NAPCO Security Technologies(NSSC) - 2024 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements This section presents NAPCO Security Technologies' unaudited condensed consolidated financial statements for the quarter ended December 31, 2023, including balance sheets, income statements, and cash flows Condensed Consolidated Balance Sheets Total assets increased to $185.9 million by December 31, 2023, driven by cash and inventory growth, with stockholders' equity rising to $158.0 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Total Current Assets | $149,728 | $131,359 | | Total Assets | $185,878 | $166,654 | | Total Current Liabilities | $21,211 | $19,686 | | Total Liabilities | $27,894 | $26,485 | | Total Stockholders' Equity | $157,984 | $140,169 | Condensed Consolidated Statements of Income Net sales for the three months ended December 31, 2023, rose to $47.5 million, with net income surging to $12.6 million due to strong service revenue growth Three Months Ended December 31, (in thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Sales | $47,547 | $42,314 | | Equipment Revenues | $29,007 | $27,434 | | Service Revenues | $18,540 | $14,880 | | Gross Profit | $25,012 | $14,354 | | Operating Income | $13,805 | $4,328 | | Net Income | $12,610 | $3,929 | | Diluted EPS | $0.34 | $0.11 | Six Months Ended December 31, (in thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Sales | $89,223 | $81,807 | | Equipment Revenues | $53,398 | $53,121 | | Service Revenues | $35,825 | $28,686 | | Gross Profit | $47,425 | $28,920 | | Operating Income | $25,360 | $7,976 | | Net Income | $23,088 | $7,013 | | Diluted EPS | $0.62 | $0.19 | Condensed Consolidated Statements of Cash Flows Operating cash flow for the six months ended December 31, 2023, significantly improved to $18.7 million, increasing cash and equivalents to $47.3 million Six Months Ended December 31, Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $18,693 | $1,088 | | Net Cash Used in Investing Activities | ($1,454) | ($10,856) | | Net Cash (Used in) Provided by Financing Activities | ($5,883) | $45 | | Net increase (decrease) in Cash and Cash Equivalents | $11,356 | ($9,723) | | Cash and Cash Equivalents - Ending | $47,311 | $32,007 | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, revenue disaggregation, stock options, and legal proceedings, highlighting strong growth in Services and Door locking devices - The company's business is primarily the manufacturing and design of electronic security devices, with significant growth driven by recurring service revenues from wireless communication services and school security products[14] Disaggregation of Revenues by Major Product Lines (in thousands) | Major Product Lines | Three months ended Dec 31, 2023 | Three months ended Dec 31, 2022 | Six months ended Dec 31, 2023 | Six months ended Dec 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Intrusion and access alarm products | $11,258 | $11,342 | $20,554 | $24,874 | | Door locking devices | $17,749 | $16,092 | $32,844 | $28,247 | | Services | $18,540 | $14,880 | $35,825 | $28,686 | | Total Revenues | $47,547 | $42,314 | $89,223 | $81,807 | - As of December 31, 2023, the company had no outstanding debt under its $11.0 million revolving line of credit, which expires in June 2024[72] - A class action lawsuit was filed against the company and certain officers on August 29, 2023, alleging securities fraud. The company intends to vigorously defend against the action[111] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong financial performance for the quarter, with 12.4% net sales growth, expanded gross profit margin, and $79 million in liquidity Results of Operations Net sales grew 12.4% to $47.5 million for the quarter, driven by service and door-locking products, with operating income surging 219.0% Key Performance Metrics Comparison | Metric | Three months ended Dec 31, 2023 | Three months ended Dec 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Total net sales | $47,547,000 | $42,314,000 | 12.4% | | Service revenues | $18,540,000 | $14,880,000 | 24.6% | | Total gross profit | $25,012,000 | $14,354,000 | 74.3% | | Gross profit as a % of net sales | 52.6% | 33.9% | 55.2% | | Operating income | $13,805,000 | $4,328,000 | 219.0% | | Net income | $12,610,000 | $3,929,000 | 220.9% | - The significant increase in gross profit on equipment sales was attributed to lower costs of certain components compared to the prior year when the company was affected by global supply chain shortages[130] - Selling, general and administrative (SG&A) expenses increased primarily due to higher legal, advertising, and internal control enhancement costs, but decreased as a percentage of net sales from 18.4% to 18.2% for the quarter[133] Liquidity and Capital Resources The company maintains strong liquidity with $79 million in cash and equivalents, generating $18.7 million in operating cash flow, with no outstanding long-term debt - The company generated $18.7 million in cash from operations during the six months ended December 31, 2023, and believes its working capital and credit agreement are sufficient to fund operations for the next year[137] - Inventories increased by $4.3 million to $52.6 million at December 31, 2023, primarily to build up radio products and secure hard-to-source components to mitigate supply chain risks[139] Quantitative and Qualitative Disclosures about Market Risk Market risks include interest rate changes and foreign currency fluctuations, with a 10% USD/RD$ exchange rate change impacting annual operating income by $940,000 - The company's primary market risks are interest rate changes on its debt and foreign currency exposure[143] - A 10% strengthening or weakening of the U.S. dollar against the Dominican Peso (RD$) would result in an approximate annual change of $940,000 in income from operations[144] Controls and Procedures Disclosure controls and procedures were deemed ineffective as of December 31, 2023, due to three material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in internal control over financial reporting[145] - Three material weaknesses were previously identified relating to: 1. Ineffective IT general controls over user access and change management 2. Deficiencies in the calculation of reserves for excess and slow-moving inventory 3. Inaccurate inventory costing and COGS calculations during the first three quarters of fiscal 2023[147][148][149] - Remediation efforts are ongoing, including installing monitoring software for IT, enhancing inventory forecast reviews, and refining the component cost calculation methods. The material weaknesses are not yet considered fully remediated[151][155] PART II: OTHER INFORMATION Legal Proceedings A class action lawsuit alleging securities fraud was filed on August 29, 2023, which the company intends to vigorously defend without recording a liability - A class action lawsuit was filed against the Company, its CEO, and CFO on August 29, 2023, alleging securities fraud related to public statements made between November 2022 and August 2023[111] - The Company has not recorded a liability for this litigation and intends to defend against the action vigorously[111][112] Risk Factors No material changes to risk factors were identified for the period, remaining consistent with those disclosed in the Form 10-K for fiscal year ended June 30, 2023 - There has been no material change in the risk factors previously disclosed in the Company's Form 10-K for the fiscal year ended June 30, 2023[155] Exhibits This section lists exhibits for the Form 10-Q, including CEO/CFO certifications and Inline XBRL documents - The exhibits filed with this report include: - Certifications from the CEO (Richard L. Soloway) and CFO (Kevin S. Buchel) - Section 1350 Certifications - Inline XBRL Instance Document and related taxonomy files[158]