Business Context and Reporting Period
National Presto Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended July 2, 2017, compared with July 3, 2016. Continuing operations consisted primarily of Housewares/Small Appliances and Defense Products. The 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 2017 | Three Months 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $74.6 million | $69.5 million | $147.4 million | $135.5 million |
| Gross profit | $17.6 million | $17.2 million | $37.7 million | $33.2 million |
| Operating profit | $12.1 million | $11.6 million | $26.1 million | $21.2 million |
| Earnings from continuing operations | $8.9 million | $7.9 million | $18.9 million | $14.4 million |
| Net earnings | $9.7 million | $8.3 million | $27.9 million | $15.5 million |
| Basic and diluted EPS | $1.39 | $1.19 | $3.99 | $2.22 |
Calculated margins were approximately 23.6% gross and 16.3% operating for the quarter, and 25.6% gross and 17.7% operating for the six-month period. Continuing-operations net margins were approximately 12.0% and 12.8%, respectively.
- Second-quarter sales increased 7%, gross profit increased 2%, operating profit increased 5%, and continuing-operations earnings increased 13% year over year.
- Six-month sales increased 9%, gross profit increased 14%, operating profit increased 23%, and continuing-operations earnings increased 31% year over year.
- Defense Products generated second-quarter sales of $57.7 million and operating profit of $13.1 million. Housewares/Small Appliances generated sales of $16.9 million and an operating loss of $0.9 million.
- For the six months, Defense Products sales were $110.5 million and operating profit was $26.5 million; Housewares/Small Appliances sales were $36.9 million and operating loss was $0.4 million.
- Net cash provided by operating activities was $5.7 million for the six months, down from $26.5 million in the prior-year period. The decline reflected higher inventories, supplier prepayments, lower accounts payable and accrued liabilities, and taxes paid.
- Investing activities provided $15.3 million, including $64.0 million of net proceeds from the Absorbent Products divestiture, partly offset by net purchases of marketable securities and $4.5 million of capital expenditures.
- Financing activities used $38.0 million, including $38.4 million of dividends paid. Cash and cash equivalents declined from $27.0 million at year-end 2016 to $10.0 million at July 2, 2017.
- At July 2, 2017, marketable securities totaled $128.7 million, producing cash and marketable securities of approximately $138.7 million. The filing presents no debt balance.
- Total current assets were $306.1 million and current liabilities were $49.1 million; management reported a 6.2-to-1 current ratio and working capital of $256.9 million.
Material Changes, Outlook, Risks, and Unusual Items
- Defense growth primarily reflected increased units shipped and, for the six-month period, improved product mix. Housewares/Small Appliances declined because of lower shipments, lower prices in the six-month period, and higher operating costs.
- Other income increased by $0.8 million in the quarter and $1.6 million for the six months, driven partly by higher interest income and partly by lease and transition-services income from Drylock.
- The Absorbent Products sale generated a pretax gain of $11.4 million in the first six months, including a $1.4 million post-closing adjustment finalized in the second quarter. The transaction also generated a $2.0 million pretax gain related to involuntary conversion of machinery and equipment and may generate an additional $4.0 million when delayed assets are sold.
- Drylock entered into a 10-year lease for part of the Company’s facilities, initially providing approximately $1.3 million of annual payments, and the transition-services agreement is expected to continue through the fourth quarter of 2017.
- Management stated that substantial liquidity is available for anticipated capital requirements, dividends, acquisitions, and other growth initiatives. The Company expects to continue evaluating acquisitions and making authorized or additional capital investments when projected returns are appropriate.
- Key risks include consumer spending, major-customer relationships, competitive pricing, product acceptance, material and freight costs, shipping or production disruptions, Asian supplier reliance, product liability and recalls, labor disruptions, government and military-contract changes, subcontractor performance, capital-equipment utilization, currency exposure involving Chinese suppliers, and information-technology failures or security breaches.
- Routine litigation is pending, but management does not expect it to materially affect financial position, liquidity, or results of operations. The Company is self-insured for certain health-care and product-liability risks; a material increase in claim frequency or severity could affect results.
- The Company reported no material inventory-obsolescence reserve in the period, although new Housewares/Small Appliances products carry excess and obsolete inventory risk.
- Management concluded that disclosure controls were effective as of July 2, 2017, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the sustainability of Defense Products volume growth and whether Housewares/Small Appliances can return to profitability.
- Separate recurring operating performance from the $11.4 million divestiture gain, the $2.0 million involuntary-conversion gain, and related post-closing adjustments.
- Monitor operating cash conversion, inventory growth, supplier prepayments, and the reduction in cash balances despite substantial marketable securities.
- Verify the timing and collectability of the potential additional $4.0 million from delayed divestiture assets and the continuing economic benefits of the Drylock lease and transition-services arrangements.
- Assess dividend capacity against operating cash flow, capital expenditures, and the Company’s stated acquisition plans.
- Follow the implementation impact of the upcoming revenue-recognition, lease, credit-loss, and cash-flow accounting standards; the filing states that the impact was still being evaluated for certain standards.