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: All of the Company’s businesses were deemed essential and as a result, all operated during the COVID-19 shutdowns. Distribution systems of customers that survived the shutdowns are largely intact as most key retail customers' outlets have been open sincethird quarter2020. Although many employees continue to work from home, customer offices are open and trade shows have resumed. As a result of government COVID-19 policies, labor and material costs have materially increased. Labor shortages continue. Due to the Company's historical conservative practices, it hasno debt and has adequate balances to fund its operations.”

(4) RECLASSIFICATIONS: Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's financial statement presentation. These reclassifications didnot affect net earnings or stockholder' equity as previously reported.

(5) 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. ASC820 utilizes athree-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. These tiers include: Level1, defined as observable inputs such as quoted prices in active markets; Level2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level3, defined as unobservable inputs in which little orno 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(6).



(6) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES:



**Cash and Cash Equivalents:The Company considers all highly liquid marketable securities with an original maturity ofthree 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, mayexceed federally insured limits. Money market funds are reported at fair value determined using quoted prices in active markets for identical securities (Level1, as defined by FASB ASC820).



The Company's cash management policy provides for its bank disbursement accounts to be reimbursed on a daily basis. Checks issued butnot presented to the bank for payment of $5,471,000 and $5,454,000 at* December 31, 2023and2022*, 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 inthree 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, 2023and2022*, 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 31is shown in the following table. All of the Company’s marketable securities are classified as Level2,* as defined by FASB ASC820, with fair values determined using significant other observable inputs, which include quoted prices in markets that arenot active, quoted prices of similar securities, recently executed transactions, broker quotations, and other inputs that are observable.





Proceeds from sales and maturities of marketable securities totaled $46,243,000 in2023, $29,195,000 in2022, and $38,539,000 in2021. There wereno realized gross gains or losses related to sales of marketable securities during the years ended* December 31, 2023,2022 and2021. Net unrealized gains (losses) included in other comprehensive income were $158,000, ($156,000) and ($170,000) before taxes for the years ended December 31, 2023*,2022, and2021, 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, 2023* are as follows: $16,330,000 withinone year; $7,536,000 beyondone year tofive years; and $2,562,000 beyondfive years toten years. All of the instruments in the beyondfive year range 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 isnot honored, the notes become immediately due and payable.



(7) 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 doesnot 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. The Company also maintains an allowance for customer chargebacks, which is determined based on the Company's historical experience with customers.



(8) 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 thefirst-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.



(9) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Straight-line depreciation is primarily 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 of* December 31, 2023*, net property, plant and equipment included $6,223,000 related to leased manufacturing and office space. See Note M. Approximately $642,000 of construction in progress in the Company’s Defense segment is presented on the Consolidated Balance Sheet as Buildings, at* December 31, 2023*.



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(10) 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 thefourth quarter and between annual tests whenever an impairment is indicated, such as the occurrence of an event that would more likely thannot reduce the fair value of the reporting unit below its carrying amount. Impairment losses are recognized when the carrying value of the reporting unit is greater than the fair value of the reporting unit. During thefourth quarter of2022, the Company assessed the poor historical performance and outlook forone of the reporting units in its Safety segment and opted to perform a quantitative assessment for impairment. The Company utilized discounted cash flow models to determine the reporting unit’s fair value. There wasno goodwill impairment recognized during2023 or2021. A goodwill impairment of $3,832,000 was recognized during2022.



The Company's goodwill was $19,433,000 and $18,573,000 as of* December 31, 2023* and2022, respectively, all of which related to the Defense segment. There have beenno impairments recognized for goodwill in the Defense segment. During2022, all of the Safety segment's goodwill was deemed impaired.

(11) INTANGIBLE ASSETS: Intangible assets are attributable to the Defense and Safety segments, primarily consist of the value of contracts/customer relationships, trademarks and safety certifications, trade secrets, and technology software, and 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. The Company utilized discounted cash flow models to determine its fair value. There wasno impairment of intangible assets recognized during2023 or2021. During2022, the Company recognized an impairment of technology software of $1,463,000 that pertains to the Safety segment.



The following shows the gross carrying amounts of the intangible assets and accumulated amortization at* December 31, 2023* and2022:

The Company estimates it will record amortization expense for the succeeding years as follows:

Amortization expense was $1,635,000, $582,000, and $214,000 during the years ended* December 31, 2023*,2022, and2021, respectively.



(12) OTHER ASSETS: Other assets includes prepayments and deposits that are made from time to time by the Company for certain materials used in the manufacturing process in the Housewares/Small Appliance and Safety segments. The Company expects to utilize the prepayments and related materials remaining as of* December 31, 2023* over an estimated period ofone year. As of* December 31, 2023and2022*, $5,018,000 and $7,578,000 of such prepayments, respectively, remained unused and outstanding. At* December 31, 2023and2022*, $5,018,000 and $5,890,000 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 thetwelve-month periods following those dates.



(13) 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 Topic606, Revenue from Contracts with Customers. The Company’s contracts generally containone 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 or negotiation at the outset of the contract and therefore, with the exception of limited escalation provisions on specific materials, is generallynot 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 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 of which $1,530,000 was reversed during the year ended December 31, 2021as actual refunds were lower than initially expected. 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.



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 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 donot represent a significant financing component. As of* December 31, 2023and2022*, $13,666,000 and $5,660,000, respectively, of contract liabilities were included in Accrued Liabilities on the Company’s Consolidated Balance Sheets. During2023, 2022, and2021, the Company recognized revenue of $326,000, $0 and $3,208,000, 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. During2023, 2022, and2021, there wereno material adjustments to the aforementioned estimates. There wereno 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 $564,005,000 and $505,069,000 as of* December 31, 2023and2022*, respectively. The Company anticipates that the unsatisfied performance obligations will be fulfilled in an 18- to 36-month period. The performance obligations in the Housewares/Small Appliances and Safety segments have original expected durations of less thanone year.



The Company’s principal sources of revenue are derived fromtwo 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.



(14) ADVERTISING: The Company's policy is to expense advertising as incurred and include it in selling and general expenses. Advertising expense was $226,000, $209,000 and $150,000 in2023, 2022, and2021, respectively.



(15) 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:





(16) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation in accordance with ASC718, Compensation — Stock Compensation. Under the fair value recognition provisions of ASC718, 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.



(17) 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. Valuation allowances are provided for deferred tax assets when it is considered more likely thannot that the Company willnot realize the benefit of such assets. Income tax contingencies are accounted for in accordance with FASB ASC740, 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. The Company evaluates its uncertain tax positions as new information becomes available.



(18) RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS: The Company assesses the impacts of adopting recently issued accounting standards by the Financial Accounting Standards Board on the Company's financial statements, and updates previous assessments, as necessary, from the Company's Quarterly Report on Form10-Q for the fiscal quarter ended* October 2, 2023.*

In* December 2023,the FASB issued ASU2023*-09 Income Taxes (Topic740*): Improvements to Income Tax Disclosures*, which requires disaggregated information about a company’s effective tax rate reconciliation and provision for income taxes, as well as information on income taxes paid. ASU2023-09 is effective for public business entities for annual periods beginning after* December 15, 2024.As this update relates to disclosures only, the Company doesnot* expect ASU2023-09 will have an impact on its consolidated results of operations and financial condition.

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B. INVENTORIES:

The amount of inventories valued on the LIFO basis was $29,627,000 and $32,994,000 as of* December 31, 2023and2022*, respectively, and consists of housewares/small appliance finished goods, as well as, certain Safety segment inventories as of* December 31, 2022*. Under LIFO, inventories are valued at approximately $9,477,000 and $9,249,000 below current cost determined on afirst-in,first-out (FIFO) basis at* December 31, 2023and2022*, respectively. During the years ended* December 31, 2023*,2022, and2021, $3,575,000, $2,180,000, and $0, respectively, of LIFO layers were 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:





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



Inventory for the Defense segment, certain products for the Safety segment, and raw materials and certain prepaid products of the Housewares/Small Appliance segment are valued under the FIFO method and total $160,793,000 and $119,114,000 at* December 31, 2023and2022*, respectively. At* December 31, 2023*, the FIFO total was comprised of $2,188,000 of finished goods, $144,684,000 of work in process, and $13,921,000 of raw material. At* December 31, 2022*, the FIFO total was comprised of $3,255,000 of finished goods, $105,564,000 of work in process, and $10,324,000 of raw material.

** **

C. ACCRUED LIABILITIES:** **

At* December 31, 2023*, accrued liabilities consisted of contract liabilities $13,666,000 (see Note A(13)), payroll $8,167,000, product liability $5,065,000, payroll taxes $330,000, environmental $900,000, and other $2,441,000. At* December 31, 2022*, accrued liabilities consisted of payroll $7,631,000, contract liabilities $5,660,000 (see Note A(13)), product liability $5,407,000, payroll taxes of $309,000, environmental $921,000, and other $1,640,000.** **



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, 2023*, the Company has authority from the Board of Directors to reacquire an additional 497,012 shares. During2023, 2022, and2021,569,510, and 292 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's401(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, 2010and the2017* Incentive Compensation Plan approved by shareholders on* May 16, 2017,which authorized 50,000 and 150,000 shares, respectively, to be available for grants. The2017* plan replaced the original2010 plan, and the shares remaining under the2010 plan areno 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.



During2023, 2022, and2021, the Company granted 1,487 shares,7,271 shares, and 9,238 shares of restricted stock, respectively, to 40 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 2024 through 2028, 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 $512,000, $476,000, and $469,000 in2023, 2022, and2021, respectively. As of* December 31, 2023*, there was approximately $1,132,000 of unrecognized compensation cost related to the restricted stock awards that is expected to be recognized over a weighted-average period of 3.1 years. There were 4,109,3,482, and 2,981 shares of restricted stock that vested during2023, 2022, and2021, respectively.



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





G.401(K) PLAN:** **

The Company sponsors a401(k) retirement plan that covers substantially all non-union employees. Historically, the Company matched up to 50% of thefirst 4% of salary contributed by employees to the plan. This matching contribution was made with common stock. Starting in2004, the Company began to match, in cash, an additional 50% of thefirst 4% 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 $1,292,000 in2023, $1,238,000 in2022, and $1,324,000 in2021. In addition, the Company made cash contributions of $936,000 in2023, $884,000 in2022, and $859,000 in2021 to the401(k) Plan. The Company also contributed $417,000, $427,000, and $465,000 to the401(k) retirement plan covering its union employees at the Amron Division of the AMTEC subsidiary during the years ended* December 31, 2023*,2022, and2021, respectively.



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H. INCOME TAXES:

The following table summarizes the provision for income taxes:



The effective rate of the provision for income taxes on earnings 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:





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:*



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 thannot that the benefit from certain state NOL and tax credit carryforwards willnot be realized. A significant factor of objective negative evidence evaluated was the cumulative losses incurred in the Safety segment over thethree-year period ended* December 31, 2023*. 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, 2023and2022,* valuation allowances of $954,000 and $1,960,000, respectively, have been provided on the deferred tax assets related to these state NOL and tax credit carryforwards, which will expire between2034 and2043. 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 isno 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 ASC740, Income Taxes. The following is a reconciliation of the Company’s unrecognized tax benefits for the years ended* December 31, 2023and2022*:





The ending net unrecognized tax benefits results from adjusting the gross balance for deferred tax items, interest and penalties, and deductible taxes. The net unrecognized tax benefits are included in Deferred Income Taxes and Federal and State Income Taxes - Non-current within the Consolidated Balance Sheet.

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, 2023,*2022 and2021, the Company accrued approximately $166,000, $169,000 and $169,000 in interest expense, respectively.



The Company is subject to U.S. federal income tax as well as income taxes of multiple states. Tax years2020 through 2022 are currently open for examination. 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 willnot have a material effect on the Company's consolidated financial position, liquidity, or results of operations.



J. CONCENTRATIONS:** **

In the Housewares/Small Appliance segment, there wasone customer that accounted for 11% of consolidated net sales for the year ended* December 31, 2023*. There wereno customer concentrations over 10% for the year ended* December 31, 2022*. There wasone customer that accounted for 10% of consolidated net sales for the year ended* December 31,*2021.



The Company sources most of its housewares/small appliances and certain safety products from vendors in the Orient and, as a result, risks deliveries from the Orient being disrupted by labor or supply problems at the vendors, or transportation delays. Should such problems or delays materialize, products mightnot be available in sufficient quantities during prime selling periods. The Company has made and will continue to make every reasonable effort to prevent these problems; however, there isno assurance that its efforts will be totally effective. As the majority of the Housewares/Small Appliance segment’s and certain Safety 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 the segment’s product costs. To date, any material impact from fluctuations in the exchange rate has been to the cost of products secured via purchase orders issued subsequent to the currency value change. Foreign transaction gains/losses are immaterial to the financial statements for all years presented.



The Company's Defense segment manufactures products primarily for the U.S. Department of Defense (DOD) and DOD prime contractors. As a consequence, this segment's future business essentially depends on the product needs and governmental funding of the DOD. During2023, 2022, and2021, substantially all of the work performed by this segment directly or indirectly for the DOD was performed on a fixed-price basis. Under fixed-price contracts, the price paid to the contractor is awarded based on competition or negotiation at the outset of the contract and therefore, with the exception of limited escalation provisions on specific materials, is generallynot subject to any adjustments reflecting the actual costs incurred by the contractor. In addition, in the case of the40mm systems contract, key components and services are provided bythird party subcontractors, several of which the segment is required to work with by government edict. Under the contract, the segment is responsible for the performance of those subcontractors, many of which it doesnot control. The Defense segment's contracts and subcontracts contain the customary provision permitting termination at any time for the convenience of the government, with payment for any work completed, associated profit, and inventory/work in process at the time of termination. Materials used in the Defense segment are available from multiple sources. As of* December 31, 2023*,191 employees of Amron, or 19% of the Company’s and its subsidiaries’ total workforce, are members of the United Steel Workers union. The most recent contract between Amron and the union is effective through* February 28, 2025.*



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K. ENVIRONMENTAL

In* May 1986,the Company’s Eau Claire, Wisconsin site was placed on the United States Environmental Protection Agency’s National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of1980* because of hazardous waste deposited on the property. As of* December 31, 1998,all remediation projects required at the Company's Eau Claire, Wisconsin site had been installed, were fully operational, and restoration activities had been completed. In addition, the Company is a member of a group of companies that mayhave disposed of waste into an Eau Claire area landfill in the1960s* and1970s. After the landfill was closed, elevated volatile organic compounds were discovered in the groundwater. Remediation plans were established, and the costs associated with remediation and monitoring at the landfill are split evenly between the group and the city of Eau Claire. As of* December 31, 2023*, there doesnot appear to be exposure related to this site that would have a material impact on the operations or financial condition of the Company.



Based on factors known as of* December 31, 2023*, it is believed that the Company's existing environmental accrued liability reserve will be adequate to satisfy on-going remediation operations and monitoring activities both on- and off-site; however, should environmental agencies require additional studies, extended monitoring, or remediation projects, it is possible that the existing accrual could be inadequate. Management believes that in the absence of any unforeseen future developments, known environmental matters willnot have any material effect on the results of operations or financial condition of the Company. The Company’s environmental accrued liability on an undiscounted basis was $900,000 and $921,000 as of* December 31, 2023and2022*, respectively, and is included in accrued liabilities on its balance sheet.



Expected future payments for environmental matters are as follows:





L. BUSINESS SEGMENTS:

The Company operates inthree business segments. The Company identifies its segments based on the Company's organization structure, which is primarily by principal products. The principal product groups are Housewares/Small Appliance, Defense, and Safety. Sales for all segments are primarily to customers in North America.



The Housewares/Small Appliance segment designs, markets, and distributes housewares and small appliances. The housewares/small appliance products are sold primarily in the United States and Canada directly to retail outlets and also through independent distributors. As more fully described in Note J, the Company primarily sources its Housewares/Small Appliance products from non-affiliated suppliers located in the Orient. Sales are seasonal, with the normal peak sales period occurring in thefourth quarter of the year prior to the holiday season.



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The Defense segment was started in2001 with the acquisition of AMTEC Corporation, which manufactures precision mechanical and electromechanical assemblies for the U.S. Government and prime contractors. During2005, and again during2010, AMTEC Corporation wasone oftwo prime contractors selected by the Army to supply all requirements for the40mm family of practice and tactical ammunition cartridges for a period offive years. In2016, AMTEC was awarded aone-year contract, and in2017 and2022, it was awardedthird andfourth five-year contracts, respectively as the sole prime contractor. AMTEC's manufacturing plant is located in Janesville, Wisconsin. Since the inception of the Defense segment in2001, the Company has expanded the segment by making several strategic business acquisitions, and has additional facilities located in East Camden, Arkansas; Antigo, Wisconsin; Clear Lake, South Dakota, and Marshall, Texas. During2003, the segment was expanded with the acquisition of Spectra Technologies, LLC of East Camden, Arkansas. This facility performs Load, Assemble, and Pack (LAP) operations on ordnance-related products for the U.S. Government and prime contractors. During2006, the segment was expanded again with the acquisition of certain assets of Amron, LLC of Antigo, Wisconsin, which primarily manufactures cartridge cases used in medium caliber (20-50mm) ammunition. In2011 the segment was further augmented with the purchase of certain assets of ALS Technologies, Inc. of Bull Shoals, Arkansas, which manufactured less lethal ammunitions. The Company subsequently relocated this operation to Perry, Florida, and in* Octoberof2018,* divested itself of the less lethal business. During2014, the Company continued the expansion of the Defense segment with the purchase of substantially all of the assets of Chemring Energetic Devices, Inc. located in Clear Lake, South Dakota, and all of the real property owned by Technical Ordnance Realty, LLC. The Clear Lake facility manufactures detonators, booster pellets, release cartridges, lead azide, and other military energetic devices and materials. During2022, the Company again expanded the Defense segment by acquiring the equity interests of Woodlawn Manufacturing, Ltd. Woodlawn Manufacturing, Ltd, is a high volume manufacturer of precision metal parts and assemblies primarily for the defense and aerospace industry. See Note P. The Defense segment’s collection of facilities enables the Company to deliver in virtually all aspects of the manufacture of medium caliber training and tactical rounds. Those aspects include the fuze, the detonator, the metal parts (including the cartridge case), and load, assemble and pack of the final round.



The Safety segment was started in2019 with the acquisition of OneEvent Technologies, Inc., which focuses on protection for buildings, homes, assets, and occupants. The company is located in Mount Horeb, Wisconsin and was established in2014. OneEvent's cloud-based learning and analytics engine utilizes a series of sensing devices integrated with a cellular gateway to predict, alert, and prevent. Sensors measure a variety of environmental data including temperature, smoke, carbon monoxide, motion, humidity, water, and more. On purchase, it was combined with Rusoh, Inc. which designed and marketed fire extinguishers. Previous to2019, Rusoh Inc. had been in included in the Company’s Housewares/Small Appliance segment. The Company divested of Rusoh, Inc. on* November 14, 2023,and recognized proceeds of $2,000,000 and a gain on sale before taxes of $351,000. On July 29, 2022,certain assets were purchased and certain liabilities were assumed of Knox Safety, Inc., a company formed in2019* with operations in Illinois and North Carolina. Knox Safety is a startup company that designs and sells carbon monoxide detectors for residential use. Subsequent to the acquisition, the company legally adopted the corporate name Rely Innovations, Inc. See Note P.

In the above summary, operating profit represents earnings before other income, income taxes. The Company's segments operate discretely from each other withno shared owned or leased manufacturing facilities. Costs associated with corporate activities (such as cash and marketable securities management) and the assets associated with such activities are included within the Housewares/Small Appliance segment for all periods presented.



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M. LEASES

The Company accounts for leases under ASCTopic842,* Leases*. The Company’s leasing activities include roles as both lessee and lessor. As lessee, the Company’s primary leasing activities include buildings and structures to support its manufacturing operations atone location in its Defense segment, warehouse space and equipment to support its distribution center operations in its Housewares/Small Appliances segment, and office space to support its Safety segment's operations. As lessor, the Company’s primary leasing activity is comprised of manufacturing and office space located adjacent to its corporate offices. All of the Company’s leases are classified as operating leases.



The Company’s leases as lessee in its Defense segment provide for variable lease payments that are based on changes in the Consumer Price Index. As lessor, the Company’s primary lease also provides for variable lease payments that are also based on changes in the Consumer Price Index, as well as on increases in costs of insurance, real estate taxes, and utilities related to the leased space. Generally, all of the Company’s lease contracts provide for options to extend and terminate them. The majority of lease terms of the Company’s lease contracts recognized on the balance sheet reflect extension options, whilenone reflect early termination options.



The Company has determined that the incremental borrowing rates implicit in its leases arenot readily determinable and estimates those rates utilizing quotes from financial institutions for real estate and equipment, as applicable, over periods of time similar to the terms of its leases. The Company has entered into various short-term leases as lessee and has elected a non-recognition accounting policy, as permitted by ASCTopic842**.





Rent expense was approximately $1,348,000, $1,129,000, and $1,076,000 for the years ended* December 31, 2023*,2022, and2021, respectively. Operating cash used for operating leases was $1,421,000, $1,248,000, and $1,190,000 for the years ended* December 31, 2023*,2022, and2021, respectively. The weighted-average remaining lease term was 19.5 years, and the weighted-average discount rate was 4.8% as of* December 31, 2023*.

Maturities of operating lease liabilities are as follows:



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Lease income from operating lease payments was $2,281,000, $2,195,000, $1,971,000 for the years ended* December 31, 2023*,2022, and2021, respectively and is included in Other income on the Consolidated Statements of Comprehensive Income. Undiscounted cash flows provided by lease payments are expected as follows:





The Company considers risk associated with the residual value of its leased real property to be low, given the nature of the long-term lease agreement, the Company’s ability to control the maintenance of the property, and the creditworthiness of the lessee. The residual value risk is further mitigated by the long-lived nature of the property, and the propensity of such assets to hold their value or, in some cases, appreciate in value.



N. INTERIM FINANCIAL INFORMATION (UNAUDITED):



The following represents quarterly unaudited financial information for2023 and2022:





Fourth quarter sales are impacted by the holiday driven seasonality of the Housewares/Small Appliance segment. This segment typically orders/purchases inventory during thefirst three quarters to meet the sales demand of thefourth quarter. The Defense and Safety segments are typically non-seasonal.



O. LINE OF CREDIT AND COMMERCIAL LETTERS OF CREDIT

The Company maintained an unsecured line of credit for short term operating cash needs of $5,000,000 as of* December 31, 2023* and2022. There wereno amounts outstanding under this line of credit as of* December 31, 2023and2022*, which expires* September 30, 2024.The interest rate on the line of credit is reset monthly to the30*-day Secured Overnight Financing Rate (SOFR) plusone half ofone percent. In addition, the Company didnot issue commercial letters of credit as of* December 31, 2023and2022*.



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P. BUSINESS ACQUISITIONS

On* July 29, 2022,the Company’s wholly owned subsidiary, UESCO, Inc., purchased with cash on hand of $3,125,000 certain assets and assumed certain liabilities of Knox Safety, Inc., a company formed in2019* with operations in Illinois and North Carolina. In addition, upon closing the Company paid a deposit of $500,000 and, subsequently in thefirst fiscal quarter of2023, an additional deposit of $1,000,000 to a vendor that had previously been a supplier of Knox Safety. Knox Safety is a startup company that designs and sells carbon monoxide detectors for residential use, the acquisition of which should complement the product lines currently offered by the Company’s Safety segment. Subsequent to the acquisition of Knox Safety, UESCO legally adopted the corporate name Rely Innovations, Inc.

The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition was recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The following table shows the amounts recorded as of their acquisition date.





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The acquired intangibles primarily included trademarks and safety certifications that will be amortized over a period oftwo years. Due to its startup nature and history of operating losses, the acquisition of Knox Safety resulted in a bargain purchase gain of $492,000, which was included with Selling and general expenses in the Consolidated Statements of Comprehensive Income. There wasno material tax impact from the acquisition on the Company’s Consolidated Financial Statements. The Company’s results of operations for2022 included revenue of $265,000 and loss of ($1,546,000) from the acquired facility from the date of acquisition through* December 31, 2022.*

On* October 26, 2022,*the Company’s wholly owned subsidiary, National Defense Corporation, and newly formed subsidiary Woodlawn Manufacturing, LLC, acquired with cash on hand of $21,558,000 the equity interests of Woodlawn Manufacturing, Ltd. Woodlawn Manufacturing, Ltd, is a high volume manufacturer of precision metal parts and assemblies primarily for the defense and aerospace industry.

The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition was recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The following table shows the amounts recorded as of their acquisition date. During the quarter ended* April 2, 2023,$860,000 of additional deferred tax liabilities were identified that would have existed as of the date of acquisition. Accordingly, both Goodwill and Deferred tax liability balances were increased during that quarter. Additionally, the Company reclassed land assets to land improvement assets during2023.* The reclass hadno net effect on property, plant, and equipment. The table below reflects those adjustments.

The acquired intangible assets primarily include customer contracts and will be amortized over a period offour years. The amount of goodwill recorded reflects expected earning potential and synergies with other operations in the Defense segment. The recorded goodwill isnot deductible for income tax purposes. The Company’s results of operations for2022 included revenue of $3,219,000 and net earnings of $101,000 from the acquired facility from the date of acquisition through* December 31, 2022.*

The following pro forma condensed consolidated results of operations has been prepared as if the acquisitions had occurred as of* January 1, 2021.*

The unaudited pro forma financial information presented above isnot intended to represent or be indicative of what would have occurred if the transactions had taken place on the dates presented and isnot indicative of what the Company’s actual results of operations would have been had the acquisition been completed at the beginning of the periods indicated above. The pro forma combined results reflectone-time costs to fully merge and operate the combined organization more efficiently, but donot reflect anticipated synergies expected to result from the combination and shouldnot be relied upon as being indicative of the future results that the Company will experience.

Q. OTHER

The Company had entered into a licensing agreement with another firm that holds intellectual property in the Rusoh® self-service/self-reloadable fire extinguisher. Under the agreement, the Company had advanced the entity funds and agreed to pay royalties to the entity on the commercial sales of the developed products. The fire extinguisher was introduced to the commercial market in2017 and the retail market in2021, and experienced several obstacles in both markets. As the promisor's ability to pay had been hindered by lack of royalties earned and projected to be earned under the agreement, repayment of the notes was doubtful. Accordingly, at* December 31, 2021,the Company fully reserved both the notes and accrued interest receivable. Notes receivable plus accrued interest of $7,615,000 related to the license agreement were previously classified as non-current Notes Receivable on the Company’s Consolidated Balance Sheets. The charge related to the impairment was included in the Selling and general expenses on the Consolidated Statements of Comprehensive Income for the year ended December 31, 2021.The Company terminated its agreement with the other firm on November 14, 2023,*upon the sale of Rusoh, Inc. to the firm. (See Note L.)



R. SUBSEQUENT EVENTS

The Company evaluates events that occur through the filing date and discloses any material events or transactions.



On* February 16, 2024,the Company’s Board of Directors announced a regular dividend of $1.00 per share, plus an extra dividend of $3.50. On March 15, 2024,a payment of $32,029,000 was made to stockholders of record as of March 1, 2024.*



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