- The amount and insurance recovery associated with the August 2021 Janesville weather damage.
- Whether operating cash flow improves after the six-month decline and remains sufficient to support substantial dividends, capital expenditures, and acquisitions.
- The accuracy and ongoing effects of the $7.430 million lease-accounting revision to the previously reported April 4, 2021 balances.