National Presto Industries, Inc. — 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, with quarterly information included for the fourth quarter. National Presto operates through three segments: Housewares/Small Appliances, Defense Products, and Absorbent Products. The business is seasonal in Housewares, with peak sales generally occurring in the fourth quarter before the holiday season; the other segments are generally nonseasonal.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $420.2 million | $472.5 million | Down 11% |
| Gross profit | $79.4 million | $94.9 million | Down 16% |
| Gross margin | 18.9% | 20.1% | Down 1.2 percentage points |
| Operating profit | $57.6 million | $59.7 million | Down 4% |
| Operating margin | 13.7% | 12.6% | Up 1.1 percentage points |
| Net earnings | $41.3 million | $38.9 million | Up 6% |
| Basic and diluted EPS | $5.97 | $5.64 | Up 6% |
| Cash flow from operations | $24.2 million | $62.3 million | Down $38.1 million |
| Total assets | $393.5 million | $353.9 million | Up $39.6 million |
Fourth-quarter 2013 net sales were $135.0 million, gross profit was $25.1 million, net earnings were $17.1 million, and diluted EPS was $2.47, compared with fourth-quarter 2012 net sales of $141.8 million, gross profit of $32.0 million, net earnings of $11.4 million, and EPS of $1.66.
- Housewares/Small Appliances sales were $137.2 million, gross profit was $26.9 million, and operating profit was $17.0 million.
- Defense sales were $206.2 million, gross profit was $50.2 million, and operating profit was $40.5 million.
- Absorbent Products sales were $76.8 million, gross profit was $2.3 million, and operating profit was $0.2 million.
Cash and cash equivalents were $23.0 million at year-end, while marketable securities were $36.4 million. The company stated that $15.6 million of variable-rate demand notes classified as marketable securities were redeemable at par plus interest within seven days, making reported liquidity higher than the cash balance alone indicates. Working capital was $209.8 million and the current ratio was 4.9 to 1. The company had no borrowings under its $5.0 million unsecured line of credit at year-end and disclosed no material funded debt.
Investing cash outflows were $38.7 million, including $36.3 million of property, plant and equipment purchases and $22.0 million related to a customer contract and equipment acquired in the DSE asset transaction, partly offset by $19.1 million of net marketable-securities maturities and sales. No dividends were paid during 2013 because the regular and extra 2013 dividends were accelerated into December 2012.
Material changes versus the prior comparable period
- Consolidated sales declined $52.3 million, primarily due to lower shipments in all three segments. Defense sales fell $38.8 million, Housewares sales fell $7.8 million, and Absorbent Products sales fell $5.7 million.
- Defense gross profit declined $13.9 million, reflecting lower sales and shipments of 40mm ammunition, cartridge cases, and loading-plant work. The 40mm program generated $125.0 million of deliveries in 2013.
- Absorbent Products continued to be affected by the loss of volume from a significant customer that opened its own facility. Management expected that customer’s purchases to decline further in 2014.
- Selling and general expenses declined $13.2 million, largely because 2012 included significant litigation, employee health costs, and the write-off of receivables and equipment associated with a financially troubled foreign manufacturing facility.
- 2013 earnings benefited from a $3.0 million reversal of contingent consideration related to the ALS acquisition and approximately $4.0 million of state tax refunds. These benefits were partly offset by a $2.8 million goodwill impairment charge related to ALS.
- Operating cash flow declined substantially because of increases in accounts receivable, inventories, and vendor deposits, compared with favorable working-capital changes in 2012.
- Defense backlog increased to approximately $452 million from $310 million and was expected to be produced and shipped over approximately 30 to 36 months.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management stated that it expected to continue evaluating acquisitions and making capital investments in existing authorized projects where acceptable returns are projected. Approximately $11.2 million of additional Absorbent Products equipment was committed and expected to be received largely by early 2015; approximately $15.2 million of construction in progress was recorded at year-end.
On November 7, 2013, AMTEC acquired selected DSE assets for total consideration of $47.8 million, including a government contract intangible asset of $21.7 million, inventory of $11.6 million, and equipment of $14.2 million. The transaction added approximately $188 million of remaining 40mm contract backlog. On January 24, 2014, AMTEC acquired substantially all assets of Chemring Energetic Devices’ Clear Lake, South Dakota business; purchase accounting was incomplete when the financial statements were issued.
- Defense results depend heavily on U.S. Department of Defense requirements, appropriations, contract funding, and the continuation of major programs. Most Defense work is fixed-price, exposing the company to cost overruns, material-price inflation, quality failures, and subcontractor performance risk.
- Government contracts may be terminated for convenience or default. The filing states that termination for convenience generally provides recovery for completed work, associated profit, and certain inventory or work in progress.
- Housewares depends on consumer spending, seasonal demand, key retail customers, and Asian suppliers, primarily in China. Risks include supply interruptions, tariffs, freight and commodity costs, currency movements, product recalls, product liability, and unsuccessful new-product introductions.
- Absorbent Products operates in a competitive, low-margin, capital-intensive market and is exposed to customer concentration, commodity costs, and underutilization of manufacturing capacity.
- Environmental liabilities were accrued at $1.65 million at year-end. Management considered the reserve adequate based on known conditions but acknowledged that additional remediation or monitoring could require higher costs.
- The company is partly self-insured for product liability and health-care claims and does not maintain product-recall insurance. Management reported no known claims expected to exceed recorded reserves materially.
- Contractual obligations totaled $237.1 million, including $235.6 million of purchase obligations and $1.5 million of operating leases. Many purchase orders may be cancellable, but cancellation costs are uncertain.
Most important facts for investors to verify
- Whether Defense backlog converts to revenue and cash at expected margins as the 40mm program progresses.
- The effect of the DSE asset acquisition and the January 2014 Clear Lake acquisition on 2014 earnings, cash flow, capacity, and contract execution.
- Whether Absorbent Products achieves sufficient capacity utilization and replaces declining volume from its former major customer.
- How much of 2013 earnings growth reflects recurring operations versus the $3.0 million contingent-consideration reversal and approximately $4.0 million tax refund.
- Whether working-capital needs, capital expenditures, and purchase commitments continue to reduce operating cash flow.
- The sustainability of future dividends: the board declared a $1.00 regular dividend plus a $4.05 extra dividend in February 2014, paid March 14, 2014.
- Potential exposure from fixed-price government contracts, environmental matters, product liability, customer or supplier concentration, and inventory obsolescence.