What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-05-17 · 42 added, 55 removed, 45 unchanged (68% of the section changed)

12 unchanged sentences

We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.

Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions.

Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”) is one of the leading manufacturers and designers of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions.

We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products.

1 unchanged sentence

We have experienced significant growth in recent years, primarily driven by fast growing recurring service revenues generated from wireless communication services for intrusion and fire alarm systems, as well as our school security products that are designed to meet the increasing needs to enhance school security as a result of on-campus shooting and violence in the U.S.

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 widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other popular product lines:

9 unchanged sentences

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

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

Historically, the end users of the Company’s hardware 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.

Recurring service revenues, which comprise approximately 33.2% of the current fiscal year to date revenues, are not affected by seasonality.

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 results for fiscal 2021 and the first three quarters of fiscal 2022 reflected the increase in customer demand after 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)

1 unchanged sentence

service revenues

Total net sales

Gross Profit:

Total gross profit

Gross profit as a % of net sales:

3 unchanged sentences

Operating income

Interest and other income (expense), net

Interest and other (expense) income, net

Gain on extinguishment of debt

Provision for income taxes

Net Sales for the three months ended March 31, 2022 increased by $7,677,000, or 27.2%, to $35,905,000 as compared to $28,228,000 for the same period a year ago.

Sales for the nine months ended March 31, 2022 increased by $21,758,000, or 27.7% to $100,364,000 as compared to $78,606,000 for the same period a year ago.

The increase in sales for the three months ended March 31, 2022 was due primarily to increased recurring communication service revenues ($3,139,000) and sales of intrusion and access products ($3,712,000) and door-locking products ($826,000).

The increase in sales for the nine months ended March 31, 2022 was due primarily to increased recurring communication service revenues ($8,927,000) and sales of intrusion and access products ($8,714,000) and door-locking products ($4,117,000).

The increase in hardware sales are due, in part, to the increase in customer demand after the decline that resulted from the COVID-19 pandemic.

Overall gross profit for the three months ended March 31, 2022 increased to $15,033,000 or 41.9% of sales as compared to $12,910,000 or 45.7% of sales for the same period a year ago.

Gross profit on equipment sales for the three months ended March 31, 2022 decreased to $4,539,000 or 19.0% of equipment sales as compared to $5,261,000 or 27.2% of equipment sales for the same period a year ago.

Overall gross profit for the nine months ended March 31, 2022 increased to $39,932,000 or 39.8% of sales as compared to $35,005,000 or 44.5% of sales for the same period a year ago.

Gross profit on equipment sales for the nine months ended March 31, 2022 decreased to $11,003,000 or 16.4% of equipment sales as compared to $14,269,000 or 26.3% of equipment sales for the same period a year ago.

The decrease in gross profit on equipment sales and gross profit as a percentage of equipment sales for the three and nine months was primarily due to continued inflation of freight and component part costs relating to the current, world-wide supply chain problems, an unfavorable shift in product mix to the Company’s Starlink radio products (products which lead to the more profitable recurring service revenues) as well as more aggressive promotional pricing of these radios in order to increase the Company’s market share of these products.

Gross profit on service sales for the three months ended March 31, 2022 increased to $10,494,000 or 87.2% of service sales as compared to $7,649,000 or 86.0% of service sales for the same period a year ago.

Gross profit on service sales for the nine months ended March 31, 2022 increased to $28,929,000 or 86.9% of service sales as compared to $20,736,000 or 85.1% of service sales for the same period a year ago.

The increase in gross profit on service sales was due primarily to the 35.3% and 36.7% increases in sales of these services for the three and nine months ended March 31, 2022, respectively, as compared to the same periods a year ago as well as the continued shift in mix to the company’s fire radio services, which typically have a higher margin than those for intrusion radio services.

Research and development expenses for the three months ended March 31, 2022 increased $107,000 to $2,009,000, or 5.6% of net sales, as compared to $1,902,000, or 6.7% of net sales, for the same period a year ago.

Research and development expenses for the nine months ended March 31, 2022 increased $243,000 to $5,918,000, or 5.9% of net sales, as compared to $5,675,000, or 7.2% 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 March 31, 2022 increased 41.2% to $8,442,000 from $5,980,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales increased to 23.5% for the three months ended March 31, 2022 as compared to 21.2% for the same period a year ago.

Selling, general and administrative expenses for the nine months ended March 31, 2022 increased 33.4% to $23,983,000 from $17,979,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales increased to 23.9% for the nine months ended March 31, 2022 as compared to 22.9% for the same period a year ago.

The increase in selling, general and administrative expenses was due primarily to increased sales incentive compensation relating to the increase in net sales as discussed above, as well as an increase in tradeshow and non-recurring legal expenses.

Other income (expense) for the three months ended March 31, 2022 decreased $133,000 to expense of $177,000 as compared to expense of $44,000 for the same period a year ago.

Other income (expense) for the nine months ended March 31, 2022 increased $3,855,000 to income of $3,802,000 as compared to expense of $53,000 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 first quarter of fiscal 2022.

The Company’s provision for income taxes for the three months ended March 31, 2022 increased by $508,000 to $1,132,000 as compared to $624,000 for the same period a year ago.

The Company’s provision for income taxes for the nine months ended March 31, 2022 increased by $349,000 to $1,771,000 as compared to $1,422,000 for the same period a year ago.

The increase in the provision for income taxes for the three and nine 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 12.8% and 12.6% for the nine months ended March 31, 2022 and 2021, respectively.

Net income for the three months ended March 31, 2022 decreased by $1,087,000 to $3,273,000 or $0.09 per diluted share as compared to $4,360,000 or $0.12 per diluted share for the same period a year ago.

The decrease in net income for the three months ended March 31, 2022 was primarily due to the items described above.

Net income for the nine months ended March 31, 2021 increased by $2,186,000 to $12,062,000 or $0.33 per diluted share as compared to $9,876,000 or $0.27 per diluted share for the same period a year ago.

The increase in net income for the nine months ended March 31, 2022 was primarily due to the items described above.

Net Sales for the three months ended September 30, 2022 increased by $8,442,000, or 27.2%, to $39,493,000 as compared to $31,051,000 for the same period a year ago.

The increase in sales for the three months ended September 30, 2022 was due primarily to increased recurring communication service revenues ($3,582,000), Napco brand intrusion products, which include the Company’s cellular radio products ($3,332,000), Alarm Lock brand door-locking products ($1,126,000), and Continental brand access control products ($402,000).

The Company’s increase in equipment sales was primarily due to customer demand returning after the decline during the COVID-19 pandemic and the related closures throughout the United States.

The Company's gross profit increased by $4,711,000 to $18,167,000, or 46.0% of net sales, for the three months ended September 30, 2022 as compared to $13,456,000, or 43.3% of net sales, for the same period a year ago.

Gross profit on equipment sales was $6,022,000, or 23.4% of net equipment sales, for the three months ended September 30, 2022 and $4,655,000, or 22.4% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $12,145,000, or 88.0% of net service revenues, for the three months ended September 30, 2022 and $8,801,000, or 86.1% of net service revenues, for the same period a year ago.

The increase in gross profit in dollars and as a percentage of net sales on equipment sales and service revenues was was primarily the result of the increase in revenues of each as described above.

The increases in revenues resulted in improved overhead absorption rates.

In addition, the increase in gross margin on service revenues was due, in part, to increased service revenues relating to the Company’s fire radios, which have higher monthly selling prices than the Company’s intrusion radios.

Research and development expenses for the three months ended September 30, 2022 increased $497,000 to $2,428,000, or 6.2% of net sales, as compared to $1,931,000, or 6.2% of net sales, for the same period a year ago.

The increase in dollars was due primarily to salary increases and additional staff.

Selling, general and administrative expenses for the three months ended September 30, 2022 increased 15.6% to $8,490,000 from $7,346,000 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 September 30, 2022 as compared to 23.7% for the same period a year ago.

The increase in dollars resulted primarily from increases in sales commissions, stock option expense and legal expenses.

The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by the aforementioned increase in expense dollars.

Interest and other (expense) income, net for the three months ended September 30, 2022 decreased by $120,000 to an expense of $103,000 as compared to income of $17,000 for the same period a year ago.

Gain on extinguishment of debt resulted from a one-time gain in the three months ended September 30, 2021 which resulted from the forgiveness of the Company’s PPP loans as described in Note 8 to the condensed consolidated financial statements.

The Company’s provision for income taxes for the three months ended September 30, 2022 increased by $396,000 to $744,000 as compared to $348,000 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.

The Company’s effective rate for income tax was 10.4% and 4.3% for the three months ended September 30, 2022 and 2021, respectively.

The effective rate for the three months ended September 30, 2021 was reduced due to the other income of $3.9 million being non-taxable.

Net income for the three months ended September 30, 2022 decreased by $1,350,000 to $6,402,000 or $0.17 per diluted share as compared to $7,752,000 or $0.21 per diluted share for the same period a year ago.

The decrease in net income for the three months ended September 30, 2022 was primarily due to the inclusion of income from the forgiveness of debt in other income in the three months ended September 30, 2021 as well as the other items described above.

Due to the inclusion of $3.9 million of income from the forgiveness of debt net income and diluted earnings per share for the three months ended September 30, 2021 would have been $3.8 million and $0.10, respectively.

Liquidity and Capital Resources

During the nine months ended March 31, 2022, the Company utilized a portion of its cash generated from operations ($1,247,000 of $8,413,000) to purchase property, plant and equipment ($1,189,000) and marketable securities ($58,000).

During the three months ended September 30, 2022, the Company utilized a portion of its cash balance at June 30, 2022 ($12,365,000 of $41,730,000) to fund operations ($1,965,000) and to purchase marketable securities and other investments ($10,028,000) and property, plant and equipment ($372,000).

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, 2022 decreased by $3,872,000 to $24,209,000 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 March 31, 2022.

Inventories at March 31, 2022 increased by $10,978,000 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 the continued increase in component unit costs and increased volume of 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 increased by $5,264,000 as of March 31, 2022, as compared to June 30, 2021.

This increase was due primarily to the increase in component part purchases as described above.

As of March 31, 2022, the Company maintained a revolving credit facility of $11,000,000 which expires in June 2024.

As of March 31, 2022, 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, 2022 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

Accounts receivable at September 30, 2022 decreased by $7,876,000 to $21,342,000 as compared to $29,218,000 at June 30, 2022.

This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2022, which is typically the Company’s highest, as compared to the quarter ended September 30, 2022.

Inventories, which include both current and non-current portions, increased by $14,051,000 to $63,837,000 at June 30, 2022 as compared to $49,786,000 at June 30, 2022.

The increase was due primarily to higher costs of component parts and freight-in as well as a build-up of inventory of the Company’s radio products in order to mitigate potential supply chain interuptions of these products..

The increase was also due to the ongoing shortages of certain component parts and the Company purchasing large quantities of these hard to source component parts when they become available.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $645,000 to $23,980,000 as of September 30, 2022 as compared to $24,625,000 as of June 30, 2022.

This decrease is primarily due to a decrease in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s Consolidated Financial Statements, and a decrease in accrued annual bonuses and commissions as partially offset by an increase in accounts payable which relates to the increase in invertory discussed above.

As of September 30, 2022 and 2021, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”), with no amounts outstanding, which expires in June 2024.

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

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

As of September 30, 2022 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