NATIONAL PRESTO INDUSTRIES INC - Quarter Report: 2014 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q |
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 28, 2014
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
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NATIONAL PRESTO INDUSTRIES, INC.
(Exact name of registrant
as specified in its charter)
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WISCONSIN |
39-0494170 |
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(State
or other jurisdiction of incorporation |
(I.R.S. Employer Identification No.) |
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3925 NORTH HASTINGS WAY |
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EAU CLAIRE, WISCONSIN |
54703-3703 |
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(Address of principal executive offices) |
(Zip Code) |
(Registrant’s telephone number, including area code) 715-839-2121
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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 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 x No o
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
There were 6,914,502 shares of the Issuer’s Common Stock outstanding as of November 1, 2014.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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September 28, 2014 and December 31, 2013 |
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(Unaudited) |
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(Dollars in thousands) |
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2014 |
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2013 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
25,289 |
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$ |
22,953 |
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Marketable securities |
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20,625 |
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36,404 |
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Accounts receivable, net |
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50,265 |
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84,322 |
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Inventories: |
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Finished goods |
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$ |
45,228 |
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$ |
36,078 |
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Work in process |
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58,086 |
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49,690 |
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Raw materials |
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10,126 |
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6,746 |
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Supplies |
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69 |
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113,509 |
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— |
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92,514 |
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Deferred tax assets |
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8,083 |
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8,083 |
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Income tax receivable |
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6,492 |
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213 |
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Other current assets |
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16,516 |
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19,584 |
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Total current assets |
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240,779 |
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264,073 |
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PROPERTY, PLANT AND EQUIPMENT |
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168,447 |
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155,872 |
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Less allowance for depreciation |
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73,402 |
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95,045 |
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66,283 |
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89,589 |
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GOODWILL |
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11,485 |
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11,485 |
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INTANGIBLE ASSETS, net |
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16,183 |
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24,698 |
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NOTE RECEIVABLE |
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3,786 |
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3,695 |
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$ |
367,278 |
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$ |
393,540 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
2
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NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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September 28, 2014 and December 31, 2013 |
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(Unaudited) |
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(Dollars in thousands) |
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2014 |
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2013 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
33,161 |
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$ |
38,323 |
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Accrued liabilities |
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14,809 |
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15,907 |
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Total current liabilities |
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47,970 |
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54,230 |
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DEFERRED INCOME TAXES |
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6,759 |
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6,759 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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Common stock, $1 par value: |
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Authorized: 12,000,000 shares |
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Issued: 7,440,518 shares |
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$ |
7,441 |
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$ |
7,441 |
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Paid-in capital |
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5,654 |
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4,998 |
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Retained earnings |
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315,941 |
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336,895 |
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Accumulated other comprehensive income |
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8 |
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8 |
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329,044 |
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349,342 |
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Treasury stock, at cost |
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16,495 |
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16,791 |
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Total stockholders’ equity |
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312,549 |
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332,551 |
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$ |
367,278 |
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$ |
393,540 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
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NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
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Three and Nine Months Ended September 28, 2014 and September 29, 2013 |
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(Unaudited) |
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(In thousands except per share data) |
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Three Months Ended |
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Nine Months Ended |
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2014 |
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2013 |
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2014 |
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2013 |
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Net sales |
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$ |
95,463 |
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$ |
100,612 |
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$ |
270,329 |
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$ |
285,198 |
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Cost of sales |
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79,298 |
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80,962 |
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222,302 |
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230,928 |
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Gross profit |
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16,165 |
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19,650 |
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48,027 |
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54,270 |
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Selling and general expenses |
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5,625 |
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5,627 |
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18,360 |
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16,737 |
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Intangibles amortization |
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2,692 |
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167 |
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8,516 |
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500 |
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Operating profit |
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7,848 |
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13,856 |
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21,151 |
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37,033 |
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Other income |
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41 |
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153 |
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353 |
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508 |
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Earnings before provision for income taxes |
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7,889 |
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14,009 |
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21,504 |
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37,541 |
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Income tax provision |
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2,766 |
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4,994 |
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7,520 |
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13,371 |
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Net earnings |
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$ |
5,123 |
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$ |
9,015 |
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$ |
13,984 |
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$ |
24,170 |
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Weighted average shares outstanding: |
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Basic and diluted |
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6,932 |
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6,907 |
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6,927 |
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6,905 |
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Net earnings per share: |
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Basic and diluted |
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$ |
0.74 |
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$ |
1.31 |
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$ |
2.02 |
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$ |
3.50 |
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Comprehensive income: |
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Net earnings |
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$ |
5,123 |
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$ |
9,015 |
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$ |
13,984 |
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$ |
24,170 |
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Other comprehensive income (loss), net of tax: |
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Unrealized gain (loss) on available-for-sale securities |
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(3 |
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(7 |
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— |
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(27 |
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Comprehensive income |
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$ |
5,120 |
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$ |
9,008 |
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$ |
13,984 |
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$ |
24,143 |
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Cash dividends declared and paid per common share* |
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$ |
0.00 |
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$ |
0.00 |
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$ |
5.05 |
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$ |
0.00 |
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* An accelerated payment was 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 for 2013. In contrast, the annual 2014 dividend payment was made during the first quarter of 2014.
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
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NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES |
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CONSOLIDATED STATEMENTS OF CASH FLOWS |
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Nine Months Ended September 28, 2014 and September 29, 2013 |
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(Unaudited) |
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(Dollars in thousands) |
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2014 |
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2013 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
13,984 |
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$ |
24,170 |
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Adjustments to reconcile net earnings to net |
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cash provided by operating activities, net of acquisition related assets: |
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Provision for depreciation |
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7,198 |
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6,241 |
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Intangibles amortization |
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8,516 |
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|
500 |
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Provision for doubtful accounts |
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424 |
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319 |
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Other |
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|
470 |
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260 |
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Changes in: |
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Accounts receivable |
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35,131 |
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14,781 |
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Inventories |
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(16,307 |
) |
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(27,879 |
) |
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Other current assets |
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3,096 |
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(3,543 |
) |
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Accounts payable and accrued liabilities |
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(6,703 |
) |
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1,507 |
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Federal and state income taxes |
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(6,277 |
) |
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(580 |
) |
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Net cash provided by operating activities |
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39,532 |
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|
15,776 |
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Cash flows from investing activities: |
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Marketable securities purchased |
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(2,833 |
) |
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(6,151 |
) |
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Marketable securities - maturities and sales |
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18,613 |
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17,373 |
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Acquisition of property, plant and equipment |
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(8,154 |
) |
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(18,055 |
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Acquisition of businesses, net of cash acquired |
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(10,534 |
) |
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— |
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Sale of property, plant and equipment |
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304 |
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8 |
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Net cash used in investing activities |
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(2,604 |
) |
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(6,825 |
) |
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Cash flows from financing activities: |
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Dividends paid |
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(34,954 |
) |
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— |
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Other |
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|
362 |
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— |
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Net cash used in financing activities |
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(34,592 |
) |
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— |
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Net increase in cash and cash equivalents |
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2,336 |
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|
8,951 |
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Cash and cash equivalents at beginning of period |
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22,953 |
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|
37,437 |
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Cash and cash equivalents at end of period |
|
$ |
25,289 |
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$ |
46,388 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
NATIONAL PRESTO
INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A – BASIS OF PRESENTATION
The consolidated interim financial statements included herein are unaudited and
have been prepared by the Company pursuant to the rules and regulations of the
United States Securities and Exchange Commission (“SEC”). In the opinion of
management of the Company, the consolidated interim financial statements
reflect all the adjustments which were of a normal recurring nature necessary for
a fair presentation of the results of the interim periods. The condensed
consolidated balance sheet as of December 31, 2013 is summarized from
consolidated financial statements, but does not include all the disclosures
contained therein and should be read in conjunction with the 2013 Annual Report
on Form 10-K. Interim results for the period are not indicative of those for
the year.
NOTE B – RECLASSIFICATIONS
Certain reclassifications have been made to the prior
periods’ 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 – EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares and participating securities outstanding during the period. Diluted
earnings per share also includes the dilutive effect of additional potential
common shares issuable. Unvested stock awards, which contain non-forfeitable
rights to dividends whether paid or unpaid (“participating securities”), are
included in the number of shares outstanding for both basic and diluted
earnings per share calculations.
6
NOTE D – 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
/ |
|
Defense |
|
Absorbent
|
|
Total |
|
||||
|
Quarter ended September 28, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales |
|
$ |
28,264 |
|
$ |
52,657 |
|
$ |
14,542 |
|
$ |
95,463 |
|
|
Gross profit |
|
|
5,166 |
|
|
13,084 |
|
|
(2,085 |
) |
|
16,165 |
|
|
Operating profit |
|
|
2,841 |
|
|
7,678 |
|
|
(2,671 |
) |
|
7,848 |
|
|
Total assets |
|
|
152,414 |
|
|
151,867 |
|
|
62,997 |
|
|
367,278 |
|
|
Depreciation and amortization |
|
|
236 |
|
|
3,326 |
|
|
1,615 |
|
|
5,177 |
|
|
Capital expenditures |
|
|
172 |
|
|
291 |
|
|
2,738 |
|
|
3,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 29, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales |
|
$ |
29,394 |
|
$ |
52,453 |
|
$ |
18,765 |
|
$ |
100,612 |
|
|
Gross profit |
|
|
6,731 |
|
|
12,922 |
|
|
(3 |
) |
|
19,650 |
|
|
Operating profit |
|
|
4,104 |
|
|
10,380 |
|
|
(628 |
) |
|
13,856 |
|
|
Total assets |
|
|
202,866 |
|
|
115,437 |
|
|
61,053 |
|
|
379,356 |
|
|
Depreciation and amortization |
|
|
260 |
|
|
520 |
|
|
1,447 |
|
|
2,227 |
|
|
Capital expenditures |
|
|
164 |
|
|
2,519 |
|
|
1,947 |
|
|
4,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
||||||||||
|
|
|
Housewares
/ |
|
Defense |
|
Absorbent
|
|
Total |
|
||||
|
Nine Months ended September 28, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales |
|
$ |
69,576 |
|
$ |
151,313 |
|
$ |
49,440 |
|
$ |
270,329 |
|
|
Gross profit |
|
|
13,363 |
|
|
37,589 |
|
|
(2,925 |
) |
|
48,027 |
|
|
Operating profit |
|
|
5,223 |
|
|
20,724 |
|
|
(4,796 |
) |
|
21,151 |
|
|
Total assets |
|
|
152,414 |
|
|
151,867 |
|
|
62,997 |
|
|
367,278 |
|
|
Depreciation and amortization |
|
|
721 |
|
|
10,454 |
|
|
4,539 |
|
|
15,714 |
|
|
Capital expenditures |
|
|
491 |
|
|
1,180 |
|
|
6,483 |
|
|
8,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 29, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales |
|
$ |
78,772 |
|
$ |
149,920 |
|
$ |
56,506 |
|
$ |
285,198 |
|
|
Gross profit |
|
|
15,762 |
|
|
36,456 |
|
|
2,052 |
|
|
54,270 |
|
|
Operating profit |
|
|
7,474 |
|
|
29,153 |
|
|
406 |
|
|
37,033 |
|
|
Total assets |
|
|
202,866 |
|
|
115,437 |
|
|
61,053 |
|
|
379,356 |
|
|
Depreciation and amortization |
|
|
817 |
|
|
1,741 |
|
|
4,183 |
|
|
6,741 |
|
|
Capital expenditures |
|
|
442 |
|
|
8,817 |
|
|
8,796 |
|
|
18,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
NOTE E - 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 F - 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. The Company deposits its cash in high quality
financial institutions. The balances, at times, may exceed federally insured
limits. 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).
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.
At September 28, 2014 and December 31, 2013, 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 following table. All of the Company’s marketable securities are classified as Level 2, as defined by FASB ASC 820, with fair values determined using significant other observable inputs, which include quoted prices in markets that are not active, quoted prices of similar securities, recently executed transactions, broker quotations, and other inputs that are observable. There were no transfers into or out of Level 2 during the nine months ended September 28, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
||||||||||
|
|
|
MARKETABLE SECURITIES |
|
||||||||||
|
|
|
Amortized
|
|
Fair Value |
|
Gross
|
|
Gross |
|
||||
|
September 28, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt Municipal Bonds |
|
$ |
6,549 |
|
$ |
6,561 |
|
$ |
12 |
|
$ |
— |
|
|
Variable Rate Demand Notes |
|
|
14,064 |
|
|
14,064 |
|
|
— |
|
|
— |
|
|
Total Marketable Securities |
|
$ |
20,613 |
|
$ |
20,625 |
|
$ |
12 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt Municipal Bonds |
|
$ |
20,813 |
|
$ |
20,825 |
|
$ |
18 |
|
$ |
6 |
|
|
Variable Rate Demand Notes |
|
|
15,579 |
|
|
15,579 |
|
|
— |
|
|
— |
|
|
Total Marketable Securities |
|
$ |
36,392 |
|
$ |
36,404 |
|
$ |
18 |
|
$ |
6 |
|
8
Proceeds from maturities and sales of available-for-sale securities totaled $4,225,000 and $723,000 for the three month periods ended September 28, 2014 and September 29, 2013, and totaled $18,613,000 and $17,373,000 for the nine months 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 other comprehensive income were $(5,000) and $(12,000) before taxes for the three month periods ended September 28, 2014 and September 29, 2013, and were $1,000 and $(42,000) before taxes for the nine month periods then ended, respectively. No unrealized gains or losses were reclassified out of accumulated other comprehensive income during the same periods.
The contractual maturities of the marketable securities held at September 28, 2014 are as follows: $4,354,000 within one year;$3,177,000 beyond one year to five years;$6,448,000 beyond five years to ten years, and $6,646,000 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 G – 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 H – BUSINESS ACQUISITION
On January
24, 2014, AMTEC Corporation, a wholly-owned subsidiary of the Company,
purchased substantially all of the assets of Chemring Energetic Devices, Inc.’s
business located in Clear Lake, South Dakota, and all of the real property
owned by Technical Ordnance Realty, LLC. The Clear Lake facility is a
manufacturer of detonators, booster pellets, release cartridges, lead azide,
and other military energetic devices and materials. Its major customers include
U.S. and foreign government agencies, AMTEC Corporation, and other defense
contractors. The acquisition of the Clear Lake facility will serve to
complement the Defense segment’s existing line of products. The total
consideration transferred was $10,534,000, consisting of $10,000,000 of cash
paid at closing, and an additional cash payment of $534,000, which was made
during the second quarter of 2014.
The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The following table shows the amounts recorded as of the acquisition date. The allocation differs from what was previously reported due to a final true up during the second quarter of 2014, the amount of which was not significant.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Receivables |
|
$ |
1,498 |
|
|
Inventory |
|
|
4,688 |
|
|
Other current assets |
|
|
28 |
|
|
Property, plant and equipment |
|
|
4,800 |
|
|
Total assets acquired |
|
|
11,014 |
|
|
Less: Current liabilities assumed |
|
|
480 |
|
|
Net assets acquired |
|
$ |
10,534 |
|
The amount shown above for receivables represents the gross accounts receivable from the sales of goods, net of an allowance for doubtful accounts of $20,000.
9
The Company’s results of operations for the third quarter of 2014 includes revenue of $5,294,000 and earnings of $171,000 from the acquired facility, and revenue of $11,301,000 and earnings of $876,000 from the acquired facility from the date of acquisition through September 28, 2014. The following pro forma condensed consolidated results of operations has been prepared as if the acquisition had occurred as of January 1, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
||||||||||
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 28, 2014 |
|
September 29, 2013 |
|
September 28, 2014 |
|
September 29, 2013 |
|
||||
|
|
|||||||||||||
|
Net sales |
|
$ |
95,463 |
|
$ |
104,397 |
|
$ |
270,964 |
|
$ |
298,098 |
|
|
Net earnings |
|
|
5,123 |
|
|
8,626 |
|
|
13,704 |
|
|
23,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share (basic and diluted) |
|
$ |
0.74 |
|
$ |
1.25 |
|
$ |
1.98 |
|
$ |
3.47 |
|
|
Weighted average shares outstanding (basic and diluted) |
|
|
6,932 |
|
|
6,907 |
|
|
6,927 |
|
|
6,905 |
|
The unaudited pro forma financial information presented above is not intended to represent or be indicative of what would have occurred if the transactions had taken place on the dates presented and is not indicative of what the Company’s actual results of operations would have been had the acquisitions been completed at the beginning of the periods indicated above. Further, the pro forma combined results do not reflect one-time costs to fully merge and operate the combined organization more efficiently, or anticipated synergies expected to result from the combination and should not be relied upon as being indicative of the future results that the Company will experience.
NOTE I – RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENT
In May 2014,
the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) which
amended the existing accounting standards for revenue recognition. ASU 2014-09
establishes principles for recognizing revenue upon the transfer of promised
goods or services to customers, in an amount that reflects the expected
consideration received in exchange for those goods or services. It is effective
for annual reporting periods beginning after December 15, 2016. Early adoption
is not permitted. The amendments may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of
the date of initial application. The Company is currently in the process of
evaluating the impact of adoption of the ASU on its consolidated financial
statements, but does not expect the impact to be material.
10
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 2013 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 20, 2014, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to consolidated financial statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending, and funding of government contracts, which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the efficient start-up and utilization of capital equipment investments; and political actions of federal and state governments which could have an impact on everything from the value of the U.S dollar vis-à-vis other currencies to the availability of affordable labor and energy. Additional information concerning these and other factors is contained in the Company’s Securities and Exchange Commission filings.
Comparison of Third Quarter 2014 and 2013
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 September 28, 2014 and September 29, 2013.
On a consolidated basis, sales decreased by $5,149,000 (5%), gross profit decreased by $3,485,000 (18%), selling and general expenses decreased by $2,000 (0%), intangibles amortization increased by $2,525,000 (1,512%) and other income decreased by $112,000 (73%). Earnings before the provision for income taxes decreased by $6,120,000 (44%), as did net earnings by $3,892,000 (43%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $1,130,000 from $29,394,000 to $28,264,000, or 4%, chiefly attributable to a decrease in shipments. Defense net sales increased nominally by $204,000 from $52,453,000 to $52,657,000. Absorbent Products net sales decreased by $4,223,000 from $18,765,000 to $14,542,000, or 23%, which was largely attributable to a reduction of shipments due to the ongoing shift in the segment’s customer base.
Housewares/Small Appliance gross profit decreased $1,565,000 from $6,731,000 to $5,166,000, primarily reflecting the decrease in sales mentioned above and differences in the timing of inventory purchases. Defense gross profit was essentially flat. Absorbent Products gross profit dropped from a loss of $3,000 to a loss of $2,085,000, primarily reflecting the decrease in sales mentioned above, increased material costs, and costs associated with the installation and startup of new capital equipment.
Selling and general expenses for the Housewares/Small Appliance segment decreased $302,000, primarily reflecting decreased product liability insurance accruals of $462,000, partially offset by increased employee compensation and benefit accruals of $152,000. Defense segment selling and general expenses increased by $339,000, primarily reflecting ongoing operational costs associated with the acquisition of substantially all of the assets from Chemring Energetic Devices, Inc.’s business, as described in Note H to the Consolidated Financial Statements in Part I of this Form 10-Q (“Tech Ord”). Absorbent Products segment selling and general expenses were essentially flat.
11
Intangibles amortization increased by $2,525,000, primarily reflecting the amortization of the customer contract intangible asset corresponding to the quarter’s shipment of a portion of the backlog acquired from DSE, Inc., one of the Company’s competitors in the Defense segment, which is described in Note Q to the Company’s Consolidated Financial Statements for the year ended December 31, 2013 on Form 10-K. For the quarter ended September 28, 2014, the Company recorded amortization expense of $2,490,000 associated with the customer contract intangible asset.
The above items were responsible for the change in operating profit.
Earnings before provision for income taxes decreased $6,120,000 from $14,009,000 to $7,889,000. The provision for income taxes decreased from $4,994,000 to $2,766,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $3,892,000 from $9,015,000 to $5,123,000, or 43%.
Comparison of First Nine Months 2014 and 2013
Readers are directed to Note D to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the first nine months ended September 28, 2014 and September 29, 2013.
On a consolidated basis, sales decreased by $14,869,000 (5%), gross profit decreased by $6,243,000 (12%), selling and general expenses increased by $1,623,000 (10%), intangibles amortization increased by $8,016,000 (1,603%) and other income decreased by $155,000 (31%). Earnings before the provision for income taxes decreased by $16,037,000 (43%), as did net earnings by $10,186,000 (42%). Details concerning these changes can be found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $9,196,000 from $78,772,000 to $69,576,000, or 12%, primarily reflecting a decrease in shipments. Defense net sales increased by $1,393,000 from $149,920,000 to $151,313,000, or 1%, reflecting increases in unit sales of non 40mm ammunition, offset by decreases in sales of 40mm ammunition and cartridge cases. Absorbent Products net sales decreased by $7,066,000 from $56,506,000 to $49,440,000, or 13%, which was largely attributable to the ongoing shift in the segment’s customer base.
Housewares/Small Appliance gross profit decreased $2,399,000 from $15,762,000 to $13,363,000, or 15%, primarily reflecting the decrease in sales mentioned above and differences in the timing of inventory purchases, offset in part by an adjustment to the warranty accrual. Defense gross profit increased $1,133,000 from $36,456,000 to $37,589,000, or 3%, primarily attributable to the increase in sales mentioned above, augmented by an improved product mix. Absorbent Products gross profit decreased $4,977,000 from a $2,052,000 profit to a $2,925,000 loss, primarily reflecting the decrease in sales mentioned above, increased material costs, cost associated with the installation of new capital equipment, and the absence of the prior year’s insurance settlement of $553,000.
Selling and general expenses for the Housewares/Small Appliance segment decreased nominally by $148,000. Defense segment selling and general expenses increased by $1,546,000, primarily reflecting ongoing operational costs of $780,000 associated with the acquisition of substantially all of the assets from Chemring Energetic Devices, Inc.’s business, as described in Note H to the Consolidated Financial Statements in Part I of this Form 10-Q (“Tech Ord”), increased employee compensation and benefit costs of $650,000, and increased reserves for doubtful accounts of $182,000. Absorbent Products segment selling and general expenses increased $225,000, reflecting increased selling expense of $130,000 related to the segment’s customer diversification program. The balance of the increase primarily reflected the absence of the prior period’s favorable adjustments to the segment’s expenses classified as administrative that related to a royalty arrangement with an independent manufacturing facility. A description of the Company’s relationship with the facility can be found in Note S to the Company’s Consolidated Financial Statements for the year ended December 31, 2013 on Form 10-K.
12
Intangibles amortization increased by $8,016,000, primarily reflecting the amortization of the customer contract intangible asset corresponding to the first nine months’ shipment of a portion of the backlog acquired from DSE, Inc., one of the Company’s competitors in the Defense segment, which is described in Note Q to the Company’s Consolidated Financial Statements for the year ended December 31, 2013 on Form 10-K. For the nine months ended September 28, 2014, the Company recorded amortization expense of $7,888,000 associated with the customer contract intangible asset.
The above items were responsible for the change in operating profit.
Earnings before provision for income taxes decreased $16,037,000 from $37,541,000 to $21,504,000. The provision for income taxes decreased from $13,371,000 to $7,520,000, primarily reflecting a decrease in taxable earnings. Net earnings decreased $10,186,000 from $24,170,000 to $13,984,000, or 42%.
Liquidity and Capital Resources
Net cash provided by operating activities was $39,532,000 and $15,776,000 for the nine months ended September 28, 2014 and September 29, 2013, 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 2014 were net earnings of $13,984,000, which included total non-cash depreciation and amortization expenses of $15,714,000, a decrease in accounts receivable levels stemming from cash collections on customer sales, and a decrease in deposits made with raw material suppliers included in other current assets. These were partially offset by a decrease in payable and accrual levels and an increase in inventory levels. Of particular note during the first nine months of 2013 were net earnings of $24,170,000, which included total non-cash depreciation and amortization expenses of $6,741,000; a decrease in accounts receivable levels stemming from cash collections on customer sales; and a net increase in payable and accrual levels; partially offset by increases in inventory levels and deposits made with raw material suppliers included in other current assets.
Net cash used in investing activities was $2,604,000 during the first nine months of 2014 compared to $6,825,000 used in investing activities during the first nine months of 2013. The change in investing activity cash flow is primarily attributable to the acquisition of substantially all of the assets from Chemring Energetic Devices, Inc.’s business located in Clear Lake, South Dakota and the real property owned by Technical Ordnance Realty, LLC during the first quarter of 2014 mentioned above; an increase in net proceeds from marketable securities activity; and a decrease in the acquisition of property, plant, and equipment.
Cash flows from financing activities for the first nine months of 2014 and 2013 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 2014 dividend payment was made during the first quarter of 2014.
Working capital decreased by $17,034,000 during the first nine months of 2014 to $192,809,000 at September 28, 2014 for the reasons stated above. The Company’s current ratio was 5.0 to 1.0 at September 28, 2014 and 4.9 to 1.0 at December 31, 2013.
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 per existing authorized projects and for additional projects, if the appropriate return on investment is projected.
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The Company has substantial liquidity in the form of cash and cash equivalents and marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund future 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.
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 period,
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 a health care claim reaches 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 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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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 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 seven days that can be tendered to the trustee or remarketer upon seven days notice for payment of principal and accrued interest amounts. The seven-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 1.1 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. As the majority of the Housewares/Small Appliance segment’s suppliers are located in China, periodic changes in the U.S. dollar and Chinese Renminbi (RMB) exchange rates do have an impact on that segment’s product costs. It is anticipated that any potential material impact from fluctuations in the exchange rate will be to the cost of products secured via purchase orders issued subsequent to the revaluation.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “1934 Act”) as of September 28, 2014. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of that date.
There were no changes to internal controls over financial reporting during the quarter ended September 28, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note G to the Consolidated Financial Statements set forth under Part I - Item 1 above.
Item 6. Exhibits
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Exhibit 3(i) |
Restated Articles of Incorporation - incorporated by reference from Exhibit 3 (i) of the Company’s annual report on Form 10-K for the year ended December 31, 2005 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Exhibit 31.1 |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2 |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1 |
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.2 |
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 101 |
The following financial information from National Presto Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended September 28, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.* |
*The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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NATIONAL PRESTO INDUSTRIES, INC. |
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/s/ Maryjo Cohen |
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Maryjo Cohen, Chair of the Board, |
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President, Chief Executive Officer |
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(Principal Executive Officer), Director |
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/s/ Randy F. Lieble |
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Randy F. Lieble, Director, Vice President, |
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Chief Financial Officer (Principal |
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Financial Officer), Treasurer |
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Date: November 7, 2014 |
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National Presto
Industries, Inc.
Exhibit Index
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Exhibit |
Exhibit Description |
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31.1 |
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101 |
The following financial information from National Presto Industries, Inc.’s Quarterly Report on Form 10-Q for the period ended September 28, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.* |
*The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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