National Presto Industries, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. reported unaudited consolidated results for the three and six months ended July 3, 2016, compared with the periods ended July 5, 2015. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products. Interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $88.0 million | $102.4 million | $174.5 million | $203.4 million |
| Gross profit | $18.4 million | $20.4 million | $36.2 million | $41.3 million |
| Gross margin | 20.9% | 20.0% | 20.7% | 20.3% |
| Operating profit | $12.1 million | $13.8 million | $22.8 million | $26.1 million |
| Operating margin | 13.7% | 13.4% | 13.1% | 12.8% |
| Net earnings | $8.3 million | $9.1 million | $15.5 million | $17.2 million |
| Basic and diluted EPS | $1.19 | $1.31 | $2.22 | $2.48 |
| Operating cash flow | Not separately provided | Not separately provided | $26.5 million | $25.7 million |
Q2 gross profit declined 10%, while gross margin improved approximately 90 basis points because the decrease in cost of sales was greater than the decline in sales. Selling and general expenses increased 10% to $6.4 million. Intangibles amortization was zero in Q2 2016 versus $0.9 million in Q2 2015, and was $0.6 million for the first six months versus $3.3 million in the prior-year period.
Liquidity, cash flow, debt, and balance sheet
- At July 3, 2016, cash and cash equivalents were $19.0 million and marketable securities were $56.3 million, providing approximately $75.3 million of these liquid investments.
- Total current assets were $257.1 million and current liabilities were $54.2 million. Working capital was $202.9 million, down $10.6 million from year-end 2015; the current ratio was 4.7:1 versus 5.4:1 at December 31, 2015.
- Total assets were $376.5 million and stockholders’ equity was $320.6 million.
- The filing reports no outstanding debt balance; liabilities primarily consisted of accounts payable, accrued liabilities, and deferred income taxes.
- Six-month operating cash flow was $26.5 million. Investing cash flow used $29.0 million, principally for $27.4 million of marketable securities purchases, a $2.4 million note issued, and $2.6 million of capital expenditures.
- Financing cash flow used $34.7 million, including $35.2 million of dividends. Cash declined $37.2 million to $19.0 million, partly because funds were shifted into marketable securities.
Material changes versus the prior comparable period
- Q2 sales decreased $14.4 million, or 14%, and six-month sales decreased $28.9 million, or 14%.
- Defense Products was the primary driver of the decline: Q2 sales fell 20% to $50.2 million and six-month sales fell 23% to $94.8 million, primarily due to fewer units shipped.
- Housewares/Small Appliances sales declined 12% in Q2 and 10% for the six-month period, primarily due to lower shipments.
- Absorbent Products sales increased 4% in Q2 and 9% for the six-month period. The segment moved from a Q2 gross loss of $0.4 million in 2015 to gross profit of $0.9 million in 2016, and from a six-month operating loss of $2.0 million to operating profit of $0.6 million.
- Defense operating profit declined to $10.9 million in Q2 from $13.1 million, despite improved product mix. Defense selling and general expense included a noncash equipment write-down and higher compensation costs.
- Absorbent Products selling and general expense also included a noncash equipment write-down.
- Lower amortization of the customer-contract intangible acquired from DSE, Inc. partially offset the operating decline. The filing attributes the lower amortization to comparatively lower shipments from the acquired backlog.
- Dividends paid increased to $35.2 million for the first six months from $28.1 million, reflecting a $1.00-per-share increase in the extra dividend.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific financial guidance. Management expects to continue evaluating acquisitions aligned with its business segments and to make capital investments where projected returns are appropriate. Management states that existing cash and marketable securities are sufficient for anticipated capital requirements, dividends, and potential acquisitions.
- Management identified risks related to consumer spending, major-customer relationships, product mix, competition, new-product acceptance, material and freight costs, production or shipping interruptions, Asian suppliers, product liability and recalls, labor disruptions, government and military funding, subcontractor performance, capital-equipment utilization, currency movements, and information-technology failures or security breaches.
- Housewares/Small Appliances product introductions create potential obsolete or excess inventory risk; no material inventory-obsolescence issue was recorded in the current period.
- The company is self-insured for health care costs and accrues for known and incurred-but-not-reported product liability and health claims. Management reported no known claims expected to have a material adverse effect beyond recorded reserves.
- Routine litigation is pending, but management expects no material effect on financial position, liquidity, or results of operations.
- Most marketable securities are tax-exempt municipal bonds and variable-rate demand notes. Management reported no material current interest-rate exposure and no history or anticipated use of derivative instruments.
- Management concluded that disclosure controls were effective as of July 3, 2016, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lower Defense shipments reflect timing, backlog conversion, contract changes, or a more persistent demand trend.
- The sustainability of Absorbent Products’ return to profitability and the effect of the recorded equipment write-downs.
- The company’s ability to fund unusually high dividends while cash and cash equivalents declined materially.
- The composition, liquidity, credit quality, and interest-rate sensitivity of the $56.3 million marketable-securities portfolio.
- Potential inventory obsolescence, product liability, recall, supplier, and government-contract risks.
- The future impact of recently issued accounting standards, particularly revenue recognition, leases, credit losses, and stock compensation; the company generally expected no material impact, but was still evaluating certain standards.