NAPCO Security Technologies, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2015. The company manufactures and sells security, access-control, door-locking, alarm, and video-surveillance products. Fiscal Q2 is seasonally below the company’s typically strongest fiscal fourth quarter.
Financial results
| Metric | Quarter ended Dec. 31, 2015 | Prior-year quarter | Six months ended Dec. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $20.497 million | $19.571 million | $38.646 million | $36.907 million |
| Gross profit / margin | $6.201 million / 30.3% | $6.103 million / 31.2% | $11.838 million / 30.6% | $11.358 million / 30.8% |
| Operating income | $1.026 million | $1.096 million | $1.350 million | $1.342 million |
| Net income | $976,000 | $951,000 | $1.291 million | $1.110 million |
| Diluted EPS | $0.05 | $0.05 | $0.07 | $0.06 |
- Quarterly sales increased 4.7%, while operating income decreased 6.4%; net income rose 2.6%. Six-month sales increased 4.7%, operating income was nearly flat (+0.6%), and net income rose 16.3%.
- For the six months, operating cash flow was $3.294 million, versus $1.740 million a year earlier. Investing cash outflow was $271,000; financing cash outflow was $3.488 million, including $2.800 million of debt repayments and $688,000 for treasury stock. Cash declined $465,000 to $1.881 million.
- At December 31, cash was $1.881 million, current assets $41.109 million, and current liabilities $7.611 million. Total debt was $7.900 million ($1.250 million current and $6.650 million long-term), down from $10.700 million at June 30, 2015. The company reported $9.000 million available under its revolving facility.
Changes and management commentary
- Management attributed sales growth mainly to door-locking products, particularly domestic digital-lock installations, and intrusion products; lower access-control sales partly offset the increases.
- Gross margin declined year over year in both the quarter and six-month period. Management cited higher R&D spending and lower production/inventory levels, which spread fixed costs over less output. Inventory decreased $413,000 from June 30; management said it reduced inventory by $1.323 million during the quarter as part of cash-flow improvement efforts.
- R&D expense was $3.008 million for the six months, versus $2.653 million. Management said products arising from R&D investments in fiscal 2015 and later were not expected to contribute materially to revenue this fiscal year, but could benefit future years.
- Six-month net income benefited from a $42,000 income-tax benefit, compared with $125,000 of tax expense a year earlier. Management attributed the change primarily to reversal of a foreign-source-income tax liability and reinstatement of the R&D tax credit. The filing reports effective tax rates of 0% for the quarter and (3)% for the six months, versus 8% and 10%, respectively, in the prior-year periods.
Outlook, risks, and other items
- No specific earnings or revenue guidance is provided. Management believes working capital, operating cash flows, and revolving-credit availability will be sufficient to fund operations for the next 12 months.
- Risks include economic and housing/construction weakness, product competition and innovation needs, reliance on the CEO for strategic planning, and foreign-exchange exposure. A 10% U.S. dollar movement against the Dominican peso would, according to the filing, change annual operating income by approximately $600,000. A 1% rate change on the reported debt balance would change annual interest by approximately $79,000.
- One customer represented 13% of quarterly sales and 11% of six-month sales; that customer accounted for 22% of receivables at both December 31 and June 30. Debt is secured by company assets and subject to financial covenants and restrictions, including restrictions on dividends and additional borrowings.
- Management said ordinary-course litigation, in aggregate, was not expected to materially adversely affect financial position or results. The company reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
- The company repurchased 116,224 shares during the six months for a weighted-average $5.90 per share. It reported no material capital-expenditure or inventory-purchase commitments outside normal-course purchase orders.
Important facts for investors to verify
- Whether sales growth in digital locks and intrusion products continues and offsets access-control weakness.
- Whether inventory reductions and lower factory utilization stabilize or further pressure gross margins.
- How much of the six-month earnings increase reflects the favorable tax benefit and whether that benefit is repeatable.
- Customer concentration, receivables collection, and the company’s liquidity after continued debt repayment and share repurchases.
- Compliance with credit-facility covenants and exposure to Dominican-peso and interest-rate changes.