PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

April 4, 2021 and December 31, 2020

(Dollars in thousands)

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

April 4, 2021 and December 31, 2020

(Dollars in thousands)

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

Three Months Ended April 4, 2021 and March 29, 2020

(Unaudited) 

(In thousands except per share data) 

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

Three Months Ended April 4, 2021 and March 29, 2020

(Unaudited) 

(Dollars in thousands) 



 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended April 4, 2021 and March 29, 2020

(Unaudited) 

(In thousands except per share data) 

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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 2020 Annual Report to Shareholders, in the Proxy Statement for the 2021 annual meeting, 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; reliance on third-party suppliers in Asia; 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 system.  Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.

 

COVID-19 Disclosure

 

At the inception of the state COVID-19-related shutdowns, all of the Company’s businesses were deemed essential and as a result, did not shutdown.  Although the state shutdowns are largely over, CDC guidelines and various state and municipal edicts remain in effect resulting in ongoing concerns about the impact of the COVID-19 virus and its possible variants.  Those guidelines and edicts typically require social distancing and the wearing of masks, which has in turn led many to remain at home.  Government payments have ensured that demand for goods is high while removing the incentive to work, which has in turn affected supply and the cost of materials, components, finished goods, labor, and transportation.  Those shortages have in turn led to congestion throughout the supply chain that has impacted all of the Company's businesses.  Due to social distancing and mask mandates, both internal and external contacts continue to be managed through internet tools like “Zoom.”  Due to the Company’s historical conservative practices, it has no debt and has adequate balances to fund its operations. 

 

The Company has complied with the applicable COVID-19 regulations and CDC guidelines.  The six-foot social distancing rule continues to be observed in the offices and where practicable in the factories.  Where not practicable, barriers were and continue to be erected between workers.  Surfaces are regularly cleaned and disinfected in accordance with guidelines.

The ongoing COVID-19 regulations and guidelines have affected each segment in a variety of ways, which include increased absenteeism; the cancellation of planned trade shows and customer/supplier visits; inefficiencies inherent from working at home; as well as challenges in securing material, components, finished goods, and labor.  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, 2020.

 

Comparison of First Quarter 2021 and 2020

 

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 April 4, 2021 and March 29, 2020.

 

The Company reports its operations on a fiscal quarter basis in which each quarter contains approximately thirteen weeks and ends on a Sunday, with the exception of the fourth quarter, which ends on December 31.  Occasionally, the end dates of the fiscal quarters are adjusted to account for differences that accumulate between the end of the fiscal year and the end of the subsequent first quarter.  One such adjustment occurred during the quarter ended April 4, 2021.  As compared to the prior year's first quarter, the current quarter includes five additional days.

On a consolidated basis, net sales increased by $15,391,000 (23%), gross profit increased by $2,244,000 (14%), selling and general expenses increased by $570,000 (8%), and intangibles amortization decreased by $6,000.  Other income decreased by $567,000  (45%), while earnings before provision for income taxes increased by $1,113,000 (11%), and net earnings increased by $771,000 (9%).  Details concerning these changes can be found in the comments by segment below.

 

Housewares/Small Appliance net sales increased by $6,693,000 from $19,812,000 to $26,505,000, or 33.8%, primarily attributable to an increase in shipments.  Defense net sales increased by $8,675,000 from $45,780,000 to $54,455,000, or 19%, also primarily reflecting an increase in shipments.   

 

Housewares/Small Appliance gross profit increased $1,527,000 from $3,264,000 to $4,791,000, primarily reflecting the increased sales mentioned above and improved product mix. Defense gross profit increased $657,000 from $13,247,000 to $13,904,000, primarily reflecting the increase in sales mentioned above, partially offset by a less favorable mix of products and higher material costs.  Due to the startup nature of both 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 $512,000, primarily reflecting higher accruals for insurance costs of $329,000, health care costs of $277,000, and legal and professional costs of $75,000.  These were partially offset by the absence of 2020 charges related to a product marketing campaign. Selling and general expenses for the Defense segment were relatively flat, increasing $82,000.  Safety segment selling and general expenses were essentially flat.

 

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

 

The $567,000 decrease in other income was primarily attributable to a decrease in interest income on marketable securities largely stemming from lower yields on a lower average daily investment.

 

Earnings before provision for income taxes increased $1,113,000 from $10,530,000 to $11,643,000.  The provision for income taxes increased from $2,308,000 to $2,650,000, which resulted in an effective income tax rate of 23% and 22%, for the three months ended April 4, 2021 and March 29, 2020, respectively.  Net earnings increased $771,000 from $8,222,000 to $8,993,000, or 9%.

Liquidity and Capital Resources

 

Net cash provided by operating activities was $6,799,000 and $10,584,000 for the three months ended April 4, 2021 and March 29, 2020, 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 three months of 2021 were net earnings of $8,993,000, which included non-cash depreciation and amortization expenses of $731,000.  Also contributing to the cash provided was a decrease in accounts receivable levels stemming from cash collections on customer sales, partially offset by increased inventory levels and a net decrease in accounts payable and accrual levels.  Of particular note during the first three months of 2020 were net earnings of $8,222,000, which included non-cash depreciation and amortization expenses of $754,000.  Also contributing to the cash provided was a net increase in payable and accrual levels, partially offset by increased inventory levels, prepayments for insurance, and an increase in accounts receivable levels.   

Net cash provided by investing activities was $15,827,000 during the first three months of 2021 as compared to $5,457,000 used in investing activities during the first three months of 2020.  Significant factors contributing to the change were maturities and sales of marketable securities in 2021 of $16,951,000, in contrast with net purchases of marketable securities in 2020 of $5,100,000.  Also contributing to the change in cash was an increase in the purchase of property, plant, and equipment in 2021. 

 

Net cash used in financing activities was $43,541,000 and $41,671,000, for the first three months of 2021 and 2020, respectively, and primarily relate to the annual dividend payments.  The extra dividend increased from $5.00 per share in 2020 to $5.25 per share in 2021.  Cash flows for both three-month periods also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.

 

Working capital decreased by $34,078,000 during the first three months of 2021 to $268,070,000 at April 4, 2021 for the reasons stated above.  The Company's current ratio was 6.2 to 1.0 at April 4, 2021 and 6.5 to 1.0 at December 31, 2020.

 

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 these 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 tax exempt variable rate demand notes described above and in fixed rate municipal notes and bonds. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

 

Critical Accounting Policies

 

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.  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.  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 current period in the Housewares/Small Appliance and Safety segments, 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 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. 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.

 

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 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 with a weighted average life of 0.6 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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 April 4, 2021. 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 April 4, 2021 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.  

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

See Note J to the Consolidated Financial Statements set forth under Part I - Item 1 above.

 

 

Item 6.  Exhibits

 

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.