UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 29, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 1-2451
NATIONAL PRESTO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN
39-0494170
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3925 NORTH HASTINGS WAY
EAU CLAIRE, WISCONSIN
54703-3703
(Address of principal executive offices)
(Zip Code)
(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 x 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 x No o
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
Smaller reporting company
There were 6,900,420 shares of the Issuer’s Common Stock outstanding as of November 1, 2013.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29, 2013 and December 31, 2012
(Unaudited)
(Dollars in thousands)
2013
2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
46,388
37,437
Marketable securities
44,321
55,586
Accounts receivable, net
61,376
76,443
Inventories:
Finished goods
56,779
33,851
Work in process
46,299
40,340
Raw materials
8,165
111,243
9,173
83,364
Deferred tax assets
8,906
Other current assets
12,561
9,018
Total current assets
284,795
270,754
PROPERTY, PLANT AND EQUIPMENT
141,282
123,418
Less allowance for depreciation
67,607
73,675
61,553
61,865
GOODWILL & OTHER INTANGIBLES
17,222
17,722
NOTE RECEIVABLE
3,664
3,571
379,356
353,912
The accompanying notes are an integral part of the consolidated financial statements.
2
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
CURRENT LIABILITIES:
Accounts payable
40,720
39,077
Federal and state income taxes
1,053
1,642
Accrued liabilities
15,081
15,254
Total current liabilities
56,854
55,973
DEFERRED INCOME TAXES
7,353
7,368
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock, $1 par value:
Authorized: 12,000,000 shares
Issued: 7,440,518 shares
7,441
Paid-in capital
4,780
4,472
Retained earnings
319,812
295,643
Accumulated other comprehensive income
26
53
332,059
307,609
Treasury stock, at cost
16,910
17,038
Total stockholders’ equity
315,149
290,571
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 29, 2013 and September 30, 2012
(In thousands except per share data)
Three Months Ended
Nine Months Ended
Net sales
100,612
116,813
285,198
330,700
Cost of sales
80,962
93,906
230,928
267,847
Gross profit
19,650
22,907
54,270
62,853
Selling and general expenses
5,794
8,058
17,237
20,188
Operating profit
13,856
14,849
37,033
42,665
Other income
153
231
508
729
Earnings before provision for income taxes
14,009
15,080
37,541
43,394
Income tax provision
4,994
5,679
13,371
15,946
Net earnings
9,015
9,401
24,170
27,448
Weighted average shares outstanding:
Basic and diluted
6,907
6,891
6,905
6,888
Net earnings per share:
1.31
1.36
3.50
3.98
Comprehensive income:
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities
7
1
27
15
Comprehensive income
9,008
9,400
24,143
27,433
Cash dividends declared and paid per common share
0.00
6.00
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 29, 2013 and September 30, 2012
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for depreciation
6,241
7,568
Intangibles amortization
500
—
Provision for doubtful accounts
319
3,340
Other
260
766
Changes in:
Accounts receivable
14,781
707
Inventories
(27,879
)
(6,969
(3,543
5,743
Accounts payable and accrued liabilities
1,507
(2,252
(580
(1,784
Net cash provided by operating activities
15,776
34,567
Cash flows from investing activities:
Marketable securities purchased
(6,151
(18,285
Marketable securities - maturities and sales
17,373
24,466
Acquisition of property, plant and equipment
(18,055
(9,931
Notes issued
(3,500
Acquisition of business
(246
Sale of property, plant and equipment
8
Net cash used in investing activities
(6,825
(7,489
Cash flows from financing activities:
Dividends paid
(41,292
357
Net cash used in financing activities
(40,935
Net decrease in cash and cash equivalents
8,951
(13,857
Cash and cash equivalents at beginning of period
73,995
Cash and cash equivalents at end of period
60,138
5
NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
NOTE A – BASIS OF PRESENTATION The consolidated interim financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management of the Company, the consolidated interim financial statements reflect all the adjustments which were of a normal recurring nature necessary for a fair presentation of the results of the interim periods. The condensed consolidated balance sheet as of December 31, 2012 is summarized from consolidated financial statements, but does not include all the disclosures contained therein and should be read in conjunction with the 2012 Annual Report on Form 10-K. Interim results for the period are not indicative of those for the year.
NOTE B – RECLASSIFICATIONS Certain reclassifications have been made to the prior periods’ 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.
NOTE C – EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share also includes the dilutive effect of additional potential common shares issuable. Unvested stock awards, which contain non-forfeitable rights to dividends whether paid or unpaid (“participating securities”), are included in the number of shares outstanding for both basic and diluted earnings per share calculations.
6
NOTE D – BUSINESS SEGMENTS 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.
(in thousands)
Housewares /Small Appliances
Defense Products
Absorbent Products
Total
Quarter ended September 29, 2013
External net sales
29,394
52,453
18,765
6,731
12,922
(3
4,104
10,380
(628
Total assets
202,866
115,437
61,053
Depreciation and amortization
520
1,447
2,227
Capital expenditures
164
2,519
1,947
4,630
Quarter ended September 30, 2012
36,545
58,856
21,412
7,426
14,456
1,025
4,226
12,553
(1,930
222,946
106,556
65,351
394,853
Depreciation
277
791
1,512
2,580
286
1,964
838
3,088
Housewares/SmallAppliances
DefenseProducts
AbsorbentProducts
Nine Months ended September 29, 2013
78,772
149,920
56,506
15,762
36,456
2,052
7,474
29,153
406
817
1,741
4,183
6,741
442
8,817
8,796
18,055
Nine Months ended September 30, 2012
84,608
182,145
63,947
16,258
44,180
2,415
7,540
38,059
(2,934
801
2,388
4,379
951
2,165
6,815
9,931
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS 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.
NOTE F - CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES 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. The Company deposits its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits. 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).
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.
At September 29, 2013 and December 31, 2012, 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 following table. All of the Company’s marketable securities are classified as Level 2, as defined by FASB ASC 820, with fair values determined using significant other observable inputs, which include quoted prices in markets that are not active, quoted prices of similar securities, recently executed transactions, broker quotations, and other inputs that are observable. There were no transfers into or out of Level 2 during the three months ended September 29, 2013.
(In Thousands)
MARKETABLE SECURITIES
Amortized Cost
Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
September 29, 2013
Tax-exempt Municipal Bonds
23,591
23,630
42
Variable Rate Demand Notes
20,691
Total Marketable Securities
44,282
December 31, 2012
24,412
24,494
94
12
31,092
55,504
Proceeds from maturities and sales of available-for-sale securities totaled $723,000 and $14,211,000 for the three month periods ended September 29, 2013 and September 30, 2012, and totaled $17,373,000 and $24,466,000 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 losses included in other comprehensive income, were $12,000 and $2,000 before taxes for the three month periods ended September 29, 2013 and September 30, 2012, and were $42,000 and $24,000 before taxes for the nine month periods then ended, respectively. No unrealized gains or losses were reclassified out of accumulated other comprehensive income during the same periods.
The contractual maturities of the marketable securities held at September 29, 2013 are as follows: $13,679,000 within one year; $12,740,000 beyond one year to five years; $5,263,000 beyond five years to ten years, and $12,639,000 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.
NOTE G – COMMITMENTS AND CONTINGENCIESThe 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.
NOTE H – SUBSEQUENT EVENTOn November 7, 2013, AMTEC Corporation, a wholly-owned subsidiary of the Company, purchased substantially all of the assets of DSE, Inc. (“DSE”), a defense contractor that manufactures and sells 40MM ammunitions to the U.S. Government. The purchase price was $47.1 million.
The fair value of the assets acquired and liabilities assumed as of the date of acquisition will be recorded in the Company’s consolidated financial statements. Because the valuation of the assets acquired and liabilities assumed had not been completed as of the date of the issuance of the Company’s consolidated financial statements, it was not possible to reasonably estimate the nature and amount of any potential goodwill or the value of identifiable intangible assets.
Assets acquired include inventory, equipment, and contract backlog. The latter is approximately $187 million and is scheduled for production and shipment during the next 36 months.
9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2012 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 21, 2013, 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 political 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.
Comparison of Third Quarter 2013 and 2012
Readers are directed to Note D to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the quarters ended September 29, 2013 and September 30, 2012.
On a consolidated basis, sales decreased by $16,201,000 (14%), gross profit decreased by $3,257,000 (14%), selling and general expenses decreased by $2,264,000 (28%), and other income decreased by $78,000 (34%). Earnings before the provision for income taxes decreased by $1,071,000 (7%), as did net earnings by $386,000 (4%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $7,151,000 from $36,545,000 to $29,394,000, or 20%, primarily reflecting a decrease in shipments. Defense net sales decreased by $6,403,000 from $58,856,000 to $52,453,000, or 11%, primarily reflecting a decrease in unit shipments to prime contractors from its cartridge case and loading plant facilities. Absorbent Products net sales decreased by $2,647,000 from $21,412,000 to $18,765,000, or 12%, and was primarily attributable to a $4,229,000 reduction of shipments to one of the segment’s major customers, which is producing much of its own product, offset in part by an increase in shipments to other customers. The balance of the decrease was attributable to a decrease in prices.
Housewares/Small Appliance gross profit decreased $695,000 from $7,426,000 to $6,731,000, or 9%, primarily reflecting the decrease in sales mentioned above, approximately half of which was offset by lower product and freight costs. Defense gross profit decreased $1,534,000 from $14,456,000 to $12,922,000, or 11%, primarily attributable to the decrease in sales mentioned above. Absorbent Products gross profit decreased $1,028,000 from $1,025,000 to a loss of $3,000, reflecting the decrease in sales mentioned above and the inefficiencies accompanying the sales decline and costs incident to the acquisition of new capital equipment. These decreases were partially offset by the absence of the prior year’s deferral of revenue recognition on the sale of raw materials to an independent manufacturing facility. A description of the Company’s relationship with the facility can be found in Note Q to the Company’s Consolidated Financial Statements for the year ended December 31, 2012 on form 10-K.
10
Selling and general expenses for the Housewares/Small Appliance segment decreased by $573,000, primarily reflecting the absence of an unfavorable adjustment to the self-insured product liability reserve, partially offset by increases in employee compensation and benefit cost accruals. Defense segment selling and general expenses increased by $639,000, primarily reflecting increased legal fees stemming from the ongoing offer to acquire the assets of DSE, Inc., which is described in Note H to the Company’s Consolidated Financial Statements included in Part I of this Form 10-Q, an increase of amortization expense related to the intangible assets stemming from the acquisition of a less than lethal manufacturing facility, and an increase in its bad debt reserves. The acquisition is more fully described in the Company’s 2012 annual report on Form 10-K. Absorbent Products selling and general expenses decreased by $2,330,000, reflecting a decrease in the provision for bad debts pertaining to the independent manufacturing facility mentioned above, and a decrease in expenses classified as administrative that related to the royalty arrangement with the same facility.
The above items were responsible for the change in operating profit.
Earnings before provision for income taxes decreased $1,071,000 from $15,080,000 to $14,009,000. The provision for income taxes decreased from $5,679,000 to $4,994,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $386,000 from $9,401,000 to $9,015,000, or 4%.
Comparison of First Nine Months 2013 and 2012
Readers are directed to Note D 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 September 29, 2013 and September 30, 2012.
On a consolidated basis, sales decreased by $45,502,000 (14%), gross profit decreased by $8,583,000 (14%), selling and general expenses decreased by $2,951,000 (15%), and other income decreased by $221,000 (30%). Earnings before the provision for income taxes decreased by $5,853,000 (14%), as did net earnings by $3,278,000 (12%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $5,836,000 from $84,608,000 to $78,772,000, or 7%, primarily reflecting a decrease in shipments. Defense net sales decreased by $32,225,000 from $182,145,000 to $149,920,000, or 18%, primarily reflecting a decrease in unit shipments. Absorbent Products net sales decreased by $7,441,000 from $63,947,000 to $56,506,000, or 12%, and was primarily attributable to a $10,202,000 reduction of shipments to one of the segment’s major customers, which is producing much of its own product, and the absence of last year’s shipments of $598,000 of raw materials to an independent manufacturing facility, offset in part by an increase in shipments to other customers. A description of the Company’s relationship with the facility can be found in Note Q to the Company’s Consolidated Financial Statements for the year ended December 31, 2012 on Form 10-K. The balance of the decrease was attributable to a decrease in prices.
Housewares/Small Appliance gross profit decreased $496,000 from $16,258,000 to $15,762,000, or 3%, primarily reflecting the decrease in sales mentioned above, approximately half of which was offset by lower product and freight costs. Defense gross profit decreased $7,724,000 from $44,180,000 to $36,456,000, or 18%, which was primarily attributable to the decrease in sales mentioned above. Absorbent Products gross profit decreased $363,000 from $2,415,000 to $2,052,000, or 15%, reflecting the decrease in sales mentioned above and inefficiencies accompanying the sales decline and the acquisition and installation of new capital equipment. These decreases were partially offset by lower freight costs, an insurance settlement of $553,000, and the absence of the prior year’s deferral of revenue recognition on the sale of raw materials of $948,000 to the independent manufacturing facility mentioned above.
11
Selling and general expenses for the Housewares/Small Appliance segment decreased by $430,000, primarily reflecting differences in adjustments to self-insured product liability and employee benefit cost reserves. Defense segment selling and general expenses increased by $1,182,000. The increase was in part due to the $500,000 of amortization expense related to the intangible assets stemming from the acquisition of a less than lethal manufacturing facility. The acquisition is more fully described in the Company’s 2012 annual report on Form 10-K. The balance of the increase stems primarily from increased legal fees from the ongoing offer to acquire the assets of DSE, Inc., which is described in Note H to the Company’s Consolidated Financial Statements included in Part I of this Form 10-Q, and an increase in bad debt reserves. Absorbent Products selling and general expenses decreased by $3,703,000, reflecting a decrease in the provision for bad debts, primarily pertaining to the independent manufacturing facility mentioned above, and a decrease in expenses classified as administrative that related to the royalty arrangement with the same facility.
Earnings before provision for income taxes decreased $5,853,000 from $43,394,000 to $37,541,000. The provision for income taxes decreased from $15,946,000 to $13,371,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $3,278,000 from $27,448,000 to $24,170,000, or 12%.
Liquidity and Capital Resources
Net cash provided by operating activities was $15,776,000 and $34,567,000 for the nine months ended September 29, 2013 and September 30, 2012, respectively. The principal factors contributing to the decrease can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during the first nine months of 2013 were net earnings of $24,170,000; a decrease in accounts receivable levels stemming from cash collections on customer sales; and a net increase in payable and accrual levels; partially offset by increases in inventory levels and deposits made with raw material suppliers included in other current assets. Of particular note during the first nine months of 2012 were net earnings of $27,448,000; a decrease in deposits made with raw material suppliers included in other current assets; partially offset by an increase in inventory levels and a decrease in payable and accrual levels.
Net cash used in investing activities was $6,825,000 during the first nine months of 2013 compared to $7,489,000 used in investing activities during the first nine months of 2012. The change in investing activity cash flow is primarily attributable to a net increase in proceeds from marketable securities activity, and to a lesser extent, a decrease in notes issued, partially offset by an increase in the acquisition of property, plant, and equipment.
Cash flows from financing activities for the first nine months of 2013 and 2012 primarily differed as a result of an accelerated payment made in late December 2012 of the annual 2013 dividend. The acceleration was occasioned by the uncertainty over the federal income tax rates that would be in effect in 2013. In contrast, the annual 2012 dividend was made during the first quarter of 2012.
Working capital increased by $13,160,000 during the first nine months of 2013 to $227,941,000 at September 29, 2013 for the reasons stated above. The Company’s current ratio was 5.0 to 1.0 at September 29, 2013 and 4.8 to 1.0 at December 31, 2012.
The Company expects to continue to evaluate acquisition opportunities that align with its business segments and continue to make capital investments in these segments as well as further acquisitions if the appropriate return on investment is projected. The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill, which is tested for impairment on an annual basis in the fourth quarter. The goodwill, intangible assets, and liability for contingent consideration related to the acquisition of the less than lethal manufacturing facility mentioned above may be adjusted as a result of the annual testing analysis.
The Company has substantial liquidity in the form of cash and short-term maturity marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund growth through acquisitions and other means. The bulk of its marketable securities are invested in the tax exempt variable rate demand notes described above and in municipal bonds that are pre-refunded with escrowed U.S. Treasuries. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings. Comparative yields during the first nine months of 2013 were lower than those in the first nine months of the preceding year, reflecting an increase in lower yielding instruments in the Company’s investment holdings as higher yielding instruments have matured and been replaced. The lower yields served to decrease interest income. The interest rate environment is a function of national and international monetary policies as well as the growth and inflation rates of the U.S. and foreign economies and is not controllable by the Company.
Critical Accounting Policies
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors.
Inventories New Housewares/Small Appliance product introductions are an important part of the Company’s sales to offset the morbidity rate of other Housewares/Small Appliance products and/or the effect of lowered acceptance of seasonal products due to weather conditions. New products entail unusual risks and have occasionally in the past resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product. There were no such obsolescence issues that had a material effect during the periods presented, and accordingly, the Company did not record a reserve for obsolete product. In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory. Inventory risk for the Company’s other segments is not deemed to be significant, as products are largely built pursuant to customers’ specific orders.
Self-Insured Product Liability and Health InsuranceThe Company is subject to product liability claims in the normal course of business and is self-insured for health care costs, although it does carry stop loss and other insurance to cover claims once they reach a specified threshold. The Company’s insurance coverage varies from policy year to policy year, and there are typically limits on all types of insurance coverage, which also vary from policy year to policy year. Accordingly, the Company records an accrual for known claims and estimated incurred but not reported claims, including an estimate for related legal fees in the Company’s consolidated financial statements. The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual. There are no known claims that would have a material adverse impact on the Company beyond the reserve levels that have been accrued and recorded on the Company’s books and records. An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition and results of operations.
Sales and ReturnsSales are recorded net of discounts and returns. The latter pertain primarily to warranty returns, returns of seasonal items, and returns of those newly introduced products sold with a return privilege. The calculation of warranty returns is based in large part on historical data, while seasonal and new product returns are primarily developed using customer provided information.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s interest income on cash equivalents and marketable securities is affected by changes in interest rates in the United States. Cash equivalents primarily consist of money market funds. Based on the accounting profession’s 2005 interpretation of cash equivalents under FASB ASC Topic 230, the Company’s seven-day variable rate demand notes are classified as marketable securities rather than as cash equivalents. The demand notes are highly liquid instruments with interest rates set every 7 days that can be tendered to the trustee or remarketer upon 7 days notice for payment of principal and accrued interest amounts. The 7-day tender feature of these variable rate demand notes is further supported by an irrevocable letter of credit from highly rated U.S. banks. To the extent a bond is not remarketed at par plus accrued interest, the difference is drawn from the bank’s letter of credit. The Company has had no issues tendering these notes to the trustees or remarketers. Other than a failure of a major U.S. bank, there are no risks of which the Company is aware that relate to these notes in the current market. The balance of the Company’s investments is held primarily in fixed and variable rate municipal bonds with a weighted average life of 1.2 years. Accordingly, the Company does not anticipate that future exposure to interest rate market risk will be material. The Company uses sensitivity analysis to determine its exposure to changes in interest rates.
The Company has no history of, and does not anticipate in the future, investing in derivative financial instruments. Most transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency cash flow hedges. As the majority of the Housewares/Small Appliance segment’s suppliers are located in China, periodic changes in the U.S. dollar and Chinese Renminbi (RMB) exchange rates do have an impact on that segment’s product costs. It is anticipated that any potential material impact from fluctuations in the exchange rate will be to the cost of products secured via purchase orders issued subsequent to the revaluation.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “1934 Act”) as of September 29, 2013. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of that date.
There were no changes to internal controls over financial reporting during the quarter ended September 29, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note G to the Consolidated Financial Statements set forth under Part I - Item 1 above.
Item 6. Exhibits
Exhibit 3(i)
Restated Articles of Incorporation - incorporated by reference from Exhibit 3 (i) of the Company’s annual report on Form 10-K for the year ended December 31, 2005
Exhibit 3(ii)
By-Laws - incorporated by reference from Exhibit 3 (ii) of the Company’s current report on Form 8-K dated July 6, 2007
Exhibit 9.1
Voting Trust Agreement - incorporated by reference from Exhibit 9 of the Company’s quarterly report on Form 10-Q for the quarter ended July 6, 1997
Exhibit 9.2
Voting Trust Agreement Amendment - incorporated by reference from Exhibit 9.2 of the Company’s annual report on Form 10-K for the year ended December 31, 2008
Exhibit 10.1
Incentive Compensation Plan - incorporated by reference from Exhibit 10.1 of the Company’s quarterly report on Form 10-Q for the quarter ended July 4, 2010
Exhibit 10.2
Form of Restricted Stock Award Agreement - incorporated by reference from Exhibit 10.2 of the Company’s quarterly report on Form 10-Q for the quarter ended July 4, 2010
Exhibit 31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101
The following financial information from National Presto Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended September 29, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.*
*The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Maryjo Cohen
Maryjo Cohen, Chair of the Board,
President, Chief Executive Officer
(Principal Executive Officer), Director
/s/ Randy F. Lieble
Randy F. Lieble, Director, Vice President,
Chief Financial Officer (Principal
Financial Officer), Treasurer
Date: November 8, 2013
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National Presto Industries, Inc.Exhibit Index
ExhibitNumber
Exhibit Description
31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
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