Forward-looking statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, elsewhere in this Form 10-Q, in
the Company's 2018 Annual Report to Shareholders, in the Proxy Statement for the
annual meeting held on May 21, 2019, and in the Company's press releases and
oral statements made with the approval of an authorized executive officer are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. There are certain important factors that could cause results
to differ materially from those anticipated by some of the statements made
herein. Investors are cautioned that all forward-looking statements involve
risks and uncertainty. In addition to the factors discussed herein and in the
Notes to Consolidated Financial Statements, among the other factors that could
cause actual results to differ materially are the following: consumer spending
and debt levels; interest rates; continuity of relationships with and purchases
by major customers; product mix; the benefit and risk of business acquisitions;
competitive pressure on sales and pricing; development and market acceptance of
new products; increases in material, freight/shipping, tariffs, or production
cost which cannot be recouped in product pricing; delays or interruptions in
shipping or production; reliance on third-party suppliers in Asia; shipment of
defective product which could result in product liability claims or recalls;
work or labor disruptions stemming from a unionized work force; changes in
government requirements, military spending, and funding of government contracts,
which could result in, among other things, the modification or termination of
existing contracts; dependence on subcontractors or vendors to perform as
required by contract; the efficient start-up and utilization of capital
equipment investments; political actions of federal and state governments which
could have an impact on everything from the value of the U.S dollar vis-à-vis
other currencies to the availability of affordable labor and energy; and
information technology system failures or security breaches. Additional
information concerning these and other factors is contained in the Company's
Securities and Exchange Commission filings.
Discontinued Operations
On January 3, 2017, the Company and its wholly-owned subsidiary, Presto
Absorbent Products, Inc. ("PAPI"), entered into an asset purchase agreement
wherein substantially all PAPI assets were sold and certain liabilities were
assigned to Drylock Technologies, LTD. As a result of this transaction, the
Company classified its results of operations for all periods presented to
reflect its Absorbent Products business as a discontinued operation and
classified the assets and liabilities of its Absorbent Products business as held
for sale. The operations of PAPI previously comprised the Company's Absorbent
Products segment.
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Comparison of Third Quarter 2019 and 2018
Readers are directed to Note E to the Consolidated Financial Statements,
"Business Segments," for data on the financial results of the Company's three
business segments for the quarters ended September 29, 2019 and September 30,
2018.
On a consolidated basis, net sales decreased by $3,647,000 (5%), gross profit
increased by $8,150,000 (52%), selling and general expenses increased by
$780,000 (13%), and impairment of long-lived assets decreased by $3,021,000.
There were no impairments recorded in 2019. Other income increased by $209,000
(18%), while earnings from continuing operations before provision for income
taxes increased by $10,605,000 (132%), and earnings from continuing operations
increased by $8,472,000 (136%). Change in earnings from discontinued operations,
net of tax, was positive by $1,546,000. Details concerning these changes can be
found in the comments by segment below.
Housewares/Small Appliance net sales decreased by $1,108,000 from $22,705,000 to
$21,597,000, or 5%, primarily attributable to an increase in allowances and
a decrease in shipments. Defense net sales decreased by $2,544,000 from
$58,939,000 to $56,395,000, or 4%, primarily reflecting a decrease in units
shipped, partially offset by proceeds from the settlement of a customer
termination of $9,412,000.
Housewares/Small Appliance gross profit decreased $494,000 from $3,317,000 to
$2,823,000, primarily reflecting less favorable product margins. Defense gross
profit increased $8,706,000 from $12,657,000 to $21,363,000, primarily
reflecting the proceeds from the customer termination agreement mentioned above.
Due to the startup nature of both businesses in the Safety segment and the
resulting limited revenues, gross margins were negative in both years.
Selling and general expenses for the Housewares/Small Appliance segment
increased $951,000, primarily reflecting higher accruals for self-insurance
reserves of $177,000, higher legal & professional expense of $289,000 and
charges related to the vesting of stock upon the retirement of long-term
employees of $448,000. Selling and general expenses for the Defense segment
decreased $643,000, primarily reflecting the absence of operating costs
associated with the Company's wholly-owned subsidiary, AMTEC Less Lethal
Systems, Inc., that was divested during the fourth quarter of 2018. See Note Q
to the Company's consolidated financial statements for the year ended December
31, 2018 on Form 10-K/A. Safety segment selling and general expenses increased
by $473,000, primarily reflecting the selling and general expenses of OneEvent,
whose assets were acquired during the reported quarter. See note L to the
Company's Consolidated Financial Statements.
There were no impairments recorded in 2019. In contrast, in third quarter 2018,
as the carrying value of the assets and liabilities included with the
divestiture of AMTEC Less Lethal (mentioned above) exceeded the selling price
less selling costs, the Company recorded an impairment on the related long-lived
assets of $3,021,000.
The above items were responsible for the change in operating profit.
The $209,000 increase in other income was primarily attributable to an increase
in interest income on marketable securities stemming from higher yields offset
by a lower average daily investment.
Earnings from continuing operations before provision for income taxes increased
$10,605,000 from $8,031,000 to $18,636,000. The provision for income taxes from
continuing operations increased from $1,791,000 to $3,924,000, which resulted in
an effective income tax rate of 21% in 2019 vs. 22% in 2018. Earnings from
continuing operations increased $8,472,000 from $6,240,000 to $14,712,000, or
136%.
On January 3, 2017, the Company and its wholly-owned subsidiary, Presto
Absorbent Products, Inc. ("PAPI"), entered into an asset purchase agreement
wherein substantially all PAPI assets were sold and certain liabilities were
assigned to Drylock Technologies, LTD. As a result of this transaction, the
Company classified its results of operations for all periods presented to
reflect its Absorbent Products business as a discontinued operation and
classified the assets and liabilities of its Absorbent Products business as held
for sale. Earnings from discontinued operations, net of tax, for the three
months ended September 29, 2019 and September 30, 2018 was $1,677,000 and
$131,000, respectively. The earnings stemmed from the settlement of a lawsuit
for breach of contract.
Net earnings increased $10,018,000 from $6,371,000 to $16,389,000.
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Comparison of First Nine Months 2019 and 2018
Readers are directed to Note E to the Consolidated Financial Statements,
"Business Segments," for data on the financial results of the Company's three
business segments for the first nine months ended September 29, 2019 and
September 30, 2018.
On a consolidated basis, sales decreased by $24,105,000 (10%), gross profit
decreased by $4,404,000 (8%), selling and general expenses increased by
$1,481,000 (8%), intangibles amortization decreased by $2,166,000 (100%), and
impairment of long-lived assets decreased by $3,021,000. There were no
impairments recorded in 2019. Other income increased by $1,587,000 (52%), while
earnings from continuing operations before provision for income taxes increased
by $889,000 (3%), and earnings from continuing operations increased by $806,000
(3%). Earnings from discontinued operations, net of tax, increased $1,558,000
(1,277%). Details concerning these changes can be found in the comments by
segment below.
Housewares/Small Appliance net sales increased by $3,695,000 from $56,721,000 to
$60,416,000, or 7%, primarily attributable to an increase in shipments. Defense
net sales decreased by $27,824,000 from $180,957,000 to $153,133,000, or 15%,
primarily reflecting a decrease in units shipped, partially offset by proceeds
from the settlement of a customer termination of $9,412,000.
Housewares/Small Appliance gross profit decreased $301,000 from $7,670,000 to
$7,369,000, primarily reflecting the increase in sales mentioned above offset by
less favorable product margins. Defense gross profit decreased $3,940,000 from
$48,232,000 to $44,292,000, primarily reflecting the decrease in sales mentioned
above and less favorable product margins, partially offset by the proceeds from
the customer termination agreement also mentioned above. Due to the startup
nature of both businesses in the Safety segment and the resulting limited
revenues, gross margins were negative in both years.
Selling and general expenses for the Housewares/Small Appliance segment
increased $2,337,000, primarily reflecting higher accruals for self-insurance of
$1,297,000, legal & professional expenses of $575,000, and charges related to
the vesting of stock upon the retirement of long-term employees of
$448,000. Selling and general expenses for the Defense segment decreased
$1,723,000, primarily reflecting the absence of operating costs associated with
the Company's wholly-owned subsidiary, AMTEC Less Lethal Systems, Inc., that was
divested during the fourth quarter of 2018. See Note Q to the Company's
consolidated financial statements for the year ended December 31, 2018 on Form
10-K/A. Safety segment selling and general expenses increased by $868,000,
primarily reflecting the selling and general expenses of OneEvent and an
increase in legal and professional expenses.
Intangibles amortization decreased by $2,166,000. The decrease primarily
reflects the Defense segment's amortization of the value of an acquired
government sales contract that was fully amortized during the second quarter of
2018. For the first nine months ended September 29, 2019 and September 30,
2018, the Company recorded amortization expense of $0 and $2,150,000,
respectively, associated with the customer contract intangible asset.
There were no impairments recorded in 2019. In contrast, in 2018, as the
carrying value of the assets and liabilities included with the divestiture of
AMTEC Less Lethal (mentioned above) exceeded the selling price less selling
costs, the Company recorded an impairment on the related long-lived assets of
$3,021,000.
The above items were responsible for the change in operating profit.
The $1,587,000 increase in other income was primarily attributable to an
increase in interest income on marketable securities with higher yields stemming
from the Federal Reserve's rate increases.
Earnings from continuing operations before provision for income taxes increased
$889,000 from $35,702,000 to $36,591,000. The provision for income taxes from
continuing operations increased from $7,692,000 to $7,775,000, which resulted in
an effective income tax rate of 21% in 2019 versus 22% in 2018. Earnings from
continuing operations increased $806,000 from $28,010,000 to $28,816,000, or 3%.
On January 3, 2017, the Company and its wholly-owned subsidiary, Presto
Absorbent Products, Inc. ("PAPI"), entered into an asset purchase agreement
wherein substantially all PAPI assets were sold and certain liabilities were
assigned to Drylock Technologies, LTD. As a result of this transaction, the
Company classified its results of operations for all periods presented to
reflect its Absorbent Products business as a discontinued operation and
classified the assets and liabilities of its Absorbent Products business as held
for sale. Earnings from discontinued operations, net of tax, for the first nine
months ended September
20
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29, 2019 and September 30, 2018 were $1,680,000 and $122,000, respectively. The
earnings stemmed from the settlement of a lawsuit for breach of contract.
Net earnings increased $2,364,000 from $28,132,000 to $30,496,000.
Liquidity and Capital Resources
Net cash (used in) provided by operating activities was ($3,570,000) and
$69,979,000 for the nine months ended September 29, 2019 and September 30, 2018,
respectively. The principal factors contributing to the decrease can be found in
the changes in the components of working capital within the Consolidated
Statements of Cash Flows. Of particular note during the first nine months of
2019 were net earnings of $30,496,000, which included non-cash depreciation
expense of $2,815,000 and a gain on a legal settlement of $2,300,000. Also
contributing to the cash used were an increase in inventory levels, deposits
with vendors included in other assets and current assets and a net increase in
payable and accrual levels, partially offset by a decrease in accounts
receivable levels stemming from cash collections on customer sales. Cash used
in operating activities from discontinued operations was $1,050,000. Of
particular note during the first nine months of 2018 were net earnings of
$28,132,000, which included total non-cash depreciation and amortization
expenses of $5,245,000 and a non-cash impairment of long-lived assets of
$3,021,000. Also contributing to the cash provided were decreases in accounts
receivable levels stemming from cash collections on customer sales, inventory
levels, deposits with raw material suppliers included in other assets and
current assets, and a net increase in payable and accrual levels. Cash used in
operating activities from discontinued operations was $562,000.
Net cash provided by investing activities was $47,905,000 during the first nine
months of 2019 as compared to $40,804,000 during the first nine months of
2018. Significant factors contributing to the change were net maturities and
sales of marketable securities in 2019 of $49,990,000, in contrast with net
maturities and sales of marketable securities in 2018 of $41,779,000, proceeds
from a legal settlement of $2,300,000, and proceeds from an insurance settlement
of $807,000 in 2019, as compared to $2,474,000 in 2018. Also contributing to the
change in cash provided was a decrease in the purchase of property, plant, and
equipment, proceeds from a note receivable, and acquisition of a business in
2019. Cash provided by discontinued operations for the first nine months of 2019
and 2018 were $3,107,000 and $6,134,000, respectively.
Cash flows from financing activities for the first nine months of 2019 and 2018
are essentially flat and primarily relate to the annual dividend payments. Cash
flows for both nine-month periods also reflected the proceeds from the sale of
treasury stock to a Company sponsored retirement plan.
Working capital decreased by $22,686,000 during the first nine months of 2019 to
$282,081,000 at September 29, 2019 for the reasons stated above. The Company's
current ratio was 7.2 to 1.0 at September 29, 2019 and 7.4 to 1.0 at December
31, 2018.
The Company expects to continue to evaluate acquisition opportunities that align
with its business segments and will make further acquisitions, as well as
continue to make capital investments in these segments per existing authorized
projects and for additional projects, if the appropriate return on investment is
projected.
The Company has substantial liquidity in the form of cash and cash equivalents
and marketable securities to meet all of its anticipated capital requirements,
to make dividend payments, and to fund future growth through acquisitions and
other means. The bulk of its marketable securities are invested in the tax
exempt variable rate demand notes described above and in fixed rate municipal
notes and bonds. The Company intends to continue its investment strategy of
safety and short-term liquidity throughout its investment holdings.
Critical Accounting Policies
The preparation of the Company's Consolidated Financial Statements in accordance
with accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect the amount of
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and revenues
and expenses during the periods reported. Actual results may differ from those
estimates. The Company reviewed the development and selection of the critical
accounting policies and believes the following are the most critical accounting
policies that could have an effect on the Company's reported results. These
critical accounting policies and estimates have been reviewed with the Audit
Committee of the Board of Directors.
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Inventories
New Housewares/Small Appliance product introductions are an important part of
the Company's sales to offset the morbidity rate of other Housewares/Small
Appliance products and/or the effect of lowered acceptance of seasonal products
due to weather conditions. New products entail unusual risks and have
occasionally in the past resulted in losses related to obsolete or excess
inventory as a result of low or diminishing demand for a product. There were no
such obsolescence issues that had a material effect during the current period,
and accordingly, the Company did not record a reserve for obsolete product. In
the future should product demand issues arise, the Company may incur losses
related to the obsolescence of the related inventory. Inventory risk for the
Company's Defense segment is not deemed to be significant, as products are
largely built pursuant to customers' specific orders.
Self-Insured Product Liability and Health Insurance
The Company is subject to product liability claims in the normal course of
business and is self-insured for health care costs, although it does carry stop
loss and other insurance to cover claims once a health care claim reaches a
specified threshold. The Company's insurance coverage varies from policy year to
policy year, and there are typically limits on all types of insurance coverage,
which also vary from policy year to policy year. Accordingly, the Company
records an accrual for known claims and incurred but not reported claims,
including an estimate for related legal fees in the Company's Consolidated
Financial Statements. The Company utilizes historical trends and other analysis
to assist in determining the appropriate accrual. There are no known claims that
would have a material adverse impact on the Company beyond the reserve levels
that have been accrued and recorded on the Company's books and records. An
increase in the number or magnitude of claims could have a material impact on
the Company's financial condition and results of operations.
Revenues
Sales are recorded net of discounts and returns for the Housewares/Small
Appliance segment. Sales discounts and returns are key aspects of variable
consideration, which is a significant estimate utilized in revenue
recognition. Sales returns pertain primarily to warranty returns, returns of
seasonal items, and returns of those newly introduced products sold with a
return privilege. The calculation of warranty returns is based in large part on
historical data, while seasonal and new product returns are primarily developed
using customer provided information.
Impairment and Valuation of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the related carrying amounts may not be
recoverable. Long-lived assets consist of property, plant and equipment and
intangible assets, including the value of a government sales contract.
Determining whether an impairment has occurred typically requires various
estimates and assumptions, including determining which cash flows are directly
related to the potentially impaired asset, the useful life over which cash flows
will occur, the amounts of the cash flows and the asset's residual value, if
any. In turn, measurement of an impairment loss requires a determination of fair
value, which is based on the best information available. The Company uses
internal discounted cash flows estimates, quoted market prices when available
and independent appraisals, as appropriate, to determine fair value. The Company
derives the required cash flow estimates from its historical experience and its
internal business plans.
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