NAPCO Security Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015 (fiscal 2016 first quarter); comparative period is the three months ended September 30, 2014. Financial amounts below are in millions of dollars unless stated otherwise. Napco manufactures security, access-control, door-locking, alarm, and video-surveillance products. The company notes that its fiscal first quarter is typically seasonally weaker.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $18.149 | $17.336 | +4.7% |
| Gross profit / margin | $5.637 / 31.1% | $5.255 / 30.3% | +7.3%; margin +0.8 percentage points |
| SG&A | $5.313 | $5.009 | +6.1%; 29.3% of sales versus 28.9% |
| Operating income | $0.324 | $0.246 | +31.7% |
| Income before taxes | $0.271 | $0.196 | +38.3% |
| Net income | $0.315 | $0.159 | +98.1% |
| Diluted EPS | $0.02 | $0.01 | Up $0.01 |
| Operating cash flow | $2.087 | $2.270 | Down $0.183 |
Gross-margin improvement reflected higher sales and a favorable shift toward door-locking products. Door-lock sales rose $0.955 million, primarily from domestic digital-lock installations; intrusion sales increased $0.014 million, partly offset by a $0.156 million decline in access-control sales. SG&A rose mainly with additional sales personnel and advertising. R&D expense was $1.489 million, up from $1.311 million.
Cash, liquidity, and debt
- At September 30, 2015, cash was $2.806 million, current assets $43.124 million, and current liabilities $8.959 million; reported working capital was approximately $34.165 million.
- Total debt was $9.3 million, down from $10.7 million at June 30, 2015. Debt consisted of $2.0 million drawn on the revolving facility and $7.3 million in term loans. The company reported $9.0 million of revolver availability. The facilities mature in June 2017 and June 2019, as applicable, and carried a reported weighted-average rate of 1.7%.
- Quarterly cash uses included $1.400 million of debt principal payments, $0.094 million of share repurchases, and $0.133 million of capital expenditures. Cash increased by $0.460 million to $2.806 million.
- Inventory increased $0.910 million from June 30 to $27.780 million, including $4.612 million classified as non-current. Management attributed the increase principally to level-loading production in the Dominican Republic ahead of the seasonally stronger fourth quarter.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management believes working capital, operating cash flows, and the revolving credit agreement will fund operations for the next 12 months.
- Management says products arising from R&D investment in fiscal 2015 and thereafter are not expected to contribute materially to revenue in the current fiscal year, but may benefit future years. R&D generally represents 6%–8% of annual revenue.
- Net income benefited from a tax benefit related primarily to reversal of a liability associated with foreign-source income. The income statement reports a $44,000 tax benefit; MD&A describes a $46,000 benefit and a (16)% effective tax rate. This difference should be reconciled.
- Risk exposures include economic and housing/construction weakness, competition and product development, dependence on the CEO, customer credit risk, and foreign operations. One customer represented 18% of accounts receivable, although no customer exceeded 10% of quarterly sales.
- Debt agreements impose financial-ratio and other covenants and restrict dividends and additional borrowing; assets secure the facilities. A 1% interest-rate change on the reported debt balance would change annual interest by approximately $107,000. Management estimates a 10% U.S. dollar movement against the Dominican peso would change annual operating income by about $0.6 million.
- Management believes ordinary-course litigation will not materially affect financial position or results. No material change to previously disclosed risk factors was reported. Disclosure controls were assessed as effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Reconcile the reported tax benefit ($44,000 in the income statement versus $46,000 in MD&A) and confirm the associated effective tax rate.
- Assess whether door-locking growth and improved product mix can continue, given seasonality and the company’s higher fourth-quarter sales pattern.
- Monitor inventory growth and the proportion classified as non-current, along with inventory obsolescence assumptions.
- Review debt covenants, borrowing-base availability, repayment schedules, and sensitivity to interest rates and Dominican-peso movements.
- Evaluate the durability of operating cash flow, particularly as receivables, inventory, and sales move through the seasonal cycle.