NAPCO SECURITY TECHNOLOGIES, INC Management's … – Marketscreener.com

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

This Quarterly Report on Form 10-Q and the documents we incorporate by reference
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, or the Exchange Act. All
statements, other than statements of historical fact, included or incorporated
in this prospectus regarding our strategy, future operations, clinical trials,
collaborations, intellectual property, cash resources, financial position,
future revenues, projected costs, prospects, plans, and objectives of management
are forward-looking statements. The words "believes," "anticipates,"
"estimates," "plans," "expects," "intends," "may," "could," "should,"
"potential," "likely," "projects," "continue," "will," "schedule," "would," and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we will achieve the plans, intentions or expectations
disclosed in our forward-looking statements and you should not place undue
reliance on our forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties, and other factors, which may be
beyond our control, and which may cause our actual results, performance, or
achievements to be materially different from future results, performance, or
achievements expressed or implied by such forward-looking statements. There are
a number of important factors that could cause our actual results to differ
materially from those indicated or implied by forward-looking statements. See
"Risk Factors" in our Annual Report on Form 10-K for the year ended June 30,
2022 for more information. These factors and the other cautionary statements
made in this prospectus and the documents we incorporate by reference should be
read as being applicable to all related forward-looking statements whenever they
appear in this prospectus and the documents we incorporate by reference. In
addition, any forward-looking statements represent our estimates only as of the
date that this prospectus is filed with the SEC and should not be relied upon as
representing our estimates as of any subsequent date. We do not assume any
obligation to update any forward-looking statements. We disclaim any intention
or obligation to update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise, except as may be required
by law.

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Overview

Napco Security Technologies, Inc ("NAPCO", "the Company", "we") is one of the
leading manufacturers and designers of high-tech electronic security devices,
cellular communication services for intrusion and fire alarm systems as well as
a leading provider of school safety solutions. We offer a diversified array of
security products, encompassing access control systems, door-locking products,
intrusion and fire alarm systems and video surveillance products. These products
are used for commercial, residential, institutional, industrial and governmental
applications, and are sold worldwide principally to independent distributors,
dealers and installers of security equipment. We have experienced significant
growth in recent years, primarily driven by fast growing recurring service
revenues generated from wireless communication services for intrusion and fire
alarm systems, as well as our school security products that are designed to meet
the increasing needs to enhance school security as a result of on-campus
shooting and violence in the U.S. Our wireless communication services have led
to the substantial growth in our monthly recurring revenues.

Since 1969, NAPCO has established a heritage and proven record in the
professional security community for reliably delivering both advanced technology
and high-quality security solutions, building many of the industry's widely
recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental
Access, Marks USA, and other popular product lines: including Gemini and
F64-Series hardwire/wireless intrusion systems and iSee Video internet video
solutions. We are also dedicated to developing innovative technology and
producing the next generation of reliable security solutions that utilize remote
communications and wireless networks, including our StarLink, iBridge, and more
recently the iSecure product lines. Today, millions of businesses, institutions,
homes, and people around the globe are protected by products from the NAPCO
Group of Companies.

Economic and Other Factors

We are subject to the effects of general economic and market conditions. If the
U.S. or international economic conditions deteriorate, our revenue, profit and
cash-flow levels could be materially adversely affected in future periods. In
the event of such deterioration, many of our current or potential future
customers may experience serious cash flow problems and as a result may, modify,
delay or cancel purchases of our products. Additionally, customers may not be
able to pay, or may delay payment of, accounts receivable that are owed to us.
If such events do occur, they may result in our fixed and semi-variable expenses
becoming too high in relation to our revenues and cash flows.

Seasonality

The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of the Company's hardware products want to install these products
prior to the summer; therefore, sales of these products historically peak in the
period April 1 through June 30, the Company's fiscal fourth quarter, and are
reduced in the period July 1 through September 30, the Company's fiscal first
quarter. Our monthly recurring service revenue, which is less susceptable to
these fluctuations, allows us to generate a more consistent and predictable
income stream.

Critical Accounting Policies and Estimates

The Company's significant accounting policies are fully described in Note 1 to
the Company's consolidated financial statements included in its 2022 Annual
Report on Form 10-K. Management believes these critical accounting policies,
among others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.

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Results of Operations

                                       Three months ended March 31,            Nine months ended March 31,
                                          (dollars in thousands)                  (dollars in thousands)
                                                            % Increase/                              % Increase/
                                      2023        2022      (decrease)       2023         2022        (decrease)
Net sales: equipment revenues       $ 28,390    $ 23,873           18.9 % 

$  81,511    $  67,080           21.5 %
service revenues                      15,142      12,032           25.8 %     43,828       33,284           31.7 %
Total net sales                       43,532      35,905           21.2 %    125,339      100,364           24.9 %
Gross Profit: equipment                9,002       4,539           98.3 %     21,271       11,003           93.3 %
services                              13,669      10,494           30.3 %     39,029       28,929           34.9 %
Total gross profit                    22,671      15,033           50.8 %     60,300       39,932           51.0 %
Gross profit as a % of net
sales:                                  52.1 %      41.9 %         24.4 %       48.1 %       39.8 %         20.9 %
equipment                               31.7 %      19.0 %         66.8 %       26.1 %       16.4 %         59.1 %
services                                90.3 %      87.2 %          3.5 %       89.1 %       86.9 %          2.5 %

Research and development               2,314       2,009           15.2 %      6,964        5,918           17.7 %
Selling, general and
administrative                         8,425       8,442          (0.2) %     24,719       23,983            3.1 %
Selling, general and
administrative as a percentage
of net sales                            19.4 %      23.5 %       (17.4) %       19.7 %       23.9 %       (17.5) %
Operating income                      11,932       4,582          160.4 %     28,617       10,031          185.3 %
Interest and other income
(expense), net                           437       (177)        (346.9) %        521        (102)        (610.8) %

Gain on extinguishment of debt             -           -              -    

       -        3,904        (100.0) %
Provision for income taxes             1,529       1,132           35.1 %      3,450        1,771           94.8 %
Net income                            10,840       3,273          231.2 %     25,688       12,062          113.0 %


Net Sales for the three months ended March 31, 2023 increased by $7,627,000, or
21.2%, to $43,352,000 as compared to $35,905,000 for the same period a year ago.
The increase in sales for the three months ended March 31, 2023 was due
primarily to revenue increases in recurring communication services ($3,110,000),
Alarm Lock brand door-locking products ($4.278,000), Marks brand door-locking
products ($927,000), and Continental brand access control products ($113,000) as
partialy offset by a decrease in Napco brand intrusion products ($1,250,000).
Net Sales for the nine months ended March 31, 2023 increased by $24,975,000, or
24.9%, to $125,339,000 as compared to $100,364,000 for the same period a year
ago. The increase in sales for the nine months ended March 31, 2023 was due
primarily to revenue increases in recurring communication services
($10,544,000), Napco brand intrusion products, which include the Company's
cellular radio products ($1,993,000), Alarm Lock brand door-locking products
($9,045,000), Marks brand door-locking products ($2,212,000), and Continental
brand access control products ($1,182,000). The Company's increase in equipment
sales was primarily due to a general increase in demand for the Company's
hardware products.

The Company's gross profit increased by $7,638,000 to $22,671,000, or 52.1% of
net sales, for the three months ended March 31, 2023 as compared to $15,033,000,
or 41.9% of net sales, for the same period a year ago. Gross profit on equipment
sales was $9,002,000, or 31.7% of net equipment sales, for the three months
ended March 31, 2023 and $4,539,000, or 19.0% of net equipment sales, for the
same period a year ago. Gross profit on service revenues was $13,669,000, or
90.3% of net service revenues, for the three months ended March 31, 2023 and
$10,494,000, or 87.2% of net service revenues, for the same period a year ago.
The increase in gross profit in dollars and as a percentage of net sales on
equipment sales and service revenues was primarily the result of the increase in
revenues of each as described above as well as increased availability and lower
costs of components and transportation as compared to the same period last year,
which resulted from improvements within the Company's supply chain. The
increases in revenues resulted in improved overhead absorption rates. In
addition, the increase in gross margin on service revenues was due, in part, to
increased service revenues relating to the Company's fire radios, which have
higher monthly selling prices than the Company's intrusion radios.

The Company's gross profit increased by $20,368,000 to $60,300,000, or 48.1% of
net sales, for the nine months ended March 31, 2023 as compared to $39,932,000,
or 39.8% of net sales, for the same period a year ago. Gross profit on equipment
sales was $21,271,000, or 26.1% of net equipment sales, for the nine months
ended March 31, 2023 and $11,003,000, or 16.4% of net equipment sales, for the
same period a year ago. Gross profit on service revenues was $39,029,000, or
89.1% of net service revenues, for the nine months ended March 31, 2023 and
$28,929,000, or 86.9% of net service revenues, for the same period a year ago.
The increase in gross profit in dollars and as a percentage of net sales on
equipment sales was primarily the result of the increase in

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revenues as described above, which improved overhead absorption rates, increased
availability and lower costs of components and transportation as compared to the
same period last year as well as a favorable shift in product mix the the
Company's Alarm Lock brand door locking products, which typically have higher
margins. The increase in gross margin on service revenues was due primarily to
increased service revenues relating to the Company's fire radios, which have
higher monthly selling prices than the Company's intrusion radios.

Research and development expenses for the three months ended March 31, 2023
increased $305,000 to $2,314,000, or 5.3% of net sales, as compared to
$2,009,000, or 5.6% of net sales, for the same period a year ago. Research and
development expenses for the nine months ended March 31, 2023 increased
$1,046,000 to $6,964,000, or 5.6% of net sales, as compared to $5,918,000, or
5.9% of net sales, for the same period a year ago. The increase in dollars was
due primarily to salary increases and additional staff.

Selling, general and administrative ("SG&A") expenses for the three months ended
March 31, 2023 remained relatively consistent at $8,425,000 as compared to
$8,442,000 for the same period a year ago. SG&A expenses as a percentage of net
sales decreased to 19.4% for the three months ended March 31, 2023 as compared
to 23.5% for the same period a year ago. The decrease as a percentage of net
sales was due primarily to the increase in net sales without the need to
increase to increase SG&A expenses. SG&A expenses for the nine months ended
March 31, 2023 increased by $736,000, or 3.1%, to $24,719,000 from $23,983,000
for the same period a year ago. SG&A expenses as a percentage of net sales
decreased to 19.7% for the nine months ended March 31, 2023 as compared to 23.9%
for the same period a year ago. The increase in dollars resulted primarily from
increases in expenses relating to the Company's President and Chairman and the
Company's Executive Vice President and Chief Financial Officer selling shares of
our Common stock in an underwritten secondary public offering, which is
discussed more fully in Note 11 to the Condensed Consolidated financial
statements, and credit card processing fees related to our monthly recurring
service revenues. The decrease as a percentage of net sales was due primarily to
the increase in net sales as partially offset by the aforementioned increase in
expense dollars.

Interest and other income (expense), net for the three months ended March 31,
2023 increased by $614,000 to income of $437,000 as compared to expense of
$177,000 for the same period a year ago. Interest and other income (expense),
net for the nine months ended March 31, 2023 increased by $623,000 to income of
$521,000 as compared to expense of $102,000 for the same period a year ago. The
increases in income for the three and nine months was primarily due to interest
income on certificates of deposits purchased during the nine months ended March
31, 2023.

Gain on extinguishment of debt resulted from a one-time gain in the nine months
ended March 31, 2022 which resulted from the forgiveness of the Company's PPP
loans as described in Note 8 to the condensed consolidated financial statements.

The Company's provision for income taxes for the three months ended March 31,
2023 increased by $397,000 to $1,529,000 as compared to $1,132,000 for the same
period a year ago. The increase in the provision for income taxes for the three
months was primarily due to higher taxable income in the U.S. The Company's
effective rate for income tax was 12.4% and 25.7% for the three months ended
March 31, 2023 and 2022 respectively. The Company's provision for income taxes
for the nine months ended March 31, 2023 increased by $1,679,000 to $3,450,000
as compared to $1,771,000 for the same period a year ago. The increase in the
provision for income taxes for the nine months was primarily due to higher
taxable income in the U.S. The Company's effective rate for income tax was 11.8%
and 12.8% for the nine months ended March 31, 2023 and 2022, respectively.

Net income for the three months ended March 31, 2023 increased by $7,567,000 to
$10,840,000 or $0.29 per diluted share as compared to $3,273,000 or $0.09 per
diluted share for the same period a year ago. Net income for the nine months
ended March 31, 2023 increased by $13,626,000 to $25,688,000 or $0.69 per
diluted share as compared to $12,062,000 or $0.33 per diluted share for the same
period a year ago. The increase in net income for the three and nine months
ended March 31, 2023 was primarily due to the items described above. Without the
inclusion of $3.9 million of income from the forgiveness of debt net income and
diluted earnings per share for the nine months ended March 31, 2022 would have
been $8.2 million and $0.22, respectively.

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Liquidity and Capital Resources

During the nine months ended March 31, 2023, the Company utilized a portion of
its cash balance at June 30, 2022 ($32,732,000 of $41,730,000) to purchase
marketable securities and other investments ($30,185,000) and property, plant
and equipment ($2,547,000). The securities and investments consist of money
market accounts, CD's and time deposits. During the nine months ended March 31,
2023, the Company generated cash flows from operations of $12,416,000. The
Company believes its current working capital, cash flows from operations and its
revolving credit agreement will be sufficient to fund the Company's operations
through the next twelve months.

Accounts receivable at March 31, 2023 decreased by $5,048,000 to $24,170,000 as
compared to $29,218,000 at June 30, 2022. This decrease is primarily the result
of the higher sales volume of equipment during the quarter ended June 30, 2022,
which is typically the Company's highest, as compared to the quarter ended March
31, 2023. In addition, sales of the Company's radio communication devices were
unusually high in the month of June 2022 due to the Company fulfilling
backorders of these products which had built up during the world-wide supply
chain difficulties. Sales of these products were at more normal levels in the
month of March 2023.

Inventories, which include both current and non-current portions, increased by
$11,000,000 to $60,786,000 at March 31, 2023 as compared to $49,786,000 at June
30, 2022. The increase was due primarily to a build-up of inventory of the
Company's radio products in order to mitigate potential supply chain
interuptions of these products. The increase was also due to the ongoing
shortages of certain component parts and the Company purchasing large quantities
of these hard to source component parts when they become available. As these
challenges begin to subside, the Company believes it's inventory levels will
decrease.

Accounts payable and accrued expenses, not including income taxes payable,
decreased by $7,129,000 to $17,496,000 as of March 31, 2023 as compared to
$24,625,000 as of June 30, 2022. This decrease is primarily due to a decreases
in the Company's accrued refund liability, which is explained in Note 2 to the
Notes to the Company's Consolidated Financial Statements, accrued employee
compensation, and accounts payable, which relates to the Company reducing
purchases of component parts in the latter part of the quarter ended March 31,
2023 after building up it's inventory in fiscal 2022.

As of March 31, 2023 and 2022, long-term debt consisted of a revolving line of
credit of $11,000,000 ("Revolver Agreement"), with no amounts outstanding, which
expires in June 2024. The revolving credit facility contains various
restrictions and covenants including, among others, restrictions on borrowings
and compliance with certain financial ratios, as defined in the agreement. The
Company's long-term debt is described more fully in Note 8 to the condensed
consolidated financial statements.

As of March 31, 2023, the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders issued in the
normal course of business. In addition, the Company's balance sheet reflects a
refund liability of $4,841,000 as of March 31, 2023 for customer returns and
promotional credits which is more fully discussed in Note 2 to the Condensed
Consolidated Financial Statements.

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