What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-01 compared with 2023-09-01 · 61 added, 60 removed, 63 unchanged (66% of the section changed)

20 unchanged sentences

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.

Our wireless communication services have led to the substantial growth in our monthly recurring revenues.

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:

11 unchanged sentences

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.

Our monthly recurring service revenue, which is less susceptible to these fluctuations, allows us to generate a more consistent and predictable income stream.

The monthly recurring service revenue, which is less susceptible to these fluctuations, allows us to generate a more consistent and predictable stream of income and mitigates the risk of fluctuation in market demand for our equipment products.

Critical Accounting Policies and Estimates

2 unchanged sentences

Results of Operations

Three months ended March 31,

Nine months ended March 31,

Three months ended December 31,

Six months ended December 31,

(dollars in thousands)

15 unchanged sentences

Provision for income taxes

Net Sales for the three months ended March 31, 2023 increased by $7,627,000, or 21.2%, to $43,352,000 as compared to $35,905,000 for the same period a year ago.

The increase in sales for the three months ended March 31, 2023 was due primarily to revenue increases in recurring communication services ($3,110,000), Alarm Lock brand door-locking products ($4.278,000), Marks brand door-locking products ($927,000), and Continental brand access control products ($113,000) as partially offset by a decrease in Napco brand intrusion products ($1,250,000).

Net Sales for the nine months ended March 31, 2023 increased by $24,975,000, or 24.9%, to

$125,339,000 as compared to $100,364,000 for the same period a year ago.

The increase in sales for the nine months ended March 31, 2023 was due primarily to revenue increases in recurring communication services ($10,544,000), Napco brand intrusion products, which include the Company’s cellular radio products ($1,993,000), Alarm Lock brand door-locking products ($9,045,000), Marks brand door-locking products ($2,212,000), and Continental brand access control products ($1,182,000).

The Company’s increase in equipment sales was primarily due to a general increase in demand for the Company’s hardware products.

The Company's gross profit increased by $6,246,000 to $21,279,000, or 48.9% of net sales, for the three months ended March 31, 2023 as compared to $15,033,000, or 41.9% of net sales, for the same period a year ago.

Gross profit on equipment sales was $7,610,000, or 26.8% of net equipment sales, for the three months ended March 31, 2023 and $4,539,000, or 19.0% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $13,669,000, or 90.3% of net service revenues, for the three months ended March 31, 2023 and $10,494,000, or 87.2% 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 primarily the result of the increase in revenues of each as described above as well as increased availability and lower costs of components and transportation as compared to the same period last year, which resulted from improvements within the Company’s supply chain.

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.

The Company's gross profit increased by $10,267,000 to $50,199,000, or 40.1% of net sales, for the nine months ended March 31, 2023 as compared to $39,932,000, or 39.8% of net sales, for the same period a year ago.

Gross profit on equipment sales was $11,170,000, or 13.7% of net equipment sales, for the nine months ended March 31, 2023 and $11,003,000, or 16.4% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $39,029,000, or 89.1% of net service revenues, for the nine months ended March 31, 2023 and $28,929,000, or 86.9% of net service revenues, for the same period a year ago.

The increase in gross profit in dollars on equipment sales for the nine months ended March 31, 2023 was primarily the result of the increase in revenues as described above, which improved overhead absorption rates, increased availability and lower costs of components and transportation as compared to the same period last year as well as a favorable shift in product mix the Company’s Alarm Lock brand door locking products, which typically have higher margins.

These factors were mostly offset by the lower margins realized during the first two quarters of fiscal 2023 which resulted, in part, The decrease in gross profit as a percentage of equipment sales was primarily the result of the sale of the remaining portion of finished goods that were in opening inventory that contained certain higher priced components as disclosed in the Form 10-Q/A for the period ending September 30, 2022.

Net Sales for the three months ended December 31, 2022 increased by $8,906,000, or 26.7%, to $42,314,000 as compared to $33,408,000 for the same period a year ago.

The increase in sales for the three months ended December 31, 2022 was due primarily to increased recurring communication service revenues ($3,852,000), Alarm Lock brand door-locking products ($3,191,000), Marks brand door-locking products ($1,288,000), and Continental brand access control products ($664,000) partially offset by Napco brand intrusion products, which include the Company’s cellular radio products which declined ($89,000).

Net Sales for the six months ended

December 31, 2022 increased by $17,348,000, or 26.9%, to $81,807,000 as compared to $64,459,000 for the same period a year ago.

The increase in sales for the six months ended December 31, 2022 was due primarily to increased recurring communication service revenues ($7,434,000), Napco brand intrusion products, which include the Company’s cellular radio products ($3,242,000), Alarm Lock brand door-locking products ($4,317,000), Marks brand door-locking products ($1,285,000), and Continental brand access control products ($1,069,000).

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 $2,911,000 to $14,354,000, or 33.9% of net sales, for the three months ended December 31, 2022 as compared to $11,443,000, or 34.3% of net sales, for the same period a year ago.

Gross profit on equipment sales was $1,139,000, or 4.2% of net equipment sales, for the three months ended December 31, 2022 and $1,809,000, or 8.1% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $13,215,000, or 88.8% of net service revenues, for the three months ended December 31, 2022 and $9,634,000, or 87.4% of net service revenues, for the same period a year ago.

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

The decrease in gross profit as a percentage of equipment sales was primarily the result of the sale of the remaining portion of finished goods that were in opening inventory that contained certain higher priced components as disclosed in the Form 10-Q/A for the period ending September 30, 2022.

The Company purchased these components at a significant premium during the supply chain interruptions during the latter part of fiscal 2022 in order to continue to supply the Company’s communication devices that led to the creation of recurring service revenues for the Company.

The effect of these higher-priced components on the nine months ended March 31, 2023 was partially offset by the higher sales volume during this period as compared to the same period a year ago.

The increase in gross margin on service revenues was due primarily 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 March 31, 2023 increased $305,000 to $2,314,000, or 5.3% of net sales, as compared to $2,009,000, or 5.6% of net sales, for the same period a year ago.

Research and development expenses for the nine months ended March 31, 2023 increased $1,046,000 to $6,964,000, or 5.6% of net sales, as compared to $5,918,000, or 5.9% of net sales, for the same period a year ago.

These higher expenses were partially offset by the higher sales volume in the three months ended December 31, 2022 as compared to the same period a year ago.

The increase in gross margin on service revenues was due primarily to continued increases in overall recurring service revenues as well as to increased service revenues relating to the Company’s fire radios, which have higher monthly selling prices than the Company’s intrusion radios.

The Company's gross profit increased by $4,021,000 to $28,920,000, or 35.4% of net sales, for the six months ended December 31, 2022 as compared to $24,899,000, or 38.6% of net sales, for the same period a year ago.

Gross profit on equipment sales was $3,560,000, or 6.7% of net equipment sales, for the six months ended December 31, 2022 and $6,464,000, or 15.0% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $25,360,000, or 88.4% of net service revenues, for the six months ended December 31, 2022 and $18,435,000, or 86.7% of net service revenues, for the same period a year ago.

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

The Company purchased these components at a significant premium during the supply chain interruptions during the latter part of fiscal 2023 in order to continue to supply the Company’s communication devices that relate to the Company’s recurring service revenues.

These higher expenses were partially offset by the higher sales volume in the three months ended December 31, 2022 as compared to the same period a year ago.

Research and development expenses for the three months ended December 31, 2022 increased $244,000 to $2,222,000, or 5.3% of net sales, as compared to $1,978,000, or 5.9% of net sales, for the same period a year ago.

Research and development expenses for the six months ended December 31, 2022 increased $741,000 to $4,650,000, or 5.7% of net sales, as compared to $3,909,000, or 6.1% 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 (“SG&A”) expenses for the three months ended March 31, 2023 remained relatively consistent at $8,425,000 as compared to $8,442,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 19.4% for the three months ended March 31, 2023 as compared to 23.5% for the same period a year ago.

The decrease as a percentage of net sales was due primarily to the increase in net sales without the need to increase to increase SG&A expenses.

SG&A expenses for the nine months ended March 31, 2023 increased by $736,000, or 3.1%, to $24,719,000 from $23,983,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 19.7% for the nine months ended March 31, 2023 as compared to 23.9% for the same period a year ago.

The increase in dollars resulted primarily from increases in expenses relating to the Company's President and Chairman and the Company’s Executive Vice President and Chief Financial Officer selling shares of our Common stock in an underwritten secondary public offering, which is discussed more fully in Note 11 to the Condensed Consolidated financial statements, and credit card processing fees related to our monthly recurring service revenues.

Selling, general and administrative expenses for the three months ended December 31, 2022 decreased by $391,000 or 4.8% to $7,804,000 from $8,195,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 18.4% for the three months ended December 31 2022 as compared to 24.5% for the same period a year ago.

The decrease in dollars resulted primarily from higher stock option expense and legal expenses incurred in the three months ended December 31, 2021.

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 income (expense), net for the three months ended March 31, 2023 increased by $614,000 to income of $437,000 as compared to expense of $177,000 for the same period a year ago.

Interest and other income (expense), net for the nine months ended March 31, 2023 increased by $623,000 to income of $521,000 as compared to expense of $102,000 for the same period a year ago.

The increases in income for the three and nine months was primarily due to interest income on certificates of deposits purchased during the nine months ended March 31, 2023.

Gain on extinguishment of debt resulted from a one-time gain in the nine months ended March 31, 2022 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 March 31, 2023 increased by $296,000 to $1,428,000 as compared to $1,132,000 for the same period a year ago.

The increase in the provision for income taxes for the three months ended March 31, 2023 was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 13.0% and 25.7% for the three months ended March 31, 2023 and 2022, respectively.

The Company’s provision for income taxes for the nine months ended March 31, 2023 increased by $704,000 to $2,475,000 as compared to $1,771,000 for the same period a year ago.

The increase in the provision for income taxes for the nine months ended March 31, 2023 was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 13.0% and 12.8% for the nine months ended March 31, 2023 and 2022, respectively.

Net income for the three months ended March 31, 2023 increased by $6,276,000 to $9,549,000 or $0.26 per diluted share as compared to $3,273,000 or $0.09 per diluted share for the same period a year ago.

Net income for the nine months ended March 31, 2023 increased by $4,500,000 to $16,562,000 or $0.45 per diluted share as compared to $12,062,000 or $0.33 per diluted share for the same period a year ago.

The increase in net income for the three and nine months ended March 31, 2023 was primarily due to the items described above.

Selling, general and administrative expenses for the six months ended December 31, 2022 increased by 753,000 or 4.8% to $16,294,000 from $15,541,000 for the same period a year ago.

Selling, general and administrative expenses as a percentage of net sales decreased to 19.9% for the six months ended December 31 2022 as compared to 24.1% for the same period a year ago.

The increase in dollars resulted primarily from increases in credit card processing fees, insurance expense and commission 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 income (expense), net for the three months ended December 31, 2022 increased by $129,000 to income of $187,000 as compared to income of $58,000 for the same period a year ago.

Interest and other income (expense), net for the six months ended December 31, 2022 increased by $9,000 to income of $84,000 as compared to income of $75,000 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 December 31, 2022 increased by $295,000 to $586,000 as compared to $291,000 for the same period a year ago.

The increase in the provision for income taxes for the three months ended December 31, 2022 was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 13.0% and 21.9% for the three months ended December 31, 2022 and 2021, respectively.

The Company’s provision for income taxes for the six months ended December 31, 2022 increased by $408,000 to $1,047,000 as compared to $639,000 for the same period a year ago.

The increase in the provision for income taxes for the six months was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 13.0% and 6.8% for the six months ended December 31, 2022 and 2021, respectively.

The effective rate for the six months ended December 31, 2021 was reduced due to a one-time gain on extinguishment of debt of $3.9 million being non-taxable.

Net income for the three months ended December 31, 2022 increased by $2,892,000 to $3,929,000 or $0.11 per diluted share as compared to $1,037,000 or $0.03 per diluted share for the same period a year ago.

Net income for the six months ended December 31, 2022 decreased by $1,776,000 to $7,013,000 or $0.19 per diluted share as compared to $8,789,000 or $0.24 per diluted share for the same period a year ago.

The increase in net income for the three ended December 31, 2022 was primarily due to the items described above.

The decrease in net income for the three months ended September 30, 2022 was primarily due to the inclusion of one-time income from the forgiveness of debt ($3.9 million related to the Company’s PPP loan) in other income in the three months ended September 30, 2021 as well as the other items described above, including the decline in gross profit on hardware sales in the current year’s quarter.

Liquidity and Capital Resources

During the nine months ended March 31, 2023, the Company utilized a portion of its cash balance at June 30, 2022 ($32,732,000 of $41,730,000) to purchase marketable securities and other investments ($30,185,000) and property, plant and equipment ($2,547,000).

The securities and investments consist of money market accounts, CD’s and time deposits.

During the nine months ended March 31, 2023, the Company generated cash flows from operations of $12,416,000.

During the six months ended December 31, 2022, the Company utilized a portion of its cash balance at June 30, 2022 ($10,856,000 of $41,730,000) to purchase marketable securities and other investments ($10,078,000) and property, plant and equipment ($816,000).

During the six months ended December 31, 2022, the Company generated a cash flow from operations of $1,088,000.

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, 2023 decreased by $5,048,000 to $24,170,000 as compared to $29,218,000 at June 30, 2022.

This decrease was 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 March 31, 2023.

In addition, sales of the Company’s radio communication devices were unusually high in the month of June 2022 due to the Company fulfilling backorders of these products which had built up during the world-wide supply chain difficulties.

Sales of these products were at more normal levels in the month of March 2023.

Inventories, which include both current and non-current portions, increased by $899,000 to $50,685,000 at March 31, 2023 as compared to $49,786,000 at June 30, 2022.

Accounts receivable at December 31, 2022 decreased by $8,233,000 to $20,985,000 as compared to $29,218,000 at June 30, 2022.

In addition, sales of the Company’s radio communication products were unusually high in the month of June 2022 due to the Company fulfilling backorders of these products which had built up during the world-wide supply chain difficulties.

Sales of these products were at more normal levels in the month of December 2022.

Inventories, which include both current and non-current portions, increased by $5,697,000 to $55,483,000 at December 31, 2022 as compared to $49,786,000 at June 30, 2022.

The increase was due primarily to a build-up of inventory of the Company’s radio products in order to mitigate potential supply chain interruptions 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.

As these challenges have begun to subside, the Company believes its inventory levels will decrease.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $7,129,000 to $17,496,000 as of March 31, 2023 as compared to $24,625,000 as of June 30, 2022.

This decrease was 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 Condensed Consolidated Financial Statements, accrued employee compensation, and accounts payable, which relates to the Company reducing purchases of component parts in the latter part of the quarter ended March 31, 2023 after building up its inventory in fiscal 2022.

As of March 31, 2023 and 2022, long-term debt consisted of a revolving line of credit of $11,000,000 (“Revolver Agreement”) which expires in June 2024.

There was no outstanding balance under the Revolver Agreement at March 31, 2023 and June 30, 2022.

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

As these challenges begin to subside, the Company believes its inventory levels of these items will decrease.

Accounts payable and accrued expenses, not including income taxes payable, decreased by $6,917,000 to $17,708,000 as of December 31, 2022 as compared to $24,625,000 as of June 30, 2022.

This decrease was 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 salaries, a decrease in accrued annual bonuses and a decrease in accounts payable which relates to the Company reducing purchases of component parts in the latter part of the quarter ended December 31, 2022 after building up its inventory in fiscal 2022.

As of December 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 March 31, 2023, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

In addition, the Company’s balance sheet reflects a refund liability of $4,841,000 as of March 31, 2023 for customer returns and promotional credits which is more fully discussed in Note 2 to the Condensed Consolidated Financial Statements.

As of December 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.

In addition, the Company has a refund liability of $4,096,000 as of December 31, 2022 for customer returns and promotional credits as more fully discussed in Note 2 to the Condensed Consolidated Financial Statements.

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/A

Item 2. Management’s Discussion and Analysis