National Presto Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended July 3, 2022, compared with the periods ended July 4, 2021. National Presto operates through Housewares/Small Appliances, Defense, and Safety segments. The interim financial statements are unaudited, and management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $77.1 million | $87.1 million | $137.9 million | $168.1 million |
| Gross profit | $15.0 million | $17.7 million | $24.7 million | $36.0 million |
| Gross margin | 19.5% | 20.3% | 17.9% | 21.4% |
| Operating profit | $7.9 million | $11.3 million | $10.9 million | $22.3 million |
| Operating margin | 10.2% | 13.0% | 7.9% | 13.3% |
| Net earnings | $6.7 million | $9.3 million | $9.6 million | $18.3 million |
| Net margin | 8.7% | 10.7% | 7.0% | 10.9% |
| Basic and diluted EPS | $0.94 | $1.32 | $1.36 | $2.59 |
Second-quarter net sales declined 12%, gross profit declined 15%, operating profit declined 31%, and net earnings declined 28% year over year. For the first six months, sales declined 18%, gross profit declined 31%, operating profit declined 51%, and net earnings declined 48%.
- Housewares/Small Appliances second-quarter sales increased 7.1% to $24.8 million, primarily from pricing; approximately 78% of the pricing benefit was offset by lower unit shipments. Segment operating profit improved to $0.6 million from a $1.6 million loss.
- Defense second-quarter sales decreased 18.3% to $52.1 million, primarily due to lower shipments. Operating profit decreased to $8.6 million from $14.1 million because of lower sales, less favorable product mix, labor shortages, and supply-chain inefficiencies.
- Safety remained a startup operation with limited revenue and negative gross margins. Its second-quarter operating loss was $1.3 million.
- Defense backlog was $422.7 million at July 3, 2022, down from $460.8 million at December 31, 2021. The company expects fulfillment over approximately 18 to 36 months.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $67.1 million at July 3, 2022, compared with $109.8 million at December 31, 2021. Marketable securities were $43.0 million, bringing cash and marketable securities to approximately $110.1 million.
- Operating activities used $2.1 million during the first six months of 2022, compared with $6.1 million provided in the prior-year period. Inventory increased by $12.4 million in the cash flow reconciliation and was $156.2 million at quarter-end.
- Investing activities used $9.2 million, including net purchases of marketable securities. Capital expenditures were $0.3 million, compared with $2.0 million in the prior-year period.
- Financing activities used $31.4 million, primarily for dividends. The company paid $31.8 million of dividends, including a regular $1.00 per-share dividend and a $3.50-per-share extra dividend.
- Management stated that the company has no debt and substantial liquidity to fund operations, dividends, capital investments, acquisitions, and other growth initiatives. Total liabilities were $57.6 million, primarily operating lease liabilities.
- Working capital was $275.8 million, down $19.1 million from year-end 2021. The current ratio was 6.7 to 1.0, compared with 6.5 to 1.0 at December 31, 2021.
Material changes, outlook, risks, and unusual items
- COVID-19-related supply-chain congestion, material and labor shortages, increased transportation and production costs, absenteeism, and delays continued to pressure operations. The company stated that these conditions remain difficult to predict.
- Management identified risks including customer concentration and demand, pricing competition, higher material, freight, tariff, and labor costs, reliance on Asian suppliers, defective products and recalls, labor disruptions, government defense spending and contract changes, acquisitions, cybersecurity, and foreign-exchange movements affecting China-sourced products.
- On July 29, 2022, after the reporting period, the company acquired certain assets and assumed certain liabilities of Knox Safety, Inc. for $3.7 million in cash, including a $0.5 million vendor deposit. Knox Safety designs and sells residential carbon monoxide detectors; the subsidiary was subsequently renamed Rely Innovations, Inc.
- The company is contesting a $2.5 million Mississippi personal-property tax assessment covering approximately seven years. Management does not consider payment probable, so no accrual was recorded.
- Routine litigation is not expected to materially affect financial position, liquidity, or results of operations. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Investor verification points
- Verify whether Defense shipments and backlog conversion recover, and whether the backlog decline signals timing, funding, or demand pressure.
- Monitor whether supply-chain, labor, freight, and material-cost pressures continue to reduce gross margins.
- Assess inventory growth, vendor prepayments, and the shift to negative operating cash flow.
- Review the financial contribution, integration costs, and execution risks associated with the Knox Safety acquisition.
- Track the Mississippi tax dispute and any change in the company’s assessment that payment is not probable.
- Evaluate dividend sustainability relative to earnings, operating cash flow, and available cash and marketable securities.