UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number   1-2451

NATIONAL PRESTO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

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     X     No         

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes     X     No         

There were 6,826,292 shares of the Issuer’s Common Stock outstanding as of the close of the period covered by this report.

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 2005 and December 31, 2004
(Unaudited)
(Dollars in thousands)

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

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 2005 and December 31, 2004
(Unaudited)
(Dollars in thousands)

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

NATIONAL PRESTO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended April 3, 2005 and April 4, 2004
(Unaudited)
(In thousands except per share data)

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

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 3, 2005 and April 4, 2004
(Unaudited)
(Dollars in thousands)

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

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 stock options, when dilutive.

NOTE B – BUSINESS SEGMENTS

In the following summary, operating profit (loss) represents earnings (loss) 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) are included within housewares/small appliances for all periods presented.

NOTE C – PRODUCT WARRANTY

Company housewares/small appliance products are generally warranted to the original owner to be free from defects in material and workmanship for a period of 1 to 12 years from date of purchase. The Company allows a 60-day over-the-counter initial return privilege through cooperating dealers. The Company services its products through independent service providers throughout the United States and a corporate service repair operation. The Company’s service and warranty programs are competitive with those offered by other manufacturers in the industry. The Company determines its product warranty liability based on historical percentages which have remained relatively consistent over the years.

The following table shows the changes in product warranty liability for the period:

NOTE D – PENSION PLAN

During the third quarter of 2003, the Company announced its decision to terminate its defined benefit pension plan and provide enhancements to its 401(k) plan. As a result, the plan was amended effective December 31, 2003, to freeze benefit accruals. The amendment eliminated the accrual of future defined benefits for all employees. A $3,528,000 settlement charge was recorded in the last half of 2004 when final distributions from the plan were made or annuities purchased in exchange for participants’ rights to receive benefits under the plan.

Components of net periodic pension cost for the three months ended April 3, 2005 and April 4, 2004 are as follows:

NOTE E – PLANT CLOSING

In November 2001, the Company announced that continued erosion of product pricing resulted in its decision to cease manufacturing housewares/small appliances in its U.S. plants, close those facilities, and purchase products from the Orient. This transition from U.S. plant production to the Orient was completed during late 2002. The Company closed its manufacturing facilities in Alamogordo, New Mexico, during the third quarter of 2002 and donated the facility to the Otero County Economic Development Council during the fourth quarter of 2004. The Company effectively closed its Jackson, Mississippi, plant during the fourth quarter of 2002 and has modified this plant to serve as a warehousing and shipping facility.

The following table summarizes the plant closing accrual activities for the periods presented:

The remaining employee termination benefits are for health care costs for workers who accepted early retirement at the time of the plant closing and will be extinguished over approximately the next three years.

The total outsourcing of all Company housewares/small appliance product manufacturing resulted in the creation of a new LIFO inventory category for the outsourced products. During the first quarter of 2004, the Company recognized a $348,000 (or $.03 per share, net of tax) partial liquidation of the Manufactured LIFO Reserve. The remaining Manufactured LIFO Reserve of $339,000 was liquidated during the last three quarters of 2004.

NOTE F – COMMITMENTS AND CONTINGENCIES

On July 16, 2002, the Securities and Exchange Commission filed a lawsuit against National Presto Industries, Inc. alleging the company operated as an unregistered investment company. The case does not involve fraud, deceptive practices or accounting methods, and the Company plans to vigorously defend itself. If unsuccessful the Company may have to reallocate invested assets which will result in reduced yields or it might be required to register as an investment company. In the latter situation, it would be prohibited from engaging in business in interstate commerce until registration occurred. The obligations upon registration are many and could include: 1) possible imposition of significant additional reporting requirements (a burden which would not be imposed upon its competitors); 2) potential regard in the market as a closed end mutual fund which could result in a trading price sharply discounted from net asset value; 3) possible limitations on the use of capital and earnings which could inhibit or terminate commercial business growth. Management is unable to make a meaningful estimate of the overall impact on the Company’s operations, if any, that would result from an unfavorable final determination of this matter.

In addition, the Company is involved in other routine litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material affect on the Company’s consolidated financial position, liquidity, or results of operations.

NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOME

The ($96,000) of accumulated comprehensive income (loss) at April 3, 2005, reflects the unrealized loss, net of tax, of available-for-sale marketable security investments. Total comprehensive income was $1,087,000 and $1,367,000 for the three month periods ended April 3, 2005 and April 4, 2004, respectively.

NOTE H – ADOPTION OF NEW ACCOUNTING STANDARDS

In November 2004, the FASB issued SFAS 151, “Inventory Costs”. The provisions of this statement become effective for the Company in fiscal 2006. SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company’s existing policies with regard to inventory accounting are consistent with the provisions of SFAS 151 and the adoption of this Statement is not expected to have a material impact on the valuation of inventory or operating results.

In December 2004, the FASB issued SFAS 123R, “Share-Based Payment”. This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS 123R will be effective for annual periods beginning after June 15, 2005. The Company will adopt this standard January 1, 2006 and it is not expected to have a material impact on our operating results.

In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets.” This statement addresses the fair value concepts contained in Opinion 29, “Accounting for Nonmonetary Transactions” which included certain exceptions to the concept that exchanges of similar productive assets should be recorded at the carrying value of the asset relinquished. SFAS 153 eliminates that exception and replaces it with a general exception for exchanges of nonmonetary assets that lack commercial substance. Only nonmonetary exchanges in which an entity’s future cash flows are expected to significantly change as a result of the exchange will be considered to have commercial substance. SFAS 153 must be applied to nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this Statement is not expected to have a material impact on our operating results.

NOTE I – INCOME TAXES

On October 22, 2004, Congress passed the American Jobs Creation Act of 2004 (the Act). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010, as well as other tax implications. The domestic production deduction will be accounted for as a special deduction and as such, will have no effect on deferred tax assets and liabilities existing at the date of enactment. It is not currently possible to predict what impact this act will have on future earnings until final implementation guidance is issued.

NOTE J – RECLASSIFICATIONS

Certain reclassifications have been made to the prior period’s financial statements to conform with the 2005 financial statement presentation. These reclassifications did not affect net earnings or stockholders’ equity as previously reported.

The foregoing information for the periods ended April 3, 2005, and April 4, 2004, 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, 2004, is summarized from audited consolidated financial statements, but does not include all the disclosures contained therein and should be read in conjunction with the 2004 Annual Report. Interim results for the period are not indicative of those for the year.

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 2004 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held October 19, 2004, 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; increases in material, freight/shipping, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping; cut backs by the US government in defense spending, and the efficient start-up and utilization of capital equipment investments. Additional information concerning those 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 First Quarter 2005 and 2004

        Readers are directed to Note B, “Business Segments” for data on the financial results of the Company’s three business segments for the Quarters ended April 3, 2005 and April 4, 2004.

        On a consolidated basis, sales were up by $9,445,000 (36%), gross margins by $679,000 (15%), selling and general expense by $1,242,000 (34%), and other income, principally interest by $45,000 (4%). Earnings before the provision for income taxes decreased by $518,000 (26%), as did net earnings by $219,000 (15%). Details concerning these changes can be found in the comments by segment found below.

        Housewares/small appliance net sales increased $1,535,000 from $17,300,000 to $18,835,000, or 9%. Approximately 50% of the increase derived from sales of new products, with the balance reflecting an increase in units shipped. Defense net sales increased by $5,965,000 from $1,922,000 to $7,887,000, or 310%, primarily reflecting a unit volume increase stemming from partial fulfillment of an augmented backlog. Absorbent products net sales increased by $1,945,000 from $6,692,000 to $8,637,000, or 29%, primarily reflecting increased sales from the adult incontinence product line.

        Housewares/small appliance gross profit for 2005 increased $286,000 from $3,481,000 to $3,767,000, remaining at a constant 20% as a percentage of sales. Defense gross profits increased $1,660,000 from $308,000 (16% of sales) from the prior year’s quarter to $1,968,000 (25% of sales). The increase reflected the increased sales referenced above. Absorbent products gross profit dropped $1,267,000 to a negative $595,000. Although the bulk of the decline stemmed from cost inefficiencies primarily of a startup/learning curve nature related to the installation of new state-of-the-art machinery, approximately 35% resulted from the effect of increased raw material costs.

        The Company accrues for unexpended selling and advertising costs, primarily for housewares/small appliances, budgeted for the year against each quarter’s sales. Selling and advertising charges included in selling expense in each quarter represent that percentage of the annual sales and advertising budget associated with that quarter’s shipments. Revisions to this budget result in periodic changes to the accrued liability for committed selling and advertising expenditures. Housewares/small appliance selling and general expenses increased $589,000, largely attributable to increases in the aforementioned accrual. Defense segment selling and general expenses increased by $520,000, reflecting increased compensation and staffing commensurate with the segment’s increased sales and earnings levels. Absorbent segment selling and general expenses increased by $133,000, reflecting an increase in administrative costs related to the expansion of the segment.

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

        Other income was essentially flat, increasing $45,000 or 4%. Increased yields on reduced dollars invested (as a result of the use of funds for expansion in the defense and absorbent products segments) boosted interest income by $200,000. That sum was almost entirely offset by a reduction in miscellaneous income, chiefly pertaining to a decline in rental income from the Eau Claire facility, which has largely been converted to the production of absorbent products.

        Earnings before provision for income taxes decreased $518,000 from $1,968,000 to $1,450,000. The provision for income taxes decreased from $473,000 to $174,000, which resulted in an effective income tax rate decrease from 24% to 12% as a result of decreased earnings subject to tax. Net earnings decreased $219,000 from $1,495,000 to $1,276,000, or 15%.

Liquidity and Capital Resources

        Cash used in operating activities was $444,000 during the first quarter of 2005, as compared to $1,593,000 provided during the first quarter of 2004. The principal factors behind the decrease can be found in the changes in the components of working capital within the Consolidated Statement of Cash Flows.

        Net cash flows from Investing activities during the first quarter of 2005 increased by $4,761,000 over the prior period largely as a result of timing – more instruments matured and were reinvested in cash equivalents during the review quarter than in the prior year’s quarter.

        Cash flows from financing activities for the first quarter of 2005 and 2004 primarily differed as a result of the $.50 per share increase in the extra dividend paid during those periods.

        Working capital decreased by $13,162,000 to $195,610,000 at April 3, 2005. The Company’s current ratio was 5.9 to 1.0 at April 3, 2005, compared to 5.3 to 1.0 at December 31, 2004.

        As of April 3, 2005, there were approximately $6,000,000 of open equipment purchase commitments to expand the product line in its absorbent products segment. The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions as well as continue to make capital investments in these segments 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 company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings. 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.

        The Company may have additional plant closing costs but is not aware of any such costs. However, plant closing activities of this nature are unique and infrequent for the Company; therefore, these activities possess inherent risk that errors in the estimation process could occur. Subject to the foregoing estimation risk, no major plant closing related expenses are expected in 2005.

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 inventory as a result of low or diminishing demand for a product. The Company did not have any major new product introductions or morbidity issues in the current period and, accordingly, 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.

Insurance:   The Company is subject to product liability claims in the normal course of business and is self-insured for health care costs. The Company insures for product liability claims and retains a self-insured retention insurance accrual in the Company’s financial statements. The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual. An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition.

Environmental:   In May 1986, the Company’s Eau Claire, Wisconsin, site was placed on the United States Environmental Protection Agency’s National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 because of hazardous waste deposited on the property. By December 31, 1998, all remediation projects had been installed, were fully operational, and restoration activities had been completed and accrued liabilities established for the expected cost of the activity. The Company believes its accrued liability reserve will be adequate to satisfy ongoing remediation operations and monitoring activities; however, should environmental agencies require additional studies or remediation projects, it is possible the existing accrual could be inadequate. The Company’s current environmental liability is based upon estimates of the future costs to maintain and operate remediation projects and monitor their results based upon historical costs incurred for such activities.

NEW ACCOUNTING PRONOUNCEMENTS

Please refer to Note H 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 include money market funds and 7-day variable rate demand notes which are highly liquid instruments with interest rates set every 7 days that can be tendered to the remarketer upon 7 days notice for payment of principal and accrued interest amounts. The 7 day tender feature of these variable rate demand notes are 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’s investments are held primarily in fixed and variable rate municipal bonds with an average life of less than one year. 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 2005, 2004, and 2003.

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 under the Securities Exchange Act of 1934 (the “1934 Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

        There have been no changes in internal controls over financial reporting during the fiscal quarter ended April 3, 2005, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

        See Note E in the Notes to Consolidated Financial Statements set forth under Part I – Item 1 above.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

        There were no purchases or sales of securities during the quarter ended April 3, 2005.

Item 6.   Exhibits and Reports on Form 8-K

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.
Exhibit Index