National Presto Industries, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
National Presto Industries, Inc. reported unaudited results for the three months ended March 29, 2020, compared with the three months ended March 31, 2019. The company operates through Housewares/Small Appliances, Defense Products, and Safety segments. All businesses were deemed essential and continued operating during the COVID-19 pandemic.
The filing was delayed under SEC Release No. 34-88465 because COVID-19 restrictions limited employee access to financial records and slowed the quarterly review process.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $65.636 million | $63.850 million | +3% |
| Gross profit | $16.117 million | $12.492 million | +29% |
| Gross margin | 24.6% | 19.6% | +5.0 percentage points |
| Operating profit | $9.263 million | $6.048 million | +53% |
| Operating margin | 14.1% | 9.5% | +4.6 percentage points |
| Earnings before taxes | $10.530 million | $7.680 million | +37% |
| Net earnings | $8.222 million | $5.951 million | +38% |
| Basic and diluted EPS | $1.17 | $0.85 | +$0.32 |
| Operating cash flow | $10.584 million | $11.670 million | −9% |
Cash dividends declared and paid were $6.00 per common share in both periods, including a $1.00 regular dividend and a $5.00 extra dividend in 2020.
At March 29, 2020, cash and cash equivalents were $43.035 million and marketable securities were $83.951 million, for total cash and marketable securities of approximately $126.986 million. The company reported no debt, other than operating lease liabilities. Total lease liabilities were $3.407 million, including current and non-current amounts.
Total assets were $383.659 million, total liabilities were $48.969 million, and stockholders’ equity was $334.690 million. Working capital was $266.211 million, and the current ratio was 6.8 to 1.0, compared with 8.6 to 1.0 at December 31, 2019.
Segment Results and Material Changes
| Q1 2020 Segment | Net Sales | Gross Profit/(Loss) | Operating Profit/(Loss) |
|---|---|---|---|
| Housewares/Small Appliances | $19.812 million | $3.264 million | $(0.054) million |
| Defense Products | $45.780 million | $13.247 million | $10.669 million |
| Safety | $0.044 million | $(0.394) million | $(1.352) million |
- Housewares/Small Appliances sales increased 0.7%, while gross profit improved primarily because of product mix and margin improvements. The segment remained approximately breakeven at the operating level.
- Defense sales increased 4%, primarily from higher shipments. Gross profit benefited from favorable product mix, higher sales, and improved efficiencies. Operating profit increased substantially, aided by lower employee compensation following retirements.
- Safety remained in the startup phase and generated negative gross and operating margins. Expenses increased primarily because of the OneEvent Technologies acquisition and increased staffing.
- OneEvent Technologies was acquired in July 2019 for $6.501 million, including $4.020 million of cash, forgiveness of a $2.364 million note receivable, and a potential earn-out. The estimated earn-out value was $117,000 at March 29, 2020.
- Defense backlog was $306.265 million at March 29, 2020, down from $310.385 million at December 31, 2019. The company expects fulfillment over approximately 18 to 24 months.
Cash Flow, Liquidity, Outlook, and Risks
- Operating cash flow declined to $10.584 million from $11.670 million, primarily because of higher accounts receivable and inventory-related uses of cash, partially offset by increased payables and accrued liabilities.
- Investing activities used $5.457 million, reflecting net purchases of marketable securities of approximately $5.100 million and $357,000 of capital expenditures. In Q1 2019, investing activities provided $35.010 million because of substantial security maturities and sales.
- Financing activities used $41.671 million, principally for the $42.172 million annual dividend payment.
- Management stated that the company has adequate liquidity to fund operations, dividends, anticipated capital requirements, acquisitions, and other growth initiatives. It expects to continue evaluating acquisitions and capital investments.
- COVID-19 had no material impact on the reported quarter’s consolidated financial statements, but the company identified increased absenteeism, canceled trade shows and visits, work-from-home inefficiencies, and customer and supplier logistics issues.
- Management cautioned that the future impact of COVID-19 remains highly uncertain and could affect demand, supply chains, manufacturing, distribution, customer and government operations, liquidity, and results of operations.
- Other stated risks include defense funding and contract changes, customer concentration, competition, product recalls and liability, supplier reliance in Asia, material and freight costs, labor disruptions, acquisitions, cybersecurity, foreign exchange exposure, and market acceptance of new products.
- The company’s disclosure controls were not effective as of March 29, 2020 because of a continuing material weakness in controls over Defense segment revenue recognition. The remediation plan includes more precise reviews of contract terms, assumptions, termination clauses, and revenue-recognition timing.
- The company adopted ASU 2016-13 on credit losses prospectively on January 1, 2020; management reported no material impact.
Important Facts for Investors to Verify
- Verify the sustainability of the improved gross and operating margins, particularly the contribution from Defense product mix and efficiencies.
- Monitor Defense backlog conversion, government funding, contract modifications, and termination provisions.
- Assess the operating trajectory and cash requirements of the Safety segment and the OneEvent business.
- Evaluate the effect of COVID-19 on demand, staffing, suppliers, deliveries, and customer payments beyond the reported quarter.
- Review the remediation and future disclosure regarding the material weakness in Defense revenue-recognition controls.
- Confirm the company’s ability to maintain its unusually large annual dividend while funding acquisitions, capital expenditures, and potential pandemic-related working-capital needs.