NAPCO Security Technologies, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2015 (fiscal Q3 and first nine months of fiscal 2015; fiscal year ends June 30). The filing is dated May 11, 2015. Financial figures below are in millions unless otherwise stated.
Business context and financial performance
NAPCO manufactures and sells security products, including access-control, door-locking, intrusion and fire-alarm, and video-surveillance products. Sales are primarily through distributors, dealers, and installers. The company notes that sales typically peak in its fiscal fourth quarter, April through June.
| Metric | Three months ended March 31, 2015 | Prior-year quarter | Nine months ended March 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $17.894 | $17.272 | $54.801 | $52.864 |
| Gross profit / margin | $5.346 / 29.9% | $5.317 / 30.8% | $16.704 / 30.5% | $15.437 / 29.2% |
| Operating income | $0.477 | $0.749 | $1.819 | $1.493 |
| Net income | $0.395 | $0.650 | $1.505 | $1.141 |
| Diluted EPS | $0.02 | $0.03 | $0.08 | $0.06 |
| Operating cash flow | Not provided separately | Not provided separately | $2.783 | $4.268 |
Quarterly sales increased 3.6%, but net income fell 39.2%; operating income declined 36.3% as SG&A rose faster than sales and gross margin contracted. For the nine-month period, sales rose 3.7%, gross margin improved, operating income increased 21.8%, and net income increased 31.9%. Management attributed sales gains mainly to door-locking products, particularly domestic digital-lock installations, and cited a favorable product-mix shift toward door-locking products. SG&A increases reflected added sales personnel and higher advertising.
Cash, debt, and liquidity
- At March 31, 2015, cash and cash equivalents were $1.675, down from $2.483 at June 30, 2014. Total assets were $61.712; current assets were $41.380 and current liabilities were $9.054.
- Total debt was $10.600, comprising $2.500 outstanding on the revolving facility and $8.100 in term loans. Debt was $11.800 at June 30, 2014. The stated interest rate was 1.7%; debt is secured by substantially all company assets and subject to financial covenants and other restrictions.
- Over the nine months, operating cash flow of $2.783 and beginning cash funded $1.200 of debt repayments, $1.890 of treasury-stock purchases, and $0.501 of capital expenditures. Cash declined by $0.808.
- Inventory, including non-current inventory, increased to $26.891 from $25.010 at June 30, 2014. Management attributed the increase primarily to level-loading production ahead of the seasonally stronger fourth quarter.
- Management stated that working capital, operating cash flows, and the revolving credit agreement should be sufficient to fund operations for the next 12 months. The filing reports $2.500 of revolver borrowings and $8.500 of availability as of December 31, 2014; it does not provide a clear March 31 availability figure.
Outlook, risks, and notable matters
- No numerical earnings or revenue guidance is provided. Management said R&D products introduced in fiscal 2014 or later were not expected to contribute materially to revenue during the current fiscal year, but could benefit future years. R&D spending was $3.995 for the nine months, compared with $3.813 a year earlier.
- Key risks identified include economic and market deterioration, customer payment or order delays, dependence on the CEO for strategic planning, maintaining financing and competitive products, offshore tax consequences, Dominican peso exchange-rate fluctuations, and distribution problems. Management reported no material change in previously disclosed risk factors.
- One customer represented 21% of accounts receivable at March 31, 2015, versus 12% at June 30, 2014, and 12% of nine-month sales. International sales were about 4% of nine-month revenue.
- The company repurchased 398,717 shares during the nine months at a weighted-average price of $4.74 per share, for $1.890 in cash. A September 2014 authorization permits repurchases of up to one million shares; 601,283 remained available at March 31.
- Management said ordinary-course claims and litigation were not expected, in aggregate, to have a material adverse effect. The company also disclosed a long-term Dominican Republic land lease and executive employment and severance obligations.
- Interest-rate sensitivity: a 1 percentage-point change applied to the March 31 debt balance would change annual interest expense by approximately $106,000. A 10% strengthening of the U.S. dollar against the Dominican peso was estimated to increase annual operating income by approximately $600,000.
- Disclosure controls were concluded effective at March 31, 2015; no material changes in internal control over financial reporting were reported. The company was evaluating the impact of the new revenue-recognition standard.
Most important facts for investors to verify
- Confirm current revolver availability and covenant headroom: the stated $8.500 availability is dated December 31, 2014, not March 31, 2015.
- Assess whether quarterly earnings weakness persists, given the drop in operating income and net income despite sales growth, and whether SG&A growth is yielding returns.
- Monitor cash conversion, the rise in inventory, and seasonality as the company enters its historically strongest quarter.
- Evaluate customer concentration and the increased share of receivables attributable to the largest customer.
- Track the remaining share-repurchase authorization against liquidity, debt obligations, and the secured credit agreement’s covenants.