UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-K



☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________________ to __________________________



Commission File Number 1-2451



NATIONAL PRESTO INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)





Registrant's telephone number, including area code:   (715) 839-2121



Securities registered pursuant to Section 12(b) of the Act:





Securities registered pursuant to Section 12(g) of the Act:

NONE



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐    No ☑



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   

Yes ☐    No ☑



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑    No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes ☑    No ☐



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or any amendment to the

Form 10-K. ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐    Accelerated filer ☑    Non-accelerated filer ☐    Smaller reporting company ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐    No ☑



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $459,511,275.  The number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2017  was 6,953,780.



The Registrant has incorporated in Part II and Part III of Form 10-K, by reference, portions of its 2016 Annual Report and portions of its Proxy Statement for its 2017 Annual Meeting of Stockholders.





 

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PART I



ITEM 1.  BUSINESS



A.  DESCRIPTION OF BUSINESS



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



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. (“Drylock”) in exchange for $67,000,000, subject to customary post-closing adjustments.  The asset purchase agreement also provides for additional proceeds of $4,000,000 upon the sale of certain delayed assets, consisting of machinery and equipment that were the subject of an involuntary conversion, at a future date.  As a result of this transaction, effective in the fourth quarter of 2016, 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.  See Note R to the Company’s Consolidated Financial Statements for further discussion. The operations of PAPI previously comprised the Company’s Absorbent Products segment which manufactured and sold private label and branded adult incontinence products. 



1. Housewares/Small Appliance Segment

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



For the year ended December 31, 2016, approximately 12% of consolidated net sales were provided by cast products (griddles, waffle makers, die cast deep fryers, skillets and multi-cookers), and approximately 18% by noncast/thermal appliances (stamped cookers and canners, pizza ovens, corn poppers, coffee makers, microwave bacon cookers, dehydrators, rice cookers, tea kettles, electric stainless steel appliances, non-cast fryers and heaters).  For the year ended December 31, 2015, approximately 13% of consolidated net sales were provided by cast products, and approximately 21% by noncast/thermal appliances.  For the year ended December 31, 2014, approximately 13% of consolidated net sales were provided by cast products, and approximately 22% by noncast/thermal appliances. For the years ended December 31, 2016, 2015 and 2014, this segment had one customer which accounted for 10% or more of the Company’s consolidated net sales.  That customer was Wal-Mart Stores, Inc., which accounted for 11%, 12%, and 12% of consolidated net sales in the years ended December 31, 2016, 2015, and 2014, respectively.  The loss of Wal-Mart Stores as a customer would have a material adverse effect on the segment. 



Products are sold primarily in the United States and Canada directly to retailers and also through independent distributors.  Although the Company has long established relationships with many of its

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customers, it does not have long-term supply contracts with them.  The loss of, or material reduction in, sales to any of the Company's major customers could adversely affect the Company's business.  Most housewares and electrical appliances are sourced from vendors in the Orient.  (See Note J to the Consolidated Financial Statements.) 



The Company has a sales force of 11 employees that sell to and service most customers.  A few selected accounts are handled by manufacturers' representatives who may also sell other product lines.  Sales promotional activities are conducted primarily through the use of newspaper advertising, in store promotions, and digital advertising.  The business is seasonal, with the normal peak sales period occurring in the fourth quarter of the year prior to the holiday season.  This segment operates in a highly competitive and extremely price sensitive environment.  Increased costs that cannot be fully absorbed into the price of products or passed along in the form of price increases to the retail customer can have a significant adverse impact on operating results.  Several companies compete for sales of housewares and small electrical appliances, some of which are larger than the Company’s segment and others which are smaller.  In addition, some customers maintain their own private label, as well as purchase brokered product directly from the Orient.  Product competition extends to special product features, product pricing, product quality, marketing programs, warranty provisions, service policies and other factors.  New product introductions are an important part of the Company's sales to offset the morbidity rate of other products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks.  Engineering and tooling costs are increasingly expensive, as are finished goods that may not have a ready market or achieve widespread consumer acceptance.  High-cost advertising commitments which may accompany such new products or may be required to maintain sales of existing products may not be fully absorbed by ultimate product sales.  Initial production schedules, set in advance of introduction, carry the possibility of excess unsold inventories.  New product introductions are further subject to delivery delays from supply sources, which can impact availability for the Company's most active selling periods. 



Research and development costs related to new product development for the years 2016, 2015, and 2014 were absorbed in operations of these years and were not a material element in the aggregate costs incurred by the Company.



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



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



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



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



2. Defense Segment 

AMTEC Corporation was acquired on February 24, 2001, and manufactures 40mm ammunition, and precision mechanical and electro-mechanical products for the U.S. Department of Defense (DOD) and DOD prime contractors.  AMTEC’s 106,000 square foot manufacturing facility located in Janesville, Wisconsin, which includes the Company’s 2016 construction of 31,000 square feet of manufacturing space to meet anticipated production needs, is focused on producing niche market ordnance products (such as training ammunition, fuzes, firing devices, and initiators).  AMTEC is also the prime contractor for the 40mm ammunition system to the DOD (more fully described below). 



Spectra Technologies LLC, a subsidiary of AMTEC, was acquired on July 31, 2003, and is engaged in the manufacture and delivery of munitions and ordnance-related products for the DOD and DOD prime contractors.  Spectra maintains 354,000 square feet of space located in East Camden, Arkansas, dedicated primarily to Load, Assemble and Pack (LAP) type work.



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



AMTEC Less Lethal Systems, Inc., a subsidiary of AMTEC Corporation, holds the assets that were purchased from ALS Technologies, Inc, a small Arkansas manufacturer of less lethal ammunition, on November 1, 2011.  The subsidiary’s products include smoke and tear gas grenades, specialty impact munitions, diversionary devices and stun munitions, support accessories like launchers and gas masks, as well as training for the use of its products.  The subsidiary’s new state-of-the-art less lethal ammunition manufacturing and training facility, which was completed in 2013, is 54,000 square feet and is located in Perry, Florida.  Previously, the subsidiary operated out of a 15,000 square foot facility in Bull Shoals, Arkansas.



Tech Ord, a division of AMTEC, holds the assets of Chemring Energetic Devices, Inc.’s business located in Clear Lake, South Dakota and all of the real property owned by Technical Ordnance Realty, LLC that were acquired on January 24, 2014. The 88,000 square foot Clear Lake facility is a manufacturer of detonators, booster pellets, release cartridges, lead azide, and other military energetic devices and materials, and its major customers include US and foreign government agencies, AMTEC Corporation, and other defense contractors. 



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



On April 25, 2005, AMTEC Corporation was awarded the high volume, five-year prime contract for management and production of the Army’s 40mm Ammunition System.  The Army selected AMTEC as one of two prime contractors responsible for supplying all requirements for 40mm practice and tactical ammunition for a period of five years.  AMTEC was awarded the majority share of requirements, and the Army estimated the total for the two contract awards, if all of the options were fully exercised, to be $1.3 billion.  Deliveries under the contract exceeded $671,000,000, with final deliveries completed in 2013.  On February 18, 2010, the Army awarded AMTEC a second five-year contract for the management and production of the 40mm Ammunition System.  As in the original five-year contract, AMTEC was awarded the majority share of the 40mm requirement.  The total dollar amount of this contract awarded to AMTEC was  $566,000,000.  The Company expects deliveries under this contract to continue into 2018.  In addition, as part of an acquisition of a group of assets from DSE, Inc. completed on November 7, 2013 (see Note Q to the Consolidated Financial Statements), AMTEC acquired through a novation agreement an additional $188,000,000, representing the remaining undelivered portion of the award that had been given to AMTEC’s competitor under the second five-year contract mentioned above. Total deliveries for the systems program under the second 40mm contract were $147,000,000 through 2016.    Additional shipments under the contract will be made during 2017 and 2018.  The Company submitted its bid for a third contract, and although the FY15 (Army’s fiscal year beginning October 1, 2014) bid request was subsequently cancelled, the 40mm program requirements remained and were subsequently awarded to AMTEC as the Army’s FY16 40mm requirements in a single award valued at $84,500,000.  The Company expects shipments under this FY16 contract will be made during 2017 and 2018.  AMTEC will be submitting a bid in early 2017 for the Army’s next five-year 40mm system contract to cover FY17-21 requirements, with an award decision expected in September 2017.    



During June of 2015, the U.S. Army awarded AMTEC two contracts to develop the next generation of 40mm high and low velocity training rounds.  Two contracts, one in each category, were also awarded to other contractors.  The values of AMTEC’s high and low velocity development awards were $2,985,000 and $2,990,000, respectively. Although the project was scheduled for completion in the first quarter of 2017, the work was finished during 2016 and samples were sent at year-end.  Each contract has three production option years beginning in 2018. If exercised, the first year would be at a low initial rate, while the last two years would be at a full production rates.  The Army will test each competitor’s samples and will select the rounds in each category that provide the best value, at which point it will decide whether to exercise the production options under the applicable contracts. The Army’s decision on both contracts is expected by September 2017.



During 2016, almost all of the work performed by this segment directly or indirectly for the DOD was performed on a fixed-price basis.  Under fixed-price contracts, the price paid to the contractor is awarded based on competition at the outset of the contract and therefore is generally not subject to adjustments reflecting the actual costs incurred by the contractor, with the exception of some limited escalation clauses, which on the 2010 contract applied to only three materials – steel, aluminum and zinc.  The Defense segment’s contracts and subcontracts contain the customary provision permitting termination at any time for the convenience of the government, with payment for any work completed, associated profit and inventory/work in progress at the time of termination. The segment’s business does not tend to be seasonal.



B.  OTHER COMMENTS



1. Sources and Availability of Materials

See Note J to the Consolidated Financial Statements. 



2. Patents, Trademarks, and Licenses

Patents, particularly on new products, trademarks and know-how are considered significant to the Company’s Housewares/Small Appliance segment.  The Company's current and future success depends upon judicial protection of its intellectual property rights (patents, trademarks and trade dress).  Removal of that protection would expose the Company to competitors who seek to take advantage of the Company's innovations and proprietary rights.  The Company has dozens of U.S. and foreign patents pending and granted.  Of those U.S. patents granted, the following is a non-exhaustive list of those relevant to current products and their expiration dates, assuming continued payment of maintenance fees (the date is the latest expiration date of the corresponding patents):  Quick Release Appliance Cord Assemblies (US 6,719,576, December 2022,  and 6,527,570, October 2021), Rotatable Cooking Apparatus (US 6,125,740 and 6,354,194, March 2019), Coffee brewer (US D695,064, December 2027), Griddle w/ folding legs (US 7,635,827, November 2027), Griddle w/ attached warming tray (US D674,656, January 2027), Low profile griddle (US D575,098, August 2022), Stirring popcorn maker (US D615,797, May 2024), and Parabolic Heater (US D633,189, February 2025).  To date, the Company has vigorously protected its rights and enjoyed success in all its intellectual property suits.  The Defense segment holds a United States patent related to its non-dud signature training round (US 8,640,621, Oct 2029), which would be deemed significant to their respective operations.



3. Effects of Compliance with Environmental Regulations

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



Based on factors known as of December 31, 2016, it is believed that the Company's environmental liability reserve will be adequate to satisfy on-going remediation operations and monitoring activities; however, should environmental agencies require additional studies or remediation projects, it is possible the existing accrual could be inadequate. 



Management believes that in the absence of any unforeseen future developments, known environmental matters will not have any material effect on the results of operations or financial condition of the Company. 



4. Number of Employees of the Company

As of December 31, 2016, the Company and its subsidiaries had 1,138 employees compared to 1,090 employees at the end of December 2015.



Approximately 174 employees of Amron are members of the United Steel Workers union.  The most recent contract between Amron and the union is effective through February 29, 2020.



5. Industry Practices Related to Working Capital Requirements

The major portion of the Company's sales was made with terms of 60 days or shorter. 



For the Housewares/Small Appliance segment, inventory levels increase in advance of the selling period for products that are seasonal, such as pressure canners, heaters, and major new product introductions.  Inventory build-up also occurs to create stock levels required to support the higher sales that occur in the latter half of each year.  Buying practices of the Company's customers require "just-in-time" delivery, necessitating that the Company carry large finished goods inventories.



The ability to meet U.S. Department of Defense demands also necessitates the carrying of large inventories in the Defense segment.



6. Order Backlog

Shipment of most of the Company's Housewares/Small Appliance products occurs within a relatively short time after receipt of the order and, therefore, there is usually no substantial order backlog.  New product introductions may result in order backlogs that vary from product to product and as to timing of introduction.



The contract backlog of the Defense segment was approximately $359,000,000, $284,000,000, and $407,000,000 at December 31, 2016, 2015, and 2014, respectively.  Backlog is defined as the value of orders from the customer less the amount of sales recognized against the orders.  It is anticipated that the backlog will be produced and shipped during an 18 to 24-month period, after December 31, 2016.





C.  AVAILABLE INFORMATION



The Company has a web site at www.gopresto.com.  The contents of the Company's web site are not part of, nor are they incorporated by reference into, this annual report.



The Company makes available on its web site its annual reports on Form 10-K or 10-K/A and, beginning with its second quarter filing in 2011, quarterly reports on Form 10-Q or 10-Q/A.  It does not provide its current reports on Form 8-K or amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act on its web site.  The Company does not do so because these and all other reports it files with the SEC are readily available to the public on the SEC web site at www.sec.gov and can be located with ease using the link provided on the Company’s web site.   The Company provides paper copies of its annual report free of charge upon request.



The public also may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC  20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.





ITEM 1A. RISK FACTORS



The Company’s two business segments described above are all subject to a number of risk factors, the occurrence of any one or more of which could have a significant adverse impact on the business, financial condition, or results of operations of the Company as a whole.



Housewares/Small Appliance Segment:



Increases in the costs for raw materials, energy, transportation and other necessary supplies could adversely affect the results of the Company’s operations.



The Company’s suppliers purchase significant amounts of metals, plastics, and energy to manufacture the Company’s products.  Also, the cost of fuel has a major impact on transportation costs.  Any increased costs that cannot be fully absorbed or passed along in the form of price increases to the retail customer can have a material adverse impact on the Company’s operating results. 



Reliance on third-party suppliers in Asia makes this segment vulnerable to supply interruptions and foreign business risks.



The majority of the housewares/small appliance products are manufactured by a handful of third-party suppliers in Asia, primarily in the People’s Republic of China.  The Company’s ability to continue to select and develop relationships with reliable vendors who provide timely deliveries of quality parts and products will impact its success in meeting customer demand.  Most products are procured on a “purchase order” basis.  As a result, the Company may be subject to unexpected changes in pricing or supply of products.  There is no assurance that it could quickly or effectively replace any of its vendors if the need arose.  Any significant failure to obtain products on a timely basis at an affordable cost or any significant delays or interruptions of supply may disrupt customer relationships and have a material adverse effect on the Company’s business.



In addition, international manufacturing is subject to significant risks, including, among others, labor unrest, adverse social, political and economic conditions, interruptions in international shipments, tariffs and other trade barriers, legal and regulatory constraints and fluctuations in currency exchange rates. Although China currently enjoys “most favored nation” trading status with the United States, the U.S. Government has in the past proposed to revoke that status and to impose higher tariffs on products imported from China, which could have a material adverse effect on the Company’s business.



The Housewares/Small Appliance segment is dependent on key customers, and any significant decline in business from one or more of its key customers could adversely affect the segment’s operating results.



Although the Company has a long-established relationship with its major customers, it does not have any long-term supply agreement or guaranty of minimum purchases.  As a result, the customers may fail to place anticipated orders, change planned quantities, delay purchases, or change product assortments for reasons beyond the Company’s control, which could prove detrimental to the segment’s operating results.



The sales for this segment are highly seasonal and dependent upon the United States retail markets and consumer spending.



Traditionally, this segment has recognized a substantial portion of its sales during the Holiday selling season.  Any downturn in the general economy, shift in consumer spending away from its housewares/small appliances, or deterioration in the financial health of its customer base could adversely affect sales and operating results.



The Company may not be successful in developing and introducing new and improved consumer products.



The development and introduction of new housewares/small appliance products is very important to the Company’s long-term success.  The ability to develop new products is affected by, among other things, whether the Company can develop and fund technological innovations and successfully anticipate consumer needs and preferences, as well as the intellectual property rights of others.  The introduction of new products may require substantial expenditures for advertising and marketing to gain marketplace recognition or to license intellectual property. There is no guarantee that the Company will be aware of all relevant intellectual property in the industry and may be subject to claims of infringement, which could preclude it from producing and selling a product. Likewise, there is no guarantee that the Company will be successful in developing products necessary to compete effectively in the industry or that it will be successful in advertising, marketing and selling any new products.



Product recalls or lawsuits relating to defective products could have an adverse effect on the Company, as could the imposition of industry sustainability standards.



As distributors of consumer products in the United States, the Company is subject to the Consumer Products Safety Act, which empowers the U.S. Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous.  Under certain circumstances, the U.S. Consumer Products Safety Commission could require the Company to repair, replace or refund the purchase price of one or more of its products, or it may voluntarily do so. Any repurchase or recall of products could be costly and damage the Company’s reputation, as well as subject it to a sizable penalty that the Commission is empowered to impose.  If the Company removed products from the market, its reputation or brands could be tarnished and it might have large quantities of finished products that could not be sold.



The Company could also face exposure to product liability claims if one of its products were alleged to have caused property damage, bodily injury or other adverse effects. It is self-insured to specified levels of those claims and maintains product liability insurance for claims above the self-insured levels. The Company may not be able to maintain such insurance on acceptable terms, if at all, in the future.  In addition, product liability claims may exceed the amount of insurance coverage.  Moreover, many states do not allow insurance companies to provide coverage of punitive damages, in the event such damages are imposed.  Additionally, the Company does not maintain product recall insurance.  As a result, product recalls or product liability claims could have a material adverse effect on the Company’s business, results of operations and financial condition.



The portable appliance and floor care companies’ industry association is in the process of trying to promulgate sustainability standards for the industry.  It has passed an outline for a standard but has not yet developed specific guidelines for implementation.  The Sustainability Consortium (TSC) under the auspices of a Retail Association (RILA) is trying to develop standards for all consumer products.  If either the association or TSC is successful in developing enforceable standards, the standards are expected to ultimately become mandatory.  The standards as drafted will do nothing for the environment, but will entail the addition of significant bureaucracy and outside certification fees.  As such, compliance will be burdensome and expensive.



The housewares/small appliance industry continues to consolidate, which could ultimately impede the Company’s ability to secure product placement at key customers.



Over the past decade, the housewares/small appliance industry has undergone significant consolidation, and, as a result, the industry primarily consists of a limited number of larger companies.  Larger companies do enjoy a competitive advantage in terms of the ability to offer a larger assortment of product to any one customer.  As a result, the Company may find it more difficult or lose the ability to place its products with its customers.



Tax reform could have a negative impact on top line and after tax profitability.



One element of proposed tax reforms is a border adjustment tax, which disallows any imported item as an expense.  If implemented, the adjustment could increase the Company’s corporate income tax and ultimately might require significant price increases that could have a negative impact on unit volume and in turn top line volume and operating profits.



Defense Segment:



The Company relies primarily on sales to U.S. Government entities, and the failure to procure or the loss of a significant contract or contracts could have a material adverse effect on its results of operations.



As the Company’s sales in the Defense segment are primarily to the U.S. Government and its prime contractors, it depends heavily on the contracts underlying these programs.  The loss or significant reduction of a major program in which the Company participates could have a material adverse effect on the results of operations.



A decline in or a redirection of the U.S. defense budget could result in a material decrease in the Defense segment sales and earnings. 



Government contracts are primarily dependent upon the U.S. defense budget.  During recent years, the Company’s sales were augmented by increased defense spending, including supplemental appropriations for operations in Iraq and Afghanistan.  However, future defense budgets could be negatively affected by several factors, including U.S. Government budget deficits, administration priorities, U.S. national security strategies, a change in spending priorities, and the reduction of military operations around the world.  Any significant decline or redirection of U.S. military expenditures could result in a decrease to the Company’s sales and earnings.



U.S. Government contracts are also dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year.  As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years.  In addition, most U.S. Government contracts are subject to modification if funding is changed.  Any failure by Congress to appropriate additional funds to any program in which the Company participates, or any contract modification as a result of funding changes, could materially delay or terminate the program.  This could have a material adverse effect on the results of the Company’s operations. 



The Company may not be able to react to increases in its costs due to the nature of its U.S. Government contracts.



Substantially all of the Company’s U.S. Government contracts are being performed on fixed-price basis.  Under fixed-price contracts, the Company agrees to perform the work for a fixed price, subject to limited escalation provisions on specified raw materials.  Thus it bears the risk that any increases or unexpected costs may reduce profits or potentially cause losses on the contract, which could have a material adverse effect on results of operations and financial condition.  That risk is potentially compounded by the political actions under consideration by federal and state governments, including climate change and labor regulations, which could have an impact if enacted or promulgated on the availability of affordable labor, energy and ultimately, materials, as the effects of the legislation/regulation ripple throughout the economy. In addition, products are accepted by test firing samples from a production lot.  Lots typically constitute a sizable amount of product.  Should a sample not fire as required by the specifications, the cost to rework or scrap the entire lot could be substantial.



The Company’s U.S. Government contracts are subject to termination.



All of the Company’s U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if the Company defaults by failing to perform under the contract.  Performance failure can occur from a myriad of factors, which include late shipments due to the inability to secure requisite raw materials or components or strikes or other labor unrest, equipment failures or quality issues which result in products that do not meet specifications, etc.  Termination for convenience provisions provide only for recovery of costs incurred and profit on the work completed prior to termination.  Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.  If a termination provision is exercised, it could have a material adverse effect on the Company’s business, results of operations and financial condition.



Failure of the Company’s subcontractors to perform their contractual obligations could materially and adversely impact contract performance.



Key components and services are provided by third party subcontractors, several of which the segment is required to work with by government edict.  Under the contract, the segment is responsible for the performance of those subcontractors, many of which it does not control.  There is a risk that the Company may have disputes with its subcontractors, including disputes regarding the quality and timeliness of work performed by subcontractors.  A failure by one or more of the Company’s subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact the Company’s ability to perform its obligations as the prime contractor.



Acquisition Risks:



The Company may pursue acquisitions of new product lines or businesses.  It may not be able to identify suitable acquisition candidates or, if suitable candidates are identified, it may not be able to complete the acquisition on commercially acceptable terms. Even if the Company is able to consummate an acquisition, the transaction would present many risks, including, among others: failing to achieve anticipated benefits or cost savings; difficulty incorporating and integrating the acquired technologies, services or products; coordinating, establishing or expanding sales, distribution and marketing functions, as necessary; diversion of management’s attention from other business concerns; being exposed to unanticipated or contingent liabilities or incurring the impairment of goodwill; the loss of key employees, customers, or distribution partners; and difficulties implementing and maintaining sufficient controls, policies and procedures over the systems, products and processes of the acquired company. If the Company does not achieve the anticipated benefits of its acquisitions as rapidly or to the extent anticipated by management, or if others do not perceive the same benefits of the acquisition as the Company does, there could be a material, adverse effect on the Company’s business, financial condition or results of operations.



Information Technology System Failure or Security Breach Risks:



The Company relies on its information technology systems to effectively manage its business data, communications, supply chain, logistics, accounting, and other business processes. While the Company endeavors to build and sustain an appropriate technology environment, information technology systems are vulnerable to damage or interruption from circumstances beyond the Company’s control, including systems failures, viruses, security breaches or cyber incidents such as intentional cyber attacks aimed at theft of sensitive data, or inadvertent cyber-security compromises.  A security breach of such systems could result in interruptions of the Company’s operations, negatively impact relations with customers or employees, and expose the Company to liability and litigation, any one of which could have a negative impact on the Company’s results of operations or financial condition.  The Company’s insurance coverage may not be adequate to cover all the costs related to cyber security attacks or disruptions.





ITEM 1B.  UNRESOLVED STAFF COMMENTS



None





ITEM 2.  PROPERTIES (Owned Except Where Indicated)



The Company's Eau Claire facility is approximately 522,000 square feet, of which approximately 380,000 square feet was formerly occupied by Presto Absorbent Products, Inc. and subsequently, beginning on January 3, 2017, is leased to Drylock Technologies, LTD mentioned in Item  1 of this Form 10-K.  The Company's corporate office occupies the balance of the space in Eau Claire. 



The Company also has Defense manufacturing facilities located in Janesville and Antigo, Wisconsin; East Camden, Arkansas; Perry, Florida; and Clear Lake, South Dakota.



The Janesville, Wisconsin facility is comprised of approximately 106,000 square feet, which includes the Company’s 2016 construction of 31,000 square feet of manufacturing space to meet anticipated needs.   The Antigo, Wisconsin facility is comprised of approximately 208,000 square feet and the Perry, Florida facility is comprised of approximately 54,000 square feet. The East Camden, Arkansas operation leases approximately 354,000 square feet.  The Company acquired the 88,000 square foot Clear Lake, South Dakota facility in 2014 as part of a business combination, which is described in Note P to the Company’s Consolidated Financial Statements.



There are two warehousing facilities located in Jackson and Canton, Mississippi used in the Housewares/Small Appliance segment.  The Jackson facility contains 252,000 square feet.  The Company also leases a 255,000 square foot building in Canton which is used primarily for warehousing and distribution and some activities for product service functions.  An additional 72,000 square feet has been leased in adjacent Canton buildings for warehousing.    



The facilities in use for each of the Company’s business segments are believed to be adequate for their ongoing business needs.





ITEM 3.  LEGAL PROCEEDINGS



See Note I to the Company’s Consolidated Financial Statements.



See Item 1-B-3 of this Form 10-K and Note K to the Consolidated Financial Statements for information regarding certain environmental matters.





ITEM 4.  MINE SAFETY DISCLOSURES



Not applicable

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PART II



ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Record of Dividends Paid and Market Price of Common Stock



* First quarter 2016 includes a regular dividend of $1.00 and an extra dividend of $4.05.  First quarter 2015 includes a regular dividend of $1.00 and an extra dividend of $3.05.



On February 10, 2017, the Company’s Board of Directors announced a regular dividend of $1.00 per share, plus an extra dividend of $4.50.  On March 15, 2017, a payment of $38,405,000 was made to the shareholders of record as of March 1, 2017.



The common stock of National Presto Industries, Inc. is traded on the New York Stock Exchange under the symbol “NPK”.  As of March 1, 2017, there were 274 holders of record of the Company’s common stock.  This number does not reflect shareholders who hold their shares in the name of broker dealers or other nominees.  During the fourth quarter of 2016, the Company did not purchase any of its equity securities. 



The information under the heading “Equity Compensation Plan Information,” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders, is incorporated by reference.



The line graph and related information set forth under the heading “Performance Graph” in the Company’s 2016 Annual Report is incorporated by reference.

 

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ITEM 6.  SELECTED FINANCIAL DATA









* Fiscal year 2012 reflects the 2012 dividend paid in March, as well as a second accelerated payment made in late December of the annual 2013 dividend.  The acceleration was occasioned by the uncertainty over the federal income tax rate that would be in effect in 2013.



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



An overview of the Company’s business and segments in which the Company operates and risk factors can be found in Items 1 and 1A of this Form 10-K.  Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2016 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 16, 2017, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein.  Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to Consolidated Financial Statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; development and market acceptance of new products; increases in material, freight/shipping, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production;  shipment of defective product which could result in product liability claims or recalls; work or labor disruptions stemming from a unionized work force; changes in government requirements, military spending, and funding of government contracts which could result, among other things, in the modification or termination of existing contracts;  dependence on subcontractors or vendors to perform as required by contract; the efficient start-up and utilization of tooling 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.



DISCONTINUED OPERATIONS



On January 3, 2017, the Company and its wholly-owned subsidiary, Presto Absorbent Products, Inc. (“PAPI”), entered into an asset purchase agreement wherein substantially all PAPI assets were sold and certain liabilities were assigned to Drylock Technologies, LTD. As a result of this transaction, effective in the fourth quarter of 2016, the Company classified its results of operations for all periods presented to reflect its Absorbent Products business as a discontinued operation and classified the assets and liabilities of its Absorbent Products business as held for sale. The operations of PAPI previously comprised the Company’s Absorbent Products segment.



2016 COMPARED TO 2015



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, 2016 and 2015.    



On a consolidated basis, sales decreased by $13,744,000 (4%), gross profit decreased by $3,771,000 (4%), selling and general expense increased by $694,000 (3%), and intangibles amortization decreased by $4,452,000 (86%).  Other income, principally interest, increased by $413,000  (104%), while earnings from continuing operations before provision for income taxes increased by $400,000 (1%), and earnings from continuing operations decreased by $247,000 (1%). Earnings from discontinued operations, net of tax, increased $4,315,000. Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales decreased by $17,816,000, from $125,944,000 to $108,128,000, or 14%, primarily due to a decrease in shipments.  Defense net sales increased by $4,072,000, from $229,705,000 to $233,777,000, or 2%, reflecting an increase in units shipped.



Housewares/Small Appliance gross profit decreased $6,492,000 from $27,455,000 (22% of sales) in 2015 to $20,963,000 (19% of sales) in 2016, primarily reflecting the decrease in sales mentioned above and higher repairs and maintenance costs of approximately $883,000.  Defense gross profit increased $2,721,000 from $61,978,000 (27% of sales) to $64,699,000 (28% of sales), primarily reflecting the increase in sales mentioned above.



Selling and general expenses for the Housewares/Small Appliance segment were essentially flat.  Defense segment selling and general expenses increased $757,000, primarily reflecting increased employee compensation and benefit costs of $381,000, increased legal and professional costs of $327,000, and a non-cash write-down of the book value of equipment of $353,000.  These were partially offset by a decrease in the provision for bad debts of $462,000.    



Intangible assets primarily consist of the value of a government sales contract, and consulting and non-compete agreements recognized as a result of the acquisition of certain assets of DSE, Inc., more fully described in Note Q to the Company’s Consolidated Financial Statements, and the value of customer relationships, trademarks and non-compete agreements related to AMTEC Less Lethal Systems, Inc. (“ALS”), a reporting unit in the Company’s Defense segment.  ALS was formed in 2011 following the acquisition of certain assets of ALS Technologies, Inc.  The intangible assets are all attributable to the Defense segment.  The government sales contract intangible asset is amortized based on units fulfilled under the applicable contract, while the other intangible assets were amortized on a straight-line basis that approximates economic use, over periods ranging from 1 to 10 years.  The decrease in amortization is primarily attributable to fewer units shipped under the acquired government sales contract in 2016 than in 2015.



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



Other income increased $413,000, which was primarily attributable to an increase in interest income to the Company’s cash equivalents and marketable securities, due to increased interest rates.



Earnings from continuing operations before provision for income taxes increased $400,000 from $62,922,000 to $63,322,000.  The provision for income taxes from continuing operations increased from $20,760,000 to $21,407,000, which resulted in an effective income tax rate increase from 33% in 2015 to 34% in 2016.  Earnings from continuing operations decreased $247,000 from $42,162,000 to $41,915,000. 



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, effective in the fourth quarter of 2016, 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. Income from discontinued operations increased $4,315,000, from a loss of $1,666,000 to income of $2,649,000, primarily attributable to higher sales and production and a gain on the involuntary conversion of machinery and equipment. 



Net earnings increased $4,068,000 from $40,496,000 to $44,564,000.



2015 COMPARED TO 2014



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, 2015 and 2014.



On a consolidated basis, sales increased by $8,451,000 (2%), gross profit increased by $8,127,000 (10%), selling and general expense increased by $313,000 (2%), and intangibles amortization decreased by $6,818,000 (57%).  Other income, principally interest, increased by $30,000 (8%), while earnings from continuing operations before provision for income taxes increased by $16,725,000 (36%), and earnings from continuing operations increased by $11,410,000 (37%).  Earnings from discontinued operations, net of tax, increased $2,609,000. Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales were essentially flat.  Defense net sales increased by $8,160,000, from $221,545,000 to $229,705,000, or 4%, reflecting an increase in units shipped. 



Housewares/Small Appliance gross profit increased $3,358,000 from $24,097,000 (19% of sales) in 2014 to $27,455,000 (22% of sales) in 2015, primarily reflecting a more favorable product mix.  Defense gross profit increased $4,769,000 from $57,209,000 (26% of sales) to $61,978,000 (27% of sales), primarily reflecting the increase in sales mentioned above, augmented by an improved product mix and increased production efficiencies.



Selling and general expenses for the Housewares/Small Appliance segment increased by $765,000, largely due to increases in insurance accruals for employee health benefits and an increased adjustment to the products liability reserve. Defense segment selling and general expenses decreased $452,000, primarily reflecting a decrease in accruals for legal fees of $411,000, the absence of last year’s one time transitional costs of $176,000 associated with the purchase of Tech Ord, which is described in Note P to the Consolidated Financial Statements included in Item 8 of this Form 10-K, and a decrease in employee compensation costs of $159,000.  These decreases were offset mainly by higher costs for information technology upgrades. 



Intangible assets primarily consist of the value of a government sales contract, product backlogs, and consulting and non-compete agreements recognized as a result of the acquisition of certain assets of DSE, Inc., more fully described in Note Q to the Company’s Consolidated Financial Statements, and the value of customer relationships, trademarks and non-compete agreements related to AMTEC Less Lethal Systems, Inc. (“ALS”), a reporting unit in the Company’s Defense segment.  ALS was formed in 2011 following the acquisition of certain assets of ALS Technologies, Inc.  The intangible assets are all attributable to the Defense segment.  The government sales contract intangible asset is amortized based on units fulfilled under the three year contract, while the other intangible assets were amortized on a straight-line basis that approximates economic use, over periods ranging from one to ten years.  The decrease in amortization is primarily attributable to fewer units shipped under the acquired government sales contract in 2015 than in 2014.



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



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



Earnings from continuing operations before provision for income taxes increased $16,725,000 from $46,197,000 to $62,922,000.  The provision for income taxes from continuing operations increased from $15,445,000 to $20,760,000, which resulted in an effective income tax rate of  33% in both years.  Earnings from continuing operations increased $11,410,000 from $30,752,000 to $42,162,000.



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, effective in the fourth quarter of 2016, 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. Income from discontinued operations improved $2,609,000, from a loss of $4,275,000 to a loss of $1,666,000, primarily attributable to higher sales and lower material costs.    



Net earnings increased $14,019,000 from $26,477,000 to $40,496,000.



LIQUIDITY AND CAPITAL RESOURCES



2016 COMPARED TO 2015



Cash provided by operating activities was $66,376,000 during 2016 as compared to $46,275,000 during 2015.  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 2016 were net earnings of $44,564,000, which included total non-cash depreciation and amortization expenses of $14,683,000 and the deferred income tax provision of $6,360,000; increases in net payables; and a decrease in deposits with vendors included in other assets and current assets. These were partially offset by increases in accounts receivable and inventory levels.  Cash provided by discontinued operations was $4,477,000.    Of particular note during 2015 were net earnings of $40,496,000, which included total non-cash depreciation and amortization expenses of $15,600,000; increases in net payables; and a decrease in accounts receivable levels. These were partially offset by an increase in inventory levels and a net increase in deposits with vendors included in other assets and current assets. Cash provided by discontinued operations was $4,733,000. 



Net cash used in investing activities was $60,846,000 during 2016 as compared to $16,300,000 used during 2015.  During 2016, the Company expanded its Defense segment’s Janesville, Wisconsin facility, as noted in Item 2 of this 10-K, and continued its expansion of its Absorbent Products business by purchasing plant and equipment, in the combined amount of $6,950,000.  Also of significance were net purchases of marketable securities of $52,256,000; the issuance of a note receivable of $2,419,000; and the acquisition of intangible assets in the Defense segment of $211,000.  These cash outflows were partially offset by proceeds from an insurance settlement of $987,000. Cash used by discontinued operations was $1,139,000. During 2015, the Company expanded its Housewares/Small Appliance segment distribution facility and continued its expansion of the Absorbent Products business by purchasing plant and equipment, in the amount of $6,461,000.  These cash outflows were augmented by net purchases of marketable securities of $9,864,000. Cash used in discontinued operations was $2,385,000.



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, 2016 and 2015, $46,306,000 and $12,144,000, 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 2016 and 2015 primarily differed as a result of the $1.00 per share increase in the extra dividend paid during those 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 2016 by $29,188,000 to $27,034,000. 



Working capital increased by $62,679,000 to $276,141,000 at December 31, 2016 for the reasons stated above.  The Company’s current ratio was 5.3 to 1.0 at December 31, 2016, compared to 5.4 to 1.0 at December 31, 2015. 



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 tax-exempt variable rate demand notes described above and in municipal bonds that are pre-refunded with escrowed U.S. Treasuries. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.



2015 COMPARED TO 2014



Cash provided by operating activities was $46,275,000 during 2015 as compared to $73,213,000 during 2014.  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 2015 were net earnings of $40,496,000, which included total non-cash depreciation and amortization expenses of $15,600,000; increases in net payables; and a decrease in accounts receivable levels. These were partially offset by an increase in inventory levels and a net increase in deposits with vendors included in other assets and current assets.  Cash provided by discontinued operations was $4,733,000. Of particular note during 2014 were net earnings of $26,477,000, which included total non-cash depreciation and amortization expenses of $21,819,000 and impairment of intangible assets charges of $2,063,000; decreases in accounts receivable and inventory levels; and decreases in deposits with vendors included in other assets and current assets.  These were partially offset by decreases in net payables. Cash provided by discontinued operations was $3,517,000.



Net cash used in investing activities was $16,300,000 during 2015 as compared to $7,531,000 used during 2014.  During 2015, the Company expanded its Housewares/Small Appliance segment distribution facility, as noted in Item 2 of this 10-K, and continued its expansion of the Absorbent Products business by purchasing plant and equipment, in the amount of $6,461,000.  These cash outflows were augmented by net purchases of marketable securities of $9,864,000. Cash used in discontinued operations was $2,385,000. During 2014, the Company continued its expansion of the Absorbent Products business by purchasing plant and equipment in the amount of $11,287,000.  The Company also acquired substantially all of the assets of Chemring Energetic Devices, Inc.’s business located in Clear Lake, South Dakota, and all of the real property owned by Technical Ordnance Realty, LLC, which is described in Note P to the Company’s Consolidated Financial Statements, totaling $10,534,000.  These were partially offset by net maturities/sales of marketable securities of $13,983,000.  Cash used in discontinued operations was $9,551,000.



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, 2015 and 2014, $12,144,000 and $13,600,000, 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 2015 and 2014 primarily differed as a result of the $1.00 per share decrease in the extra dividend paid during those 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 2015 by $2,179,000 to $56,222,000. 



Working capital increased by $31,594,000 to $213,462,000 at December 31, 2015 for the reasons stated above.  The Company’s current ratio was 5.4 to 1.0 at December 31, 2015, compared to 5.2 to 1.0 at December 31, 2014. 



DEFENSE SEGMENT BACKLOG



The Company’s Defense segment contract backlog was approximately $359,000,000 at December 31, 2016, and $284,000,000 at December 31, 2015.  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 24-month period. 



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CONTRACTUAL OBLIGATIONS



The table below discloses a summary of the Company’s specified contractual obligations at December 31, 2016:













Critical accounting policies



The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and revenues and expenses during the periods reported.  Actual results may differ from those estimates.  The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results.  These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. 



Inventories    

New Housewares/Small Appliance product introductions are an important part of the Company’s sales to offset the morbidity rate of other Housewares/Small Appliance products and/or the effect of lowered acceptance of seasonal products due to weather conditions.  New products entail unusual risks and have occasionally, in the past, resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product.  There were no such obsolescence issues that had a material effect during the current year and, accordingly, the Company did not record a reserve for obsolete product.  In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory.  Inventory risk for the Company’s 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. 



Sales and Returns

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



Impairment and Valuation of Long-lived Assets

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



NEW ACCOUNTING PRONOUNCEMENTS



Please refer to Note A(19) to the Company’s Consolidated Financial Statements for information related to the effect of adopting new accounting pronouncements on the Company’s Consolidated Financial Statements.    



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company's interest income on cash equivalents and marketable securities is affected by changes in interest rates in the United States.  Cash equivalents primarily consist of money market funds. Based on the accounting profession’s interpretation of cash equivalents under FASB ASC 230, the Company’s 7-day variable rate demand notes are classified as marketable securities rather than as cash equivalents.  The demand notes are highly liquid instruments with interest rates set every 7 days that can be tendered to the trustee or remarketer upon 7 days notice for payment of principal and accrued interest amounts.  The 7-day tender feature of these variable rate demand notes is further supported by an irrevocable letter of credit from highly rated U.S. banks.  To the extent a bond is not remarketed at par plus accrued interest, the difference is drawn from the bank’s letter of credit.  The Company has had no issues tendering these notes to the trustees or remarketers.  Other than a failure of a major U.S. bank, there are no known risks of which the Company is aware that relate to these notes in the current market.  The balance of the Company’s investments is held primarily in fixed rate municipal bonds with an average life of 0.8 year.  Accordingly, changes in interest rates have not had a material effect on the Company, and the Company does not anticipate that future exposure to interest rate market risk will be material.  The Company uses sensitivity analysis to determine its exposure to changes in interest rates. 



The Company has no history of, and does not anticipate in the future, investing in derivative financial instruments.  Most transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency cash flow hedges.  As the majority of the Housewares/Small Appliance segment’s suppliers are located in China, periodic changes in the U.S. dollar and Chinese Renminbi (RMB) exchange rates do have an impact on that segment’s product costs.  It is anticipated that any potential material impact from fluctuations in the exchange rate will be to the cost of products secured via purchase orders issued subsequent to the revaluation.



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None



ITEM 9A.    CONTROLS AND PROCEDURES



The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of December 31, 2016.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date.



There were no changes to internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 



MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING



The management of National Presto Industries, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act.  The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. 



All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 



Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our assessment and those criteria, management concluded that, as of December 31, 2016, the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the 1934 Act, was effective.



The Company’s independent registered public accounting firm has issued its report on the effectiveness of the Company’s internal control over financial reporting.  The report appears below.





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders

National Presto Industries, Inc.

Eau Claire, Wisconsin



We have audited National Presto Industries, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  National Presto Industries, Inc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Assessment of Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.



A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, National Presto Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National Presto Industries, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 16, 2017 expressed an unqualified opinion thereon.



/s/ BDO USA, LLP

Milwaukee, Wisconsin

March 16, 2017





ITEM 9B.  OTHER INFORMATION



None

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PART III



ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



The following information is provided with regard to the executive officers of the registrant:

(All terms for elected officers are one year or until their respective successors are elected.)







Ms. Cohen became Chair of the Board on January 1, 2002.  Prior to that date she had been elected Treasurer in September 1983, Vice President in May 1986, President in May 1989 and Chief Executive Officer in May 1994.  She has been associated with the registrant since 1976.  Prior to becoming an officer, she was Associate Resident Counsel and Assistant to the Treasurer.



Mr. Lieble was elected Chief Financial Officer, Vice President and Treasurer on September 8, 2008.   He has been a member of the Board of Directors since 2008. Other than a brief hiatus of one year during which he worked as a financial advisor for UBS Financial Services, Mr. Lieble has worked for the registrant since 1977 in a variety of capacities, including the positions listed above.



Mr. Frederick was elected Corporate Secretary on November 17, 2009.  He has been associated with the registrant since 2007 as an in-house attorney with expertise in litigation and intellectual property matters and in the capacity of General Counsel since January 2009.  Prior to his employment with the registrant, Mr. Frederick was a litigation attorney with the firm Rider Bennett, LLP. 



Mr. Ahneman was elected Vice President, Sales in May 2013.  He has been associated with the registrant since 1977.  Prior to becoming an officer, he was National Account Sales Manager.



Mr. Morgan was elected Vice President, Engineering in November 2015.  He has been associated with the registrant since 2010.  Prior to becoming an officer, he was Director of Engineering and Chief Engineer.  Prior to his employment with the registrant, Mr. Morgan had worked 21 years at Hoover Company, a division of Maytag, and three years at Hoover’s successor, Techtronic Industries, in engineering and engineering management capacities.



The information under the headings “Section 16(a) Beneficial Ownership Reporting Compliance,” “Information Concerning Directors and Nominees” and “Corporate Governance” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders is incorporated by reference.



The Company has adopted a code of ethics that applies to all Company employees, entitled the “Corporate Code of Conduct,” which is set forth in the Corporate Governance section of the Company’s website located at www.gopresto.com.  The Company intends to make all required disclosures concerning any amendments to, or waivers from, its Corporate Code of Conduct by the posting of such information on that section of its website.



ITEM 11.  EXECUTIVE COMPENSATION



The information under the headings “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Executive Compensation and Other Information”  and “Summary Compensation Table” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders is incorporated by reference.



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The security ownership and related stockholder matters information set forth under the heading “Voting Securities and Principal Holders Thereof” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders is incorporated by reference.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 



The certain relationships and related transactions and director independence information set forth under the heading “Corporate Governance” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders is incorporated by reference.



ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES 



The principal accountant fees and services information set forth under the heading “Independent Registered Public Accountants” in the Company’s Proxy Statement for its 2017 Annual Meeting of Stockholders is incorporated by reference.





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PART IV



ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES













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





ITEM 16.  FORM 10-K SUMMARY



None







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SIGNATURES



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





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.







 















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