What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-05-10 · 38 added, 54 removed, 50 unchanged (65% of the section changed)

28 unchanged sentences

The Company’s fiscal year begins on July 1 and ends on June 30.

Historically, the end users of the Company’s products want to install its products prior to the summer;

therefore, sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter.

Historically, the end users of the Company’s equipment products want to install these products prior to the summer;

therefore, sales of these products historically peak in the period April 1 through June 30, the Company’s fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company’s fiscal first quarter.

In addition, demand for our products is affected by the housing and construction markets.

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

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.

We sell our products primarily through distribution to dealers and we are now seeing strong sell-through statistics from several of our largest distributors.

Increased sell-through of our products from our distributors to the alarm and locking dealers during the quarter as compared to the same quarter last year, which was pre COVID-19, indicates that security equipment professionals are getting increased access to both commercial and residential installation sites and using more and more of our products.

Our results for fiscal 2021 and the first quarter of fiscal 2022 reflected the increase in customer demand after the creation of the challenging business environment resulting from the COVID-19 pandemic.

While the Company believes this recovery will continue, there can be no assurances that it will do so in the event of a return to building and construction restrictions that might result from a return to higher levels of COVID-19 cases.

Critical Accounting Policies and Estimates

2 unchanged sentences

Results of Operations

Three months ended March 31,

Nine months ended March 31,

(dollars in thousands)

Three months ended September 30,

(dollars in thousands)

7 unchanged sentences

Operating income

Interest and other expense (income), net

Interest and other income (expense), net

Gain on extinguishment of debt

Provision for income taxes

Results of Operations

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.

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 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 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.

Sales for the three months ended September 30, 2021 increased by $7,878,000, or 34.0%, to $31,051,000 as compared to $23,173,000 for the same period a year ago.

The increase in sales for the three months ended September 30, 2021 was due primarily to increased recurring communication service revenues ($2,949,000) and sales of intrusion and access products ($2,471,000) and door-locking products ($2,458,000).

Gross profit for the three months ended September 30, 2021 increased to $13,456,000 or 43.3% of sales as compared to $10,692,000 or 46.1% of sales for the same period a year ago.

While gross profit on equipment sales for the three months ended September 30, 2021 increased to $4,655,000 or 22.4% of equipment sales as compared to $4,591,000 or 28.9% of equipment sales for the same period a year ago, the decrease in gross profit as a percentage of equipment sales for the three months was primarily due to increased freight and

component part costs relating to the current, world-wide supply chain problems, an unfavorable shift in product mix from door-locking products to intrusion products (which include the Company’s Starlink radio products which lead to the more profitable recurring service revenues) as well as aggressive promotional pricing of these radios.

The increase in gross profit of equipment sales for the three months was due to the increase in net sales of equipment.

Gross profit on sales of services for the three months ended September 30, 2021 increased to $8,801,000 or 86.1% of service sales as compared to $6,101,000 or 83.9% of service sales for the same period a year ago.

The increase in gross profit on service revenues was due primarily to the 40.5% increase in sales of these services.

Research and development expenses for the three months ended September 30, 2021 increased $42,000 to $1,931,000, or 6.2% of net sales, as compared to $1,889,000, or 8.2% of net sales, for the same period a year ago.

The increase was due primarily to increased payroll while the decrease as a percentage of net sales was due primarily to the increase in net sales.

Selling, general and administrative expenses for the three months ended September 30, 2021 increased 19.5% to $7,346,000 from $6,149,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 23.7% for the three months ended September 30, 2021 as compared to 26.5% for the same period a year ago.

The increase in selling, general and administrative expenses was due primarily to tradeshow and advertising expenses, which were curtailed during the COVID-19 pandemic, as well as increased sales incentives relating to the increase in net sales as discussed above.

The decrease in selling, general and administrative expenses as a percentage of net sales was due primarily to the increase in net sales as partially offset by the increase in expenses.

Other income (expense) for the three months ended September 30, 2021 increased $3,927,000 to income of $3,921,000 as compared to expense of $6,000 for the same period a year ago.

The change in Other income (expense) was due primarily to the gain from the extinguishment of the Company’s $3,904,000 in PPP loans, which were forgiven by the SBA during the three months ended September 30, 2021.

The Company’s provision for income taxes for the three months ended September 30, 2021 increased by $19,000 to $348,000 as compared to $329,000 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.

The Company’s effective rate for income tax was 4.3% and 12% for the three months ended September 30, 2021 and 2020, respectively.

The decrease in the Company’s effective rate for the three months ended September 30, 2021 was due primarily to the income recognized as a result of the PPP loan forgiveness being non-taxable.

Net income for the three months ended September 30, 2021 increased by $5,433,000 to $7,752,000 or $0.42 per diluted share as compared to $2,319,000 or $0.13 per diluted share for the same period a year ago.

The increase in net income for the three months ended September 30, 2021 was primarily due to the items described above.

Liquidity and Capital Resources

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).

During the three months ended September 30, 2021, the Company utilized a portion of its cash generated from operations ($541,000 of $3,463,000) to purchase property, plant and equipment ($522,000) and marketable securities ($19,000).

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 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 $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 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 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.

Accounts receivable at September 30, 2021 decreased by $2,738,000 to $25,343,000 as compared to $28,081,000 at June 30, 2021.

This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2021, which is typically the Company’s highest, as compared to the quarter ended September 30, 2021.

Inventories at September 30, 2021 increased by $1,824,000 from June 30, 2021.

This increase is primarily the result of the Company level-loading its production output throughout the year, whereas the Company’s sales are typically highest in the fourth quarter as well as increasing purchases of certain components that have become difficult to source during the world-wide supply chain problems.

Accounts payable and accrued expenses other than accrued income taxes decreased by $454,000 as of September 30, 2021, as compared to June 30, 2021.

This decrease was due primarily to the decrease in the accrued refund liability caused by lower equipment sales for the three months ended September 30, 2021, as compared to equipment sales for the three months ended June 30, 2021, which is typically the Company’s highest.

As of September 30, 2021, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024.

As of September 30, 2021, the Company had no outstanding borrowings and $11,000,000 in availability under the revolving credit facility which 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 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.

As of September 30, 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