National Presto Industries (NPK) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED  October 3, 2010

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 þ    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 o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

There were 6,864,080 shares of the Issuer's Common Stock outstanding as of November 1, 2010.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

October 3, 2010 and December 31, 2009

(Unaudited)

(Dollars in thousands)

	2010				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	16,975			$	48,974
Marketable securities				114,396				118,442
Accounts receivable, net				65,611				92,359
Inventories:
Finished goods	$	50,165			$	30,361
Work in process		34,375				31,229
Raw materials		10,782		95,322		6,985		68,575
Deferred tax assets				7,110				6,605
Other current assets				17,082				7,117
Total current assets				316,496				342,072
PROPERTY,  PLANT AND EQUIPMENT		103,378				94,968
Less allowance for depreciation		47,305		56,073		46,120		48,848
GOODWILL				11,485				11,485
			$	384,054			$	402,405

The accompanying notes are an integral part of the financial statements.

2

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

October 3, 2010 and December 31, 2009

(Unaudited)

(Dollars in thousands)

	2010				2009
LIABILITIES
CURRENT LIABILITIES:
Accounts payable			$	39,230			$	37,903
Federal and state income taxes				1,553				6,291
Accrued liabilities				16,007				16,859
Total current liabilities				56,790				61,053
DEFERRED INCOME TAXES				5,352				5,480
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $1 par value:
Authorized: 12,000,000 shares
Issued: 7,440,518 shares	$	7,441			$	7,441
Paid-in capital		2,614				2,037
Retained earnings		329,428				343,930
Accumulated other comprehensive income		405				643
Treasury stock, at cost		339,888				354,051
		17,976				18,179
Total stockholders' equity				321,912				335,872
			$	384,054			$	402,405

The accompanying notes are an integral part of the financial statements.

3

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Three Months and Nine Months Ended October 3, 2010 and October 4, 2009

(Unaudited)

(In thousands except per share data)

		Three Months Ended				Nine Months Ended
		2010		2009		2010		2009
Net sales		$	113,547	$	116,392	$	337,022	$	327,479
Cost of sales			89,184		87,448		261,555		254,513
Gross profit			24,363		28,944		75,467		72,966
Selling and general expenses			4,237		4,400		12,070		13,368
Operating profit			20,126		24,544		63,397		59,598
Other income			570		749		1,959		2,734
Earnings before provision for income taxes			20,696		25,293		65,356		62,332
Income tax provision			7,483		8,588		23,969		21,427
Net earnings		$	13,213	$	16,705	$	41,387	$	40,905
Weighted average shares outstanding:
	Basic		6,863		6,856		6,861		6,853
	Diluted		6,865		6,856		6,862		6,853
Net earnings per share:
	Basic	$	1.93	$	2.44	$	6.03	$	5.97
	Diluted	$	1.92	$	2.44	$	6.03	$	5.97
Cash dividends declared and paid per common share		$	-	$	-	$	8.15	$	5.55

The accompanying notes are an integral part of the financial statements.

4

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended October 3, 2010 and October 4, 2009

(Unaudited)

(Dollars in thousands)

	2010			2009
Cash flows from operating activities:
Net earnings	$	41,387		$	40,905
Adjustments to reconcile net earnings to net
Cash provided by (used in) operating activities:
Provision for depreciation		6,566			6,537
Other		(387	)		477
Changes in:
Accounts receivable		26,748			7,348
Inventories		(26,747	)		(29,715	)
Other current assets		(9,965	)		976
Accounts payable and accrued liabilities		493			372
Federal and state income taxes		(5,800	)		(392	)
Net cash provided by operating activities		32,295			26,508
Cash flows from investing activities:
Marketable securities purchased		(45,064	)		(47,246	)
Marketable securities - maturities and sales		48,743			65,232
Acquisition of property, plant and equipment		13,858	)		(2,522	)
Sale of property, plant and equipment		1,366			72
Net cash provided by (used in) investing activities		(8,813	)		15,536
Cash flows from financing activities:
Dividends paid		(55,889	)		(38,008	)
Other		408			243
Net cash used in financing activities		(55,481	)		(37,765	)
Net increase (decrease) in cash and cash equivalents		(31,999	)		4,279
Cash and cash equivalents at beginning of period		48,974			24,692
Cash and cash equivalents at end of period	$	16,975		$	28,971

The accompanying notes are an integral part of the financial statements.

5

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – EARNINGS PER SHARE

The Company’s basic net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to restricted stock, when dilutive.

NOTE B – RECLASSIFICATIONS

Certain reclassifications have been made to the prior period’s 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 – 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		Defense			Absorbent
	Appliances		Products			Products		Total
Quarter ended October 3, 2010
External net sales	$	37,212	$	56,200		$	20,135	$	113,547
Gross profit		8,209		14,693			1,461		24,363
Operating profit		6,057		13,088			981		20,126
Total assets		243,740		89,760			50,554		384,054
Depreciation		243		912			1,036		2,191
Capital expenditures		205		492			6,756		7,453
Quarter ended October 4, 2009
External net sales	$	36,065	$	61,566		$	18,761	$	116,392
Gross profit		10,664		15,256			3,024		28,944
Operating profit		8,485		13,426			2,633		24,544
Total assets		228,688		105,470			35,127		369,285
Depreciation		240		898			1,026		2,164
Capital expenditures		315		(76	)		150		389

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	(in thousands)
	Housewares/
	Small		Defense		Absorbent
	Appliances		Products		Products		Total
Nine Months ended October 3, 2010
External net sales	$	92,126	$	185,110	$	59,786	$	337,022
Gross profit		20,815		48,450		6,202		75,467
Operating profit		13,744		43,439		6,214		63,397
Total assets		243,740		89,760		50,554		384,054
Depreciation		705		2,738		3,123		6,566
Capital expenditures		875		1,649		11,334		13,858
Nine Months ended October 4, 2009
External net sales	$	84,771	$	186,382	$	56,326	$	327,479
Gross profit		21,012		45,424		6,530		72,966
Operating profit		14,112		40,167		5,319		59,598
Total assets		228,688		105,470		35,127		369,285
Depreciation		680		2,656		3,201		6,537
Capital expenditures		804		1,208		510		2,522

NOTE D - 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 E - 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 and certificates of deposit.  The Company deposits its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits.  Certificates of deposits are reported at par value, and 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, Fair Value Measurements and Disclosures).

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.  Certificates of deposit are also classified as marketable securities.

7

At October 3, 2010 and December 31, 2009, 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 table below.  Fair values are determined using significant other observable inputs (Level 2, as defined by FASB ASC 820), which include quoted prices in markets that are not active, quoted prices of similar securities, or other inputs that are observable.

	(In Thousands)
	MARKETABLE SECURITIES
					Gross		Gross
	Amortized Cost		Fair Value		Unrealized Gains		Unrealized Losses
October 3, 2010
Tax-exempt Government  Bonds	$	111,122	$	111,745	$	660	$	37
Certificates of Deposit		2,651		2,651		0		0
Total Marketable Securities	$	113,773	$	114,396	$	660	$	37
December 31, 2009
Tax-exempt Government Bonds	$	114,754	$	115,744	$	1,015	$	25
Certificates of  Deposit		2,698		2,698		0		0
Total Marketable Securities	$	117,452	$	118,442	$	1,015	$	25

The Company considers the declines in market value of its marketable securities shown in the column headed “Gross Unrealized Losses” to be temporary in nature. The unrealized losses on the Company’s marketable securities, which are insignificant in relation to total marketable securities, were caused primarily by changes in market interest rates.  The Company typically invests in highly-rated securities with the objective of minimizing the potential risk of principal loss. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required t o sell, the investment before recovery of the investment’s amortized cost basis. During the three and nine month periods ended October 3, 2010 and October 4, 2009, the Company did not recognize any impairment charges on outstanding securities.  As of October 3, 2010 and December 31, 2009, the Company did not consider any of its investments to be other-than-temporarily impaired.

Proceeds from sales of available-for-sale securities totaled $4,459,000 and $16,328,000 for the three month periods ended October 3, 2010 and October 4, 2009, and totaled $48,743,000 and $65,232,000 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 gains (losses) included in accumulated other comprehensive income were ($84,000) and $50,000 before taxes for the three month periods ended October 3, 2010 and October 4, 2009, and were ($367,000) and $34,000 before taxes for the nine month periods then ended, respectively.  No unrealized gains (losses) were reclassified out of accumulated other comprehensive income during the same periods.

8

The contractual maturities of the marketable securities held at October 3, 2010 are as follows: $40,019,000 within one year; $46,344,000 beyond one year to five years; $8,605,000 beyond five years to ten years, and $19,428,000 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 F – COMMITMENTS AND CONTINGENCIES

The 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 G – ACCUMULATED OTHER COMPREHENSIVE INCOME

The $405,000 of accumulated comprehensive income at October 3, 2010 reflects the unrealized gain, net of tax, of available-for-sale marketable security investments.  Total comprehensive income net of tax effect was $13,159,000 and $16,737,000 for the three month periods ended October 3, 2010 and October 4, 2009, respectively, and $41,150,000 and $40,927,000 for the nine month periods ended October 3, 2010 and October 4, 2009, respectively.

NOTE H – ADOPTION OF NEW ACCOUNTING STANDARDS

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements, to provide amendments to Subtopic 820-10 that require new disclosures about transfers into and out of Level 1 and Level 2 of the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements.  Specifically, for assets and liabilities that are measured at fair value on a recurring basis in periods after initial recognition (e.g., trading securities), this ASU requires: separate disclosure of the amount of significant transfers between Levels 1 and 2 and a description of the reasons for the transfers; an d separate information about purchases, sales, issuances, and settlements, on a gross basis, in the reconciliation of Level 3 fair value measurements valued using significant unobservable inputs.  ASU 2010-06 clarifies existing disclosures as follows:

Level of disaggregation: An entity should provide fair value measurement disclosures for each class of assets and liabilities.  A class is often a subset of assets or liabilities within a line item in the statement of financial position.  An entity needs to use judgment in determining the appropriate classes of assets and liabilities.

Disclosures about inputs and valuations techniques: An entity should provide disclosures about the valuation techniques (i.e., the income, market, or cost approaches) and input used to measure fair value for both recurring and nonrecurring fair value measurements.  Those disclosures are required for fair value measurements that fall in either Level 2 of Level 3.

ASU 2010-06 also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (Subtopic 715-20), which include a change in terminology from major categories of assets to classes of assets and a cross-reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures.  This ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes.  However, comparative disclosures are required for periods ending after initial adoption.  Early adoption is permitted.  Except for the separate disclosures about purchases, sales, issuance and settlements in the roll forward of activity in Level 3 fair value measurements, the Company adopted ASU 2010-06 during the first quarter of 2010, which did not have a material effect on the Company’s consolidated financial statements. The Company does not expect the adoption of the remaining provisions of ASU 2010-06 to have a material effect on the Company’s consolidated financial statements.

9

NOTE I – PENSION PLAN

Prior to 2009, the Company contributed to a union-sponsored, multi-employer pension plan on behalf of union employees of the Amron division of its AMTEC subsidiary in accordance with the applicable union labor agreement. In December 2008, the union membership voted in favor of a withdrawal from the plan, and an amendment was made to the labor agreement authorizing the withdrawal. In December 2008, the Company permanently ceased to be obligated to contribute to the multi-employer pension plan, and instead agreed to contribute to a Company 401(k) Plan.

In a letter dated March 30, 2009, the pension plan provided Amron with documentation stating that the cost to withdraw from the plan was $238,509.  In April 2009, a payment representing the settlement of the withdrawal liability was made in the same amount.  However, should all participants in the plan withdraw before the end of 2010, some portion of the plan liability could be reallocated to AMTEC. If that were to occur, AMTEC might be assessed retroactively for an additional withdrawal charge.  The amount of a potential additional withdrawal charge, if any, cannot be currently estimated.  The Company charged the cost of the withdrawal to operations in 2008.

The foregoing information for the periods ended October 3, 2010, and October 4, 2009, is unaudited; however, in the opinion of management of the Registrant, it reflects all the adjustments, which were of a normal recurring nature, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet as of December 31, 2009 is summarized from consolidated financial statements, but does not include all the disclosures contained therein and should be read in conjunction with the 2009 annual report on Form 10-K.  Interim results for the period are not indicative of those for the year.

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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 2009 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 18, 2010, 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 po litical 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, copies of which are available from the Company without charge.

Comparison of Third Quarter 2010 and 2009

Readers are directed to Note C 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 3, 2010 and October 4, 2009.

On a consolidated basis, sales decreased by $2,845,000 (2%), gross profit decreased by $4,581,000 (16%), selling and general expense decreased by $163,000 (4%), and other income decreased by $179,000 (24%).  Earnings before the provision for income taxes decreased by $4,597,000 (18%), as did net earnings by $3,492,000 (21%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $1,147,000 from $36,065,000 to $37,212,000, or 3%, primarily as a result of an increase in unit shipments.  Defense net sales decreased by $5,366,000 from $61,566,000 to $56,200,000, or 9%, primarily reflecting a decrease in unit shipments and a less favorable product mix.  Absorbent Products net sales increased by $1,374,000 from $18,761,000 to $20,135,000, or 7%, which primarily reflected an increase in shipments.

Housewares/Small Appliance gross profits decreased $2,455,000 from $10,664,000 to $8,209,000, or 23%, primarily reflecting increased commodity and freight costs.  Defense gross profits decreased $563,000 from $15,256,000 from the prior year's quarter to $14,693,000, or 4%, in largest part due to the sales decrease mentioned above.  Absorbent Products gross profits decreased $1,563,000 from $3,024,000 to $1,461,000, or 52%, primarily reflecting increased commodity costs.

Selling and general expenses for the Housewares/Small Appliance and Absorbent Products segments were essentially flat.  Defense selling and general expenses decreased $225,000, primarily reflecting decreased compensation-related accruals.

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

11

Other income decreased $179,000, due primarily to lower interest income resulting from decreased yields.

Earnings before provision for income taxes decreased $4,597,000 from $25,293,000 to $20,696,000.  The provision for income taxes decreased from $8,588,000 to $7,483,000, which resulted in an effective income tax rate increase from 34% to 36%, primarily reflecting an increase in earnings subject to tax.  Net earnings decreased $3,492,000 from $16,705,000 to $13,213,000, or 21%.

Comparison of First Nine Months 2010 and 2009

Readers are directed to Note C 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 3, 2010 and October 4, 2009.

On a consolidated basis, sales increased by $9,543,000 (3%), gross profit increased by $2,501,000 (3%), selling and general expense decreased by $1,298,000 (10%), and other income decreased by $775,000 (28%).  Earnings before the provision for income taxes increased by $3,024,000 (5%), as did net earnings by $482,000 (1%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $7,355,000 from $84,771,000 to $92,126,000, or 9%, primarily as a result of an increase in unit shipments.  Defense net sales decreased by $1,272,000 from $186,382,000 to $185,110,000, or 1%, primarily reflecting a decrease in unit shipments.  Absorbent Products net sales increased by $3,460,000 from $56,326,000 to $59,786,000, or 6%, which primarily reflected an increase in shipments.

Housewares/Small Appliance gross profits decreased $197,000 from $21,012,000 to $20,815,000, or 1%, primarily reflecting increased commodity and freight costs, which were almost completely offset by the increase in sales mentioned above.  Defense gross profits increased $3,026,000 from $45,424,000 from the prior year to $48,450,000, or 7%, reflecting decreased material costs and a more favorable product mix, approximately 10% of which was offset by the decrease in sales mentioned above.  Absorbent Products gross profits decreased $328,000 from $6,530,000 to $6,202,000, or 5%, primarily reflecting increased commodity costs, approximately half of which were offset by the increase in sales mentioned above.

Selling and general expenses for the Housewares/Small Appliance segment increased $171,000, approximately half of which reflected increased compensation costs, with the balance largely attributable to changes in professional fee accruals.  Defense selling and general expenses decreased $246,000, reflecting changes in compensation and health care cost accruals, with the latter partially offsetting the former by approximately 14%.  Absorbent Products selling and general expenses decreased $1,223,000, reflecting a comparative increase in net gains on the sale of obsolete equipment of $1,568,000, partially offset primarily by increases in compensation and travel costs related to an augmented sales force.

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

Other income decreased $775,000, due primarily to lower interest income resulting from decreased yields.

Earnings before provision for income taxes increased $3,024,000 from $62,332,000 to $65,356,000.  The provision for income taxes increased from $21,427,000 to $23,969,000, which resulted in an effective income tax rate increase from 34% to 37%, primarily reflecting an increase in earnings subject to tax.  Net earnings increased $482,000 from $40,905,000 to $41,387,000, or 1%.

12

Liquidity and Capital Resources

Net cash provided by operating activities was $32,295,000 and $26,508,000 for the nine months ended October 3, 2010 and October 4, 2009, respectively.  The principal factors contributing to the increase 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 2010 were net earnings of $41,387,000, an increase in inventory levels and deposits with suppliers, partially offset by a decrease in accounts receivable levels stemming from cash collections on customer sales.  Of particular note during the first nine months of 2009 were net earnings of $40,905,000 and an increase in inventory levels, partially offset by lower accounts receivable levels stemming from cash collections on customer sales.

Net cash used in investing activities during the first nine months of 2010 was $8,813,000, as compared to $15,536,000 provided by investing activities during the first nine months of 2009.  The change in investing activity cash flow is attributable to a decrease in net maturities/sales of marketable securities, augmented by an increase in the acquisition of property, plant and equipment.

Cash flows from financing activities for the first nine months of 2010 and 2009 primarily differed as a result of the $2.60 per share increase in the extra dividend paid during those periods.

Working capital decreased by $21,313,000 to $259,706,000 at October 3, 2010 for the reasons stated above.  The Company's current ratio was 5.6 to 1.0 at both October 3, 2010 and December 31, 2009.

As of October 3, 2010, there was approximately $3,343,000 of open equipment purchase commitments to expand the product line in the Absorbent Products segment. 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 nine months of 2010 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 current year 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 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 impac t 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 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.

New Accounting Pronouncements

Please refer to Note H in the Notes to the Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company's consolidated financial statements.

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 1.0 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.  The Company’s manufacturing contracts with its foreign suppliers contain provisions to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Hong Kong dollar above and below a fixed range contained in the contracts.  All transactions with the foreign suppliers were within the exchange rate range specified in the contracts during 2010 and 2009.  There is no similar provision applicable to the Chinese Renminbi (RMB), which until 2005 had been tied to the U.S. Dollar.  To the extent there are further revaluations of the RMB vis-à-vis the U.S. dollar, it is anticipated that any potential material impact from such revaluations will be to the cost of products secured via purchase orders issued subsequent to the revaluation.

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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 October 3, 2010.  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 in internal controls over financial reporting during the quarter ended October 3, 2010 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 F 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 10.3 Form of Material Contract for Retired Executive Officer - incorporated by reference from Exhibit 10.3 of the Company's annual report on Form 10-K for the year ended December 31, 2006

Exhibit 11 Statement regarding computation of per share earnings

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

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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.

NATIONAL PRESTO INDUSTRIES, INC.
By:	/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 12, 2010

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National Presto Industries, Inc.

Exhibit Index

Exhibit Number	Exhibit Description
11	Computation of Earnings per Share
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

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