National Presto Industries, Inc. — FY 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, filed March 18, 2013. National Presto operates through Housewares/Small Appliances, Defense Products, and Absorbent Products. Housewares sales are seasonal and concentrated in the fourth quarter; Defense and Absorbent Products are generally non-seasonal.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $472.5 million | $431.0 million | +10% |
| Gross profit | $94.9 million | $93.8 million | +1% |
| Operating profit | $59.7 million | $73.7 million | -19% |
| Net earnings | $38.9 million | $48.0 million | -19% |
| Basic and diluted EPS | $5.64 | $6.98 | -19% |
| Operating cash flow | $62.3 million | $58.7 million | +6% |
Gross margin was approximately 20.1%, compared with 21.7% in 2011. Operating margin was approximately 12.6%, compared with 17.1%, and net margin was approximately 8.2%, compared with 11.1%. The filing reports no debt outstanding. The company had $37.4 million of cash and cash equivalents and $55.6 million of marketable securities at year-end. It also had $31.1 million of highly liquid variable-rate demand notes classified as marketable securities and an unused $5.0 million unsecured line of credit. The current ratio was 4.8 to 1.0 and working capital was $214.8 million.
Capital expenditures were $13.6 million, primarily supporting Absorbent Products expansion. Cash used in financing was $85.3 million, including two dividend payments totaling $86.1 million. Total dividends paid per share were $12.50, including an accelerated payment of the 2013 dividend in December 2012.
Material changes versus the prior comparable period
- Housewares/Small Appliance sales increased 11% to $145.0 million, but gross margin declined to 19% from 21% due mainly to higher product and ocean freight costs.
- Defense sales increased 21% to $245.0 million, driven by higher shipments and deliveries from the Department of Defense backlog. Gross margin declined to 26% from 31% because of an unfavorable product mix, primarily under the 2010 40mm contract.
- Absorbent Products sales decreased 16% to $82.5 million after a major customer, Medline, began operating its own facility. Segment operating profit fell to a $11.1 million loss from $2.0 million of profit, reflecting lower volume and under-absorbed fixed costs.
- Consolidated selling and general expenses increased 76% to $35.1 million. The increase included $5.7 million of equipment impairment, $3.9 million of additional doubtful-account provisions, a $1.6 million reserve for a note receivable, and $1.0 million of intangible-asset amortization associated with the foreign absorbent-products facility and the ALS acquisition.
- Total assets decreased to $353.9 million from $411.6 million, while stockholders’ equity decreased to $290.6 million from $336.3 million, primarily reflecting the large dividend distributions and lower retained earnings.
Guidance, outlook, risks, contingencies, and unusual items
- No formal quantitative earnings or revenue guidance is provided. Management expects continued capital investment and will evaluate acquisitions aligned with its business segments.
- Defense backlog was approximately $310 million at December 31, 2012, compared with $342 million at December 31, 2011, and was expected to ship over 18 to 24 months. Defense revenue depends on military requirements, appropriations, procurement rules, and potential federal sequestration cuts.
- The 40mm systems program generated $146 million of deliveries in 2012. Substantially all Defense work was performed under fixed-price contracts, exposing the company to cost overruns, quality issues, subcontractor performance, and potential government termination.
- The less-than-lethal operation was being relocated from Arkansas to Perry, Florida, with completion expected in the second quarter of 2013. The company purchased 544 acres for the related facilities.
- Medline’s manufacturing expansion caused a significant 2012 decline in Absorbent Products sales; its one-year manufacturing agreement ended in September 2012 with no commitment to renew, and further declines were expected in 2013.
- The company wrote off equipment and receivables associated with a financially troubled foreign absorbent-products facility. Recovery of some amounts remained possible, but the filing does not provide a clear expected recovery value.
- Environmental liabilities totaled $1.9 million at year-end. Management believes the reserve is adequate, although additional studies, monitoring, or remediation could increase costs.
- Purchase obligations totaled approximately $201.1 million, principally outstanding purchase orders, with specified contractual obligations totaling $204.5 million. The company noted that many purchase orders may be cancellable but could still generate supplier-related costs.
- The company relies on major retail customers, Asian suppliers, U.S. government contracts, commodities, and fixed-price pricing. Key risks include customer concentration, supply interruptions, raw-material and freight inflation, consumer demand, defense-budget reductions, foreign exchange, product liability, recalls, and litigation.
- Management and BDO USA, LLP concluded that internal control over financial reporting was effective as of December 31, 2012. A prior segregation-of-duties material weakness in the Defense segment was remedied during the first quarter of 2012.
Most important facts for investors to verify
- Whether Defense backlog converts to revenue and earnings as expected amid sequestration, appropriations, and fixed-price contract risks.
- The sustainability of Housewares margins after higher product and ocean freight costs.
- The pace of further Medline-related volume losses and the ability of Absorbent Products to restore utilization and profitability.
- The final recoverability of receivables, equipment, and the $3.6 million note receivable associated with the troubled facilities and licensing arrangements.
- Actual cash and investment liquidity, including the classification of $31.1 million of variable-rate demand notes as marketable securities rather than cash equivalents.
- Execution and cost of the Florida facility relocation and the remaining Absorbent Products expansion commitments.
- The effect of the unusually large $12.50 per-share 2012 dividend, which included an accelerated 2013 payment, on future dividend capacity.