NAPCO Security Technologies Inc (NSSC) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NAPCO Security Systems, Incorporated first-quarter results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Weinberger of Wolfe Axelrod Weinberger Associates. Thank you, Mr. Weinberger, you may begin.

Thank you, LaTonya. Good morning and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the first quarter ended September 30, 2008. By now all of you should have received the opportunity to review the release and should have the release. And if by chance you don't, please call my office at 212-370-4500 and we will immediately send you either by fax or by email.

On the call with us today is Richard Soloway, Chairman and Chief Executive Officer of NAPCO Security Systems, and Mr. Kevin Buchel, Senior VP of Operations and Finance. Before I ask our hosts, Dick Holloway, CEO of NAPCO, to discuss the details of today's news, let me take a moment to read the forward-looking statement.

This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors including those set forth in the Company's filings with the Securities and Exchange Commission.

With that out of the way, let me turn the discussion over to Richard Soloway, President and Chief Executive Officer of NAPCO Security Systems. Dick, please proceed.

Thank you, Don. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the first quarter of fiscal 2009, which ended September 30, 2008. First off, I'd like to thank everyone on the call today for their utmost patience while we finalized our first-quarter results. Our integration of Marks USA is moving forward as planned and although we have had approximately a half a quarter's contribution, I am proud to announce that it was accretive to our results.

In addition, our other product lines showed year-over-year improvement with strength coming from our door-locking and access control products. We believe that financial results should continue to grow as a majority of our business is derived from commercial and industrial applications partially due to the acquisition of Marks.

One other point that everyone should be aware of is that historically our first quarter has been our weakest quarter and as the year progresses, we have stronger quarters.

Despite tough economic times, NAPCO is off to a good start to its fiscal 2009. We are hopeful that many of our new products will build upon the growth that Marks is adding. More importantly, is that we have created new products that contain monthly recurring revenues, most of which will drop to the bottom line and improve the overall margins as they continue to build out. Specifically I'm referring to the iSee Video surveillance product and StarLink, our new backup radio device now being installed by our dealers.

The iSee Video product line and its recurring revenue service offers a higher level of video surveillance capability never before made available to residential and small business customers. The system offers consumers a library of video clips emailed at the time of an event which shows users possible security breaches in high-resolution video.

Our new StarLink full data wireless alarm communicator and our Netlink Internet communicator assures that alarm signals get through the central stations despite any countermeasures by intruders or assailants. The markets for these products are quite large. With more than 25 million alarms installed in the USA alone, many security companies and telecoms are seeking ways to tap into businesses and homes with new services. For only a few dollars extra per month, consumers can improve upon their current security footprint by utilizing iSee Video and StarLink.

We believe that our dealer base will be advocates of such new products as they receive an incentive fee which is reocurring for every installation. In addition, it is products like these that will enable our dealers to return to its end user base for such upgrades.

The new product offerings from NAPCO don't stop there. Alarm Lock recently introduced a proximity card stand-alone access control lock enabling us to cost-effectively address high security applications such as assisted living facilities, office suites, hospital drug storage rooms, and mental health facilities. Our Continental Access Control division's new software capabilities allow for a total facility to be instantaneously locked down of its control doors from a centralized command point should the security need arise.

We also have several new product introductions from our new Marks USA division, which also emphasized the future need for greater security and increased life safety protection. Marks' new ANSI grade one institutional life safety lock sets manage -- address managed liability concerns in security and behavioral healthcare institutions.

The shape and construction of the SS50 Series Locksets are designed to restrict the attachment of lines, shoelaces, ropes, hangers, etc. to doorknobs greatly aiding in suicide prevention. These locks comply with new state-mandated regulations calling for such locks to be installed in such facilities simultaneously and lower the liability of the facility, enabling personnel to attend to other important matters.

Before I turn the call over to Kevin, I would like to briefly explain that our 30-year history, we traditionally noticed a deteriorating economic climate causes a greater need and demand for protection of life and property. With one of the industry's most diverse and technologically advanced portfolios of security solutions, NAPCO is well-positioned to help our global network of thousands of security service providers and their customers to meet what will be a growing need for security.

Our new products and strategic direction emphasize the delivery of enhanced and increased capabilities to meet the increased future security demands of end users and consumers.

Now I'd like to turn the call over to Kevin to briefly review the financial details of the financial results. Kevin?

Thank you, Dick, and good morning, everybody. As for our financial performance, NAPCO reported revenues for the quarter of $17.5 million, a 26% increase over the revenues of $13.9 million for the first quarter of fiscal 2008. This increase of $3.6 million was primarily the result of six weeks of revenue added from our Marks acquisition as well as an increase in our existing businesses.

International sales represented $2.1 million or 12% of the total revenues for the first quarter as compared to $2.3 million or 17% of sales a year ago. The lower percentage is primarily due to the fact that the majority of Marks USA revenue, which increased our total sales, are domestic sales.

Gross profit was $5.6 million for the first quarter compared to $5.2 million during the same period one year ago. Gross margin was 32.1% versus 37.6% last year, but this was up from the 30% figure for all of fiscal 2008. The improved gross margin in the quarter as compared to the entire fiscal 2008 period was primarily attributable to the acquisition of Marks along with a lower percentage of international sales, a decrease in buy/sell transactions, and an improved product mix.

We expect to continue to improve gross margins throughout fiscal 2009 through ongoing cost-cutting measures, efficiency improvements, and a continued integration of Marks USA into our Company.

Selling, general, and administrative expenses increased by $355,000 in the first quarter to $4.8 million compared to $4.4 million a year ago. The increase in these expenses was primarily due to the addition of Marx, but due to the higher sales level, SG&A as a ratio to sales dropped to 27.3% from 31.9% a year ago.

Interest expense increased $120,000 to $315,000 during the first quarter as compared to the same period in the prior year. This increase was due to the rise in the average outstanding borrowings under our line of credit which was due specifically to the increase in the average outstanding debt from the $25 million bank refinancing utilized for the Marks acquisition. We anticipate the interest expense to be higher year-over-year going forward due to this additional set incurred to the purchase of Marks. But inventory reduction which is a top priority for the Company could potentially lead to improved cash flow and a reduced debt level.

NAPCO's effective tax rate for the quarter was approximately 32.6% as compared to 41.5% last year. This year's improved tax rate was due to our recent tax structure change that was instituted during the quarter ended December 31, 2007.

Net income was $322,000 during the quarter in comparison to $374,000 in the first quarter of fiscal 2008. We reported fully diluted earnings per share of $0.02 during the first quarter based on 19,479,269 fully diluted weighted average shares outstanding. And that compares to prior year's quarter of $0.02 per share, which was based on 20,157,065 fully diluted weighted average shares outstanding.

NAPCO's balance sheet continues to remain financially strong. We ended the quarter with $4.3 million in cash and we plan to utilize some of that for our expansion plans at NAPCO, which to move Marks USA into our Amityville, New York facility within the next 12 months.

That concludes my formal remarks. And I would now like to turn the call back over to Dick.

Thanks, Kevin. To conclude my formal remarks, I would like to reiterate that we believe strongly in our business and believes the acquisition of Marks USA was and is a great opportunity to expand our reach even further by catapulting NAPCO to a newer level of sales and profitability. We believe that our exciting new product offerings along with the integration of Marks can add value to our Company -- Company's position in the marketplace and build NAPCO into a premier provider of unique top notch cutting edge security technology products.

Our priority objective for fiscal 2009 and beyond is to continue to work aggressively to gain market penetration and increase market share throughout all segments of our businesses. Despite the economic climate of today, the global security market remains healthy and I continue to believe that we are well positioned to achieve a stronger financial performance while increasing shareholder value.

That concludes our formal remarks. Kevin and I would like to open the call for any questions. Operator, please proceed.

(Operator Instructions) Rick Fetterman, Fetterman Investments.

Good morning, everyone. Kevin, how much of the revenue in the first quarter was from Marks?

Well, we don't break it out, Rick, but I would say a good portion of it. The rest of the business was up as well. The primary increase was due to Marks. But we don't break it out.

Okay, I recalled from previous conversations and maybe I'm just getting old and don't remember correctly but that you had said that historically in the fourth fiscal quarter and first fiscal quarter were the best revenue quarters. You just said -- one of you said in your prepared remarks that first quarter is traditionally a bad quarter.

Yes, first is -- the way our quarters work, Rick, is the first is the weakest. The second and third are stronger than the first and they are similar usually and the fourth is always the best from a revenue point of view. So that is historical. You could go back for years, that's always how it's been.

Okay, can you tell us what percentage of the revenue was residential in this quarter?

We don't break that out either but I can tell you that the majority by far was commercial industrial versus residential. Because now just by definition the way this company is set up with Alarm Lock sales, which is all commercial, Continental Access Control all commercial, and now Marks all commercial. And on the NAPCO piece, it's fairly split between commercial and residential when you do the math and you add it all up, the majority is commercial.

We've said in the past that it's in the range of about 80% and what we saw this quarter was in line with that.

Okay, what were the reasons for the lower gross profit margin versus -- in this quarter versus the same quarter last year?

Last year was a period -- the first quarter was a period where we were building a lot of inventory and we had the benefit of building that inventory with a lot of labor and overhead. We weren't in that situation this year. So last year the margin was helped by that. Also last year, we had certain costs, factory costs that probably should've been charged earlier in the year. They were charged to the back end of the year. We talked about that in the fourth quarter press release.

That had an effect making the gross margin higher in Q1 37.6. Next quarter, Q2, 32.5; so it will be an easier comparison for us going forward but just a tough one.

Kevin, what with the debt level at the end of the first quarter?

The debt was 39 --

I'm going to ask you the same question regarding inventory, by the way.

$39 million, Rick, versus it was $12.4 million at year end. Of course the difference is the acquisition. That's the primary difference. And the inventory level was $35.3 million and again, that's compares to $27.2 million at the end of June and again, the majority of that is adding Marks to the picture.

Do you -- when you had the conference call announcing the acquisition of Marks, you had commented that you expected taking into account the $25 million loan for the acquisition, that you did expect debt to be down at the end of calendar '08. So basically talking about the debt that you had at the time right before the acquisition? Is that still the case? Because it is up about $1.5 million besides the Marks acquisition at this point.

The Marks acquisition was $25 million and then it was also paying off $1 million of bad debt, so that's the main reason for the change in the debt. We have built cash, cash balances of $4.3 million. So we are starting to generate cash from inventory reductions and I believe we are still on pace to be able to reduce the debt level by calendar -- by the end of calendar '08.

What -- is the reason for the inventory build besides the amount of inventory that Marks had at the time of the acquisition in preparation for the next several quarters? Or what's the reason? Is that the reason or are there other reasons?

The majority of the inventory change is Marks and any increase on NAPCO is small and it was due to what we call the level loading of the facility in anticipation of much higher quarters for the balance of the year. The first quarter, as we said earlier, is the lowest sales level on the NAPCO side and we level load so that we don't have to hire and fire factory workers and so there's always a little bit of a build. Last year we had a much more dramatic build which we didn't want to see happen this year. This year was much more modest as we would normally expect.

Okay, my last thing is just a comment. I would encourage you to include a balance sheet in future earnings releases. I wasn't able to get the Q off the SEC website, at least it doesn't show it as being filed.

Right. It is being filed. We would have done that. It's being filed later today and then the information will be out there.

It would be nice to have that at least summary information before the conference call.

Well noted, Rick.

Thank you very much and good luck.

(Operator Instructions) There are no further questions in queue at this time. I would like to turn the call back over to Mr. Soloway for closing comments.

Okay, thank you, everyone, for participating in today's conference call. As always should you have any additional questions, please feel free to call Donald Weinberger, Kevin, or myself. We thank you for your interest and support and look forward to speaking with all of you again in a few months to discuss NAPCO's second-quarter results.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.