NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2011. The company develops, manufactures, and distributes intrusion and fire alarms, access-control systems, and electronic locking devices. Its fiscal year ends June 30. Financial statement amounts below are in millions, except per-share data.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $17.617 | $17.608 | $33.820 | $32.935 |
| Gross profit / margin | $4.895 / 27.8% | $4.690 / 26.6% | $9.051 / 26.8% | $8.113 / 24.6% |
| Operating income (loss) | $0.895 | $0.531 | $0.753 | $(0.186) |
| Net income (loss) | $0.309 | $0.157 | $0.142 | $(0.977) |
| Diluted EPS | $0.02 | $0.01 | $0.01 | $(0.05) |
For the quarter, sales were essentially unchanged year over year; six-month sales rose 2.7%, primarily from higher intrusion and access-control product sales, partly offset by lower door-locking sales. Management attributed improved gross margins principally to lower overhead expenditures and, for the six-month period, increased sales. Six-month interest expense fell to $0.602 million from $1.005 million, reflecting lower rates and lower debt. Six-month results also benefited from the swing to operating income from an operating loss in the prior-year period.
- Cash flow: Six-month operating cash flow was $1.174 million, compared with $1.216 million a year earlier. Capital spending was $0.211 million; debt principal payments were $1.786 million. Cash declined $0.823 million to $2.254 million.
- Liquidity and working capital: Current assets were $39.131 million and current liabilities $19.640 million at December 31. Current liabilities include the revolving-credit balance classified as current because the facility expires within one year.
- Debt: Total debt was $21.991 million, comprising $8.600 million drawn on an $11.100 million revolving facility and a $13.391 million term loan. The term loan has a final payment of $8.033 million due August 2013. The company reported a 4.92% weighted-average interest rate.
- Other balance-sheet items: Total assets were $65.158 million; inventory, including non-current inventory, was $25.613 million. A single customer represented 16% of accounts receivable at period-end.
Outlook, risks, and other disclosures
Management said current working capital, operating cash flows, and the revolving facility it expects to renew or extend should fund operations for the next 12 months. The facility expires in August 2012; renewal or refinancing is not assured in the filing. No numerical earnings or revenue guidance was provided. Management noted that sales are seasonal, historically peaking in the fiscal fourth quarter, and are affected by housing and construction markets. It did not expect products arising from fiscal 2012 R&D investment to contribute materially to revenue during that fiscal year.
Risks discussed include economic weakness and customer payment delays, dependence on the CEO for strategic planning, financing availability, Dominican peso exposure, and integration of Marks. A 1% change in interest rates on debt outstanding would change annual interest expense by approximately $0.220 million; a 10% strengthening of the U.S. dollar against the Dominican peso was estimated to reduce annual operating income by approximately $0.600 million. Foreign sales are denominated in U.S. dollars, which may affect foreign customers’ ability to pay or willingness to order. Management said ordinary-course claims and litigation were not expected, in aggregate, to materially adversely affect financial position or results. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Unusual or notable items include the current classification of the revolving borrowing due to its August 2012 expiry, a self-funded employee health plan with $0.227 million accrued for unpaid claims, and period-to-period tax-rate volatility attributed to the geographic mix of earnings. The company recorded a $0.275 million tax provision for the quarter but an $0.018 million tax benefit for the six-month period.
Important facts for investors to verify
- Progress and final terms for extending or refinancing the revolving credit facility before its August 2012 expiration.
- Debt repayment requirements, including the August 2013 term-loan payment, and covenant or collateral terms in the credit agreement.
- Inventory levels, the $2.534 million obsolescence reserve, and whether planned production aligns with seasonal demand.
- Cash conversion and receivables collection, including exposure to the customer representing 16% of receivables.
- Whether improved gross margins and operating profitability persist, given fixed manufacturing costs and market sensitivity.
- Effects of tax mix, Dominican peso movements, interest-rate changes, and the self-insured health-plan liability.