National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended July 1, 2018, compared with July 2, 2017. Continuing operations consist primarily of Housewares/Small Appliances and Defense Products. The Absorbent Products business was treated as discontinued following its 2017 divestiture.
Financial performance and position
| Metric | Three months 2018 | Three months 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $79.2 million | $74.6 million | $156.1 million | $147.4 million |
| Gross profit | $19.4 million | $17.6 million | $39.7 million | $37.7 million |
| Operating profit | $12.4 million | $12.1 million | $25.8 million | $26.1 million |
| Earnings from continuing operations | $10.8 million | $8.9 million | $21.8 million | $18.9 million |
| Net earnings | $10.8 million | $9.7 million | $21.8 million | $27.9 million |
| Diluted EPS | $1.54 | $1.39 | $3.11 | $3.99 |
- Approximate gross margins were 24.5% for the second quarter and 25.5% year to date. Approximate operating margins were 15.6% and 16.5%, respectively.
- Second-quarter sales increased 6%, while earnings from continuing operations increased 21%. Year-to-date sales increased 6% and earnings from continuing operations increased 15%.
- Six-month net cash provided by operating activities was $49.8 million versus $5.7 million in the prior year. Cash and cash equivalents were $36.6 million at July 1, 2018, supplemented by $129.4 million of marketable securities.
- Capital expenditures were $5.3 million year to date. Investing activities provided $17.0 million, while financing activities used $41.5 million, including $42.0 million of dividends paid.
- The company reported no debt balance in the condensed balance sheet. Current liabilities were $42.2 million against current assets of $315.0 million; the reported current ratio was 7.5 to 1.0.
- Stockholders’ equity was $347.3 million, compared with $366.4 million at December 31, 2017, primarily reflecting dividend distributions.
- Defense backlog was $324.9 million at July 1, 2018, compared with $308.2 million at December 31, 2017, with fulfillment expected over approximately 18 to 24 months.
Material changes versus the prior comparable period
- Second-quarter Housewares/Small Appliances sales rose 6% to $18.0 million and Defense sales rose 6% to $61.2 million. Year-to-date Housewares/Small Appliances sales declined 8% to $34.0 million, while Defense sales increased 11% to $122.0 million.
- Second-quarter operating profit increased modestly despite a $1.4 million increase in intangible amortization. The increase primarily reflected amortization of an acquired government sales contract tied to higher Defense shipments.
- The effective tax rate declined to approximately 20% in the second quarter and 21% year to date, versus 32% and 33%, respectively, primarily because of the U.S. corporate tax rate reduction enacted in December 2017.
- Net earnings declined year to date because 2017 included an $11.4 million pretax gain from the sale of the Absorbent Products business. Discontinued operations contributed a $9 thousand loss in the first six months of 2018 versus $9.0 million of earnings in 2017.
- The delayed machinery and equipment assets from the divestiture were sold during the second quarter of 2018 for proceeds of approximately $3.7 million, with no gain or loss recognized.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative earnings or sales guidance was provided. Management expects to evaluate acquisitions aligned with its segments and continue authorized and additional capital investments where appropriate returns are projected.
- Management states that available cash and marketable securities are sufficient for anticipated capital requirements, dividends, and future growth.
- Key risks include dependence on U.S. Department of Defense funding and contracts, fixed-price Defense contracts, major customers, competition, product acceptance, material, freight and tariff costs, Asian suppliers, product liability and recalls, labor disruptions, subcontractor performance, foreign exchange exposure, and information technology failures or breaches.
- The company is involved in routine litigation and believes it will not materially affect consolidated financial position, liquidity, or results. It is self-insured for certain product liability and health costs, subject to insurance and stop-loss coverage.
- No material inventory obsolescence reserve was recorded during the period, although weak demand for new or seasonal Housewares products could create future losses.
- Adoption of ASC 606 on January 1, 2018 did not change the company’s revenue recognition pattern. The company was evaluating the future impact of the new lease standard.
- Management concluded that disclosure controls were effective as of July 1, 2018, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the sustainability of Defense revenue, margins, and the $324.9 million backlog, including dependence on government funding and fixed-price execution.
- Assess the effect of customer-contract intangible amortization on future operating profit and cash generation.
- Reconcile reported net earnings in the MD&A: the statements show second-quarter net earnings of $10.775 million, while one MD&A passage states $10.755 million.
- Review dividend policy and liquidity, including the $6.00 per-share dividend paid year to date and the decline in stockholders’ equity.
- Monitor Housewares/Small Appliances shipment trends, product returns, inventory obsolescence, supplier costs, tariffs, and currency movements.
- Review the 2017 divestiture, remaining held-for-sale assets of $528 thousand, related lease arrangements, and any continuing cash flows from discontinued operations.