NAPCO Security Technologies, Inc. — Form 10-Q Summary
Business and period: The company manufactures access-control, door-locking, intrusion and fire-alarm, and video-surveillance products. This report covers the fiscal first quarter ended September 30, 2017, compared with the quarter ended September 30, 2016. The company notes that sales are typically lower in this fiscal quarter than in its April–June quarter.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $21.174 million | $20.168 million | +5.0% |
| Gross profit / margin | $6.879 million / 32.5% | $6.452 million / 32.0% | +6.6% |
| Operating income | $1.059 million | $0.716 million | +47.9% |
| Net income | $0.890 million | $0.568 million | +56.7% |
| Diluted earnings per share | $0.05 | $0.03 | — |
| Operating cash flow | $1.501 million | $1.919 million | Down |
SG&A was $5.820 million, or 27.5% of sales, versus $5.736 million, or 28.4%. Interest expense was $26,000 versus $24,000; the effective tax rate was 14% versus 18%. Management attributed higher operating income primarily to sales growth and improved gross margin, with SG&A increasing mainly due to costs of auditing internal-control procedures.
Operating activities provided $1.501 million; capital spending was $514,000, and financing provided $12,000. Cash increased by $999,000 to $4.453 million from June 30, 2017. At quarter-end, current assets were $49.613 million and current liabilities $8.421 million. Total inventory was $31.138 million, including $4.854 million classified as non-current.
Long-term debt was $3.500 million under an $11.0 million revolving facility expiring in June 2021; $7.5 million was available. The balance carried a 2.4% interest rate. The facility is secured by company assets and contains financial covenants and restrictions, including on dividends and borrowings.
Changes and management commentary
- Sales growth was led by intrusion products, including a $926,000 increase in recurring-revenue intrusion products (up 56%), and a $326,000 increase in access-control products. Door-locking sales declined $11,000.
- Gross margin improved by 0.5 percentage points. SG&A dollars rose 1.5%, but declined as a share of sales.
- Receivables fell $2.529 million from June 30, primarily reflecting lower seasonal sales. Inventory rose $559,000, which management linked to level-loaded production and inventory held for newer products.
- Management believes working capital, operating cash flows, and the revolving facility will be sufficient to fund operations for the next twelve months. No material capital-expenditure or inventory-purchase commitments were reported beyond normal-course purchase orders.
Outlook, risks and other notable items
- No specific revenue, earnings, or margin guidance was provided. Management said fiscal 2018 R&D investments are not expected to contribute materially to revenue during that year, though they may benefit future periods.
- Seasonality, housing and construction demand, economic conditions, product competition, and the company’s fixed-cost base may affect results. International sales were approximately 2% of revenue.
- One customer represented 22% of receivables at September 30 and 11% of quarterly sales, creating customer concentration exposure.
- A 1% change in interest rates on current borrowings would change annual interest expense by approximately $35,000. Management estimated a 10% U.S. dollar move against the Dominican peso would change annual operating income by approximately $630,000. Foreign sales are denominated in U.S. dollars, which may affect customers’ ability to pay or order.
- Disclosure controls and procedures remained ineffective at September 30, 2017. Management identified four material weaknesses involving shipment-review documentation and coverage, subscription-service revenue controls, documentation of pricing reviews, and review of system-based pricing. Remediation was underway, with completion expected during fiscal 2018. No material change in internal controls was reported during the quarter.
- Management said ordinary-course litigation, in aggregate, was not expected to materially adversely affect financial position or results. The company increased its reserve for uncertain tax positions by $32,000; unrecognized net tax benefits were $215,000. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Progress and effectiveness of the planned remediation of the four material weaknesses in disclosure controls.
- Sustainability of recurring-revenue product growth and the effect of seasonal demand on quarterly sales, margins, and cash flow.
- Exposure to the major customer and the collectability of its receivable balance.
- Inventory quality and conversion, particularly the non-current portion, and availability under the borrowing-base facility and compliance with its covenants.
- Actual sensitivity to Dominican peso movements, interest rates, and any developments in tax examinations or litigation.