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.
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 June 30, 2013 and July 1, 2012.
On a consolidated basis, sales decreased by $15,718,000 (13%), gross profit decreased by $1,183,000 (6%), selling and general expenses decreased by $676,000 (11%), and other income decreased by $90,000 (38%). Earnings before the provision for income taxes decreased by $597,000 (4%), as did net earnings by $402,000 (5%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales increased by $1,118,000 from $23,371,000 to $24,489,000, or 5%, primarily reflecting an increase in shipments. Defense net sales decreased by $15,092,000 from $73,608,000 to $58,516,000, or 21%, primarily reflecting a decrease in unit shipments. Absorbent Products net sales decreased by $1,744,000 from $20,135,000 to $18,391,000, or 9%, and was primarily attributable to a 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.
Housewares/Small Appliance gross profit increased $439,000 from $4,135,000 to $4,574,000, or 11%, primarily reflecting the increase in sales mentioned above. Defense gross profit decreased $2,383,000 from $15,851,000 to $13,468,000, or 15%, primarily attributable to the decrease in sales mentioned above, partially offset by a more favorable product mix. Absorbent Products gross profit increased $761,000 from a loss of $392,000 to a profit of $369,000, primarily reflecting the absence of the prior year’s deferral of revenue recognition on the sale of raw materials to an independent manufacturing facility. A description 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.
Selling and general expenses for the Housewares/Small Appliance segment increased by $206,000, primarily reflecting changes in various accrued reserve levels. Defense segment selling and general expenses increased by $325,000, primarily reflecting increased legal fees stemming from the acquisition 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 $167,000 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. Absorbent Products selling and general expenses decreased by $1,207,000, 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.
The above items were responsible for the change in operating profit.
Earnings before provision for income taxes decreased $597,000 from $13,563,000 to $12,966,000. The provision for income taxes decreased from $4,860,000 to $4,665,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $402,000 from $8,703,000 to $8,301,000, or 5%.
Comparison of First Six 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 six months ended June 30, 2013 and July 1, 2012.
On a consolidated basis, sales decreased by $29,301,000 (14%), gross profit decreased by $5,326,000 (13%), selling and general expenses decreased by $687,000 (6%), and other income decreased by $143,000 (29%). Earnings before the provision for income taxes decreased by $4,782,000 (17%), as did net earnings by $2,892,000 (16%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales increased by $1,315,000 from $48,063,000 to $49,378,000, or 3%, primarily reflecting an increase in shipments. Defense net sales decreased by $25,822,000 from $123,289,000 to $97,467,000, or 21%, primarily reflecting a decrease in unit shipments. Absorbent Products net sales decreased by $4,794,000 from $42,535,000 to $37,741,000, or 11%, and was primarily attributable to a 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 first half shipments of $598,000 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. These decreases were offset in part by an increase in shipments to other customers.
Housewares/Small Appliance gross profit increased $199,000 from $8,832,000 to $9,031,000, or 2%, reflecting the increase in sales mentioned above. Defense gross profit decreased $6,190,000 from $29,724,000 to $23,534,000, or 21%, which was primarily attributable to the decrease in sales mentioned above. Absorbent Products gross profit increased $665,000 from $1,390,000 to $2,055,000, or 48%, primarily reflecting the absence of the prior year’s deferral of revenue recognition on the sale of raw materials to the independent manufacturing facility mentioned above. Also contributing to the increase were lower freight costs and an insurance settlement of $553,000. These increases were partially offset by the decrease in sales mentioned above.
Selling and general expenses for the Housewares/Small Appliance segment increased by $143,000, primarily reflecting changes in various accrued reserve levels. Defense segment selling and general expenses increased by $543,000, primarily reflecting increased legal fees stemming from the acquisition 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 $333,000 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. Absorbent Products selling and general expenses decreased by $1,373,000, 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.
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The above items were responsible for the change in operating profit.
Earnings before provision for income taxes decreased $4,782,000 from $28,314,000 to $23,532,000. The provision for income taxes decreased from $10,267,000 to $8,377,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $2,892,000 from $18,047,000 to $15,155,000, or 16%.
Liquidity and Capital Resources
Net cash provided by operating activities was $1,113,000 and $36,965,000 for the six months ended June 30, 2013 and July 1, 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 six months of 2013 were net earnings of $15,155,000; increases in inventory levels and deposits made with raw material suppliers included in other current assets, partially offset by a decrease in accounts receivable levels stemming from cash collections on customer sales, and a net decrease in payable and accrual levels. Of particular note during the first six months of 2012 were net earnings of $18,047,000; a decrease in accounts receivable levels stemming from cash collections on customer sales; and a decrease in inventory levels, partially offset by decreases in payable and accrual levels.
Net cash used in investing activities was $2,918,000 during the first six months of 2013 compared to $15,322,000 used in investing activities during the first six 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 six 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 $6,548,000 during the first six months of 2013 to $221,329,000 at June 30, 2013 for the reasons stated above. The Company’s current ratio was 4.9 to 1.0 at June 30, 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 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 six months of 2013 were lower than those in the first six 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.
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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.
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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. |
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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 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. |
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Sales and Returns |
Sales 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. |
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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 1.4 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 June 30, 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 June 30, 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
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| 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 June 30, 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.
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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.
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| NATIONAL PRESTO INDUSTRIES, INC. |
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| /s/ Maryjo Cohen |
| Maryjo Cohen, Chair of the Board, |
| President, Chief Executive Officer |
| (Principal Executive Officer), Director |
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| /s/ Randy F. Lieble |
| Randy F. Lieble, Director, Vice President, |
| Chief Financial Officer (Principal |
| Financial Officer), Treasurer |
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| Date: August 9, 2013 |
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National Presto Industries, Inc.
Exhibit Index
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Exhibit
Number | Exhibit Description |
31.1 | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101 | The following financial information from National Presto Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 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.
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