NAPCO Security Technologies(NSSC) - 2019 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements Financial statements for the period ended December 31, 2018, reflect significant growth in revenue and profitability, with total assets increasing and net income more than doubling Condensed Consolidated Balance Sheets Total assets increased to $78.3 million as of December 31, 2018, driven by higher cash and inventories, with total liabilities rising to $13.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 (unaudited) | June 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $7,921 | $5,308 | | Accounts receivable, net | $19,845 | $22,738 | | Inventories, net (Current + Non-current) | $33,183 | $28,934 | | Total Current Assets | $56,516 | $53,703 | | Total Assets | $78,301 | $73,269 | | Liabilities & Equity | | | | Total Current Liabilities | $13,242 | $9,402 | | Total Liabilities | $13,656 | $9,816 | | Total Stockholders' Equity | $64,645 | $63,453 | Condensed Consolidated Statements of Income Net sales for the six months ended December 31, 2018, rose 14.0% to $48.2 million, with net income growing 106.0% to $4.4 million Three Months Ended December 31 (in thousands, except per share data) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $24,829 | $21,112 | 17.6% | | Gross Profit | $10,671 | $8,479 | 25.9% | | Operating Income | $3,294 | $1,166 | 182.5% | | Net Income | $2,869 | $1,233 | 132.7% | | Diluted EPS | $0.15 | $0.07 | 114.3% | Six Months Ended December 31 (in thousands, except per share data) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $48,205 | $42,286 | 14.0% | | Gross Profit | $20,230 | $16,965 | 19.2% | | Operating Income | $5,053 | $2,225 | 127.1% | | Net Income | $4,373 | $2,123 | 106.0% | | Diluted EPS | $0.23 | $0.11 | 109.1% | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $6.3 million for the six months ended December 31, 2018, leading to a $2.6 million net increase in cash and equivalents Six Months Ended December 31 (in thousands) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $6,346 | $2,824 | | Net Cash Used in Investing Activities | ($1,119) | ($651) | | Net Cash Used in Financing Activities | ($2,614) | ($1,678) | | Net Change in Cash and Cash Equivalents | $2,613 | $495 | | Cash and Cash Equivalents - Ending | $7,921 | $3,949 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, ASC 606 adoption, significant credit concentration, and an ongoing IRS examination with a potential $1.8 million liability - The company adopted the new revenue recognition standard (ASC 606) on July 1, 2018, using the modified retrospective method, resulting in a net decrease to opening retained earnings of approximately $720,000 (net of tax)[55][56] Disaggregation of Revenues by Major Product Lines (in thousands) | Major Product Lines | Six months ended Dec 31, 2018 | Six months ended Dec 31, 2017 | | :--- | :--- | :--- | | Intrusion and Access alarm products | $14,815 | $13,122 | | Door locking devices | $25,460 | $23,733 | | Services | $7,930 | $5,431 | | Total Revenues | $48,205 | $42,286 | - The company has a significant credit concentration, with one customer comprising 21% of accounts receivable at December 31, 2018, and 12% of net sales for the six-month period[65] - The IRS has proposed an adjustment for the fiscal 2016 tax year related to deemed dividends, which could result in an incremental tax liability of approximately $1.8 million[73] - During the six months ended December 31, 2018, the company repurchased 186,393 shares at a weighted average price of $14.13, and in December 2018, the board authorized the repurchase of an additional 500,000 shares[96] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong financial performance to increased sales and improved gross profit margins, believing current working capital and cash flows are sufficient for the next twelve months Results of Operations Highlights (in thousands) | | Six months ended Dec 31, 2018 | Six months ended Dec 31, 2017 | % Increase | | :--- | :--- | :--- | :--- | | Net sales | $48,205 | $42,286 | 14.0% | | Gross profit | $20,230 | $16,965 | 19.2% | | Operating income | $5,053 | $2,225 | 127.1% | | Net income | $4,373 | $2,123 | 106.0% | - The sales increase for the six months ended Dec 31, 2018, was primarily driven by communication services (+$2.5M), door-locking products (+$1.7M), and intrusion and access products (+$1.7M)[112] - Gross profit margin for the six-month period increased to 42.0% from 40.1% year-over-year, primarily due to the increase in sales[113] - The company believes its current working capital, cash flows from operations, and its $11 million revolving credit facility will be sufficient to fund operations through the next twelve months[119][123] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is foreign currency exposure from Dominican Peso expenses, where a 10% exchange rate change could impact annual income by $630,000 - The company is exposed to foreign currency risk from expenses incurred in Dominican Pesos (RD$)[126] - A 10% strengthening or weakening in the U.S. dollar against the RD$ would result in an annual increase or decrease in income from operations of approximately $630,000[126] Controls and Procedures Disclosure controls and procedures were not effective as of December 31, 2018, due to a material weakness, with remediation actions expected to be completed during fiscal 2019 - The Company determined that it did not have effective disclosure controls and procedures as of December 31, 2018[128] - A material weakness was identified due to a lack of supervision and review to ensure proper internal control over financial reporting[129] - Management is designing additional controls and expects to complete remediation actions during fiscal 2019[129] PART II: OTHER INFORMATION Risk Factors No material changes to risk factors were reported from those previously disclosed in the Annual Report on Form 10-K for fiscal year ended June 30, 2018 - No material change in risk factors was reported for the three months ended December 31, 2018[131] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended December 31, 2018, the company repurchased 147,230 shares at an average price of $14.17, with the board authorizing an additional repurchase of 500,000 shares Share Repurchases for Quarter Ended Dec 31, 2018 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2018 | 112,474 | $13.94 | | Nov 2018 | 5,100 | $14.28 | | Dec 2018 | 29,656 | $15.01 | | Total | 147,230 | $14.17 | - On December 21, 2018, the board authorized the repurchase of an additional 500,000 shares[132] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - Exhibits filed include CEO and CFO certifications and XBRL data files[133]