Business Context and Reporting Period
National Presto Industries, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended October 2, 2011, compared with October 3, 2010. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products. Interim results are not necessarily indicative of full-year results.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $104.9 million | $113.5 million | $312.0 million | $337.0 million |
| Gross profit | $23.7 million | $24.4 million | $66.3 million | $75.5 million |
| Operating profit | $19.3 million | $20.1 million | $52.8 million | $63.4 million |
| Net earnings | $12.4 million | $13.2 million | $34.6 million | $41.4 million |
| Diluted EPS | $1.80 | $1.92 | $5.03 | $6.03 |
| Gross margin | 22.6% | 21.5% | 21.2% | 22.4% |
| Operating margin | 18.4% | 17.7% | 16.9% | 18.8% |
| Net margin | 11.8% | 11.6% | 11.1% | 12.3% |
Amounts are based on the filing’s reported figures; percentage margins are calculated from those figures.
- Operating cash flow was $35.8 million for the first nine months, compared with $33.8 million in the prior-year period.
- Capital expenditures were $12.5 million, compared with $13.9 million in the prior-year period.
- Cash and cash equivalents totaled $46.3 million at October 2, 2011, and marketable securities totaled $71.4 million. The filing reports no debt balances.
- Working capital was $251.7 million, down $27.1 million from December 31, 2010; the current ratio was 5.7 to 1.0.
- Dividends paid during the first nine months were $56.7 million, or $8.25 per share, compared with $55.9 million, or $8.15 per share.
- Cash decreased by $3.5 million during the first nine months to $46.3 million, primarily because dividends exceeded operating and investing cash inflows.
Material Changes Versus Prior Comparable Period
- Third-quarter sales decreased 8%, gross profit decreased 3%, operating profit decreased 4%, and net earnings decreased 6%.
- For the first nine months, sales declined 7%, gross profit declined 12%, operating profit declined 17%, and net earnings declined 17%.
- Housewares/Small Appliances sales declined 9% in the quarter and 12% year to date, primarily because of lower unit shipments. Gross profit was pressured by lower sales and higher commodity and freight costs.
- Defense Products sales declined 18% in the quarter and 14% year to date because of lower unit shipments. Quarterly gross profit increased 6% due to product mix and operating efficiencies, but year-to-date gross profit declined 2%.
- Absorbent Products sales increased 23% in the quarter and 20% year to date, driven primarily by adult incontinence products and raw-material sales. Profitability was reduced by commodity and freight costs and lower efficiencies during the start-up of new capital equipment.
- Selling and general expenses increased 4% in the quarter and 12% year to date. The year-to-date increase included the absence of prior-year gains from the sale and disposal of obsolete equipment and higher doubtful-account provisions.
- Other income declined because of lower interest income resulting from reduced investment yields.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide specific earnings or revenue guidance. Management expects to continue evaluating acquisitions and making capital investments where an appropriate return is projected.
- Management states that cash and short-term marketable securities provide substantial liquidity for anticipated capital requirements, dividends, acquisitions, and other growth initiatives.
- On November 1, 2011, after the reporting date, the company acquired the assets of ALS Technologies, Inc., a small manufacturer of less-than-lethal ammunition. Current-year sales were estimated at $7.5 million, and the acquisition price was immaterial to the consolidated financial statements.
- Routine litigation is pending, but management does not expect it to materially affect financial position, liquidity, or results of operations.
- Key risks include customer and consumer demand, major-customer relationships, product mix, competition, commodity and freight costs, production or shipping disruptions, product liability and recalls, labor disruptions, changes in military spending or government contracts, subcontractor performance, acquisition execution, and foreign-exchange effects on Chinese-sourced products.
- The company had no material inventory-obsolescence reserve requirement during the period, but new-product demand could create future excess or obsolete inventory losses.
- Management determined that disclosure controls and procedures were effective as of October 2, 2011, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether lower Defense and Housewares unit shipments represent temporary timing effects or a sustained demand decline.
- Monitor commodity, freight, and labor costs, particularly in Housewares and Absorbent Products, and assess whether pricing can offset these pressures.
- Evaluate the start-up and utilization of new Absorbent Products capital equipment and its effect on margins.
- Assess the sustainability of the large dividend relative to operating cash flow and investment requirements.
- Review the liquidity and credit quality of the $71.4 million marketable-securities portfolio, including variable-rate demand notes and municipal bonds.
- Track the integration and contribution of the ALS Technologies acquisition in subsequent filings.
- Review the company’s annual filing for detailed customer concentration, contract status, product-liability reserves, and commitments and contingencies.