National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. reported results for the fiscal quarter and nine months ended October 4, 2015, compared with September 28, 2014. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments. The current nine-month period includes six additional days versus the prior-year comparable period.
The interim financial statements are unaudited. Management stated that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended October 4, 2015 | Three months ended September 28, 2014 | Nine months ended October 4, 2015 | Nine months ended September 28, 2014 |
|---|---|---|---|---|
| Net sales | $90.9 million | $95.5 million | $294.3 million | $270.3 million |
| Gross profit | $19.1 million | $16.2 million | $60.4 million | $48.0 million |
| Gross margin | 21.0% | 16.9% | 20.5% | 17.8% |
| Operating profit | $12.1 million | $7.8 million | $38.2 million | $21.2 million |
| Operating margin | 13.4% | 8.2% | 13.0% | 7.8% |
| Net earnings | $8.1 million | $5.1 million | $25.3 million | $14.0 million |
| Net margin | 8.9% | 5.4% | 8.6% | 5.2% |
| Basic and diluted EPS | $1.17 | $0.74 | $3.65 | $2.02 |
For the nine months, net cash provided by operating activities was $21.5 million, compared with $39.5 million in the prior-year period. Capital expenditures were $5.6 million, compared with $8.2 million, and no business acquisition occurred in 2015 versus $10.5 million spent on the 2014 acquisition of the Clear Lake facility.
Cash and cash equivalents were $40.1 million at October 4, 2015, compared with $54.0 million at December 31, 2014. Marketable securities were $24.6 million, bringing cash and marketable securities to approximately $64.6 million. Working capital was $201.8 million, and the current ratio was 5.4 to 1.0. The filing does not report outstanding debt; the balance sheet presents no debt line item.
Dividends paid during the first nine months were $28.1 million, compared with $35.0 million in the prior-year period. Dividends declared and paid per common share were $4.05 in the 2015 nine-month period and $5.05 in the comparable 2014 period.
Material changes versus the prior comparable period
- Third-quarter sales decreased 5%, primarily because of lower unit shipments in Housewares/Small Appliances and Defense. Absorbent Products shipments increased.
- Third-quarter gross profit increased 18%, driven by improved product mix, lower costs, production efficiencies, higher Absorbent Products sales, and lower material costs.
- Third-quarter operating profit increased 55% to $12.1 million. The filing attributes the improvement partly to an $2.3 million, or 87%, reduction in intangible amortization, including lower amortization of the DSE customer-contract intangible.
- Third-quarter net earnings increased 58% to $8.1 million despite higher selling and general expenses and income taxes.
- For nine months, sales increased 9%, gross profit increased 26%, operating profit increased 81%, and net earnings increased 81%. All three segments reported higher sales for the nine-month period.
- Absorbent Products improved from a $2.1 million gross loss and $2.7 million operating loss in the third quarter of 2014 to $0.2 million gross profit and a $0.6 million operating loss in the third quarter of 2015. The segment remained loss-making for the nine-month period, with a $0.3 million gross loss and $2.6 million operating loss.
- Operating cash flow declined by $18.0 million year over year, primarily reflecting increased inventories, higher supplier prepayments, and lower noncash amortization, partly offset by collections of accounts receivable.
Guidance, outlook, risks, contingencies, and unusual items
The company did not provide quantitative earnings or revenue guidance. Management stated that it expects to continue evaluating acquisitions aligned with its segments and to make capital investments where appropriate returns are projected. Management also stated that existing cash, cash equivalents, and marketable securities provide substantial liquidity for anticipated capital requirements, dividends, acquisitions, and growth.
Management identified risks involving consumer spending, major customers, product mix, competition, product acceptance, material and freight costs, production or shipping interruptions, Asian suppliers, product liability and recalls, labor disruptions, government and military funding, subcontractors, capital-equipment utilization, foreign exchange, and information-technology failures or security breaches.
Housewares/Small Appliances selling and general expenses included higher product-liability accruals of approximately $0.5 million and higher health-benefit costs of approximately $0.4 million in the third quarter. The company is self-insured for health-care costs and records accruals for known and incurred-but-not-reported product-liability claims. Management stated that no known claims were expected to have a material adverse impact beyond recorded reserves.
The company is involved in routine litigation and believes the ultimate outcome will not materially affect financial position, liquidity, or results of operations. Inventory obsolescence did not have a material effect during the period, but new product demand remains a potential source of future losses. The company expects recently issued accounting standards, including revenue recognition and inventory measurement changes, not to have a material impact, although the evaluation of revenue recognition was ongoing.
Disclosure controls and procedures were deemed effective as of October 4, 2015, and no material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether the improvement in profitability is sustainable after the favorable effect of lower DSE customer-contract amortization.
- Whether Defense sales and shipments recover after the 15% third-quarter sales decline.
- Whether Absorbent Products can achieve sustained profitability after its near break-even third-quarter result.
- The causes and expected duration of elevated inventory and supplier prepayments, which reduced operating cash flow.
- The level and adequacy of product-liability and health-insurance reserves.
- The company’s future dividend policy and ability to maintain large distributions while funding capital investment and acquisitions.
- Exposure to government contract funding, major customers, Asian suppliers, foreign-exchange movements, and potential product recalls.
- The absence of a reported debt balance and the liquidity, credit, and maturity characteristics of the company’s marketable securities.