National Presto Industries, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. National Presto operates three segments: Housewares/Small Appliance, Defense, and Safety. The former Absorbent Products business remains classified as a discontinued operation.
All businesses were deemed essential and continued operating during COVID-19-related shutdowns. The Housewares/Small Appliance segment is seasonal, with its normal sales peak in the fourth quarter.
Key financial metrics
Amounts below are in thousands except per-share data.
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $352,627 | $308,510 | +14% |
| Gross profit | $84,922 | $71,925 | +18% |
| Gross margin | 24.1% | 23.3% | +0.8 pts |
| Operating profit | $56,196 | $46,380 | +21% |
| Operating margin | 15.9% | 15.0% | +0.9 pts |
| Earnings from continuing operations | $46,958 | $40,540 | +16% |
| Net earnings | $46,958 | $42,220 | +11% |
| Net earnings per share | $6.67 | $6.02 | +11% |
| Cash provided by operating activities | $40,973 | $9,583 | +$31,390 |
Net margin was approximately 13.3% in 2020 versus 13.7% in 2019, reflecting the absence of $1.68 million of discontinued-operation earnings recognized in 2019.
- Housewares/Small Appliance: Sales were $117.6 million, up 18%; gross profit was $24.2 million, or 20.6% of sales, versus 15.4% in 2019. Operating profit was $10.4 million versus $2.5 million.
- Defense: Sales were $234.6 million, up 12%; gross profit was $62.6 million, or 26.7% of sales, versus 27.6% in 2019. Operating profit was $52.8 million versus $47.8 million.
- Safety: Sales were $0.3 million and the segment generated an operating loss of $7.0 million. The startup businesses continued to have negative gross margins and limited revenues.
- Liquidity: Cash and cash equivalents were $86.0 million and marketable securities were $69.0 million at year-end. Working capital was $302.1 million and the current ratio was 6.5 to 1.0.
- Debt: Management states that the Company had no debt. A $5.0 million unsecured line of credit was available, with no borrowings outstanding. Lease liabilities totaled $3.4 million.
- Capital allocation: Capital expenditures were $2.6 million. Dividends paid during 2020 totaled $42.2 million, comprising a $1.00 regular dividend and a $5.00 extra dividend per share.
- Defense backlog: Contract backlog was approximately $320.2 million at December 31, 2020, compared with $310.4 million at December 31, 2019, and was expected to ship over 18 to 24 months.
Material changes versus the prior comparable period
- Consolidated sales increased $44.1 million, driven by higher Housewares/Small Appliance shipments and increased Defense units shipped.
- Housewares/Small Appliance results benefited from stronger volume, improved product mix, and improved margins, partly offset by $2.1 million of estimated customer refunds related to a product recall.
- Defense sales and profit increased despite the absence of $9.4 million of 2019 revenue from the negotiated termination of a foreign military supply contract.
- Other income declined $2.1 million because of lower interest income on a smaller portfolio of marketable securities and lower yields.
- Operating cash flow improved substantially, primarily from higher earnings and increased accounts payable and accrued liabilities, partially offset by higher receivables, inventory, and vendor deposits.
- Safety expenses increased because 2020 was the first full year of OneEvent operations and because of higher Rusoh compensation and benefit accruals.
- Discontinued-operation earnings fell from $1.7 million in 2019 to zero; the 2019 amount primarily resulted from a lawsuit settlement.
- Management and the independent auditor concluded that internal control over financial reporting was effective at year-end. Controls addressing a previously identified material weakness in Defense-segment revenue recognition were implemented during the fourth quarter.
Outlook, risks, contingencies, and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects to evaluate acquisitions and continue capital investments where acceptable returns are projected. Management states that liquidity is sufficient to fund operations, dividends, acquisitions, and other growth initiatives.
- COVID-19 caused absenteeism, delays, canceled trade shows, work-from-home inefficiencies, and supplier and customer logistics issues. Management reported no material adverse impact on 2020 consolidated financial statements but stated that future effects remain uncertain.
- Housewares/Small Appliance and Safety depend heavily on Asian suppliers, particularly in China, and face risks from tariffs, supply interruptions, transportation costs, currency movements, customer concentration, seasonality, and consumer demand.
- Wal-Mart accounted for 10% of consolidated sales and Amazon also accounted for 10% in 2020. Neither customer is subject to a long-term supply contract or minimum purchase commitment.
- Defense operations rely primarily on U.S. government and prime-contractor demand. Contracts are predominantly fixed-price, exposing the Company to cost inflation, subcontractor performance issues, funding changes, contract termination, and changes in defense spending.
- The Company recorded $2.8 million of accrued charges related to a voluntary product recall at year-end, including $2.1 million of estimated customer refunds recognized as a reduction of 2020 revenue.
- A Mississippi tax assessor issued a $2.5 million assessment for historical personal property taxes. The Company intends to contest the assessment and recorded no liability because payment was not considered probable.
- Environmental liabilities totaled $1.0 million at year-end. Management believes the reserve is adequate, although additional regulatory studies, monitoring, or remediation could increase costs.
- The Company is partly self-insured for product liability and health-care claims and does not maintain product-recall insurance. Larger-than-expected claims could materially affect results.
- Subsequent to year-end, the Board declared a $1.00 regular dividend plus a $5.25 extra dividend per share. The $44.1 million payment was made March 12, 2021.
- On March 12, 2021, AMTEC received a FY2021 option award under its Army 40mm contract. Combined with a prior award, the deliveries were valued at $92.9 million.
Important facts for investors to verify
- Confirm the sustainability of 2020 Housewares/Small Appliance demand, margin improvement, and the effect of the product recall.
- Review Defense backlog conversion, future Army funding and options, fixed-price contract profitability, and revenue-recognition judgments.
- Assess the ability of the Safety segment startups to generate meaningful revenue and reduce operating losses.
- Evaluate customer concentration and the absence of long-term purchase commitments with Wal-Mart and Amazon.
- Monitor Asian supply-chain exposure, tariffs, freight costs, and foreign-exchange effects.
- Track the Mississippi tax assessment, environmental reserve adequacy, product-liability exposure, and recall-related payments.
- Reconcile reported cash and marketable securities, including $26.0 million of variable-rate demand notes classified as marketable securities despite their stated seven-day liquidity feature.
- Review the remediation of the prior Defense revenue-control material weakness and the auditor’s critical audit matter concerning Defense revenue recognition.