National Presto Industries, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. reported unaudited results for the three and six months ended June 30, 2019, compared with the periods ended July 1, 2018. Continuing operations comprise the Housewares/Small Appliances and Defense Products segments. The Absorbent Products business remains classified as discontinued operations following its 2017 divestiture.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Three months ended July 1, 2018 | Six months ended June 30, 2019 | Six months ended July 1, 2018 |
|---|---|---|---|---|
| Net sales | $71.745 million | $79.227 million | $135.595 million | $156.053 million |
| Gross profit | $14.676 million | $19.445 million | $27.168 million | $39.722 million |
| Operating profit | $8.637 million | $12.398 million | $14.685 million | $25.779 million |
| Earnings from continuing operations | $8.153 million | $10.776 million | $14.104 million | $21.770 million |
| Net earnings | $8.156 million | $10.775 million | $14.107 million | $21.761 million |
| Diluted EPS | $1.16 | $1.54 | $2.01 | $3.11 |
Gross margin was approximately 20.5% in the quarter and 20.0% year to date, versus approximately 24.5% and 25.5%, respectively, in the comparable 2018 periods. Operating margin was approximately 12.0% in the quarter and 10.8% year to date, versus approximately 15.6% and 16.5%. Net margin was approximately 11.4% in the quarter and 10.4% year to date.
- Housewares/Small Appliances: Second-quarter sales increased 7% to $19.148 million, but gross profit declined to $2.055 million and the segment recorded an operating loss of $1.333 million. Six-month sales increased 14% to $38.857 million, while the six-month operating loss widened to $2.862 million.
- Defense Products: Second-quarter sales declined 14% to $52.597 million, gross profit declined to $12.621 million, and operating profit declined to $9.970 million. Six-month sales declined 21% to $96.738 million, with operating profit declining to $17.547 million.
- Cash flow: Six-month operating cash flow was $7.860 million, down from $49.826 million. Investing activities provided $40.523 million, primarily from net marketable-securities maturities and sales. Financing activities used $41.792 million, principally for $42.087 million of dividends.
- Liquidity: Cash and cash equivalents were $63.438 million and marketable securities were $91.517 million at June 30, 2019, totaling approximately $154.955 million. Working capital was $277.645 million, and the current ratio was 7.6 to 1.0.
- Debt and leases: The filing does not disclose conventional borrowings. Lease liabilities totaled $3.715 million, including $483,000 current and $3.232 million non-current.
- Backlog: Defense backlog was $366.244 million at June 30, 2019, compared with $333.592 million at December 31, 2018. The company expects fulfillment over approximately 18 to 24 months.
Material changes versus the prior comparable period
- Second-quarter sales decreased 9%, gross profit decreased 25%, and earnings from continuing operations decreased 24%.
- Six-month sales decreased 13%, gross profit decreased 32%, and earnings from continuing operations decreased 35%.
- Defense performance was adversely affected by lower unit shipments, less favorable product mix, and lower margins.
- Housewares/Small Appliances sales improved, but product margins were less favorable and selling and general expenses increased, including higher self-insurance and legal and professional costs.
- Intangible amortization declined by $1.416 million in the quarter and $2.161 million year to date because an acquired Defense customer-contract intangible was fully amortized in 2018.
- Other income increased because of higher yields on marketable securities, partially offsetting operating pressure.
- Inventory increased by $20.486 million during the first six months, contributing to the sharp decline in operating cash flow.
Outlook, risks, contingencies, and unusual items
The filing provides no quantitative earnings or revenue guidance. Management states that it expects to continue evaluating acquisitions and capital investments and believes existing cash and marketable securities are sufficient for anticipated capital requirements, dividends, and growth initiatives.
- Management identifies risks related to consumer spending, major customers, competition, product acceptance, material and freight costs, tariffs, Asian suppliers, product liability and recalls, labor disruptions, Defense contract modifications or termination, government funding, subcontractors, cybersecurity, and foreign-exchange movements involving the Chinese renminbi.
- The company is self-insured for certain product liability and health-care costs. Management states that no known claims are expected to have a material adverse effect beyond recorded reserves, but higher claim frequency or severity could materially affect results.
- Routine litigation is outstanding; management does not expect it to materially affect financial position, liquidity, or results of operations.
- The company adopted the lease standard effective January 1, 2019, recording $3.715 million of operating lease liabilities and corresponding right-of-use assets.
- On July 23, 2019, a subsidiary acquired substantially all assets of OneEvent Technologies, Inc. for $6.385 million plus a potential earn-out. Purchase accounting was incomplete when the filing was issued.
- Disclosure controls were reported as ineffective because of a material weakness in Defense-segment revenue-recognition controls. The weakness involved insufficient precision in evaluating contract terms, including alternative use and termination provisions. Management stated that the financial statements were fairly presented and described a remediation plan.
- Accounting guidance on expected credit losses was not yet adopted; the company was evaluating its impact.
Important facts for investors to verify
- Confirm the status and effectiveness of the remediation plan for the Defense revenue-recognition material weakness.
- Assess whether Defense backlog converts to revenue and cash flow as expected, including the effect of contract terms and government funding.
- Monitor Housewares/Small Appliances margins, inventory levels, product returns, and potential obsolescence.
- Reconcile the substantial decline in operating cash flow with earnings, inventory growth, and changes in payables and accruals.
- Review the OneEvent acquisition accounting, earn-out exposure, and any subsequent integration or impairment effects.
- Evaluate liquidity and investment concentration, including variable-rate demand notes, municipal securities, uninsured cash balances, and interest-rate sensitivity.
- Verify dividend sustainability relative to operating cash generation and the company’s investment and acquisition plans.