National Presto Industries, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Form 10-Q for the quarterly period ended October 2, 2016. Results cover the three and nine months ended October 2, 2016, compared with the corresponding periods ended October 4, 2015. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments.
Financial performance and liquidity
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $93.1 million | $90.9 million | $267.6 million | $294.3 million |
| Gross profit | $18.5 million | $19.1 million | $54.7 million | $60.4 million |
| Operating profit | $12.2 million | $12.1 million | $35.0 million | $38.2 million |
| Net earnings | $8.3 million | $8.1 million | $23.8 million | $25.3 million |
| Basic and diluted EPS | $1.19 | $1.17 | $3.41 | $3.65 |
| Operating cash flow | Not separately provided | Not separately provided | $26.6 million | $21.5 million |
Third-quarter gross margin was approximately 19.8%, operating margin 13.1%, and net margin 8.9%. Nine-month gross margin was approximately 20.4%, operating margin 13.1%, and net margin 8.9%.
- At October 2, 2016, cash and cash equivalents were $8.0 million and marketable securities were $65.8 million, versus $56.2 million and $32.3 million, respectively, at December 31, 2015.
- Total current assets were $271.6 million and total current liabilities were $55.7 million, producing working capital of $215.9 million and a current ratio of 4.9 to 1.0.
- The filing does not report outstanding borrowings or long-term debt; liabilities consisted primarily of accounts payable, accrued liabilities, and deferred income taxes.
- Inventory increased to $128.0 million from $98.6 million at year-end 2015, while accounts receivable declined to $58.1 million from $67.5 million.
- Net cash used in investing activities was $40.1 million, primarily reflecting $49.3 million of marketable securities purchases, $3.9 million of capital expenditures, and a $2.4 million note issuance.
- Net cash used in financing activities was $34.7 million, including $35.2 million of dividends. Dividends paid per share were $5.05 for the first nine months of 2016 versus $4.05 in 2015.
Material changes versus the prior comparable period
- Third-quarter sales increased 2%, but gross profit declined 3%. Net earnings increased 2%.
- Housewares/Small Appliances sales declined 14% to $23.7 million, primarily because of lower shipments. Its gross profit declined to $3.8 million from $6.2 million, partly due to higher repairs and maintenance costs.
- Defense sales increased 14% to $50.8 million, with gross profit rising to $13.6 million from $12.7 million, primarily due to higher units shipped.
- Absorbent Products sales were essentially flat, while gross profit increased to $1.1 million from $0.2 million due to improved efficiencies and lower material costs.
- For the first nine months, sales declined 9%, gross profit declined 10%, and net earnings declined 6%. Housewares/Small Appliances and Defense sales fell 12% and 13%, respectively, while Absorbent Products sales increased 6%.
- Nine-month results benefited from an $3.1 million reduction in intangibles amortization, primarily relating to the customer contract intangible asset acquired in the 2013 DSE transaction. Nine-month amortization was $0.6 million versus $3.6 million.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or sales guidance was provided. Management expects to continue evaluating acquisitions and making capital investments where projected returns are appropriate.
- Management stated that available cash and marketable securities provide substantial liquidity for capital requirements, dividends, acquisitions, and other growth initiatives.
- Key disclosed risks include consumer spending, major-customer relationships, competitive pricing, product acceptance, material and freight costs, production or shipping disruptions, Asian suppliers, product liability and recalls, labor disruptions, government and military-contract funding, subcontractor performance, foreign exchange exposure, and information-technology failures or security breaches.
- The company is self-insured for certain product liability and health-care costs and accrues known and incurred-but-not-reported claims. Management reported no known claims expected to have a material adverse effect beyond recorded reserves.
- Routine litigation is ongoing; management does not expect it to materially affect financial position, liquidity, or results of operations.
- Management reported no material inventory obsolescence reserve requirement during the period, but noted that weak demand for new or seasonal Housewares products could create future inventory losses.
- Disclosure controls and procedures were assessed as effective as of October 2, 2016, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the decline in year-to-date Defense and Housewares shipments is temporary or reflects a sustained change in demand or contract activity.
- Whether the substantial inventory balance, particularly work in process, converts to sales and cash without margin pressure or obsolescence.
- The sustainability of the unusually large dividend payments relative to operating cash flow and the reduction in cash balances.
- The liquidity, credit quality, and tenderability of the $65.8 million marketable-securities portfolio, including variable-rate demand notes.
- Potential changes in product-liability accruals, legal costs, repairs and maintenance, and other segment-specific costs.
- The impact of future government-contract funding, customer concentration, foreign exchange movements involving Chinese suppliers, and adoption of new accounting standards.