NAPCO Security Technologies, Inc. — Form 10-Q Summary
Business and period. NAPCO manufactures security, access-control, door-locking, alarm, and video-surveillance products, plus communication services. This filing covers the fiscal third quarter and nine months ended March 31, 2018; comparisons are with the periods ended March 31, 2017. Fiscal year ends June 30. Sales historically peak in the fiscal fourth quarter.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $22.2 million, up 6.7% | $64.5 million, up 4.5% |
| Gross profit / gross margin | $8.9 million / 40.1% | $25.9 million / 40.1% |
| Operating income | $1.9 million, up 68.3% | $4.1 million, up 41.9% |
| Net income / diluted EPS | $1.8 million / $0.10 | $4.0 million / $0.21 |
| Operating cash flow | Not separately presented | $4.7 million, versus $1.0 million |
At March 31, 2018, cash was $4.3 million, current assets $49.0 million, and current liabilities $8.5 million. Debt was $2.0 million, down from $3.5 million at June 30, 2017; the $11 million revolving facility had $9 million available and expires in June 2021. Total assets were $70.2 million and stockholders’ equity was $59.7 million. Nine-month capital spending was $1.0 million, debt repayments $1.5 million, and share repurchases $1.3 million.
Material changes and drivers
- Quarterly service revenue rose $1.0 million, principally from communication services; access-control and door-locking sales also increased. Nine-month service revenue increased $2.9 million, while intrusion and door-locking sales declined.
- Gross margin was essentially flat year over year for both periods. Operating income benefited from higher sales and lower quarterly SG&A; SG&A as a share of sales fell to 23.9% from 26.6% for the quarter and to 26.1% from 27.3% year to date.
- Effective tax rates fell to 3% for both 2018 periods, versus 15% quarterly and 17% year to date in 2017, primarily reflecting the Tax Cuts and Jobs Act. The Act reduced deferred tax liabilities by $286,000; the company also recorded $208,000 of provisional expense on unremitted foreign earnings. Tax accounting was not complete at quarter-end.
- Inventory was $30.8 million, including $5.4 million classified as non-current. Two customers represented 29% of accounts receivable at March 31, 2018.
Outlook, risks, and notable items
- Management said working capital, operating cash flows, and the revolving facility should fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expects fiscal fourth-quarter sales to be seasonally strongest. It stated that fiscal 2018 R&D products were not expected to contribute materially to that year’s revenue.
- Risks include economic and housing/construction weakness, product competition, customer credit and concentration, reliance on the CEO, and foreign-exchange exposure. A 10% change in the U.S. dollar against the Dominican peso was estimated to change annual operating income by about $630,000. A 1% rate move on current debt would change annual interest by about $20,000.
- Disclosure controls were deemed ineffective at March 31, 2018. Previously identified material weaknesses involved shipment-review documentation and coverage, subscription-service revenue controls, documentation of pricing reviews, and review of system-based pricing. Management was implementing remediation and expected to complete actions during fiscal 2018.
- Management said ordinary-course litigation, in aggregate, was not expected to materially affect financial position or results. The filing reported no material change to risk factors from the 2017 Form 10-K.
Key facts for investors to verify
- Whether control remediation was completed and whether disclosure and financial-reporting controls were subsequently judged effective.
- How recurring communication-service revenue, customer concentration, and product-level sales trends developed after this quarter.
- Final accounting for the Tax Cuts and Jobs Act, including the provisional foreign-earnings tax charge.
- Inventory conversion and obsolescence, cash generation, and remaining borrowing availability under the secured facility and its covenants.