NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2017 (fiscal 2018 Q2); unaudited consolidated results. NAPCO manufactures and sells security, access-control, door-locking, alarm, and video-surveillance products. Sales are seasonal, typically peaking in the fiscal fourth quarter. All dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Year-over-year | Six months ended Dec. 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Net sales | $21.112 | +1.9% | $42.286 | +3.4% |
| Gross profit / margin | $6.840 / 32.4% | $6.617 / 31.9% | $13.719 / 32.4% | $13.069 / 32.0% |
| Operating income | $1.166 | +9.6% | $2.225 | +25.0% |
| Net income | $1.233 | +43.9% | $2.123 | +49.0% |
| Diluted EPS | $0.07 | Prior: $0.05 | $0.11 | Prior: $0.08 |
Six-month operating cash flow was $2.824 million, versus $2.960 million a year earlier. Investing used $0.651 million, principally for capital expenditures; financing used $1.678 million, including $1.500 million of debt repayment and $0.194 million for treasury-stock purchases. Cash rose $0.495 million to $3.949 million.
At December 31, cash was $3.949 million, current assets $49.136 million, and current liabilities $9.517 million, giving working capital of approximately $39.619 million. Total debt was $2.000 million, down from $3.500 million at June 30, 2017. The $11 million revolving facility had $9 million available and expires in June 2021. Total assets were $70.487 million. Inventories, current and non-current combined, were $31.866 million.
Material changes and management commentary
- Revenue growth was mainly driven by intrusion products and recurring intrusion-service revenue: recurring services rose $0.968 million (52%) in the quarter and $1.894 million (54%) for six months. Access-control sales also increased; door-locking sales declined $0.525 million in the quarter and $0.535 million for six months.
- Gross margin improved modestly. SG&A increased 2.2% for the quarter and 1.8% for six months; six-month SG&A as a share of sales declined to 27.2% from 27.6%. Management attributed higher expenses mainly to sales commissions and, for the six-month period, added internal-control audit costs.
- Net income benefited from lower income-tax expense following the Tax Cuts and Jobs Act. The company recorded a $0.286 million reduction in net deferred tax liabilities and a provisional $0.208 million expense related to unremitted foreign earnings. Tax accounting remained provisional and incomplete at quarter-end. The reported quarterly tax benefit was $0.089 million; six-month tax expense was $0.054 million.
- Management said working capital, operating cash flows, and the revolving facility should fund operations for the next 12 months. It provided no specific revenue or earnings guidance and said fiscal 2018 R&D investments were not expected to contribute materially to revenue during that year.
Risks, contingencies, and unusual items
- Control weakness: The company reported ineffective disclosure controls and procedures at December 31, 2017, consistent with the prior fiscal year-end. It identified material weaknesses involving shipment-review documentation and coverage, subscription-service revenue controls, documentation of pricing reviews, and system-based pricing review. Management was implementing remediation and expected to complete actions during fiscal 2018.
- Customer concentration: Two nationwide distributors represented 15% and 14% of accounts receivable at December 31, 2017. Neither accounted for more than 10% of current-period sales.
- Market and operating exposure: Demand depends partly on housing and construction conditions; the business has significant fixed costs and seasonal sales. Management cited risks including economic and political conditions, competition and product development, reliance on the CEO, offshore tax effects, financing availability, and Dominican peso/U.S. dollar movements.
- Foreign exchange sensitivity: A 10% strengthening or weakening of the U.S. dollar against the Dominican peso was estimated to change annual operating income by approximately $0.630 million. A 1% interest-rate change on debt outstanding at quarter-end would change annual interest by approximately $0.020 million.
- The company disclosed ordinary-course litigation and stated that aggregate resolution was not expected to materially adversely affect financial position or results. Its revolving facility is secured by substantially all company assets and contains financial covenants and restrictions.
Important facts for investors to verify
- Whether recurring intrusion-service revenue growth continues and offsets weakness in door-locking products.
- Whether inventory growth and the $5.179 million classified as non-current reflect expected demand and can be converted to sales without material obsolescence charges.
- Progress and completion of remediation of the disclosed material weaknesses, and any resulting changes to reported figures or controls.
- Final accounting for the Tax Cuts and Jobs Act, including the provisional foreign-earnings tax expense and deferred-tax effects.
- Compliance with credit-facility covenants, borrowing-base availability, and liquidity as seasonal working-capital needs change.