NATIONAL PRESTO INDUSTRIES INC (NPK)

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-Q, in the Company’s 2025 Annual Report to Stockholders, in the Proxy Statement for the annual meeting held on May 19, 2026, 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 in, among other things, 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 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 the Company’s information technology systems.  Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings.

Comparison of Second Quarter 2026 and 2025



Readers are directed to Note D to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the quarters ended July 5, 2026 and June 29, 2025.

On a consolidated basis, net sales increased by $26,147,000 (22%), gross profit increased by $10,001,000 (54%), selling and general expenses decreased by $698,000 (7%), impairment of vendor deposit decreased $2,701,000, and amortization increased by $82,000 (22%).  Other income increased by $284,000 (55%), earnings before provision for income taxes increased by $13,602,000 (206%), and net earnings increased by $10,710,000 (208%).  Details concerning these changes can be found in the comments by segment below.



Housewares/Small Appliance net sales decreased by $1,263,000 from $20,346,000 to $19,083,000, or 6%, which was attributable to a decrease in units shipped, approximately 58% was offset in part by increases in pricing.  Defense net sales increased by $27,144,000 from $99,813,000 to $126,957,000 or 27%, primarily reflecting an increase in shipments from the segment's backlog.



Notwithstanding the decrease in sales mentioned above, Housewares/Small Appliance gross profit increased $4,228,000 from $480,000 to $4,708,000, primarily reflecting a refund of a portion of the tariffs the segment had paid that the Supreme Court declared unauthorized in its February 2026 decision.  By contrast, a portion of the declared unauthorized tariffs were paid during the second quarter of 2025.  Tariffs are generally recognized as they are refunded or incurred, reflecting the segment’s LIFO inventory cost valuation method. The balance of the change in gross profit was attributable to an increase in costs incident to the startup of the segment’s new warehousing facility of approximately $450,000. Defense gross profit increased $5,741,000 from $19,200,000 to $24,941,000, primarily reflecting the increase in sales mentioned above. Due to the startup nature of the businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years.



Selling and general expenses for the Housewares/Small Appliance segment decreased $1,384,000, primarily reflecting an increased allocation of corporate overhead to the Defense segment of $642,000 and decreased cost accruals for self insurance of $770,000. Selling and general expenses for the Defense segment increased $788,000, primarily attributable to the increase in the allocation of corporate overhead. Selling and general expenses for the Safety segment decreased $102,000, primarily reflecting reduced personnel costs.

During the first quarter of 2025, the Company made deposits totaling $2,701,000 with a vendor in its Housewares/Small Appliances segment. On May 29, 2025, the vendor filed for protection in the U.S. Bankruptcy Court in the Northern District of Texas.  As recovery of the deposit was deemed unlikely, the Company recorded an impairment of the full deposit during the second quarter of 2025.

Intangibles amortization increased $82,000, reflecting amortization of a trade secret intangible asset used in in the fulfillment of certain contracts in the Defense segment.

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

The $284,000 increase in other income was primarily attributable to an increase in interest income on marketable securities of $125,000 and a decrease in interest expense related to the Company's revolving line of credit of $71,000.

Earnings before provision for income taxes increased $13,602,000 from $6,613,000 to $20,215,000.  The provision for income taxes increased from $1,461,000 to $4,353,000, which resulted in an effective income tax rate of 22% for both quarters ended July 5, 2026 and June 29, 2025.  Net earnings increased $10,710,000 from $5,152000 to $15,862,000, or 208%.

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Comparison of First Six Months 2026 and 2025



Readers are directed to Note D to the Consolidated Financial Statements, “Business Segments,” for data on the financial results of the Company’s three business segments for the first six months ended July 5, 2026 and June 29, 2025.

The Company reports its operations on a fiscal quarter basis in which each quarter contains approximately thirteen weeks and ends on a Sunday, with the exception of the fourth quarter, which ends on December 31. Occasionally, the end dates of the fiscal quarters are adjusted to account for differences that accumulate between the end of the fiscal year and the end of the subsequent first quarter. One such adjustment occurred during the quarter ended April 5, 2026.

On a consolidated basis, net sales increased by $41,157,000 (18%), gross profit increased by $9,368,000 (26%), selling and general expenses increased by $1,380,000 (8%), gain on sale of property, plant and equipment increased $1,707,000, impairment of vendor deposit decreased $2,701,000, and amortization increased by $116,000 (15%).  Other income increased by $127,000 (10%), earnings before provision for income taxes increased by $12,407,000 (76%), and net earnings increased by $9,726,000 (76%).  Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $4,691,000 from $42,272,000 to $37,581,000, or 11%, which was attributable to a decrease in units shipped, approximately 45% of which was offset by increases in pricing.  The decrease in units shipped was due in large part to startup issues at the segment’s new warehousing facility and a resulting inability to ship during a portion of the first quarter.  Defense net sales increased by $45,778,000 from $180,751,000 to $226,529,000 or 25%, primarily reflecting an increase in shipments from the segment's backlog.

Notwithstanding the decrease in sales mentioned above, Housewares/Small Appliance gross profit increased $405,000 from $1,940,000 to $2,345,000, primarily reflecting a refund of a portion of the tariffs the segment had paid that the Supreme Court declared unauthorized in its February 2026 decision.  By contrast, a portion of the declared unauthorized tariffs were paid during the first six months of 2025.  Tariffs are generally recognized as they are refunded or incurred, reflecting the segment’s LIFO inventory cost valuation method. The balance of the change in gross profit was attributable to an increase in costs incident to the startup of the segment’s new warehousing facility of approximately $2,359,000.  Defense gross profit increased $8,901,000 from $36,830,000 to $45,731,000, primarily reflecting the increase in sales mentioned above. Due to the startup nature of the businesses in the Safety segment and the resulting limited revenues, gross margins were negative in both years.

Selling and general expenses for the Housewares/Small Appliance segment decreased $1,199,000, primarily reflecting the increased allocation of corporate overhead to the Defense segment of $1,569,000 and decreased accruals for self-insurance of $114,000, partially offset by increased compensation of $327,000 and legal and professional costs of $159,000. Selling and general expenses for the Defense segment increased $2,825,000, primarily attributable to increases in the allocation of corporate overhead of $1,569,000, personnel costs of $704,000, repairs and maintenance costs of $137,000, and a write off of a note receivable of $208,000. Selling and general expenses for the Safety segment decreased $246,000, primarily reflecting reduced personnel costs of $192,000 and legal and professional costs of $74,000.

The gain on sale of property, plant and equipment stemmed from the February 10, 2026 sale of the Company’s warehousing facility in Canton, Mississippi that mainly served the Housewares/Small Appliance segment.  Subsequent to the sale, the Company entered into a short-term lease agreement with the buyer, as it completes its warehousing operations transfer to the new warehousing facility in Nettleton, Mississippi.

During the first quarter of 2025, the Company made deposits totaling $2,701,000 with a vendor in its Housewares/Small Appliances segment.  On May 29, 2025, the vendor filed for protection in the U.S. Bankruptcy Court in the Northern District of Texas.  As recovery of the deposit was deemed unlikely, the Company recorded an impairment of the full deposit during the second quarter of 2025.

Intangibles amortization increased $116,000, reflecting amortization of a trade secret intangible asset used in the fulfillment of certain contracts in the Defense segment.

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

The $127,000 increase in other income was primarily attributable to an increase in interest income on marketable securities of $40,000, an increase in rental income of $52,000, and a decrease in interest expense related to the Company's revolving line of credit of $31,000.

Earnings before provision for income taxes increased $12,407,000 from $16,421,000 to $28,828,000.  The provision for income taxes increased from $3,659,000 to $6,340,000, which resulted in an effective income tax rate of 22% for both six month periods ended July 5, 2026 and June 29, 2025.  Net earnings increased $9,726,000 from $12,762,000 to $22,488,000, or 76%.

Liquidity and Capital Resources



Net cash provided by operating activities was $44,144,000 during the first six months of 2026 as compared to $1,542,000 du

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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 2025 Annual Report to Shareholders, in the Proxy Statement for the annual meeting to be held May 19, 2026, 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.



2025 COMPARED TO 2024



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, 2025 and 2024.



On a consolidated basis, sales increased by $115,296,000 (30%), gross profit increased by $1,759,000 (2%), selling and general expense increased by $4,030,000 (13%), impairment of vendor deposit increased $2,701,000, and amortization was consistent.   Other income decreased by $3,579,000 (66%), earnings before provision for income taxes decreased by $8,551,000 (17%), and net earnings decreased by $8,376,000 (20%). Details concerning these changes can be found, by segment, in the comments below.



Net sales of the Housewares/Small Appliance segment decreased by $7,195,000 (7%), from $102,799,000 to $95,604,000, primarily attributable to a decrease in units shipped, approximately 47% was offset by an increase in pricing. Net sales of the Defense segment increased by $121,912,000 (43%), from $284,025,000 to $405,937,000, reflecting an increase in shipments from the segment's backlog. Safety segment sales increased $579,000 to $1,983,000, reflecting an increase in shipments.



Gross profit of the Housewares/Small Appliance segment decreased $17,889,000 from $25,478,000 (25% of sales) in 2024 to $7,589,000 (8% of sales) in 2025, primarily reflecting the decrease in sales mentioned above and the Trump administration's tariffs that went into effect on goods deemed to have been shipped from the Orient after January 31, 2025.  Those tariffs are generally treated as period costs and expensed as they are incurred, reflecting the segment’s LIFO inventory cost valuation method. The relocation costs of the segment’s distribution center from Canton to Nettleton, Mississippi also served to reduce gross profit by approximately $1,261,000. Defense gross profit increased $19,471,000 from $58,173,000 (21% of sales) in 2024 to $77,644,000 (19% of sales) in 2025, primarily reflecting the increase in sales mentioned above, as well as differences in mix efficiencies, and material costs. Due to the startup nature of the businesses in the Safety segment and resulting limited revenues, gross margins were negative in both years.



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Selling and general expenses for the Housewares/Small Appliance segment increased $1,304,000, primarily reflecting increased personnel costs of $768,000, computers and technology costs of $266,000, and the favorable adjustment to the reserve for bad debts of $285,000 that occurred in the prior year. Defense segment selling and general expenses increased $3,941,000, primarily due to increased personnel costs of $3,012,000, legal and professional expenses of $347,000, repairs and maintenance costs of $334,000, and computers and software expenses of $256,000. Safety segment selling and general expenses decreased $1,215,000, primarily reflecting the sale of OneEvent's refrigeration monitoring business that occurred on July 31, 2025.

During the first quarter of 2025, the Company made deposits totaling $2,701,000 with a vendor in its Housewares/Small Appliances segment.  On May 29, 2025, the vendor filed for protection in the U.S. Bankruptcy Court in the Northern District of Texas.  As recovery of the deposit is deemed unlikely, the Company recorded an impairment of the full deposit during the second quarter of 2025.

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



The $3,579,000 decrease in other income was attributable to a decrease of $3,009,000 in interest income on marketable securities and an increase in interest expense of $830,000 related to the outstanding balance of the Company's revolving line of credit during 2025. Both stem from the increased investments in inventory required to support augmented Defense segment awards.



Earnings before provision for income taxes decreased $8,551,000 from $50,670,000 to $42,119,000. The provision for income taxes decreased $175,000 from $9,210,000 to $9,035,000, which resulted in an effective income tax rate of 22% and 18% for the years ended December 31, 2025 and 2024, respectively. The increase in the effective income tax rate was primarily attributable to the absence of favorable adjustments recognized in 2024 related to prior year estimates.  Net earnings decreased $8,376,000 from $41,460,000 to $33,084,000.



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2024 COMPARED TO 2023



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



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



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



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



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

Intangibles amortization decreased as a result of the absence of the prior year's amortization of intellectual property intangibles from the acquisition of Knox Safety, Inc.

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



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

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



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LIQUIDITY AND CAPITAL RESOURCES

2025 COMPARED TO 2024



Cash used in operating activities was $9,137,000 during 2025 as compared to $53,426,000 during 2024. The principal factors behind the decrease in cash used can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during 2025 was net earnings of $33,084,000, which included the non-cash impairment of a vendor deposit of $2,701,000, depreciation and amortization expenses of $5,136,000, deferred income tax of $7,741,000 and retirement plan expense of $1,008,000. The combination of these factors was more than offset by increases in inventory and accounts receivable levels and a net decrease in payables and accrual levels. Of particular note during 2024 was net earnings of $41,460,000, which included total non-cash depreciation and amortization of $5,046,000 and deferred income tax benefit of $4,528,000. This was augmented by decreases in deposits made to vendors (included in other assets and current assets) and a net increase in payable and accrual levels. The combination of these factors was more than offset by increases in inventory and accounts receivable levels.



Net cash used in investing activities was $21,876,000 during 2025 as compared to $14,965,000 provided by investing activities during 2024. The change primarily related to net sales and maturities of marketable securities of $4,477,000 in 2025, as opposed to $21,459,000 in 2024, and purchases o

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