What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2021-02-09 · 43 added, 43 removed, 61 unchanged (59% of the section changed)

4 unchanged sentences

The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

10 unchanged sentences

While recurring service revenues have continued to increase during the COVID-19 pandemic, equipment sales were negatively impacted by the economic slowdown associated with this pandemic.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high quality security solutions, building many of the industry’s best-known brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other popular product lines:

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other popular product lines:

including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions.

3 unchanged sentences

We are subject to the effects of general economic and market conditions.

In the event that the U.S.

or international economic conditions deteriorate, our revenue, profit and cash-flow levels could be materially adversely affected in future periods.

7 unchanged sentences

Deterioration of the current economic conditions may also affect this trend.

Our fourth quarter of fiscal 2020 and the first and second quarters of fiscal 2021 reflected the challenging business environment resulting from the COVID-19 pandemic.

Our fourth quarter of fiscal 2020 and the first three quarters of fiscal 2021 reflected the challenging business environment resulting from the COVID-19 pandemic.

The COVID-19 pandemic has caused difficulties for security equipment professionals getting access to both commercial and residential installation sites.

5 unchanged sentences

Results of Operations

Three months ended December 31,

Six months ended December 31,

Three months ended March 31,

Nine months ended March 31,

(dollars in thousands)

8 unchanged sentences

Operating income

Interest expense (income), net

Interest and other expense (income), net

Provision for income taxes

Results of Operations

Sales for the three months ended December 31, 2020 increased by $1,376,000 to $27,207,000 as compared to $25,829,000 for the same period a year ago.

Sales for the six months ended December 31, 2020 decreased by $1,736,000 to $50,378,000 as compared to $52,114,000 for the same period a year ago.

The increase in sales for the three months ended December 31, 2020 was due primarily to increased recurring communication service revenues ($2,405,000) and sales of intrusion and access products ($463,000) as partially offset by a decrease in sales of door-locking products ($1,492,000).

Sales for the three months ended March 31, 2021 increased by $1,989,000 or 7.6% to $28,228,000 as compared to $26,239,000 for the same period a year ago.

Sales for the nine months ended March 31, 2021 increased by $253,000 or .3% to $78,606,000 as compared to $78,353,000 for the same period a year ago.

The increase in sales for the three months ended March 31, 2021 was due primarily to increased recurring communication service revenues ($2,661,000) and sales of intrusion and access products ($548,000) as partially offset by a decrease in sales of door-locking products ($1,220,000).

The increase in sales for the nine months ended March 31, 2021 was due primarily to increased recurring communication service revenues ($6,977,000) and sales of intrusion and access products ($321,000) as partially offset by a decrease in sales of door-locking products ($7,045,000).

Sales of the Company’s door-locking products continue to be negatively impacted by the COVID-19 pandemic.

The decrease in sales for the six months ended December 31, 2020 was due primarily to decreased sales of door-locking products ($5,826,000) and intrusion and access products ($226,000) as partially offset by an increase in recurring communication service revenues ($4,316,000)

Gross profit for the three months ended December 31, 2020 decreased to $11,403,000 or 41.9% of sales as compared to $12,127,000 or 47.0% of sales for the same period a year ago.

Gross profit on equipment sales for the three months ended December 31, 2020 decreased to $4,417,000 or 23.2% of equipment sales as compared to $7,443,000 or 37.1% of equipment sales for the same period a year ago.

Gross profit on sales of services for the three months ended December 31, 2020 increased to $6,986,000 or 85.3% of service sales as compared to $4,684,000 or 81.0% of service sales for the same period a year ago.

Gross profit for the six months ended December 31, 2020 decreased to $22,095,000 or 43.9% of sales as compared to $23,645,000 or 45.4% of sales for the same period a year ago.

Gross profit on equipment sales for the six months ended December 31, 2020 decreased to $9,008,000 or 25.8% of equipment sales as compared to $14,726,000 or 36.0% of equipment sales for the same period a year ago.

Gross profit on sales of services for the six months ended December 31, 2020 increased to $13,087,000 or 84.6% of service sales as compared to $8,919,000 or 80.0% of service sales for the same period a year ago.

The decrease in gross profit and gross profit as a percentage of equipment sales for the three and six months was primarily due to the decrease in net sales of equipment, an unfavorable shift in product mix from door-locking products to intrusion products as well as lower overhead absorption which resulted from the Company’s lower purchasing and production levels.

Gross profit for the three months ended March 31, 2021 increased to $12,910,000 or 45.7% of sales as compared to $11,956,000 or 45.6% of sales for the same period a year ago.

Gross profit on equipment sales for the three months ended March 31, 2021 decreased to $5,261,000 or 27.2% of equipment sales as compared to $6,722,000 or 33.6% of equipment sales for the same period a year ago.

Gross profit on sales of services for the three months ended March 31, 2021 increased to $7,649,000 or 86.0% of service sales as compared to $5,234,000 or 84.0% of service sales for the same period a year ago.

Gross profit for the nine months ended March 31, 2021 decreased to $35,005,000 or 44.5% of sales as compared to $35,601,000 or 45.4% of sales for the same period a year ago.

Gross profit on equipment sales for the nine months ended March 31, 2021 decreased to $14,269,000 or 26.3% of equipment sales as compared to $21,448,000 or 35.2% of equipment sales for the same period a year ago.

Gross profit on sales of services for the nine months ended March 31, 2021 increased to $20,736,000 or 85.1% of service sales as compared to $,14,153,000 or 81.4% of service sales for the same period a year ago.

The decrease in gross profit and gross profit as a percentage of equipment sales for the three and nine months was primarily due to the decrease in net sales of equipment, an unfavorable shift in product mix from door-locking products to intrusion products as well as lower overhead absorption which resulted from the Company’s lower purchasing and production levels.

The lower levels of component part purchases and production were due to the Company’s efforts to reduce its inventory levels as well as the reduced hardware revenues discussed above.

The increase in gross profit and gross profit as a percentage of service sales for the three and six months ended December 31, 2020 was due primarily to the increase in service revenues as well as a favorable shift in service product mix to higher margin service plans.

Research and development expenses for the three months ended December 31, 2020 increased $61,000 to $1,884,000 as compared to $1,823,000 for the same period a year ago.

Research and development expenses for the six months ended December 31, 2020 increased $201,000 to $3,773,000 as compared to $3,572,000 for the same period a year ago.

The increase in gross profit and gross profit as a percentage of service sales for the three and nine months ended March 31, 2021 was due primarily to the increase in service revenues as well as a favorable shift in service product mix to higher margin service plans.

Research and development expenses for the three months ended March 31, 2021 increased $87,000 to $1,902,000 as compared to $1,815,000 for the same period a year ago.

Research and development expenses for the nine months ended March 31, 2021 increased $288,000 to $5,675,000 as compared to $5,387,000 for the same period a year ago.

These increases were due primarily to increased payroll.

Selling, general and administrative expenses for the three months ended December 31, 2020 decreased 7.3% to $5,850,000 from $6,310,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 21.5% for the three months ended December 31, 2020 as compared to 24.4% for the same period a year ago.

Selling, general and administrative expenses for the six months ended December 31, 2020 decreased 3.8% to $11,999,000 from $12,470,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales remained relatively constant at 23.8% for the six months ended December 31, 2020 as compared to 23.9% for the same period a year ago.

The decreases in Selling, general and administrative expenses and as a percentage of sales for the three and six months was primarily due to decreased travel, tradeshow and stock option expense.

Interest expense, net for the three months ended December 31, 2020 remained relatively constant at $3,000 as compared to $(9,000) for the same period a year ago.

Interest expense, net for the six months ended December 31, 2020 remained relatively constant at $9,000 as compared to $(2,000) for the same period a year ago.

The Company’s provision for income taxes for the three months ended December 31, 2020 increased by $38,000 to $469,000 as compared to $431,000 for the same period a year ago.

The Company’s provision for income taxes for the six months ended December 31, 2020 remained relatively constant at $798,000 as compared to $800,000 for the same period a year ago.

The increase in the provision for income taxes for the three months was primarily due to accrued interest and state tax resulting from the Company's settlement of the IRS audit for the fiscal year ended June 30, 2016 as well as higher taxable income in the U.S, as compared to income in the DR.

The Company’s effective rate for income tax was 13% and 11% for the three months and the six months ended December 31, 2020 and 2019, respectively.

Net income for the three months ended December 31, 2020 decreased by $375,000 to $3,197,000 or $0.17 per diluted share as compared to $3,572,000 or $0.19 per diluted share for the same period a year ago.

Net income for the six months ended December 31, 2020 decreased by $1,289,000 to $5,516,000 or $0.30 per diluted share as compared to $6,805,000 or $0.37 per diluted share for the same period a year ago.

The decrease in net income for the three and six months ended December 31, 2020 was primarily due to the items described above.

Selling, general and administrative expenses for the three months ended March 31, 2021 decreased 1.9% to $5,980,000 from $6,096,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 21.2% for the three months ended March 31, 2021 as compared to 23.2% for the same period a year ago.

Selling, general and administrative expenses for the nine months ended March 31, 2021 decreased 3.2% to $17,979,000 from $18,566,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 22.9% for the nine months ended March 31, 2021 as compared to 23.7% for the same period a year ago.

The decreases in Selling, general and administrative expenses and as a percentage of sales for the three and nine months was primarily due to decreased travel and tradeshow expenses.

Interest and other expense, net for the three months ended March 31, 2021 increased $39,000 to $44,000 as compared to $5,000 for the same period a year ago.

Interest and other expense, net for the nine months ended March 31, 2021 increased $50,000 to $53,000 as compared to $3,000 for the same period a year ago.

The increases were due primarily to unrealized losses on marketable securities owned by the Company.

The Company’s provision for income taxes for the three months ended March 31, 2021 increased by $199,000 to $624,000 as compared to $425,000 for the same period a year ago.

The Company’s provision for income taxes for the nine months ended March 31, 2021 increased by 197,000 to $1,422,000 as compared to $1,225,000 for the same period a year ago.

The increase in the provision for income taxes for the three months was primarily due to higher taxable income in the U.S, as compared to income in the DR.

The Company’s effective rate for income tax was 13% and 11% for the three months and 13% and 11% for the nine months ended March 31, 2021 and 2020, respectively.

Net income for the three months ended March 31, 2021, increased by $745,000 to $4,360,000 or $0.24 per diluted share as compared to $3,615,000 or $0.20 per diluted share for the same period a year ago.

Net income for the nine months ended March 31, 2021 decreased by $544,000 to $9,876,000 or $0.54 per diluted share as compared to $10,420,000 or $0.56 per diluted share for the same period a year ago.

The changes in net income for the three and nine months ended March 31, 2021 was primarily due to the items described above.

Liquidity and Capital Resources

During the three months ended December 31, 2020 the Company utilized a portion of its cash generated from operations ($390,000 of $8,938,000) to purchase property, plant and equipment.

During the nine months ended March 31, 2021 the Company utilized a portion of its cash generated from operations ($5,927,000 of $16,431,000) to purchase property, plant and equipment ($566,000) and marketable securities ($5,403,000).

The Company believes its current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company’s operations through the next twelve months.

Accounts receivable at December 31, 2020 decreased by $1,709,000 as compared to June 30, 2020.

This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2020, which is typically the Company’s highest, as compared to the quarter ended December 31, 2020 as well as extending longer payment terms for certain customers during the quarter ended June 30, 2020 to assist them during the economic slowdown resulting from the COVID-19 pandemic.

Inventories at December 31, 2020 decreased by $3,719,000 from June 30, 2020.

Accounts receivable at March 31, 2021 decreased by $577,000 to $22,355,000 as compared to $22,932,000 at June 30, 2020.

This decrease is primarily the result of the Company offering some of its top customers longer payment terms during the quarter ended June 30, 2020 as compared to those offered during the quarter ended March 31, 2021.

Inventories at March 31, 2021 decreased by $5,749,000 from June 30, 2020.

This decrease is primarily the result of the Company utilizing some of the additional inventory it had built up during the COVID-19 pandemic as partially offset by level-loading its production output throughout the year, whereas the Company’s sales are typically highest in the fourth quarter.

The non-current portion of inventory increased $2,100,000 primarily due to the Company reducing its production planning in response to decreased demand during the COVID pandemic.

Accounts payable and accrued expenses other than accrued income taxes decreased by $2,683,000 as of December 31, 2020 as compared to June 30, 2020.

Accounts payable and accrued expenses other than accrued income taxes decreased by $1,091,000 as of March 31, 2021 as compared to June 30, 2020.

This decrease was due primarily to the Company’s efforts to reduce its inventory levels by decreasing purchases of component parts and production levels.

As of December 31, 2020, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024 and term loans from the U.S.

As of March 31, 2021, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024 and term loans from the U.S.

Small Business Administration totaling $3,904,000 through its Payroll Protection Program (“PPP”).

As of December 31, 2020, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility and $3,904,000 outstanding under the PPP term loans.

As of March 31, 2021, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility and $3,904,000 outstanding under the PPP term loans.

The Company’s long-term debt is described more fully in Note 8 to the condensed consolidated financial statements.

The facility contains various restrictions and covenants including, among others, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement.

As of December 31, 2020 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

As of March 31, 2021 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis