Business Context and Reporting Period
NAPCO Security Technologies, Inc. designs and manufactures electronic security products, including intrusion and fire alarms, access control, door-locking and video-surveillance products, and provides recurring wireless communication services. This Form 10-Q covers the three months ended September 30, 2021, the first quarter of fiscal 2022; comparisons are with the three months ended September 30, 2020. The company operates as one reportable segment.
Key Financial Metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $31.051 | $23.173 |
| Gross profit / margin | $13.456 / 43.3% | $10.692 / 46.1% |
| Operating income | $4.179 | $2.654 |
| Net income | $7.752 | $2.319 |
| Diluted earnings per share | $0.42 | $0.13 |
| Cash provided by operating activities | $3.463 | $3.765 |
At September 30, 2021, cash and cash equivalents were $37.744 million and marketable securities were $5.435 million. Current assets were $97.519 million and current liabilities were $15.701 million. Total assets were $125.178 million; stockholders’ equity was $101.094 million. Debt was zero, with $11 million available under the revolving credit facility, which expires in June 2024. Capital spending was $0.522 million.
Changes Versus the Prior Comparable Period
- Sales rose 34.0% to $31.051 million. Equipment revenue increased 31.0% to $20.827 million, while service revenue increased 40.5% to $10.224 million.
- Management attributed sales growth mainly to higher recurring communication-service revenue and increased sales of intrusion/access and door-locking products.
- Gross profit increased 25.9%, but gross margin declined to 43.3% from 46.1%. Equipment gross margin fell to 22.4% from 28.9%; service gross margin improved to 86.1% from 83.9%.
- Operating income increased 57.5%. Net income rose 234.3%, substantially reflecting a $3.904 million gain from forgiveness of the company’s PPP loans.
- Cash from operations was $3.463 million, compared with $3.765 million. Inventory increased by $1.824 million from June 30, 2021, partly due to purchases of hard-to-source components and production level-loading.
Outlook, Risks and Unusual Items
- No specific revenue, earnings or other numerical guidance is provided. Management said it believes the post-pandemic recovery in customer demand will continue, but cautioned that renewed COVID-19-related building or construction restrictions could disrupt it.
- Management believes working capital, operating cash flows and the revolving facility will fund operations for at least the next 12 months.
- Management cited worldwide supply-chain problems, higher freight and component costs, product-mix changes and promotional pricing as pressures on equipment margins.
- Sales are historically seasonal: equipment sales generally peak in the fiscal fourth quarter and are lower in the July–September first quarter. Demand is also affected by housing and construction markets.
- Three customers accounted for 43% of accounts receivable at September 30, 2021; one represented 23% and also accounted for 14% of quarterly sales. A customer default could adversely affect results.
- The company reported exposure to Dominican peso expenses: a 10% U.S. dollar strengthening or weakening would change annual operating income by approximately $0.7 million. Foreign-customer collection and order risks are also noted.
- The $3.904 million PPP loans were forgiven during the quarter and recorded as a gain; the forgiveness income was non-taxable. The SBA may audit forgiveness applications for six years and has indicated it will audit those exceeding $2 million.
- Management said ordinary-course litigation, considered in aggregate, is not expected to have a material adverse effect. The filing reports no material change to previously disclosed risk factors apart from customer receivable concentration.
Important Facts for Investors to Verify
- How recurring service revenue and margins develop, and whether equipment-margin pressure from supply costs, product mix and pricing persists.
- Whether the $3.904 million PPP forgiveness gain is clearly separated from recurring operating performance when assessing earnings.
- Developments in component availability, inventory levels and customer demand, including any renewed COVID-19 or construction disruptions.
- Receivable exposure and payment performance of the three concentrated customers, particularly the customer representing 23% of receivables.
- Compliance with revolving-credit covenants and any outcomes from an SBA review of PPP forgiveness.