NAPCO Security Technologies, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal second quarter and first six months ended December 31, 2021; the comparable periods ended December 31, 2020. NAPCO designs and manufactures security equipment and provides recurring wireless alarm communication services. Its fiscal year ends June 30. Equipment sales are typically seasonal, with a historical peak in the fiscal fourth quarter.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net sales | $33.408 million | $27.205 million | $64.459 million | $50.378 million |
| Gross profit / margin | $11.443 million / 34.3% | $11.403 million / 41.9% | $24.899 million / 38.6% | $22.095 million / 43.9% |
| Operating income | $1.270 million | $3.669 million | $5.449 million | $6.323 million |
| Net income | $1.037 million | $3.197 million | $8.789 million | $5.516 million |
| Diluted earnings per share | $0.03 | $0.09 | $0.24 | $0.15 |
| Cash provided by operating activities | Not presented separately | Not presented separately | $7.801 million | $8.937 million |
- Quarterly sales grew 22.8%; six-month sales grew 28.0%. Service revenue increased 34.7% for the quarter and 37.4% for the six-month period. Equipment revenue rose 17.7% and 23.8%, respectively.
- Quarterly net income fell 67.6%, as higher sales were offset by weaker equipment profitability and higher operating expenses. Six-month net income rose 59.3%, principally including a $3.904 million gain from forgiveness of Paycheck Protection Program (PPP) loans.
- Equipment gross margin declined to 8.1% for the quarter and 15.0% for six months, versus 23.2% and 25.8%. Management attributed the deterioration to freight and component-cost inflation, supply-chain issues, product mix, and promotional pricing. Service margins improved to 87.4% and 86.7%.
- Operating expenses increased: quarterly selling, general and administrative expenses rose 40.1%, partly reflecting sales incentives and stock-based compensation. Six-month stock-based compensation was $1.344 million versus $0.188 million a year earlier.
Financial position and liquidity
- At December 31, 2021, cash and cash equivalents were $41.951 million and marketable securities were $5.417 million. Total assets were $131.391 million; stockholders’ equity was $103.525 million.
- Current assets were $103.328 million and current liabilities were $19.414 million, for working capital of approximately $83.914 million.
- Debt was zero at December 31, 2021. The $11 million revolving credit facility, expiring in June 2024, was undrawn and available, subject to its covenants. The $3.904 million PPP loans were forgiven during the six-month period.
- Operating cash flow was $7.801 million, down from $8.937 million. Inventory increased $5.288 million from June 30, 2021, which the company linked to production level-loading and purchases of hard-to-source components.
- Management said working capital, operating cash flows, and the revolving facility should be sufficient to fund operations for the next 12 months. No material capital-expenditure or inventory-purchase commitments were reported beyond normal-course purchase orders.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance was provided. Management said it believed the post-pandemic demand recovery would continue but cautioned that renewed COVID-related building or construction restrictions could disrupt it.
- Supply-chain constraints and inflation in freight and component costs are pressuring equipment margins. Demand is also affected by economic conditions, housing and construction activity, and seasonal buying patterns.
- Three customers accounted for 42% of accounts receivable at December 31, 2021. The filing warns that customer defaults could adversely affect results.
- A 10% strengthening or weakening of the U.S. dollar against the Dominican peso would change annual operating income by approximately $0.7 million. Foreign sales are denominated in U.S. dollars, which may affect customers’ ability to pay or order.
- The SBA may audit PPP forgiveness applications for six years; the filing notes that the SBA has indicated it will audit loans exceeding $2 million. The IRS notified the company in January 2022 that it would examine the fiscal 2020 income tax return; management considers its provision adequate but says the outcome is uncertain.
- The company reported ordinary-course litigation and believes its aggregate resolution will not materially adversely affect its financial position or results. It also has a long-term Dominican Republic land lease and executive employment or severance arrangements.
- The board approved a two-for-one stock split, distributed January 4, 2022; share and per-share figures were retrospectively adjusted. The six-month net-income benefit from PPP forgiveness was described as non-taxable.
Important facts for investors to verify
- Reconcile the filing’s six-month gross-profit figures: the financial statements report $24.899 million, while the MD&A narrative reports $24.889 million.
- Reconcile the capital-expenditure amount: the cash flow statement reports $0.771 million of property, plant and equipment purchases, while MD&A describes $0.711 million.
- Assess whether equipment gross margins recover as supply costs and promotional pricing change, and whether recurring service growth continues.
- Monitor customer concentration and collection risk, inventory levels, and the availability of supply-constrained components.
- Track the IRS examination and any SBA review of PPP loan forgiveness, along with compliance with the revolving facility’s covenants.