# National Presto Industries Inc: Form 10-Q for the period ended Oct 1, 2023

- Company: [National Presto Industries Inc](/companies/npk.md) (CIK 80172)
- Form: 10-Q
- Filed: 2023-11-13
- Accepted by EDGAR: Nov 13, 2023, 16:02 ET
- Period: 2023-10-01
- Accession: 0001437749-23-031605
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/80172/000143774923031605/npk20230912_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/80172/000143774923031605/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-03 to 2023-10-01 | $83.1m | us-gaap:Revenues |
| Revenue | 9 months, 2023-01-01 to 2023-10-01 | $242.5m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-07-03 to 2023-10-01 | $67.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-10-01 | $195.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-03 to 2023-10-01 | $15.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-10-01 | $46.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-03 to 2023-10-01 | $7.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-10-01 | $23.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-03 to 2023-10-01 | $7.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-10-01 | $21.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-03 to 2023-10-01 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-10-01 | $5.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-03 to 2023-10-01 | $7.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-10-01 | $21.4m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-07-03 to 2023-10-01 | $0.99 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-10-01 | $3.01 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2023-01-01 to 2023-10-01 | $28.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-03 to 2023-10-01 | $867.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2023-01-01 to 2023-10-01 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-10-01 | $28.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-10-01 | $70.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-01 | $333.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-01 | $416.0m | us-gaap:Assets |
| Current liabilities | at 2023-10-01 | $63.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-10-01 | $73.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-10-01 | $342.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,563 characters.

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 2022 Annual Report to Stockholders, in the Proxy Statement for the annual meeting held on May 16, 2023, 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, tariffs, 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 in, among other things, the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital equipment investments; 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; and security breaches and disruptions to the Company’s information technology systems. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.

### COVID-19 Disclosure

All of the Company’s businesses were deemed essential and as a result, all operated during the COVID-19 shutdowns. Distribution systems of customers that survived the shutdowns are largely intact as most key retail customers' outlets have been open since third quarter 2020. Although more people are working from home, customer offices are open and trade shows have resumed. As a result of government COVID-19 policies, labor and material costs have materially increased. Labor shortages continue. Due to the Company's historical conservative practices, it has no debt and has adequate balances to fund its operations.

For historical information about the impact of the government responses to COVID-19, please see “Item 1A. Risk Factors” titled “The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks” included in the Company's Annual Report on Form 10-K for year ended December 31, 2022.

### Comparison of Third Quarter 2023 and 2022

Readers are directed to Note E 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 1, 2023 and October 2, 2022.

On a consolidated basis, net sales increased by $13,458,000 (19%), gross profit decreased by $1,663,000 (10%), selling and general expenses increased by $1,418,000 (22%), and amortization increased 349,000 (447%). Other income increased by $690,000 (64%), earnings before provision for income taxes decreased by $2,740,000 (24%), and net earnings decreased by $1,908,000 (21%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $5,575,000 from $27,120,000 to $21,545,000, or 21%, approximately 66% of which was attributable to a decrease in units shipped, with the remainder of the decrease attributable to a decrease in pricing and changes in mix. Defense net sales increased by $18,964,000 from $42,347,000 to $61,311,000 or 45%, primarily reflecting an increase in shipments from the segment's backlog.

Housewares/Small Appliance gross profit decreased $4,867,000 from $8,787,000 to $3,920,000, primarily reflecting lower margins on the decrease in sales mentioned above, augmented by increased accruals for customer allowances, as well as higher facility repair costs. Defense gross profit increased $3,894,000 from $8,846,000 to $12,740,000, primarily reflecting the increase in sales mentioned above. Due to the startup nature of the businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years.

Selling and general expenses for the Housewares/Small Appliance increased $456,000, primarily reflecting higher accruals for self insurance of $357,000, and increased accruals for legal and professional costs. Selling and general expenses for the Defense segment increased $698,000, primarily reflecting increased salaries and compensation costs of $337,000 and increased accruals for legal settlement costs of $288,000. Selling and general expenses for the Safety segment increased $264,000, primarily reflecting the absence of the 2022 bargain purchase gain recognized upon the acquisition of Rely Innovations, Inc. of $492,000 (see Note L to the Consolidated Financial Statements) and increased employee compensation costs of $165,000, partially offset by decreased legal and professional cost accruals of $464,000.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Rely Innovations, Inc. and Woodlawn Manufacturing, Ltd. See Note L to the Consolidated Financial Statements.

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

The $690,000 increase in other income was primarily attributable to an increase in interest income on marketable securities largely stemming from higher yields on a lower average daily investment.

Earnings before provision for income taxes decreased $2,740,000 from $11,583,000 to $8,843,000. The provision for income taxes decreased from $2,656,000 to $1,824,000. The effective income tax rate was 21% and 23% for the quarters ended October 1, 2023 and October 2, 2022, respectively. Net earnings decreased $1,908,000 from $8,927,000 to $7,019,000, or 21%.

### Comparison of First Nine Months 2023 and 2022

Readers are directed to Note E 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 1, 2023 and October 2, 2022.

On a consolidated basis, net sales increased by $34,921,000 (17%), gross profit increased by $4,988,000 (12%), selling and general expenses increased by $3,623,000 (18%), and amortization increased $1,071,000 (576%). Other income increased by $2,973,000 (118%), earnings before provision for income taxes increased by $3,267,000 (14%), and net earnings increased by $2,874,000 (16%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $10,734,000 from $72,267,000 to $61,533,000, or 15%, approximately 77% of which was attributable to a decrease in units shipped, with the remainder of the decrease attributable to a decrease in pricing and changes in mix. Defense net sales increased by $45,046,000 from $134,828,000 to $179,874,000, or 33%, primarily reflecting an increase in shipments from the segment's backlog.

Housewares/Small Appliance gross profit decreased $1,206,000 from $14,020,000 to $12,814,000, primarily reflecting the decrease in sales mentioned above, year-to year timing differences in accruals for customer allowances and warranty, as well as higher facility repair costs. Defense gross profit increased $8,051,000 from $28,941,000 to $36,992,000, primarily reflecting the increase in sales mentioned above. Due to the startup nature of the businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years.

Selling and general expenses for the Housewares/Small Appliance segment increased $988,000, primarily reflecting higher accruals for self insurance of $866,000 and increased salaries and compensation of $310,000, partially offset by lower accruals for legal and professional costs of $263,000. Selling and general expenses for the Defense segment increased $1,168,000, primarily reflecting increased salaries and compensation costs of $806,000, increased accruals for legal settlement costs of $288,000, and one-time insurance related costs of $250,000. These were partially offset by an adjustment of $313,000 related to the purchase of Woodlawn Manufacturing, LTD, which was acquired on October 26, 2022. See Note L to the Condensed Consolidated Financial Statements. Selling and general expenses for the Safety segment increased $1,467,000, primarily reflecting increased employee compensation costs of $1,083,000 and the absence of the 2022 bargain purchase gain recognized upon the acquisition of Rely Innovations, Inc. of $492,000 (see Note L to the Consolidated Financial Statements). These were partially offset by a decrease in legal and professional cost accruals of $519,000.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Rely Innovations, Inc. and Woodlawn Manufacturing, Ltd. See Note L to the Consolidated Financial Statements.

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

The $2,973,000 increase in other income was primarily attributable to an increase in interest income on marketable securities largely stemming from higher yields on a lower average daily investment.

Earnings before provision for income taxes increased $3,267,000 from $23,973,000 to $27,240,000. The provision for income taxes increased $393,000 from $5,447,000 to $5,840,000. The effective income tax rate was 21% and 23%, for the nine months ended October 1, 2023 and October 2, 2022, respectively. Net earnings increased $2,874,000 from $18,526,000 to $21,400,000, or 16%.

### Liquidity and Capital Resources

Net cash provided by operating activities was $28,790,000 during the first nine months of 2023 compared to $3,280,000 used in operating activities for the first nine months of 2022. The principal factors contributing to the change 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 2023 were net earnings of $21,400,000, which included non-cash depreciation and amortization expenses of $4,144,000. Contributing to the cash provided were decreases in accounts receivable levels stemming from cash collections on customer sales and deposits made to vendors included in other assets and current assets, and increases in payable and accrual levels. These were partially offset by increases in inventory levels. Of particular note during the first nine months of 2022 were net earnings of $18,526,000, which included non-cash depreciation and amortization expenses of $2,160,000. Contributing to the cash used were increased inventory levels and a net decrease in payable and accrual levels, partially offset by a decrease in accounts receivable levels stemming from cash collections on customer sales.

Net cash used in investing activities was $1,134,000 and $13,314,000, for the first nine months of 2023 and 2022, respectively. Significant factors contributing to the change were net marketable securities purchased of $68,000 in 2023, in contrast with net marketable securities purchased of $9,743,000 in 2022. Also contributing to the change in cash were a payment to acquire Knox Safety, Inc. of $3,125,000 (see Note L to the Consolidated Financial Statements) in 2022 and an increase in the purchase of property, plant, and equipment in 2023 of $1,171,000.

Net cash used in financing activities was $27,956,000 and $31,427,000, for the first nine months of 2023 and 2022, respectively, and primarily relates to the annual dividend payments. The extra dividend decreased from $3.50 per share in 2022 to $3.00 per share in 2023. Cash flows for both nine month periods also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.

Working capital decreased by $2,607,000 during the first nine months of 2023 to $270,384,000 at October 1, 2023 for the reasons stated above. The Company's current ratio was 5.3 to 1.0 and 6.1 to 1.0 at October 1, 2023 and December 31, 2022, respectively.

The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions, as well as continue to make capital investments in its business segments per existing authorized projects and for additional projects, if the appropriate return on investment is projected.

The Company has substantial liquidity in the form of cash and cash equivalents and marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund future growth through acquisitions and other means. The bulk of its marketable securities are invested in the variable rate demand notes described in Item 3 of Part I of this quarterly report on Form 10-Q, fixed rate municipal notes and bonds, and certificates of deposits. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

### Critical Accounting Estimates

The Company's discussion and analysis of financial condition and results of operations are based upon its Consolidated Financial Statements. The preparation of the Company's 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. The estimates are based on experience and other assumptions that the Company believes are reasonable under the circumstances, and these estimates are evaluated on an ongoing basis. Actual results may differ from those estimates.

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management. 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 as they involve the use of significant estimates and assumptions as described above. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of the Annual Report on Form 10-K for the year-ended December 31, 2022 filed on March 13, 2023 for more detailed information regarding the Company's critical accounting policies.

#### Inventories

New Housewares/Small Appliance and safety product introductions are an important part of the Company’s sales. In the case of the Housewares/Small Appliance segment, the introductions are important to offset the morbidity rate of other 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. During 2022, the Housewares/Small Appliance segment recorded an impairment related to such losses of $3,613,000. In addition, due to fire safety regulations, commercial extinguishers have a limited shelf life, which is based on the date of production. The Safety segment recorded impairments of $1,807,000 and $3,090,000 in 2022 and 2021, respectively, in recognition of that fact. There were no other obsolescence issues that had a material effect during the nine months ended October 1, 2023. 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 Defense segment is not deemed to be significant, as products are largely built pursuant to customers’ specific orders.

#### Self-Insured Product Liability and Health Insurance

The 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 a health care claim reaches 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 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.

#### Revenues

Sales are recorded net of discounts and returns for the Housewares/Small Appliance segment. Sales discounts and returns are key aspects of variable consideration, which is a significant estimate utilized in revenue recognition. Sales returns 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.

#### Impairment and Valuation of Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Long-lived assets consist of property, plant and equipment and intangible assets, including the value of contracts/customer relationships, trademarks and safety certifications, trade secrets, and technology software. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, the amounts of the cash flows and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. The Company uses internal discounted cash flows estimates, quoted market prices when available, and independent appraisals, as appropriate, to determine fair value. The Company derives the required cash flow estimates from its historical experience and its internal business plans.

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. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated. The impairment test for goodwill requires the determination of fair value of the reporting unit. The Company uses multiples of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), sales, and discounted cash flow models, which are described above, to determine the reporting unit's fair value, as appropriate.

## Market risk

As filed, 2,265 characters.

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 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 seven days that can be tendered to the trustee or remarketer upon seven days notice for payment of principal and accrued interest amounts. The seven-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 and certificates of deposits with a weighted average life of 0.7 years. Accordingly, changes in interest rates have not had a material effect on the Company, and 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.

## Controls and procedures

As filed, 840 characters.

#### Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Treasurer (principal financial officer), conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of October 1, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Treasurer (principal financial officer) 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 October 1, 2023 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Filed Nov 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031605. Last ingested by Listed: Nov 2, 2026, 16:28 ET. No prices; not investment advice.