National Presto Industries, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed March 15, 2016. The company operates three segments: Housewares/Small Appliances, Defense Products, and Absorbent Products. Fourth-quarter results are included below because the filing provides quarterly data, although this is an annual report.
Financial performance and liquidity
<>| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $427.7 million | $412.4 million | +4% |
| Gross profit | $89.6 million | $77.2 million | +16% |
| Gross margin | 20.9% | 18.7% | +220 bps |
| Operating profit | $60.4 million | $39.9 million | +51% |
| Operating margin | 14.1% | 9.7% | +440 bps |
| Net earnings | $40.5 million | $26.5 million | +53% |
| Basic and diluted EPS | $5.83 | $3.82 | +53% |
| Cash from operating activities | $46.3 million | $73.2 million | -$26.9 million |
| Capital expenditures | $6.5 million | $11.3 million | -$4.8 million |
| Cash and cash equivalents | $56.2 million | $54.0 million | +$2.2 million |
| Marketable securities | $32.3 million | $22.4 million | +$9.9 million |
| Total assets | $387.4 million | $374.1 million | +4% |
The filing reports no outstanding borrowings at year-end. The company maintained a $5.0 million unsecured line of credit, with zero drawn. Working capital was $213.5 million and the current ratio was 5.4 to 1.0, compared with 5.1 to 1.0 in 2014. Management stated that cash and marketable securities were sufficient for anticipated capital needs, dividends, acquisitions, and growth.
Cash from operations declined primarily because inventory and vendor deposits increased, despite higher earnings. Investing cash use increased to $16.3 million, including $6.5 million of capital expenditures and $9.9 million of net marketable-security purchases. Financing cash use was $27.8 million, principally dividends.
Segment results
| 2015 segment | Sales | Gross profit/(loss) | Operating profit/(loss) |
|---|---|---|---|
| Housewares/Small Appliances | $125.9 million | $28.7 million | $18.0 million |
| Defense Products | $229.7 million | $62.0 million | $46.4 million |
| Absorbent Products | $72.0 million | $(1.1) million | $(4.1) million |
- Housewares/Small Appliances: Sales were essentially flat, but gross profit increased 13% to $28.7 million, primarily from a more favorable product mix. Wal-Mart accounted for 10% of consolidated sales in both 2015 and 2014.
- Defense: Sales increased 4% and operating profit increased approximately 44%, driven by higher unit shipments, improved product mix, and production efficiencies. The 40mm ammunition program generated $134.0 million of shipments in 2015.
- Absorbent Products: Sales increased 11% on higher unit shipments from institutional customers. The gross loss narrowed from $5.4 million to $1.1 million, aided by lower material costs, but equipment installation and startup inefficiencies continued to weigh on results.
Fourth-quarter information
Fourth-quarter 2015 sales were $133.4 million, gross profit was $29.1 million, net earnings were $15.2 million, and basic and diluted EPS was $2.18. The comparable 2014 figures were sales of $142.0 million, gross profit of $29.2 million, net earnings of $12.5 million, and EPS of $1.80. Housewares sales are seasonally concentrated in the holiday period, while Defense and Absorbent Products are generally non-seasonal.
Material changes and unusual items
- Net earnings benefited from higher gross profit, lower intangible amortization, and the absence of the $2.1 million finite-lived intangible impairment recorded in 2014.
- Intangible amortization fell to $5.2 million from $12.0 million, primarily because fewer units were shipped under an acquired government sales contract.
- The 2014 comparison included a $2.1 million ALS intangible impairment charge. The 2013 comparison included a $2.8 million goodwill impairment and a $3.0 million reversal of contingent consideration.
- The effective tax rate decreased to 33.1% from 34.0% in 2014. The 2013 rate of 29.3% benefited from an approximately $4.0 million state tax refund.
- At December 31, 2015, Defense backlog was approximately $284 million, down from $407 million in 2014, and was expected to ship over 18 to 24 months.
Outlook, guidance, and key risks
The filing does not provide formal numerical earnings or revenue guidance. Management expects additional shipments under the current 40mm contract during 2016 and 2017 and expected a new solicitation and award for the next 40mm contract in 2016. Two Army development contracts for next-generation training rounds, valued at approximately $3.0 million each, run through the first quarter of 2017 and include potential production options beginning in 2018.
A major national retailer was expected to place the Absorbent Products segment’s briefs in all of its stores, with shipments expected to begin in 2016. Management also expects continued capital investment and evaluation of acquisitions.
- Defense results depend heavily on U.S. government funding, contract awards, appropriations, and contracts that may be terminated for convenience or default.
- Most Defense work is fixed-price, exposing the company to raw-material, labor, quality, subcontractor, and production-cost risk.
- Housewares products are sourced primarily from Asian vendors, creating supply-chain, tariff, currency, transportation, and geopolitical risks.
- The Housewares segment is highly seasonal, price-sensitive, and dependent on major customers without long-term supply commitments.
- Absorbent Products remains a low-margin, capital-intensive business that requires high equipment utilization and is exposed to pulp, petroleum-based material, energy, and transportation costs.
- The company is partly self-insured for product liability and does not maintain product-recall insurance; reserves may be inadequate if claims increase materially.
- The company maintains an environmental reserve of $1.2 million. Management believes it is adequate, but additional remediation or monitoring could increase the liability.
Investor verification points
- Verify the sustainability of 2015’s margin expansion, particularly the Defense segment’s production efficiencies and favorable product mix.
- Assess the timing, funding, and award probability of the next 40mm ammunition solicitation and the conversion of the $284 million Defense backlog into revenue and cash flow.
- Monitor whether the Absorbent Products segment reaches profitability after the planned 2016 national-retailer shipments and equipment ramp-up.
- Review inventory growth, vendor deposits, and the decline in operating cash flow relative to net earnings.
- Evaluate customer concentration, especially Wal-Mart’s continuing 10% contribution to consolidated sales.
- Confirm the company’s ability to sustain regular and extra dividends; the board declared a $5.05 per-share dividend for payment in March 2016.
- Review the full financial-statement notes for product-liability, environmental, tax-audit, purchase-order, and fixed-price-contract contingencies.
Audit and controls: BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2015.