What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2024-08-29 compared with 2023-09-08 · 37 added, 82 removed, 120 unchanged (50% of the section changed)

1 unchanged sentence

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.

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.

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:

including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions.

We are also dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks, including our StarLink, iBridge, and more recently the iSecure product lines.

Today, millions of businesses, institutions, homes, and people around the globe are protected by products from the NAPCO Group of Companies.

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 are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks.

Our net sales were $188.8 million, $170.0 million and $143.6 million for the fiscal years ended June 30, 2024, 2023 and 2022, respectively.

The change in our net sales was driven primarily from increased sales of our recurring services ($14.0 million) and sales of equipment ($12.5 million) as compared to the same period a year ago.

The increase in our net sales from fiscal 2023 to 2024 was driven primarily from the continued growth of our recurring services revenues ($15.8 million) as well as an increase in sales of equipment products ($3.0 million).

The increase in equipment sales was due primarily to the increased demand for the Company’s door-locking products.

Our net income was $49.8 million, $27.1 million and $19.6 million for the fiscal years ended June 30, 2024, 2023 and 2022, respectively.

The increases in net income during this period were due primarily to the growth of our cellular products and the associated recurring service revenues which generated a gross margin of 89% in fiscal 2023.

The increase in net income during fiscal 2024 was due primarily to the growth of the recurring service revenues which generated a gross margin of 90% during the period.

Our Products and Services

The Company’s products and services are comprised of the following:

● Alarm Lock standalone and networked digital door locks

● Marks USA standard and custom Locksets, Panic Devices and Door Closers

● NAPCO Gemini intrusion alarm equipment

● NAPCO StarLink and FireLink cellular communication devices and services

● NAPCO iSecure integrated cellular intrusion alarm systems

● Continental Access door controllers and hosted services for access control

The Company’s products and services are comprised primarily of the following:

● Standalone and networked digital door locks

● Standard and custom Locksets, Panic Devices and Door Closers

● Intrusion alarm equipment

● Intrusion and fire alarm cellular communication devices and services

● Integrated cellular intrusion alarm systems

● Door controllers and hosted services for access control

Door Security Products

5 unchanged sentences

Communication equipment such as a cellular or digital communicator may be used to transmit the alarm signal to a central station or another person selected by a customer.

Cellular communicators have become more popular and panels and communicators are trending towards integration so that many alarm panels will contain an integrated cellular communication device.

communicators have become more popular and panels and communicators are trending towards integration so that many alarm panels will contain an integrated cellular communication device.

The Company manufactures and markets the following products for these alarm systems:

5 unchanged sentences

● Control Panels.

A control panel is the "brain"

of an alarm system.

A control panel is the "brain" of an alarm system.

When activated by any one of the various types of intrusion detectors, it can activate an audible alarm and/or various types of communication devices.

8 unchanged sentences

Combination units respond to both changes in heat patterns and changes in microwave patterns occurring at the same time.

Recurring Cellular Communication Services .

Cellular Communication (Recurring Service Revenues)

The Company provides cellular access for the cellular communication devices described above.

These services are provided and invoiced to the Company’s service customers on a month to month basis.

Revenues from these services have grown significantly over the past several years, increasing 77% from fiscal 2021 to fiscal 2023.

These revenues, which currently have a gross margin of approximately 89% for the fiscal year ended June 30, 2023, represent approximately 35% of our total revenue for the fiscal year ended of June 30, 2023.

The Company’s long-term goal is to have recurring revenues from these services represent at least 50% of total revenue.

These services are provided to the Company’s service customers on a month-to-month basis.

Access Control Systems .

11 unchanged sentences

It also buys and resells various video cameras, PC-based computers and peripheral equipment for video surveillance systems.

The Company designs, engineers, manufactures and markets the software and control panels discussed above.

It also buys and resells various identification readers, PC-based computers and various peripheral equipment for access control systems.

Peripheral Equipment

The Company also markets peripheral equipment manufactured by other companies.

Revenues from peripheral equipment have not been significant.

Our Growth Drivers

Recurring Revenue Business

In 2012, we began to generate recurring revenue by developing our cellular radio technology.

Since then, we have continued to introduce additional products generating recurring revenues, primarily in the cellular communication devices such as our StarLink, iBridge, and more recently the iSecure product lines.

These products are installed at the premises of end customers and we generate revenue from the installers by both the upfront purchase of our products and the monthly subscription fees for services we perform at our cloud-based operations center to communicate security breaches and fire alarms to a central station.

The monthly recurring revenue 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.

In addition, these monthly services generate higher gross margin, which has the effect of improving our profitability.

Recurring Service Revenue

In 2012, we began to generate monthly recurring service revenue by developing our cellular radio technology.

Revenues from these services have grown significantly over the past several years, increasing 65% from fiscal 2022 to fiscal 2024.

These revenues, which currently have a gross margin of approximately 90% for the fiscal year ended June 30, 2024, represent approximately 40% of our total revenue for the fiscal year ended of June 30, 2024.

The Company’s long-term goal is to have revenues from these recurring services represent at least 50% of total revenue.

We continue to introduce additional products generating recurring revenues, primarily in cellular communication devices.

These products are installed at the premises of end users and we generate revenue from the installers by both the upfront purchase of our products and the monthly subscription fees for cellular communication services.

Monthly recurring service revenue generate higher gross margins, and 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.

We believe there is a significant market opportunity for these products and services, because many commercial and residential customers prefer to purchase real-time security monitoring services to ensure continuous protection and swift responses to security breaches and fire alarms.

We also experienced accelerating growth in our recurring revenue from sales of fire radio products.

In the past few years, we introduced several Starlink fire radio solutions, including a Starlink dual path radio that can utilize cellular or internet technologies for their communication function.

Dual path radios are required by local fire codes in certain areas such as New York City or L.A.

A third fire radio was introduced during fiscal 2019 in the form of a Firelink fire panel with a Starlink fire radio built into it.

In general, the gross margin for fire radio products is higher than the other Starlink solutions.

The sales of fire radio products have contributed positively to our gross margin during the fiscal year ended June 30, 2023.

We expect that fire radio products will continue to be an increasing portion of the overall mix of our recurring revenue and positively impact our gross margin.

We intend to continue pursuing recurring revenue opportunities by developing new and innovative products and continuing our aggressive sales and marketing efforts.

For the fiscal year ended June 30, 2023, our recurring revenue constituted approximately 35% of our total revenue.

School Security and Public Safety

1 unchanged sentence

In the U.S., there are over 100,000 K-12 schools, over 5,000 colleges and universities and over 350,000 houses of worship.

Management estimates that less than 10% of these institutions have adequate protection from an active shooter or intruder.

Management estimates many of these institutions do not have adequate protection from an active shooter or intruder.

As a result of increased “active shooter” incidents, a number of U.S.

3 unchanged sentences

With a full suite of products and solutions, we believe we are well positioned to meet the security needs of schools, houses of worship, and other places where people congregate.

Depending on the needs of the school and their budget, we offer (i) Standalone LocDown

locks which can be operated by a teacher, (ii) a series of Networx standalone wireless locks which communicate with central controls, or (iii) enterprise-class access control with cellular connectivity, which allows the head of security to lock down all or part of the campus, including dorm rooms, classrooms and administrative offices, from a centralized office.

The Company has had several significant wins in school security contracts, including the Houston Independent School District, which is the largest school district in Texas and the seventh largest in the U.S.

On this project the Company implemented its Enterprise-wide security solution via its Continental Access control with intrusion, video and alarm communicators.

Another example is Pepperdine University in Malibu, California, where the Company provided a lockdown system in place for its over 1,700 dorm rooms that required both locking and access control technologies.

We were chosen because we were the only security company that has both locking and access control technologies that work on the same platform and met the needs of the university.

Depending on the needs of the school and their budget, we offer (i) Standalone LocDown locks which can be operated by a teacher, (ii) a series of Networx standalone wireless locks which communicate with central controls, or (iii) enterprise-class access control with cellular connectivity, which allows the head of security to lock down all or part of the campus, including dorm rooms, classrooms and administrative offices, from a centralized office.

Competitive Strengths

6 unchanged sentences

As more security installations include multiple security-related systems, which can include, intrusion, fire, access control, door-locking and connectivity, there is more demand for the various systems to communicate with each other.

By having everything manufactured under one roof, we can offer customers one integrated platform solution without the risk of incompatible equipment from multiple vendors to “talk” to each other.

By having everything

manufactured under one roof, we can offer customers one integrated platform solution without the risk of incompatible equipment from multiple vendors to “talk” to each other.

Our manufacturing facility located in the Dominican Republic (“D.R.”) manufactures over 90% of our products.

1 unchanged sentence

The Company also benefits from the lower tariffs available to it under The Dominican Republic-Central America FTA (CAFTA-DR).

manufacturing operation is vertically integrated and operates in a low-cost location, where the typical labor cost is approximately one-tenth (1/10) of the cost for similar services in the U.S.

manufacturing operation is vertically integrated and operates in a low-cost location, where the typical labor cost are significantly less than the cost for similar services in the U.S.

facility allows us to maintain a lower manufacturing overhead and improve our gross margin.

This facility is currently running one shift, plus a second shift on select products with the ability to run 3 full shifts.

Additional staffing is readily available for future expansion.

The annual revenue that can be generated per shift is approximately $100 million.

The building is a self-contained “concrete bunker” with ability to withstand Category 5 hurricanes.

We have enough land to build additional space;

180,000 square feet of additional manufacturing space in the D.R., and approximately 100,000 square feet of office and warehousing space in Amityville, should the need arise.

The Company has multiple transportation options between the D.R.

and Amityville facilities.

The building is self-contained with an ability to withstand a Category 5 hurricane.

Shipping times from the D.R.

12 unchanged sentences

As copper land lines are phased out and more people switch to cellular phone service for their homes, our cellular communication services become increasingly attractive in these installations, both new and existing.

We have built a strong

competitive position by developing a wide range of software capabilities from embedded micro-coding to enterprise system software, database design, mobile applications development, user portal design, mechanical and electronic mechanisms and telecommunications, featuring our significant radio and cellular communications expertise.

This has enabled us to create recurring revenue opportunities across product lines, and our goal is to expand such opportunities to generate recurring revenue that will account for over 50% of our total revenue and to sustain profitability from recurring revenue margins of over 80%.

We have built a strong competitive position by developing a wide range of software capabilities from embedded micro-coding to enterprise system software, database design, mobile applications development, user portal design, mechanical and electronic mechanisms and telecommunications, featuring our significant radio and cellular communications expertise.

We are also focusing on security solutions for the healthcare industry, including anti-ligature lockets designed for life safety and liability reduction in hospitals, behavior health institutions and correctional facilities, and such products are highly profitable while complying with applicable regulatory and health standards.

1 unchanged sentence

Research and Development

The success of the Company’s business depends substantially on its ability to develop new and proprietary technology and products.

The research and development (“R&D”) costs incurred by the Company are charged to expense as incurred and are included in "Operating expenses"

in the consolidated statements of operations.

During the fiscal years ended June 30, 2023, 2022 and 2021, the Company expended approximately $9,328,000, $8,024,000 and $7,620,000, respectively, on research and development activities conducted primarily by its engineering department to develop and improve the products.

The success of the Company’s business depends substantially on its ability to develop new and proprietary technology and products conducted primarily by its engineering department to develop and improve the products.

The Company intends to continue to conduct a significant portion of its future research and development activities internally.

We spend approximately 6% of our revenues on research and development.

Our Human Capital Resources

12 unchanged sentences

Compliance with these laws and regulations has not had and is not expected to have a material adverse effect on the Company, including capital expenditures for environmental compliance, or on its earnings or competitive position.

The Company's staff of approximately 59 sales and marketing support employees located at the Company's Amityville offices sells and markets our products primarily to independent distributors, wholesalers and dealers of security alarm and security hardware equipment.

The Company currently has approximately 9,000 customers made up of distributors, installing dealers and wholesalers who purchase our products from distributors or directly from the Company.

The Company's staff of approximately 59 sales and marketing support employees sells and markets our products primarily to independent distributors, wholesalers and dealers of security alarm and security hardware equipment.

The Company currently has approximately 1,800 active customers made up of distributors, installing dealers and wholesalers who purchase our products directly from the Company as well as many more who purchase our products from these distributors.

The Company's sales representatives periodically contact existing and potential customers to introduce new products and create demand for those as well as other Company products.

1 unchanged sentence

In addition to direct sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United States cities.

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

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.

In addition, demand for all of our products may be affected by the housing and construction markets.

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

The monthly recurring 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.

Raw Materials

12 unchanged sentences

In December 2008 the Company changed its name to NAPCO Security Technologies, Inc.

In 1987, the Company acquired a locking company, Alarm Lock Systems, the first of its three acquisitions.

In 2000, the Company acquired an access control company, Continental Instruments.

In 2008, the Company acquired another locking company, Marks USA.

In 1990, the Company began the process of moving most of its manufacturing operations offshore.

After studying various options, the D.R.

was chosen as it is relatively close to our headquarters (three and half hours by plane), is in the same time zone, has a relatively stable political and economic situation and is a low cost manufacturing environment.

In 1995, the Company built a state-of-the-art 180,000 square foot facility in the D.R., and we continued to improve and upgrade the facility’s manufacturing capability by utilizing and acquiring the latest technology and equipment.

Our executive offices are located at 333 Bayview Ave, Amityville NY 11701.

1 unchanged sentence

Website Access to Company Reports

Copies of our filings under the Securities Exchange Act of 1934 (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are available free of charge on our website ( www.napcosecurity.com ) on the same day they are electronically filed with the Securities and Exchange Commission.

Copies of our filings under the Securities Exchange Act of 1934 (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are available free of charge on our website ( https://investor.napcosecurity.com/sec-filings ) on the same day they are electronically filed with the Securities and Exchange Commission.

The Company has one class of Common Stock which trades on the NASDAQ Global Market under the symbol “NSSC”.

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-K

Item 1. Business