Business Context and Reporting Period
National Presto Industries, Inc. filed this unaudited Form 10-Q for the three months ended April 2, 2023, compared with the three months ended April 3, 2022. The company operates through Housewares/Small Appliances, Defense, and Safety segments. The Defense segment depends substantially on U.S. Department of Defense requirements and funding.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $80.409 million | $60.754 million | +32% |
| Gross profit | $18.020 million | $9.711 million | +86% |
| Gross margin | 22.4% | 16.0% | +6.4 percentage points |
| Operating profit | $9.420 million | $3.087 million | +205% |
| Operating margin | 11.7% | 5.1% | +6.6 percentage points |
| Net earnings | $8.878 million | $2.915 million | +205% |
| Net margin | 11.0% | 4.8% | +6.2 percentage points |
| Basic and diluted EPS | $1.25 | $0.41 | +205% |
| Operating cash flow | $37.471 million | $5.438 million | +$32.033 million |
- Other income was $1.853 million versus $0.669 million, while income taxes were $2.395 million versus $0.841 million. The effective tax rate was approximately 21% versus 22%.
- Cash and cash equivalents were $75.625 million at April 2, 2023, and marketable securities were $29.013 million, for approximately $104.638 million of immediately available financial assets.
- Total liabilities were $66.397 million, consisting primarily of current liabilities and operating lease liabilities. Management stated that the company has no debt.
- Working capital was $255.670 million and the current ratio was 5.5 to 1.0, compared with 6.1 to 1.0 at December 31, 2022.
- Capital expenditures were $0.498 million. Cash used in investing activities was $4.601 million, primarily reflecting net purchases of marketable securities and capital expenditures.
- Cash used in financing activities was $27.956 million, primarily annual dividend payments of $28.385 million. The dividend was $4.00 per share, comprising a $1.00 regular dividend and a $3.00 extra dividend.
Material Changes Versus the Prior Comparable Period
- Housewares/Small Appliances sales increased 4% to $21.052 million, primarily from higher unit prices, partly offset by lower unit shipments and mix changes. Segment operating profit increased to $1.345 million from an operating loss of $1.539 million.
- Defense sales increased 46% to $58.858 million, primarily due to increased shipments from backlog. Segment operating profit increased 74% to $10.519 million, supported by higher sales and a more favorable product mix.
- Safety sales increased to $0.499 million from $0.093 million, but the segment remained loss-making, with an operating loss of $2.444 million versus $1.412 million.
- Defense backlog increased to $544.448 million at April 2, 2023, from $505.069 million at December 31, 2022. The company expects to fulfill the backlog over approximately 18 to 36 months.
- Gross profit benefited from improved pricing and mix, lower ocean cargo and inland freight costs in Housewares/Small Appliances, and higher Defense volume and mix.
- Selling and general expenses increased 25% to $8.221 million. The company cited higher self-insurance accruals, compensation, travel, professional costs, health care costs, rent, and one-time insurance-related costs.
- Amortization increased to $0.379 million from $0.054 million, primarily reflecting acquired intangible assets.
- Accounts receivable declined to $42.179 million from $71.024 million at year-end, contributing $29.050 million to operating cash flow. Inventory increased to $154.991 million from $152.137 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific numerical earnings or revenue guidance was provided. Management expects to evaluate acquisition opportunities aligned with its segments and continue authorized and potentially additional capital investments when appropriate returns are projected.
- Management reports substantial liquidity to fund operations, dividends, capital requirements, acquisitions, and other growth initiatives, with an investment strategy focused on safety and short-term liquidity.
- COVID-19 after-effects continue to contribute to labor and material shortages, increased costs, absenteeism, supply difficulties, and operating inefficiencies, although conditions have improved.
- Key disclosed risks include DOD funding and contract modifications or termination, dependence on subcontractors and vendors, customer concentration, competitive pricing pressure, product acceptance, material and freight inflation, production or shipping interruptions, product liability and recalls, labor disruptions, acquisitions and startup businesses, cybersecurity, foreign exchange exposure, and changes in government policy.
- The company faces a $2.506 million Mississippi personal property tax assessment covering approximately seven years. Management is contesting the assessment and does not consider payment probable; no accrual has been recorded.
- Routine litigation is not expected to materially affect financial position, liquidity, or results of operations. Self-insured product liability and health-care claims remain subject to estimation risk.
- New product demand and inventory obsolescence remain risks. No material inventory obsolescence issue was recorded during the quarter, but prior impairments included $3.613 million in Housewares/Small Appliances during 2022 and $1.807 million in Safety inventory during 2022.
- The Woodlawn Manufacturing acquisition remains subject to completion of fair-value work, and material adjustments to acquired assets, liabilities, depreciation, and amortization could result. During the quarter, goodwill and deferred tax liabilities each increased by $0.860 million from identified acquisition-date amounts.
- Management concluded that disclosure controls and procedures were effective as of April 2, 2023, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify whether Defense backlog converts to revenue and cash as expected over the disclosed 18-to-36-month period and assess dependence on DOD funding and fixed-price contracts.
- Assess the sustainability of the sharp improvement in gross and operating margins, including the effects of pricing, product mix, freight costs, and shipment timing.
- Monitor Safety segment losses, startup execution, and the performance of the acquired Knox Safety and Woodlawn Manufacturing businesses.
- Review inventory levels, product returns, customer allowances, and potential obsolescence charges, particularly for new and seasonal products.
- Track the Mississippi tax assessment and any developments that could require an accrual or cash payment.
- Confirm the company’s continuing ability to fund large dividends, acquisitions, and capital investments from operating cash flow and available cash and securities without debt financing.