10-K 1 presto150957_10k.htm FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
FORM 10-K
 
 
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
☐ 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
 
 
NATIONAL PRESTO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Wisconsin  39-0494170
(State or other jurisdiction of  (IRS Employer
incorporation or organization) Identification Number)
   
3925 North Hastings Way  
Eau Claire, Wisconsin  54703-3703
(Address of principal executive offices) (Zip Code)
 
Registrants telephone number, including area code:   (715) 839-2121
 
Securities registered pursuant to Section 12(b) of the Act:
 
   
Name of each exchange
Title of each class    on which registered
  $1.00 par value common stock     New York Stock Exchange
                                                                                                   
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐         No ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐         No ☒
 
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 ☒         No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒         No ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or any amendment to the Form 10-K. ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐         No ☒
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $347,996,185.  The number of shares outstanding of each of the registrants classes of common stock, as of March 2, 2015 was 6,917,222.
 
The Registrant has incorporated in Part II and Part III of Form 10-K, by reference, portions of its 2014 Annual Report and portions of its Proxy Statement for its 2015 Annual Meeting of Stockholders.
 
 
 

 

 
PART I

ITEM 1.  BUSINESS
 
            A.  DESCRIPTION OF BUSINESS

The business of National Presto Industries, Inc. (the “Company or “National Presto”) consists of three business segments.  For a further discussion of the Company’s business, the segments in which it operates, and financial information about the segments, please refer to Note L to the Consolidated Financial Statements.  The Housewares/Small Appliance segment designs, markets and distributes housewares and small electrical appliances, including pressure cookers and canners, kitchen electrics, and comfort appliances.  The Defense segment manufactures 40mm ammunition, precision mechanical and electro-mechanical assemblies, medium caliber cartridge cases; performs Load, Assemble and Pack (LAP) operations on ordnance-related products primarily for the U.S. Government and prime contractors; produces and sells a variety of less lethal products and support accessories, and provides training for the use of less lethal products; and manufactures detonators, booster pellets, release cartridges, lead azide, and other military energetic devices and materials.  The Absorbent Products segment manufactures and sells private label and branded adult incontinence products.

1. Housewares/Small Appliance Segment
Housewares and electrical appliances sold by the Company include pressure cookers and canners; the Presto Control Master® heat control single thermostatic control line of skillets in several sizes, griddles, woks and multi-purpose cookers; deep fryers of various sizes; waffle makers; pizza ovens; slicer/shredders; electric heaters; corn poppers (hot air, oil, and microwave); dehydrators; rice cookers; microwave bacon cookers; coffeemakers and coffeemaker accessories; electric tea kettles; electric knife sharpeners; a line of kitchen gadgets; and timers.  Pressure cookers and canners are available in various sizes and are fabricated of aluminum and, in the case of cookers, of stainless steel, as well.

For the year ended December 31, 2014, approximately 11% of consolidated net sales were provided by cast products (griddles, waffle makers, die cast deep fryers, skillets and multi-cookers), and approximately 18% by noncast/thermal appliances (stamped cookers and canners, pizza ovens, corn poppers, coffee makers, microwave bacon cookers, dehydrators, rice cookers, tea kettles, electric stainless steel appliances, non-cast fryers and heaters).  For the year ended December 31, 2013, approximately 13% of consolidated net sales were provided by cast products, and approximately 18% by noncast/thermal appliances.  For the year ended December 31, 2012, approximately 13% of consolidated net sales were provided by cast products, and approximately 17% by noncast/thermal appliances. For the years ended December 31, 2014 and 2012, this segment had one customer which accounted for 10% or more of Company consolidated net sales.  That customer was Wal-Mart Stores, Inc. which accounted for 10% of consolidated net sales in both 2014 and 2012.  The loss of Wal-Mart Stores as a customer would have a material adverse effect on the segment.

Products are sold primarily in the United States and Canada directly to retailers and also through independent distributors.  Although the Company has long established relationships with many of its customers, it does not have long-term supply contracts with them.  The loss of, or material reduction in, sales to any of the Company’s major customers could adversely affect the Company’s business.  Most housewares and electrical appliances are sourced from vendors in the Orient.  (See Note J to the Consolidated Financial Statements.)

The Company has a sales force of 14 employees that sell to and service most customers.  A few selected accounts are handled by manufacturers representatives who may also sell other product lines.  Sales promotional activities are conducted through the use of newspaper advertising and television.  The business is seasonal, with the normal peak sales period occurring in the fourth quarter of the year prior to the holiday season.  This segment operates in a highly competitive and extremely price sensitive environment.  Increased costs that cannot be fully absorbed into the price of products or passed along in the form of price increases to the retail customer can have a significant adverse impact on operating results.  Several companies compete for sales of housewares and small electrical appliances, some of which are larger than the Company’s segment and others which are smaller.  In addition, some customers maintain their own private label, as well as purchase brokered product directly from the Orient.  Product competition extends to special product features, product pricing, marketing programs, warranty provisions, service policies and other factors.  New product introductions are an important part of the Company’s sales to offset the morbidity rate of other products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks.  Engineering and tooling costs are increasingly expensive, as are finished goods that may not have a ready market or achieve widespread consumer acceptance.  High-cost advertising commitments which may accompany such new products or may be required to maintain sales of existing products may not be fully absorbed by ultimate product sales.  Initial production schedules, set in advance of introduction, carry the possibility of excess unsold inventories.  New product introductions are further subject to delivery delays from supply sources, which can impact availability for the Company’s most active selling periods.
 
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Research and development costs related to new product development for the years 2014, 2013, and 2012 were absorbed in operations of these years and were not a material element in the aggregate costs incurred by the Company.

Products are generally warranted to the original owner to be free from defects in material and workmanship for a period of one to twelve years from date of purchase, depending on the product.  The Company allows a sixty-day over-the-counter initial return privilege through cooperating dealers. Products are serviced through a corporate service repair operation.  The Company’s service and warranty programs are competitive with those offered by other manufacturers in the industry.

The Company primarily warehouses and distributes its products from distribution centers located in Canton and Jackson, Mississippi.  Selective use is made of leased tractors and trailers.

The Company invests funds not currently required for business activities (see Note A(5) to the Consolidated Financial Statements).  Income from invested funds is included in Other Income in the accompanying Consolidated Financial Statements.

Earnings from investments may vary significantly from year to year depending on interest yields on instruments meeting the Company’s investment criteria, and the extent to which funds may be needed for internal growth, acquisitions, newly identified business activities, and reacquisition of Company stock.

2. Defense Segment
AMTEC Corporation was acquired on February 24, 2001, and manufactures 40mm ammunition, and precision mechanical and electro-mechanical products for the U.S. Department of Defense (DOD) and DOD prime contractors.  AMTEC’s 75,000 square foot manufacturing facility located in Janesville, Wisconsin is focused on producing niche market ordnance products (such as training ammunition, fuzes, firing devices, and initiators).  AMTEC is also the prime contractor for the 40mm ammunition system to the DOD (more fully described below).

Spectra Technologies LLC, a subsidiary of AMTEC, was acquired on July 31, 2003, and is engaged in the manufacture and delivery of munitions and ordnance-related products for the DOD and DOD prime contractors.  Spectra maintains 276,000 square feet of space located in East Camden, Arkansas, dedicated primarily to Load, Assemble and Pack (LAP) type work and during 2008, completed a facility which enabled it to begin performance in 2008 of LAP work for the 40mm systems program previously mentioned and referenced below.

Amron, a division of AMTEC, holds the assets that were purchased from Amron LLC on January 30, 2006.  Amron manufactures cartridge cases used in medium caliber ammunition (20mm, 25mm, 30mm and 40mm) primarily for the DOD and DOD prime contractors, which includes the 40mm systems program previously mentioned and referenced below.  The Amron manufacturing facility is 208,000 square feet and is located in Antigo, Wisconsin.

AMTEC Less Lethal Systems, Inc., a subsidiary of AMTEC Corporation, holds the assets that were purchased from ALS Technologies, Inc, a small Arkansas manufacturer of less lethal ammunition, on November 1, 2011.  The subsidiary’s products include smoke and tear gas grenades, specialty impact munitions, diversionary devices and stun munitions, support accessories like launchers and gas masks, as well as training for the use of its products.  The subsidiary’s new state-of-the-art less lethal ammunition manufacturing and training facility, which was completed in 2013, is 54,000 square feet and is located in Perry, Florida.  Previously, the subsidiary operated out of a 15,000 square foot facility in Bull Shoals, Arkansas.
 
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Tech Ord, a division of AMTEC, holds 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 that were acquired on January 24, 2014. The 88,000 square foot Clear Lake facility is a manufacturer of detonators, booster pellets, release cartridges, lead azide, and other military energetic devices and materials, and its major customers include US and foreign government agencies, AMTEC Corporation, and other defense contractors.

The Defense segment competes for its business primarily on the basis of technical competence, product quality, manufacturing experience, and price.  This segment operates in a highly competitive environment with many other organizations, some of which are larger and others that are smaller.

On April 25, 2005, AMTEC Corporation was awarded the high volume, five-year prime contract for management and production of the Army’s 40mm Ammunition System.  The Army selected AMTEC as one of two prime contractors responsible for supplying all requirements for 40mm practice and tactical ammunition for a period of five years.  AMTEC was awarded the majority share of requirements, and the Army estimated the total for the two contract awards, if all of the options were fully exercised, to be $1.3 billion.  Deliveries under the contract exceeded $671,000,000, with final deliveries completed in 2013.  On February 18, 2010, the Army awarded AMTEC a second five-year contract for the management and production of the 40mm Ammunition System.  As in the original five-year contract, AMTEC was awarded the majority share of the 40mm requirement.  The total dollar amount of this contract awarded to AMTEC was $566,000,000.  The actual and cumulative dollar volume with the Army will be dependent upon military requirements and funding, as well as government procurement regulations and other factors controlled by the Army and the Department of Defense.  The Company expects deliveries under this contract to continue through 2017.  In addition, as part of an acquisition of a group of assets from DSE, Inc. completed on November 7, 2013 (see Note Q to the Consolidated Financial Statements), AMTEC acquired through a novation agreement an additional $188,000,000, representing the remaining undelivered portion of the award that had been given to AMTEC’s competitor under the most recent five-year contract mentioned above. Total deliveries for the systems program under the most recent 40mm contract were $124,000,000 during 2014.  Additional shipments under the contract will be made during 2015.

On January 29, 2015, AMTEC submitted its proposal to the Army in response to the next five-year contract solicitation for the management and production of the 40mm Ammunition System.  AMTEC has been advised by the Army that a decision on any contract award will be made in the second quarter of 2015.

During 2014, almost all of the work performed by this segment directly or indirectly for the DOD was 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 is generally not subject to adjustments reflecting the actual costs incurred by the contractor, with the exception of some limited escalation clauses, which on the 2010 contract apply to only three materials – steel, aluminum and zinc.  The Defense segment’s contracts and subcontracts contain the customary provision permitting termination at any time for the convenience of the government, with payment for any work completed, associated profit and inventory/work in progress at the time of termination. The segment’s business does not tend to be seasonal.

3. Absorbent Products Segment
The Absorbent Products segment business (Presto Absorbent Products, Inc.) was formed on November 21, 2001 to purchase assets from RMED International, a company that manufactured primarily private label diapers.  On October 6, 2003, the segment purchased the assets of NCN Hygienic Products, Inc., a Marietta, Georgia company which manufactured adult incontinence products and puppy pads, which were likewise primarily private label products.  Focus continues to be on private label, although branded product is produced under the “PRESTO” label.  The absorbent products business is capital intensive.  New absorbent product equipment is extremely complex.  Not only is considerable time required to secure and install the equipment, but even more time is required to develop the requisite employee skill sets to utilize the equipment efficiently.  Sales channels must be in place to sell the increased capacity that results from new equipment and improved efficiency in operations.

During the fourth quarter of 2006, in order to enhance the Absorbent Products segment’s long-term manufacturing efficiencies, the Company decided to consolidate its adult incontinence production capabilities and, as a result, began the process of relocating its adult incontinence manufacturing equipment from its Marietta, Georgia facility to its Eau Claire, Wisconsin facility.  In addition, the Company made a decision to discontinue the manufacture of puppy pads.  This transition was largely completed by the end of the first quarter of 2007.
 
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Unlike the housewares/small appliance business, the absorbent product business is not seasonal.  To the extent there are variations from month to month, that is primarily a function of customer promotional timing or a change in the customer base.  As private label products tend to emulate branded product, new product development is important, but is largely limited to providing features similar to those found in national branded product.  Research and development costs are absorbed in operations.

The absorbent product industry is a very competitive, high volume-low margin business.  There are several competitors, most of which are larger than this segment of the Company.  Product competition is largely based on product pricing, quality, and features.

Product cost is heavily influenced by commodity costs which include wood pulp, as well as many petroleum based products.  It is also influenced by equipment operating speed, efficiency, and utilization.

Advertising is typically the responsibility of the owner of the private label and is thus minimal.  Most sales are currently handled through distributor/broker arrangements.

The segment, which realized its first significantly profitable year in 2009, began experiencing capacity constraints towards the end of that year.  To date, it has ordered four multi-million dollar machines, three of which had been installed in the Eau Claire, Wisconsin facility by the end of 2014.  The segment also completed a warehouse addition to the current facility in Eau Claire and installed an automated handling system, both of which were in operation by the third quarter of 2011. Additional equipment purchases are in process.

B.    OTHER COMMENTS

1. Sources and Availability of Materials
See Note J to the Consolidated Financial Statements.

2. Patents, Trademarks, and Licenses
Patents, particularly on new products, trademarks and know-how are considered significant to the Company’s Housewares/Small Appliance segment.  The Company’s current and future success depends upon judicial protection of its intellectual property rights (patents, trademarks and trade dress).  Removal of that protection would expose the Company to competitors who seek to take advantage of the Company’s innovations and proprietary rights.  The Company has dozens of U.S. and foreign patents pending and granted.  Of those U.S. patents granted, the following is a non-exhaustive list of those relevant to current products and their expiration dates, assuming continued payment of maintenance fees (the date is the latest expiration date of the corresponding patents):  Quick Release Appliance Cord Assemblies (US 6,719,576, December 2022,  and 6,527,570, October 2021), Rotatable Cooking Apparatus (US 6,125,740 and 6,354,194, March 2019), Coffee brewer (US D695,064 December 2027), Griddle w/ folding legs (US 7,635,827 November 2027), Griddle w/ attached warming tray (US D674,656 January 2027), Low profile griddle (US D575,098 August 2022), Stirring popcorn maker (US D615,797 May, 2024), and Parabolic Heater (US D633,189, February 2025).  To date, the Company has vigorously protected its rights and enjoyed success in all its intellectual property suits.  The Defense and Absorbent Products segments do not currently hold patents, trademarks, and licenses which would be deemed significant to their respective operations.

3. Effects of Compliance with Environmental Regulations
In May 1986, the Company’s Eau Claire, Wisconsin, site was placed on the United States Environmental Protection Agency’s (EPA) National Priorities List (NPL) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) because of alleged hazardous waste deposited on the property.  At year end 1998, all remediation projects at the Eau Claire, Wisconsin, site had been installed, were fully operational, and restoration activities had been completed.

Based on factors known as of December 31, 2014, it is believed that the Company’s environmental liability reserve will be adequate to satisfy on-going remediation operations and monitoring activities; however, should environmental agencies require additional studies or remediation projects, it is possible the existing accrual could be inadequate.

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Management believes that in the absence of any unforeseen future developments, known environmental matters will not have any material effect on the results of operations or financial condition of the Company.
 
4. Number of Employees of the Company
As of December 31, 2014, the Company and its subsidiaries had 1,043 employees compared to 889 employees at the end of December 2013.
 
Approximately 163 employees of Amron are members of the United Steel Workers union.  The most recent contract between Amron and the union was effective through February 28, 2015.  A new contract between Amron and the union has been negotiated and is effective through February 29, 2020.
 
5. Industry Practices Related to Working Capital Requirements
The major portion of the Companys sales was made with terms of 60 days or shorter.
 
For the Housewares/Small Appliance segment, inventory levels increase in advance of the selling period for products that are seasonal, such as pressure canners, heaters, and major new product introductions.  Inventory build-up also occurs to create stock levels required to support the higher sales that occur in the latter half of each year.  Buying practices of the Company’s customers require "just-in-time" delivery, necessitating that the Company carry large finished goods inventories.
 
The multiple stock keeping units inherent in the private label absorbent product business, combined with the desire to avoid excessive machine changeover (which can have a negative impact on efficiency), necessitates the carrying of a large finished goods inventory in the Absorbent Product segment as well.
 
The ability to meet U.S. Department of Defense demands also necessitates the carrying of large inventories in the Defense segment.
 
6. Order Backlog
Shipment of most of the Company’s Housewares/Small Appliance products occurs within a relatively short time after receipt of the order and, therefore, there is usually no substantial order backlog.  New product introductions may result in order backlogs that vary from product to product and as to timing of introduction.
 
The contract backlog of the Defense segment was approximately $407,000,000, $452,000,000, and $310,000,000 at December 31, 2014, 2013, and 2012, respectively.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during a 24 to 30-month period, after December 31, 2014.
 
Shipment of Absorbent Products typically occurs within 7 to 30 days from receipt of an order and thus there is usually no substantial long term backlog of orders.

C.    AVAILABLE INFORMATION
 
The Company has a web site at www.gopresto.com.  The contents of the Company’s web site are not part of, nor are they incorporated by reference into, this annual report.
 
The Company makes available on its web site its annual reports on Form 10-K or 10-K/A and, beginning with its second quarter filing in 2011, quarterly reports on Form 10-Q or 10-Q/A.  It does not provide its current reports on Form 8-K or amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act on its web site.  The Company does not do so because these and all other reports it files with the SEC are readily available to the public on the SEC web site at www.sec.gov and can be located with ease using the link provided on the Company’s web site.   The Company provides paper copies of its annual report free of charge upon request.
 
The public also may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC  20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
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ITEM 1A. RISK FACTORS
 
The Company’s three business segments described above are all subject to a number of risk factors, the occurrence of any one or more of which could have a significant adverse impact on the business, financial condition, or results of operations of the Company as a whole.
 
Housewares/Small Appliance Segment:
 
Increases in the costs for raw materials, energy, transportation and other necessary supplies could adversely affect the results of the Company’s operations.
 
The Company’s suppliers purchase significant amounts of metals, plastics, and energy to manufacture the Company’s products.  Also, the cost of fuel has a major impact on transportation costs.  Any increased costs that cannot be fully absorbed or passed along in the form of price increases to the retail customer can have a material adverse impact on the Company’s operating results.
 
Reliance on third-party suppliers in Asia makes this segment vulnerable to supply interruptions and foreign business risks.
 
The majority of the housewares/small appliance products are manufactured by a handful of third-party suppliers in Asia, primarily in the People’s Republic of China.  The Company’s ability to continue to select and develop relationships with reliable vendors who provide timely deliveries of quality parts and products will impact its success in meeting customer demand.  Most products are procured on a “purchase order” basis.  As a result, the Company may be subject to unexpected changes in pricing or supply of products.  There is no assurance that it could quickly or effectively replace any of its vendors if the need arose.  Any significant failure to obtain products on a timely basis at an affordable cost or any significant delays or interruptions of supply may disrupt customer relationships and have a material adverse effect on the Company’s business.
 
In addition, international manufacturing is subject to significant risks, including, among others, labor unrest, adverse social, political and economic conditions, interruptions in international shipments, tariffs and other trade barriers, legal and regulatory constraints and fluctuations in currency exchange rates. Although China currently enjoys “most favored nation” trading status with the United States, the U.S. Government has in the past proposed to revoke that status and to impose higher tariffs on products imported from China, which could have a material adverse effect on the Company’s business.
 
The Housewares/Small Appliance segment is dependent on key customers, and any significant decline in business from one or more of its key customers could adversely affect the segment’s operating results.
 
Although the Company has a long-established relationship with its major customers, it does not have any long-term supply agreement or guaranty of minimum purchases.  As a result, the customers may fail to place anticipated orders, change planned quantities, delay purchases, or change product assortments for reasons beyond the Company’s control, which could prove detrimental to the segment’s operating results.
 
The sales for this segment are highly seasonal and dependent upon the United States retail markets and consumer spending.
 
Traditionally, this segment has recognized a substantial portion of its sales during the Holiday selling season.  Any downturn in the general economy, shift in consumer spending away from its housewares/small appliances, or deterioration in the financial health of its customer base could adversely affect sales and operating results.
 
The Company may not be successful in developing and introducing new and improved consumer products.
 
The development and introduction of new housewares/small appliance products is very important to the Company’s long-term success.  The ability to develop new products is affected by, among other things, whether the Company can develop and fund technological innovations and successfully anticipate consumer needs and preferences, as well as the intellectual property rights of others.  The introduction of new products may require substantial expenditures for advertising and marketing to gain marketplace recognition or to license intellectual property. There is no guarantee that the Company will be aware of all relevant intellectual property in the industry and may be subject to claims of infringement, which could preclude it from producing and selling a product. Likewise, there is no guarantee that the Company will be successful in developing products necessary to compete effectively in the industry or that it will be successful in advertising, marketing and selling any new products.
 
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Product recalls or lawsuits relating to defective products could have an adverse effect on the Company, as could the imposition of industry sustainability standards.
 
As distributors of consumer products in the United States, the Company is subject to the Consumer Products Safety Act, which empowers the U.S. Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous.  Under certain circumstances, the U.S. Consumer Products Safety Commission could require the Company to repair, replace or refund the purchase price of one or more of its products, or it may voluntarily do so. Any repurchase or recall of products could be costly and damage the Company’s reputation, as well as subject it to a sizable penalty that the Commission is empowered to impose.  If the Company removed products from the market, its reputation or brands could be tarnished and it might have large quantities of finished products that could not be sold.
 
The Company could also face exposure to product liability claims if one of its products were alleged to have caused property damage, bodily injury or other adverse effects. It is self-insured to specified levels of those claims and maintains product liability insurance for claims above the self-insured levels. The Company may not be able to maintain such insurance on acceptable terms, if at all, in the future.  In addition, product liability claims may exceed the amount of insurance coverage.  Moreover, many states do not allow insurance companies to provide coverage of punitive damages, in the event such damages are imposed.  Additionally, the Company does not maintain product recall insurance.  As a result, product recalls or product liability claims could have a material adverse effect on the Company’s business, results of operations and financial condition.
 
The portable appliance and floor care companies’ industry association is in the process of trying to promulgate sustainability standards for the industry.  It has passed an outline for a standard but has not yet developed specific guidelines for implementation.  The Sustainability Consortium (TSC) under the auspices of a Retail Association (RILA) is trying to develop standards for all consumer products.  If either the association or TSC is successful in developing enforceable standards, the standards are expected to ultimately become mandatory.  The standards as drafted will do nothing for the environment, but will entail the addition of significant bureaucracy and outside certification fees.  As such, compliance will be burdensome and expensive.
 
The housewares/small appliance industry continues to consolidate, which could ultimately impede the Company’s ability to secure product placement at key customers.
 
Over the past decade, the housewares/small appliance industry has undergone significant consolidation, and, as a result, the industry primarily consists of a limited number of larger companies.  Larger companies do enjoy a competitive advantage in terms of the ability to offer a larger assortment of product to any one customer.  As a result, the Company may find it more difficult or lose the ability to place its products with its customers.
 
Defense Segment:
 
The Company relies primarily on sales to U.S. Government entities, and the loss of a significant contract or contracts could have a material adverse effect on its results of operations.
 
As the Company’s sales in the Defense segment are primarily to the U.S. Government and its prime contractors, it depends heavily on the contracts underlying these programs.  The loss or significant reduction of a major program in which the Company participates could have a material adverse effect on the results of operations.
 
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In April 2005, AMTEC Corporation was selected as one of two prime contractors responsible for supplying all requirements for 40mm practice and tactical ammunition rounds for the Army’s five year 40mm systems program.  AMTEC’s deliveries to the Army over the life of the contract exceeded $671,000,000.  In February 2010, the Army awarded AMTEC a new contract for an additional five-year period. As in the original contract, AMTEC and one other prime contractor were to be responsible for supplying all of the requirements for the 40mm family of ammunition rounds.  In November 2013, AMTEC acquired through a novation agreement as part of an acquisition of a group of assets (see Note Q to the Consolidated Financial Statements), the remaining undelivered portion of the award that had been given to AMTEC’s competitor under the second five-year contract mentioned above.  The actual annual and cumulative dollar volume with the Army will be dependent on military requirements and funding. Total deliveries under the systems program for the most recent 40mm contract were $124,000,000 during 2014.
 
On January 29, 2015, AMTEC submitted its proposal to the Army in response to the next five-year contract solicitation for the management and production of the 40mm Ammunition System.  AMTEC has been advised by the Army that a decision on any contract award will be made in the second quarter of 2015.
 
A decline in or a redirection of the U.S. defense budget could result in a material decrease in the Defense segment sales and earnings.
 
Government contracts are primarily dependent upon the U.S. defense budget.  During recent years, the Company’s sales have been augmented by increased defense spending, including supplemental appropriations for operations in Iraq and Afghanistan.  However, future defense budgets could be negatively affected by several factors, including U.S. Government budget deficits, administration priorities, U.S. national security strategies, a change in spending priorities, the complete withdrawal from Afghanistan, and the reduction of military operations in other parts of the world.  Any significant decline or redirection of U.S. military expenditures could result in a decrease to the Company’s sales and earnings.
 
U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year.  As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years.  In addition, most U.S. Government contracts are subject to modification if funding is changed.  Any failure by Congress to appropriate additional funds to any program in which the Company participates, or any contract modification as a result of funding changes, could materially delay or terminate the program.  This could have a material adverse effect on the results of the Company’s operations.
 
The Company may not be able to react to increases in its costs due to the nature of its U.S. Government contracts.
 
Substantially all of the Company’s U.S. Government contracts are being performed on fixed-price basis.  Under fixed-price contracts, the Company agrees to perform the work for a fixed price, subject to limited escalation provisions on specified raw materials.  Thus it bears the risk that any increases or unexpected costs may reduce profits or potentially cause losses on the contract, which could have a material adverse effect on results of operations and financial condition.  That risk is potentially compounded by the political actions under consideration by federal and state governments, including climate change and labor regulations, which could have an impact if enacted or promulgated on the availability of affordable labor, energy and ultimately, materials, as the effects of the legislation/regulation ripple throughout the economy. In addition, products are accepted by test firing samples from a production lot.  Lots typically constitute a sizable amount of product.  Should a sample not fire as required by the specifications, the cost to rework or scrap the entire lot could be substantial.
 
The Company’s U.S. Government contracts are subject to termination.
 
All of the Company’s U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if the Company defaults by failing to perform under the contract.  Performance failure can occur from a myriad of factors, which include late shipments due to the inability to secure requisite raw materials or components or strikes or other labor unrest, equipment failures or quality issues which result in products that do not meet specifications, etc.  Termination for convenience provisions provide only for recovery of costs incurred and profit on the work completed prior to termination.  Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.  If a termination provision is exercised, it could have a material adverse effect on the Company’s business, results of operations and financial condition.
 
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Failure of the Company’s subcontractors to perform their contractual obligations could materially and adversely impact contract performance.
 
Key components and services are provided by third party subcontractors, several of which the segment is required to work with by government edict.  Under the contract, the segment is responsible for the performance of those subcontractors, many of which it does not control.  There is a risk that the Company may have disputes with its subcontractors, including disputes regarding the quality and timeliness of work performed by subcontractors.  A failure by one or more of the Company’s subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact the Company’s ability to perform its obligations as the prime contractor.
 
Absorbent Products Segment:
 
The Absorbent Products segment is dependent on key customers, and any significant decline in business from one or more of its key customers could adversely affect the segment’s operating results.
 
One customer, Medline Industries Holdings LP, accounted for more than 10% of consolidated net sales in 2011.  In fourth quarter 2011, Medline began operating its own absorbent products facility.  As a result, sales to Medline for 2012, 2013, and 2014 declined significantly.  During the last several years, the Absorbent Products segment has been implementing a customer diversification program to reduce its reliance on this customer and in the process has developed smaller, albeit new key customers whose loss could also adversely affect the segment’s results.
 
Increases in costs for raw materials, transportation, energy and other supplies could adversely affect the results of its operations.
 
At times, the Company has experienced significant increases in its raw material, transportation, energy, and other supply costs primarily due to limited global supply and increased demand.  Any increased costs that cannot be fully absorbed or passed along in the form of price increases to its customers could adversely affect earnings.  Global economic conditions, supplier capacity constraints and other factors could affect the availability of, or prices for, those raw materials.  The risk is further compounded by the political actions under consideration by federal and state governments, including climate change and labor regulations, which could have an impact if enacted or promulgated on the availability of affordable labor, energy, and ultimately, materials, as the effects of the legislation ripple throughout the economy.
 
The Company may not be successful in developing and introducing new and improved absorbent products.
 
The development and introduction of new absorbent products is very important to long-term success.  The ability to develop new products is affected by, among other things, whether the Company can develop and fund technological innovations and successfully anticipate consumer needs and preferences.  The introduction of new products may require substantial expenditures for advertising and marketing to gain marketplace recognition or to license intellectual property. There is no guarantee that it will be aware of all relevant intellectual property in the industry and may be subject to claims of infringement, which could preclude it from producing and selling a product. Likewise, there is no guarantee that the Company will be successful in developing products necessary to compete effectively in the industry or that it will be successful in advertising, marketing and selling new products it develops.
 
The inability to operate the Company’s manufacturing facility at or near full capacity could adversely affect the result of operations.
 
The Absorbent Products segment is a very capital-intensive business, utilizing high cost, high-speed equipment.  Since the segment operates in a market that is highly competitive with relatively low margins, it is essential to operate near full capacity to achieve high efficiencies and profitable financial results.
 
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Acquisition Risks:
 
The Company may pursue acquisitions of new product lines or businesses.  It may not be able to identify suitable acquisition candidates or, if suitable candidates are identified, it may not be able to complete the acquisition on commercially acceptable terms. Even if the Company is able to consummate an acquisition, the transaction would present many risks, including, among others: failing to achieve anticipated benefits or cost savings; difficulty incorporating and integrating the acquired technologies, services or products; coordinating, establishing or expanding sales, distribution and marketing functions, as necessary; diversion of management’s attention from other business concerns; being exposed to unanticipated or contingent liabilities or incurring the impairment of goodwill; the loss of key employees, customers, or distribution partners; and difficulties implementing and maintaining sufficient controls, policies and procedures over the systems, products and processes of the acquired company. If the Company does not achieve the anticipated benefits of its acquisitions as rapidly or to the extent anticipated by management, or if others do not perceive the same benefits of the acquisition as the Company does, there could be a material, adverse effect on the Company’s business, financial condition or results of operations.
 
Information Technology System Failure or Security Breach Risks:
 
The Company relies on its information technology systems to effectively manage its business data, communications, supply chain, logistics, accounting, and other business processes. While the Company endeavors to build and sustain an appropriate technology environment, information technology systems are vulnerable to damage or interruption from circumstances beyond the Company’s control, including systems failures, viruses, security breaches or cyber incidents such as intentional cyber attacks aimed at theft of sensitive data, or inadvertent cyber-security compromises.  A security breach of such systems could result in interruptions of the Company’s operations, negatively impact relations with customers or employees, and expose the Company to liability and litigation. Any such damage or interruption could have a material adverse effect on the Company’s operating results.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2.  PROPERTIES (Owned Except Where Indicated)
 
The Company’s Eau Claire facility is approximately 522,000 square feet, of which Presto Absorbent Products, Inc. leases approximately 380,000 square feet.  The Company’s corporate office occupies the balance of the space in Eau Claire.
 
The Company also has Defense manufacturing facilities located in Janesville and Antigo, Wisconsin; East Camden, Arkansas; Perry, Florida; and Clear Lake, South Dakota.
 
The Janesville, Wisconsin facility is comprised of approximately 75,000 square feet, and the Antigo, Wisconsin facility is comprised of approximately 208,000 square feet. During 2012, the Company purchased 544 acres of vacant land in Perry, Florida on which approximately 54,000 square feet were constructed that house the Company’s less lethal ammunition manufacturing and training operations.  Those operations were previously located in Bull Schoals, Arkansas.  The move from Bull Schoals, Arkansas to the new facility was completed during 2013.  The East Camden operation leases approximately 276,000 square feet.  The Company acquired the 88,000 square foot Clear Lake, South Dakota facility in 2014 as part of a business combination, which is described in Note P to the Company’s Consolidated Financial Statements.
 
There are two warehousing facilities located in Jackson and Canton, Mississippi used in the Housewares/Small Appliance segment.
 
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The Jackson facility contains 252,000 square feet.  Additional temporary warehouse space is leased in an adjacent building, based on spaced needed, which peaked at 33,000 square feet in September 2014.  The Company also leases a 184,000 square foot building in Canton, Mississippi which is used primarily for warehousing and distribution and some activities for product service functions.  An additional 72,000 square feet has been leased in adjacent Canton buildings for warehousing.  The Company is considering constructing additional warehouse space to meet changing customer logistical demands that include smaller case pack sizes and smaller and more frequent shipments.
 
Except as mentioned above in the Housewares/Small Appliance segment, the facilities in use for each of the segments are believed to be adequate for their ongoing business needs.
 
ITEM 3.  LEGAL PROCEEDINGS
 
See Note I to the Consolidated Financial Statements.
 
See Item 1-B-3 of this Form 10-K and Note K to the Consolidated Financial Statements for information regarding certain environmental matters.
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable
 
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PART II
 
ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Record of Dividends Paid and Market Price of Common Stock
   
2014
   
2013
 
   
Applicable
   
 
   
Applicable
   
 
 
   
Dividends Paid
   
Market Price
   
Dividends Paid
   
Market Price
 
   
per Share
   
High
   
Low
   
per Share
   
High
   
Low
 
                                     
First Quarter*
  $ 5.05     $ 84.00     $ 73.24     $     $ 80.62     $ 69.00  
Second Quarter
          78.62       67.10             80.49       70.25  
Third Quarter
          75.31       61.25             77.45       68.60  
Fourth Quarter
          63.44       54.07             81.00       67.41  
                                                 
Full Year
  $ 5.05     $ 84.00     $ 54.07     $     $ 81.00     $ 67.41  

* First quarter 2014 includes a regular dividend of $1.00 and an extra dividend of $4.05.  An accelerated payment of the annual 2013 dividend, which included a regular dividend of $1.00 and an extra dividend of $5.50, was made in late December 2012.  The acceleration was occasioned by the uncertainty over the federal income tax rate that would be in effect in 2013.

On February 13, 2015, the Company’s Board of Directors announced a regular dividend of $1.00 per share, plus an extra dividend of $3.05.  On March 13, 2015, a payment of $28,114,000 was made to the shareholders of record as of March 2, 2015.

The common stock of National Presto Industries, Inc. is traded on the New York Stock Exchange under the symbol “NPK”.  As of March 2, 2015, there were 295 holders of record of the Company’s common stock.  This number does not reflect shareholders who hold their shares in the name of broker dealers or other nominees.  During the fourth quarter of 2014, the Company did not purchase any of its equity securities.

The information under the heading “Equity Compensation Plan Information,” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders, is incorporated by reference.

The line graph and related information set forth under the heading “Performance Graph” in the Company’s 2014 Annual Report is incorporated by reference.
 
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ITEM 6.  SELECTED FINANCIAL DATA
 
   
(In thousands except per share data)
 
For the years ended December 31,
 
2014
   
2013
   
2012
   
2011
   
2010
 
Net sales
  $ 412,363     $ 420,188     $ 472,490     $ 431,021     $ 479,000  
                                         
Net earnings
  $ 26,477     $ 41,252     $ 38,875     $ 47,968     $ 63,531  
                                         
Net earnings per share - Basic and Diluted
  $ 3.82     $ 5.97     $ 5.64     $ 6.98     $ 9.26  
                                         
Total assets
  $ 382,598     $ 393,540     $ 353,912     $ 411,641     $ 415,133  
                                         
Dividends paid per common share applicable to current year
                                       
      Regular
  $ 1.00     $     $ 1.00     $ 1.00     $ 1.00  
      Extra
    4.05             5.00       7.25       7.15  
      2013 Regular
          *     1.00 *            
      2013 Extra
          *     5.50 *            
         Total
  $ 5.05     $     $ 12.50     $ 8.25     $ 8.15  

* Fiscal year 2012 reflects the 2012 dividend paid in March, as well as a second accelerated payment made in late December of the annual 2013 dividend.  The acceleration was occasioned by the uncertainty over the federal income tax rate that would be in effect in 2013.
 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2014 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 19, 2015, 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 Companys Securities and Exchange Commission filings.

2014 COMPARED TO 2013

Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2014 and 2013.

On a consolidated basis, sales decreased by $7,825,000 (2%), gross profit decreased by $2,151,000 (3%), selling and general expense increased by $1,985,000 (9%), and intangibles amortization increased by $11,324,000 (1,699%).  Other income, principally interest, decreased by $365,000 (50%), while earnings before provision for income taxes decreased by $18,048,000 (31%), and net earnings decreased by $14,775,000 (36%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased $11,572,000 from $137,225,000 to $125,653,000, or 8%, primarily attributable to a decrease in units shipped.  Defense net sales increased by $15,347,000, from $206,198,000 to $221,545,000, or 7%, primarily reflecting shipments by its new division acquired during 2014 (“Tech Ord”), which is described in Note P to the Company’s Consolidated Financial Statements.  Absorbent Products net sales decreased by $11,600,000 from $76,765,000 to $65,165,000, or 15%, and was primarily attributable to a decrease in units shipped, reflecting the ongoing shift in the segment’s customer base.

Housewares/Small Appliance gross profit decreased $1,477,000 from $26,850,000 (20% of sales) in 2013 to $25,373,000 (20% of sales) in 2014, primarily reflecting the decrease in sales mentioned above.  Defense gross profit increased $7,041,000 from $50,168,000 (24% of sales) to $57,209,000 (26% of sales), primarily reflecting the increase in sales mentioned above.  Absorbent products gross profit decreased $7,715,000, from $2,334,000 to a loss of $5,381,000, largely reflecting the decrease in sales mentioned above, costs associated with the installation of new capital equipment and the absence of the prior year’s insurance settlement of $683,000.

Selling and general expenses for the Housewares/Small Appliance segment were flat. Defense segment selling and general expenses increased $1,640,000, primarily reflecting increased costs of $1,030,000 associated with its recently acquired Tech Ord division mentioned above and increases in employee compensation and benefit costs of $827,000.  Selling and general expenses for the Absorbent Products segment increased $287,000, primarily reflecting the absence of the prior year’s gain on the sale of obsolete equipment.
 
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Intangible assets primarily consist of the value of a government sales contract, product backlogs, and consulting and non-compete agreements recognized as a result of the acquisition of certain assets of DSE, Inc., more fully described in Note Q to the Company’s Consolidated Financial Statements, and the value of customer relationships, trademarks and non-compete agreements related to AMTEC Less Lethal Systems, Inc. (“ALS”), a reporting unit in the Company’s Defense segment.  ALS was formed in 2011 following the acquisition of certain assets of ALS Technologies, Inc., described in Note P to the Company’s Consolidated Financial Statements.  The intangible assets are all attributable to the Defense Products segment.  The government sales contract intangible asset is amortized based on units fulfilled under the three year contract, while the other intangible assets are amortized on a straight-line basis that approximates economic use, over periods ranging from one to nine years.  The increase in amortization is primarily attributable to the acquired government sales contract, under which significant shipments began in 2014.

Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  During 2014, the Company noted that the carrying amount of the customer relationships, trademarks and non-compete agreements related to ALS mentioned above exceeded the undiscounted cash flows expected to result from their use.  As a result, an impairment loss of $2,063,000 was recognized based on the Company’s analysis comparing the fair value of the intangible assets and their carrying amounts.  The fair value of the intangible assets was determined using a discounted cash flow model.

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated, such as the occurrence of an event that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.  A goodwill impairment of $2,840,000 was recognized during 2013, related to ALS mentioned above.  The impairment was recognized as a result of the Company’s analysis comparing the implied fair value of the reporting unit’s goodwill to its recorded carrying amount.  The fair value used in the evaluation of the goodwill impairment was determined using a multiple of EBITDA approach and discounted cash flow estimates.
 
During 2013, the Company adjusted its recorded liability for contingent consideration related to the 2011 acquisition of certain assets of ALS Technologies, Inc. mentioned above.  During the fourth quarter of 2013, the Company estimated that the earnings targets for the three calendar years following the year of acquisition, upon which the contingent consideration liability was based, would be not be achieved.  As a result, the entire contingent consideration liability of $3,000,000 was reversed.

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

Other income decreased $365,000, which was primarily attributable to lower interest income resulting from decreased yields on lower dollars of marketable securities invested.

Earnings before provision for income taxes decreased $18,048,000 from $58,345,000 to $40,297,000.  The provision for income taxes decreased from $17,093,000 to $13,820,000, which resulted in an effective income tax rate increase from 29% in 2013 to 34% in 2014.  The increase in the tax rate is primarily attributable to a revision to the filing approach used for one of the states in which the Company files returns, resulting in a tax refund of $4,000,000, which was recorded in 2013.  Net earnings decreased $14,775,000 from $41,252,000 to $26,477,000.

2013 COMPARED TO 2012

Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2013 and 2012.

On a consolidated basis, sales decreased by $52,302,000 (11%), gross profit decreased by $15,511,000 (16%), and selling and general expense decreased by $12,864,000 (38%).  Other income, principally interest, increased by $26,000 (4%), while earnings before provision for income taxes decreased by $2,079,000 (3%), and net earnings increased by $2,377,000 (6%).  Details concerning these changes can be found in the comments by segment found below.
 
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Housewares/Small Appliance net sales decreased $7,798,000 from $145,023,000 to $137,225,000, or 5%, primarily attributable to a decrease in units shipped. Defense net sales decreased by $38,800,000, from $244,998,000 to $206,198,000, or 16%, primarily reflecting a decrease in unit shipments, a significant part of which was attributable to a reduction in shipments of 40mm ammunition to the U.S. government and in cartridge case and loading plant shipments to prime contractors. Absorbent Products net sales decreased by $5,704,000 from $82,469,000 to $76,765,000, or 7%, and was primarily attributable to a decrease in unit shipments due in large part to a decline in shipments to a significant customer which opened its own facility during the fourth quarter of 2011.

Housewares/Small Appliance gross profit decreased $1,008,000 from $27,858,000 (19% of sales) in 2012 to $26,850,000 (20% of sales) in 2013, primarily reflecting the decrease in sales.  Defense gross profit decreased $13,927,000 from $64,095,000 (26% of sales) to $50,168,000 (24% of sales), primarily reflecting the decrease in sales mentioned above.  Absorbent products gross profit decreased $576,000, from $2,910,000 (4% of sales) to $2,334,000 (3% of sales), largely reflecting the decrease in sales mentioned above.  These decreases were partially offset by an insurance settlement of $683,000 in 2013 and the absence of the prior year’s deferral of revenue recognition on the sales of raw materials of $1,122,000 to an independent manufacturing facility, which was written off in 2012.  A description of the Company’s relationship with the facility can be found in Note S to the Company’s Consolidated Financial Statements.

Selling and general expenses for the Housewares/Small Appliance segment decreased $2,278,000 from the prior year’s level.  Significant items were the absence of 2012’s litigation costs stemming from lawsuits of a spurious nature and corporate employee health and accident costs of $1,220,000 and $1,408,000, respectively. Defense segment selling and general expenses increased $1,223,000, primarily reflecting legal and professional costs related to the acquisition of certain assets.  Selling and general expenses for the Absorbent Products segment decreased $11,809,000, which was primarily related to the 2012 one-time write-down of receivables and equipment attributed to the financial difficulties of a foreign independent manufacturing facility.  During 2012, due to uncertainties attributed to the facility’s government’s legal system and the financial health of the facility, all Company-owned equipment located at the foreign facility was written off, as well as all note and accounts receivables related to the facility.

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated, such as the occurrence of an event that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.  A goodwill impairment of $2,840,000 was recognized during 2013, related to AMTEC Less Lethal Systems, Inc. (“ALS”), a reporting unit in the Company’s Defense segment.  ALS was formed in 2011 following the acquisition of certain assets of ALS Technologies, Inc., described in Note P to the Company’s Consolidated Financial Statements.  The impairment was recognized as a result of the Company’s analysis comparing the implied fair value of the reporting unit’s goodwill to its recorded carrying amount.  The fair value used in the evaluation of the goodwill impairment was determined using a multiple of EBITDA approach and discounted cash flow estimates.
 
During 2013, the Company adjusted its recorded liability for contingent consideration related to the 2011 acquisition of certain assets of ALS Technologies, Inc. mentioned above.  During the fourth quarter of 2013, the Company estimated that the earnings targets for the three calendar years following the year of acquisition, upon which the contingent consideration liability is based, would be not be achieved.  As a result, the entire contingent consideration liability of $3,000,000 was reversed.

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

Earnings before provision for income taxes decreased $2,079,000 from $60,424,000 to $58,345,000.  The provision for income taxes decreased from $21,549,000 to $17,093,000, which resulted in an effective income tax rate decrease from 36% in 2012 to 29% in 2013.  The decrease in the tax rate is primarily attributable to a revision to the filing approach used for one of the states in which the Company files returns, resulting in a tax refund of $4,000,000.  Net earnings increased $2,377,000 from $38,875,000 to $41,252,000.
 
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LIQUIDITY AND CAPITAL RESOURCES

2014 COMPARED TO 2013

Cash provided by operating activities was $73,213,000 during 2014 as compared to $24,219,000 during 2013.  The principal factors behind the increase in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2014 were net earnings of $26,477,000, which included total non-cash depreciation and amortization expenses of $21,819,000 and impairment of intangible assets charges of $2,063,000; decreases in accounts receivable and inventory levels; and decreases in deposits with vendors included in other current assets.  These were partially offset by decreases in net payables.  Of particular note during 2013 were net earnings of $41,252,000, which included total non-cash depreciation and amortization expenses of $8,944,000, and an increase in net payables.  These were partially offset by increases in deposits with vendors included in other current assets, inventory levels, and account receivable levels.

Net cash used in investing activities was $7,531,000 during 2014 as compared to $38,703,000 used during 2013.  During 2014, the Company continued its expansion of the Absorbent Products segment by purchasing plant and equipment in the amount of $11,287,000.  The Company also acquired 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, which is described in Note P to the Company’s Consolidated Financial Statements, totaling $10,534,000.  These were partially offset by net maturities/sales of marketable securities of $13,983,000.  Of note during 2013 were the acquisitions of machinery and equipment of $14,245,000 and a customer contract of $21,968,000, primarily related to the acquisition of a group of assets described in Note Q to the Company’s Consolidated Financial Statements; and the acquisition of plant and equipment of $22,011,000, related to the expansion of the Company’s Absorbent Products and Defense segments. These were partially offset by net maturities/sales of marketable securities of $19,112,000.

Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2014 and 2013, $13,600,000 and $15,579,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.

Cash flows from financing activities for 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.

As a result of the foregoing factors, cash and cash equivalents increased in 2014 by $31,090,000 to $54,043,000.

Working capital decreased by $1,602,000 to $208,241,000 at December 31, 2014 for the reasons stated above.  The Company’s current ratio was 5.4 to 1.0 at December 31, 2014, compared to 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.  See Items 1-A-2 and 1-A-3.

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.
 
18

 

 

 
2013 COMPARED TO 2012

Cash provided by operating activities was $24,219,000 during 2013 as compared to $62,342,000 during 2012.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2013 were net earnings of $41,252,000, which included total non-cash depreciation and amortization expenses of $8,944,000, and an increase in net payables.  These were partially offset by increases in deposits with vendors included in other current assets, inventory levels, and account receivable levels.  Of particular note during 2012 were net earnings of $38,875,000, which included total non-cash depreciation and amortization expenses of $11,185,000, impairment of equipment of $5,725,000, and provision for doubtful accounts of $5,629,000; and decreases in inventory levels and deposits with vendors included in other current assets.  These were partially offset by a decrease in net payables and an increase in accounts receivable levels.

Net cash used in investing activities was $38,703,000 during 2013 as compared to $13,578,000 used in investing activities during 2012.  Of note during 2013 were the acquisitions of machinery and equipment of $14,245,000 and a customer contract of $21,968,000, primarily related to the acquisition of a group of assets described in Note Q to the Company’s Consolidated Financial Statements; and the acquisition of plant and equipment of $22,011,000, related to the expansion of the Company’s Absorbent Products and Defense segments. These were partially offset by net maturities/sales of marketable securities of $19,112,000.  Of note during 2012 were the acquisition of plant and equipment of $13,584,000, primarily to support the expansion of the Absorbent Products segment, and a note receivable of $3,500,000.  The note receivable is described further in Note S to the Consolidated Financial Statements.  These were partially offset by net maturities/sales of marketable securities of $3,744,000.

Based on the accounting profession’s 2005 interpretation of cash equivalents under FASB ASC 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2013 and 2012, $15,579,000 and $31,092,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.

Cash used in financing activities for 2013 and 2012 differed primarily as a result of the payment of two dividends in 2012.  The first was the 2012 dividend paid in March, while the second was an accelerated payment made in late December 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.  No dividends were paid in 2013.

As a result of the foregoing factors, cash and cash equivalents decreased in 2013 by $14,484,000 to $22,953,000.

Working capital decreased by $4,938,000 to $209,843,000 at December 31, 2013 for the reasons stated above.  The Company’s current ratio was 4.9 to 1.0 at December 31, 2013, compared to 4.8 to 1.0 at December 31, 2012.

DEFENSE SEGMENT BACKLOG

The Company’s Defense segment contract backlog was approximately $407,000,000 at December 31, 2014, and $452,000,000 at December 31, 2013.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during a 24 to 30-month period.
 
19

 

 


CONTRACTUAL OBLIGATIONS
 
The table below discloses a summary of the Company’s specified contractual obligations at December 31, 2014:
                                 
     
Payments Due By Period (In thousands)
 
               
Contractual Obligations
   
Total
   
Under 1 Year
   
1-3 Years
   
3-5 Years
   
More Than
5 Years
 
                                 
Operating lease obligations
    $ 1,249     $ 476     $ 539     $ 221     $ 13  
Purchase obligations(1)
      198,670       198,670       0       0       0  
Total
    $ 199,919     $ 199,146     $ 539     $ 221     $ 13  
 
 
(1)Purchase obligations includes outstanding purchase orders at December 31, 2014.  Included are purchase orders issued to the Company’s housewares manufacturers in the Orient, to equipment manufacturers of absorbent products machinery, and to material suppliers and building contractors in the Defense and Absorbent Products segments.  The Company can cancel or change many of these purchase orders, but may incur costs if its supplier cannot use the material to manufacture the Company’s or other customers’ products in other applications or return the material to their supplier.  As a result, the actual amount the Company is obligated to pay cannot be estimated.
 
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 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 year 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 & 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.
 
20

 

 

 
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.
 
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, including the value of a government sales contract, customer relationships, trademarks, product backlogs, and consulting and non-compete agreements. 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.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
Please refer to Note A(18) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.
 
ITEM 7A. 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 230, the Company’s 7-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 7 days that can be tendered to the trustee or remarketer upon 7 days notice for payment of principal and accrued interest amounts.  The 7-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 known 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 rate municipal bonds with an average life of 1.5 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 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
A.  
The Consolidated Financial Statements of National Presto Industries, Inc. and its subsidiaries and the related Report of Independent Registered Public Accounting Firm can be found on pages F-1 through F-19.
 
B.  Quarterly financial data is contained in Note N to the Consolidated Financial Statements.
 
21

 

 

 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None
 
ITEM 9A. CONTROLS AND PROCEDURES
 
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of December 31, 2014.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date.
 
There were no changes to internal control over financial reporting during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of National Presto Industries, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act.  The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 framework). Based on our assessment and those criteria, management concluded that, as of December 31, 2014, the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the 1934 Act, was effective.  Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Tech Ord, which was acquired on January 24, 2014, and which is included in the consolidated balance sheets of the Company as of December 31, 2014, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year then ended. Tech Ord constituted 3% of both total assets and net assets as of December 31, 2014, and 3% and 5% of net sales and net earnings, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Tech Ord because of the timing of the acquisition, which was completed on January 24, 2014.
 
The Company’s independent registered public accounting firm has issued its report on the effectiveness of the Company’s internal control over financial reporting.  The report appears below.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Stockholders
National Presto Industries, Inc.
Eau Claire, Wisconsin
 
We have audited National Presto Industries, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  National Presto Industries, Inc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Assessment of Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
22

 

 

 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
As indicated in the accompanying Item 9A, Management’s Assessment of Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Tech Ord, which was acquired on January 24, 2014, and which is included in the consolidated balance sheets of National Presto Industries, Inc. as of December 31, 2014, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year then ended. Tech Ord constituted 3% of both total assets and net assets as of December 31, 2014, and 3% and 5% of net sales and net earnings, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Tech Ord because of the timing of the acquisition which was completed on January 24, 2014.  Our audit of internal control over financial reporting of National Presto Industries, Inc. also did not include an evaluation of the internal control over financial reporting of Tech Ord.
 
In our opinion, National Presto Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National Presto Industries, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March 16, 2015 expressed an unqualified opinion thereon.
 
/s/ BDO USA, LLP
Milwaukee, Wisconsin
March 16, 2015
 
ITEM 9B.  OTHER INFORMATION
 
None
 
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PART III
 
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE IDENTIFICATION OF EXECUTIVE OFFICERS
 
The following information is provided with regard to the executive officers of the registrant:
(All terms for elected officers are one year or until their respective successors are elected.)
 
                     
  NAME
 
   
 TITLE
 
   
 AGE
 
         
Maryjo Cohen
 
Chair of the Board, President, and Chief Executive Officer,
 
62
         
Randy F. Lieble
 
Vice President, Chief Financial Officer, Treasurer, and Director
 
61
         
Lawrence J. Tienor
 
Vice President, Engineering
 
66
       
 
Douglas J. Frederick
 
Secretary and General Counsel
 
44
         
Spencer W. Ahneman
 
Vice President, Sales
 
60
 
Ms. Cohen became Chair of the Board on January 1, 2002.  Prior to that date she had been elected Treasurer in September 1983, Vice President in May 1986, President in May 1989 and Chief Executive Officer in May 1994.  She has been associated with the registrant since 1976.  Prior to becoming an officer, she was Associate Resident Counsel and Assistant to the Treasurer.
 
Mr. Lieble was elected Chief Financial Officer, Vice President and Treasurer on September 8, 2008.   He has been a member of the Board of Directors since 2008. Other than a brief hiatus of one year during which he worked as a financial advisor for UBS Financial Services, Mr. Lieble had worked for the registrant since 1977 in a variety of capacities, including the positions listed above.
 
Mr. Tienor was elected Vice President, Engineering in November 2003.  He has been associated with the registrant since 1971.  Prior to becoming an officer, he was Director of Engineering. After 43 years with the Company and 11 years as Vice President, Engineering, pursuant to personal plans, Mr. Tienor retired and resigned his officer position as of February 27, 2015.
 
Mr. Frederick was elected Corporate Secretary on November 17, 2009.  He has been associated with the registrant since 2007 as an in-house attorney with expertise in litigation and intellectual property matters and in the capacity of General Counsel since January 2009.  Prior to his employment with the registrant, Mr. Frederick was a litigation attorney with the firm Rider Bennett, LLP.
 
Mr. Ahneman was elected Vice President, Sales in May 2013.  He has been associated with the registrant since 1977.  Prior to becoming an officer, he was National Account Sales Manager.
 
The information under the headings “Section 16(a) Beneficial Ownership Reporting Compliance,” “Information Concerning Directors and Nominees” and “Corporate Governance” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders is incorporated by reference.
 
The Company has adopted a code of ethics that applies to all Company employees, entitled the “Corporate Code of Conduct,” which is set forth in the Corporate Governance section of the Company’s website located at www.gopresto.com.  The Company intends to make all required disclosures concerning any amendments to, or waivers from, its Corporate Code of Conduct by the posting of such information on that section of its website.
 
24

 

 

 
ITEM 11.  EXECUTIVE COMPENSATION
 
The information under the headings “Executive Compensation and Other Information,” “Summary Compensation Table,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders is incorporated by reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The security ownership and related stockholder matters information set forth under the heading “Voting Securities and Principal Holders Thereof” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders is incorporated by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The certain relationships and related transactions and director independence information set forth under the heading “Corporate Governance” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders is incorporated by reference.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The principal accountant fees and services information set forth under the heading “Independent Registered Public Accountants” in the Company’s Proxy Statement for its 2015 Annual Meeting of Stockholders is incorporated by reference.
 
25

 

 

 
PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
           
 
(a)
Documents filed as part of this Form 10-K:
 
         
Form 10-K
         
Page Reference
   
1.
Consolidated Financial Statements:
 
           
     
F-1 & F-2
           
     
F-3
           
     
F-4
           
     
F-5
           
     
F-6 through F-18
           
     
F-19
           
   
2.
Consolidated Financial Statement Schedule:
 
           
     
F-20
 
  (b)          Exhibits:    
       
 
Exhibit Number
   
Description
 
       
 
Exhibit 3(i)
 
Restated Articles of Incorporation – incorporated by reference from Exhibit 3(i) of the Company’s report on Form 10-K/A for the year ended December 31, 2005
       
 
Exhibit 3(ii)
 
By-Laws - incorporated by reference from Exhibit 3(ii) of the Companys current report on Form 8-K dated July 6, 2007
       
 
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
       
 
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
       
 
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
       
 
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
       
     
* Compensatory Plans
       
 
Exhibit 21
 
Subsidiaries of the Registrant
       
 
Exhibit 23.1
 
Consent of BDO USA, LLP
       
 
Exhibit 31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
26

 

 

 
 
Exhibit Number
   
Description
 
       
 
Exhibit 31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
Exhibit 32.1
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
Exhibit 32.2
 
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
Exhibit 101
 
The following financial information from National Presto Industries, Inc.’s annual report on Form 10-K for the period ended December 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity, (v) Notes to Consolidated Financial Statements, and (vi) Schedule II - Valuation and Qualifying Accounts.
       
 
(c)  Schedules:
   

            Reference is made to Item 15(a)2 of this Form 10-K.

27

 

 

SIGNATURES
 
Pursuant to the Requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
NATIONAL PRESTO INDUSTRIES, INC.
(registrant)
 
       
 
By:
/S/ Maryjo Cohen  
   
Maryjo Cohen
 
   
President and Chief Executive Officer
 
Date: March 16, 2015
     
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
           
By:
/S/ Richard N. Cardozo 
  By:
/S/ Patrick J. Quinn
 
 
Richard N. Cardozo
   
Patrick J. Quinn
 
 
Director
   
Director
 
           
By:
/S/ Maryjo Cohen  
  By:
/S/ Joseph G. Stienessen
 
 
Maryjo Cohen 
   
Joseph G. Stienessen
 
 
Chair of the Board, President,
   
Director
 
  Chief Executive Officer (Principal        
 
Executive Officer), and Director
       
           
By:
/S/ Randy F. Lieble
   
 
 
 
Randy F. Lieble
   
 
 
 
Vice President, Chief Financial
   
 
 
  Officer (Principal Financial        
  Officer), Treasurer, and Director        
           
Date: March 16, 2015        
      
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NATIONAL PRESTO INDUSTRIES, INC.
(Dollars in thousands except share and per share data)
 
December 31
 
2014
   
2013
 
ASSETS
                       
                         
CURRENT ASSETS:
                       
                         
Cash and cash equivalents
        $ 54,043           $ 22,953  
                             
Marketable securities
          22,404             36,404  
                             
Accounts receivable
  $ 70,171             $ 85,400          
                                 
Less allowance for doubtful accounts
    1,419       68,752       1,078       84,322  
                                 
Inventories:
                               
                                 
Finished goods
    30,308               36,078          
                                 
Work in process
    50,569               49,690          
                                 
Raw materials and supplies
    8,181       89,058       6,746       92,514  
                                 
Deferred tax assets
            6,623               8,083  
                                 
Income tax receivable
            1,668               213  
                                 
Other current assets
            14,321               19,584  
                                 
Total current assets
            256,869               264,073  
                                 
PROPERTY, PLANT AND EQUIPMENT:
                               
                                 
Land and land improvements
    4,757               4,007          
                                 
Buildings
    39,927               37,809          
                                 
Machinery and equipment
    126,580               114,056          
                                 
      171,264               155,872          
                                 
Less allowance for depreciation and amortization
    75,721       95,543       66,283       89,589  
                                 
GOODWILL
            11,485               11,485  
                                 
INTANGIBLE ASSETS, net
            10,644               24,698  
                                 
NOTE RECEIVABLE
            3,818               3,695  
                                 
            $ 378,359             $ 393,540  
 
The accompanying notes are an integral part of the Consolidated Financial Statements.
 
F-1

 

 

 
NATIONAL PRESTO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)

December 31
 
2014
   
2013
 
LIABILITIES
                       
                         
CURRENT LIABILITIES:
                       
                         
Accounts payable
        $ 32,948           $ 38,323  
                             
Accrued liabilities
          15,680             15,907  
                             
Total current liabilities
          48,628             54,230  
                             
DEFERRED INCOME TAXES
          4,288             6,759  
                             
COMMITMENTS AND CONTINGENCIES
                           
                             
STOCKHOLDERS’ EQUITY
                           
                             
Common stock, $1 par value:
                           
Authorized: 12,000,000 shares at December 31, 2014 and 2013
                           
Issued: 7,440,518 shares at December 31, 2014 and 2013
                           
Outstanding: 6,917,222 and 6,902,053 shares at December 31, 2014 and 2013, respectively
  $ 7,441             $ 7,441          
                                 
Paid-in capital
    5,906               4,998          
                                 
Retained earnings
    328,417               336,895          
                                 
Accumulated other comprehensive income
    (3 )             8          
                                 
      341,761               349,342          
      
                               
Less treasury stock, at cost, 523,296 and 538,465 shares at December 31, 2014 and 2013, respectively
    16,318               16,791          
   Total stockholders’ equity
            325,443               332,551  
                                 
            $ 378,359             $ 393,540  
    
The accompanying notes are an integral part of the Consolidated Financial Statements.
 
F-2

 

 

 
NATIONAL PRESTO INDUSTRIES, INC.
 
 
(In thousands except per share data)
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
Net sales
  $ 412,363     $ 420,188     $ 472,490  
                         
Cost of sales
    335,162       340,836       377,627  
                         
Gross profit
    77,201       79,352       94,863  
                         
Selling and general expenses
    23,216       21,231       34,095  
                         
Intangibles amortization
    11,991       667       1,049  
                         
Impairment of finite lived intangible assets
    2,063              
                         
Goodwill impairment
          2,840        
                         
Change to contingent consideration liability
          (3,000 )      
                         
Operating profit
    39,931       57,614       59,719  
                         
Other income, principally interest
    366       731       705  
                         
Earnings before provision for income taxes
    40,297       58,345       60,424  
                         
Provision for income taxes
    13,820       17,093       21,549  
                         
Net earnings
  $ 26,477     $ 41,252     $ 38,875  
                         
Weighted average common shares outstanding:
                       
Basic and diluted
    6,930       6,907       6,889  
                         
Net earnings per share:
                       
Basic and diluted
  $ 3.82     $ 5.97     $ 5.64  
                         
Comprehensive income:
                       
                         
Net earnings
    26,477       41,252       38,875  
                         
Other comprehensive loss, net of tax:
                       
Unrealized loss on available-for-sale securities
    11       45       19  
                         
Comprehensive income
  $ 26,466     $ 41,207     $ 38,856  
                         
The accompanying notes are an integral part of the Consolidated Financial Statements.
 
 
F-3

 

 

 
NATIONAL PRESTO INDUSTRIES, INC.
                 
                 
(In Thousands)
                 
                   
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
                   
Cash flows from operating activities:
                 
Net earnings
  $ 26,477     $ 41,252     $ 38,875  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Intangibles amortization
    11,991       667       1,049  
Provision for depreciation
    9,828       8,277       10,136  
Deferred income tax provision (benefit)
    (1,005 )     239       (4,792 )
Impairment of finite lived intangible assets
    2,063              
Change in contingent consideration liability
          (3,000 )      
Goodwill impairment
          2,840        
Loss (gain) on disposal and impairment of property, plant and equipment
    (2 )     (154 )     5,843  
Provision for doubtful accounts
    532       816       5,629  
Other
    846       608       568  
Changes in operating accounts:
                       
Accounts receivable, net
    16,536       (8,533 )     (6,546 )
Inventories
    8,144       (9,150 )     11,091  
Other current assets
    5,291       (10,728 )     10,360  
Accounts payable and accrued liabilities
    (6,033 )     2,948       (9,999 )
Federal and state income taxes receivable/payable
    (1,455 )     (1,863 )     128  
Net cash provided by operating activities
    73,213       24,219       62,342  
                         
Cash flows from investing activities:
                       
Marketable securities purchased
    (8,976 )     (6,151 )     (26,023 )
Marketable securities - maturities and sales
    22,959       25,263       29,767  
Acquisition of property, plant and equipment
    (11,287 )     (36,256 )     (13,584 )
Acquisition of customer contract
          (21,968 )      
Notes issued
                (3,500 )
Sale of property, plant and equipment
    307       409       8  
Acquisition of businesses, net of cash acquired
    (10,534 )           (246 )
Net cash used in investing activities
    (7,531 )     (38,703 )     (13,578 )
                         
Cash flows from financing activities:
                       
Dividends paid
    (34,954 )           (86,106 )
Other
    362             784  
Net cash used in financing activities
    (34,592 )           (85,322 )
                         
Net increase (decrease) in cash and cash equivalents
    31,090       (14,484 )     (36,558 )
Cash and cash equivalents at beginning of year
    22,953       37,437       73,995  
Cash and cash equivalents at end of year
  $ 54,043     $ 22,953     $ 37,437  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during the year for:
                       
Income taxes
  $ 17,411     $ 19,076     $ 26,532  
                         
The accompanying notes are an integral part of the Consolidated Financial Statements.
 
 
F-4

 

 

 
NATIONAL PRESTO INDUSTRIES, INC.
     
     
(In thousands except per share data)
     
 
For the years ended December 31, 2014, 2013, 2012
   
                                           
   
Shares of
Common
Stock
Outstanding
   
Common
Stock
   
Paid-in
Capital
   
Retained 
Earnings
   
Accumulated
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
Balance December 31, 2011
    6,875     $ 7,441     $ 3,539     $ 342,873     $ 72     $ (17,635 )   $ 336,290  
                                                         
Net earnings
                            38,875                       38,875  
                                                         
Unrealized loss on available-for-sale securities, net of tax
                                    (19 )             (19 )
                                                         
Dividends paid March 15, $1.00 per share regular, $5.00 per share extra
                            (41,292 )                     (41,292 )
                                                         
Dividends paid December 28, $1.00 per share regular, $5.50 per share extra
                            (44,814 )                     (44,814 )
                                                         
Other
    19               933       1               597       1,531  
                                                         
Balance December 31, 2012
    6,894       7,441       4,472       295,643       53       (17,038 )     290,571  
                                                         
Net earnings
                            41,252                       41,252  
                                                         
Unrealized loss on available-for-sale securities, net of tax
                                    (45 )             (45 )
                                                         
Other
    8               526                       247       773  
                                                         
Balance December 31, 2013
    6,902       7,441       4,998       336,895       8       (16,791 )     332,551  
                                                         
Net earnings
                            26,477                       26,477  
                                                         
Unrealized loss on available-for-sale securities, net of tax
                                    (11 )             (11 )
                                                         
Dividends paid March 14, $1.00 per share regular, $4.05 per share extra
                            (34,954 )                     (34,954 )
                                                         
Other
    15               908       (1 )             473       1,380  
                                                         
Balance December 31, 2014
    6,917     $ 7,441     $ 5,906     $ 328,417     $ (3 )   $ (16,318 )   $ 325,443  
                                                         
The accompanying notes are an integral part of the Consolidated Financial Statements.
 
 
F-5

 

 

 
NATIONAL PRESTO INDUSTRIES, INC.
 
A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
 
 (1)   
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:  In preparation of the Companys Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and related revenues and expenses.   Actual results could differ from the estimates used by management.
 
  (2)   
BASIS OF PRESENTATION:  The Consolidated Financial Statements include the accounts of National Presto Industries, Inc. and its subsidiaries, all of which are wholly-owned.  All material intercompany accounts and transactions are eliminated.  For a further discussion of the Company’s business and the segments in which it operates, please refer to Note L.
 
  (3)   
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.
 
  (4)   
FAIR VALUE OF FINANCIAL INSTRUMENTS:  The Company utilizes the methods of determining 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.  The fair value of marketable securities are discussed in Note A(5).

(5)  
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES:
 
Cash and Cash Equivalents:  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’s cash management policy provides for its bank disbursement accounts to be reimbursed on a daily basis.  Checks issued but not presented to the bank for payment of $7,039,000 and $3,389,000 at December 31, 2014 and 2013, respectively, are included as reductions of cash and cash equivalents or bank overdrafts in accounts payable, as appropriate.
 
Marketable Securities:  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.
 
F-6

 

 

 
At December 31, 2014 and 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 December 31 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 2014 and 2013.
                           
     
(In thousands)
 
     
MARKETABLE SECURITIES
 
     
Amortized Cost
   
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
 
 
December 31, 2014
                       
 
Tax-exempt Municipal Bonds
  $ 8,809     $ 8,804     $ 5     $ 10  
 
Variable Rate Demand Notes
    13,600       13,600              
 
Total Marketable Securities
  $ 22,409     $ 22,404     $ 5     $ 10  
                                   
 
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  
 
Proceeds from sales and maturities of marketable securities totaled $22,959,000 in 2014, $25,263,000 in 2013, and $29,767,000 in 2012.  There were no realized gross gains or losses related to sales of marketable securities during the years ended December 31, 2014, 2013 and 2012.  Net unrealized losses included in other comprehensive income were $17,000, $70,000 and $30,000 before taxes for the years ended December 31, 2014, 2013, and 2012, 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 December 31, 2014 are as follows: $3,523,000 within one year; $6,152,000 beyond one year to five years; $8,108,000 beyond five years to ten years, and $4,621,000 beyond ten years. All of the instruments in the beyond five year ranges are variable rate demand notes which, as noted above, 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.
 
  (6)    
ACCOUNTS RECEIVABLE:  The Company’s accounts receivable are related to sales of products.  Credit is extended based on prior experience with the customer and evaluation of customers’ financial condition.  Accounts receivable are primarily due within 30 to 60 days.  The Company does not accrue interest on past due accounts receivable.  Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer.  The allowance for doubtful accounts represents an estimate of amounts considered uncollectible and is determined based on the Company’s historical collection experience, adverse situations that may affect the customer’s ability to pay, and prevailing economic conditions.
 
  (7)   
INVENTORIES:  Housewares/Small Appliance segment inventories are stated at the lower of cost or market with cost being determined principally on the last-in, first-out (LIFO) method.  Inventories for the Defense and Absorbent Products segments are stated at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) method.  The Company evaluates inventories to determine if there are any excess or obsolete inventories on hand.
 
  (8)   
PROPERTY, PLANT AND EQUIPMENT:  Property, plant and equipment are stated at cost.  For machinery and equipment, all amounts which are fully depreciated have been eliminated from both the asset and allowance accounts.  Straight-line depreciation is provided in amounts sufficient to charge the costs of depreciable assets to operations over their service lives which are estimated at 15 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 15 to 20 years for land improvements.  The Company reviews long lived assets consisting principally of property, plant, and equipment, for impairment when material events and changes in circumstances indicate the carrying value may not be recoverable.  See Note S for a discussion of impairment charges recorded in the fourth quarter of 2012.  Approximately $8,100,000 of construction in progress in the Company’s Absorbent Products segment is presented on the Consolidated Balance Sheet as Machinery and Equipment at December 31, 2014.
 
F-7

 

 

 
  (9)   
GOODWILL:  The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated, such as the occurrence of an event that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value.  Goodwill impairments of $0, $2,840,000, and $0 were recognized during 2014, 2013, and 2012, respectively.  The 2013 impairment related to AMTEC Less Lethal Systems, Inc. (“ALS”), a reporting unit in the Company’s Defense segment.  ALS was created in 2011 following the acquisition of certain assets of ALS Technologies, Inc., described in Note P.  The impairment was recognized as a result of the Company’s analysis comparing the implied fair value of the reporting unit’s goodwill to its recorded carrying amount.  The fair value used in the evaluation of the goodwill impairment was determined using a multiple of EBITDA approach and discounted cash flow estimates.  See Note R for a discussion of a contingent consideration liability reversal of $3,000,000 related to ALS in 2013.
 
The Company’s goodwill as of December 31, 2014 and 2013 was $11,485,000, relating entirely to its Defense Products segment, which had cumulative impairment charges at December 31, 2014 of $2,840,000.
 
  (10)   
INTANGIBLE ASSETS:  Intangible assets primarily consist of the value of a government sales contract, product backlogs, and consulting and non-compete agreements recognized as a result of the acquisition of certain assets of DSE, Inc., more fully described in Note Q, and the value of customer relationships, trademarks and non-compete agreements related to ALS mentioned above.  The intangible assets are all attributable to the Defense Products segment.  The government sales contract intangible asset is amortized based on units fulfilled under the three year contract, while the other intangible assets are amortized on a straight-line basis that approximates economic use, over periods ranging from one to nine years.
 
Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  During 2014, the Company noted that the carrying amount of the customer relationships, trademarks and non-compete agreements related to ALS mentioned above exceeded the undiscounted cash flows expected to result from their use.  As a result, an impairment loss of $2,063,000 was recognized based on the Company’s analysis comparing the fair value of the intangible assets and their carrying amounts.  The fair value of the intangible assets was determined using a discounted cash flow model.
 
The gross carrying amounts of the government sales contract and other intangible assets subject to amortization were $21,690,000 and $278,000, respectively, totaling $21,968,000 at December 31, 2014.  The gross carrying amounts of the government sales contract and other intangible assets subject to amortization were $21,690,000 and $4,452,000, respectively, totaling $26,142,000 at December 31, 2013.  Accumulated amortization was $11,324,000 and $1,716,000 at December 31, 2014 and 2013, respectively.  Amortization expense was $11,991,000, $667,000, and $1,049,000 during the years ended December 31, 2014, 2013, and 2012, respectively.  Estimated amortization expense as of December 31, 2014 for the succeeding years is shown in the following table:
 
 
Years ending December 31:
   
(In thousands)
 
 
2015
    $ 5,330  
 
2016
      5,314  
 
  (11)   
REVENUE RECOGNITION: For all of its segments, the Company recognizes revenue when product is shipped or title passes pursuant to customers’ orders, the price is fixed and collection is reasonably assured.  For the Housewares/Small appliance segment, the Company provides for its 60-day over-the-counter return privilege and warranties at the time of shipment. Net sales for this segment are calculated by deducting early payment discounts and cooperative advertising allowances from gross sales.  The Company records cooperative advertising allowances when revenue is recognized.  See Note A(12) for a description of the Company’s policy for sales returns.
 
F-8

 

 

 
  (12)   
SALES & RETURNS: Sales are recorded net of estimated 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.
 
(13)   
 SHIPPING AND HANDLING COSTS:  In accordance with FASB ASC 605-45, Revenue Recognition, the Company includes shipping and handling revenues in net sales and shipping costs in cost of sales.
 
  (14)   
ADVERTISING:  The Company’s policy is to expense advertising as incurred and include it in selling and general expenses.  Advertising expense was $202,000, $363,000, and $210,000 in 2014, 2013, and 2012, respectively.
 
  (15)   
PRODUCT WARRANTY:  The Company’s Housewares/Small Appliance segment’s products are generally warranted to the original owner to be free from defects in material and workmanship for a period of 1 to 12 years from date of purchase.  The Company allows a 60-day over-the-counter initial return privilege through cooperating dealers.  The Company services its products through a corporate service repair operation.  The Company estimates its product warranty liability based on historical percentages which have remained relatively consistent over the years.
 
 
The product warranty liability is included in accounts payable on the balance sheet.  The following table shows the changes in product warranty liability for the period:
 
 
(In thousands)