NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2012; filed May 14, 2012. The filing identifies this as fiscal 2012 Q3, notwithstanding the request metadata indicating 2011 Q3. Napco develops, manufactures, and sells security alarm, access-control, and electronic-locking products. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
Key financial results
| Metric | Three months ended Mar. 31, 2012 | Prior-year quarter | Nine months ended Mar. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $17.236 million | $17.760 million | $51.056 million | $50.695 million |
| Gross profit / margin | $5.064 million / 29.4% | $5.513 million / 31.0% | $14.115 million / 27.6% | $13.626 million / 26.9% |
| Operating income | $689,000 | $657,000 | $1.442 million | $471,000 |
| Net income (loss) | $303,000 | $695,000 | $445,000 | $(282,000) |
| Diluted EPS | $0.02 | $0.04 | $0.02 | $(0.01) |
| Operating cash flow | Not presented by quarter | $3.029 million | $2.251 million |
For the nine-month period, investing cash use was $430,000, financing cash use was $2.679 million, and cash declined $80,000 to $2.997 million. Capital expenditures were $430,000.
Balance sheet, debt, and liquidity
- At March 31, 2012, current assets were $38.007 million and current liabilities were $18.565 million; total assets were $63.493 million and stockholders’ equity was $35.882 million.
- Total debt was $21.098 million: $8.600 million outstanding on the revolving facility and $12.498 million on the term loan. The weighted-average interest rate was 4.86%. The term loan had a final $8.033 million payment due August 2013.
- The revolving facility expires in August 2012. Management had signed a term sheet with its primary bank in May 2012 to extend both facilities through 2017, but stated there was no assurance the agreement would close. The $8.600 million revolver balance was classified as current because the extension was not yet consummated.
- Management believed working capital, operating cash flows, and anticipated renewal of the revolving facility would fund operations for the next 12 months. Debt is secured by the company’s headquarters, certain other assets, and subsidiary stock.
Material changes and management commentary
- Quarterly sales declined 3.0%, primarily from lower Marks and Alarm Lock door-lock sales, partly offset by increases in intrusion and access-control products. Nine-month sales rose 0.7%; growth in intrusion, access control, and Alarm Lock was partly offset by lower Marks sales.
- Quarterly gross margin fell to 29.4%, which management attributed to unfavorable product mix and lower sales. Nine-month gross margin improved to 27.6%, reflecting sales growth and lower overhead expenditures.
- SG&A fell 9.9% in the quarter and 3.7% year to date. Management cited lower legal and professional fees and consolidation of the European warehouse and sales office into the New York headquarters. Advertising expense increased, in part because the trade show occurred in March this year rather than the June quarter last year.
- Interest expense declined year over year, attributed to lower interest rates and reduced debt. The quarterly tax provision was $84,000 versus a prior-year benefit of $379,000; the nine-month provision was $66,000 versus a prior-year benefit of $621,000. Management cited prior-year R&D tax credits and changes in the geographic mix of earnings and losses.
- Napco converted its employee health plan from self-insured to fully insured effective March 1, 2012, citing significant medical claims and an expectation that insurance would cost less. It had accrued $296,000 for self-insured liabilities at March 31 and reported approximately $200,000 of uninsured run-out claims incurred since March 1, in addition to fully insured policy premiums.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management said fiscal fourth-quarter sales historically peak as customers install products before summer; demand is also affected by housing and construction markets. Results for the interim period may not indicate full-year results.
- Management stated that R&D products developed in fiscal 2012 were not expected to contribute materially to revenue during that year, though they could benefit future years. R&D expense was $3.134 million for the nine months.
- The company cited economic weakness, customer liquidity and payment risk, reliance on its CEO, financing availability, Dominican Republic currency exposure, distribution issues, and political, military, environmental, and tax-related risks. A 1% change in interest rates on debt outstanding would change annual interest expense by approximately $211,000; a 10% strengthening of the U.S. dollar against the Dominican peso was estimated to reduce annual operating income by approximately $600,000.
- Management said ordinary-course claims and litigation, considered in aggregate, were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
- One customer represented 17% of receivables at March 31, 2012, although sales to that customer were not more than 10% of net sales in any of the past three fiscal years. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether the bank extension of the revolver and term loan was completed, and the final terms, covenants, and maturity dates.
- Cash generation and debt repayment capacity, particularly given low cash on hand and the revolver’s August 2012 expiration at the reporting date.
- Whether quarterly gross-margin pressure and product-mix changes persist, and whether the nine-month operating-income improvement continues.
- Medical claim run-out costs and the realized cost of the fully insured employee health plan.
- Inventory valuation and demand assumptions: inventory totaled $24.272 million, including $4.466 million classified as non-current; the obsolescence reserve was $2.534 million.
- Exposure to seasonal demand, housing and construction conditions, customer receivables, and Dominican peso movements.