NAPCO Security Technologies, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2016, not a fiscal 2015 fourth-quarter filing. Financial amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
NAPCO manufactures access-control, door-locking, intrusion and fire-alarm, and video-surveillance products for commercial and residential markets. It sells mainly through independent distributors, dealers, wholesalers, and installers. The company operates manufacturing facilities in New York and the Dominican Republic and reports one operating segment. International sales were about 3% of revenue in FY2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $82.513 million | $77.762 million | Up 6.1% |
| Gross profit / gross margin | $27.584 million / 33.4% | $26.047 million / 33.5% | Profit up 5.9% |
| Operating income | $6.323 million | $5.281 million | Up 19.7% |
| Net income | $5.773 million | $4.845 million | Up 19.2% |
| Diluted EPS | $0.31 | $0.25 | Up $0.06 |
| Operating cash flow | $9.160 million | $3.887 million | Up $5.273 million |
SG&A was $21.261 million, or 25.8% of sales, versus $20.766 million, or 26.7%, in FY2015. R&D expense rose to $6.169 million from $5.382 million and is included in cost of sales. Cash capital expenditures were $693,000; operating cash flow less capital expenditures was approximately $8.467 million.
At June 30, 2016, cash was $3.805 million, working capital $36.888 million, and the current ratio 5.1:1. Total debt was $4.8 million, down from $10.7 million a year earlier; the company had $9 million available on its $11 million revolving facility, extended to June 2021. Total assets were $64.769 million and shareholders’ equity was $51.273 million. The company repurchased $1.108 million of stock and paid no dividends.
Material changes versus FY2015
- Revenue growth was led by Marks door-locking products (+$2.947 million) and Napco intrusion products (+$2.676 million), partly offset by Continental access-control products (-$1.125 million).
- Gross margin was nearly unchanged, while lower SG&A as a share of sales contributed to higher operating income.
- Net cash from operations increased substantially, aided in part by inventory and payables movements. Inventory fell $1.533 million to $25.337 million.
- Debt declined by $5.9 million through repayments. Interest expense decreased to $179,000 from $215,000.
- Foreign sales declined to $2.582 million from $3.026 million. One customer represented 13% of sales and 22% of receivables in both years.
Outlook, risks, contingencies, and unusual items
- Management expects the $1.592 million sales backlog at June 30, 2016 to be filled during FY2017. The filing provides no specific revenue or earnings guidance. Management says FY2016 R&D is not expected to contribute materially in that year, with potential benefits in future years.
- Sales are historically seasonal, peaking in the fiscal fourth quarter, and are exposed to housing and commercial construction conditions, general economic conditions, and demand for security products. A significant portion of costs is fixed, increasing operating leverage when production or sales weaken.
- Management identifies competition and technology changes, distributor dependence, extended customer payment terms, and the absence of a CEO succession plan as risks. A customer concentration and collections are also relevant to monitor.
- A 10% strengthening or weakening of the U.S. dollar against the Dominican peso would, according to the filing, change annual operating income by approximately $630,000. A 1% interest-rate change on debt outstanding at year-end would change annual interest by approximately $48,000.
- The company had $7.6 million of undistributed foreign subsidiary earnings intended to be permanently reinvested; repatriation could result in additional taxes. Its effective tax rate was 6.0%, with foreign-source income and R&D credits among the principal reconciling items.
- Debt agreements include financial covenants and restrict dividends and borrowing; substantially all company assets secure the facilities. Management believes available working capital, operating cash flow, and the revolver will fund operations for at least 12 months.
- No material pending or threatened litigation was reported. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Confirm the intended period: this source is FY2016, not FY2015 Q4.
- Review the audited statements and debt agreement for covenant headroom, borrowing-base availability, and repayment terms.
- Assess whether revenue growth and cash generation are repeatable, including the effects of seasonality, customer concentration, and working-capital changes.
- Monitor Dominican-peso exposure, foreign earnings and potential repatriation taxes, and the durability of the unusually low effective tax rate.
- Check subsequent filings for FY2017 backlog conversion, new-product contribution, and any changes in management succession or distributor relationships.