National Presto Industries, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter ended July 5, 2015, including three- and six-month comparisons with periods ended June 29, 2014. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments. The current six-month period includes six additional days versus the prior comparable period.
Financial performance and position
| Metric | Three months ended July 5, 2015 | Three months ended June 29, 2014 | Six months ended July 5, 2015 | Six months ended June 29, 2014 |
|---|---|---|---|---|
| Net sales | $102.4 million | $88.3 million | $203.4 million | $174.9 million |
| Gross profit | $20.4 million | $16.1 million | $41.3 million | $31.9 million |
| Gross margin | 20.0% | 18.3% | 20.3% | 18.2% |
| Operating profit | $13.8 million | $6.3 million | $26.1 million | $13.3 million |
| Operating margin | 13.4% | 7.2% | 12.8% | 7.6% |
| Net earnings | $9.1 million | $4.2 million | $17.2 million | $8.9 million |
| Basic and diluted EPS | $1.31 | $0.60 | $2.48 | $1.28 |
Second-quarter sales increased 16%, gross profit increased 27%, operating profit increased 118%, and net earnings increased 119%. Six-month sales increased 16%, gross profit increased 30%, operating profit increased 96%, and net earnings increased 94%.
- Defense Products generated second-quarter sales of $62.6 million and operating profit of $13.1 million, compared with $50.4 million and $7.0 million, respectively, in the prior year.
- Housewares/Small Appliances generated second-quarter sales of $22.0 million and operating profit of $1.9 million, broadly unchanged sales-wise from the prior year.
- Absorbent Products generated second-quarter sales of $17.8 million and an operating loss of $1.3 million, an improvement from a $2.1 million loss. Lower material costs and higher shipments helped, but the segment remained unprofitable.
- Six-month cash flow from operating activities was $25.7 million, versus $33.7 million in the prior year. Accounts receivable collections benefited cash flow, while higher inventories, supplier prepayments, and lower payables and accruals were uses of cash.
- Capital expenditures were $2.9 million for the six months, versus $5.0 million in the prior year. No business acquisition occurred in 2015; the prior-year period included the $10.5 million Clear Lake acquisition.
- Cash dividends paid were $28.1 million for the six months, versus $35.0 million in the prior year. Dividends paid per share were $4.05 versus $5.05.
- At July 5, 2015, cash and cash equivalents were $49.8 million and marketable securities were $21.7 million. Total current assets were $234.8 million and current liabilities were $43.5 million, producing a reported current ratio of 5.4 to 1.0.
- The filing presents no borrowings or debt balance; total liabilities shown were $47.8 million, primarily current liabilities and deferred income taxes.
- Working capital was $191.3 million at July 5, 2015, down $12.3 million from December 31, 2014. Total stockholders’ equity was $315.5 million.
Material changes versus the prior comparable period
- Defense sales rose 24% in the second quarter and 24% for the six months, primarily from increased units shipped; six-month gross profit also benefited from improved product mix.
- Absorbent Products sales rose 11% in the second quarter and 3% for the six months. The operating loss narrowed, but six-month results were partly offset by costs related to installing and starting new capital equipment.
- Intangibles amortization declined 74% in the second quarter and 44% for the six months, principally because amortization of the DSE customer-contract intangible asset was lower as shipments from the acquired backlog declined.
- Selling and general expenses decreased 10% in the second quarter and 6% for the six months, reflecting lower benefit, self-insurance, compensation, bad-debt, and prior-year acquisition-transition costs.
- Total assets declined to $363.2 million from $378.4 million at December 31, 2014, largely reflecting lower receivables and intangible assets. Other assets increased, including supplier prepayments.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings or revenue guidance. Management expects to continue evaluating acquisitions aligned with its segments and to make capital investments where projected returns are appropriate. Management states that available cash and marketable securities are sufficient for anticipated capital requirements, dividends, acquisitions, and other growth initiatives.
- Key risks include consumer spending, major-customer relationships, product mix, competitive pricing, material and freight costs, supply-chain reliance on Asian suppliers, product defects and recalls, labor disruptions, government defense spending and contract changes, subcontractor performance, capital-equipment execution, currency movements, and information-technology failures or security breaches.
- The company has routine litigation and believes its ultimate effect will not be material. It is self-insured for certain health and product-liability exposures; claims exceeding accrued reserves could adversely affect results.
- Unused supplier prepayments totaled $19.6 million at July 5, 2015, including $7.3 million classified as current.
- Variable-rate demand notes and municipal bonds comprise most marketable securities. Management reported no difficulty tendering the demand notes and does not expect interest-rate exposure to be material.
- No material inventory-obsolescence reserve was recorded during the period, although new product introductions carry excess- and obsolete-inventory risk.
- The company expects recently issued inventory and revenue-recognition standards to have no material impact, although the revenue-recognition standard was still under evaluation.
- Management concluded that disclosure controls were effective as of July 5, 2015, with no materially adverse changes in internal control over financial reporting.
Important facts for investors to verify
- Verify the sustainability and concentration of the Defense segment’s shipment-driven growth and its dependence on government contracts and funding.
- Assess whether Absorbent Products can reach profitability after new-equipment startup costs and ongoing customer-mix changes.
- Separate the benefit from lower DSE intangible amortization from underlying operating improvement.
- Review cash conversion, inventory growth, supplier prepayments, and the decline in operating cash flow.
- Confirm the company’s dividend policy and capacity for future large or special dividends given operating cash generation.
- Review commitments, self-insurance reserves, litigation, product-liability exposure, and potential contract or customer concentration risks.