National Presto Industries, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
National Presto Industries, Inc. reported unaudited results for the three months ended April 3, 2022, compared with April 4, 2021. The company operates through Housewares/Small Appliances, Defense, and Safety segments. Its Defense business is primarily conducted under fixed-price contracts for the U.S. Department of Defense and its prime contractors.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $60.754 million | $81.027 million | Down 25% |
| Gross profit | $9.711 million | $18.361 million | Down 47% |
| Gross margin | 16.0% | 22.7% | Down 6.7 percentage points |
| Operating profit | $3.087 million | $10.943 million | Down 72% |
| Operating margin | 5.1% | 13.5% | Down 8.4 percentage points |
| Net earnings | $2.915 million | $8.993 million | Down 68% |
| Basic and diluted EPS | $0.41 | $1.28 | Down $0.87 |
| Cash flow from operations | $5.438 million | $6.799 million | Down $1.361 million |
- Housewares/Small Appliances sales declined 23.4% to $20.306 million, primarily because of lower shipments; approximately 42% of the shipment-related decline was offset by pricing increases. Segment operating profit fell to a $1.539 million loss from a $0.961 million profit, reflecting lower sales and higher product, ocean cargo, and inland freight costs.
- Defense sales declined 25.9% to $40.355 million, primarily due to lower shipments. Operating profit decreased to $6.038 million from $11.245 million, driven by lower sales, less favorable product mix, and higher legal and professional costs.
- Safety generated $93,000 of sales and an operating loss of $1.412 million. The company stated that the segment remains in the startup phase and had negative gross margins in both periods.
- Net earnings included an effective income tax rate of approximately 22%, compared with 23% in the prior-year quarter.
- Cash and cash equivalents were $82.531 million at April 3, 2022, compared with $109.805 million at December 31, 2021. Marketable securities totaled $35.298 million.
- Working capital was $267.799 million, and the current ratio was 6.4 to 1.0. The company stated that it had no debt and adequate balances to fund operations.
- Total liabilities were $59.123 million, consisting primarily of accounts payable, accrued liabilities, taxes, and operating lease liabilities. Non-current lease liabilities were $9.477 million.
- Cash used in financing activities was $31.432 million, primarily reflecting annual dividend payments of $31.827 million. The quarterly cash dividend was $4.50 per share, including a regular dividend of $1.00 and an extra dividend of $3.50.
Material changes versus the prior comparable period
- Consolidated sales decreased $20.273 million, gross profit decreased $8.650 million, pretax earnings decreased $7.887 million, and net earnings decreased $6.078 million.
- Selling and general expenses decreased 11% to $6.570 million, but the reduction was insufficient to offset the decline in sales and gross profit.
- Operating cash flow decreased moderately despite a $17.606 million reduction in accounts receivable, because of higher inventories, lower accounts payable and accrued liabilities, and increased vendor deposits and other current assets.
- Investing activities used $1.280 million, compared with $15.827 million provided in the prior-year quarter. The change primarily reflected lower marketable-security maturities and sales in 2022 and modest purchases of property, plant, and equipment.
- Defense backlog declined to $447.364 million from $460.800 million at December 31, 2021. The company expects to fulfill the backlog over approximately 18 to 36 months.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide specific quantitative earnings or revenue guidance. Management expects to continue evaluating acquisitions and making capital investments when projected returns are appropriate.
- Management identified continuing COVID-19 after-effects, including supply-chain congestion, delayed materials and components, labor shortages, absenteeism, and materially higher material, transportation, and labor costs.
- Key disclosed risks include customer concentration and demand, Defense Department funding and contract modifications or termination, fixed-price contract exposure, reliance on Asian suppliers, product defects and recalls, labor disruptions, freight and tariff costs, competition, foreign-exchange effects, cybersecurity events, and the success of startup businesses.
- The company is contesting a $2.506 million Mississippi personal-property-tax assessment covering approximately seven years. Management does not consider payment probable, and no accrual was recorded.
- Routine litigation is not expected to materially affect financial position, liquidity, or results of operations. The filing states that no known product-liability or self-insurance claims exceed recorded reserves in a manner expected to have a material adverse effect.
- Marketable securities included $25.216 million of variable-rate demand notes and $10.082 million of fixed-rate municipal bonds. Management stated that interest-rate exposure was not expected to be material.
- Interim results are not necessarily indicative of full-year results, and the filing states that no recently issued or adopted accounting standard had a material impact during the quarter.
Important facts for investors to verify
- Whether shipment volumes and supply-chain constraints improve sufficiently to stabilize Housewares and Defense revenue.
- The sustainability of pricing increases relative to product, freight, labor, and material-cost inflation.
- Defense backlog conversion, customer funding, product mix, and exposure to fixed-price contract cost overruns.
- The funding requirements and operating trajectory of the Safety segment.
- Cash deployment, including the annual dividend, potential acquisitions, capital expenditures, and the balance between cash and marketable securities.
- The status and ultimate resolution of the $2.506 million Mississippi tax assessment.
- The effect of inventory levels, vendor prepayments, product returns, and potential obsolescence on future cash flow and margins.