NAPCO Security Technologies(NSSC) - 2020 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements 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 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][102] Condensed Consolidated Statements of Income 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 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 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] - One customer accounted for 21% of accounts receivable as of December 31, 2019, and 8% of net sales for the quarter[69] - 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][79] Management's Discussion and Analysis of Financial Condition and Results of Operations Sales grew 8.1% driven by service revenues, expanding gross margin to 45.4%, while strong liquidity supports strategic inventory build Results of Operations 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] - The increase in gross profit and margin was primarily due to the higher mix of service revenues[119] Liquidity and Capital Resources 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] - As of December 31, 2019, the company had no outstanding borrowings and $11,000,000 in availability under its revolving credit facility[130] - Inventories increased by $7.1 million, primarily to build stock of new devices related to recurring communication service revenues and to level-load production output[128] Quantitative and Qualitative Disclosures about Market Risk Primary market risk is foreign currency exposure to the Dominican Peso, with a 10% USD/RD$ 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] - 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] Controls and Procedures 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] - 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] PART II: OTHER INFORMATION Risk Factors 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] Exhibits 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] Signatures 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]