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 2021 Annual Report to Stockholders, in the Proxy Statement for the annual meeting, 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; reliance on third-party suppliers in Asia; 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.





COVID-19 Disclosure

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

For historical information about the impact of the government responses to COVID-19, please see "Item 1A. Risk Factors" titled "The COVID-19 or Other Pandemics, Epidemics or Similar Public Health Crises Risks" included in the Company's Annual Report on Form 10-K for year ended December 31, 2021.

Comparison of Third Quarter 2022 and 2021

Readers are directed to Note E to the Consolidated Financial Statements, "Business Segments," for data on the financial results of the Company's three business segments for the quarters ended October 2, 2022 and October 3, 2021.

On a consolidated basis, net sales decreased by $17,542,000 (20%), gross profit increased by $5,832,000 (52%), selling and general expenses decreased by $55,000 (1%), and amortization increased 24,000 (44%). Other income increased by $440,000 (68%), earnings before provision for income taxes increased by $6,303,000 (119%), and net earnings increased by $4,798,000 (116%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $612,000 from $27,732,000 to $27,120,000, or 2%, primarily attributable to a decrease in unit shipments, approximately 92% of which was offset by an increase in pricing and changes in mix. Defense net sales decreased by $16,991,000 from $59,338,000 to $42,347,000, or 29%, primarily reflecting a decrease in shipments.

Housewares/Small Appliance gross profit increased $11,967,000 from a loss of ($3,180,000) to a profit of $8,787,000, primarily reflecting the changes in pricing and mix mentioned above, augmented by decreased ocean cargo and inland freight costs, partially offset by the decrease in unit shipments. Defense gross profit decreased $5,774,000 from $14,620,000 to $8,846,000, primarily reflecting the decrease in sales mentioned above, a less favorable mix of products, and reduced efficiencies stemming largely from labor shortages and other supply chain issues. 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 $393,000, reflecting lower accruals for self insurance of $513,000, offset in largest part by legal and professional costs of $63,000, with the balance of the change primarily attributable to increases in employee compensation. Selling and general expenses for the Defense segment were relatively flat. Selling and general expenses for the Safety segment increased $281,000, primarily reflecting increased legal and professional costs of $515,000, largely offset by the bargain purchase gain recognized upon the acquisition of Knox Safety, Inc. of $492,000. (See Note L to the Consolidated Financial Statements.) The balance of the increase was primarily due to an increase in employee compensation and benefits.

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

Earnings before provision for income taxes increased $6,303,000 from $5,280,000 to $11,583,000. The provision for income taxes increased from $1,151,000 to $2,656,000, which resulted in an effective income tax rate of 23% and 22%, for the quarters ended October 2, 2022 and October 3, 2021, respectively. Net earnings increased $4,798,000 from $4,129,000 to $8,927,000, or 116%.


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Comparison of First Nine Months 2022 and 2021

Readers are directed to Note E to the Consolidated Financial Statements, "Business Segments," for data on the financial results of the Company's three business segments for the first nine months ended October 2, 2022 and October 3, 2021.

On a consolidated basis, net sales decreased by $47,795,000 (19%), gross profit decreased by $5,455,000 (12%), selling and general expenses and intangibles amortization were flat. Other income increased by $619,000 (32%), while earnings before provision for income taxes decreased by $4,845,000 (17%), and net earnings decreased by $3,888,000 (17%). Details concerning these changes can be found in the comments by segment below.

Housewares/Small Appliance net sales decreased by $5,170,000 from $77,437,000 to $72,267,000, or 7%, primarily attributable to a decrease in units shipped, approximately 78% of which was offset by an increase in pricing and changes in mix. Defense net sales decreased by $42,764,000 from $177,592,000 to $134,828,000, or 24%, primarily reflecting a decrease in shipments.

Housewares/Small Appliance gross profit increased $11,109,000 from $2,911,000 to $14,020,000, primarily reflecting the changes in pricing and mix mentioned above, augmented by lower ocean cargo and inland freight costs, partially offset by the decrease in unit shipments. Defense gross profit decreased $16,190,000 from $45,131,000 to $28,941,000, primarily reflecting the decrease in sales mentioned above, a less favorable mix of products, and reduced efficiencies stemming largely from labor shortages and other supply chain issues. 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 $951,000, primarily reflecting lower accruals for self-insurance of $1,794,000, partially offset by an increase in legal and professional costs of $685,000 and an increase in employee compensation of $116,000. Selling and general expenses for the Defense segment increased $365,000, primarily reflecting increased marketing and personnel costs of $127,000 and $141,000, respectively, as well as increased legal and professional costs of $31,000, with the remaining increased balance mainly attributable to computers and software expense. Selling and general expenses for the Safety segment increased $571,000, primarily reflecting increased legal and professional costs of $700,000, increased employee compensation costs of $92,000, and higher marketing and insurance costs of $132,000 and $94,000, respectively. These were partially offset by the bargain purchase gain recognized upon the acquisition of Knox Safety, Inc. of $492,000. (See Note L to the Consolidated Financial Statements.)

Earnings before provision for income taxes decreased $4,845,000 from $28,818,000 to $23,973,000. The provision for income taxes decreased from $6,404,000 to $5,447,000, which resulted in an effective income tax rate of 23% and 22%, for the first nine months ended October 2, 2022 and October 3, 2021, respectively. Net earnings decreased $3,888,000 from $22,414,000 to $18,526,000, or 17%.

Liquidity and Capital Resources

Net cash used in operating activities was $3,280,000 during the first nine months of 2022 as compared to $14,569,000 provided by operating activities during the first nine months of 2021. The principal factors contributing to the change can be found in the changes in the components of working capital within the Consolidated Statements of Cash Flows. Of particular note during the first nine months of 2022 were net earnings of $18,526,000, which included non-cash depreciation and amortization expenses of $2,160,000. Contributing to the cash used were increased inventory levels and a net decrease in payable and accrual levels, partially offset by a decrease in accounts receivable levels stemming from cash collections on customer sales. Of particular note during the first nine months of 2021 were net earnings of $22,414,000, which included non-cash depreciation and amortization expenses of $2,228,000. Also contributing to the cash provided was a decrease in accounts receivable levels stemming from cash collections on customer sales and a net increase in payable and accrual levels, partially offset by increased inventory levels and a net increase in deposits made to vendors included in other assets and current assets.

Net cash used in investing activities was $13,314,000 during the first nine months of 2022 as compared to $33,950,000 provided by investing activities during the first nine months of 2021. Significant factors contributing to the change were net purchases of marketable securities in 2022 of $9,743,000, in contrast with maturities and sales of marketable securities in 2021 of $35,533,000. Also contributing to the change in cash were a payment to acquire Knox Safety, Inc. of $3,125,000 (see Note L to the Consolidated Financial Statements) and a decrease in the purchase of property, plant, and equipment in 2022 of $1,947,000.

Net cash used in financing activities was $31,427,000 and $43,542,000, for the first nine months of 2022 and 2021, respectively, and primarily relates to the annual dividend payments. The extra dividend decreased from $5.25 per share in 2021 to $3.50 per share in 2022. Cash flows for both nine-month periods also reflected the proceeds from the sale of treasury stock to a Company sponsored retirement plan.

Working capital decreased by $9,879,000 during the first nine months of 2022 to $285,015,000 at October 2, 2022 for the reasons stated above. The Company's current ratio was 6.5 to 1.0 at both October 2, 2022 and December 31, 2021.

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

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 in Item 3 of Part I of this quarterly report on Form 10-Q and in fixed rate municipal notes and bonds. The Company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings.





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Critical Accounting Estimates

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

The Company's critical accounting policies are those that materially affect its Consolidated Financial Statements and involve difficult, subjective, or complex judgments by management. The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company's reported results as they involve the use of significant estimates and assumptions as described above. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors. See Note A - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of the Annual Report on Form 10-K for the year-ended December 31, 2021 filed on March 11, 2022 for more detailed information regarding the Company's critical accounting policies.

Inventories

New Housewares/Small Appliance product introductions are an important part of the Company's sales. The introductions are important to offset the morbidity rate of other products. New products entail unusual risks and have occasionally, in the past, resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product. In addition, due to fire safety regulations, commercial extinguishers have a limited shelf life, which is based on the date of production. 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 and 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.

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 intellectual property. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, the amounts of the cash flows and the asset's residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. The Company uses internal discounted cash flows estimates, quoted market prices when available, and independent appraisals, as appropriate, to determine fair value. The Company derives the required cash flow estimates from its historical experience and its internal business plans.

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

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