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NPK > SEC Filings for NPK > Form 10-Q on 10-May-2013All Recent SEC Filings

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Quarterly Report


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 to be 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--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.

Comparison of First Quarter 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 quarters ended March 31, 2013 and April 1, 2012.

On a consolidated basis, sales decreased by $13,583,000 (14%), gross profit decreased by $4,143,000 (20%), selling and general expenses decreased by $11,000 (less than 1%), and other income decreased by $53,000 (20%). Earnings before the provision for income taxes decreased by $4,185,000 (28%), as did net earnings by $2,490,000 (27%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales were essentially flat, increasing nominally by $197,000 from $24,692,000 to $24,889,000, or 1%. Defense net sales decreased by $10,730,000 from $49,681,000 to $38,951,000, or 22%, primarily reflecting a decrease in unit shipments. Absorbent Products net sales decreased by $3,050,000 from $22,400,000 to $19,350,000, or 14%, and was chiefly attributable to a reduction of shipments of $3,284,000 to the segment's major customer, which is producing much of its own product, and the absence of last year's first quarter shipments of $598,000 of raw materials to an independent manufacturing facility. These decreases were offset in part by an increase in shipments to other customers.

Housewares/Small Appliance gross profit decreased $240,000 from $4,697,000 to $4,457,000, or 5%, primarily due to an increase in product and logistics costs. Defense gross profit decreased $3,807,000 from $13,873,000 to $10,066,000, or 27%, primarily attributable to the decrease in sales mentioned above, augmented by a less favorable product mix. Absorbent Products gross profit decreased $96,000 from $1,782,000 to $1,686,000, or 5%, reflecting the sales decrease mentioned above, largely offset by an insurance settlement of $553,000.

Selling and general expenses for the Housewares/Small Appliance segment were essentially flat. Defense segment selling and general expenses increased by $218,000, primarily reflecting $167,000 of amortization expense related to the intangible assets recorded during the fourth quarter of 2012 which stemmed from 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 2012 annual report on Form 10-K. Absorbent Products selling and general expenses decreased by $166,000, primarily reflecting a decrease in expenses classified as administrative that related to the royalty arrangement with the independent manufacturing facility mentioned above.

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

Earnings before provision for income taxes decreased $4,185,000 from $14,751,000 to $10,566,000. The provision for income taxes decreased from $5,407,000 to $3,712,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $2,490,000 from $9,344,000 to $6,854,000, or 27%.

Liquidity and Capital Resources

Net cash provided by operating activities was $10,821,000 and $11,664,000 for the three months ended March 31, 2013 and April 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 three months of 2013 were net earnings of $6,854,000; a decrease in accounts receivable levels stemming from cash collections on customer sales, partially offset by increases in inventory levels and deposits made with raw material suppliers included in other current assets; and a net decrease in payable and accrual levels. Of particular note during the first three months of 2012 were net earnings of $9,344,000; a decrease in accounts receivable levels stemming from cash collections on customer sales, partially offset by net decreases in payable and accrual levels.

Net cash used in investing activities was $5,211,000 during the first three months of 2013 compared to $256,000 provided by investing activities during the first three months of 2012. 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 the acquisition of property, plant, and equipment.

Cash flows from financing activities for the first three 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 $3,565,000 to $218,346,000 at March 31, 2013 for the reasons stated above. The Company's current ratio was 5.2 to 1.0 at March 31, 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 three months of 2013 were lower than those in the first three 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.


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.

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