NAPCO Security Technologies, Inc. — Form 10-Q Summary
Business context and period: The company designs, manufactures and distributes security alarm, access-control and door-locking products. This unaudited report covers the three months ended September 30, 2011, the first quarter of fiscal 2012, and compares results with the quarter ended September 30, 2010. The company notes that sales are typically lower in this fiscal first quarter and peak in the April–June quarter.
Financial performance
| Metric | Quarter ended Sep. 30, 2011 | Quarter ended Sep. 30, 2010 |
|---|---|---|
| Net sales | $16.203 million | $15.327 million |
| Gross profit / margin | $4.156 million / 25.6% | $3.423 million / 22.3% |
| SG&A | $4.298 million | $4.140 million |
| Operating loss | $142,000 | $717,000 |
| Interest expense, net | $304,000 | $594,000 |
| Net loss / diluted loss per share | $167,000 / $0.01 | $1.134 million / $0.06 |
| Operating cash flow | $822,000 | $174,000 |
| Capital expenditures | $34,000 | $92,000 |
Financial position and liquidity
- At September 30, 2011, cash was $2.972 million, total assets $67.877 million, total liabilities $32.608 million and stockholders’ equity $35.269 million.
- Current assets were $41.834 million and current liabilities $21.719 million. The $8.6 million revolving-credit balance was classified as current because the facility expires in August 2012; the company said it intends to refinance or extend it before expiration.
- Total debt was $22.884 million, down from $23.777 million at June 30, 2011. The balance comprised $8.6 million drawn on an $11.1 million revolving facility and a $14.284 million term loan. The term loan has quarterly payments of $893,000 and a final payment of $8.033 million due in August 2013. Debt is secured by company assets, including its headquarters and subsidiary stock.
- Cash decreased $105,000 during the quarter. Operating cash flow and beginning cash funded $893,000 of debt payments and $34,000 of capital spending. Inventory rose to $26.251 million from $24.187 million at June 30, while accounts receivable declined to $15.178 million from $17.640 million.
Changes and management commentary
- Sales rose 5.7%, primarily from higher intrusion-product sales ($917,000) and access-control sales ($217,000), partly offset by lower door-locking sales ($258,000). Domestic sales increased; foreign sales were $874,000 versus $1.067 million.
- Gross margin improved to 25.6% from 22.3%, which management attributed to increased sales and relatively steady overhead costs. SG&A increased 3.8%, largely because a tradeshow occurred in September this year rather than in the December quarter as in the prior year.
- Net loss narrowed by $967,000. Management cited higher gross profit, lower interest expense from reduced rates and debt, and a larger income-tax benefit. The reported tax benefit was $293,000; the effective tax rate was 64%, versus 14% in the prior-year quarter, reflecting the geographic mix of U.S. income and non-taxable foreign losses.
- R&D expense was $1.031 million, down from $1.268 million. Management generally devotes 7–8% of annual revenue to R&D and said products from fiscal 2012 research are not expected to contribute materially to revenue during that year.
Outlook, risks and unusual items
- Management believed working capital, operating cash flows and the revolving facility—which it anticipated renewing before August 2012—would fund operations for the next 12 months. This depends in part on refinancing or extending the revolver.
- Management cited economic weakness and uncertainty, housing and construction demand, customer payment and order risks, financing availability, dependence on the CEO, offshore tax exposure, Dominican peso fluctuations, distribution issues, environmental liabilities and integration of Marks. It said there had been no material changes to the risks in its fiscal 2011 Form 10-K.
- A customer represented 22% of accounts receivable at September 30, 2011, up from 17% at June 30, 2011, although no customer exceeded 10% of sales in the prior three fiscal years. Inventory obsolescence reserves were $2.534 million.
- The company’s self-insured employee health plan had an accrued liability of $259,000, versus $150,000 at June 30, 2011. The Marks trade name impairment charge of $400,000 was recorded in the prior fiscal fourth quarter, not this reporting quarter.
- Management said ordinary-course claims and litigation were not expected, in aggregate, to materially adversely affect financial position or results. It provided no specific revenue or earnings guidance. A 1% interest-rate movement on debt outstanding would change annual interest expense by approximately $229,000; a 10% strengthening of the U.S. dollar against the Dominican peso was estimated to reduce annual operating income by approximately $600,000.
Important facts for investors to verify
- Progress and terms for refinancing or extending the $8.6 million revolver before its August 2012 expiration, and compliance with credit-facility requirements.
- Whether improved gross margin and sales persist beyond the seasonally weaker first quarter, given the company’s exposure to economic, housing and construction conditions.
- Inventory growth, the adequacy of obsolescence reserves, and the concentration of receivables with one customer.
- Cash generation relative to scheduled debt repayments, the August 2013 term-loan balloon payment, and the company’s ability to manage foreign-exchange and self-insurance exposures.