NAPCO SECURITY TECHNOLOGIES, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward Looking Statements This Quarterly Report on Form 10-Q and the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2024 for more information. These factors and the other cautionary statements made in this prospectus and the documents we incorporate by reference should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus and the documents we incorporate by reference. In addition, any forward-looking statements represent our estimates only as of the date that this prospectus is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. We do not assume any obligation to update any forward-looking statements. 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. Overview Napco is a leading manufacturer and designer of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems as well as a 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, used for commercial, residential, institutional, industrial and governmental applications. We have experienced significant growth in recent years, primarily driven by our recurring service revenues from wireless communication services for intrusion and fire alarm systems. NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions. We are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks. Highlights from the quarter ended September 30, 2024 compared with the comparable quarter in fiscal 2023 included: ● Net sales for the quarter increased 6% to a record $44.0 million. ● Recurring service revenue (“RSR”) for the quarter increased 22% to $21.1 million. ● Gross margin for recurring service revenue increased to 91% as compared to 90%. ● Gross margin for equipment revenue was 24% as compared to 28%. ● Net income increased 7% to a first quarter record $11.2 million. Industry Trends Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. 28 Table of Contents Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces. Economic Conditions and Other Factors We are subject to the effects of general macroeconomic and market conditions. The markets for security devices and services are dynamic and highly competitive. Our competitors are continually developing new products and solutions for consumers and businesses. We must continue to evolve and adapt to respond to customer and user preferences over an extended time in pace with this changing environment. Critical Accounting Policies and Estimates The Company’s significant accounting policies are fully described in Note 1 to the Company’s consolidated financial statements included in its 2024 Annual Report on Form 10-K. Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes. These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates. Results of Operations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ (dollars in thousands) ​ ​ ​ ​ ​ ​ % Increase/ ​ 2024 2023 (decrease) Net sales: equipment revenues ​ $ 22,917 ​ $ 24,391 (6.0) % service revenues ​ ​ 21,086 ​ ​ 17,285 ​ 22.0 % Total net sales ​ ​ 44,003 ​ ​ 41,676 ​ 5.6 % Gross Profit: equipment ​ ​ 5,407 ​ ​ 6,894 ​ (21.6) % services ​ ​ 19,209 ​ ​ 15,519 ​ 23.8 % Total gross profit ​ 24,616 ​ 22,413 9.8 % Gross profit as a % of net sales: ​ 55.9 % 53.8 % 3.9 % equipment ​ ​ 23.6 % ​ 28.3 % (16.6) % services ​ ​ 91.1 % ​ 89.8 % 1.4 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Research and development ​ 3,057 ​ 2,437 25.4 % Selling, general and administrative ​ 9,703 ​ 8,421 15.2 % Selling, general and administrative as a percentage of net sales ​ 22.1 % 20.2 % 9.4 % Operating income ​ 11,856 ​ 11,555 2.6 % Interest and other income, net ​ 1,144 ​ 440 160.0 % Provision for income taxes ​ 1,815 ​ 1,517 19.6 % Net income ​ 11,185 ​ 10,478 6.7 % 29 Table of Contents Net Sales Net Sales for the three months ended September 30, 2024 increased $2,327,000 to $44,003,000 as compared to $41,676,000 in the comparable period. Net equipment revenues for the three months ended September 30, 2024, decreased $1,474,000 to $22,917,000 as compared to $24,391,000 in the comparable period. The decrease in net equipment sales was primarily due to decreases in intrusion and access alarm products of $233,000 and door locking devices of $1,241,000. Net service revenues for the three months ended September 30, 2024, increased $3,801,000 to $21,086,000 as compared to $17,285,000 in the Comparable period. The increase in net service revenues was primarily due to an increase in our cellular (radio) communication device activations. Gross Profit Overall gross profit for the three months ended September 30, 2024 increased $2,203,000 to $24,616,000, or 55.9% of net sales, as compared to $22,413,000, or 53.8% of net sales, for the comparable period. Gross profit from equipment sales was $5,407,000, or 23.6% of equipment sales, as compared to $6,894,000, or 28.3% of net equipment sales, for the comparable period. The decrease in gross profit percentage from equipment sales is primarily a result of product mix. Door locking products historically result in higher margin percentages as compared to access alarm products and specifically cellular (radio) communicator devices, which also result in future increases in recurring alarm communication services revenue. Gross profit on service revenues was $19,209,000, or 91.1% of net service revenues, as compared to $15,519,000, or 89.8% of net service revenues, for the comparable period a year ago. The increase in gross profit percentage was a result of renegotiation of royalty arrangements and volume rebates received from carriers. Research and Development Research and development expenses for the three months ended September 30, 2024 increased by $620,000 to $3,057,000, or 6.9% of net sales, as compared to $2,437,000, or 5.8% of net sales, for the comparable period. The increase in research and development expenses was primarily a result of annual compensation increases and hiring of additional resources. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2024 increased by $1,282,000 to $9,703,000 as compared to $8,421,000 for the comparable period. The increase in SG&A expenses was primarily attributable to compensation increases and hiring of additional staff, increases in advertising and insurance costs, partially offset by decreases in professional fees. Other Income (Expense) Interest and other income, net for the three months ended September 30, 2024 increased by $704,000 to income of $1,144,000 as compared to income of $440,000 for the comparable period. The increase in income was primarily due to an increase in interest income on short-term investments as a result of higher interest rates and larger deposit balances. Income Taxes The Company’s provision for income taxes for the three months ended September 30, 2024 increased by $298,000 to $1,815,000 as compared to $1,517,000 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 14.0% and 12.6% for the three months ended September 30, 2024 and 2023 respectively. The Company’s effective tax rate for the three months ended September 30, 2024 increased as a result of higher non-deductible stock based compensation. 30 Table of Contents Liquidity and Capital Resources Our cash and cash equivalents increased by $20,255,000 during the quarter ended September 30, 2024, and our cash and cash equivalents and short-term investments as of September 30, 2024 was $96,522,000. We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months. As of September 30, 2024, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, none of which has been drawn. The Company has no outstanding debt. A summary of the cash flow activity for the periods ended September 30, 2024 and 2023 is as follows: Cash Flows from Operating Activities Net cash provided by operating activities was $12.0 million for the period ended September 30, 2024 and was due to net income of $11.2 million and increase in cash flow from changes in operating assets and liabilities of $1.3 million, partially offset by adjustments for non-cash items of $.4 million. The changes in operating assets and liabilities were largely attributable to increases in accounts receivables and decreases in inventories and accounts payable and accrued expenses. Net cash provided by operating activities was $11.2 million for the period ended September 30, 2023 and was due to net income of $10.5 million and adjustments for non-cash items of $1.7 million, partially offset by a decrease in cash flow from operating activities due to changes in operating assets and liabilities of $1.0 million. The changes in operating assets and liabilities was largely attributable to a decrease in accounts receivable and an increase in and accounts payable and accrued expenses offset by an increase in inventories. Cash Flows from Investing Activities The net cash provided by investing activities of $15.5 million during the period ended September 30, 2024 was primarily attributable to the redemption of other investments ($16.3 million) partially offset by expenditures used for capital expenditures ($.7 million) and purchase of investments ($.1 million). The cash used in investing activities of $0.6 million during the period ended September 30, 2023, was primarily attributable to expenditures used for capital expenditures and purchase of investments. The change in use of cash for investing activities from 2023 to 2024 was a reduction in investments in term deposits (other investments). Cash Flows from Financing Activities The cash used in financing activities of $7.2 million for the period ended September 30, 2024 was primarily related to the purchase of treasury shares. The cash used in financing activities of $2.9 million for the period ended September 30, 2023 was primarily related to the payment of stockholder dividends. Contractual Obligations and Commitments As of September 30, 2024, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business. On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges. The service charges increase 2% annually over the remaining life of the lease.