National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended June 29, 2014, compared with the periods ended June 30, 2013. The company operates through Housewares/Small Appliances, Defense Products, and Absorbent Products. Interim results are unaudited and may not be indicative of full-year results.
Key financial metrics
| Metric | Three months ended June 29, 2014 | Three months ended June 30, 2013 | Six months ended June 29, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $88.3 million | $101.4 million | $174.9 million | $184.6 million |
| Gross profit | $16.1 million | $18.4 million | $31.9 million | $34.6 million |
| Gross margin | 18.3% | 18.2% | 18.2% | 18.8% |
| Operating profit | $6.3 million | $12.8 million | $13.3 million | $23.2 million |
| Net earnings | $4.2 million | $8.3 million | $8.9 million | $15.2 million |
| Basic and diluted EPS | $0.60 | $1.20 | $1.28 | $2.20 |
Second-quarter operating margin declined to approximately 7.2% from 12.6%, and six-month operating margin declined to approximately 7.6% from 12.6%. Net margin was approximately 4.7% in the second quarter and 5.1% for the first six months.
- Six-month operating cash flow was $33.7 million, compared with $1.1 million in the prior-year period. The improvement primarily reflected collections of accounts receivable and lower supplier deposits, partly offset by higher inventories and lower payables and accruals.
- Capital expenditures were $5.0 million for the first six months, compared with $13.4 million in the prior-year period.
- Cash and cash equivalents were $20.0 million at June 29, 2014, compared with $23.0 million at December 31, 2013. Marketable securities were $23.2 million, compared with $36.4 million.
- Working capital was $185.5 million, down $24.4 million from year-end, while the current ratio improved to 5.3-to-1 from 4.9-to-1.
- No debt balance or borrowing facility draw is reported in the provided filing text. Total current liabilities were $43.1 million, and stockholders’ equity was $307.2 million.
Material changes versus the prior comparable period
- Second-quarter sales decreased 13%, primarily due to lower shipments in all three segments. Six-month sales decreased 5%.
- Second-quarter net earnings fell 50%, and six-month net earnings fell 42%.
- Defense sales declined 14% in the quarter because of reduced shipments of 40mm ammunition and cartridge cases, but increased 1% for the first six months due to higher non-40mm ammunition sales.
- Housewares/Small Appliances sales decreased 10% in the quarter and 16% year to date, primarily because of lower shipments.
- Absorbent Products sales declined 13% in the quarter and 8% year to date. The segment shifted from a $369,000 quarterly gross profit to a $1.5 million gross loss and from a $2.1 million six-month gross profit to an $840,000 gross loss.
- Intangibles amortization increased by $3.2 million in the quarter and $5.5 million year to date, primarily from amortization of the customer-contract intangible related to the DSE backlog acquisition. The related expense was $3.2 million in the quarter and $5.4 million year to date.
- Selling and general expenses increased 19% in the quarter and 15% year to date, including costs associated with the newly acquired Clear Lake defense facility and higher compensation, benefits, and insurance costs.
- The company paid its annual 2014 dividend during the first quarter. Six-month dividends paid totaled $35.0 million, compared with no dividend payment in the prior-year six-month cash-flow statement because the 2013 dividend had been accelerated into December 2012.
Guidance, outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management expects to continue evaluating acquisitions aligned with its business segments and to make capital investments where appropriate returns are projected.
- On January 24, 2014, the company acquired substantially all assets of Chemring Energetic Devices’ Clear Lake, South Dakota business and related real property for total consideration of $10.5 million. The acquired facility contributed $4.0 million of second-quarter revenue and $550,000 of earnings, and $6.0 million of revenue and $705,000 of earnings from acquisition through June 29, 2014.
- Absorbent Products performance was pressured by lower shipments, customer-base changes, higher material costs, and installation and startup costs for new capital equipment. The prior year also included a $553,000 insurance settlement.
- Key risks include consumer spending, major-customer relationships, product mix, competitive pricing, material and freight costs, production interruptions, labor disruptions, government contract funding and requirements, subcontractor performance, acquisition execution, and foreign-exchange effects on China-sourced Housewares products.
- The company reports routine litigation and believes it will not materially affect consolidated financial position, liquidity, or results. It is self-insured for health costs and carries product-liability exposure; management states that no known claims exceed recorded reserves in a manner expected to be materially adverse.
- Marketable securities consist primarily of municipal bonds and variable-rate demand notes. Management considers the portfolio highly liquid and does not expect material interest-rate exposure, although bank failure could affect support for demand notes.
- The company is evaluating the effect of ASU 2014-09, Revenue from Contracts with Customers, effective for annual periods beginning after December 15, 2016, and does not expect a material impact.
- Management concluded that disclosure controls and procedures were effective as of June 29, 2014, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower shipments in Housewares and Defense persist and whether the Absorbent Products segment returns to profitability.
- The remaining amount and duration of amortization associated with the DSE customer-contract intangible, and its effect on future operating earnings.
- The operating performance, integration costs, backlog, and customer concentration of the acquired Clear Lake facility.
- Whether the unusually strong operating cash flow is sustained after the working-capital benefit from accounts-receivable collections.
- Future dividend payments and the effect of the company’s substantial dividend policy on cash available for acquisitions and capital expenditures.
- Inventory levels, product obsolescence exposure, and startup costs related to new Absorbent Products equipment.
- Government contract funding, ammunition demand, major-customer relationships, and any changes in defense procurement priorities.