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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 2020 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 18, 2021, 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 shutdown. With the ongoing recommendations that most stay at home and current concerns about the potential impact of the COVID-19 virus, there is continued demand for the Housewares/Small Appliance segment’s products. Distribution remains largely intact as most key retail customers sell essential items (food and/or hardware) or distribute over the internet. Those that do not, have since largely reopened once the formal shutdowns ended. The federal government mandated that Defense businesses continue their operations regardless of past or future individual State edicts. The products that the Safety segment markets are also deemed essential. Material, components and finished goods have also, for the most part, continued to flow, although were frequently delayed. 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. The six-foot social distancing rule has been implemented in the offices and where practical in the factories. Where not practical, barriers have been erected between workers. Masks are mandated in a fashion consistent with CDC guidelines. Surfaces are regularly cleaned and disinfected.

The COVID-19 related shutdowns and their aftermath have affected each segment in a variety of ways, which include increased absenteeism; the cancellation of planned trade shows and customer/supplier visits; inefficiencies inherent from working at home; as well as customer and supplier issues in placing and accepting orders; picking up, accepting, or shipping product; or making or accepting deliveries occasioned by similar problems. See “Item 1A. Risk Factors” titled “The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks.”

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 three 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 R 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.

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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 Rusoh, Inc.'s, 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 R to the Company’s Consolidated Financial Statements.

Intangible 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.

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.

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2019 COMPARED TO 2018

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, 2019 and 2018.

On a consolidated basis, sales decreased by $14,807,000 (5%), gross profit decreased by $3,958,000 (5%), selling and general expense increased by $2,176,000 (9%), intangibles amortization decreased by $2,084,000 (96%), and loss on divestiture, net decreased by $2,528,000. Other income increased by $1,489,000 (34%), while earnings from continuing operations before provision for income taxes decreased by $33,000, and earnings from continuing operations increased by $651,000 (2%). Earnings from discontinued operations, net of tax, increased $1,629,000. Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales increased by $5,668,000, from $93,733,000 to $99,401,000, or 6%, primarily due to an increase in shipments. Defense net sales decreased by $20,432,000, from $229,546,000 to $209,114,000, or 9%, reflecting a decrease in units shipped, partially offset by proceeds from the negotiated termination of a commercial foreign military supply contract for $9,412,000.

Housewares/Small Appliance gross profit decreased $205,000 from $15,563,000 (17% of sales) in 2018 to $15,358,000 (16% of sales) in 2019, primarily reflecting the increase in sales mentioned above, offset by higher product costs. Defense gross profit decreased $3,206,000 from $60,979,000 (27% of sales) to $57,773,000 (28% of sales), primarily reflecting the decrease in sales mentioned above, a less favorable product mix, and comparatively less efficient operations on certain programs vis-à-vis 2018, partially offset by 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.

Selling and general expenses for the Housewares/Small Appliance segment increased $1,752,000, primarily reflecting higher legal and professional expenses of $805,000, higher health and accident costs of $505,000, and charges related to the vesting of restricted stock upon retirement of long-term employees of $448,000. Defense segment selling and general expenses decreased $1,444,000, primarily reflecting the absence of costs associated with the Company's wholly-owned subsidiary, AMTEC Less Lethal Systems, Inc. that was divested during the fourth quarter of 2018. Safety segment selling and general expenses increased $1,869,000, primarily reflecting for Rusoh, Inc., higher employee compensation and benefit cost accruals of $509,000 and higher legal and professional expenses of $398,000 along with the selling and general expense of OneEvent, whose assets were acquired during third quarter 2019. See Note R to the Company's Consolidated Financial Statements.

Intangibles amortization decreased by $2,084,000 from $2,167,000 in 2018 to $83,000 in 2019. The decrease primarily reflects the Defense segment's amortization of the value of an acquired government sales contract that was fully amortized during the second quarter of 2018.

There were no impairments recorded in 2019. In contrast, on October 17, 2018, the Company, through its wholly owned subsidiary AMTEC Corporation, sold the outstanding stock of its wholly owned subsidiary AMTEC Less Lethal Systems, Inc. (“ALS”) to PACEM Defense LLC (“PACEM”), a third party, in exchange for cash and promissory notes totaling $10,636,000, subject to customary post-closing adjustments. The Company tested long-lived assets for recoverability in the third quarter 2018 and recorded an impairment charge of $3,021,000. The pre-tax loss on divestiture, including the impairment charge, recorded in 2018 was $2,528,000. See Note Q to the Consolidated Financial Statements.

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

Other income increased $1,489,000, which was primarily attributable to higher interest earned of $1,014,000 on a reduced portfolio of marketable securities with higher yields and the increase in rental income of $456,000 from the new additional facility built for Drylock mentioned in Note P to the Company's Consolidated Financial Statements.

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Earnings from continuing operations before provision for income taxes decreased $33,000 from $52,339,000 to $52,306,000. The provision for income taxes from continuing operations decreased from $12,450,000 to $11,766,000, which resulted in an effective income tax rate of 23% and 24% for the years ended December 31, 2019 and 2018, respectively. Earnings from continuing operations increased $651,000 from $39,889,000 to $40,540,000.

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 increased $1,629,000, from $51,000 to $1,680,000. The earnings stemmed from the settlement of a lawsuit for breach of contract.

Net earnings increased $2,280,000 from $39,940,000 to $42,220,000.

LIQUIDITY AND CAPITAL RESOURCES

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 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 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 cash provided of $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 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 2020 by $6,457,000 to $86,036,000.

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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.

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.

2019 COMPARED TO 2018

Cash provided by operating activities was $9,583,000 during 2019 as compared to $76,248,000 during 2018. 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 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 with vendors included in other assets and current assets; and a decrease in net payable levels. The increase in inventory reflects early purchases from suppliers in China in an effort to avoid penalty tariffs imposed by the U.S. Government and timing of shipments from the Defense segment's backlog. Cash used in discontinued operations was $1,052,000. Of particular note during 2018 were net earnings of $39,940,000, which included total non-cash depreciation and amortization expenses of $6,219,000 and the net loss and impairment on divestiture of business of $2,528,000; a decrease in accounts receivable and inventory levels; a decrease in deposits with vendors included in other assets and current assets; and an increase in net payable levels. Cash used in discontinued operations was $636,000.

Net cash provided by investing activities was $55,160,000 during 2019 as compared to $10,844,000 during 2018. During 2019, the Company received 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. During 2018, the Company received net proceeds of $9,410,000 from the divestiture of its less lethal business, and $2,630,000 from an insurance settlement. Also of note during 2018 were net sales and maturities of marketable securities of $9,789,000; the purchase of plant and equipment of $8,686,000, which primarily included expenditures to the Housewares/Small Appliance segment to build additional facilities related to the amended lease mentioned in Note P to the Consolidated Financial Statements, and to augment of the Company’s production facilities in the Defense segment; and the issuance of a note receivable of $2,300,000. Cash provided by discontinued operations was $6,290,000.

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, 2019 and 2018, $39,249,000 and $94,416,000, 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 2019 and 2018 primarily differed as a result of the buy back of restricted stock in 2019. 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 2019 by $22,732,000 to $79,579,000.

Working capital decreased by $6,229,000 to $298,538,000 at December 31, 2019 for the reasons stated above. The Company’s current ratio was 8.6 to 1.0 at December 31, 2019 and 7.4 to 1.0 at December 31, 2018.

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DEFENSE SEGMENT BACKLOG

The Company’s Defense segment contract backlog was approximately $320,214,000 at December 31, 2020, and $310,385,000 at December 31, 2019. 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.

CONTRACTUAL OBLIGATIONS

The table below discloses a summary of the Company’s specified contractual obligations at December 31, 2020:

Payments Due by Period (in thousands)

Contractual Obligations Total Under 1 Year 1-3 Years 3-5 Years More Than 5 Years

(1) Purchase obligations includes outstanding purchase orders at December 31, 2020. Included are purchase orders issued to the Company’s Housewares and Safety segments’ manufacturers in the Orient and to material suppliers and building contractors in the Defense segment. 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 estimated.

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 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. 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.

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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

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.

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 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 0.5 years. 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.

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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

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, including the Chief Executive Officer and Treasurer (principal financial officer), 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, 2020. Based on that evaluation, the Company’s Chief Executive Officer and Treasurer (principal financial officer) concluded that the Company’s disclosure controls and procedures were effective as of that date.

There were changes in internal controls over financial reporting during the quarter ended December 31, 2020 to address a material weakness previously identified. The Company has properly designed and implemented effective controls over revenue for its Defense segment to demonstrate an appropriate level of precision over the assessment and documentation of the point in time pattern of revenue recognition and to fully consider alternative use and the impact of termination clauses in its contracts with customers that might create a legal right for payment for work completed prior to the contract termination that would include a reasonable profit margin. There were no other changes to internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

MANAGEMENT’S REPORT ON 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, 2020. 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 this assessment and those criteria, management concluded that as of December 31, 2020, the Company's internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the 1034 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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

National Presto Industries, Inc.

Eau Claire, Wisconsin

Opinion on Internal Control over Financial Reporting

We have audited National Presto Industries Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, 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, 2020, and the related notes and financial statement schedule listed in Item 15 and our report dated March 16, 2021, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’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 Report on 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

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.

/s/ BDO USA, LLP

Milwaukee, Wisconsin

March 16, 2021

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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.)

NAME TITLE AGE

Maryjo Cohen Chair of the Board, President, and Chief Executive Officer 68

Jeffery A. Morgan Vice President, Engineering 63

Richard L. Jeffers Vice President of Sales 68

David J. Peuse Director of Financial Reporting and Treasurer 51

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. Frederick was elected Corporate Secretary on November 17, 2009, Vice President on May 15, 2018, and Chief Operating Officer on December 11, 2018. 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. Morgan was elected Vice President of 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.

Mr. Jeffers was elected Vice President of Sales in September 2017. He has almost 40-years of experience in the housewares/small appliance industry, has held executive sales positions at Windmere, Applica, and Salton, and owned and operated a successful manufacturer’s representative firm. Prior to Vice President of Sales, Mr. Jeffers served as National Account Sales Manager for the Company. He has been with the Company for a total of 14 (non-consecutive) years.

Mr. Peuse was elected Treasurer in May 2019. Prior to becoming an officer, he served the registrant as Controller, and in other capacities as Manager of General Accounting, Costing Manager, Business Systems Analyst, and Internal Auditor. Mr. Peuse has been associated with the registrant since 1996.

The information under the headings “Delinquent Section 16(a) Reports,” “Information Concerning Directors and Nominees” and “Corporate Governance” in the Company’s Proxy Statement for its 2021 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.

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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 2021 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 2021 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 2021 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 2021 Annual Meeting of Stockholders is incorporated by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Form 10-K:

Page Reference

1. Consolidated Financial Statements:

a. Consolidated Balance Sheets - December 31, 2020 and 2019 F-1 & F-2

e. Notes to Consolidated Financial Statements F-6 through F-21

f. Report of Independent Registered Public Accounting Firm F-22

2. Consolidated Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts F-23

(b) Exhibits:

Exhibit Number Description

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Exhibit Number Description

Exhibit 21 Subsidiaries of the Registrant

Exhibit 23.1 Consent of Independent Registered Public Accounting Firm

Exhibit 101.INS Inline XBRL Instance Document.

Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

* Compensatory Plans

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.

NATIONAL PRESTO INDUSTRIES, INC. (registrant)

By: /S/ Maryjo Cohen

Maryjo Cohen

President and Chief Executive Officer

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.

By: /S/ Richard N. Cardozo By: /S/ Patrick J. Quinn

Richard N. Cardozo Patrick J. Quinn

Director Director

By: /S/ Maryjo Cohen By: /S/ Joseph G. Stienessen

Maryjo Cohen Joseph G. Stienessen

Chair of the Board, President, Director

Chief Executive Officer (Principal

Executive Officer), and Director

By: /S/ Randy F. Lieble By: /S/ David J. Peuse

Randy F. Lieble David J. Peuse

Director Director of Financial Reporting and

Treasurer (Principal Financial Officer)

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NATIONAL PRESTO INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share and per share data)

ASSETS

CURRENT ASSETS:

Inventories:

PROPERTY, PLANT AND EQUIPMENT:

The accompanying notes are an integral part of the Consolidated Financial Statements.

F-1

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NATIONAL PRESTO INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share and per share data)

LIABILITIES

CURRENT LIABILITIES:

Federal and state income taxes 4,777 3,799

LEASE LIABILITIES - NON-CURRENT 2,790 3,001

OTHER NON-CURRENT LIABILITIES 940 -

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Common stock, $1 par value:

Accumulated other comprehensive income 154 136

The accompanying notes are an integral part of the Consolidated Financial Statements.

F-2

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NATIONAL PRESTO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands except per share data)

For the years ended December 31,

Loss on divestiture, net - - 2,528

Earnings from discontinued operations, net of tax - 1,680 51

Weighted average common shares outstanding:

Earnings per share, basic and diluted:

From continuing operations $ 6.67 $ 5.78 $ 5.69

From discontinued operations - 0.24 0.01

Comprehensive income:

Other comprehensive income, net of tax:

Unrealized gain on available-for-sale securities 18 115 107

The accompanying notes are an integral part of the Consolidated Financial Statements.

F-3

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NATIONAL PRESTO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

For the years ended December 31,

Cash flows from operating activities:

Deferred income tax (benefit) (1,718 ) (224 ) (121 )

Noncash income tax expense - 1,370 -

Net loss and impairment on divestiture of businesses - - 2,528

Loss on disposal of property, plant and equipment 2 322 163

Provision for doubtful accounts - 7 458

Gain on legal settlement - (2,300 ) -

Changes in operating accounts, net of effects of acquisition:

Federal and state income taxes receivable/payable 978 1,045 (2,366 )

Cash flows from investing activities:

Proceeds from divestiture of businesses, net of cash paid - - 9,410

Purchase of property, plant and equipment (2,621 ) (3,138 ) (8,686 )

Notes issued - - (2,300 )

Proceeds from notes receivable - 2,146 -

Acquisition of business, net of cash acquired - (3,733 ) -

Proceeds from legal settlement - 2,300 -

Proceeds from insurance settlement - 807 2,630

Sale of property, plant and equipment - 767 1

Cash flows from financing activities:

Proceeds from sale of treasury stock 528 518 528

Supplemental disclosures of cash flow information:

Cash paid during the year for:

The accompanying notes are an integral part of the Consolidated Financial Statements.

F-4

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NATIONAL PRESTO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands except per share data)

Unrealized gain on available-for-sale securities, net of tax 107 107

Unrealized gain on available-for-sale securities, net of tax 115 115

Unrealized gain on available-for-sale securities, net of tax 18 18

The accompanying notes are an integral part of the Consolidated Financial Statements.

F-5

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NATIONAL PRESTO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(1) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: In preparation of the Company's Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.

(2) BASIS OF PRESENTATION: The Consolidated Financial Statements include the accounts of National Presto Industries, Inc. and its subsidiaries, all of which are wholly-owned. All material intercompany accounts and transactions are eliminated. For a further discussion of the Company's business and the segments in which it operates, please refer to Note L.

(3) GENERAL: Government responses to the COVID-19 virus have impacted worldwide economic activity. The Company is closely monitoring the impact of the pandemic on all aspects of its business, including effects on employees, customers, suppliers, and the global economy and will adjust procedures accordingly. All of the Company's businesses are deemed essential and as a result, all have been and are currently operating. The COVID-19 related shutdowns and their aftermath have affected each segment in a variety of fashions, which include increased absenteeism; the cancellation of planned trade shows and customer/supplier visits; inefficiencies inherent from working at home; as well as customer and supplier issues in placing and accepting orders; picking up, accepting, or shipping product; or making or accepting deliveries occasioned by similar problems. While there was no material adverse impact on the current year's consolidated financial statements and related disclosures, the extent to which the COVID-19 pandemic impacts the Company's business in 2021 and beyond will depend on future developments that are highly uncertain and cannot be predicted.

In response to the government mandated COVID-19 shutdowns, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP). The CARES Act did not have a material impact on the Company's income tax provision for the year ended December 31, 2020. Starting May 1, 2020, the Company had deferred employer social security payments as provisioned by the Act.

(4) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company utilizes the methods of determining fair value as described in Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) 820,Fair Value Measurements and Disclosures to value its financial assets and liabilities. ASC 820 utilizes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of marketable securities are discussed in Note A(5).

(5) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES:

Cash and Cash Equivalents: The Company considers all highly liquid marketable securities with an original maturity of three months or less to be cash equivalents. Cash equivalents include money market funds. The Company deposits its cash in high quality financial institutions. The balances, at times, may exceed federally insured limits. Money market funds are reported at fair value determined using quoted prices in active markets for identical securities (Level 1, as defined by FASB ASC 820).

The Company's cash management policy provides for its bank disbursement accounts to be reimbursed on a daily basis. Checks issued but not presented to the bank for payment of $4,510,000 and $1,308,000 at December 31, 2020 and 2019, respectively, are included as reductions of cash and cash equivalents or book overdrafts in accounts payable, as appropriate.

Marketable Securities: The Company has classified all marketable securities as available-for-sale which requires the securities to be reported at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Highly liquid, tax-exempt variable rate demand notes with put options exercisable in three months or less are classified as marketable securities. Due to the Company's ability to liquidate its available-for-sale securities for potential capital needs, they are classified as current assets.

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At December 31, 2020 and 2019, cost for marketable securities was determined using the specific identification method. A summary of the amortized costs and fair values of the Company's marketable securities at December 31 is shown in the following table. All of the Company’s marketable securities are classified as Level 2, as defined by FASB ASC 820, with fair values determined using significant other observable inputs, which include quoted prices in markets that are not active, quoted prices of similar securities, recently executed transactions, broker quotations, and other inputs that are observable.

(In thousands)

MARKETABLE SECURITIES

Amortized Cost Fair Value Gross Unrealized Gains Gross Unrealized Losses

Proceeds from sales and maturities of marketable securities totaled $57,823,000 in 2020, $161,420,000 in 2019, and $173,060,000 in 2018. There were no realized gross gains or losses related to sales of marketable securities during the years ended December 31, 2020, 2019 and 2018. Net unrealized gains (losses) included in other comprehensive income were $24,000, $145,000 and $135,000 before taxes for the years ended December 31, 2020, 2019, and 2018, respectively. No unrealized gains or losses were reclassified out of accumulated other comprehensive income during the same periods.

The contractual maturities of the marketable securities held at December 31, 2020 are as follows: $38,007,000 within one year; $5,006,000 beyond one year to five years; $825,000 beyond five years to ten years, and $25,143,000 beyond ten years. All of the instruments in the beyond five year ranges are variable rate demand notes which, as noted above, can be tendered for cash at par plus interest within seven days. Despite the stated contractual maturity date, to the extent a tender is not honored, the notes become immediately due and payable.

(6) ACCOUNTS RECEIVABLE: The Company's accounts receivable is related to sales of products. Credit is extended based on prior experience with the customer and evaluation of customers' financial condition. Accounts receivable are primarily due within 25 to 60 days. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer. The Company maintains an allowance for estimated expected credit losses resulting from the inability of customers to meet their financial obligations to the Company. The allowance is determined based on the Company's historical collection experience, adverse situations that may affect the customer's ability to pay, and prevailing economic conditions.

(7) INVENTORIES: Housewares/Small Appliance segment inventories and certain Safety segment inventory items are stated at the lower of cost or net realizable value with cost being determined principally on the last-in, first-out (LIFO) method. Defense segment inventories are stated at the lower of cost and net realizable value determined principally on the first-in, first-out (FIFO) method. Inventoried costs relating to contracts in progress are stated at actual production costs, including factory overhead, initial tooling, and other related costs incurred to date, reduced by amounts associated with recognized sales, utilizing a standard costing type method. The Company evaluates inventories to determine if there are any excess or obsolete inventories on hand.

(8) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Straight-line depreciation is provided in amounts sufficient to charge the costs of depreciable assets to operations over their service lives which are estimated at 15 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 15 to 20 years for land improvements. The Company reviews long-lived assets consisting principally of property, plant, and equipment, for impairment when material events and changes in circumstances indicate the carrying value may not be recoverable. As a result of the divestiture of one of its operating facilities in the Defense segment during 2018, the Company recorded an impairment of $2,975,000 during the third quarter of 2018. See Note Q for further explanation. As of December 31, 2020, net property, plant and equipment included $6,774,000 related to leased manufacturing and office space. See Note M. Approximately $1,398,000 of construction in progress in the Company’s Defense segment is presented on the Consolidated Balance Sheet as Buildings at December 31, 2020. The construction in progress is expected to be completed by mid-year 2021. Approximately $2,413,000 of construction in progress in the Company’s Defense segment is presented on the Consolidated Balance Sheet as Buildings, at December 31, 2019.

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(9) GOODWILL: 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, such as the occurrence of an event that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. No goodwill impairments were recognized during 2020, 2019, or 2018.

The Company's goodwill as of December 31, 2020 and 2019 was $15,317,000 of which, $3,831,000 relates to the Safety segment and $11,486,000 relates to the Defense segment, both of which had no cumulative impairment charges.

(10) INTANGIBLE ASSETS: Intangible assets are attributable to the Defense and Safety segments, and primarily consist of the value of an acquired government sales contract, the value of trademarks and trade secrets, technology software, and patents. The government sales contract intangible asset is amortized based on units fulfilled under the applicable contract, while the other intangible assets are amortized on a straight-line basis that approximates economic use, over periods ranging from 2 to 15 years with the exception of trade secrets which have an indefinite life.

Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As a result of the divestiture of one of its operating facilities in the Defense segment during 2018, the Company recorded an impairment of $46,000 during the third quarter of 2018. See Note Q for further explanation. There were no impairments of intangible assets recognized during 2020 or 2019.

The gross carrying amounts of the intangible assets subject to amortization was $2,142,000 at December 31, 2020. Accumulated amortization was $304,000 and $83,000 at December 31, 2020 and 2019, respectively. Amortization expense was $221,000, $83,000, and $2,167,000 during the years ended December 31, 2020, 2019, and 2018, respectively. The estimated amortization expense as of December 31, 2020 for each of the five succeeding years is $214,000.

(11) OTHER ASSETS: Other assets includes prepayments that are made from time to time by the Company for certain materials used in the manufacturing process in the Housewares/Small Appliance segment. The Company expects to utilize the prepayments and related materials over an estimated period of two years. As of December 31, 2020 and 2019, $11,217,000 and $9,396,000 of such prepayments, respectively, remained unused and outstanding. At December 31, 2020 and 2019, $4,311,000 and $4,614,000 of these amounts, respectively, are included in Other Current Assets, representing the Company’s best estimate of the expected utilization of the prepayments and related materials during the twelve-month periods following those dates.

(12) REVENUES: The Company’s revenues are derived from short-term contracts and programs that are typically completed within 3 to 24 months and are recognized in accordance with ASC Topic 606,Revenue from Contracts with Customers. The standard was adopted on January 1, 2018 and did not result in any change to the Company’s pattern of revenue recognition. The Company’s contracts each contain one or more performance obligations: the physical delivery of distinct ordered product or products. The Company provides an assurance type product warranty on its products to the original owner. In addition, for the Housewares/Small Appliances segment, the Company estimates returns of seasonal products and returns of newly introduced products sold with a return privilege. Stand-alone selling prices are set forth in each contract and are used to allocate revenue to the corresponding performance obligations. For the Housewares/Small Appliances segment, contracts include variable consideration, as the prices are subject to customer allowances, which principally consist of allowances for cooperative advertising, defective product, and trade discounts. Customer allowances are generally allocated to the performance obligations based on budgeted rates agreed upon with customers, as well as historical experience, and yield the Company’s best estimate of the expected value for the variable consideration.

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The Company's contracts in the Defense segment are primarily with the U.S. Department of Defense (DOD) and DOD prime contractors. As a consequence, this segment's business essentially depends on the product needs and governmental funding of the DOD. Substantially all of the work performed by the Defense segment directly or indirectly for the DOD is 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, with the exception of limited escalation provisions on specific materials, is generally not subject to any adjustments reflecting the actual costs incurred by the contractor.

For the Housewares/Small Appliance segment, revenue is generally recognized as the completed, ordered product is shipped to the customer from the Company’s warehouses. For the relatively few situations in which revenue should be recognized when product is received by the customer, the Company adjusts revenue accordingly. For the year ended December 31, 2020, the Company reduced revenue by $2,073,000 for estimated customer refunds related to a product recall. For the Defense segment, revenue is primarily recognized when the customer has legal title and formally documents that it has accepted the products. There are also certain termination clauses in Defense segment contracts that may give rise to an over-time pattern of recognition of revenue in the absence of alternative use of the product. During 2019, the Company recognized revenue of $9,412,000 from a negotiated termination of a commercial foreign military supply contract. In some situations, the customer may obtain legal title and accept the products at the Company’s facilities, arranging for transportation at a later date, typically in one to four weeks. The Company does not consider the short-term storage of the customer owned products to be a material performance obligation, and no part of the transaction price is allocated to it.

The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, and customer advances and deposits (contract liabilities) on the Company’s Condensed Consolidated Balance Sheets. For the Defense segment, the Company occasionally receives advances or deposits from certain customers before revenue is recognized, resulting in contract liabilities. These advances or deposits do not represent a significant financing component. As of December 31, 2020 and 2019, $4,723,000 and $1,847,000, respectively, of contract liabilities were included in Accounts Payable on the Company’s Condensed Consolidated Balance Sheets. During 2020,2019, and 2018, the Company recognized revenue of $0, $9,574,000 and $676,000, respectively, that was included in the Defense segment contract liability at the beginning of those respective years. The Company monitors its estimates of variable consideration, which includes customer allowances for cooperative advertising, defective product, and trade discounts, and returns of seasonal and newly introduced product, all of which pertain to the Housewares/Small Appliances segment, and periodically makes cumulative adjustments to the carrying amounts of these contract liabilities as appropriate. During 2020 and 2019, there were no material adjustments to the aforementioned estimates. There were no material amounts of revenue recognized during the same periods related to performance obligations satisfied in a previous period. The portion of contract transaction prices allocated to unsatisfied performance obligations, also known as the contract backlog, in the Company’s Defense segment were $320,214,000 and $310,385,000 as of December 31, 2020 and 2019, respectively. The Company anticipates that the unsatisfied performance obligations will be fulfilled in an 18 to 24-month period. The performance obligations in the Housewares/Small Appliances and Safety segments have original expected durations of less than one year.

The Company’s principal sources of revenue are derived from two segments: Housewares/Small Appliance and Defense, as shown in Note L. Management utilizes the performance measures by segment to evaluate the financial performance of and make operating decisions for the Company.

(13) ADVERTISING: The Company's policy is to expense advertising as incurred and include it in selling and general expenses. Advertising expense was $2,655,000, $245,000, and $181,000 in 2020,2019, and 2018, respectively.

(14) PRODUCT WARRANTY: The Company’s Housewares/Small Appliance segment's products are generally warranted to the original owner to be free from defects in material and workmanship for a period of 1 to 12 years from date of purchase. The Company allows a 60-day over-the-counter initial return privilege through cooperating dealers. The Company services its products through a corporate service repair operation. The Company estimates its product warranty liability based on historical percentages which have remained relatively consistent over the years.

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The product warranty liability is included in accounts payable on the balance sheet. The following table shows the changes in product warranty liability for the period:

(In thousands)

Year Ended December 31

Beginning balance January 1 $ 263 $ 221

Accruals during the period 303 416

Charges / payments made under the warranties (325 ) (374 )

Included in accounts payable as of December 31, 2020 are charges of $2,769,000 for a voluntary product recall.

(15) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation in accordance with ASC 718,Compensation — Stock Compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. As more fully described in Note F, the Company awards non-vested restricted stock to employees and executive officers.

(16) INCOME TAXES: Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported. Income tax contingencies are accounted for in accordance with FASB ASC 740,Income Taxes. See Note H for summaries of the provision, the effective tax rates, and the tax effects of the cumulative temporary differences resulting in deferred tax assets and liabilities.

(17) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

In December 2019, the FASB issued ASU No.2019-12,Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740,Income Taxes, and providing for simplification in several other areas. The standard is effective for fiscal years beginning after December 15, 2020. The Company believes the adoption of ASU 2019-12 will not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No.2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new standard was adopted on January 1, 2020 and was applied prospectively. The Company has made changes to its processes for the assessment of the adequacy of the allowance for credit losses on certain types of financial instruments, including accounts receivable, notes receivable, and available-for-sale debt securities. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements, related disclosures, and results of operations.

Other pronouncements issued but not effective until after December 31, 2020, are not expected to have a material impact on the Company's consolidated financial statements.

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B. INVENTORIES:

The amount of inventories valued on the LIFO basis was $30,515,000 and $32,744,000 as of December 31, 2020 and 2019, respectively, and consists of housewares/small appliance finished goods and certain Safety segment inventories. Under LIFO, inventories are valued at approximately $4,429,000 and $3,982,000 below current cost determined on a first-in, first-out (FIFO) basis at December 31, 2020 and 2019, respectively. During the years ended December 31, 2020, 2019, and 2018, $2,215,000, $85,000, and $26,000, respectively, of a LIFO layer was liquidated. The Company uses the LIFO method of inventory accounting to improve the matching of costs and revenues for the Housewares/Small Appliance and Safety segments.

The following table describes that which would have occurred if LIFO inventories had been valued at current cost determined on a FIFO basis:

Increase (Decrease) – (In thousands, except per share data)

Year Cost of Sales Net Earnings Earnings Per Share

This information is provided for comparison with companies using the FIFO basis.

Inventory for Defense and raw materials of the Housewares/Small Appliance segments are valued under the FIFO method and total $104,973,000 and $95,792,000 at December 31, 2020 and 2019, respectively. At December 31, 2020, the FIFO total was comprised of $925,000 of finished goods, $96,463,000 of work in process, and $7,585,000 of raw material. At December 31, 2019, the FIFO total was comprised of $751,000 of finished goods, $87,805,000 of work in process, and $7,236,000 of raw material.

C. ACCRUED LIABILITIES:

At December 31, 2020, accrued liabilities consisted of payroll $7,474,000, product liability $5,618,000, payroll taxes $1,187,000, environmental $970,000, and other $1,019,000. At December 31, 2019, accrued liabilities consisted of payroll $6,341,000, product liability $5,055,000, environmental $1,050,000, and other $878,000.

The Company is self-insured for health care costs, although it does carry stop loss and other insurance to cover health care claims once they reach a specified threshold. The Company is also subject to product liability claims in the normal course of business. It is partly self-insured for product liability claims, and therefore records an accrual for known claims and estimated incurred but unreported claims in the Company’s Consolidated Financial Statements. The Company utilizes historical trends and other analysis to assist in determining the appropriate accrual. An increase in the number or magnitude of claims could have a material impact on the Company’s financial condition and results of operations. The Company's policy is to accrue for legal fees expected to be incurred in connection with loss contingencies. See Note K for a discussion of environmental remediation liabilities.

D. TREASURY STOCK:

As of December 31, 2020, the Company has authority from the Board of Directors to reacquire an additional 498,727 shares. During 2020,2019, and 2018, 344, 4,584, and 62 shares, respectively, were acquired from participants in the Company’s Incentive Compensation Plans described in Note F to cover those participants’ tax withholding obligations related to vested stock grants in accordance with the Plans’ rules. Treasury shares have been used for stock based compensation and to fund a portion of the Company's 401(k) contributions.

E. NET EARNINGS PER SHARE:

Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share also includes the dilutive effect of additional potential common shares issuable. Unvested stock awards, which contain non-forfeitable rights to dividends, whether paid or unpaid (“participating securities”), are included in the number of shares outstanding for both basic and diluted earnings per share calculations.

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F. STOCK-BASED COMPENSATION:

The Company, from time to time, enters into separate non-vested share-based payment arrangements with employees and executive officers under the Incentive Compensation Plan approved by stockholders on May 18, 2010 and the 2017 Incentive Compensation Plan approved by shareholders on May 16, 2017, which authorized 50,000 and 150,000 shares, respectively, to be available for grants. The 2017 plan replaced the original 2010 plan, and the shares remaining under the 2010 plan are no longer available for grant. The Compensation Committee of the Company’s Board of Directors approves all stock-based compensation awards for employees and executive officers of the Company. The Company grants restricted stock that is subject to continued employment and vesting conditions, but has dividend and voting rights, and uses the fair-market value of the Company’s common stock on the grant date to measure the fair value of the awards. The fair value of restricted stock is recognized as expense ratably over the requisite service period, net of estimated forfeitures.

During 2020,2019, and 2018, the Company granted 7,310 shares, 4,138 shares, and 3,886 shares of restricted stock, respectively, to 29 employees and executive officers of the Company. Unless otherwise vested early in accordance with the Incentive Compensation Plans, the restricted stock vests on specified dates in 2021 through 2026, subject to the recipients’ continued employment or service through each applicable vesting date.

The Company recognized pre-tax compensation expense in the Consolidated Statements of Comprehensive Income related to stock-based compensation of $366,000, $830,000, and $469,000 in 2020,2019, and 2018, respectively. As of December 31, 2020, there was approximately $1,272,000 of unrecognized compensation cost related to the restricted stock awards that is expected to be recognized over a weighted-average period of 3.9 years. There were 3,193, 17,871, and 1,359 shares of restricted stock that vested during 2020,2019, and 2018, respectively.

The following table summarizes the activity for non-vested restricted stock:

Forfeited 0 - 0 - 0 -

G. 401(K) PLAN:

The Company sponsors a 401(k) retirement plan that covers substantially all non-union employees. Historically, the Company matched up to 50% of the first4% of salary contributed by employees to the plan. This matching contribution was made with common stock. Starting in 2004, the Company began to match, in cash, an additional 50% of the first4% of salary contributed by employees plus 3% of total compensation for certain employees. Contributions made from treasury stock, including the Company's related cash dividends, totaled $1,249,000 in 2020, $1,197,000 in 2019, and $1,218,000 in 2018. In addition, the Company made cash contributions of $813,000 in 2020, $802,000 in 2019, and $821,000 in 2018 to the 401(k) Plan. The Company also contributed $443,000, $387,000, and $352,000 to the 401(k) retirement plan covering its union employees at the Amron Division of the AMTEC subsidiary during the years ended December 31, 2020, 2019, and 2018, respectively.

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H. INCOME TAXES:

The following table summarizes the provision for income taxes from continuing operations:

For Years Ended December 31 (in thousands)

Current:

Deferred:

The effective rate of the provision for income taxes on earnings from continuing operations before income taxes as shown in the Consolidated Statements of Comprehensive Income differs from the applicable statutory federal income tax rate for the following reasons:

Percent of Pre-tax Income

State tax, net of federal benefit 1.7 % 0.7 % 2.6 %

Tax exempt interest and dividends (0.1 %) (0.1 %) (0.6 %)

Deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. The tax effects of the cumulative temporary differences resulting in deferred tax assets and liabilities are as follows at December 31:

(In thousands)

Deferred tax assets

Insurance (primarily product liability) $ 978 $ 947

State NOL and tax credit carryforwards 825 -

Product recall 610 -

Deferred payroll taxes 414 -

Less: valuation allowance (520) -

Deferred tax liabilities

Goodwill and other intangibles 1,585 1,391

Deferred revenue 41 37

Total deferred tax liabilities 1,627 1,559

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. The Company believes it is more likely than not that the benefit from certain state NOL and tax credit carryforwards will not be realized. A significant factor of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2020. Such objective evidence limits the ability to consider subjective evidence, such as projections for future growth.

On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $520,000 has been provided on the deferred tax assets related to these state NOL and tax credit carryforwards, which will expire between 2034 and 2040. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for growth.

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The Company establishes tax reserves in accordance with FASB ASC 740,Income Taxes. As of December 31, 2020, the carrying amount of the Company’s gross unrecognized tax benefits included in current liabilities for federal and state income taxes was $2,521,000 which, if recognized, would affect the Company’s effective income tax rate.

The following is a reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2020 and 2019:

(In thousands)

Increases for tax positions taken related to the current year 944 453

Increases for tax positions taken related to prior years 46 1,519

Decreases for tax positions taken related to prior years - -

Lapse of statute of limitations (706 ) (55 )

Settlements - -

It is the Company’s practice to include tax related interest expense, interest income, and penalties in tax expense. During the years ended December 31, 2020, 2019 and 2018, the Company accrued approximately $142,000, $298,000 and $14,000 in interest expense, respectively.

The Company is subject to U.S. federal income tax as well as income taxes of multiple states. Tax years 2017 through 2019 are currently open for examination. During 2018, the state of Wisconsin completed its audits of the tax years 2013 through 2016. During June of 2016, the Internal Revenue Service completed its audits of the tax years 2012 and 2013. For all states in which it does business, the Company is subject to state audit statutes.

I. COMMITMENTS AND CONTINGENCIES:

The Company is involved in largely routine litigation incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the Company's consolidated financial position, liquidity, or results of operations.

In the state of Mississippi, inventory that is shipped out of state that is held in a licensed Free Port Warehouse is exempt from personal property taxes. One of the Company's subsidiaries operates in Hinds County, Mississippi. That subsidiary has submitted its Hinds County Free Port Warehouse tax filing for nearly 40 years. Each year, the county then assessed the subsidiary in accordance with the Company's filing. However, in June 2020, the Hinds County tax assessor notified the Company that the county had no record of a Free Port Warehouse License and issued an assessment totaling $2,506,000, reflecting personal property tax going back seven years. The Company intends to vigorously fight the assessment, and does not consider the ultimate payment of the taxes to be probable. Accordingly, as prescribed by ASC450 - Contingencies, no accrual has been recorded on the Company's consolidated financial statements as of December 31, 2020.

J. CONCENTRATIONS:

In the Housewares/Small Appliance segment, two customers each accounted for 10% of consolidated net sales for the year ended December 31, 2020, while one of them also accounted for 12%, and 10% of consolidated net sales for the years ended December 31, 2019, and 2018, respectively.

NPK US Equity

NPK · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9A.CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

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

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

NPK US Equity☆

NPK · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9A.CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

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

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

NPK US Equity