National Presto Industries Inc: Form 10-Q for the period ended Sep 28, 2025

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 2024 Annual Report to Stockholders, in the Proxy Statement for the annual meeting held on May 20, 2025, 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.

Comparison of Third Quarter 2025 and 2024

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 28, 2025 and September 29, 2024.

On a consolidated basis, net sales increased by $23,640,000 (26%), gross profit decreased by $1,211,000 (7%), selling and general expenses increased by $1,600,000 (21%), and amortization was consistent. Other income decreased by $702,000 (61%), earnings before provision for income taxes decreased by $3,513,000 (34%), and net earnings decreased by $2,766,000 (34%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $2,274,000 from $24,816,000 to $22,542,000, or 9%, which was attributable to a decrease in units shipped, approximately 53% of which was offset by increases in pricing. Defense net sales increased by $25,794,000 from $66,794,000 to $92,588,000 or 39%, primarily reflecting an increase in shipments from the segment's backlog.

Housewares/Small Appliance gross profit decreased $4,692,000 from $4,997,000 to $305,000, primarily reflecting decrease in sales mentioned above and the impact of the various tariffs imposed under the second Trump term. Those tariffs are generally treated as period costs and expensed as they are incurred, reflecting the segment’s LIFO inventory cost valuation method. Defense gross profit increased $3,414,000 from $13,447,000 to $16,861,000, primarily reflecting the increase in sales mentioned above, partially offset by differences in product mix, efficiencies, and material costs. 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 $339,000, primarily due to increases in legal and professional cost accruals of $197,000, and compensation related expenses of $197,000, offset by decreases in self-insurance accruals of $81,000. Selling and general expenses for the Defense segment increased $1,701,000, primarily attributed to the increases in personnel costs of $1,434,000, computer and software expense of $89,000, repairs and maintenance of $76,000, and legal and professional costs of $66,000. Selling and general expenses for the Safety segment decreased $440,000, primarily reflecting reduced personnel costs of $91,000, legal and professional costs of $91,000, and the gain recognized on the sale of OneEvent's refrigeration monitoring business that occurred on July 31, 2025 of $253,000.

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

The $702,000 decrease in other income was attributable to a decrease in interest income of $553,000 on marketable securities and an increase in interest expense of $225,000 related to the outstanding balance of the Company's revolving line of credit during the third quarter of 2025. Both stem from the increased investments in inventory required to support augmented Defense segment awards.

Earnings before provision for income taxes decreased $3,513,000 from $10,373,000 to $6,860,000. The provision for income taxes decreased from $2,290,000 to $1,543,000, which resulted in an effective income tax rate of 23% and 22% for the quarters ended September 28, 2025 and September 29, 2024, respectively. Net earnings decreased $2,766,000 from $8,083,000 to $5,317,000, or 34%.

Comparison of First Nine Months 2025 and 2024

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 28, 2025 and September 29, 2024.

On a consolidated basis, net sales increased by $86,015,000 (34%), gross profit increased by $6,894,000 (15%), selling and general expenses increased by $4,476,000 (20%), impairment of vendor deposit increased $2,701,000, and amortization was consistent. Other income decreased by $3,007,000 (64%), earnings before provision for income taxes decreased by $3,290,000 (12%), and net earnings decreased by $2,649,000 (13%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales were essentially flat. Decreases in units shipped of $2,823,000 were offset by increases in pricing. Defense net sales increased by $85,379,000 from $187,960,000 to $273,339,000 or 45%, primarily reflecting an increase in shipments from the segment's backlog.

Housewares/Small Appliance gross profit decreased $9,321,000 from $11,566,000 to $2,245,000, primarily reflecting the Trump administration's tariffs that went into effect on goods deemed to have been shipped from the Orient after January 31, 2025. Those tariffs are generally treated as period costs and expensed as they are incurred, reflecting the segment’s LIFO inventory cost valuation method. These were partially offset by lower repair costs at its main facility of approximately $957,000. Defense gross profit increased $15,541,000 from $27,165,000 to $53,691,000, primarily reflecting the increase in sales mentioned above, partially offset by differences in mix, efficiencies, and material costs. 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 $1,713,000, primarily due to increases in self-insurance accruals of $675,000, legal and professional cost accruals of $450,000, compensation related expenses of $208,000, and the absence of the favorable adjustment to the reserve for bad debts of $285,000 that occurred in the prior year. Selling and general expenses for the Defense segment increased $3,436,000, primarily attributed to the increases in personnel costs of $2,721,000, computer and software expense of $188,000, repairs and maintenance of $267,000, and legal and professional costs of $205,000. Selling and general expenses for the Safety segment decreased $673,000, primarily reflecting reduced personnel costs of $217,000, legal and professional costs of $63,000, travel expenses of $143,000, and the gain recognized on the sale of OneEvent's refrigeration monitoring business that occurred on July 31, 2025 of $253,000.

During the first quarter of 2025, the Company made deposits totaling $2,701,000 with a vendor in its Housewares/Small Appliances segment. On May 29, 2025, the vendor filed for protection in the U.S. Bankruptcy Court in the Northern District of Texas. As recovery of the deposit is deemed unlikely, the Company recorded an impairment of the full deposit during the second quarter of 2025.

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

The $3,007,000 decrease in other income was attributable to a decrease of $2,710,000 in interest income on marketable securities and an increase in interest expense of $297,000 related to the outstanding balance of the Company's revolving line of credit during the first nine months of 2025. Both stem from the increased investments in inventory required to support augmented Defense segment awards.

Earnings before provision for income taxes decreased $3,290,000 from $26,571,000 to $23,281,000. The provision for income taxes decreased from $5,843,000 to $5,202,000, which resulted in an effective income tax rate of 22% for both the first nine months ended September 28, 2025 and September 29, 2024. Net earnings decreased $2,649,000 from $20,728,000 to $18,079,000, or 13%.

Liquidity and Capital Resources

Net cash used in operating activities was $23,054,000 during the first nine months of 2025 as compared to $45,793,000 cash used during the first nine months of 2024. 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 2025 were net earnings of $18,079,000, which included the non-cash impairment of a vendor deposit of $2,701,000 and depreciation and amortization expenses of $3,747,000. Contributing to the cash used were increases in accounts receivable and inventory levels, partially offset by net increases in payable and accrual levels. Of particular note during the first nine months of 2024 were net earnings of $20,728,000, which included non-cash depreciation and amortization expenses of $3,877,000. Contributing to the cash used were increases in inventory levels, as well as a net decrease in payable and accrual levels. These were partially offset by decreases in accounts receivable levels stemming from cash collections on customer sales and deposits made to vendors included in other current assets.

Net cash used in investing activities was $22,398,000 for the first nine months of 2025, while net cash provided by investing activities was $5,981,000 for the first nine months of 2024. Significant factors contributing to the change were net maturities and sales of marketable securities of $2,476,000 in 2025, and $9,624,000 in 2024; and purchases of property, plant and equipment of $25,555,000 in 2025, as opposed to $3,873,000 in 2024.

Net cash provided by financing activities was $29,878,000 for the first nine months of 2025, while net cash used in financing activities was $31,516,000 for the first nine months of 2024. The change primarily relates to net proceeds from the Company's line of credit in 2025 of $36,900,000, as well as the annual dividend payments. There was no extra dividend payment during 2025. In 2024, the extra dividend was $3.50 per share. Cash flows for both nine month periods also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan. During 2025 and 2024, the Company incurred interest expense of $299,000 and $2,000 related to its line of credit, respectively.

Working capital decreased by $6,828,000 during the first nine months of 2025 to $285,397,000 at September 28, 2025 for the reasons stated above. The Company's current ratio was 3.5 to 1.0 and 4.9 to 1.0 at September 28, 2025 and December 31, 2024, 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 sufficient liquidity in the form of operating activities cash flows and a credit facility to meet all of its anticipated capital requirements, to make dividend payments, and to fund future growth through acquisitions and other means.

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 as of 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 is the most critical accounting policy that could have an effect on the Company's reported results as it involves the use of significant estimates and assumptions as described above. This critical accounting policy and estimate has 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, 2024 filed on March 14, 2025 for more detailed information regarding the Company's critical accounting policies.

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. The Company also uses qualitative analysis to assess goodwill impairment.

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. The balance of the Company’s investments is held primarily in certificates of deposits and other fixed rate securities, with a weighted average life of 0.1 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.

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 September 28, 2025. 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 September 28, 2025 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.