National Presto Industries - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

NATIONAL PRESTO INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

(Registrant's telephone number, including area code) 715-839-2121

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

There were 6,864,080 shares of the Issuer's Common Stock outstanding as of November 1, 2010.

 

 

The Company’s basic net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to restricted stock, when dilutive.

Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s financial statement presentation.  These reclassifications did not affect net earnings or stockholders’ equity as previously reported.

In the following summary, operating profit represents earnings before other income, principally interest income and income taxes.  The Company's segments operate discretely from each other with no shared manufacturing facilities.  Costs associated with corporate activities (such as cash and marketable securities management) and the assets associated with such activities are included within the Housewares/Small Appliances segment for all periods presented.

 

 

The Company utilizes the methods of fair value as described in Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures to value its financial assets and liabilities. ASC 820 utilizes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to the immediate or short-term maturity of these financial instruments.

The Company considers all highly liquid marketable securities with an original maturity of three months or less to be cash equivalents.  Cash equivalents include money market funds and certificates of deposit.  The Company deposits its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits.  Certificates of deposits are reported at par value, and money market funds are reported at fair value determined using quoted prices in active markets for identical securities (Level 1, as defined by FASB ASC 820, Fair Value Measurements and Disclosures).

The Company has classified all marketable securities as available-for-sale, which requires the securities to be reported at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity.  Highly liquid, tax-exempt variable rate demand notes with put options exercisable in three months or less are classified as marketable securities.  Certificates of deposit are also classified as marketable securities.

 

 

At October 3, 2010 and December 31, 2009, cost for marketable securities was determined using the specific identification method.  A summary of the amortized costs and fair values of the Company’s marketable securities at the end of the periods presented is shown in the table below.  Fair values are determined using significant other observable inputs (Level 2, as defined by FASB ASC 820), which include quoted prices in markets that are not active, quoted prices of similar securities, or other inputs that are observable.

The Company considers the declines in market value of its marketable securities shown in the column headed “Gross Unrealized Losses” to be temporary in nature. The unrealized losses on the Company’s marketable securities, which are insignificant in relation to total marketable securities, were caused primarily by changes in market interest rates.  The Company typically invests in highly-rated securities with the objective of minimizing the potential risk of principal loss. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required t o sell, the investment before recovery of the investment’s amortized cost basis. During the three and nine month periods ended October 3, 2010 and October 4, 2009, the Company did not recognize any impairment charges on outstanding securities.  As of October 3, 2010 and December 31, 2009, the Company did not consider any of its investments to be other-than-temporarily impaired.

Proceeds from sales of available-for-sale securities totaled $4,459,000 and $16,328,000 for the three month periods ended October 3, 2010 and October 4, 2009, and totaled $48,743,000 and $65,232,000 for the nine month periods then ended, respectively.  There were no gross gains or losses related to sales of marketable securities during the same periods.  Net unrealized gains (losses) included in accumulated other comprehensive income were ($84,000) and $50,000 before taxes for the three month periods ended October 3, 2010 and October 4, 2009, and were ($367,000) and $34,000 before taxes for the nine month periods then ended, respectively.  No unrealized gains (losses) were reclassified out of accumulated other comprehensive income during the same periods.

 

The contractual maturities of the marketable securities held at October 3, 2010 are as follows: $40,019,000 within one year; $46,344,000 beyond one year to five years; $8,605,000 beyond five years to ten years, and $19,428,000 beyond ten years. All of the instruments in the beyond five year ranges are variable rate demand notes which can be tendered for cash at par plus interest within seven days.  Despite the stated contractual maturity date, to the extent a tender is not honored, the notes become immediately due and payable.

The Company is involved in largely routine litigation incidental to its business.  Management believes the ultimate outcome of the litigation will not have a material effect on the Company's consolidated financial position, liquidity, or results of operations.

The $405,000 of accumulated comprehensive income at October 3, 2010 reflects the unrealized gain, net of tax, of available-for-sale marketable security investments.  Total comprehensive income net of tax effect was $13,159,000 and $16,737,000 for the three month periods ended October 3, 2010 and October 4, 2009, respectively, and $41,150,000 and $40,927,000 for the nine month periods ended October 3, 2010 and October 4, 2009, respectively.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements, to provide amendments to Subtopic 820-10 that require new disclosures about transfers into and out of Level 1 and Level 2 of the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements.  Specifically, for assets and liabilities that are measured at fair value on a recurring basis in periods after initial recognition (e.g., trading securities), this ASU requires: separate disclosure of the amount of significant transfers between Levels 1 and 2 and a description of the reasons for the transfers; an d separate information about purchases, sales, issuances, and settlements, on a gross basis, in the reconciliation of Level 3 fair value measurements valued using significant unobservable inputs.  ASU 2010-06 clarifies existing disclosures as follows:

Level of disaggregation: An entity should provide fair value measurement disclosures for each class of assets and liabilities.  A class is often a subset of assets or liabilities within a line item in the statement of financial position.  An entity needs to use judgment in determining the appropriate classes of assets and liabilities.

Disclosures about inputs and valuations techniques: An entity should provide disclosures about the valuation techniques (i.e., the income, market, or cost approaches) and input used to measure fair value for both recurring and nonrecurring fair value measurements.  Those disclosures are required for fair value measurements that fall in either Level 2 of Level 3.

ASU 2010-06 also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (Subtopic 715-20), which include a change in terminology from major categories of assets to classes of assets and a cross-reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures.  This ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes.  However, comparative disclosures are required for periods ending after initial adoption.  Early adoption is permitted.  Except for the separate disclosures about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurements, the Company adopted ASU 2010-06 during the first quarter of 2010, which did not have a material effect on the Company’s consolidated financial statements. The Company does not expect the adoption of the remaining provisions of ASU 2010-06 to have a material effect on the Company’s consolidated financial statements.

 

Prior to 2009, the Company contributed to a union-sponsored, multi-employer pension plan on behalf of union employees of the Amron division of its AMTEC subsidiary in accordance with the applicable union labor agreement. In December 2008, the union membership voted in favor of a withdrawal from the plan, and an amendment was made to the labor agreement authorizing the withdrawal. In December 2008, the Company permanently ceased to be obligated to contribute to the multi-employer pension plan, and instead agreed to contribute to a Company 401(k) Plan.

In a letter dated March 30, 2009, the pension plan provided Amron with documentation stating that the cost to withdraw from the plan was $238,509.  In April 2009, a payment representing the settlement of the withdrawal liability was made in the same amount.  However, should all participants in the plan withdraw before the end of 2010, some portion of the plan liability could be reallocated to AMTEC. If that were to occur, AMTEC might be assessed retroactively for an additional withdrawal charge.  The amount of a potential additional withdrawal charge, if any, cannot be currently estimated.  The Company charged the cost of the withdrawal to operations in 2008.

The foregoing information for the periods ended October 3, 2010, and October 4, 2009, is unaudited; however, in the opinion of management of the Registrant, it reflects all the adjustments, which were of a normal recurring nature, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet as of December 31, 2009 is summarized from consolidated financial statements, but does not include all the disclosures contained therein and should be read in conjunction with the 2009 annual report on Form 10-K.  Interim results for the period are not indicative of those for the year.

 

Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-Q, in the Company’s 2009 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 18, 2010, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to consolidated financial statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending, and funding of government contracts, which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the efficient start-up and utilization of capital equipment investments; and po litical actions of federal and state governments which could have an impact on everything from the value of the U.S dollar vis-à-vis other currencies to the availability of affordable labor and energy.  Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, copies of which are available from the Company without charge.

Readers are directed to Note C to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the Quarters ended October 3, 2010 and October 4, 2009.

On a consolidated basis, sales decreased by $2,845,000 (2%), gross profit decreased by $4,581,000 (16%), selling and general expense decreased by $163,000 (4%), and other income decreased by $179,000 (24%).  Earnings before the provision for income taxes decreased by $4,597,000 (18%), as did net earnings by $3,492,000 (21%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $1,147,000 from $36,065,000 to $37,212,000, or 3%, primarily as a result of an increase in unit shipments.  Defense net sales decreased by $5,366,000 from $61,566,000 to $56,200,000, or 9%, primarily reflecting a decrease in unit shipments and a less favorable product mix.  Absorbent Products net sales increased by $1,374,000 from $18,761,000 to $20,135,000, or 7%, which primarily reflected an increase in shipments.

Housewares/Small Appliance gross profits decreased $2,455,000 from $10,664,000 to $8,209,000, or 23%, primarily reflecting increased commodity and freight costs.  Defense gross profits decreased $563,000 from $15,256,000 from the prior year's quarter to $14,693,000, or 4%, in largest part due to the sales decrease mentioned above.  Absorbent Products gross profits decreased $1,563,000 from $3,024,000 to $1,461,000, or 52%, primarily reflecting increased commodity costs.

Selling and general expenses for the Housewares/Small Appliance and Absorbent Products segments were essentially flat.  Defense selling and general expenses decreased $225,000, primarily reflecting decreased compensation-related accruals.

The above items were responsible for the change in operating profit.

 

Other income decreased $179,000, due primarily to lower interest income resulting from decreased yields.

Earnings before provision for income taxes decreased $4,597,000 from $25,293,000 to $20,696,000.  The provision for income taxes decreased from $8,588,000 to $7,483,000, which resulted in an effective income tax rate increase from 34% to 36%, primarily reflecting an increase in earnings subject to tax.  Net earnings decreased $3,492,000 from $16,705,000 to $13,213,000, or 21%.

Readers are directed to Note C to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the First Nine Months ended October 3, 2010 and October 4, 2009.

On a consolidated basis, sales increased by $9,543,000 (3%), gross profit increased by $2,501,000 (3%), selling and general expense decreased by $1,298,000 (10%), and other income decreased by $775,000 (28%).  Earnings before the provision for income taxes increased by $3,024,000 (5%), as did net earnings by $482,000 (1%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $7,355,000 from $84,771,000 to $92,126,000, or 9%, primarily as a result of an increase in unit shipments.  Defense net sales decreased by $1,272,000 from $186,382,000 to $185,110,000, or 1%, primarily reflecting a decrease in unit shipments.  Absorbent Products net sales increased by $3,460,000 from $56,326,000 to $59,786,000, or 6%, which primarily reflected an increase in shipments.

Housewares/Small Appliance gross profits decreased $197,000 from $21,012,000 to $20,815,000, or 1%, primarily reflecting increased commodity and freight costs, which were almost completely offset by the increase in sales mentioned above.  Defense gross profits increased $3,026,000 from $45,424,000 from the prior year to $48,450,000, or 7%, reflecting decreased material costs and a more favorable product mix, approximately 10% of which was offset by the decrease in sales mentioned above.  Absorbent Products gross profits decreased $328,000 from $6,530,000 to $6,202,000, or 5%, primarily reflecting increased commodity costs, approximately half of which were offset by the increase in sales mentioned above.

Selling and general expenses for the Housewares/Small Appliance segment increased $171,000, approximately half of which reflected increased compensation costs, with the balance largely attributable to changes in professional fee accruals.  Defense selling and general expenses decreased $246,000, reflecting changes in compensation and health care cost accruals, with the latter partially offsetting the former by approximately 14%.  Absorbent Products selling and general expenses decreased $1,223,000, reflecting a comparative increase in net gains on the sale of obsolete equipment of $1,568,000, partially offset primarily by increases in compensation and travel costs related to an augmented sales force.

The above items were responsible for the change in operating profit.

Other income decreased $775,000, due primarily to lower interest income resulting from decreased yields.

Earnings before provision for income taxes increased $3,024,000 from $62,332,000 to $65,356,000.  The provision for income taxes increased from $21,427,000 to $23,969,000, which resulted in an effective income tax rate increase from 34% to 37%, primarily reflecting an increase in earnings subject to tax.  Net earnings increased $482,000 from $40,905,000 to $41,387,000, or 1%.