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NPK > SEC Filings for NPK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NATIONAL PRESTO INDUSTRIES INC

Form 10-Q for NATIONAL PRESTO INDUSTRIES INC


9-Nov-2012

Quarterly Report


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 2011 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 15, 2012, 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--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 2012 and 2011

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 September 30, 2012 and October 2, 2011.

On a consolidated basis, sales increased by $11,952,000 (11%), gross profit decreased by $750,000 (3%), selling and general expenses increased by $3,471,000 (79%), and other income decreased by $217,000 (82%). Earnings before the provision for income taxes decreased by $4,438,000 (23%), as did net earnings by $2,985,000 (24%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $2,589,000 from $33,956,000 to $36,545,000, or 8%, 61% of which was attributable to an increase in unit shipments, with the balance stemming from an increase in prices. Defense net sales increased by $12,646,000 from $46,210,000 to $58,856,000, or 27%, primarily reflecting an increase in unit shipments. Absorbent Products net sales decreased by $3,283,000 from $24,695,000 to $21,412,000, or 13%, reflecting a decrease in unit shipments, 64% of which related to the adult incontinence line of products. The balance of the decrease is attributable to a reduction of shipments and the deferral of revenue recognition on the sale of raw materials to an independent manufacturing facility due to ongoing financial issues at the facility.

Housewares/Small Appliance gross profits increased $566,000 from $6,860,000 to $7,426,000, or 8%, primarily due to the increase in sales mentioned above. Defense gross profits decreased $1,155,000 from $15,611,000 to $14,456,000, or 7%, largely reflecting a less favorable product mix and reduced margins related to the new five year 40mm contract, which were offset in significant part (79%) by the sales increase mentioned above. Absorbent Products gross profits decreased $161,000 from $1,186,000 to $1,025,000, or 14%, reflecting the sales decrease mentioned above, largely offset by lower costs on certain key raw materials.

Selling and general expenses for the Housewares/Small Appliance segment increased by $950,000, primarily reflecting adjustments to self-insured product liability and employee benefit cost reserves. Defense segment selling and general expenses increased by $337,000, primarily reflecting on-going operational costs associated with the acquisition of a less than lethal manufacturing facility during the fourth quarter of 2011. The acquisition is more fully described in the Company's 2011 annual report on Form 10-K. Absorbent Products selling and general expenses increased by $2,184,000, primarily reflecting an increase in the segment's reserve for doubtful accounts related to collection issues with the independent manufacturing facility mentioned above. Additional adjustments to the reserve may be necessary for this customer in future periods. The Company's remaining exposure for this customer is approximately $2,300,000.

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

Other income decreased $217,000, $60,000 of which was due to lower interest income resulting from decreased yields on marketable securities, with the remainder primarily attributable to decreased net royalty income.

Earnings before provision for income taxes decreased $4,438,000 from $19,518,000 to $15,080,000. The provision for income taxes decreased from $7,132,000 to $5,679,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $2,985,000 from $12,386,000 to $9,401,000, or 24%.

Comparison of First Nine Months 2012 and 2011

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 September 30, 2012 and October 2, 2011.

On a consolidated basis, sales increased by $18,685,000 (6%), gross profit decreased by $3,423,000 (5%), selling and general expenses increased by $6,115,000 (45%), and other income decreased by $1,121,000 (87%). Earnings before the provision for income taxes decreased by $10,659,000 (20%), as did net earnings by $7,118,000 (21%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $3,881,000 from $80,727,000 to $84,608,000, or 5%, 66% of which was attributable to an increase in prices, with the balance stemming from an increase in unit shipments. Defense net sales increased by $22,652,000 from $159,493,000 to $182,145,000, or 14%, primarily reflecting an increase in unit shipments. Absorbent Products net sales decreased by $7,848,000 from $71,795,000 to $63,947,000, reflecting a decrease in unit shipments, 57% of which related to the adult incontinence line of products, with the balance attributable to a reduction of shipments and the deferral of revenue recognition on the sale of raw materials to an independent manufacturing facility due to ongoing financial issues at the facility.

Housewares/Small Appliance gross profits increased $718,000 from $15,540,000 to $16,258,000, or 5%,primarily due to the sales increase mentioned above. Defense gross profits decreased $3,453,000 from $47,633,000 to $44,180,000, or 7%, largely reflecting a less favorable product mix and reduced margins related to the new five year 40mm contract, approximately 66% of which was offset by the sales increase mentioned above. Absorbent Products gross profits decreased $688,000 from $3,103,000 to $2,415,000, reflecting the decrease in sales mentioned above and lower production efficiencies incident to the installation of new equipment, partially offset by lower costs on certain key raw materials.

Selling and general expenses for the Housewares/Small Appliance segment increased by $1,690,000, primarily reflecting adjustments to self-insured product liability and employee benefit cost reserves. Defense segment selling and general expenses increased by $1,204,000, primarily reflecting on-going operational costs associated with the acquisition of a less than lethal manufacturing facility during the fourth quarter of 2011. The acquisition is more fully described in the Company's 2011 annual report on Form 10-K. Absorbent Products selling and general expenses increased by $3,221,000, primarily reflecting an increase in the segment's reserve for doubtful accounts related to collection issues with the independent manufacturing facility mentioned above. Additional adjustments to the reserve may be necessary for this customer in future periods. The Company's remaining exposure for this customer is approximately $2,300,000.

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

Other income decreased $1,121,000, approximately half of which was due to lower interest income resulting from decreased yields on lower dollars of marketable securities invested, with the remainder largely attributable to decreased net royalty income.

Earnings before provision for income taxes decreased $10,659,000 from $54,053,000 to $43,394,000. The provision for income taxes decreased from $19,487,000 to $15,946,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $7,118,000 from $34,566,000 to $27,448,000, or 21%.

Liquidity and Capital Resources

Net cash provided by operating activities was $34,567,000 and $35,806,000 for the nine months ended September 30, 2012 and October 2, 2011, 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 nine months of 2012 were net earnings of $27,448,000; a decrease in deposits made with raw material suppliers included in other current assets; partially offset by an increase in inventory levels and a decrease in payable and accrual levels. Of particular note during the first nine months of 2011 were net earnings of $34,566,000; a decrease in accounts receivable levels stemming from cash collections on customer sales, partially offset by an increase in inventory levels and deposits made with raw material suppliers included in other current assets; and decreases in payable and accrual levels.

Net cash used in investing activities was $7,489,000 during the first nine months of 2012 compared to $16,966,000 provided by investing activities during the first nine months of 2011. The change in investing activity cash flow is primarily attributable to a decrease in net maturities of marketable securities and to a lesser extent an increase in notes issued, partially offset by a decrease in net acquisition of property, plant, and equipment.

Cash flows from financing activities for the first nine months of 2012 and 2011 primarily differed as a result of the $2.25 per share decrease in the extra dividend paid during 2012 v. 2011.

Working capital decreased by $19,084,000 to $243,875,000 at September 30, 2012 for the reasons stated above. The Company's current ratio was 4.9 to 1.0 at September 30, 2012 and 5.0 to 1.0 at December 31, 2011.

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 2012 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 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.

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.

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 G 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.

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