National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2018, filed November 9, 2018. National Presto operates through Housewares/Small Appliances and Defense Products. The Absorbent Products business is presented as discontinued operations following its 2017 divestiture. Comparative results are for the three and nine months ended October 1, 2017.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $81.7 million | $70.6 million | $237.7 million | $218.0 million |
| Gross profit | $15.7 million | $18.9 million | $55.4 million | $56.6 million |
| Operating profit | $6.8 million | $11.7 million | $32.6 million | $37.8 million |
| Earnings from continuing operations | $6.2 million | $8.3 million | $28.0 million | $27.3 million |
| Net earnings | $6.4 million | $8.3 million | $28.1 million | $36.2 million |
| Basic and diluted EPS | $0.91 | $1.19 | $4.02 | $5.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $70.0 million | $(5.5) million |
Q3 gross margin was approximately 19.2%, versus 26.7% in the prior-year quarter; nine-month gross margin was approximately 23.3%, versus 26.0%. Q3 operating margin was approximately 8.4%, versus 16.5%; nine-month operating margin was approximately 13.7%, versus 17.3%.
- Housewares/Small Appliances Q3 sales increased 9% to $22.7 million, while operating profit declined to $0.1 million from $0.3 million.
- Defense Q3 sales increased 19% to $58.9 million, but operating profit declined to $6.8 million from $11.4 million, primarily due to less favorable product mix.
- Nine-month Defense backlog was $358.4 million at September 30, 2018, compared with $308.2 million at December 31, 2017; fulfillment was expected over 18 to 24 months.
- Cash and cash equivalents were $80.5 million and marketable securities were $102.5 million at September 30, 2018, for combined liquid investments of approximately $183.1 million.
- Total current assets were $333.7 million and current liabilities were $50.4 million. Working capital was $283.3 million and the current ratio was 6.6 to 1.0.
- The filing shows no debt balance or borrowings. Stockholders’ equity was $354.0 million.
- Capital expenditures were $7.1 million for the first nine months, and dividends paid were $42.0 million. Cash dividends declared and paid were $6.00 per share for the nine-month period.
Material changes versus the prior comparable period
- Q3 sales rose 16%, but gross profit fell 17% and operating profit fell 41%, reflecting higher product costs, unfavorable Defense product mix, and a $3.0 million impairment charge.
- Q3 earnings from continuing operations declined 25% to $6.2 million, while net earnings declined 24% to $6.4 million.
- For the first nine months, sales increased 9%, but gross profit decreased 2% and operating profit decreased 14%. Earnings from continuing operations increased 3% because the effective tax rate fell to approximately 22% from 33%, primarily due to U.S. tax reform.
- Nine-month net earnings declined 22% because 2017 included an $11.4 million after-tax-related gain associated with the Absorbent Products divestiture. Discontinued operations contributed only $0.1 million in 2018 versus $8.9 million in 2017.
- Operating cash flow improved by $75.4 million year over year, driven by working-capital changes, including collections of receivables, lower inventories, and higher accounts payable and accrued liabilities.
- Intangibles amortization decreased in Q3 because an acquired Defense government-contract intangible was fully amortized in the second quarter of 2018; nine-month amortization nevertheless increased because of higher shipments under the related contract backlog.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal revenue or earnings guidance. Management expects to evaluate acquisitions aligned with its business segments and continue authorized capital investments where projected returns are appropriate.
- Management states that existing cash and marketable securities are sufficient for anticipated capital requirements, dividends, acquisitions, and other growth initiatives.
- On October 17, 2018, after the reporting date, AMTEC sold AMTEC Less Lethal Systems to PACEM Defense for cash and promissory notes totaling $10.6 million, subject to post-closing adjustments. The transaction resulted in a $3.0 million Q3 2018 impairment charge because carrying value exceeded estimated sale proceeds less selling costs.
- Key risks include dependence on Department of Defense funding and contracts, fixed-price contract exposure, major customers, competition and pricing, material, freight and tariff costs, Asian suppliers, product defects and recalls, labor disruptions, subcontractor performance, foreign-exchange movements, information technology failures, and cybersecurity breaches.
- The Company is involved in routine litigation; management does not expect the outcomes to materially affect financial position, liquidity, or results of operations.
- Management identified product liability and health-insurance claims, inventory obsolescence, variable consideration for returns and allowances, and long-lived-asset impairment as significant estimates. No known product liability claims were expected to exceed recorded reserves materially.
- The Company adopted ASC Topic 606 on January 1, 2018 without changing its revenue-recognition pattern. Adoption of the new credit-loss and goodwill standards was not expected to have a material effect; the impact of the new lease standard was still being evaluated.
Important facts for investors to verify
- Confirm the sustainability of Defense revenue growth and the $358.4 million backlog, including contract funding, margins, and delivery timing.
- Assess whether the Q3 gross-margin deterioration reflects temporary product mix and cost issues or a continuing trend.
- Review the valuation and post-closing adjustments associated with the $10.6 million AMTEC Less Lethal Systems sale and the related $3.0 million impairment.
- Reconcile cash generation with the Company’s unusually large dividend payments, acquisition plans, and future capital expenditures.
- Monitor liquidity and market risk in the $102.5 million marketable-securities portfolio, including variable-rate demand notes and uninsured cash balances.
- Distinguish recurring operating earnings from discontinued-operation results and the nonrecurring 2017 divestiture gain.