NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2023, compared with the periods ended March 31, 2022. The company designs and manufactures electronic security products and provides recurring wireless communication services. Fiscal year ends June 30. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $43.532m, up 21.2% | $125.339m, up 24.9% |
| Gross profit / margin | $22.671m / 52.1%; prior year $15.033m / 41.9% | $60.300m / 48.1%; prior year $39.932m / 39.8% |
| Operating income | $11.932m; prior year $4.582m | $28.617m; prior year $10.031m |
| Net income | $10.840m; prior year $3.273m | $25.688m; prior year $12.062m |
| Diluted EPS | $0.29; prior year $0.09 | $0.69; prior year $0.33 |
| Operating cash flow | Not separately presented for the quarter | $12.416m; prior year $8.413m |
Quarterly revenue growth included services (+25.8%) and equipment (+18.9%). For the nine months, services grew 31.7% and equipment 21.5%. Services generated a 90.3% quarterly gross margin and 89.1% for the nine-month period. Management attributed improved equipment margins to better component availability, lower component and transportation costs, improved overhead absorption, and a favorable Alarm Lock product mix. Higher-margin fire-radio service revenue also supported service margins.
At March 31, 2023, cash and cash equivalents were $31.515m, other investments (certificates of deposit) $20.271m, and marketable securities $5.155m. Current assets were $130.642m against current liabilities of $17.783m; working capital was $112.859m. Total assets were $165.282m and stockholders’ equity $140.695m. The company had no revolver borrowings and had an $11m revolving facility expiring in June 2024. Total inventory was $60.786m, including $13.865m classified as non-current.
Nine-month investing cash outflow was $22.713m, including $30.185m of purchases and $10.091m of redemptions of other investments, plus $2.547m of capital expenditures. Cash declined by $10.215m from June 30, 2022, to $31.515m. Management said working capital, operating cash flows, and the credit facility should fund operations for the next 12 months.
Material changes and unusual items
- Gross margin increased substantially year over year, and operating income more than doubled for both the quarter and nine-month period.
- Nine-month 2022 net income included a one-time $3.904m gain from forgiveness of Paycheck Protection Program loans. Excluding that gain, prior-period nine-month net income and diluted EPS were approximately $8.2m and $0.22, respectively.
- Interest and other income turned positive, reaching $0.437m for the quarter and $0.521m for nine months, principally due to interest earned on certificates of deposit.
- Company executives sold shares in a February 2023 secondary offering; NAPCO issued no shares and received no proceeds, but incurred $0.496m of offering expenses in SG&A.
- On May 5, 2023, the board declared a $0.0625-per-share cash dividend, payable June 12, 2023, to holders of record May 22.
Outlook, commentary, and risks
- The filing gives no quantified revenue or earnings guidance. Management cited recurring communication services as a more predictable revenue stream and noted that hardware sales are seasonal, historically peaking in the fiscal fourth quarter.
- Inventory increased by $11.0m from fiscal year-end as the company built radio-product inventory and bought hard-to-source components to mitigate supply interruptions. Management expects inventory levels to decline as supply challenges ease.
- Management warned that economic deterioration could reduce or delay customer purchases and payments. Demand may also be affected by housing and construction markets.
- Three customers represented notable receivables concentrations at March 31: 12%, 19%, and a further customer below 10%. One customer accounted for 12% of nine-month sales.
- The company reported two unremediated material weaknesses in internal control over financial reporting: IT access and program-change controls, and review/reconciliation controls for excess and slow-moving inventory reserves. Management expected remediation efforts to be completed during fiscal 2023; controls remained ineffective as of March 31. No related financial statement misstatements were identified.
- Foreign-currency exposure includes Dominican peso operating costs; a 10% change in the U.S. dollar against the peso was estimated to change annual operating income by approximately $0.885m. Foreign sales are denominated in U.S. dollars, which can create collection or demand risks for foreign customers.
- Management said ordinary-course claims and litigation were not expected, in aggregate, to materially affect financial position or results. The SBA may audit PPP loan forgiveness applications for six years after forgiveness.
Important facts for investors to verify
- Whether service-revenue growth and high service margins persist, and how recurring service revenue and equipment demand develop.
- Whether inventory build-up unwinds as expected, and whether component availability, obsolescence reserves, or customer demand create further inventory risk.
- Progress and completion of remediation for both material weaknesses, especially inventory-reserve controls.
- Cash generation and liquidity after investment purchases, capital spending, and the declared dividend; the company had no revolver borrowings at quarter-end.
- The effect of customer concentration, economic conditions, seasonality, and Dominican peso movements on sales, collections, and profitability.