National Presto Industries, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended April 1, 2018, compared with the three months ended April 2, 2017. National Presto operates through Housewares/Small Appliances and Defense segments. The former Absorbent Products business was sold in 2017 and is presented as a discontinued operation.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $76.8 million | $72.9 million | 6% |
| Gross profit | $20.3 million | $20.1 million | 1% |
| Gross margin | 26.4% | 27.6% | Down 120 bps |
| Operating profit | $13.4 million | $14.0 million | Down 4% |
| Operating margin | 17.4% | 19.2% | Down 180 bps |
| Earnings from continuing operations | $11.0 million | $10.0 million | 10% |
| Net earnings | $11.0 million | $18.2 million | Down 39% |
| Continuing-operations EPS | $1.57 | $1.43 | 10% |
| Net EPS | $1.57 | $2.60 | Down 40% |
Defense sales increased 15% to $60.8 million, while Housewares/Small Appliance sales declined 20% to $16.1 million. Defense operating profit rose to $14.3 million from $13.5 million; Housewares/Small Appliance reported an operating loss of $0.9 million versus profit of $0.5 million.
Net cash provided by operating activities was $42.0 million, compared with $25.4 million in the prior-year quarter. Investing activities provided $11.9 million, including $63.3 million of marketable-securities maturities and sales and $1.9 million from an insurance settlement. Capital expenditures were $1.8 million. Financing activities used $41.5 million, primarily for $42.0 million of dividends.
At April 1, 2018, cash and cash equivalents were $23.6 million and marketable securities were $132.6 million. Total current assets were $313.0 million versus current liabilities of $49.4 million, producing a 6.3-to-1 current ratio. The filing does not report debt balances, and no material borrowings are identified. Stockholders’ equity was $336.3 million.
Material changes versus the prior comparable period
- Sales growth was driven by higher Defense unit shipments, partly offset by reduced Housewares/Small Appliance shipments.
- Housewares/Small Appliance gross profit declined $1.3 million, primarily because of lower sales. Defense gross profit increased $1.4 million, partly offset by a less favorable product mix.
- Intangible-amortization expense increased 103% to $0.7 million, principally because of amortization of an acquired Defense government-sales-contract intangible asset.
- The effective tax rate on continuing operations declined to 23% from 33%, primarily reflecting the U.S. corporate tax-rate reduction enacted in December 2017.
- Net earnings benefited in Q1 2017 from an $8.2 million after-tax discontinued-operations gain, including the gain on sale of the Absorbent Products business. Q1 2018 discontinued operations produced an $8,000 loss.
- Cash dividends declared and paid increased to $6.00 per share from $5.50 per share.
Guidance, outlook, risks, contingencies, and unusual items
Management states that liquidity is sufficient for anticipated capital requirements, dividends, acquisitions, and other growth initiatives. The company expects to continue evaluating acquisitions and making capital investments where projected returns are appropriate. No formal earnings or revenue guidance is provided.
On April 19, 2018, a wholly owned subsidiary received a Defense subcontract for Small Diameter Bomb warhead production. Together with other recent subcontracts, the awards have an approximate value of $43 million, with deliveries beginning in 2018. Defense unsatisfied performance obligations totaled $335.5 million at April 1, 2018, expected to be fulfilled over approximately 18 to 24 months.
The Absorbent Products transaction includes potential additional proceeds of $4.0 million from delayed asset sales, expected in Q2 2018. Related assets held for sale totaled $4.4 million at April 1, 2018.
Key risks include dependence on U.S. Department of Defense funding and contracts, fixed-price contract exposure, customer concentration, competitive pricing, material and freight costs, Asian suppliers and currency movements, product defects and recalls, inventory obsolescence, labor disruptions, subcontractor performance, cybersecurity, and changes in government requirements or military spending. Routine litigation is not expected to materially affect financial position, liquidity, or results.
Management concluded that disclosure controls and procedures were effective as of April 1, 2018, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Defense shipment growth and the $335.5 million backlog translate into sustained revenue and margins.
- The timing and final proceeds from the remaining Absorbent Products assets, including the potential $4.0 million payment.
- Whether the Housewares/Small Appliance sales decline and operating loss are temporary or indicate continuing product, demand, or inventory issues.
- The sustainability of the $6.00-per-share dividend relative to recurring operating cash flow and future investment needs.
- Exposure to fixed-price Defense contracts, DOD funding changes, supplier costs, product liability, and inventory obsolescence.
- The eventual balance-sheet effect of the pending lease-accounting standard and other newly issued accounting guidance.