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 2022 Annual Report to Shareholders, in the Proxy Statement for the
annual meeting to be held May 16, 2023, and in the Company's press releases and
oral statements made with the approval of an authorized executive officer are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. There are certain important factors that could cause results
to differ materially from those anticipated by some of the statements made
herein. Investors are cautioned that all forward-looking statements involve
risks and uncertainty. In addition to the factors discussed herein and in the
notes to Consolidated Financial Statements, among the other factors that could
cause actual results to differ materially are the following: consumer spending
and debt levels; interest rates; continuity of relationships with and purchases
by major customers; product mix; the benefit and risk of business acquisitions;
competitive pressure on sales and pricing; development and market acceptance of
new products; increases in material, freight/shipping, tariffs, or production
cost which cannot be recouped in product pricing; delays or interruptions in
shipping or production; 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 ability of startup businesses
to ultimately have the potential to be successful; the efficient start-up and
utilization of capital and equipment investments; political actions of federal
and state governments which could have an impact on everything from the value of
the U.S. dollar vis-à-vis other currencies to the availability of affordable
labor and energy; and security breaches and disruptions to our information
technology system. Additional information concerning these and other factors is
contained in the Company's Securities and Exchange Commission filings.
COVID-19 DISCLOSURE
All of the Company's businesses were deemed essential and as a result, all
operated during the COVID-19 shutdowns. Distribution systems of customers that
survived the shutdowns are largely intact as most key retail customers' outlets
have been open since third quarter 2020. Most customer offices are now open,
although some may not reopen until 2023. Trade shows, albeit with reduced
attendance, have resumed. Material, components, and finished goods continue to
be delayed due to the supply chain congestion. As a result of government
COVID-19 policies, material, transportation and labor costs have materially
increased. Labor shortages continue. Due to the Company's historical
conservative practices, it has no debt and has adequate balances to fund its
operations.
For historical information about the impact of the government responses to
COVID-19, please see "Item 1A. Risk Factors" titled "The COVID-19 or Other
Pandemics, Epidemics or Similar Public Health Crises Risks" included in this
Form 10-K for year ended December 31, 2022.
2022 COMPARED TO 2021
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, 2022 and
2021.
On a consolidated basis, sales decreased by $34,154,000 (10%), gross profit
decreased by $9,271,000 (14%), selling and general expense decreased by
$7,032,000 (21%), intangibles amortization increased by $368,000 (172%) and
Impairments - goodwill and intangible assets increased $5,295,000. Other income
increased by $1,387,000 (57%), earnings before provision for income taxes
decreased by $6,515,000 (20%), and net earnings decreased by $4,955,000
(19%). Details concerning these changes can be found in the comments by segment
below.
Housewares/Small Appliance net sales increased by $2,424,000, from $115,924,000
to $118,348,000, or 2%, primarily attributable to an increase in pricing and
changes in mix. Approximately 85% of the increase from price and mix changes
were offset by a decrease in units shipped. The increase was further offset by
the absence of the prior year's partial reversal of $1,530,000 of a reserve for
estimated refunds related to a product recall of indoor smokers. Defense net
sales decreased by $37,031,000, from $239,514,000 to $202,483,000, or 15%,
reflecting a decrease in units shipped.
Housewares/Small Appliance gross profit increased $7,039,000 from $9,974,000 (9%
of sales) in 2021 to $17,013,000 (14% of sales) in 2022, primarily reflecting
the changes in pricing and mix mentioned above, augmented by decreased ocean
cargo and inland freight costs, partially offset by the decrease in unit
shipments, as well as adjustments related to obsolete or excess inventory levels
of $3,613,000, and decreases in standard unit costs of $3,108,000 that were not
offset by decreases in the segment's LIFO inventory reserve. Defense gross
profit decreased $18,567,000 from $61,205,000 (26% of sales) to $42,638,000 (21%
of sales), primarily reflecting the decrease in sales mentioned above, a less
favorable mix, inefficiencies from labor shortages, delays in securing
materials and other supply chain issues. Due to the startup nature of the
businesses in the Safety segment, gross margins were negative in both years. A
reduction in the amount of write-downs of inventory and materials at Rusoh, Inc.
to reflect realizable values contributed to the comparative increase in gross
margin of $1,848,000.
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Selling and general expenses for the Housewares/Small Appliance segment
decreased $446,000, primarily reflecting lower health and accident expenses of
$699,000, product liability costs of $383,000, and insurance costs of $164,000.
These decreases were partially offset by higher legal and professional expenses
of $567,000 and compensation expenses of $175,000. Defense segment selling and
general expenses increased $680,000, primarily due to increased legal and
professional expenses of $302,000, increased compensation/payroll costs of
$209,000, and increased marketing costs of $121,000. Safety segment selling and
general expenses decreased $7,267,000, primarily reflecting the absence of prior
year impairment of $7,615,000 of notes receivable and related interest held
by Rusoh, Inc., augmented by the bargain purchase gain of $492,000 recognized
upon the acquisition of Knox Safety, Inc. See Note P. These were offset in
part by increased compensation expenses of $311,000 and legal and professional
expenses of $383,000, both largely related to the acquisition of Knox Safety,
Inc.
Intangibles amortization increased as a result of the acquisition of
contracts/customer relationship and intellectual property intangibles in the
acquisitions of Knox Safety, Inc. and Woodlawn Manufacturing, Ltd. See Note P to
the Consolidated Financial Statements.
Impairment - goodwill and intangible assets increased as a result of impairments
of goodwill and technology intangibles in the Safety segment. See Note A (10)
and Note A (11) to the Consolidated Financial Statements.
The above items were responsible for the change in operating profit from
continuing operations.
Other income increased $1,387,000, which was primarily attributable to higher
interest earned with higher yields, offset in part by a reduced portfolio of
marketable securities.
Earnings before provision for income taxes decreased $6,515,000 from $32,459,000
to $25,944,000. The provision for income taxes decreased from $6,805,000 to
$5,245,000, which resulted in an effective income tax rate of 20% and 21% for
the years ended December 31, 2022 and 2021, respectively. Net earnings
decreased $4,955,000 from $25,654,000 to $20,699,000.
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2021 COMPARED TO 2020
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 two business segments for the years ended December 31, 2021 and 2020.
On a consolidated basis, sales increased by $3,150,000 (1%), gross profit
decreased by $20,526,000 (24%), selling and general expense increased by
$5,648,000 (20%), and intangibles amortization decreased by $7,000 (3%). Other
income decreased by $1,362,000 (36%), earnings from continuing operations before
provision for income taxes decreased by $27,529,000 (46%), and earnings from
continuing operations decreased by $21,304,000 (45%). Details concerning these
changes can be found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $1,721,000, from $117,645,000
to $115,924,000, or 2%, primarily due to a decrease in shipments, approximately
54% of which was offset by an increase in prices. The decrease was further
offset by the partial reversal of prior year charges for estimated refunds
related to a product recall, which had a year over year favorable effect of
$3,603,000. Defense net sales increased by $4,869,000, from $234,645,000 to
$239,514,000, or 2%, reflecting an increase in units shipped.
Housewares/Small Appliance gross profit decreased $14,232,000 from $24,206,000
(21% of sales) in 2020 to $9,974,000 (9% of sales) in 2021, primarily due
to increased ocean cargo and product costs and the decreased sales mentioned
above, partially offset by the partial reversal of prior year charges for
estimated refunds related to a product recall, which had a year over year
favorable comparable impact of $4,923,000. Defense gross profit decreased
$1,356,000 from $62,561,000 (27% of sales) to $61,205,000 (26% of sales),
primarily reflecting the increase in sales mentioned above offset by a less
favorable mix and inefficiencies from labor shortages and delays in securing
materials. The segment's results were also unfavorably impacted by storm damage
that led to the shutdown of one of its lines for several months. Due to the
startup nature of both businesses in the Safety segment, gross margins were
negative in both years. The write-down of inventory and materials of $5,247,000
at Rusoh, Inc. to reflect realizable values contributed to the comparative
decrease in gross margin of $4,938,000.
Selling and general expenses for the Housewares/Small Appliance segment
decreased $1,230,000, primarily reflecting the absence of prior year marketing
production and media costs of $2,200,000 and lower product liability costs of
$364,000. These decreases were partially offset by higher health and accident
and legal and professional expenses of $314,000 and $259,000, respectively and
higher insurance costs of $449,000. Defense segment selling and general expenses
increased $354,000, approximately a third of which relates to higher health and
accident costs with the balance related to miscellaneous general and
administrative costs. Safety segment selling and general expenses increased
$6,640,000, primarily reflecting Rusoh, Inc.'s, impairment of notes receivable
and the related interest of $7,615,000 offset in part by reduced
compensation/payroll costs of $422,000 and professional expenses of $517,000.
The above items were responsible for the change in operating profit from
continuing operations.
Other income decreased $1,362,000, which was primarily attributable to lower
interest earned of $1,255,000 with lower yields on a reduced portfolio of
marketable securities.
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Earnings from continuing operations before provision for income taxes decreased
$27,529,000 from $59,988,000 to $32,459,000. The provision for income taxes from
continuing operations decreased from $13,030,000 to $6,805,000, which resulted
in an effective income tax rate of 21% and 22% for the years ended December 31,
2021 and 2020, respectively. Earnings from continuing operations and net
earnings decreased $21,304,000 from $46,958,000 to $25,654,000.
LIQUIDITY AND CAPITAL RESOURCES
2022 COMPARED TO 2021
Cash provided by operating activities was $8,768,000 during 2022 as compared to
$34,688,000 during 2021. 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 2022 were
net earnings of $20,699,000, which included a non-cash loss on impairment of
goodwill and intangible assets of $5,295,000 and total non-cash depreciation and
amortization expenses of $3,347,000. These were partially offset by a non-cash
deferred income tax benefit of $2,311,000 and increases in accounts receivable
and inventory levels. Of particular note during 2021 were net earnings of
$25,654,000, which included a non-cash provision for doubtful notes and accounts
receivable of $7,665,000, total non-cash depreciation and amortization expenses
of $2,978,000, a non-cash deferred income tax benefit of $1,612,000, and a net
decreases in deposits made to vendors included in other assets and current
assets and accounts receivable. These were partially offset by an increase in
inventory levels and a net decrease in payable and accrual levels.
Net cash used in investing activities was $16,436,000 during 2022 as compared
to $32,548,000 provided by investing activities during 2021. During 2022 the
Company acquired two businesses for $24,683,000 net of cash acquired,
and purchased plant and equipment for $1,030,000. These were partially offset
by net sales and maturities of marketable securities of $9,171,000. Of note
during 2021 were net sales and maturities of marketable securities of
$34,621,000 offset by the purchase of plant and equipment of $2,866,000, which
primarily included expenditures to augment the Company's production facilities
in the Defense segment.
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, 2022 and 2021, $3,638,000 and $25,427,000, 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 2022 and 2021 primarily differed as a
result of the $1.75 per share decrease in the extra dividend paid during these
years. Cash flows for both years also reflected the proceeds from the sale of
treasury stock to a Company sponsored retirement plan.
As a result of the foregoing factors, cash and cash equivalents decreased in
2022 by $39,094,000 to $70,711,000.
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Working capital decreased by $21,903,000 to $272,991,000 at December 31, 2022
for the reasons stated above. The Company's current ratio was 6.1 to 1.0 at
December 31, 2022 and 6.6 to 1.0 at December 31, 2021.
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 Item 1-A-2.
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 variable
rate demand notes described above, in municipal bonds that are pre-refunded with
escrowed U.S. Treasuries, and certificates of deposit. The Company intends to
continue its investment strategy of safety and short-term liquidity throughout
its investment holdings.
The Company's principal commitments consist of purchase and lease obligations.
Purchase obligations include outstanding purchase orders issued to the Company's
Housewares and Safety segments' manufacturers in the Orient and to material
suppliers and contractors in the Defense segment, and as of December 31, 2022
amounted to approximately $277,378,000. 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 reasonably estimated. Lease
obligations are described in Note M - Leases to the consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K.
2021 COMPARED TO 2020
Cash provided by operating activities was $34,688,000 during 2021 as compared to
$40,973,000 during 2020. 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 2021 were
net earnings of $25,654,000, which included a non-cash provision for doubtful
notes and accounts receivable of $7,665,000, total non-cash depreciation and
amortization expenses of $2,978,000, a non-cash deferred income tax benefit of
$1,612,000, and decreases in deposits made to vendors included in other assets
and current assets and accounts receivable. These were partially offset by an
increase in inventory levels and a net decrease in payable and accrual levels.
Of particular note during 2020 were net earnings of $46,958,000, which included
total non-cash depreciation and amortization expenses of $3,005,000; a non-cash
deferred income tax benefit of $1,718,000 and a net increase in payable and
accrual levels. These were partially offset by an increase in inventory levels;
deposits made to vendors included in other assets and current assets; and an
increase in accounts receivable levels.
Net cash provided by investing activities was $32,548,000 during 2021 as
compared to $7,155,000 during 2020. During 2021 the Company had net sales and
maturities of marketable securities of $34,621,000 offset by the purchase of
plant and equipment of $2,866,000, which primarily included expenditures to
augment the Company's production facilities in the Defense segment. Of note
during 2020 were net sales and maturities of marketable securities of $9,776,000
offset by the purchase of plant and equipment of $2,621,000, which primarily
included expenditures to augment the Company's production facilities in the
Defense segment.
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, 2021 and 2020, $25,427,000 and $25,968,000, 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 2021 and 2020 were essentially flat and
primarily relate to the annual dividend payments. Cash flows for both years
also reflected the proceeds from the sale of treasury stock to a Company
sponsored retirement plan.
As a result of the foregoing factors, cash and cash equivalents increased in
2021 by $23,769,000 to $109,805,000.
Working capital decreased by $7,478,000 to $294,894,000 at December 31, 2021 for
the reasons stated above. The Company's current ratio was 6.6 to 1.0 at December
31, 2021 and 6.5 to 1.0 at December 31, 2020.
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DEFENSE SEGMENT BACKLOG
The Company's Defense segment contract backlog was approximately $505,069,000 at
December 31, 2022, and $460,800,000 at December 31, 2021. 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 an 18- to 36-month period.
Critical accounting ESTIMATES
The Company's discussion and analysis of financial condition and results of
operations are based upon its Consolidated Financial Statements. 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. The estimates are based on experience and other assumptions
that the Company believes are reasonable under the circumstances, and these
estimates are evaluated on an ongoing basis. Actual results may differ from
those estimates.
The Company's critical accounting policies are those that materially affect its
Consolidated Financial Statements and involve difficult, subjective, or complex
judgments by management. 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 as they involve the use of significant estimates and assumptions as
described above. These critical accounting policies and estimates have been
reviewed with the Audit Committee of the Board of Directors. See Note A -
Summary of Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for
more detailed information regarding the Company's critical accounting policies.
Inventories
New Housewares/Small Appliance and Safety product introductions are an important
part of the Company's sales. In the case of the Housewares/Small Appliance
segment, the introductions are important 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 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. During 2022, the Housewares/Small
Appliance segment recorded an impairment related to such losses of $3,613,000.
In addition, due to fire safety regulations, commercial extinguishers have a
limited shelf life, which is based on the date of production. The Safety segment
recorded impairments of $1,807,000 and $3,090,000 in 2022 and 2021,
respectively, in recognition of that fact. There were no other obsolescence
issues that had a material effect during the current year. In the future should
product demand issues arise, the Company may incur losses related to the
obsolescence of the related inventory. Inventory risk for the Company's Defense
segment is not deemed to be significant, as products are largely built pursuant
to customers' specific orders.
Self-Insured Product Liability & 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.
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Revenues
Sales are recorded net of discounts and returns for the Housewares/Small
Appliance segment. Sales discounts and returns are key aspects of variable
consideration, which is a significant estimate utilized in revenue
recognition. Sales returns pertain primarily to warranty returns, returns of
seasonal items, and returns of those newly introduced products sold with a
return privilege. The calculation of warranty returns is based in large part on
historical data, while seasonal and new product returns are primarily developed
using customer provided information.
Impairment and Valuation of Long-lived Assets and Goodwill
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 contracts/customer relationships,
trademarks and safety certifications, trade secrets, and technology
software. 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.
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.
The impairment test for goodwill requires the determination of fair value of the
reporting unit. The Company uses multiples of earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), sales, and discounted cash flow
models, which are described above, to determine the reporting unit's fair value,
as appropriate.
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.
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NATIONAL PRESTO INDUSTRIES, INC. 