National Presto Industries, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended April 2, 2017, compared with the three months ended April 3, 2016. National Presto operates primarily through Housewares/Small Appliances and Defense Products. The Absorbent Products business was classified as discontinued following its sale to Drylock Technologies on January 3, 2017.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $72.854 million | $65.942 million | +11% |
| Gross profit | $20.126 million | $16.048 million | +25% |
| Gross margin | 27.6% | 24.3% | +3.3 percentage points |
| Operating profit | $13.999 million | $9.653 million | +45% |
| Operating margin | 19.2% | 14.6% | +4.6 percentage points |
| Earnings from continuing operations | $9.973 million | $6.510 million | +53% as stated in MD&A |
| Net earnings | $18.155 million | $7.211 million | +$10.944 million |
| Basic and diluted EPS | $2.60 | $1.04 | +$1.56 |
| Operating cash flow | $25.399 million | $13.049 million | +$12.350 million |
Continuing-operations earnings contributed $1.43 per share versus $0.94 in the prior-year quarter. Discontinued operations contributed $8.182 million, or $1.17 per share, including a $10.704 million after-tax-related gain component associated with the divestiture and a $1.580 million gain on involuntary conversion of machinery and equipment. The filing presents the divestiture gain as $10.704 million before related tax effects.
At April 2, 2017, cash and cash equivalents were $16.620 million and marketable securities were $143.379 million, for immediately available cash and investments of approximately $159.999 million. Current assets were $323.069 million versus current liabilities of $71.897 million, producing a current ratio of 4.5 to 1.0. The company reported no outstanding debt in the balance-sheet information provided. Stockholders’ equity was $330.843 million.
Net cash used in financing activities was $38.001 million, primarily reflecting $38.405 million of dividends paid. The dividend was $5.50 per share, compared with $5.05 in Q1 2016. Capital expenditures were $2.257 million on a consolidated cash-flow basis; segment disclosure reported $677,000 of continuing-operations capital expenditures.
Material changes versus the prior comparable period
- Defense sales increased 19% to $52.807 million, primarily due to higher units shipped. Defense gross profit increased 44% to $16.957 million, aided by sales growth and improved product mix.
- Housewares/Small Appliances sales decreased 6% to $20.047 million, primarily due to lower shipments. Gross profit declined 26% to $3.169 million because of lower sales and higher operating costs.
- Other income increased to $950,000 from $183,000, reflecting higher interest income and income from the Drylock lease and transition services agreement.
- Selling and general expenses declined 1%, while intangible amortization declined 35% to $367,000.
- The company sold substantially all Absorbent Products assets and assigned certain liabilities for $67.0 million, subject to post-closing adjustments, with potential additional proceeds of $4.0 million from delayed assets.
- Cash and cash equivalents declined by $10.414 million during the quarter, while marketable securities increased by $58.922 million, largely reflecting proceeds from the divestiture and investment activity.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that interim results are not necessarily indicative of full-year results. No specific revenue, earnings, or margin guidance was provided. Management expects to continue evaluating acquisitions and making capital investments where projected returns are appropriate. It also stated that existing cash and marketable securities should support anticipated capital requirements, dividends, and future growth.
The Drylock transaction includes a 10-year lease for portions of the company’s facilities, initially generating annual payments of $1.288 million, and a transition services agreement expected to continue through the end of 2017. Divestiture proceeds and related gains materially affected reported net earnings and cash flows.
Principal disclosed risks include consumer spending, interest rates, major-customer relationships, product mix, competitive pricing, new-product acceptance, material and freight costs, production or shipping interruptions, reliance on Asian suppliers, product liability and recalls, labor disruptions, government and defense-contract funding, subcontractor performance, capital-equipment utilization, currency movements, 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. The company is self-insured for certain health-care and product-liability risks and estimates known and incurred-but-not-reported claims. No known claims were identified as materially adverse beyond recorded reserves.
Adoption of several recently issued accounting standards was not expected to have a material effect, although the company was still evaluating the future lease standard. The company expected to adopt the revenue-recognition standard on January 1, 2018 and had not finalized the transition method or potential effects.
Important facts for investors to verify
- Confirm the final post-closing adjustments and any additional $4.0 million proceeds from delayed Absorbent Products assets.
- Assess the sustainability of Q1 results excluding the divestiture gain, involuntary-conversion gain, and other discontinued-operation effects.
- Review Defense backlog, contract funding, customer concentration, shipment timing, and product mix supporting the 19% sales increase.
- Monitor Housewares/Small Appliances shipment trends, product introductions, input costs, and potential inventory obsolescence.
- Verify the company’s debt and off-balance-sheet commitments, including the Drylock lease and transition services agreement.
- Evaluate liquidity after the $38.405 million dividend payment and the company’s ongoing acquisition and capital-investment plans.
- Review the impact and transition method for upcoming revenue-recognition and lease-accounting standards.