Page 1 of 41
Index to Schedules and
Exhibits are at Page 14 and 15
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002
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)
Registrant's 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 whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark 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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to the Form 10-K __X__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes __X__ No ____
The aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the price at which the stock was sold, as of
February 28, 2003, was $182,397,680.
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 28, 2003, was 6,830,812.
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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: $213,277,792.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The following documents are incorporated by reference into that part of this
Form 10-K designated to the right of the document title.
TITLE PART
----- ----
Proxy Statement dated April 4, 2003 Part III
Except as specifically incorporated herein by reference, the foregoing Proxy
Statement is not deemed filed as part of this report.
Page 3 of 41
PART I
ITEM 1. BUSINESS
A. DESCRIPTION OF BUSINESS
The business of National Presto Industries, Inc., and its consolidated
subsidiaries (the "Company") consists of three business segments. The
Housewares/Small Appliance segment designs and distributes small
electrical appliances and housewares, including comfort appliances,
pressure cookers and canners, and kitchen electrics. The Defense
Products segment manufactures precision mechanical, electromechanical
and electronic assembly components for the U.S. government and
sub-contractors. The Absorbent Products segment manufactures and sells
primarily private label diapers.
1. HOUSEWARES/SMALL APPLIANCE SEGMENT
Electrical appliances and housewares sold by the Company include
pressure cookers and canners; the Presto Control Master(R) heat
control single thermostatic control line of fry pans in several sizes,
griddles and multi-purpose cookers; deep fryers of various sizes;
pizza ovens, can openers, slicer/shredders; electric heaters; corn
poppers (hot air and microwave); microwave bacon cookers;
coffeemakers; electric grills; electric tea kettles; electric knives;
bread slicing systems; electric knife sharpeners; 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, 2002, approximately 49% of
consolidated net sales were provided by cast products (fry pans,
griddles, grills, deep fryers and multi-cookers), approximately 4% by
motorized nonthermal appliances (can openers, slicer/shredders, knife
sharpeners, electric knives, and bread slicing systems), and
approximately 31% by noncast/thermal appliances (stamped cookers and
canners, stainless steel cookers, pizza ovens, corn poppers [hot air
and microwave], coffeemakers, microwave bacon cookers, tea kettles,
and heaters). For the year ended December 31, 2001, approximately 53%
of consolidated net sales were provided by cast products,
approximately 5% by motorized nonthermal appliances and approximately
31% by noncast/thermal appliances. For the year ended December 31,
2000, approximately 58% of consolidated net sales were provided by
cast products, approximately 6% by motorized nonthermal appliances and
approximately 32% by noncast/thermal appliances.
For the year ended December 31, 2002, Wal-Mart Stores, Inc. accounted
for 37% of consolidated net sales. Wal-Mart Stores, Inc., accounted
for 37% and Costco Companies accounted for 11% of consolidated net
sales in 2001. Wal-Mart Stores, Inc. accounted for 41% and Target,
Inc. accounted for 11% of consolidated net sales for the year ended
December 31, 2000.
Products are sold directly to retailers throughout the United States
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, business from any of the Company's major customers could
adversely affect the Company's business (see Footnote K in the Notes
to Consolidated Financial Statements).
The Company has a sales force of approximately nine employees that
sell to and service customers. In selected geographic areas sales are
handled by manufacturers' representatives who may also sell other
product lines. Sales promotional activities are conducted through the
use of television, radio and newspaper advertising. The Company's
business is highly competitive and seasonal, with the normal peak
sales period occurring in the fourth quarter of the year prior to the
holiday season. Many companies compete for sales of housewares and
small electrical appliances, some of which are larger than the Company
and others which are smaller. 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 components and finished goods that may
not have a ready market or achieve widespread consumer acceptance.
High-cost advertising commitments accompanying such new products or to
maintain sales
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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.
Research and development costs related to new product development for
the years 2002, 2001 and 2000 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 two to twelve
years from date of purchase. The Company allows a sixty-day
over-the-counter initial return privilege through cooperating dealers.
Products are serviced through independent service providers throughout
the United States and a corporate service repair operation. The
Company's service and warranty programs are competitive with those
offered by other manufacturers in the industry.
Prior to 2002 the Company's products were manufactured in plants
located in Jackson, Mississippi and Alamogordo, New Mexico. In 2002,
the Company purchased a portion of its products from non-affiliated
companies located in the Orient (47% in 2002). During 2002, the
Company successfully completed the transition of outsourcing all of
its manufacturing activities and as a result phased out all
domestic-manufacturing activities during the second half of 2002. (See
Footnote N to the Notes to Consolidated Financial Statements).
The Company warehouses and distributes its products from a
distribution center located in Canton, Mississippi. Selective use is
made of leased tractors and trailers.
The Company invests funds not currently required for business
activities (see Footnote A (3) in the Notes to Consolidated Financial
Statements). Income from invested funds is included in Other Income in
the accompanying 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, reacquisition of Company stock, acquisitions and
newly identified business activities.
2. DEFENSE PRODUCTS SEGMENT
The defense products segment (AMTEC Corporation) was acquired on
February 24, 2001; accordingly, net sales for this segment represented
approximately ten months of activity in 2001. AMTEC manufactures
precision mechanical, electromechanical and electronic assembly
components for the U.S. government and sub-contractors. During 2002,
construction of a 55,000 square foot building was started with
expected completion by early 2003. The Company believes that AMTEC has
significant growth potential, which will come from two primary
sources, new defense contracts and additional acquisitions that can be
rolled up into AMTEC's operations.
3. ABSORBENT PRODUCTS SEGMENT
The absorbent products segment (Presto Absorbent Products, Inc.) was
acquired on November 19, 2001; accordingly, net sales for this segment
represented approximately one month of activity in 2001. Presto
Absorbent Products manufactures primarily private label diapers.
Additional manufacturing space is available to expand production to
other consumables. Examples of other product categories, which could
be manufactured by this entity, are briefs for incontinent adults, and
handy wipes. The Company is currently exploring alternative selling
approaches for its product line. Given more effective selling
solutions, this company can offer increasingly attractive profit
potential.
B. OTHER COMMENTS
1. SOURCES AND AVAILABILITY OF MATERIALS
See Footnote K in the Notes to the Consolidated Financial Statements.
2. TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS HELD
In recent years, patents on new products have become more meaningful
to operating results. Trademarks and know-how are considered
significant. The Company's current and future success
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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. To date, the Company
has vigorously protected its rights and enjoyed success in all its
intellectual property suits.
3. EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL AND OSHA 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. During July 1986, the
Company entered into an agreement with the EPA and the Wisconsin
Department of Natural Resources to conduct a remedial investigation
and feasibility study at the site.
The remedial investigation was completed in 1992, the feasibility
study in 1994, and in May 1996 the final record of decision (ROD) was
issued for the site by the EPA. At year end 2002, all remediation
projects at the Eau Claire, Wisconsin, site had been installed, were
fully operational, and restoration activities had been completed.
In February 1988, the Company entered into an agreement with the
Department of the Army (the 1988 Agreement), pursuant to which the
Army agreed to fund environmental restoration activities related to
the site. As a result of the 1988 Agreement, a total of $27,000,000
has been appropriated and spent for environmental matters. Based on
factors known as of December 31, 2002, it is believed that the
Company's existing environmental accrued 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.
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, 2002, the Company had 301 employees compared to 846
employees at the end of December, 2001.
5. INDUSTRY PRACTICES RELATED TO WORKING CAPITAL REQUIREMENTS
The major portion of the Company's sales were made with terms of 90
days or shorter.
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.
6. BACKLOG
Shipment of most of the Company's 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.
C. PLANT CLOSINGS
See Footnote N in the Notes to the Consolidated Financial Statements.
D. 2001 ACQUISITIONS
See Footnote M in the Notes to the Consolidated Financial Statements.
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E. WEB SITE DISCLOSURES
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 does not make available on its web site its annual reports
on Form 10-K, quarterly reports on Form 10-Q, 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 because those reports are
already readily available to the public on the SEC web site at
www.sec.gov. The Company does provide paper copies of those reports
free of charge upon request.
ITEM 2. PROPERTIES (OWNED EXCEPT WHERE INDICATED)
The Company's Eau Claire facility is approximately 560,000 square feet.
Presto Absorbent Products, Inc. utilizes 115,000 square feet of this area.
Leases for 135,000 square feet of this area have been entered into with
outside tenants. The Company's corporate office is also located in Eau
Claire.
The Company also has manufacturing facilities in Jackson, Mississippi,
Alamogordo, New Mexico and Janesville, Wisconsin. The manufacturing ceased
at the Jackson and Alamogordo plants during the third and fourth quarters
of 2002 since the Company is outsourcing all of its housewares/small
appliances. (see Note N in the Notes to the Consolidated Financial
Statements).
The Jackson facility contains 283,000 square feet. Modification to adapt
this facility for warehousing and shipping will be completed during 2003.
The facility at Alamogordo contains 170,700 square feet. A final decision
on sale or other disposition of this facility will be made in 2003.
The Janesville facility is comprised of 23,000 square feet and is leased.
During the year, an additional 17,500 square foot building adjacent to the
plant was leased for expansion. In August 2002, construction of a new
55,000 square foot building began and when completed, the above leases will
be terminated.
The Company has a 191,900 square foot building at Canton, Mississippi which
is used primarily for warehousing and distribution and some activities for
product service functions. An additional 72,200 square feet has been leased
in adjacent buildings for warehousing. During the peak season, an
additional 110,000 square feet has been leased.
ITEM 3. LEGAL PROCEEDINGS
See Footnote J in the Notes to the Consolidated Financial Statements.
See Item 1.B.3. For information regarding certain environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 7 of 41
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided with regard to the executive officers of
the registrant: (All terms of office are for one year or until their respective
successors are duly elected.)
NAME TITLE AGE
----- ------ ---
Maryjo Cohen Chair of the Board, President 50
and Chief Executive Officer
James F. Bartl Executive Vice President 62
and Secretary
Neil L. Brown Vice President, Manufacturing 59
Donald E. Hoeschen Vice President, Sales 55
Randy F. Lieble Chief Financial Officer 49
and Treasurer
Ms. Cohen became Chair of the Board on January 1, 2002. Prior to that date
she had been elected Treasurer in September 1983, to the additional
positions of 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. Bartl was elected Secretary in May 1978 and the additional position of
Executive Vice President in November 1998. He has been associated with the
registrant since 1969. Prior to becoming an officer, he was Resident
Counsel and Director of Industrial Relations, the latter position he
continues to hold.
Mr. Brown was elected Vice President in November 1997. He has been
associated with the registrant since 1966. Prior to becoming an officer, he
was Director of Manufacturing.
Mr. Hoeschen was elected Vice President in May 1997. He has been associated
with the registrant since 1971. Prior to becoming an officer, he was
Director of Sales.
Mr. Lieble was elected Treasurer in November 1995 and the additional
position of Chief Financial Officer in November 1999. He has been
associated with the registrant since 1977. Prior to becoming an officer, he
was Manager of Investments and Government Contracts.
Page 8 of 41
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RECORD OF DIVIDENDS PAID AND MARKET PRICE OF COMMON STOCK
2002 2001
---------------------------------------- -------------------------------------------
Market Price Market Price
Applicable ------------- Applicable -------------
Dividends Paid Dividends Paid
per Share High Low per Share High Low
---------- ----- ---- ---------- ----- ---
First Quarter $0.92 $29.06 $26.80 $2.00 $34.30 $29.60
Second Quarter -- 34.50 28.75 -- 30.40 26.30
Third Quarter -- 32.00 27.25 -- 29.97 25.80
Fourth Quarter -- 32.00 27.00 -- 29.10 26.42
------- ------- -------- -------- -------- --------
Full Year $0.92 $34.50 $26.80 $2.00 $34.30 $25.80
Common stock of National Presto Industries, Inc. is traded on the New York Stock
Exchange under the symbol NPK. As of December 31, 2002, there were 630
stockholders of record. There were 627 stockholders of record as of February 28,
2003, the latest practicable date.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands except per share data)
------------------------------------------------------------------
For the years ended December 31, 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $133,729 $119,078 $118,955 $115,891 $108,065
Net earnings 8,690* 6,286* 15,158 20,822 19,733
Net earnings per share 1.27* .92* 2.16 2.84 2.68
Total assets 289,994 284,076 288,530 298,647 294,909
Dividends paid per common share applicable
to current year 0.92 2.00 2.10 2.00 2.00
* 2002 includes $2,843,000 -- $.42 per share versus 2001's $4,771,000 --
$.70 per share for after-tax expenses relating to plant closings. 2002
earnings also reflect $1,040,000 or $.15 per share after-tax charge
primarily related to the early retirement of long term employees. The 2002
expenses were largely offset ($3,259,000 or $.48 per share after-tax) by
the partial reversal of the LIFO reserve stemming from the shutdown of the
domestic manufacturing plants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this report 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; customer acceptance of or delays in
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the development of new products; 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; exchange rate fluctuations; changes in foreign import tariffs
and monetary policies and other changes in the regulatory climate in the
foreign countries in which National Presto Industries, Inc. buys or sells
products; product liability, regulatory actions or other litigation,
warranty claims or returns of products; increases in material or production
cost which cannot be recouped in product pricing; the impact of closing
certain U.S. production facilities; and the impact that terrorist
activities may have on supplies and finished goods deliveries, consumer
confidence, or the economy in general. Additional information concerning
those and other factors is contained in the Company's Securities and
Exchange Commission filings, including but not limited to the Form 10-K,
copies of which are available from the Company without charge.
2002 COMPARED TO 2001
Readers are directed to Note O, "Business Segments" for data on the
financial results of the Company's three business segments for the years
ended December 31, 2002 and 2001.
During 2002, consolidated net sales increased $14,651,000 from $119,078,000
to $133,729,000 or 12%. The increase in net sales of the housewares/small
appliance division of $4,768,000 largely reflects the positive impact of
the expansion of 2001's regional TV advertising program on the Presto(R)
Pizzazz(R) pizza oven to a national program in 2002. The defense products
division (purchased at the end of February 2001) and the absorbent products
division (purchased in mid-November 2001) combined to provide increased net
sales of $9,883,000 during their first full year of operation.
Gross profit for 2002 increased $12,282,000 from $24,959,000 to
$37,241,000. As a percentage of sales, gross margins were 28% in 2002
versus 21% in 2001. The gross profit percentage increase was primarily
attributable to the housewares/small appliance division which recorded an
increase of $10,691,000 from $23,153,000 in 2001 to $33,844,000 in 2002. As
a percentage of sales, housewares/small appliance margins increased to 29%
versus 2001's 21%. The gross margin dollar increase stemmed in largest part
from the partial liquidation of the LIFO inventory reserve, as discussed in
Notes B and N, and from increased sales volume while 2001 gross margin was
negatively impacted by the write-down of inventory related to the plant
closing in the amount of $880,000. The defense product division gross
profit increased $1,199,000 reflecting greater unit sales, higher margin
product sales mix improvement, and a full year of revenues. The absorbent
product division's gross profit increase reflects a full year of operation
versus approximately a month and a half of operation during 2001. The
absorbent products division is continuing to establish a customer base and
working on expanding its product offerings. There can be no assurance the
segment will be successful in achieving these objectives.
Selling and general expenses increased $6,398,000. A national television
advertising campaign for the Presto(R) Pizzazz(R) pizza oven accounted for
approximately $5,000,000 of this increase. In addition, during the fourth
quarter of 2002 the Company recorded a pension cost charge related to the
Company's offer of early retirement to long-term employees in the amount of
$1,677,000.(See Note H.)
Fiscal years 2002 and 2001 included charges of $4,585,000 and $7,653,000,
respectively, related to closing the Company's manufacturing operations in
Jackson, Mississippi, and Alamogordo, New Mexico. See Note N for plant
closing discussion.
Other income, principally interest, decreased $3,258,000 from $8,377,000 to
$5,119,000, in largest part due to decreased yields on financial
instruments and in part due to a reduced average daily investment balance,
$189,870,000 in 2002 versus $197,719,000 in 2001, stemming from the 2001
acquisitions.
Earnings before provision for income taxes increased $5,379,000 from
$6,135,000 to $11,514,000. The provision for income taxes increased from a
tax benefit of $151,000 to a provision of $2,824,000, which resulted in an
effective income tax rate increase from a benefit of 2.5% to a tax rate of
24.5% as a result of increased earnings subject to tax. Net earnings
increased $2,404,000 from $6,286,000 to $8,690,000, or 38%.
Page 10 of 41
2001 COMPARED TO 2000
Net sales increased by $123,000 from $118,955,000 to $119,078,000, or .1%.
This slight increase was primarily attributable to incremental sales of
$6,999,000 associated with the 2001 AMTEC (defense products division)
acquisition, offset by the shipment of fewer units of household/small
appliances at reduced prices.
Gross profit for 2001 decreased $10,332,000 from $35,291,000 to
$24,959,000, or 29% versus 21% as a percentage of net sales. Gross profit
contribution by the defense segment was $1,767,000, or 25%. The reduction
of gross profit percentage was primarily due to the reduced prices demanded
by housewares/small appliance retailers and the inability to pass on the
Company's increased manufacturing costs for these goods. It is not
anticipated that product pricing will increase, and further decreases are
possible. The decision to outsource housewares/small appliances (see Note
N) is expected to ultimately decrease manufacturing costs. However, those
decreases are not expected to be realized until at least 2003, given the
need to continue domestic production at reduced rates (and hence reduced
burden absorption) during 2002 while the new sources tool, manufacture, and
ship product.
Selling and general expenses decreased $6,252,000 largely due to decreased
advertising expenses. This decrease was primarily due to reduced television
advertisement of the Presto(R) Pizzazz(R) pizza oven which was introduced
in 2000. As a percentage of net sales, selling and general expenses
decreased from 22% to 17%. Selling and general expense for defense was
$520,000.
The fiscal 2001 fourth quarter includes a $7,653,000 charge related to
closing the Company's manufacturing operations in Jackson, Mississippi, and
Alamogordo, New Mexico, and transferring all production of Presto(R) brand
housewares/small appliances to manufacturers in the Orient. See Note N.
Other income, principally interest, decreased $2,340,000 from $10,717,000
to $8,377,000. The average daily investment decreased from $209,736,000 to
$197,719,000 primarily as a result of business acquisitions and the
purchase of treasury stock.
Earnings before provision for income taxes decreased $13,193,000 from
$19,328,000 to $6,135,000. The provision for income taxes decreased from
$4,170,000 to a benefit of $151,000, which resulted in an effective income
tax rate decrease from 22% to a tax benefit of 3%, as a result of decreased
earnings subject to tax. Net earnings decreased $8,872,000 from $15,158,000
to $6,286,000, or 59%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $25,517,000 during 2002 compared
to cash used of $6,042,000 in the comparable period in the prior year. The
principle factors behind the increased cash provided are the changes in the
components of working capital listed in the statement of cash flows under
the line, "Cash Flows from Operating Activities". It is expected that the
remaining portions of raw material, work in process, and finished goods
inventory, which were part of the Manufactured LIFO Reserve, will be
largely liquidated during 2003. As a result, most of the remaining
$5,700,000 of LIFO reserve associated with the Manufactured LIFO Reserve
will flow through earnings as a reduction in cost of sales in 2003 as these
inventories are sold. Cash flows from investing activities were
$11,536,000, principally flowing from the sale or maturity of marketable
securities. The Company invested in new tooling for the housewares/small
appliance division and expanded facilities for the defense products
division which accounted for the majority of the $3,408,000 expended for
additions to property, plant, and equipment. Financing activity cash flows
consisted of a dividend payment of $6,290,000 and the purchase of treasury
stock of $3,000. As a result of the foregoing factors, cash and cash
equivalents rose by $30,760,000 to $114,637,000.
Working capital increased by $1,088,000 to $209,361,000 at December 31,
2002. The Company's current ratio was 5.0 to 1.0 at December 31, 2002,
compared to 5.4 to 1.0 at the end of fiscal 2001. The increase in working
capital is primarily due to the liquidation of a portion of the Company's
LIFO inventory reserve. The current year earnings more than offset the
dividend paid, and the increase in accounts payable and accrued liabilities
were partially offset by reduced accounts receivable.
The Company expects to continue to evaluate acquisition opportunities that
align with its business segments and will make further acquisitions or
capital investments in these segments if the appropriate return on
investment is projected.
Page 11 of 41
The Company has substantial liquidity in the form of cash and marketable
securities to meet all of its anticipated capital requirements, to make
dividend payments, and to fund growth through acquisitions and other means.
The slow and steady declines in interest rate yield for tax exempt and
other debt securities over the past several years has resulted in reduced
levels of interest income for the Company. There can be no assurance when,
or if, interest rate yields will return to more historically normal levels.
The Company intends to continue its investment strategy of safety and
relative near-term liquidity throughout its investment holdings. As a
result of this strategy, interest rate yields are not expected to improve,
and could continue to decline, during 2003. Interest rate yields are a
function of national and international monetary policies and the growth of
U.S. and world economies and are not controllable by the Company. As of
December 31, 2002, there were no material capital commitments outstanding.
No major capital expansion projects are currently planned for 2003.
In connection with the Company's plant closing activity during 2003, the
Company could incur additional losses upon the disposition of property,
plant, and equipment associated with the operations being closed. In
addition, the Company may have underestimated its plant closing costs that
could result in additional expenses during 2003. The Company is not aware
of any such costs; however, plant closing activities of this nature are
unique and infrequent for the Company, therefore, these activities possess
inherent risk that errors in the estimation process could occur. Subject to
the foregoing estimation risk, no major plant closing related expenses are
expected in 2003.
NEW ACCOUNTING PRONOUNCEMENTS
Please refer to Note A (13) for information related to the future 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 include money market funds and 7-day variable rate demand notes
which are highly liquid instruments with interest rates set every 7 days
that can be tendered to the remarketer upon 7 days notice for payment of
principal and accrued interest amounts. The 7-day tender feature of these
variable rate demand notes are further supported by an irrevocable letter
of credit from highly rated U.S. banks. To the extent a bond is not
remarketed at par plus accrued interest, the difference is drawn from the
bank's letter of credit. The Company's investments are held primarily in
fixed and variable rate municipal bonds with an average life of less than
one year. Accordingly, changes in interest rates have not had a material
affect 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. Any transactions that are
currently entered into for settlement in foreign currency are not deemed
material to the financial statements.
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 Certified
Public Accountants are contained on pages F-1 through F-18 of this report.
B. Quarterly financial data is contained in Note P in Notes to Consolidated
Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
Page 12 of 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A listing of the Executive Officers of the Registrant is included in Part
I. See Note following Item 13 for information relating to Directors of the
Company.
ITEM 11. EXECUTIVE COMPENSATION
See Note following Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATERS.
See Note following Item 13.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to the Company's
equity compensation plans as of December 31, 2002.
(a) (b) (c)
--------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under
warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
--------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 6,250 $39.36 --
Equity compensation
plans not approved by
security holders -- -- --
-------- --------- --------
Total 6,250 $39.36 --
======== ========= ========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the following Note.
NOTE: Within 120 days after the close of the registrant's fiscal year ended
December 31, 2002, the registrant intends to file a definitive proxy statement
pursuant to Regulation 14A. Pursuant to the Rules and Regulations of the
Securities Exchange Act of 1934, the information required for Items 401, 402,
403 and 404 has been omitted and is incorporated herein by reference from the
Proxy.
ITEM 14. 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) within 90 days prior to the filing date of this annual report. Based
on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
Page 13 of 41
procedures are effective in ensuring that information required to be
disclosed by the Company in the reports it files or submits under the 1934
Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms.
There have been no significant changes in internal controls, or in other
factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed
their evaluation.
Page 14 of 41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following consolidated financial statements of National Presto
Industries, Inc. and its subsidiaries and the related Report of Independent
Certified Public Accountants are included in this report:
Form 10-K
Page Reference
--------------
1. Consolidated Balance Sheets - December 31, 2002 and 2001 F-1 & F-2
2. Consolidated Statements of Earnings -
Years ended December 31, 2002, 2001 and 2000 F-3
3. Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2001 and 2000 F-4
4. Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2002, 2001 and 2000 F-5
5. Notes to Consolidated Financial Statements F-6 thru F-16
6. Report of Independent Certified Public Accountants F-17
B. The following Schedules and Exhibits are included in this report:
Schedule II - Valuation and Qualifying Accounts F-18
Exhibit 3 (i) - Restated Articles of Incorporation - incorporated by
reference from Exhibit 3 (i) of the Company's quarterly
report on Form 10-Q for the quarter ended July 6, 1997
(ii) - By-Laws - incorporated by reference from Exhibit
3 (ii) of the Company's quarterly report on Form 10-Q
for the quarter ended October 3, 1999
Exhibit 9 - 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 10.1 - 1988 Stock Option Plan - incorporated by reference from
Exhibit 10.1 of the Company's quarterly report on Form
10-Q for the Quarter ended July 6, 1997
Exhibit 10.2 - Form of Incentive Stock Option Agreement under the 1988
Stock Option Plan - Incorporated by reference from
Exhibit 10.2 of the Company's quarterly report on Form
10-Q for the Quarter ended July 6, 1997
Exhibit 11 - Statement Re Computaton of Per Share Earnings
Exhibit 21 - Parent and Subsidiaries
Exhibit 23.1 - Consent of Grant Thornton LLP
Exhibit 99.1 - Chief Executive Officer Certification
Page 15 of 41
Exhibit 99.2 - Chief Financial Officer Certification
All other Schedules and Exhibits for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and
therefore have been omitted. Columns omitted from schedules filed have been
omitted because the information is not applicable.
C. Reports on Form 8-K:
None
Page 16 of 41
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/ Randy F. Lieble
----------------------------
Randy F. Lieble
Chief Financial Officer
and Treasurer
(Principal Accounting Officer)
By: /S/ Richard N. Cardozo By: /S/ Melvin S. Cohen
- ------------------------------- ----------------------------
Richard N. Cardozo Melvin S. Cohen
Director Director
By: /S/ Patrick J. Quinn By: /S/ James F. Bartl
- ------------------------------- ----------------------------
Patrick J. Quinn James F. Bartl
Director Executive Vice President,
Secretary and Director
By: /S/ Michael J. O'Meara By: /S/ Maryjo Cohen
- ------------------------------- ----------------------------
Michael J. O'Meara Maryjo Cohen
Director Chair of the Board, President,
Chief Executive Officer and Director
Date: March 24, 2003
- ---------------------
Page 17 of 41
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Maryjo Cohen, certify that:
1. I have reviewed this annual report on Form 10-K of National Presto
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 24, 2003 /S/ M.J. Cohen
--------------
M. J. Cohen
Chief Executive Officer
Page 18 of 41
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randy F. Lieble, certify that:
1. I have reviewed this annual report on Form 10-K of National Presto
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made,.in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 24, 2003 /S/ R. F. Lieble
- --------------------- -----------------
R. F. Lieble
Chief Financial Officer
Page 19 of 41
F-1
NATIONAL PRESTO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
DECEMBER 31, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $114,637 $ 83,877
Marketable securities 92,578 106,606
Accounts receivable $ 28,378 $ 31,101
Less allowance for doubtful accounts 480 27,898 480 30,621
-------- --------
Inventories:
Finished goods 17,675 19,505
Work in process 3,355 5,349
Raw materials 2,976 8,262
Supplies 981 24,987 881 33,997
-------- --------
Prepaid expenses 998 896
-------- --------
Total current assets 261,098 255,997
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 163 163
Buildings 8,385 8,369
Machinery and equipment 14,119 10,796
-------- -------
22,667 19,328
Less allowance for depreciation 9,400 13,267 7,483 11,845
-------- --------
OTHER ASSETS 15,629 16,234
-------- --------
$289,994 $284,076
======== ========
The accompanying notes are an integral part of these financial statements.
Page 20 of 41
NATIONAL PRESTO INDUSTRIES, INC. F-2
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $18,753 $17,435
Federal and state income taxes 3,643 3,055
Accrued liabilities 29,341 27,234
-------- --------
Total current liabilities 51,737 47,724
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $1 par value
Authorized: 12,000,000 shares
Issued: 7,440,518 shares $ 7,441 $ 7,441
Paid-in capital 998 1,011
Retained earnings 249,313 246,913
Accumulated other comprehensive income (loss) (698) (251)
------- -------
257,054 255,114
Treasury stock, at cost, 605,513 shares in 2002
and 603,654 shares in 2001 18,797 18,762
------- -------
Total stockholders' equity 238,257 236,352
-------- --------
$289,994 $284,076
======== ========
The accompanying notes are an integral part of these financial statements.
Page 21 of 41
NATIONAL PRESTO INDUSTRIES, INC. F-3
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share data)
For the years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Net sales $ 133,729 $ 119,078 $ 118,955
Cost of sales 96,488 94,119 83,664
--------- --------- ---------
Gross profit 37,241 24,959 35,291
Selling and general expenses 26,826 20,428 26,680
Plant closing costs 4,020 6,773 --
--------- --------- ---------
Operating profit (loss) 6,395 (2,242) 8,611
Other income, principally interest 5,119 8,377 10,717
--------- --------- ---------
Earnings before provision for income taxes 11,514 6,135 19,328
Provision (benefit) for income taxes 2,824 (151) 4,170
--------- --------- ---------
Net earnings $ 8,690 $ 6,286 $ 15,158
========= ========= =========
Weighted average shares outstanding:
Basic 6,839 6,856 7,014
========= ========= =========
Diluted 6,840 6,857 7,015
========= ========= =========
Net earnings per share:
Basic $ 1.27 $ 0.92 $ 2.16
========= ========= =========
Diluted $ 1.27 $ 0.92 $ 2.16
========= ========= =========
The accompanying notes are an integral part of these financial statements.
Page 22 of 41
NATIONAL PRESTO INDUSTRIES, INC. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended December 31, 2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net earnings $ 8,690 $ 6,286 $ 15,158
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Provision for depreciation 1,934 3,436 2,786
Deferred income taxes 311 (2,343) 198
Pension charges (credits) 2,646 (399) (266)
Plant closing and asset impairment charges 685 7,653 --
Other (49) 212 209
Changes in:
Accounts receivable 2,723 (18,887) 9,993
Inventories 9,010 605 (13,980)
Prepaid expenses (41) 67 25
Accounts payable and accrued liabilities (980) (2,619) 2,442
Federal and state income taxes 588 (53) (2,956)
--------- --------- ---------
Net cash provided by (used in) operating activities 25,517 (6,042) 13,609
--------- --------- ---------
Cash flows from investing activities:
Marketable securities purchased (45,211) (63,553) (55,125)
Marketable securities - maturities and sales 60,651 104,144 57,997
Acquisition of property, plant and equipment (3,408) (2,038) 3,843)
Acquisition of businesses (500) (3,593) --
Sale of property, plant, and equipment 4 11 72
--------- --------- ---------
Net cash provided by (used in) investing activities 11,536 34,971 (899)
--------- --------- ---------
Cash flows from financing activities:
Dividends paid (6,290) (13,754) (14,995)
Payment of debt acquired in acquisition -- (5,243) --
Purchase of treasury stock (3) (1,301) (10,544)
--------- --------- ---------
Net cash used in financing activities (6,293) (20,298) (25,539)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 30,760 8,631 (12,829)
Cash and cash equivalents at beginning of year 83,877 75,246 88,075
--------- --------- ---------
Cash and cash equivalents at end of year $ 114,637 $ 83,877 $ 75,246
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 1,985 $ 2,423 $ 6,930
========= ========= =========
Supplemental disclosure of non-cash investing and financing activities:
As of December 31, 2002, 2001, and 2000, the unrealized gain (loss) on
available for sale securities, net of tax was $667, $(251), and
$(177).
The accompanying notes are an integral part of these financial statements.
Page 23 of 41
NATIONAL PRESTO INDUSTRIES, INC. F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share and per share data)
For the years ended December 31, 2002, 2001, 2000
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
----- ------- -------- ------- ----- -----
Balance January 1, 2000 $ 7,441 $ 1,033 $ 254,218 $ (746) $ (7,360) $ 254,586
Net earnings -- -- 15,158 -- -- 15,158
Unrealized gain on available for sale
securities, net of tax -- -- -- 569 -- 569
---------
Total other comprehensive income -- -- -- -- -- 15,727
Dividends paid, $2.10 per share -- -- (14,995) -- -- (14,995)
Purchase of treasury stock - 338,600 shares -- -- -- -- (10,544) (10,544)
Other -- (6) -- -- 215 209
--------- --------- --------- --------- --------- ---------
Balance December 31, 2000 7,441 1,027 254,381 (177) (17,689) 244,983
Net earnings -- -- 6,286 -- -- 6,286
Unrealized loss on available for sale
securities, net of tax -- -- -- (74) -- (74)
---------
Total other comprehensive income -- -- -- -- -- 6,212
Dividends paid, $2.00 per share -- -- (13,754) -- -- (13,754)
Purchase of treasury stock - 48,200 shares -- -- -- -- (1,301) (1,301)
Other -- (16) -- -- 228 212
--------- --------- --------- --------- --------- ---------
Balance December 31, 2001 7,441 1,011 246,913 (251) (18,762) 236,352
Net earnings -- -- 8,690 -- -- 8,690
Unrealized gain on available for sale
securities, net of tax -- -- -- 918 -- 918
Unrealized loss on net periodic
pension cost, net of tax -- -- -- (1,365) -- (1,365)
---------
Total other comprehensive income -- -- -- -- -- 8,243
Dividends paid, $.92 per share -- -- (6,290) -- -- (6,290)
Purchase of treasury stock - 100 shares -- -- -- -- (3) (3)
Other -- (13) -- -- (32) (45)
--------- --------- --------- --------- --------- ---------
Balance December 31, 2002 $ 7,441 $ 998 $ 249,313 $ (698) $ (18,797) $ 238,257
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
Page 24 of 41
NATIONAL PRESTO INDUSTRIES, INC. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: In
preparation the Company's 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) PRINCIPLES OF CONSOLIDATION: 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.
(3) 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 and highly-liquid variable rate demand notes with put options
exercisable in three months or less.
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 $788,000 and $1,199,000
at December 31, 2002 and 2001, are included as reductions of cash and
cash equivalents.
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.
At December 31, 2002 and 2001, 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:
MARKETABLE SECURITIES
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
December 31, 2002
Tax exempt
government
bonds $ 90,409,000 $ 91,626,000 $ 1,257,000 $ 40,000
Equity Securities 1,142,000 952,000 132,000 322,000
------------ ------------ ------------ ------------
Total marketable
Securities $ 91,551,000 $ 92,578,000 $ 1,389,000 $ 362,000
============ ============ ============ ============
December 31, 2001
Tax exempt
government
bonds $105,601,000 $105,965,000 $ 828,000 $ 464,000
Equity securities 1,391,000 641,000 9,000 759,000
------------ ------------ ------------ ------------
Total marketable
Securities $106,992,000 $106,606,000 $ 837,000 $ 1,223,000
============ ============ ============ ============
Proceeds from sales of marketable securities totaled $60,651,000 in
2002, $104,144,000 in 2001, and $57,997,000 in 2000. Gross gains
related to sales of marketable securities totaled $16,000, $47,000,
and $9,000 in 2002, 2001, and 2000. Gross losses related to sales of
marketable securities were $231,000, $0, and $15,000 in 2002, 2001,
and 2000. Net unrealized gains and losses are reported as a separate
component of accumulated other comprehensive income and were a gain of
$1,027,000, a loss of $386,000, and a loss of $ 273,000 before taxes
at December 31, 2002, 2001, and 2000.
The contractual maturities of the marketable securities held at
December 31, 2002 are $42,276,000 in 2003, $20,402,000 in 2004,
$11,892,000 in 2005, $17,056,000 beyond 2005 and $952,000 with
indeterminate maturities.
Page 25 of 41
F-7
(4) 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 days. 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
customers' ability to pay, and prevailing economic conditions.
(5) 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. Inventory for 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.
(6) 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. Depreciation is provided in amounts sufficient to
relate the costs of depreciable assets to operations over their
service lives which are estimated at fifteen to forty years for
buildings and three to seven years for machinery and equipment.
(7) GOODWILL: The Company recognizes the excess cost of an acquired entity
over the net amount assigned to assets acquired and liabilities
assumed as goodwill. Goodwill is tested for impairment on an annual
basis and between annual tests whenever an impairment is indicated.
Impairment losses will be recognized whenever the implied fair value
of goodwill is less than its carrying value. Prior to January 1, 2002,
goodwill was amortized over 15 years. Beginning January 1, 2002,
goodwill is no longer amortized. The Company's carrying amount, net of
accumulated amortization, for goodwill as of December 31, 2002 and
December 31, 2001 was $3,406,000 and $2,906,000 and relates to its
defense products segment.
The Company adopted the preceding accounting policy on January 1, 2002
as required by Statement of Financial Accounting Standard ("SFAS")
141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets".
During the first quarter of fiscal 2002, the Company performed the
transitional impairment test of goodwill required by SFAS 142. This
testing did not indicate an impairment of goodwill at January 1, 2002.
In addition, no impairment was indicated when the Company performed
its annual impairment test on October 1, 2002. The Company had no
intangible assets on January 1, 2002 other than goodwill.
The following table presents a reconciliation of net earnings and
earnings per share, as reported in the financial statements, to those
amounts adjusted for goodwill determined in accordance with the
provisions of SFAS 142. Comparative information for the year ending
December 31, 2000 has not been provided as the goodwill was acquired
during 2001 (See Note M).
(In thousands except per share amounts)
2002 2001
---- ----
Net earnings as reported $8,690 $6,286
Add back: goodwill amortization -- 130
------ ------
Adjusted net earnings $8,690 $6,416
====== ======
Basic earnings per share:
As reported $1.27 $0.92
Change in amortization expense -- 0.02
------ ------
Adjusted basic earnings per share $1.27 $0.94
====== ======
Diluted earnings per share:
As reported $1.27 $0.92
Change in amortization expense -- 0.02
------ ------
Adjusted diluted earnings per share $1.27 $0.94
====== ======
Page 26 of 41
F-8
8) REVENUE RECOGNITION: The Company recognizes revenue when product is
shipped. The Company provides for its 60-day over-the-counter return
privilege and warranties at the time of shipment for small appliance
sales. Early payment discounts are deducted in arriving at net sales.
(9) ADVERTISING: The Company's policy is to expense advertising as
incurred for the year. Advertising expense, including cooperative
advertising, was $14,734,000, $9,605,000 and $15,195,000 in 2002, 2001
and 2000.
(10) STOCK OPTIONS: The intrinsic value method is used for valuing stock
options issued. The pro forma effect on earnings of accounting for
stock options using the fair value method is not material. See Note G.
(11) RECLASSIFICATIONS: Certain reclassifications have been made to the
2001 and 2000 financial statements to conform with the 2002 financial
statement presentation. These reclassifications did not affect net
earnings as previously reported.
(12) ACCOUNTING POLICY AND DISCLOSURE CHANGES:
CASH EQUIVALENTS - In 2002 the Company defined cash equivalents as
debt instruments with an original maturity of three months or less as
permitted by SFAS 95. In prior periods the Company defined cash
equivalents as debt instruments with an original maturity of one week
or less. Redefining the period of maturity from one week to three
months had no effect on the reported dollar amounts of cash
equivalents in any period presented.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) - During 2002 the
Company began recording comprehensive income amounts related to its
available-for-sale securities and net periodic pension liability.
Accumulated comprehensive income presentation has been conformed for
all periods to the December 31, 2002 presentation. At December 31,
2002, the $698,000 of accumulated comprehensive loss includes an
additional net periodic pension liability related to the Company's
defined benefit pension plan in the amount of $1,365,000 offset in
part by an unrealizable gain on the Company's available-for-sale
marketable security investments in the amount of $667,000. These
amounts are recorded net of tax effect.
(13) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 addresses accounting for
guarantees and the disclosure requirements of a guarantor in its
interim and annual financial statements. The disclosure requirements
of FIN 45 related to the Company's warranty program for the year ended
December 31, 2002, are contained in Note D. The liability recognition
requirements of FIN 45 apply to guarantees issued or modified after
December 31, 2002. This pronouncement is not anticipated to have a
material affect on the Company's consolidated financial position or
results of operations upon its full adoption on January 1, 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" (VIE), which requires
consolidation of variable interest entities by holders of variable
interests that meet certain conditions. FIN 46 establishes accounting
for variable interests in a VIE created after January 31, 2003. FIN 46
clarifies how an enterprise should determine if it should consolidate
a VIE. The adoption of FIN 46 is not expected to have a material
affect on the Company's consolidated financial position or results of
operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses
accounting and processing for costs associated with exit or disposal
activities. SFAS 146 requires the recognition of a liability, measured
at fair value, for a cost associated with an exit or disposal activity
when the liability is incurred versus the date the Company commits to
an exit plan. The requirements of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The
adoption of SFAS 146 is not expected to have a material affect on the
Company's consolidated financial position or results of operation.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS 148 amends
the disclosure and certain transition provisions of SFAS 123,
"Accounting
Page 27 of 41
F-9
for Stock-Based Compensation". New interim and annual disclosures
related to stock options are required in financial statements prepared
after December 15, 2002. The pro forma effect of accounting for the
minor number of stock options issued by the Company using the fair
value method is not material. Accordingly, this pronouncement is not
expected to have a material affect on the Company's consolidated
financial position or results of operations.
B. INVENTORIES:
The amount of inventories valued on the LIFO basis was $18,024,000 and
$27,759,000 as of December 31, 2002 and 2001. Under LIFO, inventories are
valued at approximately $5,723,000 and $10,979,000 below current cost
determined on a FIFO basis at December 31, 2002 and 2001. The significant
reduction in the amount of LIFO inventory below current cost from 2001 to
2002 is attributable to the Company's decision to outsource manufacturing
of its housewares/small appliances. See Note N for further information
related to the effect of this decision on inventory valuation. The Company
uses the LIFO method of inventory accounting to improve the matching of
costs and revenues for the housewares/small appliances segment.
The following table describes the effect, as if LIFO inventories had been
valued at current cost determined on a FIFO basis.
Increase (Decrease)
-------------------
Cost of Net Earnings
Year Sales Earnings Per Share
---- ----- -------- ---------
2002 $ 5,256,000 (3,259,000) $ (0.48)
2001 266,000 (165,000) (0.02)
2000 (368,000) 228,000 0.03
Inventory for the Company's defense and absorbent products segments are
valued on a FIFO basis and total $6,108,000 and $5,481,000 at December 31,
2002 and 2001. The 2002 total is comprised of $493,000 of finished goods,
$3,336,000 of work in process, and $2,279,000 of raw material and supplies.
At December 31, 2001 the total was comprised of $1,030,000 of finished
goods, $3,443,000 of work in process, and $1,008,000 of raw material and
supplies.
C. ACCRUED LIABILITIES:
At December 31, 2002 accrued liabilities consisted of payroll $2,883,000,
insurance $16,854,000, environmental $2,692,000, plant closing costs
$521,000, employee termination $2,148,000, minimum pension liability
$2,713,000 and other $1,530,000. At December 31, 2001 accrued liabilities
consisted of payroll $3,143,000, insurance $17,230,000, environmental
$3,101,000, plant closing costs $1,399,000, employee termination $637,000
and other $1,724,000.
D. PRODUCT WARRANTY:
Company products are generally warranted to the original owner to be free
from defects in material and workmanship for a period of 2 to 12 years from
date of purchase. The Company allows a sixty-day over-the-counter initial
return privilege through cooperating dealers. The Company services its
products through independent service providers throughout the United States
and a corporate service repair operation. The Company's service and
warranty programs are competitive with those offered by other manufacturers
in the industry. The Company determines its product warranty liability
based on historical percentages.
The following table shows the changes in product warranty liability for the
period (in thousands):
2002 2001
---- ----
Beginning balance January 1, $ 1,492 $ 1,309
Accruals during the period 3,002 3,103
Charges/payments made under the warranties (3,029) (2,920)
------- -------
Balance December 31 $ 1,465 $ 1,492
======= =======
Page 28 of 41
F-10
E. TREASURY STOCK:
As of December 31, 2002, the Company has authority from the Board of
Directors to reacquire 520,900 shares of the Company's common stock. During
2002 and 2001, 100 and 48,200 shares were reacquired. Treasury shares have
been used for the exercise of stock options and to fund the Company's
401(k) contributions.
F. NET EARNINGS PER SHARE:
Basic net earnings per share amounts have been computed by dividing net
earnings by the weighted average number of outstanding common shares.
Diluted net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive. Options to purchase
6,250; 7,500; and 8,750 shares of common stock with a weighted average
exercise price of $39.36, $39.39, and $39.41 were outstanding at December
31, 2002, 2001, and 2000, but were excluded from the computation of common
share equivalents because their exercise prices were greater than the
average market price of the common shares.
G. STOCK OPTION PLAN:
The National Presto Industries, Inc. Stock Option Plan reserves 100,000
shares of common stock for key employees. Stock options for 6,250 shares at
a weighted average price of $39.36 per share were outstanding at December
31, 2002. Stock options for 7,500 shares at a weighted average price of
$39.39 per share were outstanding at December 31, 2001. There were 1,250
shares exercisable at $39.36 at December 31, 2002 and 1,250 shares
exercisable at $39.39 at December 31, 2001. The pro forma effect of
accounting for stock options using the fair value method is not material.
H. RETIREMENT PLANS:
PENSION PLANS:
The Company has pension plans which cover the majority of employees.
Pension benefits are based on an employee's years of service and
compensation near the end of those years of service. The Company's funding
policy has been to contribute such amounts as necessary, computed on an
actuarial basis, to provide the plans with assets sufficient to meet the
benefits to be paid to plan members. The Company obtains actuarial
valuations for defined benefit plans on December 31 of each year. Plan
assets consist primarily (74%) of interest bearing securities with the
balance in corporate stocks, principally National Presto Industries, Inc.
common stock. Effective January 1, 2003 the Company's two defined benefit
pension plans were merged into one plan. The actuarial information
presented below as of December 31, 2002, was prepared by the Company's
actuary, as if the plan merger had occurred on December 31, 2002.
(In Thousands)
Pension Benefits
--------------------------------
2002 2001 2000
---- ---- ----
Net periodic cost:
Service cost $ 407 $ 374 $ 325
Interest cost 802 755 708
Expected return on assets (749) (743) (717)
Amortization of transition amount (83) (104) (104)
Amortization of prior service cost 187 223 227
Actuarial loss 212 157 90
Settlement charge 882 -- --
Curtailment charge 58 74 --
------- ------- -------
Net periodic benefit cost $ 1,716 $ 736 $ 529
======= ======= =======
Page 29 of 41
F-11
(In Thousands)
Pension Benefits
----------------------
2002 2001
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 10,755 $ 9,683
Service cost 407 374
Interest cost 802 755
Special termination benefits 737 20
Curtailment gain (203) (5)
Actuarial loss 1,018 557
Benefits and expenses paid (2,832) (629)
-------- --------
Benefit obligation at end of year $ 10,684 $ 10,755
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 10,132 $ 8,656
Employer contributions 961 1,857
Actual return on plan assets 240 248
Benefits and expenses paid (2,832) (629)
-------- --------
Fair value of plan assets at end of year $ 8,501 $ 10,132
======== ========
Reconciliation of funded status:
Funded status $ (2,183) $ (623)
Unrecognized actuarial loss 4,059 3,829
Unrecognized prior service cost 497 743
Unrecognized net transition obligation -- (83)
-------- --------
Prepaid benefit $ 2,373 $ 3,866
======== ========
Statement of financial position:
Prepaid benefit cost $ 2,373 $ 3,866
Additional minimum liability (2,713) --
Intangible asset 497 --
Accumulated other comprehensive income 2,216 --
-------- --------
Recognized amount $ 2,373 $ 3,866
======== ========
The Company's accumulated benefit obligation of $8,841,000 exceeds the fair
value of the plan's assets at December 31, 2002. This caused the Company to
recognize an additional minimum liability in the fourth quarter of 2002 of
$2,713,000. The recognition of this additional minimum liability results in
the Company recognizing an additional intangible asset of $497,000, which
is equal to the unrecognized prior service cost. The difference between the
additional minimum liability and intangible asset of $2,216,000, or
$1,365,000 net of tax, represents a net loss not yet recognized as net
periodic pension cost and is recorded net of tax in other comprehensive
income as an unrealized loss on net periodic pension cost. When the value
of plan assets exceeds the accumulated benefit obligation the additional
minimum liability, intangible asset and the unrealized loss recorded in
comprehensive income will no longer be required.
During 2002 the company offered an early retirement window of enhanced
retirement benefits to long-term employees in its pension plan. The special
termination benefit cost associated with this window was $737,000.
The combination of the early retirement window and a concurrent layoff,
which were part of the same restructuring plan, resulted in a curtailment.
The effect of the curtailment was a charge of $58,000 in 2002.
The amount of lump sum benefits paid from the plan during 2002 triggered a
settlement. The effect of the settlement was a charge of $882,000.
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
2002 2001 2000
---- ---- ----
Discount rate 6.50% 7.25% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 5.00% 5.00%
Page 30 of 41
F-12
401(k) PLAN:
The Company sponsors a 401(k) retirement plan that covers substantially all
employees. The Company will match up to 50% of the first 4% contributed by
employees to the plan. This matching contribution can be made with either
cash or common stock, at the company's discretion. Contributions made from
the treasury stock, including the Company's cash dividends, totaled
$213,000 in 2002, $251,000 in 2001, and $209,000 in 2000.
I. INCOME TAXES:
The following table summarizes the provision for income taxes:
(In Thousands)
----------------------------
2002 2001 2000
---- ---- ----
Current:
Federal $ 1,927 $ 1,790 $ 3,345
State 586 402 627
------- ------- -------
2,513 2,192 3,972
======= ======= =======
Deferred:
Federal 286 (2,013) 170
State 25 (330) 28
------- ------- -------
311 (2,343) 198
------- ------- -------
Total tax provision $2 ,824 $ (151) $ 4,170
======= ======= =======
The effective rate of the provision for income taxes as shown in the
consolidated statements of earnings differs from the applicable statutory
federal income tax rate for the following reasons:
Percent of Pre-tax Income
----------------------------
2002 2001 2000
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
State tax 3.5 0.8 2.2
Tax exempt interest and dividends (12.3) (37.3) (14.9)
Other (1.7) (1.0) (0.7)
------- ------- -------
Effective rate 24.5% (2.5)% 21.6%
======= ======= =======
Deferred tax assets and liabilities are recorded based on the differences
between the tax basis of assets and liabilities and their carrying amounts
for financial reporting purposes. The tax effects of the cumulative
temporary differences resulting in a net deferred tax asset are as follows
at December 31:
(In Thousands)
------------------
2002 2001
---- ----
Insurance $ 6,472 $ 6,616
Environmental 1,034 1,119
Pension (911) (1,521)
Plant Closing 3,202 2,939
Other (222) 734
------- -------
$ 9,575 $ 9,887
======= =======
J. COMMITMENTS AND CONTINGENCIES:
On July 16, 2002, the Securities and Exchange Commission filed a lawsuit
against National Presto Industries, Inc. alleging the company operated as
an unregistered investment company. The case does not involve fraud,
deceptive practices or questionable accounting methods, and the Company
plans to vigorously defend itself. If unsuccessful, the Company may have to
reallocate invested assets which will result in reduced yields, or it might
be required to register as an investment company. The obligations upon
registration are many and could include: 1) possible imposition of
significant additional reporting requirements (a burden which would not be
Page 31 of 41
F-13
imposed on its competitors); 2) potential regard in the market as a closed
end mutual fund which could result in a trading price sharply discounted
from net asset value; 3) possible limitations on the use of capital and
earnings which could inhibit or terminate commercial business growth.
In addition, the Company is involved in other routine litigation incidental
to its business. Management believes the ultimate outcome of this
litigation will not have a material affect on the Company's consolidated
financial position, liquidity, or results of operations.
K. CONCENTRATIONS:
For the year ended December 31, 2002, one customer accounted for 37% of net
sales. Two customers accounted for 37% and 11% of net sales for the year
ended December 31, 2001. Two customers accounted for 41% and 11% of net
sales for the year ended December 31, 2000. The preceding concentrations
related to housewares/small appliance net sales.
As discussed in Note N, the Company has decided to cease manufacturing
housewares/small appliances in its U.S. plants, close those facilities, and
purchase products from the Orient. With this decision, it could see
deliveries from the Orient disrupted by labor or supply problems at the
vendors, or transportation delays. As a consequence, products may not be
available in sufficient quantities during the prime selling period. The
Company has made and will continue to make every reasonable effort to
prevent these problems; however, there is no assurance that its efforts
will be totally effective. In addition, the Company's manufacturing
contracts with its foreign suppliers contain provisions to share the impact
of fluctuations in the exchange rate between the U.S. dollar and the Hong
Kong dollar above and below a fixed range contained in the contracts. All
transactions with the foreign suppliers were within the exchange rate range
specified in the contracts during 2002.
L. ENVIRONMENTAL:
As of December 31, 1998, all remediation projects required at the Company's
Eau Claire, Wisconsin, site had been installed, were fully operational, and
restoration activities had been completed. Based on factors known as of
December 31, 2002, it is believed that the Company's existing environmental
accrued 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
that the existing accrual could be inadequate. Management believes that in
the absence of any unforeseen future developments, known environmental
matters will not have any material affect on the results of operations or
financial condition of the Company.
M. BUSINESS ACQUISITIONS:
On February 24, 2001 the Company acquired the outstanding stock of AMTEC
Corporation, a supplier to the defense industry, for cash. The acquisition
was accounted for as a purchase with all assets and liabilities recorded at
fair market value. At the date of the acquisition, total assets were
approximately $8,500,000. An earn-out payment of $500,000 was made during
2002 and was recorded as additional goodwill. An additional $150,000 of
purchase consideration is contingently payable to the previous shareholders
of AMTEC based on meeting certain criteria.
On November 19, 2001 the Company purchased two high speed diaper machines
and assumed other liabilities in the acquisition of the existing customer
base of RMED International, Inc. The acquisition was accounted for as a
purchase with no goodwill recognized. At the date of the acquisition, total
assets were approximately $7,300,000.
N. PLANT CLOSING:
In November 2001, the Company announced that continued erosion of product
pricing resulted in its decision to cease manufacturing housewares/small
appliances in its U.S. plants, close those facilities, and purchase
products from the Orient. This transition from U.S. plant production to the
Orient was completed during late 2002. The Company closed its manufacturing
facilities in Alamogordo, New Mexico, during the third quarter of 2002 and
is currently exploring alternative uses for the facility. A final decision
on sale or other disposition of the Alamogordo facility will be made in
2003. The Company closed its Jackson, Mississippi plant during the fourth
quarter of 2002 and has decided to modify this plant to serve as a
warehousing and shipping facility. Modification to the Jackson plant should
be completed during 2003.
Page 32 of 41
F-14
As a result of the Company's transition from U.S. plant production to
Orient sourcing, the Company recorded charges in both 2002 and 2001, which
are summarized in the table below. During the first quarter of 2002, the
Company recorded a charge of $3,953,000 related to involuntary termination
benefits. In the fourth quarter of 2002, the Company recorded an additional
charge of $701,000 associated with additional employees identified by the
Company for early retirement and termination as a result of plant closing
activities. The total plant closing charge for 2002 was $.42 per share, net
of tax, and amounted to $4,585,000, of which $565,000 related to the write
down of inventory which was recorded in cost of sales. During the fourth
quarter of 2001 the Company recorded a charge of $7,653,000 or $.70 per
share, net of tax. This 2001 fourth quarter charge included $5,617,000 for
impairment of principally machinery and equipment, $880,000 for the write
down of inventory recorded in cost of sales, $637,000 for involuntary
employee termination benefits and other exit costs of $519,000. The
machinery and equipment impairment charge was computed using fair values
obtained from third party appraisers, equipment price lists and other
suppliers, which were compared to the historical net book values at the
time of the decision to close the plants. The provisions of SFAS 121 were
applied to the impaired assets in determining the amount of impairment to
record. A change in estimates was recorded in the fourth quarter of 2002,
decreasing the employee termination benefit accrual and increasing the
inventory write-down and other exit cost accruals. The estimated changes
were primarily due to lower than expected health care costs associated with
employee termination benefits and higher than expected costs associated
with the shutdown of U.S. plant manufacturing activities.
The total outsourcing of all Company housewares/small appliance product
manufacturing results in the creation of a new LIFO inventory category for
the outsourced products. The previous LIFO inventory reserve of
approximately $11,000,000 ("Manufactured LIFO Reserve"), which is
associated with the manufactured housewares/small appliance inventories
prior to plant closings, will be realized as this inventory category is
sold. During 2002, the Company recognized a $5,300,000 (or $.48 per share,
net of tax) reduction in cost of goods sold resulting from the partial
liquidation of the Manufactured LIFO Reserve. The Company expects to
largely liquidate the remainder of the Manufactured LIFO Reserve of
approximately $5,700,000 during 2003.
The following table summarizes the plant closing accrual:
Employee Other
Termination Inventory Exit
Benefits Writedown Cost Total
-------- --------- ---- -----
January 1, 2001 $ -- $ -- $ -- $ --
Additions in 2001 637,000 880,000 519,000 2,036,000
----------- ----------- ----------- -----------
Balance December 31, 2001 637,000 880,000 519,000 2,036,000
Additions in 2002 4,654,000 -- -- 4,654,000
Charges in 2002 (2,156,000) (1,445,000) (299,000) (3,900,000)
Changes in estimates (987,000) 565,000 301,000 (121,000)
----------- ----------- ----------- -----------
Balance December 31, 2002 $ 2,148,000 $ -- $ 521,000 $ 2,669,000
=========== =========== =========== ===========
O. BUSINESS SEGMENTS:
Historically the Company has operated in one business segment,
housewares/small appliances. As described in Note M, the Company completed
two acquisitions during 2001. The Company identifies its segments based on
the Company's organization structure, which is primarily by principal
products. The principal product groups are housewares/small appliances,
defense products and absorbent products.
Housewares/small appliances is the Company's primary product line which has
historically manufactured and distributed small electrical appliances and
housewares. These products are sold directly to retail outlets throughout
the United States and also through independent distributors. Many of the
products have been manufactured in Alamogordo, New Mexico, and Jackson,
Mississippi, while other products are imported from
Page 33 of 41
F-15
nonaffiliated companies located in the Orient. As more fully described in
Note N, the Company has exited U.S. manufacturing during 2001 and 2002 and
will now primarily source its housewares/small appliance products from
foreign manufacturers.
The defense segment was acquired in February 2001 and manufactures
precision mechanical, electromechanical and electronic assembly components
for the U.S. government and sub-contractors. The defense segment
manufacturing plant is located in Janesville, Wisconsin.
The absorbent product line was acquired on November 19, 2001. This segment
manufactures diapers at the Company's facilities in Eau Claire, Wisconsin.
Products are sold to retail outlets, distributors, and other absorbent
product manufacturers.
In the following summary, operating profit represents earnings before other
income, principally interest income and income taxes.
The Company's segments operate discretely from each other with no shared
manufacturing facilities. Costs associated with corporate activities (such
as cash and marketable securities management) are included within the
housewares/small appliances segment for all periods presented.
(In Thousands)
------------------------------------------------------------
Housewares /
Small Defense Absorbent
Appliances Products Products Total
---------- -------- -------- -----
YEAR ENDED DECEMBER 31, 2002
External net sales $ 116,032 $ 9,290 $ 8,407 $ 133,729
Gross profit 33,844 2,966 431 37,241
Operating profit 4,601 1,925 (131) 6,395
Total assets 270,042 11,899 8,053 289,994
Depreciation and amortization 954 153 827 1,934
Capital expenditures 1,425 1,771 212 3,408
YEAR ENDED DECEMBER 31, 2001
External net sales $ 111,264 $ 6,999(2) $ 815(3) $ 119,078
Gross profit 23,153 1,767 39 24,959
Operating profit (loss) (3,342)(1) 1,247 (147) (2,242)
Total assets 266,030 10,187 7,859 284,076
Depreciation and amortization 2,896 280 260 3,436
Capital expenditures 1,968 70 -- 2,038
YEAR ENDED DECEMBER 31, 2000
External net sales $ 118,955 $ -- $ -- $ 118,955
Gross profit 35,291 -- -- 35,291
Operating profit 8,611 -- -- 8,611
Total assets 288,530 -- -- 288,530
Depreciation and amortization 2,786 -- -- 2,786
Capital expenditures 3,843 -- -- 3,843
(1) The operating loss in small appliances in 2001 reflects a charge for plant
closing costs of $7,653,000 which is more fully described in Note N.
(2) The defense product segment was acquired on February 24, 2001 and,
accordingly, external net sales represents approximately ten months of
activity.
(3) The Absorbent Products division was acquired on November 19, 2001 and,
accordingly external net sales represents approximately one month of
activity.
Page 34 of 41
F-16
P. INTERIM FINANCIAL INFORMATION (UNAUDITED):
The following represents unaudited financial information for 2002 and 2001:
(In Thousands)
----------------------------------------------
Net Gross Net Earnings
Quarter Sales Profit Earnings Per Share
----- ------ -------- ---------
2002
First $ 22,596 $ 3,057 $ (2,360) $ (0.35)
Second 20,378 4,103 1,083 0.16
Third 28,447 5,656 893 0.13
Fourth 62,308 24,425 9,074 1.33
-------- -------- -------- --------
Total $133,729 $ 37,241 $ 8,690 $ 1.27
======== ======== ======== ========
2001
First $ 19,827 $ 2,746 $ 1,250 $ 0.18
Second 17,408 3,040 1,379 0.20
Third 26,902 6,225 2,137 0.31
Fourth 54,941 12,948 1,520 0.23
-------- -------- -------- --------
Total $119,078 $ 24,959 $ 6,286 $ 0.92
======== ======== ======== ========
During the fourth quarter of 2002 the Company recorded plant closing costs
and changes in estimates related to plant closing activities of $580,000
and a reduction in cost of goods sold of $4,079,000 resulting from the
sale of products accounting for under the LIFO method which had been
manufactured in the Company's U.S. manufacturing plants which were closed
in 2002. (See Note N.)
In addition, the Company recorded a $1,677,000 pension cost charge during
the fourth quarter of 2002 primarily related to the early retirement of
long-term employees. (See Note H).
Page 35 of 41
F-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
National Presto Industries, Inc.
We have audited the accompanying consolidated balance sheets of National
Presto Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note A(12), the accompanying consolidated financial
statements for the years ended December 31, 2001 and 2000, have been adjusted to
present separately other comprehensive income and charges in other comprehensive
income.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National Presto
Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period
ended December 31, 2002. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, represents fairly,
in all material respects, the information therein.
/S/ Grant Thornton LLP
Minneapolis, Minnesota
February 14, 2003
Page 36 of 41
F-18
NATIONAL PRESTO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
--------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Balance at
Beginning End
Description of Period Additions (A) Deductions (B) of Period
----------- --------- ------------- -------------- ---------
Deducted from assets:
Allowance for doubtful accounts:
Year ended December 31, 2002 $ 480 $ 113 $ 113 $ 480
===== ===== ===== =====
Year ended December 31, 2001 $ 450 $ 226 $ 196 $ 480
===== ===== ===== =====
Year ended December 31, 2000 $ 450 $ (41) $ (41) $ 450
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Notes:
(A) Amounts charged (credited) to selling and general expenses
(B) Principally bad debts written off, net of recoveries