National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and nine months ended October 1, 2017, compared with October 2, 2016. The company operates primarily through Housewares/Small Appliances and Defense segments. Its Absorbent Products business was sold to Drylock Technologies on January 3, 2017 and is presented as a discontinued operation.
Financial performance and position
| Metric | Three months ended Oct. 1, 2017 | Three months ended Oct. 2, 2016 | Nine months ended Oct. 1, 2017 | Nine months ended Oct. 2, 2016 |
|---|---|---|---|---|
| Net sales | $70.6 million | $74.5 million | $218.0 million | $210.0 million |
| Gross profit | $18.9 million | $17.1 million | $56.6 million | $50.3 million |
| Operating profit | $11.7 million | $11.4 million | $37.8 million | $32.6 million |
| Earnings from continuing operations | $8.3 million | $7.8 million | $27.3 million | $22.2 million |
| Net earnings | $8.3 million | $8.3 million | $36.2 million | $23.8 million |
| Continuing-operations EPS | $1.19 | $1.11 | $3.90 | $3.18 |
- Third-quarter gross margin was approximately 26.8%, versus 22.9% in the prior-year quarter. Nine-month gross margin was approximately 26.0%, versus 24.0%.
- Third-quarter operating margin was approximately 16.5%; nine-month operating margin was approximately 17.3%.
- Net cash used in operating activities for the first nine months was $5.5 million, compared with $26.6 million of cash provided in the prior-year period. Working-capital use included higher inventories, supplier deposits, lower payables and accrued liabilities, and income-tax payments related to the divestiture.
- Investing activities provided $22.5 million, including $64.0 million of net divestiture proceeds and $2.0 million of insurance proceeds, partially offset by marketable-securities purchases and capital expenditures.
- Financing activities used $38.0 million, primarily reflecting $38.4 million of dividends paid. Dividends paid per share were $5.50 for the nine-month period, compared with $5.05 in the prior-year period.
- Cash and cash equivalents were $6.1 million at October 1, 2017, while marketable securities were $121.3 million. Total current assets were $312.4 million against current liabilities of $44.2 million, producing a reported current ratio of 7.1 to 1.0.
- The filing does not report outstanding debt. Stockholders’ equity was $349.4 million at October 1, 2017.
Material changes versus the prior comparable periods
- Third-quarter sales declined 5%, primarily from lower shipments in Housewares/Small Appliances and Defense. Housewares/Small Appliances sales fell 12% to $20.9 million; Defense sales fell 2% to $49.7 million.
- Defense gross profit increased 15% to $15.7 million, supported by improved product mix and operating efficiencies. Housewares/Small Appliances gross profit decreased 9% to $3.1 million.
- Nine-month sales increased 4%. Defense sales rose 10% to $160.1 million, while Housewares/Small Appliances sales declined 10% to $57.9 million.
- Nine-month operating profit in Housewares/Small Appliances declined to a $0.1 million loss from $2.6 million of profit, while Defense operating profit increased to $37.9 million from $30.0 million.
- Intangibles amortization increased to $1.5 million in the quarter and $1.9 million year to date, primarily due to amortization of a customer-contract intangible related to the DSE asset acquisition.
- Discontinued operations contributed $8.9 million after tax in the first nine months, including the $11.4 million pretax gain on the Absorbent Products divestiture and a $2.0 million pretax gain from an involuntary conversion of machinery and equipment. The discontinued operation produced a $0.01 million after-tax loss in the third quarter.
- Total assets decreased to $393.6 million from $417.6 million at December 31, 2016, primarily reflecting the divestiture and related reduction in assets held for sale.
Guidance, outlook, risks and unusual items
- Management did not provide specific quantitative earnings or revenue guidance. It expects to evaluate acquisitions and continue capital investments where projected returns are appropriate.
- Management states that available cash, cash equivalents and marketable securities are sufficient for anticipated capital requirements, dividends and future growth.
- The company entered into a 10-year lease with Drylock for part of its facilities, initially providing approximately $1.3 million in annual payments. A transition-services agreement is expected to continue through the fourth quarter of 2017.
- Key risks include consumer spending, major-customer relationships, product mix, pricing competition, material and freight costs, supply-chain reliance on Asia, product liability and recalls, labor disruptions, government and military-contract funding, subcontractor performance, capital-equipment utilization, foreign exchange exposure and cybersecurity or information-technology failures.
- The company is involved in routine litigation and believes it will not materially affect financial position, liquidity or results of operations. It is self-insured for certain health-care and product-liability exposures; materially higher claims could adversely affect results.
- Housewares/Small Appliances inventory is exposed to obsolescence risk from new-product introductions and seasonal demand. No material obsolescence issue was recorded during the period.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 and was still evaluating its effect and transition method. It is also evaluating the future impact of the new leases standard.
Important facts for investors to verify
- Whether the improvement in consolidated profitability is sustainable after separating the one-time divestiture and insurance gains from recurring operations.
- The Defense segment’s backlog conversion, customer concentration, contract funding and effect of customer-contract intangible amortization.
- Whether the Housewares/Small Appliances sales decline, operating loss and elevated work-in-process inventory reverse.
- The composition, liquidity and credit quality of the $121.3 million marketable-securities portfolio, including variable-rate demand notes and municipal bonds.
- The effect of negative operating cash flow, inventory growth and supplier deposits on future liquidity despite the company’s substantial investment portfolio.
- The final impact and transition method of the revenue-recognition standard, and the eventual balance-sheet effect of the leases standard.