National Presto Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended April 1, 2018. The interim financial statements are unaudited. The company operates through Housewares/Small Appliance and Defense segments; the Absorbent Products business remains classified as discontinued operations.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $63.850 million | $76.826 million | Down 17% |
| Gross profit | $12.492 million | $20.277 million | Down 38% |
| Gross margin | 19.6% | 26.4% | Down 6.8 percentage points |
| Operating profit | $6.048 million | $13.381 million | Down 55% |
| Operating margin | 9.5% | 17.4% | Down 7.9 percentage points |
| Earnings from continuing operations | $5.951 million | $10.994 million | Down 46% |
| Net earnings | $5.951 million | $10.986 million | Down 46% |
| Basic and diluted EPS | $0.85 | $1.57 | Down $0.72 |
| Cash dividends per share | $6.00 | $6.00 | Unchanged |
Other income increased 83% to $1.632 million, primarily because higher marketable-security yields benefited from Federal Reserve rate increases. The effective income tax rate was approximately 23% in both periods.
Housewares/Small Appliance sales increased 23% to $19.709 million, primarily on higher shipments. Segment operating loss widened to $1.529 million from $0.875 million, partly because of $0.841 million of higher self-insurance charges. Defense sales declined 27% to $44.141 million because of lower unit shipments, while operating profit fell to $7.577 million from $14.256 million. Defense gross profit was affected by an unfavorable product mix.
Net cash provided by operating activities was $11.670 million, compared with $41.966 million in the prior-year quarter. Investing activities provided $35.010 million, principally from net maturities and sales of marketable securities. Capital expenditures were $2.507 million. Financing activities used $41.792 million, primarily for $42.087 million of dividend payments. Cash and cash equivalents increased to $61.735 million from $56.847 million at December 31, 2018.
At March 31, 2019, marketable securities totaled $97.767 million, producing cash, cash equivalents, and marketable securities of approximately $159.5 million. Total current assets were $310.276 million against current liabilities of $42.579 million, and the reported current ratio was 7.3 to 1.0. The company had no reported borrowings; lease liabilities totaled $3.832 million, including $0.539 million current and $3.293 million non-current.
Material changes versus the prior comparable period
- Consolidated sales declined $12.976 million, driven by a $16.628 million Defense decline partly offset by a $3.652 million Housewares/Small Appliance increase.
- Gross profit decreased $7.785 million, primarily because of the Defense volume and product-mix deterioration.
- Selling and general expenses increased 5% to $6.444 million, mainly because of higher Housewares/Small Appliance self-insurance charges. Defense expenses declined following the 2018 divestiture of AMTEC Less Lethal Systems.
- Intangible amortization fell to zero from $0.745 million because an acquired Defense government-sales-contract intangible was fully amortized in Q2 2018.
- Operating cash flow fell substantially as the prior-year benefit from working-capital changes did not recur; Q1 2019 also included an inventory increase and a decrease in payables and accruals.
- Working capital decreased $37.070 million to $267.697 million, primarily reflecting lower marketable securities and accounts receivable.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings or revenue guidance. It expects to continue evaluating acquisitions and making capital investments when appropriate returns are projected. Management states that available liquidity is sufficient for anticipated capital requirements, dividends, and potential growth initiatives.
Defense backlog was $345.399 million at March 31, 2019, up from $333.592 million at December 31, 2018. The company expects to fulfill the backlog over approximately 18 to 24 months. Defense results remain dependent on U.S. Department of Defense product requirements, funding, government-contract changes, subcontractors, and vendors.
Key disclosed risks include consumer spending, major-customer relationships, competitive pricing, product mix, material, freight and tariff costs, supply dependence on Asia, defective products and recalls, labor disruptions, military spending and contract modifications or termination, capital-equipment utilization, foreign-exchange exposure involving Chinese suppliers, and information-technology failures or security breaches.
The company adopted ASC 842 lease accounting on January 1, 2019, recognizing $3.832 million of right-of-use lease assets and corresponding lease liabilities. Quarterly lease cost was $0.191 million. Routine litigation is not expected by management to materially affect financial position, liquidity, or results of operations. Self-insurance and product-liability estimates remain potential sources of volatility; management reported no known claims expected to have a material adverse impact beyond recorded reserves.
The Absorbent Products disposal was completed in prior periods. Discontinued operations produced no income or loss in Q1 2019, compared with an $8,000 loss in Q1 2018, and no assets remained classified as held for sale at March 31, 2019.
Important facts for investors to verify
- Whether Defense shipment volumes, product mix, government funding, and backlog conversion improve in subsequent quarters.
- Whether the Housewares/Small Appliance segment can sustain higher shipments while reversing its operating loss and controlling self-insurance and inventory risks.
- The sustainability of the $6.00-per-share dividend relative to earnings and operating cash flow, particularly given the substantial quarterly dividend outflow.
- The composition, liquidity, credit quality, and interest-rate sensitivity of the company’s $97.767 million marketable-securities portfolio.
- Potential effects of tariffs, Chinese supplier costs, freight, product returns, recalls, and self-insurance claims on margins and cash flow.
- Management’s assessment of the pending expected-loss accounting standard and any future effect on receivables or available-for-sale securities.