2017 ANNUAL REPORT
Another
Record-Breaking
Year
Featuring: SAAS Revenue
and School Safety
& Security Growth
NASDAQ:NSSC
NAPCO Security Technologies, Inc.
Total Security Solution for Wireless Locking, Access Control & Alarms
Security & Fire
Systems plus Cell/IP
Alarm Reporting
Complete Platform:
Access, Wireless
Locking & Security
Management
Wireless Locking &
Standalone Access
& Egress
Architectural Door
Hardware, Locks,
Lifesafety & Exit Trim
NAPCO Security Technologies, Inc.
provides commercial and residen-
tial security through a professional
dealer network of more than 10,000
security dealers, integrators,
locksmiths and contractors world-
wide. Its innovative, synergistic
products and technologies, provide
solutions in three main categories:
alarms and connectivity, locking and
access control and surveillance.
One of NAPCO’s strong growth
drivers is recurring revenue services
from its cellular communicator -
and connected home-brands.
Among the fastest growing brands
in its class, NAPCO StarLink™ Alarm
Communicators report alarm signals
universally from any brand of security
system, in lieu of telephone landlines
and 2G cell networks, both rapidly
disappearing. StarLink™ is a proven
go-to solution, ideal for millions of
installed and new alarm systems,
now available for residential, as well
as commercial fire alarm reporting.
It checks all the boxes, as it is easy
to install, economical and depend-
ably uses today’s leading nationwide
cellular networks, both AT&T® and
Verizon Network Certified®, protect-
ing security consumers and dealers’
account bases and valuation.
On-trend for households seeking to
bridge their home with increasingly
mobile lifestyles, iBridge® Con-
nected Home Services, accessible
from any smart phone/tablet via an
app, provides security, video and
smart home automation and newly
features complementary iBridge
Messenger™ SMS/MMS text and
video notifications. iBridge offers
dealers a value-add to their NAPCO
Gemini security system, for old and
new accounts, providing incremental
Recurring Monthly Revenue for both
the installer and the Company.
Faced with escalating school
violence, as a long-time trusted
source in some of the largest school
districts and leading colleges and
universities across the country,
NAPCO’s divisions, Alarm Lock®,
Continental Access®, and Marks
USA®, continue to evolve and
expand their LocDown™ security
solutions, to fit any classroom,
campus and budget. From enterprise
access control systems with inte-
grated access control, locks, alarms,
video and visitor-/threat-manage-
ment to wireless networked access
locks with built-in ID readers and
keyfob-control; or LocDown™ me-
chanical locks that lock from inside
the classroom, the Company makes
the scalable solutions needed to
(NASDAQ:NSSC)
safeguard schools, students and
staffers. In this same vertical, NAPCO
Commercial™ security systems have
gained considerable traction provid-
ing intrusion and lifesafety protection
in new addressable and wireless
systems and upgrade applications.
Based on the continued popularity
and strengths of Alarm Lock’s®
Trilogy Networx™ Access Lock
Platform, teamed with Marks’® wide
array of architectural hardware,
the Company created the new
décor-friendly ArchiTech™ Series
Designer Wireless Access Control
line, designed with the proven
functionality for traditional corporate,
healthcare and educational campus-
es, plus new customizable aesthetics
to satisfy even the most discriminat-
ing multi-dwelling residential build-
ings. These locks will also offer an
all new smartphone app paired with
Bluetooth LE technology, for
ultimate keyless user convenience
and compromise-free security.
Additionally, ArchiTech™ Locks
are seamlessly integrated on
Continental’s® enterprise class
CA4K system providing interopera-
ble global control, real-time access,
video and visitor management
and a host of robust server-based
advantages.
Richard L. Soloway
Chairman, President, and CEO
CEO Letter to Shareholders
Dear Fellow Shareholders,
automation. Our dedicated
ISO-9001 certified low-cost
Fiscal 2017 was a very successful
manufacturing facility gives us the
and transformative year for
ability to craft innovative end-to-
NAPCO, as the Company
end solutions ranging from simple
continues to fine tune its strategy
devices to complex systems. This
to focus on dynamic growth
dedicated low-cost manufacturing
opportunities presented by major
capability also provides us with
paradigm-shifts that are affecting
greater flexibility to adapt to
the global security market.
fast-changing markets while
maintaining a relatively fixed cost
I am pleased to report record sales
manufacturing infrastructure that
of $87.4 million in Fiscal 2017, up
maximizes capacity utilization and
6% from $82.5 million in Fiscal
overhead absorption.
2016. Operating income was
$6.3 million for Fiscal 2017, and
Two successive years of solid
Adjusted EBITDA* also increased
revenue growth demonstrate our
to $7.9 million.
ability to capitalize on two major
paradigm-shifts: the use of ‘smart
Our balance sheet remains strong.
devices’ and the Internet ‘cloud’ to
Working capital climbed to $40.8
remotely monitor homes and
million as of June 30, 2017, up
businesses; and growing concerns
from $36.9 million one-year prior.
over safety at schools and colleges
We also have zero net debt, down
and other public gathering places.
from a high of $35.9 million
following the acquisition of Marks
NAPCO offers B to B professional
USA in August of 2008.
grade solutions that appeal to the
younger generation, including a
NAPCO is the industry’s only “pure
broad range of security alarms,
play” public company that has
locks, access control, and home
multi-disciplinary expertise in both
automation capabilities that are
commercial & residential systems
accessible via our ‘cloud’ using
coupled with the broadest range
apps and virtually all popular
of security products, including
‘smart devices’. In addition, we
access control, electronic door
provide our dealers with simple
locking, fire and burglary alarm
and cost effective upgrades for up
systems, with ‘Connected Home’
to 30 million currently installed
*See table on inside back cover (page 51)
3
alarm systems, thus allowing
security camera video and voice
preparedness with recommended
NAPCO and its dealers to benefit
recordings from any smart device.
security upgrades. The SAVI index
from highly affordable equipment
Starlink Connect is ideal for new
leverages our unique ability to
retrofits that subsequently lead
installations and also provides a
deliver comprehensive end-to-end
to recurring revenue streams
cost effective retrofit for previously
solutions for the educational
generated by Software as a
installed alarm systems, including
marketplace that are modular,
Service (SaaS), which carries very
NAPCO brand systems and
scalable, and fully interoperable.
high gross profit margins of
virtually all of its competitors.
These solutions include Alarm
approximately 90%. Revenue from
Lock™ and LocDown™ locking/
SaaS increased by 65% in Fiscal
Another notable paradigm-shift is
access control solutions, Marks
2017 up to an approximate $10
rising violence at schools and
commercial grade locking
million run rate as of June 30,
universities, and other public
hardware, Continental access
2017. SaaS income helps ‘level’
meeting places.
seasonal revenue swings and
control systems, and NAPCO
intrusion and fire alarm systems.
permits more consistent and
The critical educational market
predictable sales forecasting.
segment is comprised of more
Increased spending on Research
than 100,000 K-12 schools
and Development (“R&D”), as well
Anticipating the future potential
and 10,000 higher education
as selling and marketing expenses
of SaaS, NAPCO made a CAPEX
institutions, and is expected to
were needed to launch numerous
investment to expand our
reach $4.9 billion.** As a major
breakthrough products and to
in-house Network Operating
provider of security and safety
accelerate brand awareness and
Center (NOC) Cloud to support
solutions for colleges, universities,
adoption by leading security
the potential growth of SaaS
and K-12 schools, NAPCO offers
dealers, systems integrators, and
up to $50 million annually in its
in-depth product solutions to
locksmiths in our network. These
current configuration.
serve all budgets: from highly
investments caused a slight drop
affordable wireless locking and ID
in net income to $5.6 million in
A notable SaaS success story
systems designed for public and
Fiscal 2017 as compared to $5.8
is the new StarLink3™ fire and
private K-12 schools; to state-of-
million for Fiscal 2016. Spending
commercial communicator.
the-art solutions for leading
for R&D, selling, and marketing is
Available in AT&T 3G/4G and
colleges and universities, including
expected to remain relatively level
Verizon versions, StarLink 3
Stanford, Pepperdine, Columbia,
in 2018, enabling profit margins to
replaces outdated hard-wired
and NYU, to name a few.
rise as sales increase while suffi-
phone lines and aging 2G
ciently supporting our efforts to
communicators that were phased
NAPCO also established the
establish a strong market share
out in 2016. We also offer the
School Access-control Vulnerability
early-on to help blunt competitive
StarLink Connect™ controller,
Index (SAVI™), a propriety audit
inroads.
a universal cellular solution that
system that rates the security
integrates with NAPCO’s
preparedness of K-12 schools.
Looking to the future, I see
proprietary iBridge™ ‘Connected
The SAVI index provides school
NAPCO as primed for vibrant and
Home’ services to provide remote
administrators with a benchmark
sustainable growth, continuing on
control of the alarm system,
that can be used to demonstrate
a path to reach our next goal of
lighting, HVAC, door locks,
a measurable improvement in
$100 million in gross annual sales,
4
including a growing contribution
services. With insiders owning 38%
StarLink Connect, which recently
from highly profitable SaaS
of all outstanding shares, we are
won two prestigious awards: ISC
recurring revenues. In Fiscal
aligned with other investors in
WEST-SIA New Product Showcase
2018, we expect to see further
supporting these investments.
‘Best in Residential and Monitoring
improvement in our operating
Solutions Award’ and 2017 ‘Most
leverage, with incremental sales
The major paradigm shifts I’ve
Valuable Product Award’.
generating further overhead
discussed are still relatively young,
absorption and increased gross
with largely untapped potential.
Through product innovation,
margin expansion.
We must work diligently to grasp
manufacturing excellence,
these opportunities by combining
outstanding customer service,
This is a ‘hockey stick’ effect where
visionary management with an
and expert technical support,
gross profit margins begin to
experienced team of talented
we will continue to attract greater
expand on a linear curve: starting
engineers and other professionals.
numbers of channel partners and
at roughly 32% when quarterly
Together, we will develop
accelerate product adoption.
revenue is $20 million; rising to
forward-thinking solutions that
Expanding our sales network will
nearly 44% when quarterly
invigorate and expand our
expand our growth potential while
revenues climb to $26 million.
growing network of over 10,000
enhancing shareholder value.
SaaS revenues compound this
security and locking dealers and
effect by boosting profitability
2,000 systems integrators.
Once again, I would like to thank
with nominal added cost.
our customers, employees, channel
With such dynamic opportunities
patent-protected products and
continued confidence and support.
Armed with a growing portfolio of
partners, and investors for their
on our horizon, we must seek to
proprietary technologies, NAPCO
maintain our innovative edge with
has the talent and resources to
Sincerely,
ongoing investments in R&D and
introduce breakthrough products
world-class manufacturing to
and services that set industry
create an ever-expanding pipeline
standards for innovation and
Richard L. Soloway
of game-changing products and
excellence. A prime example is
Chairman, President and CEO
* Non-GAAP Information. Certain non-GAAP measures are included in this document, including EBITDA, non-GAAP operating income and
Adjusted EBITDA. We define EBITDA as GAAP net income plus income tax expense (benefit), net interest expense and depreciation and
amortization expense. Non-GAAP operating income does not include impairment of goodwill, amortization of intangibles, restructuring
charges, stock-based compensation expense and other infrequent or unusual charges. These non-GAAP measures are provided to enhance
the user’s overall understanding of our financial performance. By excluding these charges our non-GAAP results provide information to
management and investors that is useful in assessing NAPCO’s core operating performance and in comparing our results of operations on a
consistent basis from period to period. The presentation of this information is not meant to be a substitute for the corresponding financial
measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliation of
GAAP to non-GAAP financial measures included in the above.
** Source: IHS, Inc, an Englewood, Colorado-based research company.
This letter contains statements relating to future results of the Company (including certain projections and business trends) that are “for-
ward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for
and market acceptance of new and existing products, as well as other risks and uncertainties detailed from time to time in the filings of the
Company with the Securities and Exchange Commission.
Trademarks of NAPCO: NAPCO, StarLink, StarLink Connect, iBridge, iBridge Messenger, iSee Video, LocDown, Lifesaver, Alarm Lock,
ContinentalAccess, Marks USA, NAPCO Commercial, Trilogy, Trilogy Networx, ArchiTech, SAVI
Trademarks of their respective companies: AT&T, Verizon Network Certified, Control4, NASDAQ
5
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2017
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition period from ___ to___
Commission File Number 0-10004
NAPCO SECURITY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11-2277818
(I.R.S. Employer I.D. Number)
333 Bayview Avenue, Amityville, New York
(Address of principal executive offices)
11701
(Zip Code)
Registrant's telephone number, including area code: (631) 842-9400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of Each Class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes _ No X
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes _ No X
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X No _
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. Yes X No _
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “Large accelerated filer”, “Accelerated filer” and “Smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer _ Accelerated filer X Non-accelerated filer Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes _ No X
As of December 31, 2016, the aggregate market value of the common stock of Registrant held by non-affiliates based upon the last sale
price of the stock on such date was $100,041,141.
As of September 11, 2017, 18,846,657 shares of common stock of Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant’s definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the Registrant’s 2017 Annual Meeting of Stockholders.
6
ITEM 1: BUSINESS.
PART I
NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in December 1971 in the State of
Delaware. Its executive offices are located at 333 Bayview Ave, Amityville NY 11701. Its telephone number is (631)
842-9400.
The Company is a diversified manufacturer of security products, encompassing access control systems, door-locking
products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. 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.
Website Access to Company Reports
Copies of our filings under the Securities Exchange Act of 1934 (including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are available free of charge on
our website (www.napcosecurity.com) on the same day they are electronically filed with the Securities and Exchange
Commission.
Products
The Company’s products (“Products”) are comprised of the following:
Access Control Systems. Access control systems consist of one or more of the following: various types of identification
readers (e.g. card readers, hand scanners), a control panel, a PC-based computer and electronically activated door-
locking devices. When an identification card or other identifying information is entered into the reader, the information
is transmitted to the control panel/PC which then validates the data and determines whether or not to grant access by
electronically deactivating the door locking device. An electronic log is kept which records various types of data
regarding access activity.
The Company designs, engineers, manufactures and markets the software and control panels discussed above. It also
buys and resells various identification readers, PC-based computers and various peripheral equipment for access control
systems.
Door Security Products. The Company manufactures a variety of door locking devices including microprocessor-based
electronic door locks with push button, card reader and bio-metric operation, door alarms, mechanical door locks and
simple dead bolt locks. These devices may control a single door or, in the case of some of the Company’s
microprocessor-based door locks, may be networked with the Company’s access control systems and controlled
remotely.
Intrusion and Fire Alarm Systems. Alarm systems usually consist of various detectors, a control panel, a digital keypad
and signaling equipment. When a break-in occurs, an intrusion detector senses the intrusion and activates a control panel
via hard-wired or wireless transmission that sets off the signaling equipment and, in most cases, causes a bell or siren to
sound. Communication equipment such as a digital communicator may be used to transmit the alarm signal to a central
station or another person selected by a customer.
The Company manufactures and markets the following products for alarm systems:
Automatic Communicators. When a control panel is activated by a signal from an intrusion detector, it activates a
communicator that can automatically dial one or more pre-designated telephone numbers utilizing wired
(“landline”) or cellular communications systems. If programmed to do so, a digital communicator dials the
telephone number of a central monitoring station and communicates in computer language to a digital
communicator receiver, which signals an alarm message.
Control Panels. A control panel is the "brain" of an alarm system. When activated by any one of the various types
of intrusion detectors, it can activate an audible alarm and/or various types of communication devices.
Combination Control Panels/Digital Communicators and Digital Keypad Systems. A combination control panel,
digital communicator and a digital keypad has continued to be the leading configuration in terms of dealer and
consumer preference. Benefits of the combination format include the cost efficiency resulting from a single
microcomputer function, as well as the reliability and ease of installation gained from the simplicity and
sophistication of micro-computer technology.
Fire Alarm Control Panel. Multi-zone fire alarm control panels, which accommodate an optional digital
7
communicator for reporting to a central station, are also manufactured by the Company.
Area Detectors. The Company's area detectors are both passive infrared heat detectors and combination
microwave/passive infrared detectors that are linked to alarm control panels. Passive infrared heat detectors
respond to the change in heat patterns caused by an intruder moving within a protected area. Combination units
respond to both changes in heat patterns and changes in microwave patterns occurring at the same time.
Video Surveillance Systems. Video surveillance systems typically consist of one or more video cameras, a control panel
and a video monitor or PC. More advanced systems can also include a recording device and some type of remote
communication device such as an internet connection to a PC or browser-enabled cell phone. The system allows the user
to monitor various locations at once while recorders save the video images for future use. Remote communication
devices can allow the user to view and control the system from a remote location.
The Company designs, engineers, and markets the software and control panels discussed above. It also buys and resells
various video cameras, PC-based computers and peripheral equipment for video surveillance systems.
Peripheral Equipment
The Company also markets peripheral and related equipment manufactured by other companies. Revenues from
peripheral equipment have not been significant.
Research and Development
The Company's business involves a high technology element. Research and development costs incurred by the Company
are charged to expense as incurred and are included in "Cost of Sales" in the consolidated statements of operations.
During the fiscal years ended June 30, 2017, 2016 and 2015, the Company expended approximately $6,723,000,
$6,169,000 and $5,382,000, respectively, on Company-sponsored research and development activities conducted
primarily by its engineering department to develop and improve the Products. The Company intends to continue to
conduct a significant portion of its future research and development activities internally.
Employees
As of June 30, 2017, the Company had 1,101 full-time employees.
Marketing
The Company's staff of 54 sales and marketing support employees located at the Company's Amityville offices sells and
markets the Products primarily to independent distributors and wholesalers of security alarm and security hardware
equipment. Management estimates that these channels of distribution represented approximately 49%, 51% and 53% of
the Company's total sales for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The remaining revenues
are primarily from installers and governmental institutions. The Company's sales representatives periodically contact
existing and potential customers to introduce new products and create demand for those as well as other Company
products. These sales representatives, together with the Company's technical personnel, provide training and other
services to wholesalers and distributors so that they can better service the needs of their customers. In addition to direct
sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United
States and European cities.
In the ordinary course of the Company's business the Company grants extended payment terms to certain customers. The
Company had one customer with an accounts receivable balance that comprised 24% and 22% of the Company’s
accounts receivable at June 30, 2017 and 2016, respectively. Sales to this customer comprised 13% of net sales in each
of the fiscal years ended June 30, 2017, 2016 and 2015. For further discussion on Concentration of Credit Risk see
disclosures included in Item 1A and Item 7.
Competition
The security products industry is highly competitive. The Company's primary competitors are comprised of
approximately 20 other companies that manufacture and market security equipment to distributors, dealers, central
stations and original equipment manufacturers. The Company believes that no one of these competitors is dominant in
the industry. Most of these companies have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality, reliability and pricing of, and the incorporation of
the latest innovative and technological advances into, its Products. The Company also competes by offering technical
support services to its customers. In addition, the Company competes on the basis of its expertise, its proven products, its
8
reputation and its ability to provide Products to customers on a timely basis. The inability of the Company to compete
with respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business.
Relatively low-priced "do-it-yourself" alarm system products are available to the public at retail stores. The Company
believes that these products compete with the Company only to a limited extent because they appeal primarily to the "do-
it-yourself" segment of the market. Purchasers of such systems do not receive professional consultation, installation,
service or the sophistication that the Company's Products provide.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s products
want to install its products prior to the summer; therefore sales of its 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. In addition, demand is affected by the housing and construction markets. Deterioration of
the current economic conditions may also affect this trend.
Raw Materials
The Company prepares specifications for component parts used in the Products and purchases the components from
outside sources or fabricates the components itself. These components, if standard, are generally readily available; if
specially designed for the Company, there is usually more than one alternative source of supply available to the
Company on a competitive basis. The Company generally maintains inventories of all critical components. The
Company for the most part is not dependent on any one source for its raw materials. The Company believes that any
vendor that is currently the sole source of a component can be replaced without a material impact on the Company.
Sales Backlog
In general, orders for the Products are processed by the Company from inventory. A sales backlog of approximately
$922,000, $1,592,000 and $2,044,000 existed as of June 30, 2017, 2016 and 2015, respectively. The Company expects to
fill the entire backlog that existed as of June 30, 2017 during fiscal 2018.
Government Regulation
The Company's telephone dialers, microwave transmitting devices utilized in its motion detectors and any new
communication equipment that may be introduced from time to time by the Company must comply with standards
promulgated by the Federal Communications Commission ("FCC") in the United States and similar agencies in other
countries where the Company offers such products, specifying permitted frequency bands of operation, permitted power
output and periods of operation, as well as compatibility with telephone lines. Each new Product that is subject to such
regulation must be tested for compliance with FCC standards or the standards of such similar governmental agencies.
Test reports are submitted to the FCC or such similar agencies for approval. Cost of compliance with these regulations
has not been material.
Patents and Trademarks
The Company has been granted several patents and trademarks relating to the Products. While the Company obtains
patents and trademarks as it deems appropriate, the Company does not believe that its current or future success is
dependent on its patents or trademarks.
9
Foreign Sales
The revenues and identifiable assets attributable to the Company's domestic and foreign operations for its last three fiscal
years are summarized in the following table:
Financial Information Relating to Domestic and Foreign Operations
Fiscal Year ended June 30,
2017
2016
2015
(in thousands)
$84,820
2,554
$79,931
2,582
$74,736
3,026
Sales to external
customers(1):
Domestic
Foreign
Total Net Sales
$87,374
$82,513
$77,762
As of June 30,
2017
2016
2015
Identifiable assets:
United States
Dominican Republic (2)
$55,550
15,312
$51,272
13,497
$50,998
14,039
Total Identifiable Assets
$70,862
$64,769
$65,037
(1) All of the Company's sales originate in the United States and are shipped primarily from the Company's facilities in
the United States. There were no sales into any one foreign country in excess of 10% of total Net Sales.
(2) Consists primarily of inventories (2017 = $11,831; 2016 = $10,076; 2015 = $10,546) and fixed assets (2017 =
$3,233; 2016 = $3,311; 2015 = $3,347) located at the Company's principal manufacturing facility in the Dominican
Republic.
ITEM 1A: RISK FACTORS
The risks described below are among those that could materially and adversely affect the Company’s business, financial
condition or results of operations. These risks could cause actual results to differ materially from historical results and
from any results predicted by any forward-looking statements related to conditions or events that may occur in the future.
Our Business Could Be Materially Adversely Affected as a Result of General Economic and Market Conditions
We are subject to the effects of general economic and market conditions. In the event that 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 expenses being too high in relation to our revenues and cash flows.
We Are Dependent Upon the Efforts of Richard L. Soloway, Our Chief Executive Officer and There is No Succession
Plan in Place
The success of the Company is largely dependent on the efforts of Richard L. Soloway, Chief Executive Officer. The
loss of his services could have a material adverse effect on the Company's business and prospects. There is currently no
succession plan to address the loss of Mr. Soloway’s services.
Competitors May Develop New Technologies or Products in Advance of Us
Our business may be materially adversely affected by the announcement or introduction of new products and services by
our competitors, and the implementation of effective marketing or sales strategies by our competitors. The industry in
10
which the Company operates is characterized by constantly improved products. There can be no assurance that
competitors will not develop products that are superior to the Company's products. The Company has historically
invested approximately 6% to 8% of annual revenues on Research and Development to mitigate this risk. Future success
will depend, in part, on our ability to continue to develop and market products and product enhancements cost-
effectively. The Company's research and development expenditures are principally targeted at enhancing existing
products, and to a lesser extent at developing new ones. Further, there can be no assurance that the Company will not
experience additional price competition, and that such competition may not adversely affect the Company's revenues and
results of operations.
Our Business Could Be Materially Adversely Affected by the Inability to Maintain Expense Levels Proportionate to
Sales Volume
While expense levels relative to current sales levels result in positive net income and cash flows, if sales levels decrease
significantly and we are unable to decrease expenses proportionately, our business may be adversely affected.
Our Business Could Be Materially Adversely Affected as a Result of Housing and Commercial Building Market
Conditions
We are subject to the effects of housing and commercial building market conditions. If these conditions deteriorate,
resulting in declines in new housing or commercial building starts, existing home or commercial building sales or
renovations, our business, results of operations or financial condition could be materially adversely affected, particularly
in our intrusion and door locking product lines.
Our Business Could Be Materially Adversely Affected as a Result of Lessening Demand in the Security Market
Our revenue and profitability depend on the overall demand for our products. Delays or reductions in spending,
domestically or internationally, for electronic security systems could materially adversely affect demand for our
products, which could result in decreased revenues or earnings.
The Markets We Serve Are Highly Competitive and We May Be Unable to Compete Effectively
We compete with approximately 20 other companies that manufacture and market security equipment to distributors,
dealers, control stations and original equipment manufacturers. Most of these companies may have substantially greater
financial and other resources than the Company. The Company competes primarily on the basis of the features, quality,
reliability and pricing of, and the incorporation of the latest innovative and technological advances into, its products. The
Company also competes by offering technical support services to its customers. In addition, the Company competes on
the basis of its expertise, its proven products, its reputation and its ability to provide products to customers on a timely
basis. The inability of the Company to compete with respect to any one or more of the aforementioned factors could have
an adverse impact on the Company's business.
Our Business Could be Materially Adversely Affected as a Result of Offering Extended Payment Terms to Customers
We regularly grant credit terms beyond 30 days to certain customers. These terms are offered in an effort to keep a full
line of our products in-stock at our customers’ locations. The longer the terms that are granted, the more risk is inherent
in collection of those receivables. We believe that our Bad Debt reserves are adequate to account for this inherent risk.
We Rely On Distributors To Sell Our Products And Any Adverse Change In Our Relationship With Our Distributors
Could Result In A Loss Of Revenue And Harm Our Business.
We distribute our products primarily through independent distributors and wholesalers of security alarm and security
hardware equipment. Our distributors and wholesalers also sell our competitors' products, and if they favor our
competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary
to provide effective sales, which would cause our results to suffer. In addition, the financial health of these distributors
and wholesalers and our continuing relationships with them are important to our success. Some of these distributors and
wholesalers may be unable to withstand adverse changes in business conditions. Our business could be seriously harmed
if the financial condition of some of these distributors and wholesalers substantially weakens.
Members of Management and Certain Directors Beneficially Own a Substantial Portion of the Company’s Common
Stock and May Be in a Position to Determine the Outcome of Corporate Elections
Richard L. Soloway, our Chief Executive Officer, members of management and the Board of Directors beneficially own
approximately 38% of the currently outstanding shares of Common Stock. By virtue of such ownership and their
positions with NAPCO, they may have the practical ability to determine the election of all directors and control the
outcome of substantially all matters submitted to NAPCO’s stockholders.
11
In addition, NAPCO has a staggered Board of Directors. Such concentration of ownership and the staggered Board could
have the effect of making it more difficult for a third party to acquire, or discourage a third party from seeking to acquire,
control of NAPCO.
Our Business Could be Materially Adversely Affected by Adverse Tax Consequences of Offshore Operations
We operate on a global basis, with a portion of our operating income generated outside the United States.
We intend to reinvest these earnings in our foreign operations indefinitely, except where we are able to repatriate these
earnings to the United States without material incremental tax provision. A significant portion of our assets that result
from these earnings remain outside the United States. If these indefinitely reinvested earnings were repatriated into the
United States as dividends, we would be subject to additional taxes.
Our Business Could Be Materially Adversely Affected as a Result of the Inability to Maintain Adequate Financing
Our business is dependent on maintaining adequate levels of financing used to fund operations and capital expenditures.
The current debt facilities provide for certain financial covenants relating to ratios affected by profit, asset and debt
levels. If the Company’s profits, asset or cash-flow levels decline below the minimums required to meet these
covenants, the Company may be materially adversely affected. Effects on the Company could include higher interest
costs, reduction in borrowing availability or revocation of these credit facilities.
If We are Unable to Successfully Remediate any Material Weakness in our Internal Control over Financial Reporting, or
Identify any Additional Material Weaknesses, the Accuracy and Timing of our Financial Reporting may be Adversely
Affected, We May be Unable to Maintain Compliance with Securities Law Requirements Regarding Timely Filing of
Periodic Reports in Addition to Applicable Stock Exchange Listing Requirements, and our Stock Price May Decline
Materially as a Result.
In connection with the audit of our consolidated financial statements for the year ended June 30, 2017, our management
and independent registered public accounting firm concluded that there were material weaknesses in our internal control
over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in
internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely basis. Material weaknesses were identified
related to controls over revenue, specifically regarding the application of controls related to the existence and
completeness of product shipments and services as well as the accuracy of the extended pricing of goods and services
sold to customers and have been included in management’s assessment.
While we expect to take the measures necessary to address the underlying causes of these material weaknesses, we
cannot at this time estimate how long it will take and our efforts may not prove to be successful in remediating these
material weaknesses. While we have not incurred and do not expect to incur material expenses specifically related to the
remediation of these material weaknesses, actual expenses may exceed our current estimates and overall costs of
compiling the system and processing documentation necessary to assess the effectiveness of our internal control over
financial reporting may be material.
We cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses.
If we are unable to successfully remediate any material weakness in our internal control over financial reporting, or
identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be
adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of
periodic reports in addition to applicable stock exchange listing requirements, and our stock price may decline materially
as a result.
Our Business Could Be Materially Adversely Affected by a weakening of the US Dollar against the Dominican Peso
We are exposed to foreign currency risks due to our operations in the Dominican Republic. We have significant
operations in the Dominican Republic which are denominated in Dominican pesos. We are subject to the risk that
currency exchange rates between the United States and the Dominican Republic will fluctuate significantly, potentially
resulting in an increase in some of our expenses when US dollars are transferred to Dominican pesos to pay these
expenses.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
12
ITEM 2: PROPERTIES
The Company owns executive offices and production and warehousing facilities at 333 Bayview Avenue, Amityville,
New York. This facility consists of a fully-utilized 90,000 square foot building on a six acre plot. This six-acre plot
provides the Company with space for expansion of office, manufacturing and storage capacities. These facilities are
pledged as security in the Company’s credit facilities with its primary bank.
The Company's foreign subsidiary located in the Dominican Republic, NAPCO DR, S.A. (formerly known as
NAPCO/Alarm Lock Grupo International, S.A.), owns a building of approximately 167,000 square feet of production
and warehousing space in the Dominican Republic. That subsidiary also leases the land associated with this building
under a 99-year lease expiring in the year 2092 at an annual cost of approximately $288,000. As of June 30, 2017, a
majority of the Company's products were manufactured at this facility, utilizing U.S. quality control standards.
Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable
future.
ITEM 3: LEGAL PROCEEDINGS
There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their
property is subject.
In the normal course of business, the Company is a party to claims and/or litigation. Management believes that the
settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the
Company's financial position and results of operations.
ITEM 4: MINE SAFETY DISCLOSURE
Not Applicable.
13
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Principal Market
NAPCO's Common Stock is traded on the NASDAQ Stock Market, Global Market System, under the symbol NSSC.
The tables set forth below reflect the range of high and low sales of the Common Stock in each quarter of the past two
fiscal years as reported by the NASDAQ Global Market System.
Common Stock
High
Low
Common Stock
High
Low
Sept. 30
$7.48
$6.36
Sept. 30
$6.09
$5.47
Approximate Number of Security Holders
Quarter Ended Fiscal 2017
Dec. 31
$8.55
$7.00
March 31
June 30
$10.70
$8.05
$10.65
$8.80
Quarter Ended Fiscal 2016
Dec. 31
$7.33
$5.41
March 31
$6.32
$5.18
June 30
$6.64
$5.57
The number of holders of record of NAPCO's Common Stock as of September 11, 2017 was 94 (such number does not
include beneficial owners of stock held in nominee name).
Dividend Information
NAPCO has declared no cash dividends during the past two years with respect to its Common Stock. Any cash dividends
must be approved by the Company's lenders.
Equity Compensation Plan Information as of June 30, 2017
PLAN CATEGORY
Equity compensation plans
approved by security holders:
Equity compensation plans not
approved by security holders:
Total
NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS
(a)
WEIGHTED AVERAGE
EXERCISE PRICE OF
OUTSTANDING
OPTIONS
(b)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE (EXCLUDING
SECURITIES REFLECTED IN
COLUMN (a)
(c)
89,800 (1)
--
89,800 (1)
$5.64
--
$5.64
857,900 (2)
--
857,900 (2)
(1) The 2002 Employee Stock Option Plan expired in 2012. 5,000 options are outstanding under the 2002 Plan. No
further options may be granted under this plan.
(2) In December 2012, the stockholders approved the 2012 Employee Stock Option Plan which authorizes the
granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company's
common stock to be acquired by the holders of such awards. In December 2012, the stockholders also approved
the 2012 Non-Employee Stock Option Plan which authorizes the granting of awards, the exercise of which
would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders
of such awards.
14
ITEM 6: SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further information, refer to the audited consolidated
financial statements and the notes thereto beginning on page FS-1 of this report.
Statement of earnings data:
Net Sales
Gross Profit
Income from Operations
Net Income
Cash Flow Data:
Net cash flows provided by
operating activities
Net cash flows used in investing
activities
Net cash flows used in financing
activities
Per Share Data:
Net earnings per common share:
Basic
Diluted
Weighted average common shares
outstanding:
Basic
Diluted
Cash Dividends declared per
common share (1)
Balance sheet data:
Working capital (2)
Total assets
Long-term debt
Stockholders' equity
Fiscal Year Ended and at June 30
(In thousands, except share and per share data)
2017
2016
2015
2014
2013
$87,374
$82,513
$77,762
$74,382
$71,386
29,578
27,584
26,047
23,713
21,724
6,378
5,599
2,448
(1,414)
6,323
5,773
9,160
(693)
5,281
4,845
3,887
(730)
4,316
3,476
3,717
3,021
4,743
(753)
4,899
(383)
(1,385)
(7,008)
(3,294)
(4,736)
(4,266)
$0.30
$0.30
$0.31
$0.31
$0.25
$0.25
$0.18
$0.18
$0.16
$0.16
18,809,000
18,874,000
19,164,000
19,392,000
19,210,000
18,854,000
18,894,000
19,169,000
19,428,000
19,362,000
$.00
$.00
$.00
$.00
$.00
$40,798
$36,888
$35,590
$33,436
$33,221
70,862
3,500
56,889
64,769
4,500
51,273
65,037
9,100
46,504
63,364
10,200
43,752
63,903
14,800
40,335
(1) The Company has never paid a dividend on its common stock.
(2) Working capital is calculated by deducting Current Liabilities from Current Assets.
15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company is a diversified manufacturer of security products, encompassing access control systems, door security
products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. 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. International sales
accounted for approximately 3%, 3% and 4% of our revenues for the fiscal years ended June 30, 2017, 2016 and 2015,
respectively.
The Company owns and operates manufacturing facilities in Amityville, New York and the Dominican Republic. A
significant portion of our operating costs are fixed, and do not fluctuate with changes in production levels or utilization
of our manufacturing capacity. As production levels rise and factory utilization increases, the fixed costs are spread over
increased output, which may contribute to increasing profit margins. Conversely, when production levels decline our
fixed costs are spread over reduced levels, which may contribute to decreasing margins.
The security products market is characterized by constant incremental innovation in product design and manufacturing
technologies. Generally, the Company devotes 6-8% of revenues to research and development (R&D) on an annual
basis. The Company does not expect products resulting from our R&D investments in a given fiscal year to contribute
materially to revenue during that same fiscal year, but should benefit the Company over future years. In general, the new
products introduced by the Company are initially shipped in limited quantities, and increase over time. Prices and
manufacturing costs tend to decline over time as products and technologies mature.
Economic and Other Factors
We are subject to the effects of general economic and market conditions. In the event that 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 NAPCO's products want
to install its products prior to the summer; therefore sales of its 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. In addition, demand is affected by the housing and construction markets. The timing of any
significant deterioration of the current economic conditions may also affect this trend.
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 2017 Annual Report on Form 10-K. Management believes the following critical accounting
policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
The Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an agreement
exists, (ii) there is a fixed and determinable price for the Company's product or service, (iii) shipment and passage of
title occurs or service has been provided, and (iv) collectability is reasonably assured. Revenues from product sales
are recorded at the time the product is shipped or delivered to the customer pursuant to the terms of the sale.
Revenues for services are recorded at the time the service is provided to the customer pursuant to the terms of sale.
The Company reports its sales on a net sales basis, with net sales being computed by deducting from gross sales the
amount of actual sales returns and other allowances and the amount of reserves established for anticipated sales
returns and other allowances.
The Company analyzes sales returns and is able to make reasonable and reliable estimates of product returns based
on the Company’s past history. Estimates for sales returns are based on several factors including actual returns and
based on expected return data communicated to it by its customers. Accordingly, the Company believes that its
16
historical returns analysis is an accurate basis for its allowance for sales returns. Actual results could differ from
those estimates.
Concentration of Credit Risk
An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have
had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently,
depending on the nature of the concentration, and vary in significance. The Company had one customer with an
accounts receivable balance that comprised 24% and 22% of the Company’s accounts receivable at June 30, 2017
and 2016, respectively. Sales to this customer comprised 13% of net sales in each of the fiscal years ended June 30,
2017, 2016 and 2015.
In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in
the amount of $155,000 and $145,000 as of June 30, 2017 and 2016, respectively. Our reserve for doubtful accounts
is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the
evaluation of accounts receivable agings, specific exposures and historical or anticipated events.
Inventories
Inventories are valued at the lower of cost or market, with cost being determined on the first-in, first-out (FIFO)
method. The reported net value of inventory includes finished saleable products, work-in-process and raw materials
that will be sold or used in future periods. Inventory costs include raw materials, direct labor and overhead. The
Company’s overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are
related to procuring and storing raw materials as compared to the manufacture and assembly of finished products.
These proportions, the method of their application, and the resulting overhead included in ending inventory, are
based in part on subjective estimates and actual results could differ from those estimates.
In addition, the Company records an inventory obsolescence reserve, which represents the difference between the
cost of the inventory and its estimated market value, based on various product sales projections. This reserve is
calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends,
requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to
convert finished product into alternate versions of the same product to better match customer demand. There is
inherent professional judgment and subjectivity made by both production and engineering members of management
in determining the estimated obsolescence percentage. In addition, and as necessary, the Company may establish
specific reserves for future known or anticipated events. The Company also regularly reviews the period over which
its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the
balance sheet date are classified as non-current.
Intangible Assets
The Company evaluates its Intangible Assets for impairment at least on an annual basis and will evaluate them
earlier if there are indicators of a potential impairment. Those intangible assets that are classified as goodwill or as
other intangibles with indefinite lives are not amortized. Impairment testing is performed in two steps: (i) the
Company determines if there is impairment by comparing the fair value of a reporting unit with its carrying value,
and (ii) if there is impairment, the Company measures the amount of impairment loss by comparing the implied fair
value of intangible assets with the carrying amount of the intangible assets.
Income Taxes
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2012 and
forward years are still open for examination.
For the year ended June 30, 2017, the Company recognized a net income tax expense of $696,000. During the year
ending June 30, 2017 the Company increased its reserve for uncertain income tax positions by $35,000. The
Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and
accrued income taxes. As of June 30, 2017, the Company had accrued interest totaling $0 and $183,000 of
unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in
any future period. The Company uses the flow through method to account for investment tax credits earned on
eligible research and development expenditures. Under this method, the investment tax credits are recognized as a
reduction to income tax expense.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
17
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and
deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns
on an ongoing basis.
Liquidity and Capital Resources
The Company's cash on hand as of June 30, 2016 combined with proceeds from operating activities during fiscal 2017
were adequate to meet the Company's capital expenditure needs and debt obligations during fiscal 2017. The Company's
primary internal source of liquidity is the cash flow generated from operations. The primary source of external financing
is a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2021. As of June 30,
2017, $3,500,000 was outstanding under this revolving line of credit. As of June 30, 2017, the Company's unused
sources of funds consisted principally of $3,454,000 in cash and $7,500,000 unused balance available under its revolving
line of credit.
During the year ended June 30, 2017 the Company utilized a portion of its cash on hand at June 30, 2016 ($2,714,000 of
$3,805,000) to repay outstanding debt ($1,300,000) and purchase property, plant and equipment ($1,414,000).
As of June 30, 2017, long-term debt consisted of a revolving credit facility of $11,000,000 (the “Revolving Credit
Facility”) which expires in June 2021. The term loan which was outstanding as of June 30, 2016 was repaid in full as of
June 30, 2017. The Company’s long-term debt is described more fully in Note 6 to the condensed consolidated financial
statements.
The Revolving Credit Facility contains various restrictions and covenants including, among others, restrictions on
payment of dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the restated
agreement.
Outstanding balances and interest rates as of June 30, 2017 and June 30, 2016 are as follows:
June 30, 2017
June 30, 2016
Outstanding
Interest Rate
Outstanding
Interest Rate
Revolving line of credit
Term loans
Total debt
$3,500
--
$3,500
2.2%
--
2.2%
$2,000
2,800
$4,800
1.6%
1.6%
1.6%
The Company believes its current working capital, anticipated cash flows from operations and its Revolving Credit
Agreement will be sufficient to fund the Company’s operations through at least the next twelve months.
The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below:
Current Ratio
Sales to Receivables
Total debt to equity
As of June 30,
2017
4.9 to 1
4.3 to 1
.06 to 1
2016
5.1 to 1
4.3 to 1
.09 to 1
As of June 30, 2017, the Company had no material commitments for capital expenditures or inventory purchases other
than purchase orders issued in the normal course of business. On April 26, 1993, the Company's foreign subsidiary
entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s
principle manufacturing facility is located, at an annual cost of approximately $288,000.
Working Capital. Working capital increased by $3,910,000 to $40,798,000 at June 30, 2017 from $36,888,000 at June
30, 2016. Working capital is calculated by deducting Current Liabilities from Current Assets.
Accounts Receivable. Accounts Receivable increased by $1,263,000 to $20,275,000 at June 30, 2017 as compared to
$19,012,000 at June 30, 2016. The increase in Accounts Receivable was due primarily to an increase in sales for the
quarter ended June 30, 2017 as compared to the same quarter a year ago.
18
Inventories. Inventories, which include both current and non-current portions, increased by $5,242,000 to $30,579,000 at
June 30, 2017 as compared to $25,337,000 at June 30, 2016. The increase was due primarily to the Company building
up stock of its expanding line of cellular communication products. The increase in inventory was also due to unexpected
softness in demand of industrial door locking products which the Company believes is temporary. The Company
believes that inventory levels of these products will decrease as demand increases.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses, not including income taxes payable,
increased by $1,496,000 to $10,184,000 as of June 30, 2017 as compared to $8,688,000 at June 30, 2016. This increase
is primarily due to the increase in inventory as described above.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes the Company's contractual obligations by fiscal year:
Payments due by period:
Contractual obligations
Long-term debt
obligations
Land lease (76 years
remaining) (1)
Operating lease
obligations
Other long-term
obligations (employment
agreements) (1)
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$3,500,000
$ --
$ --
$3,500,000
$ --
21,600,000
288,000
576,000
576,000
20,160,000
36,000
27,000
14,000
1,515,000
1,391,000
124,000
--
--
--
--
Total
$26,651,000
$1,701,000
$714,000
$4,076,000
$20,160,000
(1) See footnote 10 to the accompanying consolidated financial statements.
Results of Operations
Fiscal 2017 Compared to Fiscal 2016
Fiscal year ended June 30,
Net sales
Gross profit
Gross profit as a % of net sales
Selling, general and
administrative
Selling, general and
administrative as a % of net sales
Income from operations
Interest expense, net
Provision for income taxes
Net income
2017
$87,374
29,578
33.9%
2016
$82,513
27,584
33.4%
23,200
21,261
26.6%
6,378
83
696
5,599
25.8%
6,323
179
371
5,773
% Increase/
(decrease)
5.9%
7.2%
1.5%
9.1%
3.1%
0.9%
(53.6)%
87.6%
(3.0)%
Net sales in fiscal 2017 increased by $4,861,000 to $87,374,000 as compared to $82,513,000 in fiscal 2016. The increase
in net sales was primarily due to increased sales of the Company’s NAPCO brand intrusion products ($4,081,000),
Marks brand door-locking products ($808,000) and Continental brand access control products ($240,000) and was
partially offset by decreases in the Company’s Alarm Lock brand door-locking products ($268,000).
19
The Company's gross profit increased by $1,994,000 to $29,578,000 or 33.9% of net sales in fiscal 2017 as compared to
$27,584,000 or 33.4% of net sales in fiscal 2016. Gross profit was primarily affected by the increase in net sales as
discussed above as partially offset by increased Research and Development expenditures which are included in Cost of
Sales.
Selling, general and administrative expenses for fiscal 2017 increased by $1,939,000 to $23,200,000 as compared to
$21,261,000 in fiscal 2016. Selling, general and administrative expenses as a percentage of net sales increased to 26.6%
in fiscal 2017 from 25.8% in fiscal 2016. The increases in dollars and as a percentage of sales resulted primarily from
increases in selling wages and commissions as well as increased advertising and tradeshow expenditures. The Company
increased expenditures in these areas in order to generate higher sales.
Interest expense for fiscal 2017 decreased by $96,000 to $83,000 from $179,000 for the same period a year ago. The
decrease in interest expense is primarily the result of the Company’s reduction of its outstanding borrowings under its
revolving line of credit and its term loan, which was repaid in full during fiscal 2017.
The Company’s provision for income taxes for fiscal 2017 increased by $325,000 to $696,000 as compared to $371,000
for the same period a year ago. The increase in income taxes from fiscal 2016 to fiscal 2017 resulted primarily from the
benefit recognized in fiscal 2016 from a one-time reversal of certain reserves.
Net income for fiscal 2017 decreased by $174,000 to $5,599,000 as compared to $5,773,000 in fiscal 2016. This resulted
primarily from the items discussed above.
Results of Operations
Fiscal 2016 Compared to Fiscal 2015
Fiscal year ended June 30,
2016
2015
Net sales
Gross profit
Gross profit as a % of net sales
Selling, general and
administrative
Selling, general and
administrative as a % of net sales
Income from operations
Interest expense, net
Other expense, net
Provision for income taxes
Net income
$82,513
27,584
33.4%
21,261
25.8%
6,323
179
--
371
5,773
$77,762
26,047
33.5%
20,766
26.7%
5,281
215
5
216
4,845
% Increase/
(decrease)
6.1%
5.9%
(0.3)%
2.4%
(3.4)%
19.7%
(16.7)%
(100.0)%
71.8%
19.2%
Net sales in fiscal 2016 increased by $4,751,000 to $82,513,000 as compared to $77,762,000 in fiscal 2015. The increase
in net sales was primarily due to increased sales of the Company’s Napco brand intrusion products ($2,676,000), Alarm
Lock brand door-locking products ($253,000), and Marks brand door-locking products ($2,947,000) and was partially
offset by decreases in the Company’s Continental brand access control products ($1,125,000).
The Company's gross profit increased by $1,537,000 to $27,584,000 or 33.4% of net sales in fiscal 2016 as compared to
$26,047,000 or 33.5% of net sales in fiscal 2015. Gross profit was primarily affected by the increase in net sales as
discussed above as partially offset by increased Research and Development expenditures which are included in Cost of
Sales.
Selling, general and administrative expenses for fiscal 2016 increased by $495,000 to $21,261,000 as compared to
$20,766,000 in fiscal 2015. Selling, general and administrative expenses as a percentage of net sales decreased to 25.8%
in fiscal 2016 from 26.7% in fiscal 2015. The increases in dollars resulted primarily from increases in selling wages and
commissions as well as increased advertising and tradeshow expenditures. The Company increased expenditures in these
areas in order to generate higher sales. The decrease as a percentage of net sales was due primarily to Net sales
increasing at a higher rate than Selling, general and administrative expenses.
Interest expense for fiscal 2016 decreased by $36,000 to $179,000 from $215,000 for the same period a year ago. The
decrease in interest expense is primarily the result of the Company’s reduction of its outstanding borrowings under its
20
revolving line of credit and its term loan.
Other expenses remained relatively constant at $0 and $5,000 for fiscal 2016 and 2015, respectively.
The Company’s provision for income taxes for fiscal 2016 increased by $155,000 to $371,000 as compared to $216,000
for the same period a year ago. The increase in income taxes from fiscal 2015 to fiscal 2016 resulted primarily from the
higher pre-tax income in fiscal 2016 as compared to fiscal 2015 as well as a benefit recognized in fiscal 2015 resulting
from R&D Credits and a decrease in certain of the Company’s income tax reserves.
Net income for fiscal 2016 increased by $928,000 to $5,773,000 as compared to $4,845,000 in fiscal 2015. This resulted
primarily from the items discussed above.
Forward-looking Information
This Annual Report on Form 10-K and the information incorporated by reference may include "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of
1934. The Company intends the Forward-Looking Statements to be covered by the Safe Harbor Provisions for Forward-
Looking Statements. All statements regarding the Company's expected financial position and operating results, its
business strategy, its financing plans and the outcome of any contingencies are Forward-Looking Statements. The
Forward-Looking Statements are based on current estimates and projections about our industry and our business. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and
similar expressions are intended to identify such Forward-Looking Statements. The Forward-Looking Statements are
subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any
Forward-Looking Statements. For example, the Company is highly dependent on its Chief Executive Officer for
strategic planning. If he is unable to perform his services for any significant period of time, the Company's ability to
grow could be adversely affected. In addition, factors that could cause actual results to differ materially from the
Forward-Looking Statements include, but are not limited to, uncertain economic, military and political conditions in the
world, our ability to maintain and develop competitive products, adverse tax consequences of offshore operations, the
ability to maintain adequate financing and significant fluctuations in the exchange rate between the Dominican Peso and
the U.S. Dollar. The Company’s Risk Factors are discussed in more detail in Item 1A.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt (consisting of a revolving credit facility) that provides
for interest based on the prime rate or LIBOR as described in the agreement. The Company is affected by market risk
exposure primarily through the effect of changes in interest rates on amounts payable by the Company under these credit
facilities. At June 30, 2017, an aggregate principal amount of approximately $3,500,000 was outstanding under the
Company's credit facilities with a weighted average interest rate of approximately 2.2%. If principal amounts outstanding
under the Company's credit facilities remained at this level for an entire year and the interest rate increased or decreased,
respectively, by 1% the Company would pay or save, respectively, an additional $35,000 in interest that year.
All foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted
foreign currency exposure onto its foreign customers. As a result, if exchange rates move against foreign customers, the
Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the
loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and
results of operations. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos
("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of 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.
21
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements: Financial statements required pursuant to this Item are presented on pages FS-1 through FS-25
of this report as follows:
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
Management Report on Internal Control
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2017 and 2016
Page
FS-1
FS-2
FS-4
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2017, 2016 and 2015
FS-6
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 2017,
2016 and 2015
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2017, 2016 and
2015
Notes to Consolidated Financial Statements
FS-7
FS-8
FS-9
22
Management Report on Internal Control
Management has prepared and is responsible for our consolidated financial statements and related notes. Management is
also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Napco Technologies, Inc. (the
“Company”) internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with the authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements prepared for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis. Management identified the following material weaknesses: 1. The
documentation of a key review control over product shipments was not designed properly to evidence the operating
effectiveness of the control, and a portion of the Company’s shipments were not subjected to this review control due to
in-process consolidation of warehouse operations. This was rectified by the end of the period. 2. Controls around
subscription-based service revenue were not assessed at the transaction level because they are largely automated, but
subjected only to management-level reasonableness review 3. Management’s reviews of price lists and pricing discounts
are not formally documented on a consistent basis, and 4. Review of system-based pricing for certain products and
services was not performed to correct data entry errors, although no significant errors were detected.
Management conducted an assessment of the effectiveness of internal control over financial reporting based on the
framework in Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, management determined that as of June 30, 2017, the Company
did not maintain effective internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of June 30, 2017 has been audited by Baker Tilly
Virchow Krause, LLP, an independent registered public accounting firm, as stated in their report included herein.
FS-1
23
Report of Independent Registered Public Accounting Firm
To the Shareholders, Audit Committee and Board of Directors
Napco Security Technologies, Inc. and Subsidiaries
Amityville, New York
We have audited Napco Security Technologies, Inc. and Subsidiaries internal control over financial reporting as of June
30, 2017, based on criteria established in or Internal Control – Integrated Framework (2013)issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Napco Security Technologies, Inc. and
Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis. Material weaknesses were identified related to controls over revenue,
specifically regarding the application of controls related to the existence and completeness of product shipments and
services as well as the accuracy of the extended pricing of goods and services sold to customers and have been included
in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2017 financial statements, and this report does not affect our report dated
September 13, 2017 on those financial statements.
In our opinion, Napco Security Technologies, Inc. and Subsidiaries did not maintain, in all material respects, effective
internal control over financial reporting as of June 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Napco Security Technologies, Inc. and Subsidiaries as of June 30, 2017 and
2016, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years
in the period ended June 30, 2017 and our report dated September 13, 2017 expressed an unqualified opinion thereon.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
September 13, 2017
FS-2
24
Report of Independent Registered Public Accounting Firm
To the Shareholders, Audit Committee and Board of Directors
Napco Security Technologies, Inc. and Subsidiaries
Amityville, New York
We have audited the accompanying consolidated balance sheets of Napco Security Technologies, Inc. and Subsidiaries
(the “Company”) as of June 30, 2017 and 2016 and the related consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended June 30, 2017. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Napco Security Technologies, Inc. and Subsidiaries at June 30, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2017, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Napco Security Technologies, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated September 13, 2017 expressed an adverse
opinion thereon.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
September 13, 2017
FS-3
25
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2017 and 2016
(In Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $155 and
$145 at June 30, 2017 and 2016, respectively, and other reserves
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total Current Assets
Inventories - non-current
Deferred income taxes
Property, plant and equipment, net
Intangible assets, net
Other assets
TOTAL ASSETS
2017
2016
$3,454
$3,805
20,275
26,212
1,330
--
19,012
21,428
936
703
51,271
45,884
4,367
644
6,543
7,916
121
3,909
436
6,049
8,357
134
$70,862
$64,769
See accompanying notes to consolidated financial statements.
FS-4
26
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2017 and 2016
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt
Accounts payable
Accrued expenses
Accrued salaries and wages
Accrued income taxes
Total Current Liabilities
Long-term debt, net of current maturities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares
authorized; 21,174,507 and 21,116,743 shares issued; and
18,844,657 and 18,786,893 shares outstanding, respectively
Additional paid-in capital
Retained earnings
2017
2016
$ --
5,653
2,209
2,322
289
10,473
3,500
13,973
212
16,638
51,771
68,621
$300
4,328
1,893
2,467
8
8,996
4,500
13,496
211
16,622
46,172
63,005
Less: Treasury Stock, at cost (2,329,850 and 2,329,850 shares,
respectively)
(11,732)
(11,732)
TOTAL STOCKHOLDERS' EQUITY
56,889
51,273
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$70,862
$64,769
See accompanying notes to consolidated financial statements.
FS-5
27
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2017, 2016 and 2015
(In Thousands, Except Share and Per Share Data)
Net sales
Cost of sales
Gross Profit
Selling, general, and administrative expenses
Operating Income
Other expense:
Interest expense, net
Other, net
Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
Income per share:
Basic
Diluted
2017
2016
2015
$87,374
$82,513
$77,762
57,796
29,578
23,200
6,378
83
--
83
6,295
696
54,929
27,584
21,261
6,323
179
--
179
6,144
371
51,715
26,047
20,766
5,281
215
5
220
5,061
216
$5,599
$5,773
$4,845
$0.30
$0.30
$0.31
$0.31
$0.25
$0.25
Weighted average number of shares outstanding:
Basic
Diluted
18,809,000
18,874,000
19,164,000
18,854,000
18,894,000
19,169,000
See accompanying notes to consolidated financial statements.
FS-6
28
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2017, 2016 and 2015
(In Thousands, Except Share Data)
Common Stock
Treasury Stock
Number of
Shares
Issued
Amount
Additional
Paid-in
Capital
Number of
Shares
Amount
Retained
Earnings
Total
BALANCE June 30,
2014
Repurchase of Treasury
Shares
Stock-based
compensation expense
21,049,243
$210
$16,032
(1,630,167)
$(8,044)
$35,554
$43,752
--
--
--
--
--
(453,048)
(2,194)
101
--
--
--
--
(2,194)
101
Net income
--
--
--
--
--
4,845
4,845
BALANCE June 30,
2015
Repurchase of Treasury
Shares
Stock Options
Exercised
Stock-based
compensation expense
21,049,243
$210
$16,133
(2,083,215)
$(10,238)
$40,399
$46,504
--
67,500
--
1
--
(192,767)
(1,108)
386
(53,868)
(386)
--
--
(1,108)
1
--
--
103
--
--
--
103
Net income
--
--
--
--
--
5,773
5,773
BALANCE June 30,
2016
Stock Options
Exercised, net of tax
effect
Stock-based
compensation expense
21,116,743
$211
$16,622
(2,329,850)
$(11,732)
$46,172
$51,273
57,764
1
(86)
--
--
--
(85)
Net income
--
--
--
--
--
5,599
--
--
102
--
--
--
102
5,599
BALANCE June 30,
2017
21,174,507
$212
$16,638
(2,329,850)
$(11,732)
$51,771
$56,889
See accompanying notes to consolidated financial statements.
FS-7
29
1,570
(472)
66
230
101
(1,156)
(1,388)
(57)
121
--
6
21
3,887
(730)
(730)
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2017, 2016 and 2015 (In Thousands)
2017
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$5,599
$5,773
$4,845
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Change to inventory obsolescence reserve
Provision for doubtful accounts
Deferred income taxes
Non-cash stock based compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Income tax receivable
Tax deficiency from stock-based awards
1,374
(457)
10
361
102
(1,273)
(4,785)
(394)
1,420
(455)
(30)
375
103
(988)
1,988
110
--
--
134
--
Other assets
--
--
Accounts payable, accrued expenses, accrued salaries and
wages, accrued income taxes
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt
Proceeds from long-term debt
Proceeds from stock option exercises
Tax deficiency from stock-based awards
Cash paid for purchase of treasury stock
Net Cash Used in Financing Activities
Net Change in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - Beginning
1,777
2,448
(1,414)
(1,414)
(2,800)
1,500
49
(134)
--
(1,385)
(351)
3,805
864
9,160
(693)
(693)
(5,900)
(1,600)
--
--
--
(1,108)
(7,008)
1,459
2,346
500
--
--
(2,194)
(3,294)
(137)
2,483
CASH AND CASH EQUIVALENTS - Ending
$3,454
$3,805
$2,346
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net
Income taxes paid
$88
$54
$184
$--
$215
$29
Surrender of Common Shares
86
54
--
See accompanying notes to consolidated financial statements
FS-8
30
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
Nature of Business:
NAPCO Security Technologies, Inc. and Subsidiaries (the "Company") is a diversified manufacturer of security
products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video
surveillance products for commercial and residential use. 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.
The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company's products
want to install its products prior to the summer; therefore sales of its 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. In addition, demand is affected by the housing and construction markets.
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of NAPCO Security Technologies, Inc. and all of its wholly-
owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Critical estimates include management's judgments associated with
reserves for sales returns and allowances, concentration of credit risk, inventory reserves, intangible assets and income
taxes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:
Current Assets and Current Liabilities - The carrying amount of cash, certificates of deposits, current receivables and
payables and certain other short-term financial instruments approximate their fair value as of June 30, 2017 due to their
short-term maturities; Long-Term Debt - The carrying amount of the Company’s long-term debt, including the current
portion, at June 30, 2017 in the amount of $3,500,000 approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $460,000 of short-term time deposits at June 30, 2017 and June 30,
2016. The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other
international agencies as of June 30, 2017 and June 30, 2016. The Company has historically not experienced any credit
losses with balances in excess of FDIC limits.
Accounts Receivable
Accounts receivable is stated net of the reserves for doubtful accounts of $155,000 and $145,000 and for returns and
other allowances of $1,250,000 and $1,255,000 as of June 30, 2017 and June 30, 2016, respectively. Our reserves for
doubtful accounts and for returns and other allowances are subjective critical estimates that have a direct impact on
reported net earnings. These reserves are based upon the evaluation of our accounts receivable aging, specific exposures,
sales levels and historical trends.
Inventories
Inventories are valued at the lower of cost or market, with cost being determined on the first-in, first-out (FIFO) method.
The reported net value of inventory includes finished saleable products, work-in-process and raw materials that will be
sold or used in future periods. Inventory costs include raw materials, direct labor and overhead. The Company’s
31
overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are related to
procuring and storing raw materials as compared to the manufacture and assembly of finished products. These
proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part
on subjective estimates and actual results could differ from those estimates.
In addition, the Company records an inventory obsolescence reserve, which represents any excess of the cost of the
inventory over its estimated market value, based on various product sales projections. This reserve is calculated using an
estimated obsolescence percentage applied to the inventory based on age, historical trends, requirements to support
forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into
alternate versions of the same product to better match customer demand. In addition, and as necessary, the Company
may establish specific reserves for future known or anticipated events. There is inherent professional judgment and
subjectivity made by both production and engineering members of management in determining the estimated
obsolescence percentage.
The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories
expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and
repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time
property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from
the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.
Depreciation is recorded over the estimated service lives of the related assets using primarily the straight-line method.
Amortization of leasehold improvements is calculated by using the straight-line method over the estimated useful life of
the asset or lease term, whichever is shorter.
Intangible Assets
Intangible assets determined to have indefinite lives are not amortized but are tested for impairment at least annually.
Intangible assets with definite lives are amortized over their useful lives. Intangible assets are reviewed for impairment at
least annually at the Company’s fiscal year end of June 30 or more often whenever there is an indication that the carrying
amount may not be recovered.
The Company’s acquisition of substantially all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”)
in August 2008 included intangible assets recorded at fair value on the date of acquisition. The intangible assets are
amortized over their estimated useful lives of twenty years (customer relationships) and seven years (non-compete
agreement). The Marks trade name was deemed to have an indefinite life.
Changes in intangible assets are as follows (in thousands):
Customer relationships
Non-compete agreement
Trade name
June 30, 2017
June 30, 2016
Cost
$9,800
340
5,900
$16,040
Accumulated
amortization
Net book
value
$(7,784)
(340)
--
$(8,124)
$2,016
--
5,900
$7,916
Cost
$9,800
340
5,900
$16,040
Accumulated
amortization
Net book
value
$(7,343)
(340)
--
$(7,683)
$2,457
--
5,900
$8,357
Amortization expense for intangible assets subject to amortization was approximately $441,000, $529,000 and $667,000
for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Amortization expense for each of the next five
fiscal years is estimated to be as follows: 2018 - $371,000; 2019 - $313,000; 2020 -$264,000; 2021 - $223,000; and 2022
- $188,000. The weighted average amortization period for intangible assets was 11.1 years and 12.1 years at June 30,
2017 and 2016, respectively.
32
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances where
undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset.
Revenue Recognition
The Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an agreement exists,
(ii) there is a fixed and determinable price for the Company's product or service, (iii) shipment and passage of title occurs
or service has been provided, and (iv) collectability is reasonably assured. Revenues from product sales are recorded at
the time the product is shipped or delivered to the customer pursuant to the terms of the sale. Revenues for services are
recorded at the time the service is provided to the customer pursuant to the terms of sale. The Company reports its sales
on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and
other allowances and the amount of reserves established for anticipated sales returns and other allowances.
Sales Returns and Other Allowances
The Company analyzes sales returns and is able to make reasonable and reliable estimates of product returns based on
the Company’s past history. Estimates for sales returns are based on several factors including actual returns and based on
expected return data communicated to it by its customers. Accordingly, the Company believes that its historical returns
analysis is an accurate basis for its allowance for sales returns. Actual results could differ from those estimates. As a
percentage of gross sales, sales returns, rebates and allowances were 7%, 7% and 8% for the fiscal years ended June 30,
2017, 2016 and 2015, respectively.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the consolidated
statements of operations and are expensed as incurred. Advertising expense for the fiscal years ended June 30, 2017,
2016 and 2015 was $2,444,000, $2,144,000 and $1,671,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense as incurred and are included in "Cost
of Sales" in the consolidated statements of operations. Company-sponsored research and development expense for the
fiscal years ended June 30, 2017, 2016 and 2015 was $6,723,000, $6,169,000 and $5,382,000, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred
income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The Company measures and recognizes the tax
implications of positions taken or expected to be taken in its tax returns on an ongoing basis.
Net Income Per Share
Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number
of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net
income by the weighted average number of common shares and dilutive common share equivalents and convertible
securities then outstanding.
33
The following provides a reconciliation of information used in calculating the per share amounts for the fiscal years
ended June 30 (in thousands, except per share data):
Net Income
Weighted Average Shares
Net Income per Share
2017
2016
2015
2017
2016
2015
2017
2016
2015
Basic EPS
$5,599
$5,773
$4,845
18,809
18,874
19,164
$0.30
$0.31
$0.25
Effect of Dilutive
Securities:
Stock Options
--
--
--
45
20
5
--
--
--
Diluted EPS
$5,599
$5,773
$4,845
18,854
18,894
19,169
$ 0.30
$ 0.31
$0.25
Options to purchase 0, 127,404 and 255,688 shares of common stock for the fiscal years ended June 30, 2017, 2016 and
2015, respectively, were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive.
These options were still outstanding at the end of the respective periods.
Stock-Based Compensation
The Company has established two share incentive programs as discussed in Note 7.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as
expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant
date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors.
Stock-based compensation costs of $102,000, $103,000 and $101,000 were recognized for fiscal years ended June 30,
2017, 2016 and 2015, respectively. The effect on both Basic and Diluted Earnings per share was $0.01 for each of the
fiscal years ended June 30, 2017, 2016 and 2015.
Foreign Currency
All assets and liabilities of foreign subsidiaries are translated into U.S. Dollars at fiscal period-end exchange rates.
Income and expense items are translated at average exchange rates prevailing during the fiscal year. The realized and
unrealized gains and losses associated with foreign currency translation, as well as related other comprehensive income,
were not material for the fiscal years ended June 30, 2017, 2016 and 2015.
Comprehensive Income
For the fiscal years ended June 30, 2017, 2016 and 2015, the Company's operations did not give rise to material items
includable in comprehensive income, which were not already included in net income. Accordingly, the Company's
comprehensive income approximates its net income for all periods presented.
Segment Reporting
The Company’s reportable operating segments are determined based on the Company's management approach. The
management approach is based on the way that the chief operating decision maker organizes the segments within an
enterprise for making operating decisions and assessing performance. The Company's results of operations are reviewed
by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The
Company has presented required geographical data in Note 11, and no additional segment data has been presented.
Shipping and Handling Revenues and Costs
The Company records the amount billed to customers for shipping and handling in net sales ($461,000, $492,000 and
$515,000 in the fiscal years ended June 30, 2017, 2016 and 2015, respectively) and classifies the costs associated with
these revenues in cost of sales ($947,000, $918,000 and $945,000 in fiscal years ended June 30, 2017, 2016 and 2015).
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the way
companies account for certain aspects of share-based payments to employees. The most significant impact relates to the
34
accounting for income tax effects of share-based compensation awards. This new guidance is part of the FASB’s
simplification initiative and requires that all excess tax benefits and tax deficiencies be recorded as income tax expense
or benefit in the income statement. In addition, companies are required to treat the tax effects of exercised or vested
awards as discrete items in the period that they occur. Other updates include changing the threshold on tax withholding
requirements. Under this guidance, an employer can withhold up to the maximum statutory withholding rates in a
jurisdiction without tainting the award classification. Additionally, this guidance allows companies to elect a forfeiture
recognition method whereby they account for forfeitures as they occur (actual) or they estimate the number of awards
expected to be forfeited (current GAAP). Lastly, as it relates to public entities, this guidance also provides requirements
for the cash flow classification of cash paid by an employer when directly withholding shares for tax-withholding
purposes and excess tax benefits. This guidance becomes effective for the Company’s fiscal 2018 first quarter, with
early adoption permitted, and the guidance prescribes different transition methods for the various provisions (i.e.,
retrospective, modified retrospective, or prospective). The Company does not expect this to have a material effect on its
consolidated results of operations and financial condition.
In February 2016, the FASB issued authoritative guidance that requires lessees to account for most leases on their
balance sheets with the liability being equal to the present value of the lease payments. The right-of-use asset will be
based on the lease liability adjusted for certain costs such as direct costs. Lease expense will be recognized similar to
current accounting guidance with operating leases resulting in a straight-line expense and financing leases resulting in a
front-loaded expense similar to the current accounting for capital leases. This guidance becomes effective for the
Company’s fiscal 2020 first quarter, with early adoption permitted. This guidance must be adopted using a modified
retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative
period in the financial statements, and provides for certain practical expedients. The Company is currently evaluating
the timing, impact and method of applying this guidance on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”. The amendments
require deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the
balance sheet. As a result, each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The
new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one
jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 is effective for the Company’s fiscal year
ended June 30, 2018. Early application is permitted. We have early adopted ASU 2015-17 as of December 31, 2016. The
new guidance will be applied prospectively. Prior periods were not retrospectively adjusted.
In July 2015, the FASB issued ASU 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” (ASU
2015-11). The amendments in ASU 2015-11 simplify the subsequent measurement of inventory by requiring inventory
to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for the Company’s quarter ended
September 30, 2017. Early application is permitted. We have not early adopted ASU 2015-11. The new guidance must
be applied prospectively after the date of adoption. We are in the process of evaluating the adoption of this ASU, and do
not expect this to have a material effect on our consolidated results of operations and financial condition.
In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts
with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. It provides companies with a single comprehensive five-step principles-based model to use in
accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and
transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue
standard by one year. As a result, the new standard would not be effective for the Company until fiscal 2019. In
addition, the FASB is allowing companies to early adopt this guidance for the Company’s fiscal 2018. The guidance
permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or
apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new
guidance when it becomes effective and has not yet selected a transition method. The Company is currently evaluating
the impact of adoption on its consolidated financial statements.
NOTE 2 - Business and Credit Concentrations
An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had
if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending
on the nature of the concentration, and vary in significance. The Company had one customer with an accounts receivable
balance that comprised 24% and 22% of the Company’s accounts receivable June 30, 2017 and 2016, respectively. Sales
to this customer comprised 13% of net sales in each of the fiscal years ended June 30, 2017, 2016 and 2015.
35
NOTE 3 - Inventories
Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or market. The Company regularly
reviews parts and finished goods inventories on hand and, when necessary, records a provision for excess or obsolete
inventories. The Company also regularly reviews the period over which its inventories will be converted to sales. Any
inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.
Inventories, net of reserves consist of the following (in thousands):
Component parts
Work-in-process
Finished product
June 30,
2017
2016
$16,638
$14,021
4,415
3,758
9,526
7,558
$30,579
$25,337
Classification of inventories, net of reserves:
Current
Non-current
$26,212
$21,428
4,367
3,909
$30,579
$25,337
NOTE 4 - Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
June 30,
2017
2016
Useful Life in Years
Land
Buildings
Molds and dies
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Less: accumulated depreciation and
amortization
$904
8,911
7,058
2,570
22,183
485
42,111
$904
8,911
7,036
2,531
21,035
294
40,711
(35,568)
(34,662)
$6,543
$6,049
--
30 to 40
3 to 5
5 to 10
7 to 10
Shorter of the lease term or life of asset
Depreciation and amortization expense on property, plant, and equipment was approximately $920,000, $878,000 and
$890,000 in fiscal 2017, 2016 and 2015, respectively.
36
NOTE 5 - Income Taxes
The provision for income taxes is comprised of the following (in thousands):
For the Years Ended June 30,
2017
2016
2015
Current income taxes:
Federal
State
Deferred income tax
provision
$280
55
335
361
Provision for income taxes
$696
$(31)
27
(4)
375
$371
$(49)
35
(14)
230
$216
A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income
taxes is as follows for the years ended June 30, (dollars in thousands):
2017
2016
2015
% of
Pre-tax
Income
Amount
% of
Pre-tax
Income
Amount
% of
Pre-tax
Income
Amount
Tax at Federal statutory rate
$2,140
34.0%
$2,089
34.0%
$1,721
34.0%
Increases (decreases) in taxes resulting
from:
Meals and entertainment
State income taxes, net of Federal income
tax benefit
68
1.1%
61
1.0%
66
1.3%
28
0.4%
20
0.3%
21
0.4%
Foreign source income not subject to tax
(1,286)
(20.4)%
(1,278)
(20.8)%
(1,069)
(21.1)%
R&D Credit refund
Undistributed foreign earnings
Other, net
Effective tax rate
(286)
(4.5)%
--
32
--%
0.5%
(415)
(90)
(16)
(6.8)%
(1.4)%
(0.3)%
(328)
(93)
(102)
(6.5)%
(1.8)%
(2.0)%
$696
11.1%
$371
6.0%
$216
4.3%
37
Deferred tax assets and deferred tax liabilities at June 30, 2017 and 2016 are as follows (in thousands):
Deferred Tax Assets (Liabilities)
2017
2016
Accounts receivable
Inventories
Accrued Liabilities
Stock based compensation
expense
Intangibles
R&D credit
Property, plant and equipment
Other deferred tax liabilities
Valuation allowance
Net deferred tax assets
$26
586
453
28
(258)
1,427
(579)
(1,039)
644
--
$644
$26
564
400
154
(14)
1,214
(503)
(702)
1,139
--
$1,139
The Company has identified the United States and New York State as its major tax jurisdictions. The fiscal 2012 and
forward years are still open for examination.
During the year ending June 30, 2017 the Company increased its reserve for uncertain income tax positions by $35,000.
The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and
accrued income taxes. As of June 30, 2017, the Company had accrued interest totaling $0 and $183,000 of unrecognized
net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.
The Company uses the flow through method to account for investment tax credits earned on eligible research and
development expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax
expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Tax
Interest
Total
Balance of gross unrecognized tax benefits as of July 1, 2015
$102
$ --
$102
Increases to unrecognized tax benefits resulting from the generation of
additional R&D credits
Balance of gross unrecognized tax benefits as of June 30, 2016
Increases to unrecognized tax benefits resulting from the generation of
additional R&D credits
46
148
35
--
46
$ --
148
--
35
Balance of gross unrecognized tax benefits as of June 30, 2017
$183
$ --
$183
The Company plans to permanently reinvest a substantial portion of its foreign earnings and as such has not provided US
corporate taxes on the permanently reinvested earnings. As of June 30, 2017, the Company had approximately $12.4
million of undistributed earnings of foreign subsidiaries.
NOTE 6 - Long-Term Debt
As of June 30, 2017, long-term debt consisted of a revolving line of credit of $11,000,000 (“Agreement”) which expires
in June 2021. The Company had one term loan outstanding at June 30, 2016 which was repaid during fiscal 2017.
38
Outstanding balances and interest rates as of June 30, 2017 and June 30, 2016 are as follows:
June 30, 2017
June 30, 2016
Outstanding
Interest Rate
Outstanding
Interest Rate
Revolving line of credit
Term loan
Total debt
$3,500
--
$3,500
2.2%
--
2.2%
$2,000
2,800
$4,800
1.6%
1.6%
1.6%
The Agreement also provides for a LIBOR-based interest rate option of LIBOR plus 1.15% to 2.00%, depending on the
ratio of outstanding debt to EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the
prime rate plus 0.25% and other terms and conditions as more fully described in the Agreement. In addition, the
Agreement provides for availability to be limited to the lesser of $11,000,000 or the result of a borrowing base formula
based upon the Company’s Accounts Receivables and Inventory values net of certain deductions. The Company’s
obligations under the Agreement continue to be secured by all of its assets, including but not limited to, deposit accounts,
accounts receivable, inventory, and the Company’s corporate headquarters in Amityville, NY, equipment and fixtures
and intangible assets. In addition, the Company’s wholly-owned subsidiaries, with the exception of the Company’s
foreign subsidiaries, have issued guarantees and pledges of all of their assets to secure the Company’s obligations under
the Agreement. All of the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common
stock of the Company’s foreign subsidiaries has been pledged to secure the Company’s obligations under the Agreement.
The Agreement contains various restrictions and covenants including, among others, restrictions on payment of
dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the Agreement.
NOTE 7 - Stock Options
The Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees,
including stock options, be recognized as compensation expense in the consolidated financial statements based on their
fair values and over the requisite service period. For the fiscal years ended June 30, 2017, 2016 and 2015, the Company
recorded non-cash compensation expense of $102,000 ($0.01 per basic and diluted share), $103,000 ($0.01 per basic and
diluted share) and $101,000 ($0.01 per basic and diluted share), respectively, relating to stock-based compensation
2012 Employee Stock Option Plan
In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The
2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000
shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may
grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued employees. Any plan
participant who is granted ISOs and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.
Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an
exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part,
at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in
control” as defined in the plan. At June 30, 2017, 70,600 stock options were granted, 38,700 stock options were
exercisable and 843,900 stock options were available for grant under this plan.
The fair value of each option granted during fiscal 2017, 2016 and 2015 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average assumptions:
Risk-free interest rates
Expected lives
Expected volatility
Expected dividend yields
2017
2.4%
10 years
52%
0%
2016
1.8%
10 years
54%
0%
2015
2.3%
10 years
54%
0%
The Company uses a weighted-average expected stock-price volatility assumption that is a combination of both current
and historical implied volatilities of the underlying stock. The implied volatilities were obtained from publicly available
39
data sources. For the weighted-average expected option life assumption, the Company considers the exercise behavior of
past grants. The average risk-free interest rate is based on the U.S. Treasury Bond rate for the expected term of the
options and the average dividend yield is based on historical experience.
The following table reflects activity under the 2012 Plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated
Exercised
Outstanding, end of year
Exercisable, end of year
Weighted average fair value at grant date of options
granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
2017
2016
Weighted
average
exercise
price
$5.54
8.15
6.10
5.13
$5.84
$5.98
Options
112,500
5,000
(11,400)
(35,500)
70,600
38,700
$5.22
$152,000
$252,000
$132,000
Options
112,500
15,000
(15,000)
--
112,500
55,700
$3.86
n/a
$93,000
$43,000
Weighted
average
exercise
price
$5.30
6.05
4.29
--
$5.54
$5.59
The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30,
2017:
Options outstanding
Options exercisable
Range of
exercise prices
Number
outstanding
$4.29-$8.15
70,600
70,600
Weighted
average
remaining
contractual life
7.0
7.0
Weighted
average exercise
price
Number
exercisable
Weighted
average exercise
price
$5.84
$5.84
38,700
38,700
$5.58
$5.58
As of June 30, 2017, there was $119,000 of unearned stock-based compensation cost related to share-based
compensation arrangements granted under the 2012 Employee Plan. 5,000 and 15,000 options were granted during the
fiscal years ended June 30, 2017 and 2016, respectively. 34,000 of the 35,500 stock options exercised during the fiscal
year ended June 30, 2017 were settled by exchanging 16,120 shares of the Company’s common stock which were retired
and returned to unissued status upon receipt. The total fair value of the options vesting during the fiscal years ended June
30, 2017 and 2016 under this plan was $79,000 and $119,000, respectively. $10,000 and $0 was received from option
exercises for the fiscal years ended June 30, 2017 and 2016, respectively, and the actual tax benefit realized for the tax
deductions from option exercises was $0 for each of these periods.
2012 Non-Employee Stock Option Plan
In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee
Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000
shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company
may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.
Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price
equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year
beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined
in the plan. At June 30, 2017, 14,200 stock options were granted, 5,200 stock options were exercisable and 15,000 stock
options were available for grant under this plan.
40
The following table reflects activity under the 2012 Non-Employee Plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated
Exercised
Outstanding, end of year
Exercisable, end of year
Weighted average fair value at grant date of options
granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
2017
2016
Weighted
average
exercise
price
$4.73
--
--
4.76
$4.69
$4.76
Options
35,000
--
--
(20,800)
14,200
5,200
n/a
$96,000
$67,000
$24,000
Options
35,000
--
--
--
35,000
19,000
n/a
n/a
$57,000
$30,000
Weighted
average
exercise
price
$4.73
--
--
--
$4.73
$4.77
The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June
30, 2017:
Options outstanding
Options exercisable
Range of
exercise prices
Number
outstanding
Weighted average
remaining
contractual life
Weighted
average exercise
price
Number
exercisable
Weighted
average exercise
price
$4.37 - $4.88
14,200
14,200
6.6
6.6
$4.69
5,200
$4.69
5,200
$4.76
$4.76
As of June 30, 2017, there was $28,000 of unearned stock-based compensation cost related to share-based compensation
arrangements granted under the 2012 Non-Employee Plan. No options were granted during the fiscal years ended June
30, 2017 and 2016, respectively. The 20,800 stock options exercised during the fiscal year ended June 30, 2017 were
settled by exchanging 9,998 shares of the Company’s common stock which were retired and returned to unissued status
upon receipt. The total fair value of the options vesting during each of the fiscal years ended June 30, 2017 and 2016
under this plan was $22,000.
2002 Employee Stock Option Plan
In December 2002, the stockholders approved the 2002 Employee Stock Option Plan (the 2002 Employee Plan). This
plan expired in October 2012. This plan authorized the granting of awards, the exercise of which would allow up to an
aggregate of 1,836,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this
plan, the Company may have granted stock options, which were intended to qualify as incentive stock options (ISOs), to
key employees. Any plan participant who was granted ISOs and possessed more than 10% of the voting rights of the
Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market
value on the date of grant.
Under the 2002 Employee Plan, stock options have been granted to key employees with a term of 10 years at an exercise
price equal to the fair market value on the date of grant and are exercisable in whole or in part at 20% per year from the
date of grant. At June 30, 2017, 1,471,480 stock options had been granted, 5,000 stock options were exercisable and no
further stock options were available for grant under this plan after the plans expiration in October 2012.
41
The following table reflects activity under the 2002 Employee plan for the fiscal years ended June 30,:
Outstanding, beginning of year
Granted
Terminated/Lapsed
Exercised
2017
Weighted average
exercise price
$6.04
--
6.02
6.08
Options
102,500
--
(10,500)
(87,000)
Outstanding, end of period
5,000
$5.35
Options
208,500
--
(38,500)
(67,500)
102,500
Exercisable, end of period
5,000
$5.35
102,500
Weighted average fair value at grant date of
options granted
Total intrinsic value of options exercised
Total intrinsic value of options outstanding
Total intrinsic value of options exercisable
n/a
$289,000
$20,000
$20,000
n/a
$42,000
$40,000
$40,000
2016
Weighted average
exercise price
$6.86
--
11.03
5.73
$6.04
$6.04
The following table summarizes information about stock options outstanding under the 2002 Employee Plan at June 30,
2017:
Range of
exercise
prices
$5.35
Options outstanding and exercisable
Number
outstanding
Weighted average
remaining contractual
life
Weighted
average
exercise price
5,000
5,000
0.3
0.3
$5.35
$5.35
As of June 30, 2017, there was no unearned stock-based compensation cost related to share-based compensation
arrangements granted under the 2002 Non-Employee Plan. 87,000 and 67,500 stock options were exercised during the
fiscal years ended June 30, 2017 and 2016, respectively. 80,500 of the 87,000 stock options exercised during the fiscal
year ended June 30, 2017 were settled by exchanging 59,418 shares of the Company’s common stock which was
included in Treasury Stock upon receipt. The 67,500 stock options exercised during the fiscal year ended June 30, 2016
were settled by exchanging 53,868 shares of the Company’s common stock which were retired and returned to unissued
status upon receipt. $39,000 and $0 was received from option exercises for the fiscal years ended June 30, 2017 and
2016, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of
these periods.
NOTE 8 – Stockholders’ Equity Transactions
On September 16, 2014 the Company’s board of directors authorized the repurchase of up to 1 million of the
approximately 19.4 million shares of the Company’s common stock outstanding. The repurchase will be made from time
to time in the open market or in privately negotiated transactions subject to market conditions and the market price of the
common stock. Relative to the loan agreements described in Note 6, the Company’s lender gave its consent to this stock
repurchase plan. During the fiscal year ended June 30, 2017 the Company did not repurchase any shares of its
outstanding common stock. Shares repurchased prior to fiscal 2017 are included in the Company’s Treasury Stock as of
June 30, 2017.
During fiscal 2017, certain employees and Directors exercised incentive stock options under the Company’s 2012 and
2002 Plans totaling 143,300 shares. 135,300 of these exercises were completed as cashless exercises as allowed for under
the Plans, where the exercise shares are issued by the Company in exchange for shares of the Company’s common stock
that are owned by the optionees. The number of shares surrendered by the optionees was 85,536 and was based upon the
per share price on the effective date of the option exercise.
During fiscal 2016, certain employees exercised incentive stock options under the Company’s 2002 Plan totaling 67,500
shares. All of these exercises were completed as cashless exercises as allowed for under the 2002 Plan, where the
exercise shares are issued by the Company in exchange for shares of the Company’s common stock that are owned by
42
the optionees. The number of shares surrendered by the optionees was 53,868 and was based upon the per share price on
the effective date of the option exercise.
NOTE 9 - 401(k) Plan
The Company maintains a 401(k) plan (“the Plan”) that covers all U.S. non-union employees with one or more years of
service and is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Company contributions to this
plan are discretionary and totaled $118,000, $111,000 and $122,000 for the years ended June 30, 2017, 2016 and 2015,
respectively.
NOTE 10 - Commitments and Contingencies
Leases
The Company is committed under various operating leases, not including the land lease discussed below, which do not
extend beyond fiscal 2019. Minimum lease payments through the expiration dates of these leases, with the exception of
the land leases referred to below, are as follows:
Year Ending June 30,
2018
2019
Total
Amount
$22,000
14,000
$36,000
Rent expense, with the exception of the land lease referred to below, totaled approximately $23,000, $26,000 and
$30,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Land Lease
On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99 year lease, expiring in 2092, for
approximately four acres of land in the Dominican Republic at an annual cost of $288,000, on which the Company's
principal production facility is located.
Litigation
In the normal course of business, the Company is a party to claims and/or litigation. Management believes that the
settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the
Company's financial position and results of operations.
Employment Agreements
As of June 30, 2017, the Company was obligated under three employment agreements and one severance agreement.
The employment agreements are with the Company’s CEO, Senior Vice President of Sales and Marketing (“the SVP of
Sales”) and the Senior Vice President of Engineering (“the SVP of Engineering”). The employment agreement with the
CEO provides for an annual salary of $730,000, as adjusted for inflation; incentive compensation as may be approved by
the Board of Directors from time to time and a termination payment in an amount up to 299% of the average of the prior
five calendar year's compensation, subject to certain limitations, as defined in the agreement. The employment
agreement renews annually in August unless either party gives the other notice of non-renewal at least six months prior
to the end of the applicable term. The employment agreement with the SVP of Sales expires in October 2018 and
provides for an annual salary of $324,000, a bonus arrangement for fiscal 2017 and, if terminated by the Company
without cause, severance of nine months’ salary and continued company-sponsored health insurance for six months from
the date of termination. The employment agreement with the SVP of Engineering expires in August 2018 and provides
for an annual salary of $293,000, a bonus arrangement for fiscal 2017 and, if terminated by the Company without cause,
severance of nine month’s salary and continued company-sponsored health insurance for six months from the date of
termination. The severance agreement is with the Senior Vice President of Operations and Finance and provides for, if
terminated by the Company without cause or within three months of a change in corporate control of the Registrant,
severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of
termination and certain non-compete and other restrictive provisions.
43
NOTE 11 - Geographical Data
The Company is engaged in one major line of business: the development, manufacture, and distribution of access control
systems, door security products, intrusion and fire alarm systems and video surveillance products for commercial and
residential use. Sales to unaffiliated customers are primarily shipped from the United States. The Company has
customers worldwide with major concentrations in North America.
Financial Information Relating to Domestic and Foreign Operations
Fiscal Year ended June 30,
2016
2015
2017
Sales to external
customers(1):
Domestic
Foreign
(in thousands)
$84,820
2,554
$79,931
2,582
$74,736
3,026
Total Net Sales
$87,374
$82,513
$77,762
As of June 30,
2017
2016
2015
Identifiable assets:
United States
Dominican Republic (2)
$55,550
15,312
$51,272
13,497
$50,998
14,039
Total Identifiable Assets
$70,862
$64,769
$65,037
(1) All of the Company's sales originate in the United States and are shipped primarily from the Company's facilities in
the United States. There were no sales into any one foreign country in excess of 10% of total Net Sales.
(2) Consists primarily of inventories (2017 = $11,831; 2016 = $10,076) and fixed assets (2017 = $3,233; 2016 = $3,311)
located at the Company's principal manufacturing facility in the Dominican Republic.
44
NOTE 12 – Subsequent Events
The Company has evaluated subsequent events occurring after the date of the consolidated financial statements for
events requiring recording or disclosure in the financial statements.
b. Supplementary Financial Data
QUARTERLY RESULTS
The following table sets forth unaudited financial data for each of the Company's last eight fiscal quarters (in thousands
except for per share data):
Fiscal Year Ended June 30, 2017,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net Sales
Gross Profit
Income from Operations
Net Income
Net Income Per Share
Basic EPS
Diluted EPS
$20,168
6,452
716
568
.03
.03
$20,715
$20,807
$25,684
6,617
1,064
857
.05
.05
6,663
1,136
952
.05
.05
9,846
3,462
3,222
.17
.17
Fiscal Year Ended June 30, 2016,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$18,149
5,637
324
315
.02
.02
$20,497
$19,808
$24,059
6,201
1,026
976
.05
.05
6,108
1,217
1,044
.06
.06
9,638
3,756
3,438
.18
.18
Net Sales
Gross Profit
Income from Operations
Net Income
Net Income Per Share(1):
Basic EPS
Diluted EPS
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of the Company’s products
want to install its products prior to the summer; therefore sales of its 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. In addition, demand is affected by the housing and construction markets. Deterioration of
the current economic conditions may also affect this trend.
45
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A: CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. At the conclusion of the period ended June 30, 2017, we carried out
an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of June 30, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control
over Financial Reporting is set forth on page FS-1.
Audit Opinion on Internal Control over Financial Reporting. The effectiveness of the Company’s internal control over
financial reporting has been audited by Baker Tilly Virchow Krause, LLP an independent registered public accounting
firm, as stated in their report, which is included herein on page FS-2.
Limitations on Internal Control. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Board of Directors of the Company has an Audit Committee comprised of three non-management directors. The
Committee meets periodically with financial management and the independent auditors to review accounting, control,
audit and financial reporting matters. Baker Tilly Virchow Krause, LLP has full and free access to the Audit Committee,
with and without the presence of management.
Changes in Internal Control over Financial Reporting. During the quarterly period ending June 30, 2017, we identified a
material weakness in our internal control over financial reporting regarding controls related to revenue. Beginning in this
quarter, we initiated a process to remediate that material weakness. As a result, we made changes in our internal control
over financial reporting during the quarter ended June 30, 2017 that would materially affect or are likely to materially
affect our internal controls over financial reporting. We improved the design and effectiveness of our controls
surrounding shipping operations and scoped in shipments which had not been previously included while undergoing
warehouse transitions. We assessed pricing for subscription-based service revenue to ensure it was properly authorized
and configured in the system to ensure proper extension when calculating revenue. We instituted additional, documented,
management-level reviews of pricing on all products at the order level.
ITEM 9B: OTHER INFORMATION
None
46
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information about our directors appearing in the Company’s Definitive Proxy Statement for the 2017 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (“Proxy Statement”) under the
heading “Election of Directors”, is incorporated herein by reference.
We have adopted a Code of Ethics which applies to our senior executive and financial officers, among others. The
Code is posted on our website, www.napcosecurity.com, under the “Investors – Other” caption. We intend to make all
required disclosures regarding any amendment to, or waiver of, a provision of the Code of Ethics for senior executive
and financial officers by posting such information on our website.
The information appearing in the Proxy Statement relating to the members of the Audit Committee and the Audit
Committee financial expert under the headings “Corporate Governance and Board Matters – Board Structure and
Committee Composition” and “Corporate Governance and Board Matters – Board Structure and Committee
Composition – Audit Committee” and the information appearing in the Proxy Statement under the heading “Section
16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by this reference.
The information set forth in the Proxy Statement under the heading “Information Concerning Executive Officers” is
incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the heading “Executive Compensation” and the information
appearing in the Proxy Statement relating to the compensation of directors under the caption “Compensation of
Directors” is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information appearing in the Proxy Statement under the heading “Beneficial Ownership of Common Stock” is
incorporated herein by this reference.
Information regarding Equity Compensation Plan Information as of June 30, 2017 is included in Item 5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information appearing in the Proxy Statement under the headings “Corporate Governance and Board Matters –
Independence of Directors,” “Corporate Governance and Board Matters – Board Structure and Committee
Composition,” “Corporate Governance – Policy with Respect to Related Person Transactions,” and “Executive
Compensation – Certain Transactions” is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing in the Proxy Statement under the headings “Principal Accountant Fees” and “Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors” is incorporated herein
by this reference.
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Omitted.
Upon written request of any stockholder of the Company, the Company will provide such shareholder a copy of the
Company’s Annual Report on Form 10-K for 2017, including the financial statements and schedules thereto, filed with
the Security and Exchange Commission. Any such request should be directed to Secretary, NAPCO Security
Technologies, Inc., 333 Bayview Avenue, Amityville, New York 11701. There will be no charge for such report unless
one or more exhibits thereto are requested, in which case the Company’s reasonable expenses of furnishing such exhibits
requested may be charged.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
September 13, 2017
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By: /s/RICHARD SOLOWAY
Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and the dates indicated.
Signature
Title
Date
/s/RICHARD SOLOWAY
Richard Soloway
Chairman of the Board of Directors,
President and Secretary and Director
(Principal Executive Officer)
September 13, 2017
/s/KEVIN S. BUCHEL
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer and Director
(Principal Financial and Accounting Officer)
September 13, 2017
/s/PAUL STEPHEN BEEBER
Paul Stephen Beeber
/s/RANDY B. BLAUSTEIN
Randy B. Blaustein
/s/ARNOLD BLUMENTHAL
Arnold Blumenthal
/s/DONNA SOLOWAY
Donna Soloway
/s/ANDREW J. WILDER
Andrew J. Wilder
Director
Director
Director
Director
Director
September 13, 2017
September 13, 2017
September 13, 2017
September 13, 2017
September 13, 2017
48
This page is intentionally blank
49
COMPARATIVE PERFORMANCE GRAPH
The SEC requires the Company to present a chart comparing the cumulative total stockholder return on its common stock
with the cumulative total stockholder return of (i) a broad equity market index and (ii) a published industry index or peer
group. The following chart compares the performance of the Company’s common stock with that of the NASDAQ
Composite Index and a peer group index, assuming an investment of $100 on June 30, 2012 in each of the Company’s
common stock, the stocks comprising the NASDAQ Composite Index and the stocks comprising the peer group and the
reinvestment of dividends
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN*
Among NAPCO Security Technologies, Inc., the NASDAQ Composite Index,
and a Peer Group**
$350
$300
$250
$200
$150
$100
$50
$0
6/12
6/13
6/14
6/15
6/16
6/17
NAPCO Security Technologies, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 6/30/12 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
NAPCO Security Technologies, Inc.
NASDAQ Composite
Peer Group**
100.00
100.00
100.00
162.59
117.64
132.98
184.69
156.01
166.65
194.90
177.83
169.82
216.33
174.04
178.88
319.73
221.96
212.94
6/12
6/13
6/14
6/15
6/16
6/17
Peer Group Cumulative Total Return
(Weighted Average by Market Value)
Cumulative Total Return
6/12
6/13
6/14
6/15
6/16
6/17
Peer Group Weighted Average:
100.00
132.98
166.65
169.82
178.88
212.94
Honeywell International Inc
Johnson Controls International Plc
NAPCO Security Technologies Inc
United Technologies Corp
Vicon Industries Inc
145.58
129.51
162.59
126.23
81.70
173.97
182.32
184.69
160.10
79.50
194.69
156.57
194.90
157.22
47.40
226.93
177.48
216.33
149.29
18.09
267.20
198.12
319.73
182.01
20.85
100.00
100.00
100.00
100.00
100.00
50
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NON-GAAP MEASURES OF PERFORMANCE* (unaudited)
(In thousands, except for shares)
Net income
Add back provision for income taxes
Add back interest
Operating income (GAAP)
Adjustments for non-GAAP measures of performance:
Add back amortization of acquisition-related intangibles
Add back stock-based compensation expense
Adjusted non-GAAP operating income
Add back depreciation and other amortization
Adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization)
Three months ended
June 30,
Twelve months ended
June 30,
2017
$3,222
216
24
2016
$3,438
288
30
2017
$5,599
696
83
2016
$5,773
317
179
3,462
3,756
6,378
6,323
110
4
3,576
272
131
11
3,898
251
441
102
6,921
934
529
103
6,955
891
$3,848
$4,149
$7,855
$7,846
Adjusted EBITDA* per Diluted Share
$0.20
$0.22
$0.42
$0.42
Weighted average number of Diluted Shares outstanding
18,884,000
18,804,000
18,854,000
18,894,000
* Non-GAAP Information
Certain non-GAAP measures are included above, including EBITDA, non-GAAP operating income and Adjusted EBITDA. We define EBITDA
as GAAP net income plus income tax expense (benefit), net interest expense and depreciation and amortization expense. Non-GAAP
operating income does not include impairment of goodwill, amortization of intangibles, restructuring charges, stock-based compensation
expense and other infrequent or unusual charges. These non-GAAP measures are provided to enhance the user’s overall understanding of
our financial performance. By excluding these charges our non-GAAP results provide information to management and investors that is useful
in assessing NAPCO’s core operating performance and in comparing our results of operations on a consistent basis from period to period.
The presentation of this information is not meant to be a substitute for the corresponding financial measures prepared in accordance with
generally accepted accounting principles. Investors are encouraged to review the reconciliation of GAAP to non-GAAP financial measures
included in the above.
51
NASDAQ:NSSC
Officers
Richard L. Soloway
Chairman, President
and C.E.O.
Kevin S. Buchel
Senior Vice President of
Operations and Finance
and Treasurer
Jorge D. Hevia
Senior Vice President
of Sales
and Marketing
Michael Carrieri
Senior Vice President
of Engineering
Alfred DePierro
Vice President
of Engineering
Microcomputer Applications
George R. Marks
President, Marks USA
Common Stock Listing
Nasdaq Global
Market System®
(Symbol—”NSSC”)
Directors
Richard L. Soloway
Chairman, President and C.E.O.
Paul Stephen Beeber
Attorney
Randy B. Blaustein, Esq.
Tax Attorney
Arnold B. Blumenthal
Group Publisher Emeritus,
Security Dealer, Locksmith Ledger;
Publisher, Security Line
Kevin S. Buchel
Senior Vice President of
Operations and Finance
and Treasurer
Donna A. Soloway
Security Industry Publicist
Andrew J. Wilder
Officer of Israeloff,
Trattner & Company
(Certified Public Accountants)
Primary Bank
HSBC Bank USA
534 Broadhollow Road
Melville, NY 11747
Investor Relations
Copies of the Company’s Annual
Report, Forms 10-K and 10-Q and
other information filed with the
Securities and Exchange
Commission may be obtained
directly from the Corporation by
contacting:
NAPCO
Security Technologies, Inc.
333 Bayview Avenue
Amityville, NY 11701
Attention: Corporate Secretary
Independent Accountants
Baker Tilly Virchow Krause, LLP
125 Baylis Road
Melville, NY 11747-3823
Legal Counsel
Forman & Shapiro LLP
1345 Avenue of the Americas
New York, NY 10105
Transfer Agent
Continental Stock
Transfer & Trust Co.
17 Battery Place
New York, NY 10004
www.napcosecurity.com