NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2016; comparative period ended September 30, 2015. Figures are unaudited unless stated otherwise. Amounts are in millions except per-share data.
Business context and results
NAPCO manufactures security products, including access control, door-locking, intrusion and fire alarm, and video surveillance products. It sells primarily through independent distributors, dealers, and installers. Sales are seasonal: historically, they peak in the fiscal fourth quarter (April–June) and are lower in the July–September quarter. International sales were approximately 3% of revenue.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $20.168 | $18.149 | +11.1% |
| Gross profit | $6.452 | $5.637 | +14.5% |
| Gross margin | 32.0% | 31.1% | +0.9 percentage points |
| Operating income | $0.716 | $0.324 | +121.0% |
| Net income | $0.568 | $0.315 | +80.3% |
| Diluted EPS | $0.03 | $0.02 | Increased |
| Operating cash flow | $1.919 | $2.087 | Down $0.168 |
Financial position and liquidity
- At September 30, cash and cash equivalents were $4.715 million; current assets were $45.436 million and current liabilities were $8.747 million. Working capital was approximately $36.689 million.
- Total debt was $3.925 million, down from $4.800 million at June 30, 2016, after $0.875 million of principal payments. Cash exceeded reported debt by approximately $0.790 million.
- The $11 million revolving facility had $2 million drawn and $9 million available. It expires in June 2021; the term loan expires in June 2019. Borrowings are secured by company assets and subject to financial covenants and other restrictions.
- Cash increased by $0.910 million during the quarter. Operating cash flow of $1.919 million funded $0.134 million of capital expenditures and $0.875 million of debt repayments.
Material changes and management commentary
- Revenue increased by $2.019 million. Management attributed the increase mainly to intrusion products, particularly wireless products, and door-locking products, particularly digital locks; access-control sales declined.
- Gross profit and gross margin rose, primarily due to higher sales, partly offset by increased research and development costs. R&D expense was $1.628 million versus $1.489 million.
- SG&A increased to $5.736 million from $5.313 million, mainly due to increased advertising and additional sales personnel. SG&A as a share of sales declined to 28.4% from 29.3%.
- Net interest expense fell to $24,000 from $53,000, reflecting lower average debt. The tax result shifted from a $44,000 benefit in the prior-year quarter to $124,000 expense; the prior period included reversal of a tax liability. The reported effective tax rates were 18% and negative 16%, respectively.
- Accounts receivable fell to $17.311 million from $19.012 million at June 30, primarily reflecting the normal seasonal sales decline from the fiscal fourth quarter. Inventory increased to $25.804 million from $25.337 million, which management linked to level-loading production.
Outlook, risks, and unusual items
- Management stated that working capital, operating cash flows, and the revolving credit agreement should be sufficient to fund operations for the next 12 months. No specific revenue or earnings guidance was provided.
- The company generally invests 6–8% of annual revenue in R&D and said products resulting from its R&D investments in fiscal 2017 were not expected to contribute materially to revenue during that year, though they may benefit future years.
- Risks highlighted include economic conditions and customer purchasing or payment capacity, competition and product development, reliance on the CEO for strategic planning, tax consequences of offshore operations, financing availability, and foreign-exchange movements. A 10% change in the U.S. dollar versus the Dominican peso was estimated to change annual operating income by approximately $0.630 million. A 1% interest-rate change on quarter-end debt was estimated to affect annual interest expense by approximately $39,000.
- One customer represented 25% of accounts receivable at September 30 and 14% of quarterly sales, compared with 22% and 9%, respectively, in the cited prior-period comparisons. Sales returns, rebates, and allowances were 9% of gross sales versus 7%.
- Management said ordinary-course claims and litigation, in aggregate, were not expected to have a material adverse effect. No material change to the risk factors disclosed in the fiscal 2016 Form 10-K was reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether revenue growth in wireless intrusion and digital door-locking products continues, and whether seasonal demand and housing or construction conditions affect subsequent quarters.
- Whether gross-margin improvement persists as R&D, advertising, and selling costs change.
- The customer concentration in receivables and sales, and the adequacy of doubtful-account, returns, and inventory-obsolescence reserves.
- Debt-covenant compliance, borrowing-base availability, and the cash-flow impact of scheduled term-loan payments.
- The effect of Dominican-peso movements and any changes in tax exposures, including the $177,000 of unrecognized net tax benefits disclosed at quarter-end.