NAPCO Security Technologies, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2013. The filing is dated May 13, 2013. NAPCO manufactures and sells electronic locks, intrusion and fire alarms, and building access-control systems. Sales historically peak in the fiscal fourth quarter (April–June).
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Mar. 31, 2013 | Three months ended Mar. 31, 2012 | Nine months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Net sales | $17.163 | $17.236 | $49.591 | $51.056 |
| Gross profit / margin | $4.652 / 27.1% | $5.064 / 29.4% | $13.429 / 27.1% | $14.115 / 27.6% |
| Operating income | $0.258 | $0.689 | $0.213 | $1.442 |
| Net income (loss) | $0.111 | $0.303 | $(0.188) | $0.445 |
| Diluted earnings (loss) per share | $0.01 | $0.02 | $(0.01) | $0.02 |
| Net interest expense | $0.122 | $0.287 | $0.440 | $0.889 |
- Cash flow: Nine-month operating cash flow was $2.971 million, compared with $3.029 million a year earlier. Capital spending was $0.316 million. Debt principal payments were $3.457 million and treasury-stock purchases were $0.435 million. Cash declined $1.123 million to $1.856 million.
- Liquidity and debt: At March 31, cash was $1.856 million, current assets were $35.319 million, and current liabilities were $7.298 million; working capital was $28.021 million. Total debt was $16.8 million ($1.6 million current and $15.2 million long-term), down from $20.257 million at June 30, 2012. The credit facilities carried a 2.5% weighted-average rate and were secured by substantially all company assets; they include financial covenants and restrictions.
- Balance-sheet movements: Total assets were $59.866 million versus $64.750 million at June 30, 2012. Inventory totaled $22.428 million, including $5.129 million classified as non-current, up from $3.834 million. Accounts receivable was $14.532 million, down from $16.408 million.
Changes versus comparable periods
- Third-quarter sales were nearly flat, down 0.4%; nine-month sales declined 2.9%. Lower intrusion and access-control sales were partly offset by higher door-locking sales. Management cited customer inventory reductions, weaker demand from a large intrusion dealer, and disruption from Superstorm Sandy.
- Gross margin fell 2.3 percentage points in the quarter and 0.5 percentage points for nine months. Management attributed lower gross profit in part to higher R&D spending, especially development of the iBridge tablet-style keypad and related applications, and a one-time $175,000 settlement of a product-licensing dispute.
- Nine-month SG&A rose 4.3% to $13.216 million, including higher sales personnel and trade-show and advertising costs. Nine-month R&D expense rose to $3.842 million from $3.134 million.
- Operating income declined sharply; the nine-month period moved from $0.445 million net income to a $0.188 million net loss. Lower interest expense, due to reduced borrowing and rates, partly offset weaker operating performance.
Outlook, risks, and unusual items
- Management said working capital, operating cash flow, and the revolving credit agreement should fund operations for the next 12 months. No specific revenue or earnings forecast was provided.
- Management did not expect products arising from fiscal 2013 R&D investments to contribute materially to revenue in that fiscal year, while anticipating potential benefits in future years.
- Demand is seasonal and sensitive to housing and construction markets. Management also cited economic uncertainty, customer credit and order risk, competition and product development, reliance on the CEO, financing availability, offshore tax issues, Dominican peso movements, distribution risks, environmental liabilities, and integration of Marks.
- Debt is variable-rate: management estimated a 1 percentage-point rate change on the March 31 balance would change annual interest by approximately $168,000. A 10% strengthening of the U.S. dollar against the Dominican peso was estimated to reduce annual operating income by approximately $600,000.
- The company increased its reserve for uncertain tax positions by $28,000 during the nine months; long-term accrued income tax liability was $154,000 at March 31. Management said it did not expect unrecognized tax benefits to change significantly over the next 12 months. Routine litigation was not expected to have a material aggregate adverse effect.
- Management reported effective disclosure controls and no material change in internal controls during the quarter. It reported no material changes to the risk factors disclosed in its prior annual report.
Investor verification points
- Check whether intrusion-product demand and customer inventory levels recover, and whether door-locking growth continues.
- Track gross margin, R&D spending and the commercial contribution of the iBridge product line; distinguish recurring costs from the $175,000 licensing settlement.
- Monitor non-current inventory, inventory reserves, and the pace at which inventory converts to sales.
- Review debt repayment, revolving-facility availability, covenant compliance, and cash generation, particularly given cash of $1.856 million.
- Assess exposure to variable interest rates, Dominican peso costs, seasonal sales patterns, and customer concentration; one customer represented 11% of receivables at quarter-end.