NATIONAL PRESTO INDUSTRIES INC - Quarter Report: 2021 October (Form 10-Q)

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

October 3, 2021 and December 31, 2020

(Dollars in thousands)

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

October 3, 2021 and December 31, 2020

(Dollars in thousands)

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

Three and Nine Months Ended October 3, 2021 and September 27, 2020

(Unaudited) 

(In thousands except per share data) 

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

Nine Months Ended October 3, 2021 and September 27, 2020

(Unaudited) 

(Dollars in thousands) 



 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Nine Months Ended October 3, 2021 and September 27, 2020

(Unaudited) 

(In thousands except per share data) 

 



The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

 

NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED 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 of 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, 2020 is summarized from audited consolidated financial statements, but does not include all the disclosures contained therein and should be read in conjunction with the 2020 Annual Report on Form 10-K.  Interim results for the period are not indicative of those for the year.

 

NOTE B – GENERAL

Government responses to the COVID-19 virus have impacted worldwide economic activity.  The Company continues to monitor the impact of the pandemic on all aspects of its business, including effects on employees, customers, suppliers, and the global economy and will adjust procedures accordingly.  All of the Company’s businesses are deemed essential and as a result, all have been and are currently operating.  The COVID-19 related edicts and guidelines continue to affect each segment in a variety of fashions, which include material and labor shortages, contributing to increased material and labor costs as well as difficulty in securing needed products and components; congestion throughout the supply chain resulting in sizable delays; increased absenteeism; limited opportunities to meet with customers/suppliers; as well as inefficiencies inherent when dealing with suppliers and customers that continue to work from home.  The extent to which the various responses to the COVID-19 pandemic impact the Company’s business for the remainder of 2021 and beyond will depend on future developments that are highly uncertain and cannot be predicted.

 

In response to the government mandated COVID-19 shutdowns, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020.  The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP).  The CARES Act did not have a material impact on the Company’s income tax provision for the three months or nine months ended October 3, 2021.  

 

NOTE C – REVENUES

The Company’s revenues are derived from short-term contracts and programs that are typically completed within 3 to 24 months and are recognized in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The Company’s contracts generally contain one or more performance obligations: the physical delivery of distinct ordered product or products.  The Company provides an assurance type product warranty on its products to the original owner.  In addition, for the Housewares/Small Appliances segment, the Company estimates returns of seasonal products and returns of newly introduced products sold with a return privilege.  Stand-alone selling prices are set forth in each contract and are used to allocate revenue to the corresponding performance obligations.  For the Housewares/Small Appliances segment, contracts include variable consideration, as the prices are subject to customer allowances, which principally consist of allowances for cooperative advertising, defective product, and trade discounts.  Customer allowances are generally allocated to the performance obligations based on budgeted rates agreed upon with customers, as well as historical experience, and yield the Company’s best estimate of the expected value for the variable consideration.

 

The Company's contracts in the Defense segment are primarily with the U.S. Department of Defense (DOD) and DOD prime contractors. As a consequence, this segment's business essentially depends on the product needs and governmental funding of the DOD. Substantially all of the work performed by the Defense segment directly or indirectly for the DOD is performed on a fixed-price basis. Under fixed-price contracts, the price paid to the contractor is awarded based on competition at the outset of the contract and therefore, with the exception of limited escalation provisions on specific materials, is generally not subject to any adjustments reflecting the actual costs incurred by the contractor.

 

For the Housewares/Small Appliance segment, revenue is generally recognized as the completed, ordered product is shipped to the customer from the Company’s warehouses.  For the relatively few situations in which revenue should be recognized when product is received by the customer, the Company adjusts revenue accordingly.  For the Defense segment, revenue is primarily recognized when the customer has legal title and formally documents that it has accepted the products.  There are also certain termination clauses in Defense segment contracts that may give rise to an over-time pattern of recognition of revenue in the absence of alternative use of the product.  In some situations, the customer may obtain legal title and accept the products at the Company’s facilities, arranging for transportation at a later date, typically in one to four weeks.  The Company does not consider the short-term storage of the customer owned products to be a material performance obligation, and no part of the transaction price is allocated to it.

The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, and customer advances and deposits (contract liabilities) on the Company’s Condensed Consolidated Balance Sheets. For the Defense segment, the Company occasionally receives advances or deposits from certain customers before revenue is recognized, resulting in contract liabilities.  These advances or deposits do not represent a significant financing component.  As of October 3, 2021 and December 31, 2020, $2,068,000 and $4,723,000, respectively, of contract liabilities were included in Accounts Payable on the Company’s Condensed Consolidated Balance Sheets.  The Company recognized revenue of $3,222,000 during the nine-month period ended October 3, 2021 that was included in the Defense segment contract liability at the beginning of that period. The Company monitors its estimates of variable consideration, which includes customer allowances for cooperative advertising, defective product, and trade discounts, and returns of seasonal and newly introduced product, all of which pertain to the Housewares/Small Appliances segment, and periodically makes cumulative adjustments to the carrying amounts of these contract liabilities as appropriate.  During the nine month periods ended October 3, 2021 and September 27, 2020, the Company reduced its estimate of returns of seasonal and newly introduced product by $138,000 and $421,000, respectively with no adjustments during the three month periods then ended.  There were no other material adjustments to the aforementioned estimates during the same periods.  There were no amounts of revenue recognized during the same periods related to performance obligations satisfied in a previous period.  The portion of contract transaction prices allocated to unsatisfied performance obligations, also known as the contract backlog, in the Company’s Defense segment were $474,752,000 and $320,214,000 as of October 3, 2021 and December 31, 2020, respectively.  The Company anticipates that the unsatisfied performance obligations (contract backlog) will be fulfilled in an 18 to 24-month period.  The performance obligations in the Housewares/Small Appliances segment have original expected durations of less than one year.

 

The Company’s principal sources of revenue are derived from three segments: Housewares/Small Appliance, Defense, and Safety, as shown in Note E. Management utilizes the performance measures by segment to evaluate the financial performance of and make operating decisions for the Company.

 

NOTE D – 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. 

 

NOTE E – BUSINESS SEGMENTS 

In the following summary, operating profit represents earnings before other income and income taxes.  The Company's segments operate discretely from each other with no shared owned or leased 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.

 



NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company utilizes the methods of fair value as described in FASB 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 amounts for cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and accrued liabilities approximate fair value due to the immediate or short-term maturity of these financial instruments.  See Note G for fair value information on marketable securities.

 

NOTE G - 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 estimated 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 October 3, 2021 and December 31, 2020, 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.

 

 

Proceeds from maturities and sales of available-for-sale securities totaled $9,127,000 and $23,224,000 for the three month periods ended October 3, 2021 and September 27, 2020, respectively, and totaled $35,537,000 and $41,859,000 for the nine month periods then ended, respectively.  There were no gross gains or losses related to sales of marketable securities during the same periods.  Net unrealized (losses) gains included in other comprehensive income were ($28,000) and ($81,000) before taxes for the three month periods ended October 3, 2021 and September 27, 2020, respectively and were ($134,000) and $119,000 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 October 3, 2021 are as follows: $6,403,000 within one year; $1,485,000 beyond one year to five years; $4,175,000 beyond five years to ten years, and $21,250,000 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 H – OTHER ASSETS

Other Assets includes prepayments that are made from time to time by the Company for certain materials used in the manufacturing process in the Housewares/Small Appliances segment.  The Company expects to utilize the prepayments and related materials over an estimated period of two years.  As of October 3, 2021 and December 31, 2020, $8,711,000 and $11,217,000 of such prepayments, respectively, remained unused and outstanding.  At  October 3, 2021 and December 31, 2020, $4,361,000 and $4,311,000 of those payments, respectively were included in Other Current Assets, representing the Company’s best estimate of the expected utilization of the prepayments and related materials during the twelve-month periods following those dates.

 

NOTE I – LEASES

The Company accounts for leases under ASC Topic 842, Leases.  The Company’s leasing activities include roles as both lessee and lessor.  As lessee, the Company’s primary leasing activities include buildings and structures to support its manufacturing operations at one location in its Defense segment, and warehouse space and equipment to support its distribution center operations in its Housewares/Small Appliances segment.  As lessor, the Company’s primary leasing activity is comprised of manufacturing and office space located adjacent to its corporate offices.  All of the Company’s leases are classified as operating leases.

 

The Company’s leases as lessee in its Defense segment provide for variable lease payments that are based on changes in the Consumer Price Index.  As lessor, the Company’s primary lease also provides for variable lease payments that are based on changes in the Consumer Price Index, as well as on increases in costs of insurance, real estate taxes, and utilities related to the leased space. Generally, all of the Company’s lease contracts include options for extensions and early terminations.  The majority of lease terms of the Company’s lease contracts recognized on the balance sheet reflect extension options, while none reflect early termination options.

 

The Company has determined that the rates implicit in its leases are not readily determinable and therefore, estimates its incremental borrowing rates utilizing quotes from financial institutions for real estate and equipment, as applicable, over periods of time similar to the terms of its leases. The Company has entered into various short-term (12 months or less) leases as lessee and has elected a non-recognition accounting policy, as permitted by ASC Topic 842.

Operating cash used for operating leases was $300,000 and $894,000 for the three and nine months ended October 3, 2021, respectively.  The weighted-average remaining lease term was 22.7 years, and the weighted-average discount rate was 4.6% as of October 3, 2021.

 

Maturities of operating lease liabilities are as follows:

 

 

Lease income from operating lease payments was $464,000 and $463,000 for the quarters ended October 3, 2021 and September 27, 2020, respectively and $1,392,000 and $1,389,000 for the nine month periods then ended, respectively.  Undiscounted cash flows provided by lease payments are expected as follows:



 

The Company considers risk associated with the residual value of its leased real property to be low, given the nature of the long-term lease agreement, the Company’s ability to control the maintenance of the property, and the creditworthiness of the lessee.  The residual value risk is further mitigated by the long-lived nature of the property, and the propensity of such assets to hold their value or, in some cases, appreciate in value.

 

 

NOTE J – 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. 

In the state of Mississippi, inventory that is shipped out of state that is held in a licensed Free Port Warehouse is exempt from personal property taxes.  One of the Company's subsidiaries operates in Hinds County, Mississippi.  That subsidiary has submitted its Hinds County Free Port Warehouse tax filing for approximately 40 years.  Each year, the county then assessed the subsidiary in accordance with the Company's filing.  However, in June 2020, the Hinds County tax assessor notified the Company that the county had no record of a Free Port Warehouse License and issued an assessment totaling $2,506,000, reflecting personal property tax going back seven years.  The Company intends to vigorously fight the assessment, and does not consider the ultimate payment of the taxes to be probable.  Accordingly, as prescribed by ASC 450 - Contingencies, no accrual has been recorded on the Company's consolidated financial statements as of October 3, 2021.



NOTE K – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, Income Taxes, and providing for simplification in several other areas.  The standard became effective for fiscal years beginning after December 15, 2020.  The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.

 

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 2020 Annual Report to Shareholders, in the Proxy Statement for the 2021 annual meeting, 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, tariffs, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; reliance on third-party suppliers in Asia; 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 in, among other things, the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital equipment investments; 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; and security breaches and disruptions to the Company’s information technology systems.  Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.

 

COVID-19 Disclosure

 

At the inception of the state COVID-19-related shutdowns, all of the Company’s businesses were deemed essential and as a result, did not shutdown.  Although the state shutdowns are largely over, CDC guidelines remain in effect resulting in ongoing concerns about the government responses to the COVID-19 virus and in particular, to the Delta and other variants.  Those guidelines typically require social distancing for the unvaccinated and the wearing of masks.  Government payments, which have partially ended, had ensured that demand for goods was high while removing the incentive to work, which in turn affected supply and the cost of materials, components, finished goods, labor, and transportation.  Those shortages have led to congestion throughout the supply chain that has impacted all of the Company's businesses.  The vaccine mandates if implemented could lead to additional shortages and congestion.  As a result of ongoing uncertainties, many external contacts continue to be managed through internet tools like “Zoom.”  Due to the Company’s historical conservative practices, it has no debt and has adequate balances to fund its operations. 

 

The Company has complied with the applicable COVID-19 regulations and CDC guidelines.  For individuals not fully vaccinated, both masks and the six-foot social distancing rule continue to be observed in the offices and where practicable in the factories.  Where not practicable, barriers are in place between workers. 

The ongoing COVID-19 regulations and guidelines have affected each segment in a variety of ways, which include increased absenteeism; the cancellation of planned trade shows and customer/supplier visits; inefficiencies inherent when dealing with suppliers and customers that continue to work from home; as well as challenges in securing material, components, finished goods, and labor.  See “Item 1A. Risk Factors” titled “The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks” included in the Company's Annual Report on Form 10-K for year ended December 31, 2020.

 

Comparison of Third Quarter 2021 and 2020

 

Readers are directed to Note E to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the quarters ended October 3, 2021 and September 27, 2020.

 

On a consolidated basis, net sales decreased by $6,712,000 (7%), gross profit decreased by $9,488,000 (46%), selling and general expenses increased by $329,000 (5%), and intangibles amortization was flat.  Other income decreased by $167,000 (21%), while earnings before provision for income taxes decreased by $9,984,000 (65%), and net earnings decreased by $8,009,000 (66%).  Details concerning these changes can be found in the comments by segment below.

 

Housewares/Small Appliance net sales increased by $563,000 from $27,169,000 to $27,732,000, or 2.1%, primarily attributable to an increase in pricing, approximately a third of which was offset by a decrease in shipments.  Defense net sales decreased by $7,341,000 from $66,679,000 to $59,338,000, or 11.0%, primarily reflecting a decrease in shipments.   

 

Housewares/Small Appliance gross profit decreased $8,439,000 from $5,259,000 to a loss of $3,180,000, primarily reflecting higher product and ocean cargo and inland freight costs. Defense gross profit decreased $1,098,000 from $15,718,000 to $14,620,000, primarily reflecting the decrease in sales mentioned above, partially offset by a more favorable mix of products.  Due to the startup nature of both businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years. 

 

Selling and general expenses for the Housewares/Small Appliance segment increased $223,000, primarily reflecting higher costs and accruals for employee compensation and benefits of $228,000 and insurance of $136,000 partially offset by the absence of 2020 charges related to a product marketing campaign of $100,000.  Selling and general expenses for the Defense increased $219,000, primarily reflecting increased accruals for health care of $61,000 and legal and professional costs of $67,000.  Selling and general expenses for the Safety segment were essentially flat.

 

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

 

The $167,000 decrease in other income was primarily attributable to a decrease in interest income on marketable securities largely stemming from lower yields on a lower average daily investment.

 

Earnings before provision for income taxes decreased $9,984,000 from $15,264,000 to $5,280,000.  The provision for income taxes decreased from $3,126,000 to $1,151,000, which resulted in an effective income tax rate of 22% and 21%, for the quarters ended October 3, 2021 and September 27, 2020, respectively.  Net earnings decreased $8,009,000 from $12,138,000 to $4,129,000, or 66%.

Comparison of First Nine Months 2021 and 2020

Readers are directed to Note E to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the first nine months ended October 3, 2021 and September 27, 2020.

The Company reports its operations on a fiscal quarter basis in which each quarter contains approximately thirteen weeks and ends on a Sunday, with the exception of the fourth quarter, which ends on December 31.  Occasionally, the end dates of the fiscal quarters are adjusted to account for differences that accumulate between the end of the fiscal year and the end of the subsequent first quarter.  One such adjustment occurred during the quarter ended April 4, 2021.  As compared to the prior year's first nine months, the current year's first nine months includes five additional days. 

On a consolidated basis, sales increased by $8,665,000 (4%), gross profit decreased by $11,312,000 (19%), selling and general expenses increased by $830,000 (4%), and intangibles amortization was essentially flat.   Other income decreased by $1,122,000 (37%), while earnings before provision for income taxes decreased by $13,258,000 (32%), and net earnings decreased by $10,603,000 (32%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $4,412,000 from $73,025,000 to $77,437,000, or 6%, largely attributable to an increase in shipments.  Defense net sales increased by $4,103,000 from $173,489,000 to $177,592,000, or 2%, also primarily reflecting an increase in units shipped.  

Housewares/Small Appliance gross profit decreased $11,071,000 from $13,982,000 to $2,911,000, primarily reflecting the increase in sales mentioned above offset by increased product and ocean cargo and inland freight costs. Defense gross profit decreased $500,000 from $45,631,000 to $45,131,000, primarily reflecting the increase in sales mentioned above offset by a less favorable product mix. Due to the startup nature of both businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years.

Selling and general expenses for the Housewares/Small Appliance segment increased $577,000, primarily reflecting higher costs and accruals for employee compensation and benefits of $709,000 and increased accruals for insurance of $461,000, partially offset by the absence of 2020 charges related to a product marketing campaign of $624,000.  Selling and general expenses for the Defense segment increased $386,000, primarily reflecting an increase in employee compensation and health care costs of $232,000 and legal and professional costs of $69,000.  Safety segment selling and general expenses decreased by $139,000 primarily reflecting decreased accruals for legal and professional expense of $346,000 and the absence of 2020 charges related to a product marketing campaign of $267,000 partially offset by an increase in employee compensation of $512,000.

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

The $1,122,000 decrease in other income was primarily attributable to a decrease in interest income on marketable securities stemming from lower yields on a lower average daily investment.

Earnings before provision for income taxes decreased $13,258,000 from $42,076,000 to $28,818,000.  The provision for income taxes decreased from $9,059,000 to $6,404,000, which resulted in an effective income tax rate of 22% in both 2021 and 2020.  Net earnings decreased $10,603,000 from $33,017,000 to $22,414,000, or 32%.

Liquidity and Capital Resources

 

Net cash provided by operating activities was $14,569,000 and $8,264,000 for the nine months ended October 3, 2021 and September 27, 2020, 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 2021 were net earnings of $22,414,000, which included non-cash depreciation and amortization expenses of $2,228,000.  Also contributing to the cash provided was 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 increased inventory levels and a net increase in deposits made to vendors included in other assets and current assets.  Of particular note during the first nine months of 2020 were net earnings of $33,017,000, which included non-cash depreciation and amortization expenses of $2,238,000.  Also contributing to the cash provided was a net increase in payable and accrual levels, partially offset by increased inventory levels, deposits made to vendors included in other assets and current assets, and an increase in accounts receivable levels.   

Net cash provided by investing activities was $33,950,000 during the first nine months of 2021 as compared to $1,744,000 used in investing activities during the first nine months of 2020.  Significant factors contributing to the change were net maturities and sales of marketable securities in 2021 of $35,533,000, in contrast with net purchases of marketable securities in 2020 of $246,000.  Also contributing to the change in cash was an increase in the purchase of property, plant, and equipment in 2021. 

 

Net cash used in financing activities was $43,542,000 and $41,671,000, for the first nine months of 2021 and 2020, respectively, and primarily relate to the annual dividend payments.  The extra dividend increased from $5.00 per share in 2020 to $5.25 per share in 2021.  Cash flows for both nine-month periods also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.

 

Working capital decreased by $18,120,000 during the first nine months of 2021 to $284,028,000 at October 3, 2021 for the reasons stated above.  The Company's current ratio was 5.6 to 1.0 at October 3, 2021 and 6.5 to 1.0 at December 31, 2020.

 

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 its business segments per existing authorized projects and for additional projects, if the appropriate return on investment is projected.

 

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 fixed rate municipal notes and bonds. 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 Company’s 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.  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 in the Housewares/Small Appliance and Safety segments, 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 Defense segment 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. 

 

Revenues 

Sales are recorded net of discounts and returns for the Housewares/Small Appliance segment.  Sales discounts and returns are key aspects of variable consideration, which is a significant estimate utilized in revenue recognition.  Sales returns 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.

 

Impairment and Valuation of Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Long-lived assets consist of property, plant and equipment and intangible assets. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, the amounts of the cash flows and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. The Company uses internal discounted cash flows estimates, quoted market prices when available, and independent appraisals, as appropriate, to determine fair value. The Company derives the required cash flow estimates from its historical experience and its internal business plans.

 

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 0.6 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

 

Evaluation of Disclosure Controls and Procedures 

 

The Company’s management, including the Chief Executive Officer and Treasurer (principal financial officer), 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 October 3, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Treasurer (principal financial officer) 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 October 3, 2021 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 J to the Consolidated Financial Statements set forth under Part I - Item 1 above. 

Item 1A. Risk Factors

In addition to the other information set forth in this report and the risk factor noted below, the risk factors discussed in Part I "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, could have a significant adverse impact on the business, financial condition or results of operations of the Company as a whole. Other than noted below, there have been no material changes to the Company's Risk Factors described in the 2020 Annual Report on Form 10-K. 

The U.S. government's rules and regulations concerning mandatory COVID-19 vaccination of U.S.-based employees of companies that have 100 or more employees, could materially and adversely affect the Company's results of operations, financial condition and cash flows. 

On September 9, 2021, President Biden issued an executive order requiring all employers with U.S. government contracts to ensure that their U.S.-based employees, contractors and subcontractors, that work on or in support of future U.S. government service contracts, are fully vaccinated against COVID-19 as required by the executive order.  The executive order includes on-site and remote U.S.-based employees, contractors and subcontractors and provides for limited medical and religious exceptions.  As most of the Defense segment's business pertains to the sale of supplies (i.e. ammunition), not services, the order is largely inapplicable. 

In addition, on November 5, 2021, the Occupational Safety and Health Administration (OSHA) issued an Emergency Temporary Standard (ETS) mandating either the full vaccination against COVID-19 or weekly testing of employees for employers with 100 or more employees.  Currently, the 5th Circuit of the U.S. Court of Appeals has issued a temporary stay of that order. 

It is not possible to predict with certainty the impact the OSHA ETS will have on the Company's workforce.  If the stay is lifted and the order is implemented, these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could materially and adversely affect the Company's results of operations, financial condition and cash flows. 

 

 

Item 6.  Exhibits

 

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.