NAPCO Security Technologies, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016; fiscal year ends June 30. Unaudited interim results. Napco manufactures and sells security, access-control, door-locking, alarm, and video-surveillance products. Results are seasonal, with sales historically strongest in the fiscal fourth quarter.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Quarter ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $20.715 million | $20.497 million | $40.883 million | $38.646 million |
| Gross profit / margin | $6.617 million / 31.9% | $6.201 million / 30.3% | $13.069 million / 32.0% | $11.838 million / 30.6% |
| Operating income | $1.064 million | $1.019 million | $1.780 million | $1.343 million |
| Net income | $857,000 | $976,000 | $1.425 million | $1.291 million |
| Diluted EPS | $0.05 | $0.05 | $0.08 | $0.07 |
| Operating cash flow | Not separately presented by quarter | $2.960 million | $3.294 million |
Quarterly sales rose 1.1%, while six-month sales increased 5.8%. For the six-month period, gross margin improved to 32.0% from 30.6%; SG&A rose 7.6% to $11.289 million and was 27.6% of sales versus 27.2%. Six-month operating income grew 32.5%. Net income increased 10.4% for six months but fell 12.2% in the quarter, primarily reflecting higher income tax expense; quarterly tax expense was $189,000 versus $2,000, and six-month tax expense was $313,000 versus a $42,000 benefit. The six-month effective tax rate was 18%, compared with (3)% in the prior period.
Balance sheet and liquidity
- At December 31, cash was $3.784 million; current assets were $44.469 million and current liabilities $9.145 million, implying working capital of approximately $35.324 million and a current ratio of about 4.9.
- Total debt was $2.350 million ($2.000 million revolver and $350,000 term loan), down from $4.800 million at June 30, 2016. The revolver had $9.000 million available under its $11 million commitment. Cash exceeded reported debt by approximately $1.434 million.
- Six-month operating cash flow of $2.960 million funded $580,000 of capital expenditures and, together with cash on hand, $2.450 million of debt repayments. Cash decreased by $21,000 to $3.784 million.
- Inventories, current and non-current, totaled $27.706 million, up $2.369 million from June 30; accounts receivable declined $2.745 million to $16.267 million.
Material changes and management commentary
- Intrusion product sales, particularly wireless products, drove growth: up $863,000 for the quarter and $2.247 million for six months. Door-locking and access-control sales weakened, which management attributed primarily to softer commercial and industrial building markets.
- Higher production levels improved gross profit through increased overhead absorption. SG&A increased mainly due to advertising and additional selling personnel.
- Management expects working capital, operating cash flow, and the revolving credit facility to fund operations for the next 12 months. No formal revenue or earnings guidance is provided. Management said R&D products developed in fiscal 2017 are not expected to contribute materially to that year’s revenue, but may benefit future years.
- Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective. It noted that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- One customer represented 25% of receivables at December 31 and 13% of quarterly sales; the same customer accounted for 14% of six-month sales. Sales returns, rebates, and allowances were 8% of gross sales for the six months, versus 7% a year earlier.
- Debt agreements are secured by company assets and include borrowing, dividend, and financial-ratio covenants. Debt carries variable interest rates; management estimated a 1% rate change would affect annual interest by approximately $23,500 at the period-end balance.
- Foreign-currency exposure includes Dominican peso expenses: a 10% strengthening or weakening of the U.S. dollar against the peso was estimated to change annual operating income by approximately $630,000. Foreign customer exposure could also affect collections and orders, although sales are denominated in U.S. dollars.
- Management says ordinary-course claims and litigation are not expected, in aggregate, to have a material adverse effect. The filing also describes a 99-year Dominican Republic land lease with annual cost of $288,000 and executive employment/severance obligations.
- Income-tax examinations remain possible for fiscal 2012 and later years. The company increased its reserve for uncertain tax positions by $29,000 during the six months and reported $177,000 of unrecognized net tax benefits.
Important facts for investors to verify
- Whether wireless intrusion-product demand persists and offsets softness in door-locking and access-control markets.
- Whether inventory growth and the seasonal sales pattern convert into cash as expected, and whether inventory reserves remain adequate.
- Customer concentration, receivable collections, and the assumptions behind sales-return and allowance estimates.
- Compliance with credit-facility covenants, remaining revolver availability, and the effects of interest-rate and Dominican peso movements.
- The timing and financial impact of pending accounting-standard adoptions, particularly lease accounting and revenue recognition; management was still evaluating their effects.