What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-05-08 · 39 added, 62 removed, 52 unchanged (66% 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, 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.

These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment.

These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold principally to independent distributors, dealers and installers of security equipment.

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.

13 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 susceptable to these fluctuations, allows us to generate a more consistent and predictable income stream.

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

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)

10 unchanged sentences

Interest and other income (expense), net

Gain on extinguishment of debt

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 partialy 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 $7,638,000 to $22,671,000, or 52.1% 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 $9,002,000, or 31.7% 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 $20,368,000 to $60,300,000, or 48.1% 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 $21,271,000, or 26.1% 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 and as a percentage of net sales on equipment sales 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 the Company’s Alarm Lock brand door locking products, which typically have higher margins.

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.

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.

Net Sales for the three months ended September 30, 2023 increased by $2,183,000, or 5.5%, to $41,676,000 as compared to $39,493,000 for the same period a year ago.

The increase in sales for the three months ended September 30, 2023 was due primarily to revenue increases in recurring communication services ($3,479,000), Alarm Lock brand door-locking products ($2,111,000), Marks brand door-locking products ($828,000), and Continental brand access control products ($79,000) as partially offset by a decrease in Napco brand intrusion products ($4,314,000).

The Company's gross profit increased by $7,847,000 to $22,413,000, or 53.8% of net sales, for the three months ended September 30, 2023 as compared to $14,566,000, or 36.9% of net sales, for the same period a year ago.

Gross profit on equipment sales was $6,894,000, or 28.3% of net equipment sales, for the three months ended September 30, 2023 and $2,421,000, or 9.4% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $15,519,000, or 89.8% of net service revenues, for the three months ended September 30, 2023 and $12,145,000, or 88.0% 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 revenues during the three months ended September 30, 2023 primarily resulted from a favorable shift in the proportion of sales to the Company’s door-locking products, which typically have higher margins than intrusion products, as well as from lower costs of certain components as compared to the same period a year ago when the Company was still feeling the effects of the global supply chain shortages.

The price of these components had increased during the supply chain disruptions that occurred during the three months ended September 30, 2022.

The increase in gross profit in dollars and as a percentage of net sales on service revenues during the three months ended September 30,

2023 was primarily the result of the increase in revenues as described above as well as a greater proportion of those revenues being generated by the Company’s fire radios, which generate higher monthly service charges than those of the Company’s intrusion radios.

The increases in total Gross Profit and total Gross Profit as a Percentage of Net Sales resulted from the increases described above.

Research and development expenses for the three months ended September 30, 2023 remained relatively consistent at $2,437,000, or 5.8% of net sales, as compared to $2,428,000, or 6.1% of net sales, for the same period a year ago.

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2023 remained relatively consistent at $8,421,000 as compared to $8,490,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 20.2% for the three months ended September 30, 2023 as compared to 21.5% 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.

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 $397,000 to $1,529,000 as compared to $1,132,000 for the same period a year ago.

Interest and other income (expense), net for the three months ended September 30, 2023 increased by $543,000 to income of $440,000 as compared to expense of $103,000 for the same period a year ago.

The increase in income for the three months was primarily due to an increase in interest income on certificates of deposits.

The Company’s provision for income taxes for the three months ended September 30, 2023 increased by $1,056,000 to $1,517,000 as compared to $461,000 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 12.4% 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 $1,679,000 to $3,450,000 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 was primarily due to higher taxable income in the U.S.

The Company’s effective rate for income tax was 11.8% 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 $7,567,000 to $10,840,000 or $0.29 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 $13,626,000 to $25,688,000 or $0.69 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.

Without the inclusion of $3.9 million of income from the forgiveness of debt net income and diluted earnings per share for the nine months ended March 31, 2022 would have been $8.2 million and $0.22, respectively.

The Company’s effective rate for income tax was 12.6% and 13.0% for the three months ended September 30, 2023 and 2022 respectively.

Net income for the three months ended September 30, 2023 increased by $7,394,000 to $10,478,000 or $0.28 per diluted share as compared to $3,084,000 or $0.08 per diluted share for the same period a year ago.

The increase in net income for the three months ended September 30, 2023 was primarily due to the items described above.

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 Company has cash, certificates of deposit (“CD”) which mature within 12 months, and marketable securities which aggregate to $74 million.

During the three months ended September 30, 2023, the Company utilized a portion of its cash balance at June 30, 2023 ($646,000 of $35,955,000) to purchase marketable securities and other investments ($389,000) and property, plant and equipment ($257,000).

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 three months ended September 30, 2023, the Company generated cash flows from operations of $11,210,000.

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 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 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 $11,000,000 to $60,786,000 at March 31, 2023 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 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.

As these challenges begin to subside, the Company believes it’s 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 is primarily due to a decreases in the Company’s accrued refund liability, which is explained in Note 2 to the Notes to the Company’s 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 it’s 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”), 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.

Accounts receivable at September 30, 2023 decreased by $3,148,000 to $22,921,000 as compared to $26,069,000 at June 30, 2023.

This decrease is primarily the result of the higher sales volume of equipment during the quarter ended June 30, 2023, which is typically the Company’s highest, as compared to the quarter ended September 30, 2023.

Inventories, which include both current and non-current portions, increased by $5,798,000 to $54,147,000 at September 30, 2023 as compared to $48,349,000 at June 30, 2023.

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 became available.

As these challenges have begun to subside, the Company has reduced the quantities of these components being purchased and believes it’s inventory levels will decrease.

Accounts payable and accrued expenses, not including income taxes payable, increased by $2,210,000 to $21,896,000 as of September 30, 2023 as compared to $19,686,000 as of June 30, 2023.

This increase is primarily due to an increase in accounts payable, which relates to the Company’s recent purchases relating to its newly introduced Prima intrusion alarm products as well as recent purchases of components for the Company’s radio products.

As of September 30, 2023 and 2022, 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 September 30, 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 $3,833,000 as of September 30, 2023 for customer returns and promotional credits which is 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

Item 2. Management’s Discussion and Analysis