NATIONAL PRESTO INDUSTRIES INC (NPK)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2024 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 20, 2025, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to Consolidated Financial Statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, tariffs, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending,  and funding of government contracts which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital and equipment investments; political actions of federal and state governments which could have an impact on everything from the value of the U.S. dollar vis-à-vis other currencies to the availability of affordable labor and energy; and security breaches and disruptions to our information technology system. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.



2024 COMPARED TO 2023



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2024 and 2023.



On a consolidated basis, sales increased by $47,316,000 (14%), gross profit increased by $11,114,000 (17%), selling and general expense increased by $1,054,000 (3%), and intangibles amortization decreased by $120,000 (7%). Other income decreased by $1,941,000 (26%), earnings before provision for income taxes increased by $8,239,000 (19%), and net earnings increased by $6,901,000 (20%). Details concerning these changes can be found, by segment, in the comments below.



Net sales of the Housewares/Small Appliance segment increased by $5,180,000, from $97,619,000 to $102,799,000, or 5%, primarily attributable to the increase in units shipped.  Net sales of the Defense segment increased by $42,322,000, from $241,703,000 to $284,025,000, or 18%, reflecting an increase in units shipped.



Gross profit of the Housewares/Small Appliance segment increased $5,611,000 from $19,867,000 (20% of sales) in 2023 to $25,478,000 (25% of sales) in 2024, primarily reflecting the increase in sales mentioned above, augmented by an improved product mix and a favorable LIFO inventory adjustment. Defense gross profit increased $6,170,000 from $52,003,000 (22% of sales) in 2023 to $58,173,000 (21% of sales) in 2024, primarily reflecting the increase in sales mentioned above.  Due to the startup nature of the businesses in the Safety segment, gross margins were negative in both years. The comparative decrease in gross margins of $667,000 were primarily due to increased product development and testing.



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Selling and general expenses for the Housewares/Small Appliance segment increased $361,000, primarily reflecting increased personnel costs of $654,000 and accrual levels for self insurance of $339,000, partially offset by changes to accrual levels for bad debt of $571,000. Defense segment selling and general expenses increased $1,530,000, primarily due to increased personnel costs of $1,609,000, partially offset by decreased legal and professional expenses of $156,000. Safety segment selling and general expenses decreased $837,000, primarily reflecting decreased personnel costs of $935,000 and legal and professional expenses of $322,000, partially offset by the absence of the prior year's gain on the sale of Rusoh, Inc. of $351,000. See Notes L to the Company's Consolidated Financial Statements.

Intangibles amortization decreased as a result of the absence of the prior year's amortization of intellectual property intangibles from the acquisition of Knox Safety, Inc. See Note P to the Company's Consolidated Financial Statements.

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



Other income decreased $1,941,000, which was primarily attributable to a reduced portfolio of marketable securities.



Earnings before provision for income taxes increased $8,239,000 from $42,431,000 to $50,670,000. The provision for income taxes increased from $7,872,000 to $9,210,000, which resulted in an effective income tax rate of 18% and 19% for the years ended December 31, 2024 and 2023, respectively. Net earnings increased $6,901,000 from $34,559,000 to $41,460,000.



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2023 COMPARED TO 2022



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2023 and 2022.



On a consolidated basis, sales increased by $19,289,000 (6%), gross profit increased by $12,327,000 (22%), selling and general expense increased by $3,663,000 (14%), intangibles amortization increased by $1,053,000 (181%) and Impairments - goodwill and intangible assets decreased $5,295,000.  Other income increased by $3,581,000 (94%), earnings before provision for income taxes increased by $16,487,000 (64%), and net earnings increased by $13,860,000 (67%). Details concerning these changes can be found, by segment, in the comments below.



Net sales of the Housewares/Small Appliance segment decreased by $20,729,000, from $118,347,000 to $97,619,000, or 18%. Approximately 30% of which was attributable to a decrease pricing with the balance due to changes in units shipped and mix.  Net sales of the Defense segment increased by $39,220,000, from $202,483,000 to $241,703,000, or 19%, reflecting an increase in units shipped.  In addition, as Woodlawn Manufacturing, Ltd. was acquired during the fourth quarter of 2022 (see Note P to the Company's Consolidated Financial Statements), 2023 was the first full year that its operations were reflected in the segment's sales.



Gross profit of the Housewares/Small Appliance segment increased $2,445,000 from $17,422,000 (15% of sales) in 2022 to $19,867,000 (20% of sales) in 2023, primarily reflecting the absence of the levels of inventory adjustments made in the prior year. Those adjustments related to obsolete or excess inventory adjustments of $3,613,000, and decrease in standard unit costs of $3,108,000 that were not offset by decreases in the segment's LIFO inventory reserve. Decreased ocean cargo and inland freight costs and a more favorable U.S. Dollar-RMB exchange rate affected margins to a lesser degree.  These elements were partially offset by the changes in pricing and unit shipments mentioned above.  Defense gross profit increased $9,365,000 from $42,638,000 (21% of sales) in 2022 to $52,003,000 (22% of sales) in 2023, primarily reflecting the increase in sales mentioned above, and comparatively more efficient operations.  Due to the startup nature of the businesses in the Safety segment, gross margins were negative in both years.  Fiscal year 2023 included a full year of operations of Rely Innovations, Inc., which was acquired in July of 2022. See Note P. This increase in operating losses was offset by the absence of the prior year's write-downs of inventory and materials to reflect realizable values of $1,822,000, leading to the comparative increase in gross margin of $517,000.



Selling and general expenses for the Housewares/Small Appliance segment increased $355,000, primarily reflecting increased compensation/payroll costs of $503,000, and changes to accrual levels, which included increased bad debt reserves of $285,000 and decreased legal and professional fees of $534,000.  Defense segment selling and general expenses increased $1,606,000, primarily due to increased compensation/payroll costs of $724,000, insurance settlement/deductible costs of $538,000 and a full year of selling and general expenses of Woodlawn Manufacturing, Ltd., which was acquired, during the fourth quarter of 2022. The increase in Woodlawn's selling and general expenses was $405,000. Safety segment selling and general expenses increased $1,702,000, primarily reflecting increased compensation/payroll costs of $1,420,000 and the absence of the prior year bargain purchase gain of $492,000 recognized upon the acquisition of Knox Safety, Inc., partially offset by the gain on the sale of Rusoh, Inc. of $351,000. See Notes L and P to the Company's Consolidated Financial Statements.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Knox Safety, Inc. and Woodlawn Manufacturing, Ltd. See Note P to the Company's Consolidated Financial Statements.

Impairment - goodwill and intangible assets decreased as a result of the absence of the prior year's impairment of goodwill and technology intangibles in the Safety segment. See Note A(10) and Note A(11) to the Consolidated Financial Statements.

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



Other income increased $3,581,000, which was primarily attributable to higher interest earned with higher yields, partially offset by a reduced portfolio of marketable securities.



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Earnings before provision for income taxes increased $16,487,000 from $25,944,000 to $42,431,000. The provision for income taxes increased from $5,245,000 to $7,872,000, which resulted in an effective income tax rate of 19% and 20% for the years ended December 31, 2023 and 2022, respectively. Net earnings increased $13,860,000 from $20,699,000 to $34,559,000.

LIQUIDITY AND CAPITAL RESOURCES

2024 COMPARED TO 2023



Cash used in operating activities was $53,426,000 during 2024 as compared to $45,389,000 provided by operating activities during 2023. The principal factors behind the increase in cash used can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during 2024 was net earnings of $41,460,000, which included total non-cash depreciation and amortization of $5,046,000 and deferred income tax benefit of $4,528,000. This was augmented by decreases in deposits made to vendors (included in other assets and current assets) and a net increase in payable and accrual levels. The combination of these factors was more than offset by increases in inventory and accounts receivable levels. Of particular note during 2023 were net earnings of $34,559,000, which included total non-cash depreciation and amortization of $6,007,000, decreases in accounts receivable levels and deposits made to vendors (included in other assets and current assets), and a net increase in payable and accrual levels. These were partially offset by non-cash deferred income tax benefit of $1,190,000 and an increase in inventory levels.



Net cash provided by investing activities was $14,965,000 during 2024 as compared to $447,000 used in investing activities during 2023. Of note during 2024 were net sales and maturities of marketable securities of $21,459,000 and proceeds from a note receivable of $1,037,000. These were partially offset by purchases of plant and equipment of $7,531,000. Of note during 2023 were proceeds from sale of subsidiary of $2,000,000, net purchases of marketable securities of $1,466,000 and purchases of plant and equipment of $1,840,000.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio. As of December 31, 2024, there were no variable rate demand notes classified as marketable securities. As of December 31, 2023, $5,123,000 of variable rate demand notes are classified as marketable securities. These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2024 and 2023 primarily differed as a result of the $0.50 per share increase in the extra dividend paid during these years. Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan. In addition, the Company drew on and repaid its line of credit during 2024, incurring interest expense of $2,000.



As a result of the foregoing factors, cash and cash equivalents decreased in 2024 by $69,994,000 to $17,663,000.



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Working capital increased by $4,134,000 to $292,225,000 at December 31, 2024 for the reasons stated above. The Company’s current ratio was 4.9 to 1.0 at December 31, 2024 and 5.0 to 1.0 at December 31, 2023.



The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions, as well as continue to make capital investments in these segments per existing authorized projects and for additional projects if the appropriate return on investment is projected. See Item 1-A-2.



The Company has sufficient liquidity in the form of cash and cash equivalents and marketable securities and credit facilities 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 have been invested in the variable rate demand notes described above, in municipal bonds that are pre-refunded with escrowed U.S. Treasuries, and certificates of deposit. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

The Company's principal commitments consist of purchase and lease obligations.  Purchase obligations include outstanding purchase orders issued to the Company's Housewares and Safety segments' manufacturers in the Orient and to material suppliers and contractors in the Defense segment, and as of December 31, 2024 amounted to approximately $346,143,000. The Company can cancel or change many of these purchase orders, but may incur costs if its supplier cannot use the material to manufacture the Company's or other customers' products in other applications or return the material to their supplier. As a result, the actual amount the Company is obligated to pay cannot be reasonably estimated. Lease obligations are described in Note M - Leases to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.



2023 COMPARED TO 2022

Cash provided by operating activities was $45,389,000 during 2023 as compared to $8,768,000 during 2022.  The principal factors behind the increase in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during 2023 were net earnings of $34,559,000, which included total non-cash depreciation and amortization of $6,007,000, decreases in accounts receivable levels and deposits made to vendors (included in other assets and current assets), and a net increase in payable and accrual levels. These were partially offset by non-cash deferred income tax benefit of $1,190,000 and an increase in inventory levels. Of particular note during 2022 were net earnings of $20,699,000, which included a non-cash loss on impairment of goodwill and intangible assets of $5,295,000 and total non-cash depreciation and amortization expenses of $3,347,000.  These were partially offset by a non-cash deferred income tax benefit of $2,311,000 and increases in accounts receivable and inventory levels.



Net cash used in investing activities was $447,000 during 2023 as compared to $16,436,000 during 2022. Of note during 2023 were proceeds from sale of subsidiary of $2,000,000, net purchases of marketable securities of $1,466,000 and purchases of plant and equipment of $1,840,000. During 2022 the Company acquired two businesses for $24,683,000 net of cash acquired and purchased plant and equipment for $1,030,000. These were partially offset by net sales and maturities of marketable securities of $9,171,000.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2023 and 2022, $5,123,000 and $3,638,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2023 and 2022 primarily differed as a result of the $0.50 per share decrease in the extra dividend paid during these years.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents increased in 2023 by $16,946,000 to $87,657,000.



Working capital increased by $15,100,000 to $288,091,000 at December 31, 2023 for the reasons stated above.  The Company’s current ratio was 5.0 to 1.0 at December 31, 2023 and 6.1 to 1.0 at December 31, 2022.

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DEFENSE SEGMENT BACKLOG



The Company’s Defense segment contract backlog was approximately $1,085,612,000 at December 31, 2024, and $564,005,000 at December 31, 2023.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during an 18- to 42-month period. 

Critical accounting ESTIMATES



The Company's discussion and analysis of financial condition and results of operations are based upon its Consolidated Financial Statements. The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and revenues and expenses during the periods reported. The estimates are based on experience and other assumptions that the Company believes are reasonable under the circumstances, and these estimates are evaluated on an ongoing basis. Actual results may differ from those estimates.

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management. The Company reviewed the development and selection of the critical accounting policies and believes the following is the most critical accounting policy that could have a material effect on the Company’s reported results as it involves the use of significant estimates and assumptions as described above. This critical accounting policy and estimate have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed information regarding the Company's critical accounting policies.

 

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Impairment and Valuation of Long-lived Assets and Goodwill

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

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated. The impairment test for goodwill requires the determination of fair value of the reporting unit. The Company uses multiples of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), sales, and discounted cash flow models, which are described above, to determine the reporting unit's fair value, as appropriate. The Company also utilizes qualitative analyses to assess goodwill impairment.



NEW ACCOUNTING PRONOUNCEMENTS



Please refer to Note A(17) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2023 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 21, 2024, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to Consolidated Financial Statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, tariffs, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending,  and funding of government contracts which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital and equipment investments; political actions of federal and state governments which could have an impact on everything from the value of the U.S. dollar vis-à-vis other currencies to the availability of affordable labor and energy; and security breaches and disruptions to our information technology system. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.



2023 COMPARED TO 2022



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2023 and 2022.



On a consolidated basis, sales increased by $19,289,000 (6%), gross profit increased by $12,327,000 (22%), selling and general expense increased by $3,663,000 (14%), intangibles amortization increased by $1,053,000 (181%) and Impairments - goodwill and intangible assets decreased $5,295,000.  Other income increased by $3,581,000 (94%), earnings before provision for income taxes increased by $16,487,000 (64%), and net earnings increased by $13,860,000 (67%). Details concerning these changes can be found in the comments, by segment, below.



Net sales of the Housewares/Small Appliance segment decreased by $20,729,000, from $118,347,000 to $97,619,000, or 18%. Approximately 30% of which was attributable to a decrease pricing with the balance due to changes in units shipped and mix.  Net sales of the Defense segment increased by $39,220,000, from $202,483,000 to $241,703,000, or 19%, reflecting an increase in units shipped.  In addition, as Woodlawn Manufacturing, Ltd. was acquired during the fourth quarter of 2022 (see Note P to the Company's Consolidated Financial Statements), 2023 was the first full year that its operations were reflected in the segment's sales.



Gross profit of the Housewares/Small Appliance segment increased $2,445,000 from $17,422,000 (15% of sales) in 2022 to $19,867,000 (20% of sales) in 2023, primarily reflecting the absence of the levels of inventory adjustments made in the prior year. Those adjustments related to obsolete or excess inventory adjustments of $3,613,000, and decrease in standard unit costs of $3,108,000 that were not offset by decreases in the segment's LIFO inventory reserve. Decreased ocean cargo and inland freight costs and a more favorable U.S. Dollar-RMB exchange rate affected margins to a lesser degree.  These elements were partially offset by the changes in pricing and unit shipments mentioned above.  Defense gross profit increased $9,365,000 from $42,638,000 (21% of sales) in 2022 to $52,003,000 (22% of sales) in 2023, primarily reflecting the increase in sales mentioned above, and comparatively more efficient operations.  Due to the startup nature of the businesses in the Safety segment, gross margins were negative in both years.  Fiscal year 2023 included a full year of operations of Rely Innovations, Inc., which was acquired in July of 2022. See Note P. This increase in operating losses was offset by the absence of the prior year's write-downs of inventory and materials to reflect realizable values of $1,822,000, leading to the comparative increase in gross margin of $517,000.



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Selling and general expenses for the Housewares/Small Appliance segment increased $355,000, primarily reflecting increased compensation/payroll costs of $503,000, and changes to accrual levels, which included increased bad debt reserves of $285,000 and decreased legal and professional fees of $534,000.  Defense segment selling and general expenses increased $1,606,000, primarily due to increased compensation/payroll costs of $724,000, insurance settlement/deductible costs of $538,000 and a full year of selling and general expenses of Woodlawn Manufacturing, Ltd., which was acquired, during the fourth quarter of 2022. The increase in Woodlawn's selling and general expenses was $405,000. Safety segment selling and general expenses increased $1,702,000, primarily reflecting increased compensation/payroll costs of $1,420,000 and the absence of the prior year bargain purchase gain of $492,000 recognized upon the acquisition of Knox Safety, Inc., partially offset by the gain on the sale of Rusoh, Inc. of $351,000. See Notes L and P to the Company's Consolidated Financial Statements.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Knox Safety, Inc. and Woodlawn Manufacturing, Ltd. See Note P to the Company's Consolidated Financial Statements.

Impairment - goodwill and intangible assets decreased as a result of the absence of the prior year's impairment of goodwill and technology intangibles in the Safety segment. See Note A(10) and Note A(11) to the Consolidated Financial Statements.

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



Other income increased $3,581,000, which was primarily attributable to higher interest earned with higher yields, partially offset by a reduced portfolio of marketable securities.



Earnings before provision for income taxes increased $16,487,000 from $25,944,000 to $42,431,000.  The provision for income taxes increased from $5,245,000 to $7,872,000, which resulted in an effective income tax rate of 19% and 20% for the years ended December 31, 2023 and 2022, respectively.  Net earnings increased $13,860,000 from $20,699,000 to $34,559,000.



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2022 COMPARED TO 2021



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2022 and 2021.



On a consolidated basis, sales decreased by $34,154,000 (10%), gross profit decreased by $9,271,000 (14%), selling and general expense decreased by $7,032,000 (21%), intangibles amortization increased by $368,000 (172%) and Impairments - goodwill and intangible assets increased $5,295,000.  Other income increased by $1,387,000 (57%), earnings before provision for income taxes decreased by $6,515,000 (20%), and net earnings decreased by $4,955,000 (19%). Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales increased by $2,424,000, from $115,924,000 to $118,348,000, or 2%, primarily attributable to an increase in pricing and changes in mix.  Approximately 85% of the increase from price and mix changes were offset by a decrease in units shipped.  The increase was further offset by the absence of the prior year's partial reversal of $1,530,000 of a reserve for estimated refunds related to a product recall of indoor smokers. Defense net sales decreased by $37,031,000, from $239,514,000 to $202,483,000, or 15%, reflecting a decrease in units shipped.



Housewares/Small Appliance gross profit increased $7,448,000 from $9,974,000 (9% of sales) in 2021 to $17,422,000 (15% of sales) in 2022, primarily reflecting the changes in pricing and mix mentioned above, augmented by decreased ocean cargo and inland freight costs, partially offset by the decrease in unit shipments, as well as adjustments related to obsolete or excess inventory levels of $3,613,000, and decreases in standard unit costs of $3,108,000 that were not offset by decreases in the segment's LIFO inventory reserve.  Defense gross profit decreased $18,567,000 from $61,205,000 (26% of sales) to $42,638,000 (21% of sales), primarily reflecting the decrease in sales mentioned above, a less favorable mix, inefficiencies from labor shortages, delays in securing materials and other supply chain issues.  Due to the startup nature of the businesses in the Safety segment, gross margins were negative in both years.  A reduction in the amount of write-downs of inventory and materials at Rusoh, Inc. to reflect realizable values contributed to the comparative increase in gross margin of $1,848,000.



Selling and general expenses for the Housewares/Small Appliance segment decreased $446,000, primarily reflecting lower health and accident expenses of $699,000, product liability costs of $383,000, and insurance costs of $164,000.  These decreases were partially offset by higher legal and professional expenses of $567,000 and compensation expenses of $175,000.  Defense segment selling and general expenses increased $680,000, primarily due to increased legal and professional expenses of $302,000, increased compensation/payroll costs of $209,000, and increased marketing costs of $121,000.  Safety segment selling and general expenses decreased $7,267,000, primarily reflecting the absence of prior year impairment of $7,615,000 of notes receivable and related interest held by Rusoh, Inc., augmented by the bargain purchase gain of $492,000 recognized upon the acquisition of Knox Safety, Inc. See Note P. These were offset in part by increased compensation expenses of $311,000 and legal and professional expenses of $383,000, both largely related to the acquisition of Knox Safety, Inc.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Knox Safety, Inc. and Woodlawn Manufacturing, Ltd. See Note P to the Consolidated Financial Statements.

Impairment – goodwill and intangible assets increased as a result of impairments of goodwill and technology intangibles in the Safety segment.  See Note A (10) and Note A (11) to the Consolidated Financial Statements.

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



Other income increased $1,387,000, which was primarily attributable to higher interest earned with higher yields, offset in part by a reduced portfolio of marketable securities.



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Earnings before provision for income taxes decreased $6,515,000 from $32,459,000 to $25,944,000.  The provision for income taxes decreased from $6,805,000 to $5,245,000, which resulted in an effective income tax rate of 20% and 21% for the years ended December 31, 2022 and 2021, respectively.  Net earnings decreased $4,955,000 from $25,654,000 to $20,699,000.

LIQUIDITY AND CAPITAL RESOURCES

2023 COMPARED TO 2022



Cash provided by operating activities was $45,389,000 during 2023 as compared to $8,768,000 during 2022.  The principal factors behind the increase in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during 2023 were net earnings of $34,559,000, which included total non-cash depreciation and amortization of $6,007,000, decreases in accounts receivable levels and deposits made to vendors (included in other assets and current assets), and a net increase in payable and accrual levels. These were partially offset by non-cash deferred income tax benefit of $1,190,000 and an increase in inventory levels. Of particular note during 2022 were net earnings of $20,699,000, which included a non-cash loss on impairment of goodwill and intangible assets of $5,295,000 and total non-cash depreciation and amortization expenses of $3,347,000.  These were partially offset by a non-cash deferred income tax benefit of $2,311,000 and increases in accounts receivable and inventory levels.



Net cash used in investing activities was $447,000 during 2023 as compared to $16,436,000 during 2022. Of note during 2023 were proceeds from sale of subsidiary of $2,000,000, net purchases of marketable securities of $1,466,000 and purchases of plant and equipment of $1,840,000. During 2022 the Company acquired two businesses for $24,683,000 net of cash acquired and purchased plant and equipment for $1,030,000. These were partially offset by net sales and maturities of marketable securities of $9,171,000.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2023 and 2022, $5,123,000 and $3,638,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2023 and 2022 primarily differed as a result of the $0.50 per share decrease in the extra dividend paid during these years.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents increased in 2023 by $16,946,000 to $87,657,000.



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Working capital increased by $15,100,000 to $288,091,000 at December 31, 2023 for the reasons stated above.  The Company’s current ratio was 5.0 to 1.0 at December 31, 2023 and 6.1 to 1.0 at December 31, 2022.



The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions, as well as continue to make capital investments in these segments per existing authorized projects and for additional projects if the appropriate return on investment is projected.  See Item 1-A-2.



The Company has substantial liquidity in the form of cash and cash equivalents and marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund future growth through acquisitions and other means.  The bulk of its marketable securities are invested in the variable rate demand notes described above, in municipal bonds that are pre-refunded with escrowed U.S. Treasuries, and certificates of deposit. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

The Company's principal commitments consist of purchase and lease obligations.  Purchase obligations include outstanding purchase orders issued to the Company's Housewares and Safety segments' manufacturers in the Orient and to material suppliers and contractors in the Defense segment, and as of December 31, 2023 amounted to approximately $343,580,000. The Company can cancel or change many of these purchase orders, but may incur costs if its supplier cannot use the material to manufacture the Company's or other customers' products in other applications or return the material to their supplier. As a result, the actual amount the Company is obligated to pay cannot be reasonably estimated. Lease obligations are described in Note M - Leases to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.



2022 COMPARED TO 2021

Cash provided by operating activities was $8,768,000 during 2022 as compared to $34,688,000 during 2021.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2022 were net earnings of $20,699,000, which included a non-cash loss on impairment of goodwill and intangible assets of $5,295,000 and total non-cash depreciation and amortization expenses of $3,347,000.  These were partially offset by a non-cash deferred income tax benefit of $2,311,000 and increases in accounts receivable and inventory levels.  Of particular note during 2021 were net earnings of $25,654,000, which included a non-cash provision for doubtful notes and accounts receivable of $7,665,000, total non-cash depreciation and amortization expenses of $2,978,000, a non-cash deferred income tax benefit of $1,612,000, and net decreases in deposits made to vendors included in other assets and current assets and accounts receivable.  These were partially offset by an increase in inventory levels and a net decrease in payable and accrual levels.



Net cash used in investing activities was $16,436,000 during 2022 as compared to $32,548,000 provided by investing activities during 2021. During 2022 the Company acquired two businesses for $24,683,000 net of cash acquired, and purchased plant and equipment for $1,030,000.  These were partially offset by net sales and maturities of marketable securities of $9,171,000.  Of note during 2021 were net sales and maturities of marketable securities of $34,621,000 offset by the purchase of plant and equipment of $2,866,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2022 and 2021, $3,638,000 and $25,427,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2022 and 2021 primarily differed as a result of the $1.75 per share decrease in the extra dividend paid during these years. Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents decreased in 2022 by $39,094,000 to $70,711,000.



Working capital decreased by $21,903,000 to $272,991,000 at December 31, 2022 for the reasons stated above.  The Company’s current ratio was 6.1 to 1.0 at December 31, 2022 and 6.6 to 1.0 at December 31, 2021.

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DEFENSE SEGMENT BACKLOG



The Company’s Defense segment contract backlog was approximately $564,005,000 at December 31, 2023, and $505,069,000 at December 31, 2022.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during an 18- to 36-month period. 

Critical accounting ESTIMATES



The Company's discussion and analysis of financial condition and results of operations are based upon its Consolidated Financial Statements. The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and revenues and expenses during the periods reported.  The estimates are based on experience and other assumptions that the Company believes are reasonable under the circumstances, and these estimates are evaluated on an ongoing basis. Actual results may differ from those estimates.

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management.  The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results as they involve the use of significant estimates and assumptions as described above. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed information regarding the Company's critical accounting policies.



Inventories

New Housewares/Small Appliance and Safety product introductions are an important part of the Company’s sales.  In the case of the Housewares/Small Appliance segment, the introductions are important to offset the morbidity rate of other products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks and have occasionally, in the past, resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product. The Housewares/Small Appliance segment recorded impairments related to such losses of $1,216,000 and $3,613,000 in 2023 and 2022, respectively.  The Safety segment recorded impairments of $1,822,000 and $3,090,000 in 2022 and 2021, respectively, largely due to aged Rusoh extinguisher inventory. Fire safety regulations require fire extinguishers to be replaced or torn down every 12 years after the date of manufacture. There were no other obsolescence issues that had a material effect during the current year.  In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory.  Inventory risk for the Company’s Defense segment is not deemed to be significant, as products are largely built pursuant to customers’ specific orders.



Self-Insured Product Liability & Health Insurance

The Company is subject to product liability claims in the normal course of business and is self-insured for health care costs, although it does carry stop loss and other insurance to cover claims once a health care claim reaches a specified threshold.  The Company’s insurance coverage varies from policy year to policy year, and there are typically limits on all types of insurance coverage, which also vary from policy year to policy year. Accordingly, the Company records an accrual for known claims and incurred but not reported claims, including an estimate for related legal fees in the Company’s Consolidated Financial Statements.  The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual.  There are no known claims that would have a material adverse impact on the Company beyond the reserve levels that have been accrued and recorded on the Company’s books and records.  An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition and results of operations.



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Revenues

Sales are recorded net of discounts and returns for the Housewares/Small Appliance segment.  Sales discounts and returns are key aspects of variable consideration, which is a significant estimate utilized in revenue recognition.  Sales returns pertain primarily to warranty returns, returns of seasonal items, and returns of those newly introduced products sold with a return privilege.  The calculation of warranty returns is based in large part on historical data, while seasonal and new product returns are primarily developed using customer provided information.



Impairment and Valuation of Long-lived Assets and Goodwill

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

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated. The impairment test for goodwill requires the determination of fair value of the reporting unit. The Company uses multiples of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), sales, and discounted cash flow models, which are described above, to determine the reporting unit's fair value, as appropriate.



NEW ACCOUNTING PRONOUNCEMENTS



Please refer to Note A(18) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2022 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 16, 2023, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to Consolidated Financial Statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, tariffs, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending,  and funding of government contracts which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital and equipment investments; political actions of federal and state governments which could have an impact on everything from the value of the U.S. dollar vis-à-vis other currencies to the availability of affordable labor and energy; and security breaches and disruptions to our information technology system. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.



COVID-19 DISCLOSURE

All of the Company’s businesses were deemed essential and as a result, all operated during the COVID-19 shutdowns.  Distribution systems of customers that survived the shutdowns are largely intact as most key retail customers' outlets have been open since third quarter 2020. Most customer offices are now open, although some may not reopen until 2023. Trade shows, albeit with reduced attendance, have resumed.  Material, components, and finished goods continue to be delayed due to the supply chain congestion.  As a result of government COVID-19 policies, material, transportation and labor costs have materially increased.  Labor shortages continue. Due to the Company's historical conservative practices, it has no debt and has adequate balances to fund its operations.

For historical information about the impact of the government responses to COVID-19, please see “Item 1A. Risk Factors” titled “The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks” included in this Form 10-K for year ended December 31, 2022.



2022 COMPARED TO 2021



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2022 and 2021.



On a consolidated basis, sales decreased by $34,154,000 (10%), gross profit decreased by $9,271,000 (14%), selling and general expense decreased by $7,032,000 (21%), intangibles amortization increased by $368,000 (172%) and Impairments - goodwill and intangible assets increased $5,295,000.  Other income increased by $1,387,000 (57%), earnings before provision for income taxes decreased by $6,515,000 (20%), and net earnings decreased by $4,955,000 (19%). Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales increased by $2,424,000, from $115,924,000 to $118,348,000, or 2%, primarily attributable to an increase in pricing and changes in mix.  Approximately 85% of the increase from price and mix changes were offset by a decrease in units shipped.  The increase was further offset by the absence of the prior year's partial reversal of $1,530,000 of a reserve for estimated refunds related to a product recall of indoor smokers. Defense net sales decreased by $37,031,000, from $239,514,000 to $202,483,000, or 15%, reflecting a decrease in units shipped.



Housewares/Small Appliance gross profit increased $7,039,000 from $9,974,000 (9% of sales) in 2021 to $17,013,000 (14% of sales) in 2022, primarily reflecting the changes in pricing and mix mentioned above, augmented by decreased ocean cargo and inland freight costs, partially offset by the decrease in unit shipments, as well as adjustments related to obsolete or excess inventory levels of $3,613,000, and decreases in standard unit costs of $3,108,000 that were not offset by decreases in the segment's LIFO inventory reserve.  Defense gross profit decreased $18,567,000 from $61,205,000 (26% of sales) to $42,638,000 (21% of sales), primarily reflecting the decrease in sales mentioned above, a less favorable mix, inefficiencies from labor shortages, delays in securing materials and other supply chain issues.  Due to the startup nature of the businesses in the Safety segment, gross margins were negative in both years.  A reduction in the amount of write-downs of inventory and materials at Rusoh, Inc. to reflect realizable values contributed to the comparative increase in gross margin of $1,848,000.



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Selling and general expenses for the Housewares/Small Appliance segment decreased $446,000, primarily reflecting lower health and accident expenses of $699,000, product liability costs of $383,000, and insurance costs of $164,000.  These decreases were partially offset by higher legal and professional expenses of $567,000 and compensation expenses of $175,000.  Defense segment selling and general expenses increased $680,000, primarily due to increased legal and professional expenses of $302,000, increased compensation/payroll costs of $209,000, and increased marketing costs of $121,000.  Safety segment selling and general expenses decreased $7,267,000, primarily reflecting the absence of prior year impairment of $7,615,000 of notes receivable and related interest held by Rusoh, Inc., augmented by the bargain purchase gain of $492,000 recognized upon the acquisition of Knox Safety, Inc. See Note P. These were offset in part by increased compensation expenses of $311,000 and legal and professional expenses of $383,000, both largely related to the acquisition of Knox Safety, Inc.

Intangibles amortization increased as a result of the acquisition of contracts/customer relationship and intellectual property intangibles in the acquisitions of Knox Safety, Inc. and Woodlawn Manufacturing, Ltd. See Note P to the Consolidated Financial Statements.

Impairment – goodwill and intangible assets increased as a result of impairments of goodwill and technology intangibles in the Safety segment.  See Note A (10) and Note A (11) to the Consolidated Financial Statements.

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



Other income increased $1,387,000, which was primarily attributable to higher interest earned with higher yields, offset in part by a reduced portfolio of marketable securities.



Earnings before provision for income taxes decreased $6,515,000 from $32,459,000 to $25,944,000.  The provision for income taxes decreased from $6,805,000 to $5,245,000, which resulted in an effective income tax rate of 20% and 21% for the years ended December 31, 2022 and 2021, respectively.  Net earnings decreased $4,955,000 from $25,654,000 to $20,699,000.



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2021 COMPARED TO 2020



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s two business segments for the years ended December 31, 2021 and 2020.



On a consolidated basis, sales increased by $3,150,000 (1%), gross profit decreased by $20,526,000 (24%), selling and general expense increased by $5,648,000 (20%), and intangibles amortization decreased by $7,000 (3%).  Other income decreased by $1,362,000 (36%), earnings from continuing operations before provision for income taxes decreased by $27,529,000 (46%), and earnings from continuing operations decreased by $21,304,000 (45%). Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales decreased by $1,721,000, from $117,645,000 to $115,924,000, or 2%, primarily due to a decrease in shipments, approximately 54% of which was offset by an increase in prices. The decrease was further offset by the partial reversal of prior year charges for estimated refunds related to a product recall, which had a year over year favorable effect of $3,603,000. Defense net sales increased by $4,869,000, from $234,645,000 to $239,514,000, or 2%, reflecting an increase in units shipped.



Housewares/Small Appliance gross profit decreased $14,232,000 from $24,206,000 (21% of sales) in 2020 to $9,974,000 (9% of sales) in 2021, primarily due to increased ocean cargo and product costs and the decreased sales mentioned above, partially offset by the partial reversal of prior year charges for estimated refunds related to a product recall, which had a year over year favorable comparable impact of $4,923,000.  Defense gross profit decreased $1,356,000 from $62,561,000 (27% of sales) to $61,205,000 (26% of sales), primarily reflecting the increase in sales mentioned above offset by a less favorable mix and inefficiencies from labor shortages and delays in securing materials. The segment's results were also unfavorably impacted by storm damage that led to the shutdown of one of its lines for several months.  Due to the startup nature of both businesses in the Safety segment, gross margins were negative in both years.  The write-down of inventory and materials of $5,247,000 at Rusoh, Inc. to reflect realizable values contributed to the comparative decrease in gross margin of $4,938,000.



Selling and general expenses for the Housewares/Small Appliance segment decreased $1,230,000, primarily reflecting the absence of prior year marketing production and media costs of $2,200,000 and lower product liability costs of $364,000.  These decreases were partially offset by higher health and accident and legal and professional expenses of $314,000 and $259,000, respectively and higher insurance costs of $449,000.  Defense segment selling and general expenses increased $354,000, approximately a third of which relates to higher health and accident costs with the balance related to miscellaneous general and administrative costs.  Safety segment selling and general expenses increased $6,640,000, primarily reflecting Rusoh, Inc.'s, impairment of notes receivable and the related interest of $7,615,000 offset in part by reduced compensation/payroll costs of $422,000 and professional expenses of $517,000.



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



Other income decreased $1,362,000, which was primarily attributable to lower interest earned of $1,255,000 with lower yields on a reduced portfolio of marketable securities.



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Earnings from continuing operations before provision for income taxes decreased $27,529,000 from $59,988,000 to $32,459,000.  The provision for income taxes from continuing operations decreased from $13,030,000 to $6,805,000, which resulted in an effective income tax rate of 21% and 22% for the years ended December 31, 2021 and 2020, respectively.  Earnings from continuing operations and net earnings decreased $21,304,000 from $46,958,000 to $25,654,000.

LIQUIDITY AND CAPITAL RESOURCES

2022 COMPARED TO 2021



Cash provided by operating activities was $8,768,000 during 2022 as compared to $34,688,000 during 2021.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2022 were net earnings of $20,699,000, which included a non-cash loss on impairment of goodwill and intangible assets of $5,295,000 and total non-cash depreciation and amortization expenses of $3,347,000.  These were partially offset by a non-cash deferred income tax benefit of $2,311,000 and increases in accounts receivable and inventory levels.  Of particular note during 2021 were net earnings of $25,654,000, which included a non-cash provision for doubtful notes and accounts receivable of $7,665,000, total non-cash depreciation and amortization expenses of $2,978,000, a non-cash deferred income tax benefit of $1,612,000, and a net decreases in deposits made to vendors included in other assets and current assets and accounts receivable.  These were partially offset by an increase in inventory levels and a net decrease in payable and accrual levels.



Net cash used in investing activities was $16,436,000 during 2022 as compared to $32,548,000 provided by investing activities during 2021. During 2022 the Company acquired two businesses for $24,683,000 net of cash acquired, and purchased plant and equipment for $1,030,000.  These were partially offset by net sales and maturities of marketable securities of $9,171,000.  Of note during 2021 were net sales and maturities of marketable securities of $34,621,000 offset by the purchase of plant and equipment of $2,866,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2022 and 2021, $3,638,000 and $25,427,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2022 and 2021 primarily differed as a result of the $1.75 per share decrease in the extra dividend paid during these years.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents decreased in 2022 by $39,094,000 to $70,711,000.



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Working capital decreased by $21,903,000 to $272,991,000 at December 31, 2022 for the reasons stated above.  The Company’s current ratio was 6.1 to 1.0 at December 31, 2022 and 6.6 to 1.0 at December 31, 2021.



The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions, as well as continue to make capital investments in these segments per existing authorized projects and for additional projects if the appropriate return on investment is projected.  See Item 1-A-2.



The Company has substantial liquidity in the form of cash and cash equivalents and marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund future growth through acquisitions and other means.  The bulk of its marketable securities are invested in the variable rate demand notes described above, in municipal bonds that are pre-refunded with escrowed U.S. Treasuries, and certificates of deposit. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

The Company's principal commitments consist of purchase and lease obligations.  Purchase obligations include outstanding purchase orders issued to the Company's Housewares and Safety segments' manufacturers in the Orient and to material suppliers and contractors in the Defense segment, and as of December 31, 2022 amounted to approximately $277,378,000. The Company can cancel or change many of these purchase orders, but may incur costs if its supplier cannot use the material to manufacture the Company's or other customers' products in other applications or return the material to their supplier. As a result, the actual amount the Company is obligated to pay cannot be reasonably estimated. Lease obligations are described in Note M - Leases to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.



2021 COMPARED TO 2020

Cash provided by operating activities was $34,688,000 during 2021 as compared to $40,973,000 during 2020.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2021 were net earnings of $25,654,000, which included a non-cash provision for doubtful notes and accounts receivable of $7,665,000, total non-cash depreciation and amortization expenses of $2,978,000, a non-cash deferred income tax benefit of $1,612,000, and decreases in deposits made to vendors included in other assets and current assets and accounts receivable. These were partially offset by an increase in inventory levels and a net decrease in payable and accrual levels.  Of particular note during 2020 were net earnings of $46,958,000, which included total non-cash depreciation and amortization expenses of $3,005,000; a non-cash deferred income tax benefit of $1,718,000 and a net increase in payable and accrual levels.  These were partially offset by an increase in inventory levels; deposits made to vendors included in other assets and current assets; and an increase in accounts receivable levels.



Net cash provided by investing activities was $32,548,000 during 2021 as compared to $7,155,000 during 2020. During 2021 the Company had net sales and maturities of marketable securities of $34,621,000 offset by the purchase of plant and equipment of $2,866,000, which primarily included expenditures to augment the Company’s production facilities in the Defense segment.  Of note during 2020 were net sales and maturities of marketable securities of $9,776,000 offset by the purchase of plant and equipment of $2,621,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2021 and 2020, $25,427,000 and $25,968,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2021 and 2020 were essentially flat and primarily relate to the annual dividend payments.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents increased in 2021 by $23,769,000 to $109,805,000.



Working capital decreased by $7,478,000 to $294,894,000 at December 31, 2021 for the reasons stated above.  The Company’s current ratio was 6.6 to 1.0 at December 31, 2021 and 6.5 to 1.0 at December 31, 2020.

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DEFENSE SEGMENT BACKLOG



The Company’s Defense segment contract backlog was approximately $505,069,000 at December 31, 2022, and $460,800,000 at December 31, 2021.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during an 18- to 36-month period. 

Critical accounting ESTIMATES



The Company's discussion and analysis of financial condition and results of operations are based upon its Consolidated Financial Statements. The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and revenues and expenses during the periods reported.  The estimates are based on experience and other assumptions that the Company believes are reasonable under the circumstances, and these estimates are evaluated on an ongoing basis. Actual results may differ from those estimates.

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management.  The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results as they involve the use of significant estimates and assumptions as described above. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed information regarding the Company's critical accounting policies.



Inventories

New Housewares/Small Appliance and Safety product introductions are an important part of the Company’s sales.  In the case of the Housewares/Small Appliance segment, the introductions are important to offset the morbidity rate of other products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks and have occasionally, in the past, resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product.  During 2022, the Housewares/Small Appliance segment recorded an impairment related to such losses of $3,613,000.  In addition, due to fire safety regulations, commercial extinguishers have a limited shelf life, which is based on the date of production. The Safety segment recorded impairments of $1,807,000 and $3,090,000 in 2022 and 2021, respectively, in recognition of that fact. There were no other obsolescence issues that had a material effect during the current year.  In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory.  Inventory risk for the Company’s Defense segment is not deemed to be significant, as products are largely built pursuant to customers’ specific orders.



Self-Insured Product Liability & Health Insurance

The Company is subject to product liability claims in the normal course of business and is self-insured for health care costs, although it does carry stop loss and other insurance to cover claims once a health care claim reaches a specified threshold.  The Company’s insurance coverage varies from policy year to policy year, and there are typically limits on all types of insurance coverage, which also vary from policy year to policy year. Accordingly, the Company records an accrual for known claims and incurred but not reported claims, including an estimate for related legal fees in the Company’s Consolidated Financial Statements.  The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual.  There are no known claims that would have a material adverse impact on the Company beyond the reserve levels that have been accrued and recorded on the Company’s books and records.  An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition and results of operations.



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Revenues

Sales are recorded net of discounts and returns for the Housewares/Small Appliance segment.  Sales discounts and returns are key aspects of variable consideration, which is a significant estimate utilized in revenue recognition.  Sales returns pertain primarily to warranty returns, returns of seasonal items, and returns of those newly introduced products sold with a return privilege.  The calculation of warranty returns is based in large part on historical data, while seasonal and new product returns are primarily developed using customer provided information.



Impairment and Valuation of Long-lived Assets and Goodwill

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

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated. The impairment test for goodwill requires the determination of fair value of the reporting unit. The Company uses multiples of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), sales, and discounted cash flow models, which are described above, to determine the reporting unit's fair value, as appropriate.



NEW ACCOUNTING PRONOUNCEMENTS



Please refer to Note A(18) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2021 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 17, 2022, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to Consolidated Financial Statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, tariffs, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production; shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending,  and funding of government contracts which could result, among other things, in the modification or termination of existing contracts; dependence on subcontractors or vendors to perform as required by contract; the ability of startup businesses to ultimately have the potential to be successful; the efficient start-up and utilization of capital and equipment investments; political actions of federal and state governments which could have an impact on everything from the value of the U.S. dollar vis-à-vis other currencies to the availability of affordable labor and energy; and security breaches and disruptions to our information technology system. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.



COVID-19 DISCLOSURE

All of the Company’s businesses are deemed essential and as a result, all operated during the COVID-19 shutdowns.  With the ongoing concerns about the potential impact of the COVID-19 virus, many employers have not reopened their offices or have authorized their employees to work from home.  As a result, there is continued COVID-related demand for the Housewares/Small Appliance segment’s products.  Distribution remains largely intact as most key retail customers' outlets either were deemed essential and were open throughout the shutdowns or reopened once the formal shutdowns ended.  Material, components and finished goods have also, for the most part, continued to flow, although were frequently delayed.  As a result of heavy demand and a shortage of labor stemming from government COVID-19 policies, material, transportation and labor costs have materially increased.  Both internal and external contacts were managed during the shutdown through internet tools like “Zoom.”  Most external contacts continue to be managed in this fashion.  Due to the Company’s historical conservative practices, it has no debt and has adequate balances to fund its operations.

The Company has complied with the applicable COVID-19 regulations.  Until vaccines became available, the six-foot social distancing rule had been in place in the offices and where practical in the factories.  Where not practical, barriers were erected between workers.  Mask policies have been maintained in a fashion largely consistent with CDC guidelines.

The aftermath of COVID-19 has affected each segment in a variety of ways, which include increased absenteeism; the cancellation of planned trade shows, elimination of most customer/supplier visits; inefficiencies inherent from most customers' and suppliers' decisions to work from home. See “Item 1A. Risk Factors” titled “The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks.”



2021 COMPARED TO 2020



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s three business segments for the years ended December 31, 2021 and 2020.



On a consolidated basis, sales increased by $3,150,000 (1%), gross profit decreased by $20,526,000 (24%), selling and general expense increased by $5,648,000 (20%), and intangibles amortization decreased by $7,000 (3%).  Other income decreased by $1,362,000 (36%), earnings from continuing operations before provision for income taxes decreased by $27,529,000 (46%), and earnings from continuing operations decreased by $21,304,000 (45%). Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales decreased by $1,721,000, from $117,645,000 to $115,924,000, or 2%, primarily due to a decrease in shipments, approximately 54% of which was offset by an increase in prices. The decrease was further offset by the partial reversal of prior year charges for estimated refunds related to a product recall, which had a year over year favorable effect of $3,603,000. Defense net sales increased by $4,869,000, from $234,645,000 to $239,514,000, or 2%, reflecting an increase in units shipped.



Housewares/Small Appliance gross profit decreased $14,232,000 from $24,206,000 (21% of sales) in 2020 to $9,974,000 (9% of sales) in 2021, primarily due to increased ocean cargo and product costs and the decreased sales mentioned above, partially offset by the partial reversal of prior year charges for estimated refunds related to a product recall, which had a year over year favorable comparable impact of $4,923,000.  Defense gross profit decreased $1,356,000 from $62,561,000 (27% of sales) to $61,205,000 (26% of sales), primarily reflecting the increase in sales mentioned above offset by a less favorable mix and inefficiencies from labor shortages and delays in securing materials. The segment's results were also unfavorably impacted by storm damage that led to the shutdown of one of its lines for several months.  Due to the startup nature of both businesses in the Safety segment, gross margins were negative in both years.  The write-down of inventory and materials of $5,247,000 at Rusoh, Inc. to reflect realizable values contributed to the comparative decrease in gross margin of $4,938,000.



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Selling and general expenses for the Housewares/Small Appliance segment decreased $1,230,000, primarily reflecting the absence of prior year marketing production and media costs of $2,200,000 and lower product liability costs of $364,000.  These decreases were partially offset by higher health and accident and legal and professional expenses of $314,000 and $259,000, respectively and higher insurance costs of $449,000.  Defense segment selling and general expenses increased $354,000, approximately a third of which relates to higher health and accident costs with the balance related to miscellaneous general and administrative costs.  Safety segment selling and general expenses increased $6,640,000, primarily reflecting Rusoh, Inc.'s, impairment of notes receivable and the related interest of $7,615,000 offset in part by reduced compensation/payroll costs of $422,000 and professional expenses of $517,000.



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



Other income decreased $1,362,000, which was primarily attributable to lower interest earned of $1,255,000 with lower yields on a reduced portfolio of marketable securities.



Earnings from continuing operations before provision for income taxes decreased $27,529,000 from $59,988,000 to $32,459,000.  The provision for income taxes from continuing operations decreased from $13,030,000 to $6,805,000, which resulted in an effective income tax rate of 21% and 22% for the years ended December 31, 2021 and 2020, respectively.  Earnings from continuing operations and net earnings decreased $21,304,000 from $46,958,000 to $25,654,000.



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2020 COMPARED TO 2019



Readers are directed to Note L, “Business Segments,” to the Company’s Consolidated Financial Statements for data on the financial results of the Company’s two business segments for the years ended December 31, 2020 and 2019.



On a consolidated basis, sales increased by $44,117,000 (14%), gross profit increased by $12,997,000 (18%), selling and general expense increased by $3,043,000 (12%), and intangibles amortization increased by $138,000 (166%).  Other income decreased by $2,134,000 (36%), while earnings from continuing operations before provision for income taxes increased by $7,682,000 (15%), and earnings from continuing operations increased by $6,418,000 (16%). Earnings from discontinued operations, net of tax, decreased $1,680,000 (100%). Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales increased by $18,244,000, from $99,401,000 to $117,645,000, or 18%, primarily due to an increase in shipments, which was partially offset by charges for estimated refunds related to a product recall of $2,073,000. Defense net sales increased by $25,531,000, from $209,114,000 to $234,645,000, or 12%, reflecting an increase in units shipped, partially offset by the absence of the 2019 proceeds from the negotiated termination of a commercial foreign military supply contract for $9,412,000.



Housewares/Small Appliance gross profit increased $8,848,000 from $15,358,000 (16% of sales) in 2019 to $24,206,000 (21% of sales) in 2020, primarily reflecting the increase in sales mentioned above, augmented by improved product mix and margins, partially offset by the charges for estimated refunds related to a product recall of $2,073,000.  Defense gross profit increased $4,788,000 from $57,773,000 (28% of sales) to $62,561,000 (27% of sales), primarily reflecting the increase in sales mentioned above and comparatively more efficient operations on certain programs vis-à-vis 2019, partially offset by the absence of the proceeds from the termination agreement mentioned above. Due to the startup nature of both businesses in the Safety segment, gross margins were negative in both years. As OneEvent was acquired during the third quarter of 2019 (see Note Q to the Company's Consolidated Financial Statements), 2020 was the first full year that its operations were reflected in the segment's earnings, which was the primary contributor to the comparative reduction in gross margins.



Selling and general expenses for the Housewares/Small Appliance segment increased $999,000, primarily reflecting higher marketing production and media costs of $2,200,000, augmented by higher health and accident and product liability costs of $344,000 and $488,000, respectively.  These increases were partially offset by lower legal and professional expenses of $459,000, lower compensation costs of $695,000, primarily related to the absence of prior year charges for the vesting of restricted stock upon retirement of long-term employees, lower travel and sales show expenses of $379,000 due to COVID-19 restrictions and lower accruals for doubtful accounts of $237,000.  Defense segment selling and general expenses decreased $354,000, primarily reflecting lower travel expense due to COVID-19 restrictions.  Safety segment selling and general expenses increased $2,221,000, primarily reflecting for Rusoh, Inc., higher employee compensation and benefit cost accruals of $1,301,000, largely related to health insurance claims, partially offset by lower legal and professional expenses of $288,000 along with a full year of the selling and general expense of OneEvent, which was acquired during third quarter 2019.  See Note Q to the Company's Consolidated Financial Statements.

Intangibles amortization increased by $138,000 from $83,000 in 2019 to $221,000 in 2020.  The increase reflects the amortization of the OneEvent acquisition-related intangibles.

 

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



Other income decreased $2,134,000, which was primarily attributable to lower interest earned of $2,293,000 on a reduced portfolio of marketable securities with lower yields partially offset by an increase in rental income of $179,000.



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Earnings from continuing operations before provision for income taxes increased $7,682,000 from $52,306,000 to $59,988,000.  The provision for income taxes from continuing operations increased from $11,766,000 to $13,030,000, which resulted in an effective income tax rate of 22% and 23% for the years ended December 31, 2020 and 2019, respectively.  Earnings from continuing operations increased $6,418,000 from $40,540,000 to $46,958,000.



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 decreased $1,680,000, from $1,680,000 to $0. The 2019 earnings stemmed from the settlement of a lawsuit for breach of contract.



Net earnings increased $4,738,000 from $42,220,000 to $46,958,000.

LIQUIDITY AND CAPITAL RESOURCES

2021 COMPARED TO 2020



Cash provided by operating activities was $34,688,000 during 2021 as compared to $40,973,000 during 2020.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2021 were net earnings of $25,654,000, which included a non-cash provision for doubtful notes and accounts receivable of $7,665,000, total non-cash depreciation and amortization expenses of $2,978,000, a non-cash deferred income tax benefit of $1,612,000, and decreases in deposits made to vendors included in other assets and current assets and accounts receivable. These were partially offset by an increase in inventory levels and a net decrease in payable and accrual levels.  Of particular note during 2020 were net earnings of $46,958,000, which included total non-cash depreciation and amortization expenses of $3,005,000; a non-cash deferred income tax benefit of $1,718,000 and a net increase in payable and accrual levels.  These were partially offset by an increase in inventory levels; deposits made to vendors included in other assets and current assets; and an increase in accounts receivable levels.



Net cash provided by investing activities was $32,548,000 during 2021 as compared to $7,155,000 during 2020. During 2021 the Company had net sales and maturities of marketable securities of $34,621,000 offset by the purchase of plant and equipment of $2,866,000, which primarily included expenditures to augment the Company’s production facilities in the Defense segment.  Of note during 2020 were net sales and maturities of marketable securities of $9,776,000 offset by the purchase of plant and equipment of $2,621,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2021 and 2020, $25,427,000 and $25,968,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2021 and 2020 were essentially flat and primarily relate to the annual dividend payments.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents increased in 2021 by $23,769,000 to $109,805,000.



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Working capital decreased by $7,478,000 to $294,894,000 at December 31, 2021 for the reasons stated above.  The Company’s current ratio was 6.2 to 1.0 at December 31, 2021 and 6.5 to 1.0 at December 31, 2020.



The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions, as well as continue to make capital investments in these segments per existing authorized projects and for additional projects if the appropriate return on investment is projected.  See Item 1-A-2.



The Company has substantial liquidity in the form of cash and cash equivalents and marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund future growth through acquisitions and other means.  The bulk of its marketable securities are invested in the variable rate demand notes described above and in municipal bonds that are pre-refunded with escrowed U.S. Treasuries. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.

The Company's principal commitments consist of purchase and lease obligations.  Purchase obligations include outstanding purchase orders issued to the Company's Housewares and Safety segments' manufacturers in the Orient and to material suppliers and contractors in the Defense segment, and as of December 31, 2021 amounted to approximately $236,520,000. The Company can cancel or change many of these purchase orders, but may incur costs if its supplier cannot use the material to manufacture the Company's or other customers' products in other applications or return the material to their supplier. As a result, the actual amount the Company is obligated to pay cannot be reasonably estimated. Lease obligations are described in Note M - Leases to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.



2020 COMPARED TO 2019

Cash provided by operating activities was $40,973,000 during 2020 as compared to $9,583,000 during 2019.  The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows.  Of particular note during 2020 were net earnings of $46,958,000, which included total non-cash depreciation and amortization expenses of $3,005,000; a non-cash deferred income tax benefit of $1,718,000 and a net increase in payable and accrual levels.  These were partially offset by an increase in inventory levels; deposits made to vendors included in other assets and current assets; and an increase in accounts receivable levels.  Of particular note during 2019 were net earnings of $42,220,000, which included total non-cash depreciation and amortization expenses of $3,689,000; a non-cash income tax expense of $1,370,000 and a decrease in accounts receivable levels.  These were partially offset by a gain on a legal settlement of $2,300,000; an increase in inventory levels; an increase in deposits made to vendors included in other assets and current assets; and a decrease in net payable levels. Cash used in discontinued operations was $1,052,000.



Net cash provided by investing activities was $7,155,000 during 2020 as compared to $55,160,000 during 2019. During 2020, the Company had net sales and maturities of marketable securities of $9,776,000 offset by the purchase of plant and equipment of $2,621,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment.  During 2019, the Company received net proceeds of $2,146,000 from a note receivable and $2,300,000 from a legal settlement.  Also of note during 2019 were net sales and maturities of marketable securities of $56,011,000; the purchase of plant and equipment of $3,138,000, which primarily included expenditures to augment the Company's production facilities in the Defense segment; and the acquisition of substantially all the assets of OneEvent Technologies, Inc. for $3,733,000, net of cash acquired.  Cash provided by discontinued operations was $3,107,000.



Based on the accounting profession’s 2005 interpretation of cash equivalents under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 230, the Company’s variable rate demand notes have been classified as marketable securities. This interpretation, which is contrary to the interpretation that the Company’s representative received directly from the FASB (which indicated it would not object to the Company’s classification of variable rate demand notes as cash equivalents), has resulted in a presentation of the Company’s Consolidated Balance Sheets that the Company believes understates the true liquidity of the Company’s income portfolio.  As of December 31, 2020 and 2019, $25,968,000 and $39,249,000, respectively, of variable rate demand notes are classified as marketable securities.  These notes have structural features that allow the Company to tender them at par plus interest within any 7-day period for cash to the notes’ trustees or remarketers and thus provide the liquidity of cash equivalents.



Cash flows from financing activities for 2020 and 2019 were essentially flat and primarily relate to the annual dividend payment.  Cash flows for both years also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.



As a result of the foregoing factors, cash and cash equivalents increased in 2020 by $6,457,000 to $86,036,000.



Working capital increased by $3,610,000 to $302,148,000 at December 31, 2020 for the reasons stated above.  The Company’s current ratio was 6.5 to 1.0 at December 31, 2020 and 8.6 to 1.0 at December 31, 2019.

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DEFENSE SEGMENT BACKLOG



The Company’s Defense segment contract backlog was approximately $460,800,000 at December 31, 2021, and $320,214,000 at December 31, 2020.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during an 18- to 36-month period. 

Critical accounting ESTIMATES



The Company's discussion and analysis of financial condition and results of operations are based upon its Consolidated Financial Statements. The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and revenues and expenses during the periods reported.  The estimates are based on experience and other assumptions that the Company believes are reasonable under the circumstances, and these estimates are evaluated on an ongoing basis. Actual results may differ from those estimates.

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management.  The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results as they involve the use of significant estimates and assumptions as described above. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more detailed information regarding the Company's critical accounting policies.



Inventories

New Housewares/Small Appliance and Safety product introductions are an important part of the Company’s sales.  In the case of the Housewares/Small Appliance segment, the introductions are important to offset the morbidity rate of other products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks and have occasionally, in the past, resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product.  In addition, due to fire safety regulations, commercial extinguishers have a limited shelf life, which is based on the date of production. The Safety segment recorded an impairment of $3,090,000 in 2021 in recognition of that fact. There were no other obsolescence issues that had a material effect during the current year.  In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory.  Inventory risk for the Company’s Defense segment is not deemed to be significant, as products are largely built pursuant to customers’ specific orders.



Self-Insured Product Liability & Health Insurance

The Company is subject to product liability claims in the normal course of business and is self-insured for health care costs, although it does carry stop loss and other insurance to cover claims once a health care claim reaches a specified threshold.  The Company’s insurance coverage varies from policy year to policy year, and there are typically limits on all types of insurance coverage, which also vary from policy year to policy year. Accordingly, the Company records an accrual for known claims and incurred but not reported claims, including an estimate for related legal fees in the Company’s Consolidated Financial Statements.  The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual.  There are no known claims that would have a material adverse impact on the Company beyond the reserve levels that have been accrued and recorded on the Company’s books and records.  An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition and results of operations.



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Revenues

Sales are recorded net of discounts and returns for the Housewares/Small Appliance segment.  Sales discounts and returns are key aspects of variable consideration, which is a significant estimate utilized in revenue recognition.  Sales returns pertain primarily to warranty returns, returns of seasonal items, and returns of those newly introduced products sold with a return privilege.  The calculation of warranty returns is based in large part on historical data, while seasonal and new product returns are primarily developed using customer provided information.



Impairment and Valuation of Long-lived Assets and Goodwill

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

The Company recognizes the excess cost of acquired entities over the net amount assigned to the fair value of assets acquired and liabilities assumed as goodwill. Goodwill is tested for impairment on an annual basis at the start of the fourth quarter and between annual tests whenever an impairment is indicated. The impairment test for goodwill requires the determination of fair value of the reporting unit. The Company uses multiples of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), sales, and discounted cash flow models, which are described above, to determine the reporting unit's fair value, as appropriate.



NEW ACCOUNTING PRONOUNCEMENTS



Please refer to Note A(18) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.