NAPCO Security Technologies, Inc. — FY2019 Form 10-K
Period clarification: The filing is the annual report for the fiscal year ended June 30, 2019, comparing FY2019 with FY2018; it is not a standalone 2018 Q4 report. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless noted.
Business context and reporting period
NAPCO manufactures security products, including access control, door-locking, intrusion and fire alarm, and video surveillance systems, and provides recurring wireless alarm communication services. It sells primarily through independent distributors, dealers, and installers. FY2019 service revenue was $17.4 million, about 17% of sales; international sales were about 2%. Sales are historically seasonal, peaking in the fiscal fourth quarter.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $102.9 million | $91.7 million | +12.2% |
| Gross profit / margin | $43.9 million / 42.6% | $38.0 million / 41.4% | +15.5%; margin +1.2 percentage points |
| Operating income | $13.5 million | $8.4 million | +60.0% |
| Net income | $12.2 million | $7.6 million | +59.8% |
| Diluted EPS | $0.66 | $0.41 | +$0.25 |
| Operating cash flow | $8.7 million | $7.9 million | Higher |
| Cash and cash equivalents | $8.0 million | $5.3 million | +$2.7 million |
| Working capital | $51.1 million | $44.3 million | +$6.8 million |
| Long-term debt outstanding | $0 | $0 | No change |
Operating margin rose to approximately 13.1% from 9.2%; net margin rose to approximately 11.9% from 8.3%. Investing cash flow was a $2.0 million outflow, primarily for capital expenditures. Financing cash flow was a $3.9 million outflow, including $4.0 million of share repurchases. The company had an unused $11.0 million revolving facility, expiring June 2021, subject to covenants. Its current ratio was 4.6, versus 5.7 a year earlier.
Material changes versus FY2018
- Sales growth reflected higher alarm communication service revenue (+$5.4 million), intrusion products (+$2.8 million), and door-locking products (+$2.8 million, combined Marks and Alarm Lock brands); access control also increased.
- Gross margin improved despite higher salary and freight expenses. SG&A rose only 1.1% and declined to 22.6% of sales from 25.0%; R&D expense increased 8.8% to $7.2 million.
- Inventory increased $5.9 million to $34.8 million, primarily to support recently introduced and forthcoming products. Receivables increased $3.2 million to $26.0 million, mainly due to higher June-quarter sales.
- The company repurchased 274,065 shares for $4.0 million. No cash dividends were declared.
Outlook, risks, contingencies, and unusual items
- Management said working capital, expected operating cash flows, and the revolving facility should fund operations for at least the next 12 months. The filing provides no specific revenue or earnings guidance. The June 30, 2019 sales backlog was approximately $992,000, expected to be filled in FY2020.
- Key risks include economic and housing/construction downturns, competition and technology changes, dependence on distributors and the CEO, fixed-cost exposure, customer credit and concentration, and Dominican peso movements. Management estimated a 10% U.S. dollar move against the Dominican peso could change annual operating income by about $700,000.
- The IRS proposed an approximately $1.8 million additional FY2016 tax liability, excluding interest and penalties, concerning deemed dividends under IRC Section 956. NAPCO protested and management believes it will prevail; no additional reserve was recorded. The outcome is uncertain.
- NAPCO adopted ASC 606 on July 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by approximately $719,000, net of tax, and changed the presentation of certain sales-related reserves. The FY2019 effect on product sales was described as immaterial.
- A material weakness in internal control identified in FY2018 was reported as remediated during FY2019. Management and the independent auditor concluded controls were effective at June 30, 2019; the auditor also issued an unqualified opinion on the financial statements.
- Management identified no material pending litigation, but disclosed ordinary-course claims and the IRS matter. The company also plans to recognize right-of-use assets and lease liabilities upon adopting the lease standard in FY2020; it did not expect a material effect on results or cash flows.
Important facts for investors to verify
- Confirm the applicable period: this is FY2019, not a 2018 Q4 filing, and assess seasonality when comparing quarters.
- Track whether service-revenue growth and improved margins continue, and whether the higher inventory converts to sales without increased obsolescence or discounting.
- Monitor receivable collection, customer concentration, and the effect of extended payment terms.
- Follow the IRS Section 956 dispute and any resulting tax, interest, or penalty exposure.
- Review revolving-credit covenants and availability, Dominican peso exposure, and continued effectiveness of remediated financial controls.