National Presto Industries, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
National Presto Industries, Inc. filed its annual report for the fiscal year ended December 31, 2021. The company operates through three segments: Housewares/Small Appliance, Defense, and Safety. Housewares products are primarily sold in the United States and Canada; Defense products are supplied principally to the U.S. Department of Defense and its prime contractors; and Safety consists of startup businesses Rusoh and OneEvent.
The business remained operational during COVID-19 shutdowns because all segments were deemed essential. The company reported continued supply-chain delays, labor shortages, absenteeism, and higher material, transportation, and labor costs.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $355.8 million | $352.6 million | Up 1% |
| Gross profit | $64.4 million | $84.9 million | Down 24% |
| Gross margin | 18.1% | 24.1% | Down 6.0 percentage points |
| Operating profit | $30.0 million | $56.2 million | Down 47% |
| Operating margin | 8.4% | 15.9% | Down 7.5 percentage points |
| Net earnings | $25.7 million | $47.0 million | Down 45% |
| Basic and diluted EPS | $3.63 | $6.67 | Down 46% |
| Cash from operations | $34.7 million | $41.0 million | Down 15% |
| Capital expenditures | $2.9 million | $2.6 million | Up 9% |
| Dividends paid | $44.1 million | $42.2 million | Up 5% |
At December 31, 2021, cash and cash equivalents were $109.8 million and marketable securities were $34.2 million. The company stated that it had no debt. Working capital was $294.9 million and the current ratio was 6.2-to-1. The company had an unused $5.0 million unsecured line of credit and $1.247 million of undrawn commercial letters of credit.
Variable-rate demand notes totaling $25.4 million were classified as marketable securities rather than cash equivalents, although management stated they can generally be tendered for cash at par plus interest within seven days. Total assets were $420.4 million, total liabilities were $62.8 million, and stockholders’ equity was $357.6 million.
Segment performance and material changes
| 2021 segment | Net sales | Gross profit/(loss) | Operating profit/(loss) |
|---|---|---|---|
| Housewares/Small Appliance | $115.9 million | $10.0 million | $(2.6) million |
| Defense | $239.5 million | $61.2 million | $51.2 million |
| Safety | $0.3 million | $(6.8) million | $(18.6) million |
- Housewares/Small Appliance sales declined 2% because of lower shipments, partly offset by price increases and a favorable $3.6 million year-over-year effect from the partial reversal of estimated product-recall refunds. Gross profit fell 59% to $10.0 million, and the segment moved from a $10.4 million operating profit in 2020 to a $2.6 million operating loss.
- Housewares margins were pressured by higher ocean freight and product costs, supply-chain constraints, and lower volume. Amazon represented 10% of consolidated sales; the company stated that the loss of Amazon or Wal-Mart could materially affect the segment.
- Defense sales increased 2% on higher units shipped. Gross profit declined 2% because of less favorable product mix, labor shortages, material delays, and storm damage that shut down one production line for several months.
- Defense backlog rose to approximately $460.8 million from $320.2 million at December 31, 2020. The company expects to produce and ship this backlog over approximately 18 to 36 months. The backlog remains dependent on military requirements, appropriations, and government funding.
- Safety remained materially unprofitable. The segment recorded a $5.247 million write-down of Rusoh inventory and materials and a $7.615 million impairment of Rusoh notes receivable and related interest. The company stated that both Safety businesses remain startup operations with limited revenue.
- Consolidated selling and general expense increased 20% to $34.2 million, primarily because of the Rusoh receivable impairment and related interest. Other income declined 36% to $2.4 million, primarily because of lower interest income.
Cash flow, liquidity, outlook, and risks
Operating cash flow remained positive but declined to $34.7 million, primarily reflecting lower earnings, increased inventories, and lower payables and accruals. Investing cash flow was $32.5 million, primarily from net sales and maturities of marketable securities, partially offset by $2.9 million of capital expenditures. Financing activities used $43.5 million, principally for dividends.
Management stated that liquidity is sufficient to fund operations, dividends, capital investments, acquisitions, and other growth initiatives. The company expects to continue evaluating acquisitions and capital projects but provided no specific earnings or revenue guidance.
The board announced after year-end a regular dividend of $1.00 per share plus an extra dividend of $3.50 per share, payable March 15, 2022.
- Key risks include inflation and increases in raw material, freight, energy, labor, and transportation costs that may not be recoverable through pricing.
- Housewares and Safety depend heavily on Asian suppliers, particularly in China, creating exposure to supply interruptions, tariffs, trade restrictions, shipping delays, and currency movements.
- The Housewares business is seasonal and dependent on consumer spending, retail demand, major customers, and successful new-product introductions.
- Defense contracts are predominantly fixed-price, exposing the company to cost overruns, labor and material constraints, subcontractor performance, quality failures, and unfavorable contract economics.
- Defense contracts may be modified or terminated by the government, and future sales depend on congressional appropriations, defense budgets, and military requirements.
- Environmental remediation reserves totaled $1.0 million. Management believes the reserve is adequate, but additional studies, monitoring, or remediation could require further costs.
- The company is contesting a $2.506 million Mississippi personal-property-tax assessment and has not accrued the amount because payment was not considered probable.
- The company is partly self-insured for product liability and does not maintain product-recall insurance, creating exposure to claims, recalls, and uninsured losses.
- Management disclosed risks from cybersecurity incidents, cloud and wireless infrastructure failures, and continuing COVID-19-related disruptions.
Most important facts for investors to verify
- Whether elevated freight, material, labor, and supply-chain costs continue to pressure Housewares margins.
- Execution, funding, timing, and profitability of the Defense backlog, including the 40mm ammunition program.
- Whether the Safety segment can generate meaningful revenue and avoid further inventory, receivable, goodwill, or intangible impairments.
- The collectability and accounting treatment of Rusoh-related notes and the effect of the $7.615 million impairment.
- The outcome of the $2.506 million Mississippi tax assessment and adequacy of the $1.0 million environmental reserve.
- Customer concentration, particularly Amazon and other major retail accounts, given the absence of long-term supply contracts.
- Cash generation after dividends, inventory investment, capital expenditures, and any future acquisitions.
- The filing’s critical audit matter regarding timing of Defense-segment revenue recognition under ASC 606.
- Management’s assertion that disclosure controls and internal control over financial reporting were effective as of December 31, 2021; the independent auditor issued unqualified opinions.