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New York Society of Security Analysts Committee On Corporate Governance and Shareholder Rights
 

 

 

FORUM
Discussion Papers Regarding National Presto Industries, Inc.

 

 

 

July 1999

NYSSA is proud to provide a forum for analysis and debate on issues relating to corporate governance and shareholder rights. The matters stated by participants do not necessarily represent a consensus of beliefs, and they do not constitute statements by NYSSA.

NYSSA makes no representation concerning the accuracy, completeness or timeliness of information conveyed by speakers in meetings or by authors in written communications. The speakers and authors are solely responsible for the content of their presentations.

Meaningful discourse often involves discussion among persons who flatly disagree with each other. NYSSA believes it can accomplish more by providing a forum receptive to divergent views than by endorsing one side of an issue. NYSSA urges all listeners and readers to participate actively in the analysis and debate, to question the correctness of statements that are made, and to reach their own independent conclusions.


Table of Contents

History and Purpose
James F. Reda
Analyses
Vahan Janjigian
Gina H. Sockolow
John Tully
Mark S. Nurse
Management’s Response
Maryjo Cohen, President

NYSSA Work Group Participants

Peter F. Brennan, Chair
Barbara M. Eden
Vahan Janjigian
Gary Lutin
Mark Nurse
Gina H. Sockolow
James F. Reda
John Tully
 


History and Purpose of the NYSSA Demonstration Project

By James F. Reda

Over the past five months members of the New York Society of Security Analysts ("NYSSA") have been working on a special project examining how potential changes in a publicly traded company's corporate governance practices might increase shareholder value.

The primary purpose of the project is to educate NYSSA members in the effects of governance practices on publicly traded companies, analyzing the impact of potential changes on firm value. Our intention was that this project would provide a real world, practical application of corporate governance principles for the training of NYSSA's analyst membership.

The project was administered under the auspices of the Corporate Governance and Shareholder Rights Committee (the "Committee"), which is one of many standing committees of the NYSSA.

What We Are Doing?

We want to analyze corporate governance issues on a similar level as corporate finance issues in the decision to buy, hold, or sell a stock. Our purpose is to provide analysts and investment managers with the tools to evaluate this type of investment situation.

A summary of the process to evaluate a stock is as follows:

a) Assess the potential value of change in use of corporate assets.

b) Assess the likelihood that the board of directors can be expected to implement the changes.

c) In the absence of board action, assess the likelihood that shareholders have the practical ability to exercise their rights to replace directors or take other appropriate actions. Or, in the absence of real rights, should a shareholder just sell the stock?

How We Got Here

Under the new leadership of Peter Brennan as chairman of the Committee in the Spring of 1998, with John McCabe as vice-chairman (the past Committee chairman and current president of the NYSSA), the Committee quickly attracted interested members who were committed to provide a forum for corporate governance and shareholder rights issues.

The Committee determined that its focus should be on how corporate governance issues relate to shareholder value, reflecting the NYSSA membership's professional investment perspective. The Committee discussed the issue of corporate governance with various investment professionals, corporate officers, and consultants such as Institutional Shareholder Services (advisors in matters of proxy voting and corporate governance to institutional shareholders), who confirmed our belief that there was a need to go beyond the academic and legal theories of "good corporate governance."

Among other things, the Committee evaluated various formats to present the measurable effects of corporate governance principles and practices on the value of a stock, such as case studies, speakers, panel discussions, and conferences. The case study approach was selected by the Committee because it would best allow the Committee to show the NYSSA membership the value of good corporate governance principles as it would involve using practical methods with an existing company – not just a hypothetical, academic exercise.

These Committee discussions led to a meeting with Gary Lutin, whose background is in investment banking and the management of controlling shareholder interests. Mr. Lutin expressed considerable interest in our plans for a small work study group to conduct a "real life" case for the purpose of assessing the relevance of potential corporate governance changes to the ultimate object of value enhancement, and agreed to be an advisor of the project.

Why National Presto Industries?

For its test case, the Committee decided to draw up a list of companies with a combination of two conditions: first, a controversy concerning the management of shareholder assets, and, second, the existence of relevant corporate governance issues. The Committee considered 20 to 30 companies, eventually reducing it to a short list of a few companies based on published reports of corporate governance issues and potential value enhancement opportunities associated with proposed changes in uses of assets.

We finally selected National Presto Industries (the "Company"), based on a variety of considerations which included the following:

  • Approximately 93 percent of 1997 stockholders equity, and 80 percent of the Company's total assets, were in cash or cash-equivalents.
  • The Company had been maintaining similar levels of cash without growing its operating business for over a decade.
  • The Chairman and President of the Company are a father and daughter who control approximately 29% of the stock, including approximately 23% held in a voting trust for family members.
  • The Company had enacted several entrenchment provisions, including supermajority voting requirements, a staggered board and a poison pill.
  • The six member board included three Company officers and, according to the 1998 proxy statement, met only twice during the past year.
  • More than half of senior executives’ total compensation, which was generally below industry norms, consisted of "discretionary" bonuses based entirely on subjective judgment, without any formulas, defined performance criteria, or ties to shareholder value.
  • Although the Company was small and not covered by any major analysts, it was familiar to many investors because of its position in an S&P index and some 1998 news coverage.
  • There was a wide range of differing views among investors concerning the Company’s management policies and prospects.
  • Management had demonstrated a willingness to vigorously express its views regarding corporate governance issues in response to past investor inquiries and attempts by shareholders to effect change.

This author was professionally interested in the selection criteria concerning director qualifications and executive compensation. A more detailed review of these issues follows:

Outside Director Issues: The three outside directors currently receive $1,000 for each Board and $275 for each Audit Committee meeting attended. Under this fee schedule, the maximum amount earned by a director would be $2,550. This amount is well below competitive practice of approximately $15,000 per year, for companies of comparable size. This could be an inhibitor to attracting qualified, seasoned board members.

There is no indication from the proxy statement of stock-based director compensation. The 1998 proxy showed that the two continuing outside directors, Messrs. Sirianni, and O’Meara owned only 500 and 100 shares, respectively.

The 1998 proxy statement’s listing of director credentials and relationships, summarized in the accompanying chart, suggested a lack of independence. As noted above, three of the six members of the board are Company executives. Of the “outside” directors, Mr. Sirianni is a manager of the local brokerage office of Piper Jaffray, from which the Company buys and sells marketable securities. Mr. O'Meara is President of a community bank in Eau Claire, Wisconsin, where the Company is headquartered. A new outside director, Professor Cardozo, appears to have no financial or familial ties to the Company. However, Professor Cardozo told Mr. Lutin that he expected the Company to be considering some form of relationship involving his programs for marketing and product development.

The board does not have a compensation committee. Rather, each member of the board, including the three inside directors, signs the compensation committee report.

Executive Officer Issues: The overall compensation levels are relatively low in relation to companies of similar size. And, as noted above, more than half of that compensation is made up of a discretionary bonus based entirely on the subjective judgment of the management team. This type of compensation format is unusual and may be unappealing to professional senior executives.

Highlights of the Compensation Committee Report presented in the Company’s 1999 proxy statement are as follows:

  • The Company has not relied on stock incentives as a principal part of its compensation program for its executives. The rationale for this policy, according to the Company, is that Mr. Cohen, Ms. Cohen, and Mr. Bartl already own substantial amounts of company stock in relation to their compensation levels.
  • The Company does not employ an outside compensation consultant.
  • Annual bonuses are not based on upon a percentage or other formula utilizing revenues, income or other financial data as predicates.
  • The Company has maintained salary levels below competitive levels.
  • The Company has used the same compensation philosophy approach for more than 25 years and is not considering changing the philosophy.
  • The defined benefit pension plan results in a maximum annual benefit of only $30,000 per year.
  • There are no employment agreements.

The net result of this compensation program is that National Presto could have difficulty in attracting senior executive talent. Reliance on a discretionary annual bonus for most of their compensation places the executives in a very difficult position. There is apparently no objective measure tied directly to shareholder value to measure executive’s performance. This de-linking of shareholder value and executive compensation is exacerbated by a lack of stock-based long-term incentive program.

 

The Forum

The Committee assembled a Working Group for this demonstration case study consisting of a mixture of NYSSA members intended to represent a range of expertise and perspectives. Task assignments for the information gathering and research phase of the project were as follows:


Work Group Member Responsibility/Assignment

Barbara Eden Technical analysis, coordination of analytical and presentation methodology
   
Vahan Janjigian General description of company
   
Mark S. Nurse Index comparisons, peer group and benchmark definition, minimum and average standards for asset utilization
   
James F. Reda Director and officer qualifications, resource requirements, and performance measurement
   
Gina Sockolow Fundamental analysis, evaluation of action alternatives, coordination of communications with subject company
   
John Tully Investor perceptions of alternatives, coordination of communications with investors

The Participation of the Company

National Presto was invited to participate in the project prior to the first meeting of the work group in January 1999. Maryjo Cohen, the Company's President and CEO, declined. As the project progressed the Company declined to attend work group meetings, to respond to work group questions, or to present management views at an NYSSA luncheon. We nevertheless assured the Company that we would provide it with an opportunity to comment on the analyses prepared by work group members, and that we would include any Company response with the final forum papers.

According to the project's original 90-day research schedule, drafts of the work group members' analyses were submitted to the Company for review at the end of April 1999. Ms. Cohen urged our deferral of the discussion papers until after the company's annual shareholders' meeting, which had by then been scheduled for May 19th, stating that our work group's analyses were "replete with factual errors and dubious conclusions" which the Company needed time to identify. After several letters from Ms. Cohen, we agreed to her requested one-month deferral. Ms. Cohen submitted her promised response on June 22, 1999.

Analyses of Work Group Members

The analyses prepared by the work group members presented similar views concerning the Company's use of shareholder assets. In summary, the analyses indicate that value could be enhanced by changing from the past decade's practice of investing most of the assets in short-term municipal notes.

The accompanying discussion papers by the work group members were prepared in April 1999. Some of the authors have added footnote references to the Company's June 1999 comments.

Monitoring Future Developments

The original project plan provided for continuing monitoring of the Company to learn what happens.

The only significant development at the time of this writing was the voting on dissident shareholder proposals at the Company's May 19, 1999 annual meeting. The results confirmed the expectations stated in Mr. Tully's report, that shareholder votes were not likely to force change because of the significant holdings of the Cohen family and the supermajority requirements for passage of key measures. But the results did show significant shareholder support for change:

% votes cast FOR: NPK Total NPK excl Mgmt 1998 IRRC Avg*
       
Sale of company 6.49% 9.95% 10.3%
Independent directors 30.25% 46.38% 23.8%
Declassified board 36.89% 56.48% 47.3%
       
* 1998 average of companies monitored by the Investor Responsibility Research Center

******************************************************************************

Regarding the possibility of the SEC requiring the Company's compliance with the Investment Company Act, based on our understanding of SEC procedures as discussed at work group meetings, we should not expect the SEC to disclose the status of any inquiries unless it takes formal action.

List of Directors - National Presto Industries, Inc.


Director Age Principal Occupation Director Since Director’s Term to Expire Shares Beneficially Owned Comments

John M. Sirianni 39 Managing Director, Piper Jaffray Inc. 1992 2001 500 Son of person who was previously on the Board. Assists firm in management of investments.
Richard N. Cardozo 62 Curtis L. Carlson Chair in Entrepreneurial Studies, University of Minnesota 1998 2001 Not available at time of 1998 proxy statement. Professor of Management for at least 10 years. On two other boards.
James F. Bartl 57 Secretary and Resident Counsel of the Company 1995 1999 15,420 shares1 Corporate Secretary since 1978.
Michael J. O'Mera 47 Chairman of the Board, People's National Bank, Eau Claire Wisconsin 1996 1999 100 Local Banker.
Melvin S. Cohen 80 Chairman 1949 2000 442,856 (6%) Mr. Cohen joined the Company in 1944.
Maryjo Cohen 45 President, CEO and CFO2 1998 2000 2,005,40003 Daughter of Chairman. Full-time employee since 1976, officer since 1983, and President since 1994.

  1. Does not include 42,042 shares held by pension and retirement trusts of the Company or affiliates that Mr. Bartl, Mr. Cohen and Ms. Cohen share voting and investment powers.
  2. According to the 1998 proxy statement, Mr. Cohen assumed the added responsibilities of Chief Executive Officer and Chief Financial Officer.
  3. Includes 1,669,664 shares that Ms. Cohen has voting rights.

Description and Summary
Prepared by Vahan Janjigian

(Note—Footnotes are in response to management’s comments.)

National Presto (NPK) manufactures and markets various appliances and accessories commonly used in the kitchen. Some of the company’s more popular products include pressure cookers, fry pans, griddles, slicers and shredders, toasters, electric knives and sharpeners, coffeemakers and popcorn poppers.(1) The company segments sales into three major product lines: cast products, noncast/thermal appliances and motorized nonthermal appliances. These product lines accounted for 59%, 25% and 13%, respectively, of 1998 sales. Although most of the company’s products are manufactured at its plants in Mississippi and New Mexico, approximately 14% of 1998 sales were generated from products imported from independent firms in the Pacific Rim.

The company has a sales force of ten employees, yet it also relies on independent distributors. NPK’s biggest customer is Wal-Mart, which accounted for 44% of 1998 revenues. This figure has risen steadily during recent years. NPK’s increasing dependence on Wal-Mart is worrisome. This development is largely due to the loss of business from other customers: For example, Caldor and Service Merchandise have suffered serious financial difficulties.(2) And Kmart halted purchases in 1993 following a dispute over terms and conditions that affected its net cost.(3)

During 1998, NPK experienced a 2.3% decrease in net sales, yet its gross margin increased from 32.4% to 33.8%. Management attributes the rise in the gross margin to improved operating efficiencies and cost reductions. Indeed, the widely reported economic problems in Asia resulted in a reduction in the cost of the company’s imported products. And the failure to introduce new products has minimized the company’s development expenses.(4)

The operating profit margin rose by an even more impressive amount from 11.1% to 17.1%. This was primarily due to a significant reduction in advertising expenditures from $13 million in 1997 to less than $7 million in 1998.(5) In fact, NPK has embarked on a new advertising strategy that deemphasizes network television.(6) Although the new strategy is less expensive, it is not yet clear if it will be more effective. The 1998 sales decline may have been one unintended consequence.(7)

In order to boost sales significantly in the long run, NPK needs to develop and market new products. Recent product introductions involved only marginal improvements to existing designs rather than new inventions. Management has alluded to the existence of new products in the pipeline, but claims to be awaiting the results of significant patent applications. Management’s apparent frustration in this arena has prompted it to announce plans to “overtly seek products conceived by outside inventors,” who will be identified through print advertisements and networking activities.(8) Yet management recognizes the uncertainty of this “inventor relations” program. It tries to restrain expectations in the 1998 annual report by citing Minnesota Mining and Manufacturing as an example of a company that has yet to benefit from a similar program.(9)

Finally, and most importantly, NPK’s working capital management policy can be described as excessively conservative. The company’s most recent balance sheet shows $241 million in cash, cash equivalents and marketable securities, which comes out to about $32 per outstanding share of common stock. This is more than 92% of shareholders’ equity and more than 81% of total assets. These excess funds are invested primarily in investment grade, tax-exempt securities. During 1998, NPK reported more than $9 million of “other income,” most of which was interest earned from these investments. Yet this income is then distributed to shareholders in the form of taxable dividends. Thus, in effect, NPK stockholders incur a tax liability on otherwise tax-exempt income. NPK’s need for such an excessive degree of liquidity is highly questionable. Management’s inability to make better use of shareholder funds is the most likely explanation for the company’s depressed stock market valuation.

  1. These and other products are listed on page 3 of the company’s 1998 Form 10-K.
  2. Indeed, Caldor is currently being liquidated.
  3. As reported by Dow Jones News Service, Nov. 9, 1993. Management claims Kmart subsequently resumed purchasing.
  4. Management disputes this assessment and claims that “the absence of new products stimulates even greater efforts to develop them.” Management also says, “Development costs precede the marketing of a product, and do not appear simultaneously therewith.” Yet on page 4 of the 1998 Form 10-K it is stated that, for each of the past three years, research and development expenses “were not a material element in the aggregate costs incurred by the Company.”
  5. See pages 9 and F-7 in 1998 Form 10-K.
  6. The shift from network television to cable is discussed on Page 7 of the company’s 1998 Annual Report.
  7. We note, however, that NPK did report an increase in revenues for the first quarter of fiscal 1999.
  8. See pages 3 and 4 of 1998 Annual Report.
  9. See page 6 of 1998 Annual Report.

NPK Achieving Industry Standards
By Gina H. Sockolow

National Presto is facing the following financial challenges to at least be in line with the industry:

  • Improving sales growth, in line with the industry;
  • Improving operating profitability; and
  • Improving return on equity.

We believe that National Presto can improve its return on equity by improving specific non-operating business operations. The process of improving sales growth and lowering operating costs, to at least be in line with those of the industry, are functions of corporate management expertise.

Improving the return on non-operating assets is a function of more effectively deploying existing non-industry specific resources, such as non-operating income (see Table below). We believe that this could be accomplished by taking the following steps:

  • Investing the cash reserves, about $241 million in 1998, in a suitable low risk, low growth business operation instead of investing in a changing portfolio of municipal bonds;
  • Given NPK’s high asset turnover investment pattern, achieving a rate of return on reserves of 10%, from 4%, could be expected to increase pre-tax income by 55% and would reduce a non-operating business expense, transaction costs; and
  • Allowing for a higher effective tax rate on the pre-tax income, due to the lower tax rate on income generated by investing in municipal bonds compared to a business operation, the after-tax income would increase 33%, to $26 million.

The result of NPK deploying reserves at a higher rate, with lower transaction costs and without increasing the investment risk, would have the following benefits, given the 1998 data:

  • Increase NPK’s EPS by 33%, to $3.56 per share from $2.68 per share; and
  • Raise NPK’s return on equity to 10.3% from 7.8%.

National Presto Corp.: Achieving Industry Standards
Fiscal Year ending Dec. 1998
(In thousands except per share and percent data)

 

  Actual Projected % Change Notes and Calculations
Operating Profit 18,319 18,319 0.0%  
         
Income generated from $241 mil. of Reserves 9,077 24,123 165.8% Projection assumes investment in a suitable low risk, low growth business operation
         
Rate of Return on Reserves 3.8% 10.0% 165.8%  
         
Pre-tax Income 27,396 42,442 54.9%  
         
Income Taxes 7,663 16,213 111.6%  
         
Effective Tax Rate 28.0% 38.2% 36.6%  
         
After Tax Income 19,733 26,229 32.9%  
         
EPS $2.68 $3.56 32.9% Shares outstanding of 7,358
         
Return on Equity 7.8% 10.3% 32.9% Stockholders equity of 254,405

Analysis of National Presto Industries
By John Tully

The purpose of this analysis is to assess if a change in the use of shareholders’ assets could significantly enhance value and if so, would the current management be willing and capable to execute these changes.

As of 12/31/98, the company had $241 million invested in cash equivalents and marketable securities. The company earned less than 4% before taxes on these reserves in 1998. In its annual report management forecasts no improvement on this return in 1999. (1)

If the company invested the $241 million alternatively in conservative ventures generating only 10% returns, the pre-tax income would equal $24.1 million. (2) Assessing a tax rate of 38.2% to this and the existing $18.3 million 1998 operating income (assuming no growth), EPS would increase to $3.56 per share. This represents an increase of $.88 (33%) to EPS. If the market assigned a modest P/E of 15, a conservative price objective for the stock would be in the mid-50’s.

If the company were instead to continue its practices of the past decade, a more appropriate valuation model would be a dividend discount model with no growth and no reversionary value. If one assumes a 25 year liquidation of the company’s assets and a 6% discount rate, the value for the stock would be $25.57. If you extend the liquidation out to 50 years and increase the discount rate to 8%, the value declines to $24.47.(3)

Several alternatives to increase the return on shareholders’ assets were suggested in discussions I had with current and past institutional investors. Since the purpose of this analysis is not to choose a particular action for the company to implement, it is not necessary here to evaluate or rank these suggestions:

New Product Development.
Major Acquisition.
Series of Small Acquisitions.
Increased channels of distribution for the company’s products to reduce the company’s reliance on Wal-Mart.
Stock Repurchase.
Special Cash Dividend.
Sale of Company.
Take the Company Private.
 

Although not suggested by investors, the chairman has stated in the 1998 Annual Report that the Company is considering the possibility of an increased role for their dormant subsidiary, National Defense Corporation: “A multitude of problems throughout the world may require military solutions. Under these circumstances, 1999 could prove a timely period for renewed efforts by this Company’s executives in pursuit of an elevated military role”.

Regarding management's willingness to change their use of shareholders' assets, some other concerns were raised:

  1. The president of the company serves as both a corporate director and as the sole trustee of a family voting trust. Does this dual service raise issues regarding possible conflicts of different fiduciary duties?
  2. The company might qualify as an investment company.
  3. Some past institutional investors I spoke with were not able to open a dialogue with the Chairman on ways to maximize shareholder value. (See Exhibit "A"). (4)

Based on this information and the company's current use of assets, it leads me to believe that existing management is not willing or able to take the necessary actions to increase shareholders' wealth.

If shareholders do not think the current board of directors is willing and capable of taking actions necessary to increase the return on assets, they may consider steps that could change the company's governance. These steps could include:

  1. Shareholder Votes

    There are three shareholder proposals included in this year's proxy statement. Proxy votes are not necessarily the most efficient way to stimulate change, especially in this case with 29% of the votes controlled by management, but are the most frequently used activist tool. The proposals are:

    1. prompt sale of company
    2. directors to be elected annually
    3. independent board
  2. SEC Action

    Shareholders could request an inquiry by the SEC to determine if the company is operating as an investment company and therefore would have to be registered as such under the Investment Company Act of 1940.

  3. Shareholder Action

    Litigation against the current Board could commence litigation proceedings against the current directors alleging inappropriate management.

The following footnotes are in response to the Company’s June 22, 1999 “Analysis”

  1. Cash and Marketable Securities
    These are the amounts of cash and marketable securities reported in the Company’s 10Q reports for the 3 quarters preceding and one quarter after the 1999 fiscal year end :
    04/05/98 $ 222,312,000, after the payment of $ 14,710,000 in dividends.
    07/05/98 $ 219,097,000
    10/04/98 $ 216,057,000
    04/04/99 $ 227,369,000, after the payment of $ 14,719,000 in dividends.
    The analyst does not believe these end of quarter reserves are materially different than the $ 241 million as of 12/31/98.
     
  2. Assumptions of 10% Returns
    The analyst assumed a level of return at or below the lowest levels reported for various industry and stock indices as a basis for a pre-tax hurdle rate of 10%.
  3. Dividend Discount Model
    The analyst used conventional valuation methodologies, which are not based on knowledge of the industry. The assumptions made by the analyst are based on the historical record of the company’s relative proportion of investment in cash and marketable securities compared with its investment in operating businesses and the fact that the company has not raised its dividend since 1995.
  4. Exhibit A
    The analyst relied on interviews with current and past institutional holders and not exclusively on Exhibit A.
  5. Shareholder Votes
    The draft of this report misstated the percentage (35%) of shareholder votes controlled by management, based on the work group’s misinterpretation of footnote explanations in the Company’s 1998 proxy statement. The final draft uses the 29% portion of control based on the Company’s June 22, 1999 Analysis.

The analyst did not have access to the results of the May 19, 1999 stockholders meeting at the time of preparing this analysis in April 1999.


State of New York
Office Of The State Comptroller
Albany, NY
 

H. Carl McCall John E. Hull
State Comptroller Deputy Comptroller

August 29, 1996

 

Mr. Melvin S. Cohen
Chairman
National Presto Industries Inc.
3925 North Hastings Way
Eau Claire, WI 54703-3703
 

Dear Mr. Cohen:

 

Comptroller McCall as the sole trustee of the $77 billion New York State and Local Retirement Systems (“Systems”) is committed to achieving superior performance over the long term. With over $37 billion in domestic equities, including 43,200 shares of National Presto Industries Inc. we are concerned when the long term performance shows continued signs of lagging behind the Industry.

To monitor long term performance we have implemented an extensive analysis and review process. A database of the Systems’ 900 largest domestic holdings captures and evaluates performance indicators such as stock returns, valuation ratios, accounting data and capital spending. These indicators are reviewed for both one and five year periods, (with return risk adjusted) and grouped by industry. Twice a year the portfolio is screened to identify these companies that have underperformed in comparison with their industry peers. In addition, our investment staff reviews collateral materials to ascertain whether management, governance or strategic changes have been announced that might mitigate or explain the results of the objective financial screening. Those companies identified in two consecutive reviews are contacted in the hope that the directors may provide additional insight as to the future direction of the business or governance strategy.

Our most recent objective screening and subjective review has raised concern regarding National Presto Industries Inc.’s performance. We are writing the Board to learn your reaction to our concerns and to obtain assurance that actions are being taken to enhance and maintain performance on a long-term basis. Indeed, with such an assurance, we believe, the reed for direct shareholder involvement in any other corporate other corporate governance matter is significantly reduced.

Since the Board’s response will be a factor in our monitoring process, we encourage you to maintain the line of communication we hope this latter has established. Your cooperation in providing a reply within the next two weeks would be greatly appreciated.

Sincerely,

 

John E. Hull
Deputy Comptroller

JEH:mm


National Presto Industries, Inc.
Eau Claire, Wisconsin 54701

September 9, 1996

Dear Mr. Hull:

 

In response to your letter of August 29, it seems apparent that your belief that this company is underperforming its industry is predicated upon a false definition of the constituents of that industry.

The problem to which reference is made is not uncommon. Quite frequently, we find our company cast with producers of consumer consumables, such as Proctor and Gamble with manufacturers of major appliances, or with huge conglomerates such as Black & Decker and Premark International, both of whom do indeed have a segment of their business engaged in competition with us, but whose results, in those areas, are neither clearly defined nor controlling their respective destinies.

Should our assumption be correct, you may want to narrow your definition of the industry in which this company competes to producers of durable housewares, and, to be even more precise, consumers of durable electric housewares. Our arena does not extend to consumable items or to major appliances.

You may not be aware that over an extensive period of time this company has consistently outperformed most of its peers in terms of returns on sales and significant areas measured by accountants. We do not purport to influence the stock market, and regard those who keep one eye on Wall Street as failing to concentrate an their businesses which are difficult to run in any event, without dissipating talent and energy chasing a market will-o'-the-wisp.

So that you will appreciate our performance against our immediate peers, I am enclosing comparative data for those who are properly recognized as our competitors as of the close of the second quarter 1996. Wherever second quarter data was not found, first quarter information has been supplied. Additional enclosures that should be of interest relate to two of the recognized pre-eminent companies in our industry, Sunbeam and Rubbermaid, both of which are troubled, indeed. Finally, so that you may observe that our industry is beleaguered even offshore, I am enclosing an article relating to an international leader, Krups, and a very recent clipping from The Wall Street Journal demonstrating that companies in our industry from Japan and Thailand are market laggards.

There was a time when we disdained comparative performance with other members of our industry, since we found such a study inappropriate. However, with the changes in distribution which have occurred in recent years, resulting in the pre-eminence of discount retailers such as Wal-Mart and Target, we must now accept that "price is king", and absent new product introductions of a revolutionary nature (which unfortunately are increasingly rare), profit opportunities have been seriously leveled.

In the last analysis, we recognize, as we believe you should, that our industry is under siege, with none of us showing any immediate promise of acceptable profitability. Under the circumstances, while we would regret losing you as a shareholder, would be fully sympathetic with a decision on your part to seek better returns elsewhere, and admit that doing so might be a part of your long-term responsibility.

Because of the rules of law that preclude our sharing “additional insight as to the future direction of the business or governance strategy” with any one shareholder rather than all simultaneously, our directors must regrettably decline any further comments. I believe, however, that if you read the last several annual and quarterly reports, the information you are seeking can be found in the appropriate public declarations.

 

Sincerely yours,
Melvin S. Cohen

Mr. John E. Hull, Deputy Comptroller
Division of Investments and Cash Management
State of New York
Office of the State Comptroller
Albany, NY 12236
MSC/plk
Enclosures
 


STATE OF NEW YORK
OFFICE OF THE STATE COMPTROLLER
ALBANY, NEW YORK

H. Carl McCall John Hull
State Comptroller Deputy Comptroller

November 13, 1996

Mr. Melvin S. Cohen
Chairman
National Presto Industries, Inc.
3923 North Hastings Way
Eau Claire, Wisconsin 54703
 

Dear Mr. Cohen:

As indicated in my letter of August 29, 1996, the Now York State Common Retirement Fund is concerned about the performance of National Presto Industries, Inc., and will be monitoring the corporation to determine whether actions are being taken to enhance and maintain performance on a long term basis.

Our investment staff recently completed a thorough review of National Presto’s performance. We recognize that the company is difficult to classify and have not weighed heavily its comparisons to industry medians. Nevertheless, we note that the company's stock returns have been consistently negative, and its performance has been disappointing. At the same time, there are positive signs – such as the introduction of three new products – which encourage us to give management an opportunity to demonstrate its ability.

The Fund remains greatly concerned about issues of corporate governance. Ws are particularly disturbed that none of the directors are non – management independents with no direct relationship with the company. We firmly believe that independence encourages board members to act in the best interest of shareholders.

Similarly, we are disturbed that National Presto’s board does not include a separate compensation or nominating committee. Such committees, when they consist of independent directors, can ensure the quality of director nominees as well as provide shareholders a means to be involved in the nomination and compensation process.

Finally, because the Common Retirement Fund holds equity through index funds, we do not have the option to sell our shares in National Presto, contrary to the suggestion in your letter of September 9, 1996. For that reason, we remain committed to close monitoring of performance and communication with portfolio companies to obtain the reassurances that might preclude the need for direct shareholder involvement in other corporate governance matters.

I look forward to hearing from you.

Sincerely,

John Hull
Deputy Comptroller


National Presto Industries, Inc.
Eau Claire, Wisconsin 54701

November 22, 1996

Dear Mr. Hull:

 

Quite frankly, I was hoping that my letter to you of September 9 would put to rest any need for further correspondence.

So that you will not be laboring under false premises with respect to our three new products, I an enclosing a copy of our most recent press release which indicates that results are proving disappointing.

Your study of our company should have revealed that the family of which I am the patriarch holds approximately 30% of its stock. It should be obvious, therefore, that prodding from the outside is totally unnecessary. Try as I might, I can see no advantage to either of us by your proposed monitoring. It is unneeded, distracting and hence most unwelcome.

You are quite wrong in your assessment of our outside directors. Our newest director, Michael O'Meara, who replaced our general counsel , is a commercial banker, having had no previous relationship to our family or this company, and not acting in a banking capacity with us now. Walter Ryberg is a former Vice President for Sales, who has been disassociated from us, in all respects, for 13 years. Finally, John Sirianni is an investment banker who handles only occasional transactions for the company or our family. All of these men have been selected for their independence and maturity of judgment.

While some huge corporations may be in need of the committees to which you refer, they would be as useful for us as a flea on the hair of a tail of a dog. Any concern with respect to compensation should be quickly dissipated, if you look at our forms filed with the SEC which show that both officer and director compensation is among the lowest, if not the lowest, of all companies of our size on the New York Stock Exchange.

From the fact that your shareholdings are derivative, with the primary shareholder being the fund in which you invested, I believe your quarrel lies with it, rather than us. If you disapprove of the mix in which the fund has invested, please express your disappointment, chagrin or recommendations to the fund manager. An alternative would be to substitute a fund which does not include our equity.

Please believe me, it is my desire to avoid rudeness, under any circumstances. Nevertheless, we should both recognize that correspondence between us is proving fruitless, and is consuming time, which could otherwise be properly devoted to our respective more direct concerns. Perhaps yours could be aimed at more individual stock selection (as opposed to the indiscriminate mix found in indices, such as the Mid-Cap 400) which would provide the flexibility in stock selection and rejection which you apparently sorely desire, but cannot secure in your present sterile posture.

Sincerely yours,

Melvin S. Cohen

 

Mr. John E. Hull, Deputy Comptroller
Division of Investments and Cash Management
State of New York
Office of the State Comptroller
Albany, NY 12236

14SC/pl k


Peer Group Analysis of National Presto Industries
Mark Nurse

One important way to measure how well a company is doing is to make comparisons to other companies in its peer group. Companies that compete in the same industry are usually subject to the same market conditions, and in most cases, only the strong will survive. When compared to companies in its peer group, the picture does not look too good for National Presto. Top line growth has decreased an average of 2% over the past ten years, compared to 5% growth for the industry. Return on equity, five-year average, is 8%, compared to the 15.6% industry average. National Presto superficially appears to produce a healthy EBIT margin, averaging 23.5% for the past five years, but much of this can be attributed to approximately $ 9 million annual interest income rather than profits generated by operations. Excluding interest income, EBIT margin averages 16.9%, which is more in line with the industry standard. With numbers such as these, it should come as no surprise that for the past 10 years, National Presto has traded at an average P/E of 14.7, while the average for its peer group is 21.7 (see attached).

It is widely believed that the problem at National Presto is the under-utilization of assets. The company is cash rich, with over $ 200 million on the balance sheet, and no debt. In reality, National Presto utilizes approximately 14 % of its total assets in its housewares business, while the remaining is invested primarily in Tax Exempt securities. This means that more than 80% of the company’s assets is earning less than 5%. At the same time, management has significantly reduced advertising expenses, and the company has not developed a new product for quite some time.

It is our belief that management could act to increase shareholder value. The question is whether the current Board of Directors is interested in implementing changes. At present, the board comprises of 6 members, three of whom are directly employed by the company and others appear to have other direct or indirect financial interests controlled by management. Shareholders are entitled to a voice on the Board of Directors. With this structure, there is insufficient non-insider shareholder representation. Maybe one genuine outsider would be able to champion a new direction for the company. Though management controls 35% of shares outstanding, shareholders have the right to voice their concerns about the future of this company by demanding changes.

Management should be more open to suggestions on how to proceed. Everyone I spoke to agrees that management need not do an acquisition that does not make sense. But in the meanwhile, there are other ways to win back the support of disgruntled shareholders, and Wall Street. As stated elsewhere by other analysts in this forum's papers, excess cash on the balance sheet can be used in research and development, and for advertising. If the company’s assets are adequately utilized, it will have a positive reflection on profits and growth, and thus ultimately on the common stock. But these changes do not have to come overnight. Any attempt by management to address the issues that are of concern to shareholders can be viewed as positive. A shake-up of the board of directors will be a step in the right direction.

Regarding management’s reluctance to use media (TV) advertising, just recently I read an article which stated that Volkswagen Passat is now the number one selling car in the nation. Much of this vehicle’s success was directly attributed to (TV) advertising. Maybe National Presto can take a page from Volkswagen. Also, with the recent boom in the housing market, there are a lot of new kitchens that need appliances. I think this offers an excellent opportunity for National Presto to improve its top line. Instead of reducing advertising and copying an “inventor relations” program which management says has not worked for others, maybe National Presto should copy the practices of industry leaders like Salton . National Presto should be capable to grow at the same pace of its competitors, instead of being a laggard. The future is bright, National Presto should open the door wider to let the light in.

                             
COMPANY NAME REVENUE 1998 (MILL) REVENUE 10YR HIST GR RATE EBITDA MARGIN EBITDA 5 YR AVG0 CALENDAR EARNINGS 1998 EARNINGS ESTIMATE 1999 P/E 10 YR AVG P/E REL TO SPX PRICE PER SHR 4/23/99 52 WEEK TTL RTRN % CHG 10 YRS % OF LT DEBT TO CAPITAL MRKT CAP (MILS) 4/23/99
HIGH LOW
EKCO GROUP $329 8.00% 13.60% 15.40% $0.37 $0.53 17.20 0.30 $3.50 $9 $2 12.00% 56.00% $66.80
GENERAL HOUSEWARES $97 4.00% NM 8.50% $0.24 - 20.00 1.60 $11.75 $15 $7 31.00% 31.00% $47.30
HOME PRODUCTS INT'L $252 - 17.70% 8.00% $1.07 $1.37 - 0.30 $9.00 $16 $6 18.00% 79.00% $68.80
MIKASA $411 - 10.10% 12.40% $0.00 $1.09 - 0.40 $10.69 $15 $7 - 33.00% $189.00
MAYTAG $4,100 3.00% 16.50% 12.80% $3.05 $3.65 19.30 0.70 $66.25 $70 $39 264.00% 47.00% $6,000.00
NACCO INDUSTRIES 'A' $2,500 9.00% 10.50% 10.50% $12.53 $9.90 14.70 0.20 $82.00 $177 $69 143.00% 52.00% $666.00
NAT'L PRESTO $107 -2.00% 27.60% 23.50% $2.68 - 14.70 0.40 $35.63 $44 $34 47.00% 0.00% $262.00
NEWELL RUBBERMAID $3,700 18.00% 31.50% 21.50% $1.97 $2.03 20.10 0.80 $50.63 $56 $35 547.00% 31.00% $14,200
PREMARK INT'L $2,700 -1.00% 11.20% 10.80% $2.11 $2.44 8.10 0.50 $33.44 $37 $26 799.00% 21.00% $2,100
ROYAL APPLIANCE $283 - 6.90% 5.40% $0.15 - 27.10 0.50 $4.88 $7 $2 - 28.00% $97.40
SALTON $306 - 10.20% 7.40% $2.69 - - 0.30 $26.25 $35 $8 - 78.00% $173.00
SUNBEAM $1,800 - NM 8.80% -$4.32 -$0.02 - NM $5.38 $29 $4 - 61.00% $542.00
TANDYCRAFTS $232 9.00% NM 4.50% -$0.86 - 21.60 NM $2.63 $6 $1 -27.00% 30.00% $31.60
TRION $57 - 10.60% 8.10% $0.20 $0.27 - 0.60 $3.75 $7 $2 -47.00% 21.00% $26.80
TUPPERWARE $1,100 - 17.20% 18.60% $1.18 $1.40 - 0.60 $21.56 $29 $11 - 69.00% $1,200.00
WHIRLPOOL $10,000 5.00% 12.10% 8.80% $4.06 $4.68 16.10 0.50 $65.50 $74 $40 177.00% 35.00% $5,000.00
WINDMERE-DURABLE HLD $474 7.00% 14.30% 10.40% $0.75 $0.98 29.90 0.30 $9.31 $38 $4 -62.00% 46.00% $206.00
INDICES                            
HOUSEWARES - 5.00% 17.80% 16.80% $46.77 $50.13 21.70 0.90 $1,162.74 $1,206 $798 - 35.00% $11,300.00
RUSSELL 2000 - - - - - - - 0.80 $432.73 $493 $303 207.00% - -
S&B SMALLCAP 600 - - 12.50% 13.80% $7.74 $9.08 - 0.70 $170.65 $205 $126 - 43.00% $903.00
S&P500 - 4.00% 16.90% 17.30% $44.07 $47.74 18.00 1.00 $1,356.85 $1,364 $923 402.00% 29.00% $102,300.00

Source: Baseline


PRESTO
National Presto Industries, Inc.
Eau Claire, WI 54 703-3703

Tel. 715-839-2121
Fax 715-839-2148
715-839-2122
715-839-2242
 

June 22, 1999

Mr. Gary Lutin
Lutin & Company
5 75 Madison Avenue – 10th Floor
New York, NY 10022
 

Dear Mr. Lutin:

As promised, the enclosed material comments upon your submissions of April 26, 1999.

Shortly after receipt, I advised that just a quick reading revealed numerous factual errors, as well as dubious conclusions. My weekend review, which provided time for a careful examination, unfortunately leads me to believe that my initial impressions were charitable. Frankly, if I had been aware of the amount of work and hence time required to satisfy my obligation, I would not have undertaken the task. I became so tired that I may have failed to comment upon other obvious errors or false conclusions.

The enclosed analysis of each of the four reports demonstrate, among others, the following:

  1. Your analyst assigned the task of listing our popular products, failed to perform her task.
  2. Your analysts have not been able to identify the industry in which we are engaged, and, as a consequence, reached incorrect untenable conclusions.
  3. Your analyst failed to understand the differentials in timing between cost of development and product availability.
  4. Your analysts adopted speculative, unrealistic and wildly conjectural hypotheticals.
  5. Your analyst completely disregarded frequently stated corporate policies and objectives.
  6. Your analysts evidenced a misunderstanding of the role of advertising in the small appliance industry, generally, and this company specifically.
  7. Your analyst misrepresents the status of our Directors, as to independence.

Perhaps your authors, none of which appear to be CFAs, lacked motivation or found reporting on NPK of insufficient complexity or general interest to merit a study in the first instance. If the latter is at the root of their difficulty, I must say I concur fully with them. Certainly their problem could not have been lack of transparency, since data supporting my comments upon factual matters are readily available in public documents.

Most people in your position would take their markdown and abandon the project. Such abandonment seems the appropriate course in that the project presumably was directed to the subject of corporate governance. Following the necessary editorial modifications to Mr. Tully's report, comments upon corporate governance are very few, and those that remain have been obviated by the overwhelming shareholder vote at our May 18, 1999 Annual Meeting endorsing our company's practices (to which Mr. Tully is opposed). Moreover, not a single broad educational value is served by the group, despite the fact that this was the second stated objective of the study. Finally, your report is confrontational, judgmental and critical of a company's practices, all of which appear to be out of harmony with the Society's policy in opposition thereto.

Should you decide that the report is still worthy of publication in any written form, I would appreciate receiving a copy, fully reflecting my analysis. My expectations in that regard stem from your repeated assurances that "anything you provide will be incorporated in the presentation of project material to be made available to NYS SA members and to the public".

While I recognize as strictly within your discretion the choice of format whereby the presentation of project material can be made available to NYSSA members and to the public, I think it would be helpful if my analytical comments appeared opposite or immediately following the exact statement(s) of the analyst, to which they relate.

Sincerely yours,

NATIONAL PRESTO INDUSTRIES, INC.

Maryjo Cohen
President

Enclosures


NATIONAL PRESTO ANALYSIS OF:

NPK - Description and Summary
By Vahan Janjigian

This author begins his commentary by purporting to identify NPK's more popular products, but fails to do so from both a positive and a negative point of view. Illustratively, this company does not produce a toaster, as a reading of the 1998 annual report demonstrates. On the other hand, while including inconsequential categories, such as knife sharpeners, not mentioned is one of the most significant product categories manufactured and marketed by the company, its deep fryers, which have been consistently advertised on TV over the last decade (and so declared in Annual Reports).

Reference to your files will disclose that Mr. Janjigian is mistaken with respect to Kmart not being a customer; to misapprehension concluding that failure to introduce significant new products in a given year minimized development expense in that same year; and that a new advertising strategy de-emphasized TV advertising, which in turn enabled the increases in operating margins achieved by the company. In response to your request for three obvious errors, we had provided you with the following comments on May 3 and May 4, 1999 (after receiving these comments, you decided to defer publication of the report pending your receipt of our full analysis):

The Kmart Corporation has been a continuous customer for a number of years, and was so identified in the 1994 Annual Report.

A statement appears that earnings improvements in 1998 are sourced in the fact that the "failure to introduce new products has minimized development expenses". Anyone with knowledge of the operation of a business in our industry would know that, if anything, the absence of new products stimulates even greater efforts to develop them. As explained in the 1997 Annual Report:

"It is common knowledge that products are conceptualized in a given time frame, with ultimate design (both mechanical and aesthetic), patenting, production, and commercial introduction occurring appreciably later."

The conclusion would be erroneous as a blanket statement not only in our industry, but in practically all others. "Development costs” precede the marketing of a product, and do not appear simultaneously therewith.

In the same paragraph, increased earnings are stated to be "primarily due to a significant reduction in advertising expenditures". The writer failed to read the Annual Report, which recites at page 7 that "Because market analysis indicated the price sensitivity of the PowerPop® microwave multi-popper made it advisable to offer the unit at a price from which the advertising cost had been eliminated, that product was not included in the television campaign." Inasmuch as pricing includes the cost of advertising, it should be apparent that revenue had likewise been relieved of the cost of the advertising, and hence the writer’s conclusion is in error.

An inference of dubious practices by us in construction of our sales force lies in the contention that "the company has a sales force of 1O employees, yet it also relies on independent distributors" (emphasis supplied). Certainly, multilayered sales forces are not strange to industry. Some successful companies supplement their sales force with telephonic solicitations, door-to-door salesmen, etc. It has historically been uneconomical for any company in our industry to call upon/ship directly to the "ma and pa" stores, or their equivalent, when our salesman represents only one line. On the other hand, distributors representing a multiplicity of lines can do so effectively and economically.

The author identifies Caldor as a customer suffering financial difficulties - Caldor no longer exists - it was liquidated in January 1999. The 1998 Annual Report in fact stated that it failed to emerge from bankruptcy.

A fresh error occurs in the allegation by the author that management’s frustration with its efforts to develop and market new products prompted it to announce plans to seek products conceived by outside inventors. The alleged frustration never occurred. Opening avenues for the flow of new product ideas from outside inventors is a supplementary process, to complement ongoing internal efforts.

Contrary to your analysts statements, identification means for securing new product opportunities from outside the company are not limited to print ads and "networking activities" (whatever that means). Our annual report expressly states we would not disclose more than a sampling of our methods since doing so would provide assistance to competitors.

The analyst's conclusion that the double tax liability allegedly visited upon shareholders by virtue of dividends derived from tax exempt securities has rendered investment in such instruments imprudent, is inappropriate. First, it should not be forgotten that in most years the company enjoys some retention of income. While no attempt is made to identify the sources of that retention, clearly one would expect income from tax-free securities to be the major source thereof. Of primary importance, however, it should be understood that tax-free securities are purchased only when net yield to the company is greater than it would be on taxable instruments at the moment in time that the company enters the market with funds for investment. Our experience has demonstrated that, over time, there are substantially more opportunities for superior net yield, sourced from tax-free instruments. On the other hand, there are times when net yields favor taxable securities. Thus, when appropriate, investments occur in the taxable securities arena. Before rendering false judgements, your analyst should ask himself if it makes sense to purchase taxable instruments, with a lesser net yield, only for the purpose of being able to tell shareholders double taxation has been avoided.

NPK - Achieving Industry Standards
By Gina H. Sockolow

This analysis, as well as that by Mark Nurse entitled "National Presto Industries Peer Group Analysis" commits the cardinal sin of comparing vital statistics for National Presto Industries against those of companies that are not truly competitors, and, indeed, does not represent any known industrial group. Your authors have fabricated a new category, consisting of some of NPK’s competitors, major appliance producers and large conglomerates. Major appliance companies operate in a totally separate sphere from the points of view of manufacturing, advertising, pricing, buyers, location within stores for sale, sales outlets, etc. This company with its competitors are popularly grouped in a category dubbed the traffic appliance industry. That name was intentionally selected to distinguish it from major appliance producers. The word "traffic" implies that a customer can walk out of the store with a small appliance under her arm, whereas treating a refrigerator or clothes washer, in the same fashion, would be most difficult. Comparison with a conglomerate group is highly misleading, since earnings from NPK's competitors included within these operations represent only a tiny sliver of those companies' total sales and income, and in most cases the competitive entities enjoy either only very modest profits, or, indeed, suffer losses.

If Ms. Sockolow and Mr. Nurse had examined public documents prior to undertaking their editorial projects, they could not have avoided the pure and clean description of all components of the small electric appliance industry, which includes National Presto, as provided in the NPK 1999 proxy statement, at page 15. Supporting evidence can be found in the first three paragraphs of your own Exhibit A (letter of M.S. Cohen to John Hull dated September 9, 1996).

Nor is it acceptable to contend that because of some special elevated status enjoyed by analysts, they need not stick to the facts, but may depart, freely, in defining an industry in which the studied company is engaged. Mr. Lutin was guilty of that observation in a conversation with our James Bartl in which he stated that the judgment of analysts is not susceptible to criticism, so that as per the illustration Mr. Bartl used in the conversation, if a cereal company were compared to the automotive industry by any analyst, rather than to other marketers of breakfast cereals, contradiction would not be in order.

Ms. Sackolow next posits a multiplicity of low risk, low growth business operations, which can easily enjoy a 1O% return, from which the company could make a selection. Unhappily, such businesses are probably impossible to find. Certainly, it would have been helpful, if Ms. Sockolow is aware of these operations, if she would have named a few. Moreover, to achieve the elevated earnings per share, the author expands funds beyond those we possess (see the second paragraph of my remarks upon Mr. Tully's essay, at pages 4-5). Certainly, she would not recommend borrowing money for her proposed purposes, since the interest cost, over time, would probably exceed the net yield from the portion of the business, so funded. In this same context, what intelligent management seeking expansion and growth, would spend every dollar in its treasury (as Ms. Sokolow proposes) to make a pedestrian acquisition? Even accepting presumed availability, one must question the amount of premium that would be involved in the acquisition, amortization of which might depress the yield below the stated threshold. Probably the most serious drawback to the author's scenario is the extent our company would become entangled with its acquisition. NPK's apparent (and oft repeated) strategy in maintaining its cash position is its long term plan to invest the funds in a business or businesses with high potential which will enable it to escape its complete dependence upon the beleaguered small appliance business, thus providing contraseasonal and other apparent benefits (see, for example, the concluding paragraph in the Chairman's and President's letter to shareholders in the Annual Report for 1997). To enjoy the liquidity necessary to make a timely acquisition or engage in a new business, yield has been sacrificed. One must assume that a pedestrian type business would, in all likelihood, prove difficult to sell or liquidate, without a substantial loss in so doing, when and if time pressure necessitated such action. The chances are high that the amount of the capital loss would exceed any increment of additional yield secured over the term the acquisition was in place.

In view of the foregoing comments and explanation, analyzing the consequences of the yield improvement presumably to be enjoyed from the acquisition, becomes a thoroughly idle pursuit. Engaging in such projections can be fun. Just imagine how much better the earnings per share would become if a simple 15% return were inserted, rather than the 10% arbitrarily chosen. Unhappily, speculation rarely meets the standards of reality.

Analysis of National Presto Industries
By John Tully

As evidenced by the second and fourth paragraphs in his report, Mr. Tully is inordinately fond of presupposing static data, as opposed to the dynamics which pervade the industrial and commercial worlds.

In the second paragraph, the author presupposes December 31 cash and securities sums of $241,000,000 as being available for investment by the company throughout the year, and then makes an earnings calculation predicated thereupon. A more thoughtful approach would take into account the fact that at year-end finished goods, work-in-process and material (including parts) inventories are at low ebb, receivables have been substantially paid down, payrolls have been trimmed because production to meet Christmas business is no longer needed, etc. We believe it obvious that well prior to the Christmas season (September through

November) substantial funds are needed to support the materials needed for manufacturing, manufacturing activities per se, such as payrolls, ballooning of accounts receivable reflecting pre-Christmas sales, etc. Accordingly, sums needed for operation of the business (working capital) fluctuate throughout the year, with a final balance, at year-end, unreflective of the dynamism inherent in the operation. Likewise, in large part at year-end, earnings enjoyed during the year have been transformed into cash and securities on the balance sheet. Obviously, these were not available during the entire year for investment; certainly, as of the beginning of the year they did not even exist. Moreover, the author overlooks the approximately $15,000,000, at a minimum, required for dividend distribution in early March, availability of which is dependent upon cash and cash equivalents on hand.

A repetition of Ms. Sockolow's assumption of the ready availability of a low risk business operation carrying a 10% return, and that such a business would fit within the policy considerations of this company, is included as a part of Mr. Tully's analysis. Our comments in response to Ms. Sockolow are, of course, applicable, so that no further remarks are required.

The foregoing errors fade into insignificance when compared to an assumption of a totally stagnant period for the company over periods of 25 and 50 years, to be utilized as a predicate for forecasting stock values. A basic rule of nature is that change will and does occur. While we will not and cannot contend that the future may hold nothing but progress for this company, so that, indeed, adversities might be encountered, we find it impossible to accept total stagnancy. Please read the last incomplete paragraph at column one and the first incomplete paragraph in column two at page 4 of our 1998 Annual Report, as well as the concluding paragraph of the Chairman's and President's letter at page 6. Experience and history have both taught us the fallibility of forecasting in our business, even for one year ahead. Few would contend, in view of our intimacy with our own business, that a forecast from us would not have greater value than that from strangers. Under these circumstances, how does one find value in projections 25 and 50 years distant, by an individual who should not be expected to be familiar with the vagaries of the small electric appliance industry?

A dire conclusion is predicted for this company's stock price "If it continues its practices of the past decade." It would seem that the author's criticism should be aimed at the market's predilections, rather than alleged corporate practices. This company has suffered market snubs in the face of increasing its year-over-year earnings by 15% in 1997 and by 16% in 1998. Moreover, first quarter 1999 shows an improvement in quarter-over-quarter sales of 13.9% accompanied by an earnings increase of 16%. Unfortunately for NPK and many other companies suffering the same fate, today's markets are enamored of small company growth stocks (that lose money), while small company value stocks, such as NPK, are clearly out of favor. If Mr. Tully believes that the current market favorites will continue to be such for the next 25 or 50 years, he should find most interesting a study of the market's history, which describes, in vivid language, how today’s favorites become the dogs of tomorrow.

If this company remains confined to its present industry, a reasonable expectation on its stock price during the next 25 years (not to mention 50) is that it will fluctuate in keeping with the rate of success and failure of its new product introductions. Product introduction fruitful periods, such as those enjoyed by NPK in the latter 1980s and early 1990s, will probably happen again, with similar market results. By the same token, droughts can also occur. Nor can general economic health during these intervals be overlooked. A robust economy versus one that is depressed will produce widely different scenarios, regardless of the internal activities pertaining to new product development.

No comment will be contained herein upon Mr. Tully's remarks as contained in the second and third paragraphs at page 6 (numbered 1 and 2), the final two paragraphs on that page (numbered 2 and 3), and items classified as (b) and (c) at page 7. It seems apparent that with the elimination of an exhibit originally planned for attachment, statements bottomed upon it must likewise be eliminated.

Exhibit A, appended to Mr. Tully's remarks, is submitted as a demonstration of the alleged unwillingness of our company's Chairman to participate in a dialogue with institutional investors. This conclusion is dependent upon the presumed disaffection of a "past institutional investor". It should be noted that the entity involved at no point owned shares in NPK, but rather had invested in a mid-cap index fund. Upon NPK's elimination from the fund’s portfolio (a sound move since NPK is a small company rather than a mid-cap company, by definition) the investor's derivative interest was extinguished. It does not take careful examination of the two initial letters in that exchange to conclude that Mr. Tully is in error, when stating his conclusion. In his two page letter of September 9, Mr. Cohen endeavored to answer Mr. Hull's questions in a complete and courteous fashion, while expressing sympathy for Mr. Hull's point-of-view. Admittedly, upon learning from Mr. Hull's later letter that he had misrepresented holdings of the entity he represented, it became apparent that Mr. Cohen's patience was worm thin indeed. Bullies are not respected anywhere. Bullies that misrepresent suffer even a lower status.

We find inexplicable Mr. Tully's statement that "proxy votes are not necessarily the most efficient way to stimulate change". To the best of our knowledge, there is no alternative way for owners to express their preferences. Certainly corporate governance should not, instead, be decreed by a pool of market analysts. Apparently, as a part of Mr. Tully's dissatisfaction with corporate governance being entrusted to the owners of the company, he specifically laments an alleged share ownership of 35% by management. It should be noted that his ownership figure is in error. Management controls approximately 29% of the votes. (See 1998 and 1999 proxy statement, at page 3.)

Finally, Mr. Tully predicts benefits that would flow from votes by shareholders favoring resolutions to sell the company and to require the majority of the Board's members to be independent. Concern is expressed, however, that the desired result might not eventualize because of management’s holdings. Not surprisingly to us (and contrary to Mr. Tully’s preferences), a resounding vote endorsing management’s methods of operation and governance was directed by shareholders at our annual meeting on May 18. The results of the vote would have been precisely the same with or without management's ballots.

In the last analysis, the people that own this company do not share Mr. Tully's discontent. It seems apparent that they continue to repose confidence in the judgment of the management that was able to earn the cash and cash equivalents, the accumulation of which so disturbs academic critics, such as Mr. Tully. Similarly, they are prepared to await availability of a prudent purchase, rather than advocate the inpatient tactics of those who might temporarily expand yield at the expense of long term value. Last but not least, they respect the dedication and competency of the Board they have chosen to represent them, and the management responsible to that Board.

NATIONAL PRESTO INDUSTRIES PEER GROUP ANALYSIS
By Mark Nurse

Among the four analysts, Mr. Nurse is the leading proponent of comparing NPK to non-peers, while labeling the latter as peers. Adequate comment on this egregious error appears elsewhere in this analysis, so that repetition is not required.

Following repetition of the false conclusion with respect to advertising at this company upon which I have already commented, the analyst states that "The company has not developed a new product for quite some time." (emphasis added.) We believe it apparent that no one outside this company is aware of products in development. Activities in our laboratory, and those being considered by our new products committee, are not disclosed to anyone, for very apparent reasons.

Your analyst is hopelessly at sea when he ventures into the area of advertising. At page 19 he charges us with "significantly reducing advertising expense" while at page 20 he suggests using "excess cash for advertising purposes". As explained in our earlier exchange of facsimile messages, reduction in ad expense in 1998 was largely the consequence of accepting the recommendation of important customers to the effect that our microwave popper was, in their opinion, extremely price sensitive, so that eliminating ads comparable to those which had been run for several prior Christmas seasons, while simultaneously reducing the product price by the planned cost of the ads, could lead to a welcome increase in volume. It is important for Mr. Nurse to understand that TV costs are very high, with such costs absorbable only by either new or totally unique products where competitors cannot erode prices (which include TV costs within them). Were NPK to advertise, utilizing TV, its fry pans, pressure cookers, or other products where it shares the market with other producers, the resultant price would be so high as to assure competitors a preferred counter position, with our products being uncompetitive. On the other hand, new patented products can and properly do sustain TV costs. As a result, NPK's TV budget will be dictated by product positioning in the marketplace, and not by an overall advertising strategy influenced by allegedly excess cash positions, and hence fluctuate from year-to-year. Most of our competitors do not venture into television, but confine their advertising to dealer print. The few that have, e.g., Fantom and Salton referenced by Mr. Nurse, have done so with the requisite new or totally unique products. NPK has historically been among the leaders in TV advertising, certainly in the preferred time slots with the greatest number of the target viewing audience. Our company will continue to enjoy that position, with budgets rising or falling in keeping with new patentable products entering the market.

At page 19 and 20, a contention is made that all NPK Directors bear the taint of financial dependence, and hence there is not a single genuine outsider to champion a new direction for the company. This contention is utterly false. Everyone (other than Mr. Nurse) agree that Mr. O'Meara and Professor Cardozo qualify as independent Directors, while most fair minded evaluators find Mr. Sirianni similarly qualified.

It should be observed that Mr. Nurse is in error, as was Mr. Tully, of assuming a 35% management stock ownership, whereas the figure is approximately 29%.

Unfortunately, this writer is guilty of selective reading. While criticizing attempts to open up new product opportunities sourced from outside inventors, as described in the 1998 Annual Report's President's and Chairman's letter, he laments the lack of "any attempt by management to address the issues that are of concern to shareholders". Just a little investigation would disclose that in the very same page of the 1998 Annual Report devoted to externally sourced inventions, extensive comment appears describing studies being undertaken to identify and capitalize upon new business ventures, not arising via the acquisition route, and without foregoing efforts to consummate acquisitions via normal channels.

In previous communications, I have solicited a legible copy of Mr. Nurse's "Peer Group Comparison", as presented at page 21. Since none has been received, comment, here, is not possible. However, inasmuch as the peer group has been incorrectly identified, I suspect that any remarks would be superfluous.

 

 

Material presented on this page was originally published on the web site of the New York Society of Security Analysts ("NYSSA"), and was provided by Gary Lutin as co-sponsor of a "Forum Program" conducted for public educational purposes with NYSSA's Committee for Corporate Governance and Shareholder Rights from January 1999 to July 2001.

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