Business Context and Reporting Period
National Presto Industries, Inc. filed its Form 10-K for the fiscal year ended December 31, 2014. The company operates through three segments: Housewares/Small Appliances, Defense Products, and Absorbent Products. The Housewares business is seasonal, with its principal selling period in the fourth quarter; the other segments are generally non-seasonal.
The Defense segment includes ammunition, ordnance-related products, less-lethal systems, and military energetic devices. The Absorbent Products segment manufactures primarily private-label adult incontinence products.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $412.4 million | $420.2 million | Down 2% |
| Gross profit | $77.2 million | $79.4 million | Down 3% |
| Gross margin | 18.7% | 18.9% | Down 0.2 percentage points |
| Operating profit | $39.9 million | $57.6 million | Down 31% |
| Operating margin | 9.7% | 13.7% | Down 4.0 percentage points |
| Net earnings | $26.5 million | $41.3 million | Down 36% |
| Basic and diluted EPS | $3.82 | $5.97 | Down 36% |
| Operating cash flow | $73.2 million | $24.2 million | Up $49.0 million |
| Capital expenditures | $11.3 million | $36.3 million | Down $25.0 million |
| Cash and cash equivalents | $54.0 million | $23.0 million | Up $31.1 million |
| Marketable securities | $22.4 million | $36.4 million | Down $14.0 million |
| Total assets | $378.4 million | $393.5 million | Down 4% |
Working capital was $208.2 million and the current ratio was 5.4 to 1.0 at year-end. The company had no borrowings under its $5.0 million unsecured line of credit. The filing does not report funded long-term debt. Commercial letters of credit totaled $0.2 million and were undrawn.
Cash provided by operations benefited from lower accounts receivable and inventory, lower vendor deposits, and non-cash depreciation and amortization. Investing cash outflows included $11.3 million of capital expenditures and $10.5 million for the Clear Lake acquisition. Financing cash outflows included $35.0 million of dividends.
Material Changes Versus the Prior Comparable Period
- Housewares/Small Appliance sales declined 8% to $125.7 million, primarily due to lower unit shipments. Operating profit declined to $15.4 million from $17.0 million.
- Defense sales increased 7% to $221.5 million, primarily due to the Tech Ord acquisition. Gross profit increased to $57.2 million, but operating profit declined to $32.3 million from $40.5 million because of substantially higher intangible amortization and acquisition-related costs.
- Absorbent Products sales declined 15% to $65.2 million. The segment reported a $5.4 million gross loss and a $7.8 million operating loss, compared with a $0.2 million operating profit in 2013. The decline reflected lower shipments, installation costs for new equipment, and the absence of a prior-year insurance settlement.
- Intangible amortization increased to $12.0 million from $0.7 million, primarily because of the acquired government contract intangible.
- The company recorded a $2.1 million impairment of finite-lived intangible assets associated with the ALS reporting unit. No goodwill impairment was recorded in 2014; a $2.8 million goodwill impairment had been recorded in 2013.
- The 2013 results benefited from a $4.0 million state tax refund and a $3.0 million reversal of contingent consideration. These benefits did not recur in 2014, contributing to the higher effective tax rate and lower earnings.
- The company acquired the Clear Lake, South Dakota energetic-devices business for $10.5 million. The acquired operation contributed $13.7 million of revenue and $1.3 million of earnings from acquisition through year-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- AMTEC submitted a proposal on January 29, 2015, for the next five-year Army 40mm Ammunition System contract. The Army expected to announce a decision in the second quarter of 2015. The filing provides no assurance of award.
- Defense backlog was approximately $407 million at December 31, 2014, compared with $452 million at December 31, 2013, and was expected to be produced and shipped over approximately 24 to 30 months.
- Deliveries under the current 40mm contract totaled $124 million in 2014, with additional shipments expected in 2015. Contract volume remains dependent on military requirements, congressional appropriations, government procurement rules, and funding.
- Nearly all Defense work performed for the Department of Defense was fixed-price. Cost increases, quality failures, subcontractor performance, testing failures, or contract termination could reduce margins or cause losses.
- Housewares is exposed to seasonal retail demand, customer concentration, price competition, supply interruptions from Asian vendors, transportation costs, commodity costs, foreign-exchange movements, product recalls, warranty and product-liability claims, and new-product acceptance risk. Wal-Mart represented 10% of consolidated sales in 2014.
- Absorbent Products remains a capital-intensive, low-margin business that requires high capacity utilization. It faces customer concentration, commodity-cost volatility, and the continuing effects of the loss of significant Medline business.
- The environmental reserve was $1.4 million at year-end. Management considered it adequate for known remediation and monitoring obligations, but additional studies, monitoring, or remediation could make the reserve insufficient.
- Specified contractual obligations totaled $199.9 million, consisting primarily of $198.7 million of purchase orders. The company stated that many purchase orders may be cancellable or modifiable, although cancellation could create costs.
- The Board declared a regular dividend of $1.00 per share plus an extra dividend of $3.05 per share in February 2015; $28.1 million was paid in March 2015.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014. The assessment excluded Tech Ord, which represented approximately 3% of assets and sales and 5% of net earnings.
Most Important Facts for Investors to Verify
- Whether AMTEC receives the next five-year Army 40mm contract and the associated effect on Defense revenue, backlog, and capacity utilization.
- Whether the Absorbent Products segment can return to profitability after equipment investments, customer-base changes, and the 2014 operating loss.
- The sustainability of earnings after excluding the 2013 tax refund and contingent-consideration reversal and considering elevated amortization.
- The composition, liquidity, and credit quality of the company’s cash and marketable-securities portfolio, including $13.6 million of variable-rate demand notes classified as marketable securities.
- The recoverability of Defense-related intangible assets and goodwill, particularly the ALS assets following the 2014 impairment charge.
- Exposure to fixed-price contract cost overruns, government funding changes, contract termination, subcontractor performance, and acceptance testing.
- Customer concentration and supply-chain exposure in Housewares, including dependence on Asian suppliers and major retailers.
- The status of environmental, product-liability, tax, and other contingencies and whether existing reserves remain adequate.