National Presto Industries, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
The filing reports the fiscal year ended December 31, 2016, with comparative information for 2015 and 2014. National Presto operates two continuing segments: Housewares/Small Appliance and Defense. The former Absorbent Products segment was classified as discontinued operations in the fourth quarter of 2016 following the subsequent sale of substantially all related assets.
Housewares/Small Appliance products include pressure cookers, canners, kitchen electrics, heaters, and other consumer appliances. The Defense segment manufactures ammunition, cartridge cases, precision assemblies, less-lethal products, and military energetic devices, primarily for the U.S. Department of Defense and prime contractors.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $341.9 million | $355.6 million | Down 4% |
| Gross profit | $85.7 million | $89.4 million | Down 4% |
| Gross margin | 25.1% | 25.1% | Flat |
| Operating profit | $62.5 million | $62.5 million | Essentially flat |
| Earnings from continuing operations | $41.9 million | $42.2 million | Down 1% |
| Net earnings | $44.6 million | $40.5 million | Up 10% |
| Basic and diluted EPS | $6.39 | $5.83 | Up 10% |
| Cash flow from operations | $66.4 million | $46.3 million | Up 43% |
Continuing-operations earnings before taxes were $63.3 million, compared with $62.9 million in 2015. The effective tax rate increased to 33.8% from 33.0%. Depreciation and amortization totaled $14.7 million, including $0.7 million of intangible amortization.
Housewares/Small Appliance sales were $108.1 million, down 14%, and operating profit was $9.7 million, down from $16.1 million. Defense sales were $233.8 million, up 2%, and operating profit was $52.8 million, up from $46.4 million. Segment gross margins were approximately 19% and 28%, respectively.
Cash and cash equivalents were $27.0 million at year-end, compared with $56.2 million in 2015. Marketable securities increased to $84.5 million from $32.3 million. Management stated that variable-rate demand notes totaling $46.3 million were classified as marketable securities but could generally be tendered for cash within seven days. Working capital was $276.1 million, and the current ratio was 5.3 to 1.0.
The company had no borrowings under its $5.0 million unsecured line of credit at year-end. Commercial letters of credit totaled $1.8 million and had not been drawn. Total stockholders’ equity was $350.2 million, versus $339.3 million in 2015. The filing does not identify material funded debt.
Capital expenditures were $7.0 million, including expansion of the Defense facility in Janesville, Wisconsin. Investing cash outflows also included $52.3 million of net marketable-securities purchases and a $2.4 million note receivable issuance. Dividends paid were $35.2 million, or $5.05 per share applicable to 2016, comprising a $1.00 regular dividend and a $4.05 extra dividend.
Material changes versus the prior comparable period
- Consolidated sales declined $13.7 million, primarily because Housewares/Small Appliance shipments decreased.
- Housewares/Small Appliance gross profit fell $6.5 million, driven by lower sales and approximately $0.9 million of higher repairs and maintenance costs.
- Defense gross profit increased $2.7 million, reflecting higher shipments; its gross margin improved to approximately 28% from 27%.
- Intangible amortization declined $4.5 million, primarily because fewer units were shipped under an acquired government sales contract.
- Net earnings benefited from discontinued operations, which generated $2.6 million of after-tax income versus a $1.7 million loss in 2015. The improvement included higher sales and production and a gain related to involuntary conversion of machinery and equipment.
- Defense backlog increased to approximately $359 million at December 31, 2016, from $284 million. Management expected this backlog to be produced and shipped over approximately 18 to 24 months.
Outlook, commentary, risks, contingencies, and unusual items
On January 3, 2017, the company agreed to sell substantially all Presto Absorbent Products assets and certain liabilities to Drylock Technologies for $67.0 million, subject to customary adjustments, with potential additional proceeds of $4.0 million for delayed assets. The transaction was reflected as discontinued operations and assets held for sale in the 2016 financial statements. The company also entered into a 10-year lease with Drylock, initially providing for annual payments of approximately $1.3 million, and a transition-services agreement expected to continue through 2017.
Management expected additional shipments under existing 40mm Defense contracts during 2017 and 2018. The company had submitted a bid for the Army’s next five-year 40mm system contract, with an award decision expected in September 2017. The Army was also expected to decide by September 2017 whether to exercise production options for next-generation training rounds developed by AMTEC.
Key risks include dependence on U.S. defense spending and appropriations, fixed-price government contracts, contract termination rights, subcontractor performance, customer concentration, seasonal consumer demand, intense price competition, reliance on Asian suppliers, raw-material and freight costs, foreign-exchange exposure, product liability and recalls, environmental remediation, labor disruptions, acquisitions, and information-technology or cybersecurity failures.
Environmental liabilities were accrued at $1.0 million at December 31, 2016. Management believed the reserve was adequate, but acknowledged that additional studies, monitoring, or remediation could make the reserve insufficient. Routine litigation was not expected to have a material effect. The company was self-insured for specified health-care and product-liability exposures.
The Board announced a $1.00 regular dividend plus a $4.50 extra dividend in February 2017; $38.4 million was paid on March 15, 2017. The auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Verify the final cash proceeds, post-closing adjustments, delayed-asset proceeds, lease economics, and accounting effects of the Drylock transaction.
- Assess whether the $359 million Defense backlog converts to revenue and cash flow as expected and monitor the 40mm contract bids, awards, options, and appropriations.
- Evaluate the sustainability of Housewares/Small Appliance sales and margins after the 14% sales decline and reduced operating profit.
- Reconcile reported cash of $27.0 million with the $84.5 million marketable-securities balance and confirm the liquidity and credit quality of variable-rate demand notes.
- Review working-capital requirements, inventory levels, purchase obligations of $193.5 million, and the effect of seasonal demand on cash generation.
- Monitor exposure to fixed-price contract cost overruns, supplier concentration in Asia, major-customer dependence, product claims, environmental costs, and cybersecurity events.