What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-06 compared with 2024-02-05 · 51 added, 54 removed, 60 unchanged (64% of the section changed)

35 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)

10 unchanged sentences

Operating income

Interest and other income (expense), net

Interest and other income, net

Provision for income taxes

Net Sales for the three months ended December 31, 2023 increased by $5,233,000, or 12.4%, to $47,547,000 as compared to $42,314,000 for the same period a year ago.

The increase in sales for the three months ended December 31, 2023 was due primarily to revenue increases in recurring communication services ($3,660,000), Alarm Lock brand door-locking products ($166,000), Marks brand door-locking products ($1,492,000), and Napco brand intrusion products ($98,000) as partially offset by a decrease in Continental brand access control products ($183,000).

Net Sales for the six months ended December 31, 2023 increased by $7,416,000, or 9.1%, to $89,223,000 as compared to $81,807,000 for the same period a year ago.

The increase in sales for the six months ended December 31, 2023 was due primarily to revenue increases in recurring communication services ($7,139,000), Alarm Lock brand door-locking products ($2,277,000), Marks brand door-locking products ($2,320,000) as partially offset by a decrease in Continental brand access control products ($104,000) and Napco brand intrusion products ($4,216,000).

The Company's gross profit increased by $10,658,000 to $25,012,000, or 52.6% of net sales, for the three months ended December 31, 2023 as compared to $14,354,000, or 33.9% of net sales, for the same period a year ago.

Gross profit on equipment sales was $8,351,000, or 28.8% of net equipment sales, for the three months ended December 31, 2023 as compared to $1,139,000, or 4.2% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $16,661,000, or 89.9% of net service revenues, for the three months ended December 31, 2023 and $13,215,000, or 88.8% 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

December 31, 2023 resulted 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 impacted the three months ended December 31, 2022.

The increase in gross profit in dollars and as a percentage of net sales on service revenues during the three months ended December 31, 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.

Net Sales for the three months ended March 31, 2024 increased by $5,735,000, or 13.2%, to $49,267,000 as compared to $43,532,000 for the same period a year ago.

The increase in sales for the three months ended March 31, 2024 was due primarily to revenue increases in recurring communication services ($4,390,000), Alarm Lock brand door-locking products ($407,000), and Marks brand door-locking products ($2,330,000) as partially offset by a decrease in Napco brand intrusion products ($1,376,000) and Continental brand access control products (16,000).

Net Sales for the nine months ended March 31, 2024 increased by $13,151,000, or 10.5%, to $138,490,000 as compared to $125,339,000 for the same period a year ago.

The increase in sales for the nine months ended March 31, 2024 was due primarily to revenue increases in recurring communication services ($11,530,000), Alarm Lock brand door-locking products ($2,684,000), and Marks brand door-locking products ($4,651,000) as partially offset by a decrease in Continental brand access control products ($122,000) and Napco brand intrusion products ($5,592,000).

The Company's gross profit increased by $5,205,000 to $26,484,000, or 53.8% of net sales, for the three months ended March 31, 2024 as compared to $21,279,000, or 48.9% of net sales, for the same period a year ago.

Gross profit on equipment sales was $8,556,000, or 28.8% of net equipment sales, for the three months ended March 31, 2024 as compared to $7,610,000, or 26.8% of net

equipment sales, for the same period a year ago.

Gross profit on service revenues was $17,928,000, or 91.8% of net service revenues, for the three months ended March 31, 2024 and $13,669,000, or 90.3% 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 March 31, 2024 resulted primarily from increased equipment revenues as well as a favorable shift in product mix to the Company’s locking products, which typically have higher gross margins than the Company’s intrusion products.

The increase in gross profit in dollars and as a percentage of net sales on service revenues during the three months ended March 31, 2024 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.

The Company's gross profit increased by $18,505,000 to $47,425,000, or 53.2% of net sales, for the six months ended December 31, 2023 as compared to $28,920,000, or 35.4% of net sales, for the same period a year ago.

Gross profit on equipment sales was $15,245,000, or 28.5% of net equipment sales, for the six months ended December 31, 2023 and $3,560,000, or 6.7% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $32,180,000, or 89.8% of net service revenues, for the three months ended December 31, 2023 and $25,360,000, or 88.4% 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 six months ended December 31, 2023 primarily resulted 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 impacted the six months ended December 31, 2022.

The increase in gross profit in dollars and as a percentage of net sales on service revenues during the six months ended December 31, 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 Company's gross profit increased by $23,710,000 to $73,909,000, or 53.4% of net sales, for the nine months ended March 31, 2024 as compared to $50,199,000, or 40.1% of net sales, for the same period a year ago.

Gross profit on equipment sales was $23,801,000, or 28.6% of net equipment sales, for the nine months ended March 31, 2024 and $11,170,000, or 13.7% of net equipment sales, for the same period a year ago.

Gross profit on service revenues was $50,108,000, or 90.5% of net service revenues, for the three months ended March 31, 2024 and $39,029,000, or 89.1% 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 revenues during the nine months ended March 31, 2024 resulted primarily from increased equipment revenues as well as a favorable shift in product mix to the Company’s locking products, which typically have higher gross margins than the Company’s intrusion products.

Additionally, the increase in the gross profit percentage for the nine months ended March 31, 2024 was due to the lower margins realized during the first two quarters of fiscal 2023.

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 during the first two quarters of fiscal 2023.

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 increase in gross profit in dollars and as a percentage of net sales on service revenues during the nine months ended March 31, 2024 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 December 31, 2023 increased by $320,000 to $2,542,000, or 5.3% of net sales, as compared to $2,222,000, or 5.3% of net sales, for the same period a year ago.

Research and development expenses for the six months ended December 31, 2023 increased by $329,000 to $4,979,000, or 5.6% of net sales, as compared to $4,650,000, or 5.7% of net sales, for the same period a year ago.

The increase in research and development for the three and six months primarily resulted from compensation increases and additional staff.

Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2023 increased by $861,000 to $8,665,000 as compared to $7,804,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 18.2% for the three months ended December 31, 2023 as compared to 18.4% for the same period a year ago.

The increase in SG&A expenses for the three months ended December 31, 2023 was primarily due to increases in legal and advertising expenses as well as additional expenses relating to the Company’s enhancing its internal control systems.

Research and development expenses for the three months ended March 31, 2024 increased by $443,000 to $2,757,000, or 5.6% of net sales, as compared to $2,314,000, or 5.3% of net sales, for the same period a year ago.

Research and development expenses for the nine months ended March 31, 2024 increased by $772,000 to $7,736,000, or 5.6% of net sales, as compared to $6,964,000, or 5.6% of net sales, for the same period a year ago.

The increase in research and development for the three and nine months primarily resulted from compensation increases and additional staff.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2024 increased by $808,000 to $9,233,000 as compared to $8,425,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 18.7% for the three months ended March 31, 2024 as compared to 19.4% for the same period a year ago.

The increase in SG&A expenses for the three months ended March 31, 2024 was primarily due to increases in legal expenses as well as additional expenses relating to the Company’s enhancing its internal control systems offset by a decrease in advertising expense.

The decrease as a percentage of net sales was due primarily to the increase in net sales being proportionally larger than the increase in SG&A expenses.

Selling, general and administrative expenses for the six months ended December 31, 2023 increased by $792,000 to $17,086,000 as compared to $16,294,000 for the same period a year ago.

The increase in SG&A expenses for the six months ended December 31, 2023 was primarily due to increases in legal and accounting fees, advertising expenses as well as additional expenses relating to the Company’s enhancing its internal control systems.

These increased expenses were partially offset by decreased incentive compensation for certain executive officers.

SG&A expenses as a percentage of net sales decreased to 19.1% for the six months ended December 31, 2023 as compared to 19.9% for the same period a year ago.

Selling, general and administrative expenses for the nine months ended March 31, 2024 increased by $1,600,000 to $26,319,000 as compared to $24,719,000 for the same period a year ago.

SG&A expenses as a percentage of net sales decreased to 19.0% for the nine months ended March 31, 2024 as compared to 19.7% for the same period a year ago The increase in SG&A expenses for the nine months ended March 31, 2024 was primarily due to increases in legal and accounting fees as well as additional expenses relating to the Company’s enhancing its internal control systems.

These increased expenses were partially offset by decreased incentive compensation for certain executive officers as well as a decrease in the stock based compensation.

The decrease as a percentage of net sales was due primarily to the increase in net sales being proportionally larger than the increase in SG&A expenses.

Interest and other income (expense), net for the three months ended December 31, 2023 increased by $542,000 to income of $729,000 as compared to income of $187,000 for the same period a year ago.

Interest and other income (expense), net for the six months ended December 31, 2023 increased by $1,085,000 to income of $1,169,000 as compared to income of $84,000 for the same period a year ago.

The increase in income for the three and six 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 December 31, 2023 increased by $1,338,000 to $1,924,000 as compared to $586,000 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 13.2% and 13.0% for the three months ended December 31, 2023 and 2022 respectively.

The Company’s provision for income taxes for the six months ended December 31, 2023 increased by $2,394,000 to $3,441,000 as compared to $1,047,000 for the same period a year ago.

Interest and other income, net for the three months ended March 31, 2024 increased by $200,000 to income of $637,000 as compared to income of $437,000 for the same period a year ago.

Interest and other income, net for the nine months ended March 31, 2024 increased by $1,285,000 to income of $1,806,000 as compared to income of $521,000 for the same period a year ago.

The increase in income for the three and nine 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 March 31, 2024 increased by $507,000 to $1,935,000 as compared to $1,428,000 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 13.0% for the both the six months ended December 31, 2023 and 2022 respectively.

Net income for the three months ended December 31, 2023 increased by $8,681,000 to $12,610,000 or $0.34 per diluted share as compared to $3,929,000 or $0.11 per diluted share for the same period a year ago.

Net income for the six months ended December 31, 2023 increased by $16,075,000 to $23,088,000 or $0.62 per diluted share as compared to $7,013,000 or $0.19 per diluted share for the same period a year ago.

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

The Company’s effective rate for income tax was 12.8% and 13.0% for the three months ended March 31, 2024 and 2023 respectively.

The Company’s provision for income taxes for the nine months ended March 31, 2024 increased by $2,901,000 to $5,376,000 as compared to $2,475,000 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 12.9% and 13.0% for the nine months ended March 31, 2024 and 2023, respectively.

Net income for the three months ended March 31, 2024 increased by $3,647,000 to $13,196,000 or $0.36 per diluted share as compared to $9,549,000 or $0.26 per diluted share for the same period a year ago.

Net income for the nine months ended March 31, 2024 increased by $19,722,000 to $36,284,000 or $0.98 per diluted share as compared to $16,562,000 or $0.45 per diluted share for the same period a year ago.

The increase in net income for the three and nine months ended March 31, 2024, was primarily due to the items described above.

Liquidity and Capital Resources

The Company has cash, certificates of deposit (“CD”) which mature within 12 months, and marketable securities which aggregate to $87.5 million.

During the six months ended December 31, 2023, the Company utilized a portion of its cash balance at June 30, 2023 ($117,000 of $35,955,000) to purchase marketable securities and other investments ($655,000) and property, plant and equipment ($682,000).

During the nine months ended March 31, 2024, the Company utilized a portion of its cash balance at June 30, 2023 ($160,000) to purchase marketable securities and other investments ($1,123,000) and property, plant and equipment ($1,043,000).

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

During the six months ended December 31, 2023, the Company generated cash flows from operations of $18,693,000.

During the nine months ended March 31, 2024, the Company generated cash flows from operations of $31,032,000.

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, 2023 increased by $1,483,000 to $27,552,000 as compared to $26,069,000 at June 30, 2023.

This increase was due primarily to initial sales of intrusion products to a large, new customer during the quarter ended December 31, 2023.

Inventories, which include both current and non-current portions, increased by $4,285,000 to $52,634,000 at December 31, 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, even after the prices came down.

Accounts payable and accrued expenses, not including income taxes payable, increased by $1,525,000 to $21,211,000 as of December 31, 2023 as compared to $19,686,000 as of June 30, 2023.

This increase is primarily due to an increase in accounts payable, which was the result of a large increase in the amount of component part purchases occurring towards the end of the quarter ended December 31, 2023 as compared to those purchases made towards the end of the quarter ended June 30, 2023.

The increase is partially offset by a decrease in the accrued refund liabilities.

As of December 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.

Accounts receivable at March 31, 2024 increased by $4,204,000 to $30,273,000 as compared to $26,069,000 at June 30, 2023.

This increase was due primarily to sales of intrusion products to a large, new customer during the nine months ended March 31, 2024 as well as sales of door locking products to one of the Company’s customers in March 2024 to supply several of their contracting jobs.

Inventories, which include both current and non-current portions, increased by $1,754,000 to $50,103,000 as of March 31, 2024, as compared to $48,349,000 at June 30, 2023.

The increase was due primarily to the Company level-loading its production facility where production is smoothed out over the year in order to avoid large fluctuations in manpower requirements throughout the fiscal year.

Accounts payable and accrued expenses, not including income taxes payable, remained consistent at $19,745,000 as of March 31, 2024 as compared to $19,686,000 as of June 30, 2023.

As of March 31, 2024 long-term debt consisted of a revolving line of credit of $20,000,000 (“Amended Agreement”), with no amounts outstanding, which expires in February 2029.

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 December 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 $4,612,000 as of December 31, 2023 for customer returns and promotional credits which is more fully discussed in Note 2 to the condensed consolidated financial statements.

As of March 31, 2024, 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 $5,224,000 as of March 31, 2024 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