NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2012; comparable period is the three months ended September 30, 2011. Amounts are in U.S. dollars. Napco manufactures security products, including electronic locks, alarms and access-control systems, and sells primarily through independent distributors, dealers and installers. The company notes that its first quarter is seasonally weaker than its fiscal fourth quarter.
Key financial results
| Metric | Quarter ended Sep. 30, 2012 | Prior-year quarter |
|---|---|---|
| Net sales | $15.216 million | $16.203 million |
| Gross profit / margin | $4.136 million / 27.2% | $4.156 million / 25.6% |
| Operating loss | $399,000 | $142,000 |
| Net loss / diluted loss per share | $434,000 / $0.02 | $167,000 / $0.01 |
| Cash provided by operations | $1.570 million | $822,000 |
| Capital expenditures | $65,000 | $34,000 |
- SG&A was $4.535 million, or 29.8% of sales, compared with $4.298 million, or 26.5%. Interest expense fell to $177,000 from $304,000.
- Cash and equivalents were $2.327 million at quarter-end, down from $2.979 million at June 30, 2012. Current assets were $37.357 million and current liabilities $8.203 million; working capital was approximately $29.154 million.
- Total debt was $18.100 million, down from $20.257 million at June 30, 2012. The reported weighted-average interest rate was 3.1%. The $11 million revolving facility had $6 million outstanding, subject to borrowing-base limits.
Changes and management commentary
- Sales declined 6.1%, primarily because intrusion-product sales fell $1.061 million as several customers reduced inventory, and access-control sales fell $170,000. Door-locking sales increased $244,000.
- Gross profit dollars were nearly flat, while gross margin improved to 27.2% from 25.6%. Management attributed the margin improvement to product mix and lower manufacturing overhead.
- SG&A increased mainly due to tradeshow spending and additional sales staff. Advertising expense rose to $427,000 from $251,000; R&D expense, included in cost of sales, rose to $1.336 million from $1.031 million, primarily for development of the iBridge tablet/touch-screen keypad.
- The company generated $1.570 million in operating cash, paid $2.157 million of debt principal and spent $65,000 on property and equipment, resulting in a $652,000 decline in cash.
Outlook, risks and contingencies
- Management believes working capital, operating cash flows and the revolving credit agreement will be sufficient to fund operations for the next twelve months. No specific revenue or earnings guidance is provided.
- Management said products resulting from fiscal 2013 R&D investment are not expected to contribute materially to revenue during that fiscal year, but may benefit the company in future years.
- The credit agreement matures between June 2017 and June 2019, includes financial covenants and restrictions, and is secured by substantially all company assets and subsidiary guarantees. Term-loan repayments began September 30, 2012. A substantial $3.9 million balance on one term loan is due by its June 2019 expiration.
- Risks cited include economic weakness affecting demand and customer collections, dependence on the CEO, maintaining competitive products and financing, foreign tax and currency exposure, distribution issues, environmental liabilities and integration of Marks. A 10% strengthening of the U.S. dollar against the Dominican peso would reduce annual operating income by approximately $600,000, according to the filing.
- The company reported no material change to previously disclosed risk factors. Management said ordinary-course litigation, in aggregate, is not expected to materially affect financial position or results. The filing also describes a CEO employment agreement with annual salary of $587,000 and a potential termination payment subject to stated limits.
Important facts for investors to verify
- Whether the intrusion-customer inventory reductions and lower sales persist beyond the seasonally weak quarter.
- Whether improved gross margin can offset elevated SG&A and restore operating profitability.
- Revolver availability under the borrowing-base formula, covenant compliance and the pace of scheduled debt repayment.
- Inventory quality and conversion timing: $4.735 million of the $23.433 million total inventory was classified as non-current.
- The impact of CEO dependence, Dominican peso exposure and customer concentration; two customers represented 22% of receivables at September 30, 2012.