Business Context and Reporting Period
National Presto Industries, Inc. filed this unaudited Form 10-Q for the fiscal quarter and nine months ended October 3, 2021, compared with October 3, 2020 and September 27, 2020, respectively. The company operates through Housewares/Small Appliances, Defense, and Safety segments. All businesses remained operational during the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $87.2 million | $93.9 million | $255.4 million | $246.7 million |
| Gross profit | $11.2 million | $20.7 million | $47.3 million | $58.6 million |
| Gross margin | 12.9% | 22.1% | 18.5% | 23.7% |
| Operating profit | $4.6 million | $14.5 million | $26.9 million | $39.0 million |
| Operating margin | 5.3% | 15.4% | 10.5% | 15.8% |
| Net earnings | $4.1 million | $12.1 million | $22.4 million | $33.0 million |
| Net margin | 4.7% | 12.9% | 8.8% | 13.4% |
| Diluted EPS | $0.58 | $1.72 | $3.18 | $4.69 |
| Operating cash flow | Not separately provided | Not separately provided | $14.6 million | $8.3 million |
At October 3, 2021, cash and cash equivalents were $91.0 million and marketable securities were $33.3 million, compared with $86.0 million and $69.0 million, respectively, at December 31, 2020. The company stated that it had no debt and adequate liquidity to fund operations, capital requirements, dividends, acquisitions, and growth. Working capital was $284.0 million and the current ratio was 5.6 to 1.0.
Nine-month investing cash flow was $34.0 million, primarily reflecting $35.5 million of marketable-securities maturities and sales. Financing cash flow was negative $43.5 million, primarily due to $44.1 million of dividends paid. Capital expenditures were $2.5 million. The company paid a regular dividend of $1.00 per share and an additional dividend of $5.25 per share in March 2021.
Material Changes Versus Prior Comparable Period
- Third-quarter sales decreased 7% to $87.2 million, while nine-month sales increased 4% to $255.4 million. The nine-month comparison includes five additional days in 2021.
- Third-quarter gross profit declined 46%, operating profit declined 68%, and net earnings declined 66%. Nine-month gross profit declined 19%, operating profit declined 31%, and net earnings declined 32%.
- Housewares/Small Appliances third-quarter sales increased 2% to $27.7 million, but the segment generated a $3.2 million gross loss and a $6.3 million operating loss, primarily due to higher product, ocean-cargo, and inland-freight costs.
- Defense third-quarter sales decreased 11% to $59.3 million, and operating profit declined to $12.1 million from $13.4 million. The segment's nine-month sales increased 2% to $177.6 million, while operating profit declined modestly to $37.5 million.
- Safety remained a startup operation with limited revenue and negative gross margins; its third-quarter operating loss was $1.2 million.
- Higher employee compensation, benefits, insurance, health-care, and legal costs increased selling and general expenses. Lower yields and lower average investments reduced other income.
- Defense backlog increased to $474.8 million at October 3, 2021 from $320.2 million at December 31, 2020, with fulfillment generally expected over 18 to 24 months.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative earnings or sales guidance. Management expects to continue evaluating acquisitions and making capital investments where projected returns are appropriate. Management described the company as highly liquid and debt-free.
- COVID-19-related material, component, labor, transportation, and supply-chain shortages continued to cause delays, absenteeism, higher costs, and operating inefficiencies. The potential effects of variants and vaccination mandates remained uncertain.
- Key risks include defense-government funding and contract changes, fixed-price contract performance, customer concentration, competition and pricing pressure, product liability and recalls, reliance on Asian suppliers, labor disruptions, freight and material inflation, cybersecurity events, and foreign-exchange effects on Chinese-sourced products.
- A Mississippi tax assessor issued a $2.5 million personal-property-tax assessment covering approximately seven years. The company intends to contest it, considers payment not probable, and recorded no accrual.
- Routine litigation was not expected to materially affect financial position, liquidity, or results of operations. The filing states that no known product-liability or health-insurance claims exceeded recorded reserve levels in a manner expected to be material.
- The company had $10.3 million of recognized operating lease liabilities at October 3, 2021, with total undiscounted lease payments of $17.6 million.
- Management concluded that disclosure controls and procedures were effective as of October 3, 2021, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether supply-chain, freight, labor, and material-cost pressures continue to impair Housewares/Small Appliances margins.
- The conversion of the $474.8 million Defense backlog into revenue and cash flow, including exposure to government funding, contract modifications, and fixed-price execution risk.
- Future dividend policy and the company’s ability to sustain large regular and extra dividend payments while funding acquisitions and capital expenditures.
- The status and potential financial outcome of the $2.5 million Mississippi tax assessment.
- Whether COVID-19 vaccination requirements or labor shortages materially affect staffing, production, or government-related business.
- Inventory levels, vendor prepayments, and potential obsolescence or impairment in Housewares/Small Appliances and Safety.