Napco Security Technologies, Inc. (NASDAQ:NSSC) Q2 2021 Earnings Conference Call February 8, 2021 11:00 AM ET Company Participants Patrick McKillop - Director of Investor Relations Richard Soloway - President and CEO Kevin Buchel - Senior Vice President and CFO Conference Call Participants Rich Valera - Needham & Company Mike Walkley - Canaccord Genuity Jaeson Schmidt - Lake Street David Robinson - William Blair Raj Sharma - B. Riley Abba Horwitz - OSP Christopher Hillary - Roubaix Capital Operator Greeting ...

Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☒ Emerging growth company ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧ Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2020 OR ☐ TRANSITION REPORT PURSU ...

NAPCO Security Technologies, Inc. (NASDAQ:NSSC) Q1 2021 Earnings Conference Call November 2, 2020 11:00 AM ET Company Participants Patrick McKillop - Director of Investor Relations Richard Soloway - President and CEO Kevin Buchel - Senior Vice President and CFO Conference Call Participants Matt Pfau - William Blair Mike Walkley - Canaccord Genuity Jaeson Schmidt - Lake Street Jeffrey Kessler - Imperial Capital Operator Greetings, and welcome to the NAPCO Security Technologies, Inc. Fiscal First Quarter 2021 ...

Financial Performance - Net sales for the fiscal year ended June 30, 2020, were $101.4 million, a decrease from $102.9 million in 2019, primarily due to a 34% decline in hardware sales in Q4 2020 attributed to the COVID-19 pandemic[94] - Net income for the fiscal year ended June 30, 2020, was $8.5 million, down from $12.2 million in 2019, reflecting the impact of COVID-19, partially offset by growth in recurring revenue[94] - Net sales for fiscal 2020 decreased by $1,573,000 to $101,359,000, a decline of 1.5% compared to fiscal 2019[127] - Gross profit for fiscal 2020 was $43,592,000, representing 43.0% of net sales, compared to $43,890,000 or 42.6% in fiscal 2019[129] - Net income for fiscal 2020 decreased by $3,703,000 to $8,520,000 compared to $12,223,000 in fiscal 2019[135] Revenue and Expenses - Sales returns, rebates, and allowances were 9% of gross sales for the fiscal year ended June 30, 2020, compared to 8% in 2019[104] - Selling, general and administrative expenses increased by $458,000 to $23,670,000, with a percentage of net sales rising to 23.4% from 22.6%[131] - Research and Development expenses remained relatively constant at $7,257,000 in fiscal 2020 compared to $7,212,000 in fiscal 2019[130] - The Company's provision for income taxes increased by $1,062,000 to $2,284,000, with an effective tax rate rising to 21% from 9%[134] Assets and Liabilities - As of June 30, 2020, the Company had cash and cash equivalents of $18,248,000 and an unused balance of $11,000,000 under its Revolving Credit Facility[117] - Working capital increased by $19,963,000 to $61,046,000 at June 30, 2020, compared to $51,083,000 at June 30, 2019[122] - Accounts Receivable decreased by $3,038,000 to $22,932,000 as of June 30, 2020, primarily due to decreased hardware sales[123] - Inventories increased by $6,917,000 to $41,755,000 as of June 30, 2020, driven by the buildup of new products[124] Impairment and Accounting Changes - The company recorded an impairment charge of $1.852 million for its Marks USA trade-name during Q4 of fiscal 2020, reclassifying the asset to a long-lived asset with a remaining useful life of 20 years[110] - The company adopted a new lease accounting standard effective July 1, 2019, resulting in the recording of an operating right-of-use asset and lease liabilities of approximately $7.7 million[116] Market Conditions and Strategy - The company has experienced significant growth in recurring service revenues from wireless communication services for intrusion and fire alarm systems[92] - The company is focused on developing innovative technology and next-generation security solutions, including the StarLink and iSecure product lines[93] - The company anticipates that economic conditions may adversely affect revenue, profit, and cash flow levels in future periods[95] - The company’s fiscal year runs from July 1 to June 30, with sales historically peaking in the fourth quarter[96] Customer Concentration - One customer accounted for 24% of accounts receivable as of June 30, 2020, while another customer represented 10% of accounts receivable[105]

Financial Data and Key Metrics Changes - For Q4 2020, net sales decreased by 22% to $23 million compared to $29.6 million in the same period last year [14] - For fiscal year 2020, net sales decreased by 2% to $101.4 million from $102.9 million in the previous year [14] - Recurring monthly revenue increased by 35% for Q4 and 38% for the fiscal year, with an annual run rate of $27.5 million as of June 2020 [11][15] - Gross profit for Q4 decreased by 38% to $8 million, with a gross margin of 35%, compared to $12.9 million and 44% last year [16] - Net income for Q4 was a loss of $1.9 million, or negative $0.10 per diluted share, compared to a profit of $4.7 million or $0.26 per share last year [27] - Net income for fiscal year 2020 was $8.5 million or $0.46 per diluted share, down from $12.2 million or $0.66 the previous year [28] Business Line Data and Key Metrics Changes - Equipment sales were significantly impacted by COVID-19, leading to decreased sales across the board [10] - Recurring revenue gross margins improved to 83% for Q4, up from 78% last year, driven by increased sales of higher-margin products [18] - Research and development costs remained constant at $1.9 million for Q4 and $7.3 million for the fiscal year, representing 8% and 7% of sales respectively [19][20] Market Data and Key Metrics Changes - The company noted a strong demand for school security solutions, with increased availability of grants for funding these projects [35][66] - The healthcare vertical is also highlighted as a significant market opportunity, particularly for locking and access control products [33] Company Strategy and Development Direction - The company is focused on expanding its recurring revenue model, aiming for a 50:50 split between recurring and hardware sales in the long term [60][87] - New product innovations, such as the iSecure alarm system and air access control system, are expected to drive future growth and recurring revenue [39][52] - The management emphasized the importance of adapting to changing market conditions and increasing security needs due to civil unrest and the ongoing pandemic [74][76] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about a rebound in business as buildings reopen and installation access improves [10] - The company is well-positioned for economic recovery, with a strong balance sheet and zero debt [12][29] - Management noted that the need for security is greater than ever, particularly in commercial settings [34][74] Other Important Information - The company recognized a one-time impairment charge of $1.85 million in Q4 due to a decline in revenue related to a trade name intangible asset [23] - Cash balance increased to $18.2 million as of June 30, 2020, compared to $8 million the previous year [29] Q&A Session Summary Question: Can you provide more detail on sell-through improvements post-Q4? - Management noted a significant increase in sell-through rates, with one distributor up 41% in July and another up 25% [44][45] Question: When will iSecure become a material contributor to recurring revenue? - Management expects iSecure to add significant recurring revenue, with a potential of $7 to $13 per month per installation [46][48] Question: What is the market for the new air access product? - The air access product targets enterprises of all sizes, providing a cellular access control system with recurring revenue potential [50][52] Question: How are inventory levels among distributors? - Distributors did not load up on inventory, indicating a need for replenishment based on strong sell-through [55][56] Question: What are the expectations for school security projects? - Management indicated that many schools are ready to award jobs, but timing is uncertain due to access issues [65][66] Question: Is there any pricing power in hardware sales? - Management confirmed that the decline in gross margins was strictly due to volume, not pricing issues [82][83]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2020 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. Commission File number: 0-10004 NAPCO SECURITY TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware 11-2 ...

Financial Data and Key Metrics Changes - For Q3 2020, net sales increased 4% to $26.2 million, marking a record performance and the 23rd consecutive quarter of year-over-year record sales compared to $25.1 million in the same period last year [15] - Gross profit for Q3 increased 11% to $12 million with a gross margin of 46%, up from $10.7 million and 43% last year [17] - Net income for Q3 increased 16% to a record $3.6 million or $0.20 per diluted share, compared to $3.1 million or $0.17 per diluted share last year [23] - Adjusted EBITDA for Q3 increased 22% to $4.9 million or $0.26 per diluted share, compared to $4 million or $0.22 per diluted share last year [24] Business Line Data and Key Metrics Changes - Recurring monthly revenue for the Alarm division increased 37% for the quarter and 39% for the nine months, with an annual run rate of $25.4 million as of March 2020 [16] - Sales of alarm communication services and intrusion and access products contributed to the increase in sales, while door locking products saw a decrease [15] Market Data and Key Metrics Changes - The company noted a 25% rise in commercial burglaries during the COVID-19 shutdown, indicating increased demand for security products [34] - The school security market remains a significant growth contributor, with new funding initiatives for school security upgrades [36] Company Strategy and Development Direction - The company aims to expand its cellular communications technology to other areas in the security business, focusing on generating recurring revenue from new product lines [42][43] - Management emphasized the importance of maintaining a high level of ownership in equity, with senior management owning approximately 38% [13][48] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to weather market challenges due to its strong balance sheet and focus on non-discretionary commercial sectors [47] - The company anticipates continued growth in recurring revenue and profitability, aiming for a 50% split between recurring revenue and equipment sales in the long term [59][74] Other Important Information - The cash balance at March 31, 2020, was $11 million, up from $8 million at June 30, 2019, with zero debt [25] - The company repurchased approximately $2.4 million worth of stock during the quarter, indicating a strategic use of capital [29] Q&A Session Summary Question: Update on the production facility in the Dominican Republic - The Dominican Republic facility experienced some disruption but is now operational, allowing the company to maintain production levels [51][54] Question: Update on a large distributor's purchasing status - The distributor's business increased by 64% sequentially, indicating a return to normal purchasing levels [55][56] Question: Future gross margin expectations for recurring revenue - Gross margins are expected to fluctuate, but the company aims to increase the proportion of high-margin fire radios in its product mix [57][64] Question: Market position and potential for market share gain - The company is optimistic about gaining market share due to its strong balance sheet and innovative product offerings, particularly in the recurring revenue segment [72][74] Question: Interest in anti-microbial locks - The company has seen growing interest in anti-microbial locks, particularly in healthcare settings, and expects this trend to continue [90][91] Question: Supply chain interest from new distributors - The company is experiencing increased interest from distributors who prefer American-made products due to supply chain disruptions affecting competitors [95][96]

Napco Security Technologies, Inc. (NASDAQ:NSSC) Q2 2020 Results Earnings Conference Call February 3, 2020 11:00 AM ET Company Participants Patrick McKillop - Director, Investor Relations Richard Soloway - President and CEO Kevin Buchel - Senior Vice President and CFO Conference Call Participants Mike Walkley - Canaccord Genuity Jaeson Schmidt - Lake Street Matt Pfau - William Blair Jeff Kessler - Imperial Capital Operator Greetings. And welcome to the NAPCO Security Technologies, Inc. Fiscal Second Quarter ...

PART I: FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) NAPCO reported strong growth in H2 2019, with net sales up 8.1% to $52.1M and net income up 55.6% to $6.8M, driven by service revenue growth [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets grew to $101.4M, driven by cash, inventory, and new lease assets, while liabilities increased to $23.1M Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 (unaudited) | June 30, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | $71,278 | $65,455 | | **Total Assets** | **$101,360** | **$85,908** | | **Total Current Liabilities** | $15,080 | $14,372 | | **Total Liabilities** | **$23,058** | **$14,736** | | **Total Stockholders' Equity** | **$78,302** | **$71,172** | - The adoption of the new lease accounting standard (ASC 842) resulted in the recognition of a **$7.4 million** operating lease right-of-use asset and a **$7.1 million** operating lease liability as of December 31, 2019[7](index=7&type=chunk)[102](index=102&type=chunk) [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net income surged 24.5% to $3.6M for Q2 and 55.6% to $6.8M for H1, driven by strong service revenue growth Three Months Ended December 31 (in thousands, except per share data) | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | **Net Sales** | **$25,829** | **$24,829** | **4.0%** | | - Equipment Revenues | $20,045 | $20,685 | -3.1% | | - Service Revenues | $5,784 | $4,144 | 39.6% | | **Gross Profit** | **$12,127** | **$10,671** | **13.6%** | | Gross Margin | 47.0% | 43.0% | +4.0 p.p. | | **Operating Income** | **$3,994** | **$3,294** | **21.3%** | | **Net Income** | **$3,572** | **$2,869** | **24.5%** | | **Diluted EPS** | **$0.19** | **$0.15** | **26.7%** | Six Months Ended December 31 (in thousands, except per share data) | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | **Net Sales** | **$52,114** | **$48,205** | **8.1%** | | - Equipment Revenues | $40,966 | $40,275 | 1.7% | | - Service Revenues | $11,148 | $7,930 | 40.6% | | **Gross Profit** | **$23,645** | **$20,230** | **16.9%** | | Gross Margin | 45.4% | 42.0% | +3.4 p.p. | | **Operating Income** | **$7,603** | **$5,053** | **50.5%** | | **Net Income** | **$6,805** | **$4,373** | **55.6%** | | **Diluted EPS** | **$0.37** | **$0.23** | **60.9%** | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow decreased to $4.8M due to inventory build, while cash and equivalents increased to $11.8M by period end Six Months Ended December 31 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $4,813 | $6,346 | | Net Cash Used in Investing Activities | ($1,063) | ($1,119) | | Net Cash Used in Financing Activities | $0 | ($2,614) | | **Net Change in Cash and Cash Equivalents** | **$3,750** | **$2,613** | | **Cash and Cash Equivalents - Ending** | **$11,778** | **$7,921** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail ASC 842 adoption, revenue disaggregation, significant customer concentration, and an ongoing IRS tax examination - The company adopted the new lease accounting standard (ASC 842) on July 1, 2019, using the modified retrospective method, resulting in the recognition of an operating ROU asset and lease liabilities of approximately **$7.7 million**[102](index=102&type=chunk) - One customer accounted for **21%** of accounts receivable as of December 31, 2019, and **8%** of net sales for the quarter[69](index=69&type=chunk) - The IRS is examining the company's fiscal 2017 tax return. Additionally, the IRS has proposed a **$1.8 million** tax adjustment for fiscal 2016 related to intercompany balances, which the company is protesting and has not reserved for[78](index=78&type=chunk)[79](index=79&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Sales grew 8.1% driven by service revenues, expanding gross margin to 45.4%, while strong liquidity supports strategic inventory build [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Net sales increased 8.1% to $52.1M, driven by service revenues, boosting gross profit by 16.9% and operating income by 50.5% Results of Operations Summary (in thousands) | Metric | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $52,114 | $48,205 | 8.1% | | Gross profit | $23,645 | $20,230 | 16.9% | | Operating income | $7,603 | $5,053 | 50.5% | | Net income | $6,805 | $4,373 | 55.6% | - The increase in sales for the six months was primarily due to increased communication service revenues (**+$3,218,000**) and sales of intrusion and access products (**+$971,000**), partially offset by a decrease in sales of door-locking products (**-$280,000**)[118](index=118&type=chunk) - The increase in gross profit and margin was primarily due to the higher mix of service revenues[119](index=119&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Strong liquidity, including an $11M credit facility, supports operations, with a strategic $7.1M increase in inventories - The company believes its current working capital, cash flows from operations, and its revolving credit agreement will be sufficient to fund operations through the next twelve months[126](index=126&type=chunk) - As of December 31, 2019, the company had no outstanding borrowings and **$11,000,000** in availability under its revolving credit facility[130](index=130&type=chunk) - Inventories increased by **$7.1 million**, primarily to build stock of new devices related to recurring communication service revenues and to level-load production output[128](index=128&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Primary market risk is foreign currency exposure to the Dominican Peso, with a 10% USD/RD$ change impacting income by $700,000 - The company is exposed to foreign currency risk related to expenses incurred in Dominican Pesos (RD$) at its production facility[132](index=132&type=chunk) - A **10%** strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or decrease in income from operations of approximately **$700,000**[132](index=132&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including CEO and CFO, concluded disclosure controls and procedures were effective with no material changes - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[134](index=134&type=chunk) - No changes in internal controls over financial reporting occurred during the six months ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, these controls[135](index=135&type=chunk) PART II: OTHER INFORMATION [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported from the prior fiscal year's Form 10-K filing - There has been no material change in the risk factors previously disclosed in the Company's Form 10-K for the year ended June 30, 2019[136](index=136&type=chunk) [Exhibits](index=29&type=section&id=Item%206.%20Exhibits) Required CEO/CFO certifications and XBRL data files are included as exhibits to this report - Exhibits filed with this report include CEO and CFO certifications (31.1, 31.2), Section 1350 certifications (32.1), and XBRL data files (101 series)[137](index=137&type=chunk) Signatures [Signatures](index=30&type=section&id=Signatures) The quarterly report was signed on February 3, 2020, by the Chairman, President, CEO, and Principal Financial Officer - The report was duly signed and authorized on February 3, 2020[140](index=140&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2019 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. Commission File number: 0-10004 NAPCO SECURITY TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware ...