National Presto Industries, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, although fourth-quarter results are separately disclosed. The Company operates in Housewares/Small Appliances, Defense Products, and Absorbent Products.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $431.0 million | $479.0 million | Down 10% |
| Gross profit | $93.8 million | $113.6 million | Down 17% |
| Gross margin | 21.8% | 23.7% | Down 190 bps |
| Operating profit | $74.0 million | $97.1 million | Down 24% |
| Operating margin | 17.2% | 20.3% | Down 310 bps |
| Net earnings | $48.0 million | $63.5 million | Down 25% |
| Basic and diluted EPS | $6.98 | $9.26 | Down 25% |
| Operating cash flow | $58.7 million | $57.8 million | Up $0.9 million |
| Capital expenditures | $15.0 million | $18.0 million | Down $3.0 million |
Fourth-quarter 2011 net sales were $119.0 million, gross profit was $27.5 million, and net earnings were $13.4 million, compared with fourth-quarter 2010 sales of $142.0 million, gross profit of $38.1 million, and net earnings of $22.1 million.
- Cash and cash equivalents increased to $74.0 million from $49.7 million.
- Marketable securities were $59.4 million, including $33.0 million of highly liquid variable-rate demand notes that management believes function economically like cash equivalents.
- Working capital was $263.0 million, with a current ratio of 5.0 to 1.0.
- The Company reported no debt outstanding. Its $5.0 million unsecured line of credit was unused at year-end.
- Dividends paid increased to $56.7 million, or $8.25 per share, from $55.9 million, or $8.15 per share.
- Total assets were $411.6 million and stockholders’ equity was $336.3 million.
Segment results and material changes
| Segment | 2011 sales | 2011 operating profit | Key change |
|---|---|---|---|
| Housewares/Small Appliances | $130.9 million | $16.7 million | Sales down 17%; margin pressure from lower unit shipments and higher commodity costs |
| Defense Products | $202.4 million | $55.0 million | Sales down 16%; efficiencies and favorable mix partly offset lower shipments |
| Absorbent Products | $97.8 million | $2.2 million | Sales up 21%, but profit fell sharply because of commodity costs, equipment start-up inefficiencies, and a machine fire |
- Housewares demand was affected by increased private-label purchasing and retailers’ just-in-time inventory practices. Management expected these trends to reduce volume during the first half of 2012.
- Defense backlog increased to approximately $342 million from $329 million and was expected to be performed over 18 to 24 months. The 40mm ammunition program generated approximately $92 million of deliveries in 2011.
- The Company acquired the assets of ALS Technologies, a less-lethal ammunition manufacturer, on November 1, 2011, for approximately $4.5 million net of cash acquired. The acquisition was described as immaterial to consolidated results; the purchase-price allocation was preliminary.
- Absorbent Products continued a capacity expansion program authorized at $30 million. New equipment, a warehouse addition, and an automated handling system were operational by the third quarter of 2011.
- Medline Industries accounted for 12% of consolidated sales in 2011. Its one-year manufacturing agreement ended in September 2012, and Medline expected to reduce purchases significantly after beginning production at its own facility.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal numerical revenue or earnings guidance. Management expected higher commodity costs in 2012 and anticipated reduced Absorbent Products shipments to Medline and lower Housewares volume in the first half of 2012.
- Defense operations are heavily dependent on U.S. government appropriations, military requirements, contract funding, and fixed-price contracts. Cost increases, subcontractor failures, testing issues, or government termination could reduce profitability.
- Housewares products are primarily sourced from Asian suppliers, creating exposure to supply interruptions, transportation delays, tariffs, foreign exchange movements, raw material costs, and customer concentration.
- The Absorbent Products segment operates in a high-volume, low-margin market and is sensitive to pulp, petroleum-based material, energy, transportation, capacity utilization, and customer concentration.
- Environmental liabilities were accrued at $2.25 million. Management believed the reserve was adequate, but additional studies, monitoring, or remediation could increase the obligation.
- The Company is self-insured for portions of product liability and health-care claims and does not maintain product recall insurance. Known claims were not expected to have a material effect beyond recorded reserves.
- Contractual obligations totaled $188.0 million, consisting primarily of $184.4 million of purchase obligations, substantially due within one year. Many purchase orders may be cancellable, although cancellation could result in costs.
- The auditors issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness involved improper segregation of duties in the Defense segment. Management stated that the issue was remediated before the report was issued, with quarterly access reviews planned.
- The Board declared a February 2012 dividend of $1.00 per share plus an extra $5.00 per share; $41.3 million was paid on March 15, 2012.
Most important facts for investors to verify
- Whether Medline’s expected purchasing reduction is offset by customer diversification and the Absorbent Products expansion.
- The timing, funding, and profitability of Defense backlog, including the Army’s 40mm ammunition program.
- Progress and returns from the Absorbent Products capital expansion and resolution of equipment-related inefficiencies.
- Whether commodity, freight, labor, and supplier costs can be passed through to customers.
- Remediation of the Defense-segment segregation-of-duties material weakness and the results of subsequent control testing.
- The liquidity and credit risks associated with marketable securities, particularly variable-rate demand notes.
- The sustainability of unusually large dividend payments relative to annual net earnings and operating cash flow.