NAPCO Security Technologies(NSSC) - 2024 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Presents NAPCO's unaudited consolidated financial statements and management's discussion and analysis ITEM 1. Financial Statements Presents NAPCO's unaudited consolidated financial statements for Q3 and YTD March 2024, including notes Condensed Consolidated Balance Sheets Details NAPCO's financial position as of March 31, 2024, outlining assets, liabilities, and equity | Metric | March 31, 2024 (in thousands) | June 30, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :--------------------------- | :-------------------- | :------- | | Total Current Assets | $158,199 | $131,359 | $26,840 | 20.4% | | Total Assets | $194,792 | $166,654 | $28,138 | 16.9% | | Total Current Liabilities | $19,948 | $19,686 | $262 | 1.3% | | Total Liabilities | $26,606 | $26,485 | $121 | 0.5% | | Total Stockholders' Equity | $168,186 | $140,169 | $28,017 | 20.0% | - Cash and cash equivalents increased significantly to $55,518,000 as of March 31, 2024, from $35,955,000 as of June 30, 2023[7] Condensed Consolidated Statements of Income (Three Months) Summarizes NAPCO's financial performance for the three months ended March 31, 2024 | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Net Sales | $49,267 | $43,532 | $5,735 | 13.2% | | Gross Profit | $26,484 | $21,279 | $5,205 | 24.5% | | Operating Income | $14,494 | $10,540 | $3,954 | 37.5% | | Net Income | $13,196 | $9,549 | $3,647 | 38.2% | | Basic EPS | $0.36 | $0.26 | $0.10 | 38.5% | | Diluted EPS | $0.36 | $0.26 | $0.10 | 38.5% | Condensed Consolidated Statements of Income (Nine Months) Summarizes NAPCO's financial performance for the nine months ended March 31, 2024 | Metric | Nine Months Ended March 31, 2024 (in thousands) | Nine Months Ended March 31, 2023 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Net Sales | $138,490 | $125,339 | $13,151 | 10.5% | | Gross Profit | $73,909 | $50,199 | $23,710 | 47.2% | | Operating Income | $39,854 | $18,516 | $21,338 | 115.2% | | Net Income | $36,284 | $16,562 | $19,722 | 119.1% | | Basic EPS | $0.99 | $0.45 | $0.54 | 120.0% | | Diluted EPS | $0.98 | $0.45 | $0.53 | 117.8% | Condensed Consolidated Statements of Stockholders Equity Outlines changes in NAPCO's equity for the nine months ended March 31, 2024 | Metric | March 31, 2024 (in thousands) | June 30, 2023 (in thousands) | | :-------------------- | :---------------------------- | :--------------------------- | | Common Stock | $398 | $397 | | Additional Paid-in Capital | $22,855 | $21,553 | | Retained Earnings | $164,454 | $137,740 | | Treasury Stock | $(19,521) | $(19,521) | | Total Stockholders' Equity | $168,186 | $140,169 | - Total stockholders' equity increased by $28,017,000 from June 30, 2023, to March 31, 2024, primarily due to net income and stock-based compensation, partially offset by cash dividends[11] Condensed Consolidated Statements of Cash Flows Presents NAPCO's cash flows for the nine months ended March 31, 2024 | Cash Flow Activity | Nine Months Ended March 31, 2024 (in thousands) | Nine Months Ended March 31, 2023 (in thousands) | | :-------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net Cash Provided by Operating Activities | $31,032 | $12,416 | | Net Cash Used in Investing Activities | $(2,326) | $(22,713) | | Net Cash (Used in) Provided by Financing Activities | $(9,143) | $82 | | Net increase (decrease) in Cash and Cash Equivalents | $19,563 | $(10,215) | | Cash and Cash Equivalents - Ending | $55,518 | $31,515 | - Operating cash flow significantly increased to $31,032,000 for the nine months ended March 31, 2024, compared to $12,416,000 in the prior year, driven by higher net income[12] - Cash and cash equivalents at period end increased by $19,563,000, reaching $55,518,000[12] Notes to Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies and specific financial line items NOTE 1 - Nature of Business and Summary of Significant Accounting Policies Describes NAPCO's business and outlines key accounting policies applied in financial statements - NAPCO Security Technologies, Inc. designs and manufactures high-tech electronic security devices, cellular communication services for alarm systems, and school safety solutions, experiencing significant growth from recurring service revenues[13] - The Company's fiscal year runs from July 1 to June 30, with hardware sales historically peaking in the fiscal fourth quarter (April 1 - June 30) and declining in the first quarter (July 1 - September 30); monthly recurring service revenue provides a more consistent income stream[14] Cash and Cash Equivalents (in thousands) | Cash and Cash Equivalents (in thousands) | March 31, 2024 | June 30, 2023 | | :--------------------------------------- | :------------- | :------------ | | Cash | $19,412 | $20,713 | | Money Market Fund | $30,766 | $63 | | Certificates of Deposit | $5,340 | $15,179 | | Total | $55,518 | $35,955 | R&D Expense (in thousands) | R&D Expense (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Amount | $2,757 | $2,314 | $7,736 | $6,964 | Stock-Based Compensation (in thousands) | Stock-Based Compensation (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Amount | $266 | $322 | $876 | $1,134 | NOTE 2 – Revenue Recognition and Contracts with Customers Details NAPCO's revenue recognition policies across product lines and services - The Company's revenue is disaggregated into major product lines: Intrusion and access alarm products, Door locking devices, and Services; Services revenue showed significant growth[59] Major Product Lines (in thousands) | Major Product Lines (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Intrusion and access alarm products | $10,139 | $11,530 | $30,693 | $36,405 | | Door locking devices | $19,596 | $16,860 | $52,440 | $45,106 | | Services | $19,532 | $15,142 | $55,357 | $43,828 | | Total Revenues | $49,267 | $43,532 | $138,490 | $125,339 | - Refund liabilities were approximately $5,224,000 as of March 31, 2024, and return-related assets were approximately $1,316,000[57] NOTE 3 – Business and Credit Concentrations Identifies significant customer concentrations and credit risk exposures - Two customers accounted for 16% and 11% of accounts receivable as of March 31, 2024, though sales to these customers did not exceed 10% of net sales for the three and nine months ended March 31, 2024[60] NOTE 4 – Marketable Securities Provides information on NAPCO's marketable securities, fair value, and recognized gains or losses - Marketable securities, primarily fixed income mutual funds, are reported at fair value using Level 1 inputs (quoted prices in active markets)[62][63] Marketable Securities (in thousands) | Marketable Securities (in thousands) | March 31, 2024 | June 30, 2023 | | :----------------------------------- | :------------- | :------------ | | Cost | $5,811 | $5,651 | | Fair Value | $5,348 | $5,136 | | Unrealized Gain (Loss) | $(463) | $(515) | Net Gains on Marketable Securities (in thousands) | Net Gains on Marketable Securities (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net gains recognized | $42 | $32 | $160 | $110 | | Unrealized gains (losses) | $(18) | $95 | $52 | $(23) | | Total | $24 | $127 | $212 | $87 | NOTE 5 - Inventories Details NAPCO's inventory valuation and composition, including current and non-current classifications - Inventories are valued at the lower of cost (FIFO) or net realizable value, with non-current inventories representing those expected to convert to sales beyond 12 months[65][26][28] Inventories, net of reserves (in thousands) | Inventories, net of reserves (in thousands) | March 31, 2024 | June 30, 2023 | | :---------------------------------------- | :------------- | :------------ | | Component parts | $34,669 | $29,939 | | Work-in-process | $7,529 | $7,726 | | Finished product | $7,905 | $10,684 | | Total | $50,103 | $48,349 | | Current | $37,010 | $35,062 | | Non-current | $13,093 | $13,287 | NOTE 6 – Property, Plant, and Equipment Outlines NAPCO's property, plant, and equipment, including cost, depreciation, and methods - Property, plant, and equipment are carried at cost less accumulated depreciation, with depreciation primarily using the straight-line method[66][29][30] Property, Plant, and Equipment (in thousands) | Property, Plant, and Equipment (in thousands) | March 31, 2024 | June 30, 2023 | | :-------------------------------------------- | :------------- | :------------ | | Land | $904 | $904 | | Buildings | $8,911 | $8,911 | | Molds and dies | $7,539 | $7,517 | | Furniture and fixtures | $3,626 | $3,387 | | Machinery and equipment | $29,197 | $28,574 | | Building improvements | $3,129 | $3,078 | | Less: accumulated depreciation and amortization | $(44,328) | $(43,063) | | Net Property, Plant, and Equipment | $8,978 | $9,308 | Depreciation and Amortization Expense (in thousands) | Depreciation and Amortization Expense (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :--------------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Amount | $454 | $380 | $1,374 | $1,127 | NOTE 7 - Income Taxes Details NAPCO's income tax expense, effective tax rates, and unrecognized tax benefits - The effective tax rate for the three and nine months ended March 31, 2024, was approximately 12.8% and 12.9%, respectively, consistent with the prior year[139] - The Company recognized $41,660,000 in total pre-tax book income for the nine months ended March 31, 2024, with a significant portion from foreign pre-tax book income ($36,248,000)[68] - As of March 31, 2024, the Company had accrued interest of $198,000 and $700,000 of unrecognized net tax benefits[69] NOTE 8 - Long-Term Debt Describes NAPCO's long-term debt arrangements, credit agreement amendments, and outstanding balances - The Company amended its credit agreement on February 9, 2024, extending the term to February 9, 2029, and increasing the revolving credit line from $11,000,000 to $20,000,000[72] - The new benchmark interest rate is the Secured Overnight Financing Rate (SOFR) plus 1.2645% to 1.3645%[73] - As of March 31, 2024, the Company had no outstanding debt[72] NOTE 9 - Stock Options Details NAPCO's stock option plans, including outstanding, exercisable, and available options 2012 Employee Stock Option Plan Details the status of stock options under the 2012 Employee Stock Option Plan - As of March 31, 2024, 363,036 stock options were outstanding and 178,984 were exercisable under the 2012 Employee Plan, with no further options available for grant[79] - A total of 147,544 stock options were exercised during the nine months ended March 31, 2024, with a total intrinsic value of $3,972,000[80][81] - Unearned stock-based compensation cost related to this plan was $1,306,000 as of March 31, 2024[82] 2012 Non-Employee Stock Option Plan Details the status of stock options under the 2012 Non-Employee Stock Option Plan - As of March 31, 2024, 20,400 stock options were outstanding and 16,560 were exercisable under the 2012 Non-Employee Plan, with no further options available for grant[84] - No stock options were exercised during the three and nine months ended March 31, 2024 and 2023[87] - Unearned stock-based compensation cost related to this plan was $29,000 as of March 31, 2024[87] 2018 Non-Employee Stock Option Plan Details the status of stock options under the 2018 Non-Employee Stock Option Plan - As of March 31, 2024, 71,900 stock options were outstanding and 62,500 were exercisable under the 2018 Non-Employee Plan, with no further options available for grant[89] - A total of 3,100 stock options were exercised during the nine months ended March 31, 2024, with a total intrinsic value of $59,000[90] - Unearned stock-based compensation cost related to this plan was $71,000 as of March 31, 2024[91] 2020 Non-Employee Stock Option Plan Details the status of stock options under the 2020 Non-Employee Stock Option Plan - As of March 31, 2024, 56,900 stock options were outstanding and 30,140 were exercisable under the 2020 Non-Employee Plan, with 43,100 options available for grant[95] - No stock options were exercised during the three and nine months ended March 31, 2024 and 2023[96] - Unearned stock-based compensation cost related to this plan was $248,000 as of March 31, 2024[98] 2022 Employee Stock Option Plan Details the status of stock options under the 2022 Employee Stock Option Plan - As of March 31, 2024, 10,000 stock options were outstanding and 2,000 were exercisable under the 2022 Employee Plan, with 940,000 options available for grant[100] - 10,000 options were granted during the nine months ended March 31, 2024, with a weighted average fair value of $9.75 at grant date[101] - Unearned stock-based compensation cost related to this plan was $68,000 as of March 31, 2024[102] NOTE 10 – Stockholders' Equity Transactions Summarizes significant transactions affecting stockholders' equity, including dividends and option exercises - The Board of Directors declared cash dividends of $0.08 per share in August and November 2023, and $0.10 per share in February 2024[103][104] - During the nine months ended March 31, 2024, 150,644 stock options were exercised, with 112,644 of these being cashless exercises[106] NOTE 11 – Related Party Transaction Discloses a significant related party transaction involving common stock sale by executives - In March 2024, the Company's President and Chairman sold 2,000,000 shares of common stock in a secondary public offering, with an additional 50,000 shares sold in April 2024 via a Greenshoe Option[108] - The Company did not sell any shares or receive proceeds from the offering but incurred $372,000 in offering expenses, recorded in SG&A[108] NOTE 12 - 401(k) Plan Provides details on NAPCO's contributions to its 401(k) retirement plan 401(k) Company Contributions (in thousands) | 401(k) Company Contributions (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Amount | $72 | $64 | $191 | $187 | NOTE 13 - Commitments and Contingencies Outlines NAPCO's contractual commitments, including leases, and potential litigation liabilities Leases Details NAPCO's lease obligations, including a long-term operating lease for its production facility - The Company has a 99-year operating lease for its principal production facility in the Dominican Republic, with an annual base rent of $235,000 plus $105,000 in annual service charges (increasing 2% annually)[111] Lease Liabilities Maturities (in thousands) | Lease Liabilities Maturities (in thousands) | Amount | | :---------------------------------------- | :----- | | Year Ending June 30, 2024 | $77 | | Year Ending June 30, 2025 | $299 | | Year Ending June 30, 2026 | $282 | | Year Ending June 30, 2027 | $267 | | Year Ending June 30, 2028 | $253 | | Thereafter | $4,386 | | Total | $5,564 | Litigation Describes a class action lawsuit alleging securities fraud against NAPCO and its officers - A purported class action lawsuit was filed on August 29, 2023, alleging securities fraud against the Company and its officers, with an amended complaint filed on February 16, 2024, adding claims related to a secondary public offering[114] - The Company has not recorded a liability for this matter and intends to vigorously defend against the action[115] Employment Agreements Outlines key employment and severance agreements with NAPCO's executive leadership - The Company has employment agreements with its CEO and SVP of Engineering, and a severance agreement with its CFO, detailing annual salaries, incentive compensation, and termination provisions[116][117][118] NOTE 14 – Geographical Data Provides a geographical breakdown of NAPCO's sales and identifiable assets - All of the Company's sales originate in the United States and are shipped primarily from U.S. facilities, with major customer concentrations in North America[119][120] Sales to External Customers (in thousands) | Sales to External Customers (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Domestic | $49,004 | $43,228 | $137,666 | $124,373 | | Foreign | $263 | $304 | $824 | $966 | | Total Net Sales | $49,267 | $43,532 | $138,490 | $125,339 | Identifiable Assets (in thousands) | Identifiable Assets (in thousands) | March 31, 2024 | June 30, 2023 | | :--------------------------------- | :------------- | :------------ | | United States | $148,492 | $122,995 | | Dominican Republic | $46,300 | $43,659 | | Total Identifiable Assets | $194,792 | $166,654 | NOTE 15 - Subsequent Events Discloses significant events after the balance sheet date, including a declared cash dividend - On May 2, 2024, the Board of Directors declared a cash dividend of $0.10 per share, payable on June 24, 2024[121] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes NAPCO's financial condition and results, highlighting growth drivers, margins, and liquidity - NAPCO is a leading manufacturer of high-tech electronic security devices, cellular communication services, and school safety solutions, with significant growth driven by recurring service revenues[124] - Net sales for the three months ended March 31, 2024, increased by 13.2% to $49,267,000, and for the nine months, increased by 10.5% to $138,490,000[129][130] - Service revenues were a primary driver of sales growth, increasing by $4,390,000 for the three months and $11,530,000 for the nine months[129][130] - Gross profit increased by 24.5% for the three months and 47.2% for the nine months, with gross profit as a percentage of net sales rising to 53.8% and 53.4% respectively, driven by increased equipment and service revenues and a favorable product mix towards higher-margin locking products and fire radios[131][133][134] - Net income for the three months ended March 31, 2024, increased by 38.2% to $13,196,000 ($0.36 diluted EPS), and for the nine months, increased by 119.1% to $36,284,000 ($0.98 diluted EPS)[140] - The Company's liquidity position is strong, with cash, certificates of deposit, and marketable securities aggregating to $87.5 million[141] - Accounts receivable increased by $4,204,000 to $30,273,000, primarily due to sales of intrusion products to a new customer and door locking products for contracting jobs[142] - Inventories increased by $1,754,000 to $50,103,000, attributed to level-loading production to avoid manpower fluctuations[143] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Details NAPCO's market risk exposures, including interest rate and foreign currency fluctuations - The Company is exposed to market risk from changes in interest rates on its revolving credit facility, which is based on the prime rate or SOFR[147] - All foreign sales transactions are denominated in U.S. dollars, transferring foreign currency exposure to customers, which could lead to collection difficulties or lost orders if exchange rates move unfavorably[148] - A 10% strengthening or weakening of the U.S. dollar against the Dominican Peso would result in an approximate $890,000 annual increase or decrease in income from operations[150] ITEM 4. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses, with ongoing remediation - Disclosure controls and procedures were deemed ineffective as of March 31, 2024, due to material weaknesses in internal control over financial reporting[151] - Identified material weaknesses include ineffective IT general controls over user access and change management, lack of precise review controls over inventory obsolescence reserve calculations, and issues with identifying significant inventory cost fluctuations in COGS and inventory[153][154][155] - Remediation efforts are ongoing and include installing monitoring software for administrative users, enhancing review of inventory forecasts with retrospective reconciliation, and refining methods for calculating component parts costs to identify fluctuations[156][163] - The material weaknesses will not be considered remediated until new and existing controls have operated effectively for a sufficient period and have been tested[159] PART II: OTHER INFORMATION Provides additional information, including legal proceedings, risk factors, and a list of exhibits ITEM 1. Legal Proceedings Refers to Note 13 for details on legal proceedings, specifically a class action lawsuit - Information on legal proceedings is incorporated by reference from Note 13, Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements[162] ITEM 1A. Risk Factors Confirms no material changes to previously disclosed risk factors from prior reports - No material changes in risk factors were identified for the three and nine months ended March 31, 2024, compared to previous disclosures in the Annual Report on Form 10-K and Form 424(b)(7) Prospectus[163] ITEM 6. Exhibits Lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the Chairman/President and EVP/CFO, Section 1350 Certifications, and various Inline XBRL documents (Instance, Schema, Calculation, Label, Presentation, Definition Linkbase Documents, and Cover Page Interactive Data File)[166] SIGNATURES Contains official signatures of executive officers, certifying the report's accuracy - The report was signed on May 6, 2024, by Richard L. Soloway, Chairman of the Board of Directors & Chief Executive Officer, and Kevin S. Buchel, President, Chief Operating Officer & Chief Financial Officer[169]