Funny Little Presto
Board: Value Hounds
[See Post for Tables]
National Presto is a funny little company. It operates in three segments that are unrelated.
Housewares and appliances
They sell the well-known Presto cookware. Cookware includes pressure cookers, deep fryers, waffle irons, pizza ovens, coffeemakers and more. Wal-Mart accounts for 11% of the houseware segment sales. Housewares are sold directly to retailers and some independent distributors. There is a massive sales force of 11 employees that sell and service customers. These sales peak in Q4 during Christmas
Extra cash not needed for business activity is invested and called “other income” on the P&L
AMTEC was acquired early in 2001 and was the defense segment business at the start. AMTEC makes 40mm ammunition and precision mechanical and electro-mechanical products for the DoD.
Mechanical and electro mechanical devices are used with the ammo
AMTEC is powered by a 75,000 square foot facility in Janesville WI. It focuses on niche market ordnance products such as training ammunition, fuzes, firing devices, and initiators as well as the 40mm ammo.
In a military munition a fuze is the part of the device that initiates function. The term fuze is used to indicate a sophisticated ignition device incorporating mechanical and/or electronic components
Most English-language countries use the "z" spelling to distinguish between simple burning fuses and more complicated munition fuzes, which contain mechanical and/or electronic components, although historically this has by no means been a hard-and-fast rule
Spectra Technologies, a subsidiary of AMTEC, was acquired in 2003, and is the manufacturer of munitions and ordnance-related products for the DOD and DOD prime contractors.
Amron, a division of AMTEC, holds the assets that were purchased from Amron LLC on January 30, 2006. Amron manufactures cartridge cases used in medium caliber ammunition (20mm, 25mm, 30mm and 40mm) primarily for the DOD and DOD prime contractors---including 40mm systems.
The contract backlog was approximately $329,000,000, $274,000,000, and $265,000,000 December 31, 2010, 2009, and 2008 respectively, net of intercompany sales.
Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders. It is anticipated that the backlog will be performed during a 12 to 18-month period, after December 31, 2010.
AMTEC was given a 5-year contract by the army in 2005 for the management and production of 40mm ammunition systems. That contract was re-upped in Feb 2010 for another 5 years. In April,NPK received a $70 million award under the current 5-year 40mm contract. The deliveries on the $70 million will be during 2012. The cumulative amount under the contract is $253 million.
In November 2011, NPK acquired ALS technology, a manufacturer of less than lethal ammunition. Products include smoke and tear gas grenades, stun munitions, and impact munitions that do not kill. The customers include law enforcement and corrections facilities. ALS generates around $7.5 million per year.
The segment was born in 2001 with the express purpose of purchasing assets from RMED International, a company that manufactured primarily private label diapers. In 2003 Presto acquired NCN Hygienic Products, a Marietta, Georgia company that manufactured adult incontinence products and pads for dogs.
The absorbent products business is capital intensive and a substantial investment in new equipment was made during 2004 and 2005.
New absorbent product equipment is extremely complex==who would have guessed? Not only is considerable time required to secure and install the equipment, but even more time is required to develop the requisite employee skill sets to utilize the equipment efficiently. Sales channels must be in place to sell the increased production that results from new equipment and improved efficiency in operations.
During the fourth quarter of 2006, in order to become more efficient, Presto decided to consolidate its adult incontinence production and, as a result, began the process of shutting down GA and relocating to the Eau Claire, Wisconsin facility. They discontinued the dog pads --- a business that did not fit the long-term Absorbent Products segment strategy. The transition was completed by the end of the first quarter of 2007.
Unlike the housewares/small appliance business, the absorbent product business is not seasonal. To the extent there are variations from month to month, that is primarily a function of customer promotional timing. As private label products tend to emulate branded product as much as possible, new product development is important, but is largely limited to providing features similar to those found in national branded product. Research and development costs are absorbed in operations.
The absorbent product industry is a competitive, high volume-low margin business. There are competitors, larger than Presto with recognizable brand name power—Depends anyone? Product competition is largely based on product pricing, quality, and features.
Product cost is heavily influenced by commodity costs including wood pulp and petroleum based products. Equipment operating speed, efficiency, and utilization play a big part in making this low margin business profitable.
For 2010, 2009, and 2008, Medline was 11%, 12%, and 12%, respectively, of sales.
On July 31, 2009, the contract with Medline expired. In September 2009, Presto entered a two-year private label manufacturing agreement provising a framework for the ongoing relationship with Medline. The contract ended September 2011.
In September, NPK signed an agreement with Medline for an additional year of sales to them. Shipments will be slightly lower as Medline begins its own production. I would expect Medline revenue to disappear in 2013. With revenue at $80 million in 2010, we might anticipate the loss of at least $8 million from absorbent in 2013. However, NPK is having some success at diversifying the customer base in the last 3 quarters.
Absorbents had its first profitable year in 2009. The segment has been experiencing capacity constraints and plans a $30 million expansion. Presto bought one multi-million dollar machine installed in the Eau Claire facility during March of 2011. Presto built a warehouse addition to the current facility in Eau Claire and installed an automated handling system in 2011.
The following is gross margins and operating margins by segment. Absorbent has the lowest margins and is the smallest percent of revenue. They became profitable in 2009. Defense with the highest percentage of segment revenue also has the best margins. With the DoD contract in place through 2015, at least 50% of revenue is locked in.
The business has changed over the past several years. Housewares has declined as a percentage of revenue as has defense. Absorbent is a slightly larger percentage.
Housewares margins have lost a few points but that has been more than offset by defense helping to raise total margins. The direction the business is taking actually looks good even as they depend less on their roots in housewares.
Growth has slowed with 2010 being difficult and the first 9 months continuing to see sales decline.
NPK does not appear to have conference calls—at least at M* and SA or at their website. Instead, the CEO comments on the earnings in 8Ks.
Here are the comments on the last 3 quarters earnings briefly. We are looking for the reason for negative growth:Q3 2011
In response to questions about sales and earnings, Maryjo Cohen, President, stated,
“As expected, third quarter 2011 was a challenge for each of the three segments. The Absorbent Product segment alone enjoyed a revenue gain over the prior year’s third quarter.
The comparative gain was 22.6% and stemmed from its ongoing customer diversification program.
Both the Housewares/Small Appliance and the Defense segments’ net sales declined, 8.7% and 17.8%, respectively. The former [housewares]reflected reduced sales in the category at retail, as well as increased emphasis by retailers on private label products, while the latter was largely a function of the timing of shipments.
Operating earnings at the Defense segment increased from those secured during third quarter 2010 by 7.3%, primarily as a result of realized efficiencies. The increase was more than offset by declines at the Housewares/Small Appliance and Absorbent Product segments.
Housewares/Small Appliances segment comparative operating earnings dropped 23.9% in largest part due to the decline in top line volume and increases in material costs, while the Absorbent Products segment decreased by 38.9 %, primarily from increased material and freight costs, and a decrease in efficiency incident to the startup of the segment’s new capital equipment.
Decreased yields from the company’s portfolio had a negative, comparative impact on earnings as well.”
The houseware’s loss of market share to private label may be the biggest take away worry. There is no comment whether this trend to private label is likely to continue.
The timing issue for Defense seems like a short-term problem.
Operating earnings for absorbent should improve as the recently installed equipment begins to correct capacity constraints.
The decreased yields from the portfolio are expected. Cash not used for operations is invested. In Q2 [last Q available], cash was $30.5 million and marketable securities were $81.5 million. Earnings are reported as other income. We don’t have Q3 yet, but Q2 invested earnings decreased 23%. It is a small part of earnings at $485,000 while operating earnings were $16.4 million. NPK sells and buys investments quarterly. The proceeds have helped pay the special dividend recently. Since 2008 marketable securities declined from $121 million in 2008 to $85.1 million in Q2 2011. Total cash per share at the end of Q2 was $16.29 and at the end of 2008 it was $21 per share.
I am expecting NPK may discontinue the special dividend in favor of a higher regular dividend. At present the regular dividend is $1.00. In 2010, the total dividend was $8.15--$1.00 regular dividend and $7.15 special dividend Q2 2011
For the second quarter, housewares declined 24% again due to private label incursion
Defense was down on timing of payments
Absorbent was up 30% as the customer base expanded. This bodes well for the eventual loss of Medline. Only the Absorbent Q1 2011
In Q1, defense increased revenue by 5% as backlog was shipped
Housewares was down largely due to overstock at the retail level and failure to restock at formerly high levels seen in the previous year.
A fire at the absorbent segment facility impacted earnings and operating income. Revenue increased 8% while operating income was down 76%Tying it up
NPK is not necessarily the easiest company to wrap up neatly. The three disparate operating segments look ridiculous on the surface. They are however, run pretty well and at a profit for all three segments the last two years.
IMO defense is the best of the three with the highest margins and reasonably good growth. The new 5-year contract gives a little visibility at least until 2015
Housewares has been the core and heart of the business for decades and is under pressure
seemingly as retailers move to private labels. There will always be a market for the Presto brand, but it may, in the worst case, lose more market share. It has underperformed in the last 9 months
Absorbent looks poised
for at least slow growth. NPK is investing in equipment to increase efficiency and capacity and has begun to expand the customer base as the loss of Medline looks imminent in 2013.
The reason to invest in NPK is partly for continued stable growth and largely for the dividend.
The dividend is a combination of a regular dividend and a yearly special dividend. The extra dividend has been paid since 2004.
In 2011, it was $8.25 with the regular dividend still at $1.00. It did not increase as much as in past years—-2011 has been a difficult year.
The dividend was not covered by free cash flow in 2010 and by selling investments in excess of purchase, they were paid. They were short in 2006 and burned quite a bit of cash. Cash at the end of 2010 increased slightly.
I would expect the dividend would be maintained at least in some form. If Presto continues to experience slowing revenue, they could revert back to a regular dividend but at a lower level. Even at $4 to $5, the yield would be approximately 5%. With around 7 million shares, the savings would be around $21 million over 2011 levels. NPK has low capex needs and high returns on invested capital and a willingness to share the cash with shareholders.
At the same time, Presto has an aversion to debt. There is no debt on the balance sheet and there has not been any as far back as my research goes to 2003. Without debt the cost of capital is 9.5%
The Cohens have been with Presto for around 50 years. The current CEO is Maryjo Cohen. She has been in place for 117 years. She owns 30% of the stock
The stock never splits and the share count is remarkably stable –6.82 shares in 2003 and 6.87 in 2011.Very few options are used and shares are not repurchased.
Ms Cohen takes a small salary at $473,000. It was $398,846 in 2008. She has no non-equity bonuses, but did get a stock award of $141,145 in 2009-2010. As a 30% owner, the special dividend constitutes a fair amount of her pay. That does give her some vested interest in keeping the dividend at a reasonably good level. I would not expect to see it drop back to $1 unless she begins to take a non-equity bonus as part of her pay package. At present, her interests are aligned with other shareholders.
What we have is a rather stodgy small business, conservatively run, making decent cash flow whose growth prospects are somewhat muted. In 2010 the dividend was not been covered by CFFO and the shortfall was made up by selling investments
In 2011, the first six months, the dividend was paid in March and the shortfall was high with just 6 months of cash flow supporting the yearly dividend. Securities were sold and cash was used. To pay the dividend, $20 million in investments were sold and cash decreased by $20 million. That will look better at year’s end.
Interesting quirky little company. It generates cash, invests cash for shareholders, does not dilute shareholders with share issues and share count is low; issues no debt and pays for acquisitions as it goes. Returns on invested capital are high. Insiders own a good deal of the company. It is followed by one analyst and seems to live by its own rules, not heeding Wall Street much. There are no conference calls and the SEC filings are generally short, straight-forward and to the point.
It’s best growth is likely behind it and the price per share is likely to depend on the dividend. With the yield at 8.7% and in the absence of bad news, NPK is not likely to move much one way or another. Should it drop the dividend dramatically, expect the stock price to follow suit. There is not enough growth here to push the price higher if the dividend is pulled.
It seems unlikely that the dividend is just a passing phase. It has been paid for decades—just not at such high yields as currently exist. The special dividend may be abandoned. If so, I suspect the regular dividend would approximate at least a 5% yield at current prices. Ms Cohen depends on the dividend for the bulk of her income and her self-interest happens to be aligned with other shareholders at least for now. Guidance
In looking ahead to 2011, Ms. Cohen stated, “The Federal Reserve Board’s ultra easy money policy in combination with its monetization of the debt and the administration’s fiscal irresponsibility, all but assures continued commodity inflation throughout the new year. As such, 2011 is expected to be an even more challenging year than 2010.
With challenges, there are always opportunities. The Defense segment is in the process of bringing additional work from its 40MM systems contract in house with the anticipation that further vertical integration will ultimately enhance profitability. A new adult underwear machine ordered by the Absorbent Products segment should be installed and in operation during the second quarter of the year.
The machine is designed to manufacture gender specific product, i.e., disposable underwear tailored to the specific needs of men and women. Gender specific products are very much in demand and should provide the segment with an opportunity to enter the retail market, as well as further serve the institutional market with premium products.”