National Presto Industries, Inc. 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed March 10, 2020. National Presto operates through Housewares/Small Appliance, Defense, and Safety segments. The Safety segment was established in 2019 after acquiring substantially all assets of OneEvent Technologies; Rusoh was moved from Housewares/Small Appliance into Safety. The former Absorbent Products business remains classified as a discontinued operation.
Financial performance and condition
- Net sales: $308.5 million, down 5% from $323.3 million in 2018.
- Gross profit: $71.9 million, down 5%; gross margin was approximately 23.3%, compared with 23.5% in 2018.
- Operating profit: $46.4 million, down 3%; operating margin was approximately 15.0%.
- Earnings from continuing operations: $40.5 million, up 2% from $39.9 million. The effective tax rate declined to approximately 22.5% from 23.8%.
- Net earnings: $42.2 million, up 6% from $39.9 million. Discontinued operations contributed $1.7 million, primarily from a legal settlement.
- EPS: $6.01 basic and diluted, compared with $5.70 in 2018; continuing-operations EPS was $5.77 versus $5.69.
- Cash flow: Operating cash flow was $9.6 million, down from $76.2 million. The decline primarily reflected higher inventories, vendor deposits, and lower payables, partly offset by lower receivables.
- Investing cash flow: $55.2 million provided, including $56.0 million of net marketable-securities sales and maturities. Capital expenditures were $3.1 million, and the OneEvent acquisition used $3.7 million net of cash acquired.
- Liquidity: Cash and cash equivalents were $79.6 million, and marketable securities were $78.7 million at year-end. The Company reported working capital of $298.5 million and a current ratio of 8.6 to 1.0.
- Debt and obligations: No borrowings were outstanding, and the Company did not renew its $5.0 million line of credit in 2019. Lease liabilities totaled $3.5 million. Commercial letters of credit totaled $1.2 million and had not been drawn.
- Capital returns: $42.1 million of dividends were paid in 2019, consisting of a $1.00 regular dividend and a $5.00 extra dividend per share. A further $6.00 per share dividend was declared in February 2020.
Segments and material changes versus 2018
| Segment | 2019 sales | 2018 sales | 2019 operating profit | Key change |
|---|---|---|---|---|
| Housewares/Small Appliance | $99.4 million | $93.7 million | $2.5 million | Sales increased 6% on higher shipments, but profit declined due to higher product costs and expenses. |
| Defense | $209.1 million | $229.5 million | $47.8 million | Sales declined 9% on lower unit shipments; results included $9.4 million from a negotiated contract termination. |
| Safety | Less than $0.1 million | $0.04 million | $(4.0) million | Startup operations remained loss-making; OneEvent was acquired in July 2019. |
- Defense gross margin increased to approximately 27.6% from 26.6%, despite lower volume, aided partly by the contract-termination proceeds; management also cited unfavorable mix and less efficient operations.
- Company-wide selling and general expense increased 9% to $25.5 million, while intangible amortization fell to $0.1 million from $2.2 million after a Defense contract intangible was fully amortized in 2018.
- The 2018 comparison included a $2.5 million net loss on the divestiture of the less-lethal business; no comparable charge was recorded in 2019.
- Defense backlog was approximately $310.4 million at December 31, 2019, down from $333.6 million, with production and shipment expected over 18 to 24 months.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or revenue guidance was provided. Management stated that it expects to pursue aligned acquisitions and capital investments while maintaining substantial liquidity.
- Management identified tariffs on Chinese imports and the Wuhan coronavirus as potential threats to Housewares and Safety supply chains, product costs, and delivery timing.
- Housewares depends significantly on retail customers, including Walmart, which represented 12% of consolidated sales in 2019. The segment is seasonal, price-sensitive, and exposed to raw-material, freight, supplier, tariff, product-acceptance, recall, and product-liability risks.
- Defense revenue is concentrated in U.S. Government and prime-contractor programs. Fixed-price contracts expose the Company to cost overruns, quality issues, subcontractor performance, changes in military spending, appropriations, and contract termination.
- Government contracts may be terminated for convenience or default. The filing states that termination for convenience generally provides recovery of completed work, associated profit, and eligible inventory or work in process.
- Environmental reserves totaled $1.1 million at year-end. Management believes the reserve is adequate, but additional studies, monitoring, or remediation could increase the obligation.
- Product liability reserves, self-insurance, tax positions, environmental matters, and inventory valuation involve significant estimates. Gross unrecognized tax benefits increased to $2.2 million.
- Material weakness: Management and the auditor concluded that internal control over financial reporting was ineffective because Defense revenue controls did not adequately assess and document the timing of revenue recognition, alternative use, and termination clauses. A remediation plan was expected to be implemented during 2020. The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
Most important facts for investors to verify
- Whether the planned 2020 remediation fully addresses the Defense revenue-recognition control weakness and whether any restatements or material adjustments become necessary.
- The sustainability and composition of Defense earnings, particularly the effect of the $9.4 million contract-termination revenue and the declining backlog.
- Inventory growth and working-capital conversion, given the sharp decline in operating cash flow and purchases made to mitigate tariffs.
- The financial performance, cash needs, earn-out exposure, and integration progress of OneEvent and the broader Safety segment.
- Exposure to Chinese supply disruptions, tariffs, currency movements, and the coronavirus-related disruptions identified in the filing.
- Customer concentration, especially Walmart and U.S. Government programs, and the absence of long-term supply commitments with major Housewares customers.
- The adequacy of environmental, product-liability, tax, and other contingency reserves, including the $1.2 million of undrawn commercial letters of credit and $196.8 million of disclosed contractual obligations.