NAPCO Security Technologies, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015, compared with fiscal 2014. Although the request metadata labels the period “2014 Q4,” this filing reports annual results for FY2015, not a standalone quarter. NAPCO manufactures access-control, door-security, intrusion/fire alarm and video-surveillance products, primarily selling through distributors, dealers and installers.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $77.762 | $74.382 | +4.5% |
| Gross profit / gross margin | $26.047 / 33.5% | $23.713 / 31.9% | +9.8% gross profit |
| Operating income | $5.281 | $4.316 | +22.4% |
| Net income | $4.845 | $3.476 | +39.4% |
| Diluted EPS | $0.25 | $0.18 | — |
| Cash from operating activities | $3.887 | $4.743 | Down $0.856 |
- Sales growth was primarily attributed to Alarm Lock door-locking products, Continental access-control products and Marks door-locking products; Napco intrusion-product sales declined.
- Gross margin improved with higher sales and a favorable product mix. SG&A rose 7.1% to $20.766 million, faster than sales, mainly due to selling wages and commissions, advertising and trade-show spending.
- Net income benefited in part from a lower income-tax provision: $216,000, or a 4.3% effective rate, versus $531,000, or 13.3%, in FY2014. Management cited R&D credits and tax-reserve adjustments.
- Cash and cash equivalents were $2.346 million. Working capital was $35.590 million, and the current ratio was 4.8:1. The company reported $8.0 million of unused availability under its $11.0 million revolving facility.
- Total debt was $10.7 million at 1.7% stated interest, versus $11.8 million a year earlier. Long-term debt was $9.1 million, excluding $1.6 million of current maturities. The company believes working capital, operating cash flows and credit availability will fund operations for at least 12 months.
- Capital spending was $730,000. Financing cash use was $3.294 million, including $1.6 million of debt principal payments and $2.194 million for treasury-stock purchases. No cash dividends were paid.
Material changes and notable items
- Sales increased $3.380 million year over year; gross margin rose 1.6 percentage points and operating income increased $965,000.
- Cash from operations declined despite higher net income, with working-capital investment including increases in receivables and inventory. Inventory rose to $26.870 million from $25.010 million.
- Accounts receivable increased to $17.994 million. One customer represented 13% of FY2015 sales and 22% of year-end receivables, up from 12% of receivables a year earlier.
- Backlog increased to $2.044 million from $1.278 million, primarily on late-year Marks orders; the company expected to fill the backlog during FY2016.
- NAPCO repurchased 453,048 shares during FY2015 for $2.194 million. The board had authorized repurchases of up to 1 million shares.
Outlook, risks and contingencies
- No specific FY2016 revenue or earnings guidance is provided. Management said FY2015 and subsequent R&D investments were not expected to contribute materially to revenue in the near term, but could benefit future years. R&D expense was $5.382 million in FY2015.
- Sales are historically seasonal, tending to peak in the fiscal fourth quarter and soften in the first quarter. Demand is also exposed to housing and commercial construction conditions.
- Key risks include competition and technology changes, economic or security-market weakness, dependence on distributors, customer credit and extended payment terms, and the ability to adjust fixed costs if sales decline.
- Management identified reliance on CEO Richard Soloway, with no succession plan, and noted that management and certain directors beneficially owned approximately 39% of shares.
- Operations in the Dominican Republic expose the company to peso exchange-rate movements. Management estimated a 10% change in the U.S. dollar/peso rate could change annual operating income by approximately $600,000. A 1% interest-rate change on year-end debt would change annual interest by approximately $107,000, assuming balances stayed constant.
- Debt agreements include financial covenants and restrictions, including on dividends and additional borrowing; substantially all company assets secure the facilities. The company reported no material pending litigation and no off-balance-sheet arrangements. Contractual obligations totaled $33.913 million, including $22.176 million for the Dominican Republic land lease over its remaining term.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether sales growth and improved gross margin persisted after FY2015, particularly for Alarm Lock, Continental and Marks products.
- Collection and credit risk related to the concentrated customer, extended payment terms and rising receivables.
- Inventory growth, obsolescence assumptions and conversion of the increased Marks-related stock and backlog into sales and cash.
- Debt covenant headroom, scheduled repayments and ongoing availability under the borrowing-base revolver.
- Sustainability of the unusually low 4.3% effective tax rate, R&D credits and indefinitely reinvested foreign earnings.
- Exposure to Dominican peso movements, seasonal demand, housing/construction conditions and CEO succession risk.