Business Context and Reporting Period
National Presto Industries, Inc. filed this unaudited Form 10-Q for the quarter ended September 29, 2013, covering the three and nine months ended September 29, 2013, with comparable periods ended September 30, 2012. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products segments.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $100.6 million | $116.8 million | $285.2 million | $330.7 million |
| Gross profit | $19.7 million | $22.9 million | $54.3 million | $62.9 million |
| Operating profit | $13.9 million | $14.8 million | $37.0 million | $42.7 million |
| Net earnings | $9.0 million | $9.4 million | $24.2 million | $27.4 million |
| Basic and diluted EPS | $1.31 | $1.36 | $3.50 | $3.98 |
| Operating cash flow | Not separately provided | Not separately provided | $15.8 million | $34.6 million |
Calculated margins were approximately 19.5% gross, 13.8% operating, and 9.0% net in the third quarter; for the first nine months, approximately 19.0%, 13.0%, and 8.5%, respectively.
- At September 29, 2013, cash and cash equivalents were $46.4 million and marketable securities were $44.3 million, for total cash and marketable securities of approximately $90.7 million.
- Working capital was $227.9 million and the current ratio was 5.0 to 1.0, compared with 4.8 to 1.0 at December 31, 2012.
- Total assets were $379.4 million and stockholders’ equity was $315.1 million.
- The balance sheet presents current liabilities of $56.9 million and deferred income taxes of $7.4 million. The filing does not identify any funded debt balance.
- Capital expenditures were $18.1 million for the first nine months, compared with $9.9 million in the prior-year period.
- No dividends were paid during the first nine months of 2013; the prior-year period included $41.3 million of dividends. The company stated that the 2013 dividend was paid early in December 2012.
Material Changes Versus Prior Comparable Period
- Third-quarter sales declined 14% to $100.6 million, gross profit declined 14% to $19.7 million, operating profit declined 7% to $13.9 million, and net earnings declined 4% to $9.0 million.
- For the first nine months, sales decreased 14%, gross profit decreased 14%, operating profit decreased 13%, and net earnings decreased 12%.
- Third-quarter Housewares/Small Appliances sales declined 20%, primarily due to lower shipments; Defense sales declined 11% due to lower unit shipments; and Absorbent Products sales declined 12%, mainly because a major customer produced more of its own product.
- For the first nine months, Defense sales declined 18% and accounted for most of the consolidated sales reduction. Housewares/Small Appliances sales declined 7% and Absorbent Products sales declined 12%.
- Absorbent Products reported a third-quarter gross loss of $3,000 and an operating loss of $628,000, compared with prior-year gross profit of $1.0 million and operating loss of $1.9 million. Management cited lower sales, operating inefficiencies, and costs associated with new capital equipment.
- Selling and general expenses declined 28% in the third quarter and 15% year to date, partly offsetting the sales and gross-profit declines.
- Operating cash flow fell to $15.8 million from $34.6 million, primarily reflecting increased inventory and supplier deposits, despite collections reducing accounts receivable.
- Cash increased by $9.0 million from year-end 2012 to $46.4 million at September 29, 2013, while marketable securities declined by $11.3 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management expects to continue evaluating acquisitions, making capital investments, paying dividends, and using liquidity to fund growth.
- On November 7, 2013, wholly owned AMTEC Corporation acquired substantially all assets of DSE, Inc., a defense contractor producing 40MM ammunition, for $47.1 million. The acquired contract backlog was approximately $187 million, scheduled for production and shipment over the following 36 months. Purchase accounting, including potential goodwill and identifiable intangible assets, had not been completed at the filing date.
- Management identified risks relating to consumer spending, major customers, product mix, competition, pricing, input and freight costs, production interruptions, product liability, labor disruptions, government requirements and military funding, subcontractor performance, acquisitions, and capital-equipment utilization.
- The company is involved in routine litigation and believes it will not materially affect financial position, liquidity, or results of operations.
- Housewares/Small Appliances is exposed to inventory obsolescence risk for new products, although no material obsolescence reserve was recorded for the periods presented.
- The company is self-insured for health care costs and maintains accruals for product liability claims. Management reported no known claims expected to have a material adverse effect beyond recorded reserves.
- Interest income was pressured by lower yields as higher-yielding investments matured. Management considered interest-rate exposure immaterial and reported no derivative investments.
- Disclosure controls and procedures were deemed effective as of September 29, 2013, with no material changes to internal controls during the quarter.
Investor Verification Priorities
- Verify the final purchase-price allocation and subsequent financial impact of the $47.1 million DSE acquisition, including goodwill, intangible assets, liabilities, and backlog conversion.
- Assess whether reduced Defense shipments and government-contract funding pressures persist, given the segment’s 18% year-to-date sales decline.
- Monitor Absorbent Products for recovery from customer insourcing, equipment-related inefficiencies, and operating losses.
- Reconcile the significant decline in operating cash flow with higher inventories and supplier deposits, and evaluate inventory turnover and obsolescence exposure.
- Review capital expenditures, acquisition spending, dividend policy, and the company’s cash and marketable-securities balance after the DSE transaction.
- Evaluate customer concentration, product liability reserves, self-insurance estimates, and the effect of material, freight, labor, interest-rate, and foreign-exchange changes on margins.