NAPCO Security Technologies Inc (NSSC) 2009 Q3 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Napco Security Systems third quarter and nine-months conference call. 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 third quarter ended March 31, 2009.

By now all of you should have had the opportunity to review the press release discussing the results, but if you have not, please call my office, Wolfe Axelrod Weinberger at 212-370-4500 and we will immediately fax or email. On the call with me today is Mr. Richard Soloway, Chairman and Chief Executive Officer of Napco Security Technologies, and Mr. Kevin Buchel, Senior VP of Operations and Finance.

Before I ask our host, Dick Soloway, to discuss the particulars of today's news, let me take a moment to read the forward-looking statements. 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 & Exchange Commission.

With that out of the way, let me turn the discussion over to Richard Soloway. Dick, please proceed.

Thank you, Don. Good morning, everyone, and thank you for joining Napco's quarterly conference call to discuss the financial results for the third quarter of fiscal 2009, which ended March 31, 2009.

To say the least, the third quarter was a challenging one for Napco. Our sales declined in the quarter, as many of our distributors dramatically reduced their on-hand inventory levels this past quarter, due to credit line and banking pressures. This inventory reduction process, although expected to be temporary, hurt the Company's third quarter sales and profits, because 90% of our Intrusion and Locking sales are conducted through distributors that sell to the thousands of alarm and locking dealers, both domestically and internationally.

In addition, this decline occurred despite the fact that demand from the dealers, who buy from these distributors, remains steady. While I believe that business will improve in the ensuing quarters, no one can accurately predict when the economy will recover, thus we have taken decisive restructuring actions to enhance our operational execution, improve our financial performance, and cut our expenses. The steps we have taken will allow us to be profitable at reduced sales levels, yet still enable us to promptly ramp up capacity when sales levels improve.

These steps include downsizing direct and indirect labor in our factories where capacity was under-utilized, consolidating our European and Middle East warehouses into our USA facility, and reducing or eliminating discretionary spending. In addition, we have implemented an across-the-board payroll reduction program that will remain in place until we see a sustained improvement in the economic climate.

Despite the issues we incurred at the distribution level in the quarter, we continue to see an increasing need for security, as a result of the decline in the economy, which has lead to a jump in crime levels and has kept dealer demand for Alarm and Locking products at a respectable level. We are cautiously optimistic that such demand will lead to improved sales and profits in the near future.

Take a look at the longer term. We expect savings of several million dollars from the continued integration of Marks, as well as the restructuring and cost-cutting measures we took in this quarter.

We continue to work hard on inventory reduction, and are encouraged by the approximately $1.9 million decrease in inventory that occurred this quarter. Cash and cash equivalents as of March 31, 2009, amounted to approximately $2.6 million. In addition, we reduced our debt level this quarter by approximately $3.8 million, and our net debt position, inclusive of cash, stands at $31.9 million. Net cash provided by operating activities aggregate approximately $4.1 million for the nine months ending March 31, 2009.

We are disappointed with our overall performance, and we are committed to achieving a meaningful turnaround as quickly as possible. Despite slower economic conditions, our business fundamentals remain strong; our strategy throughout our entire history has been and continues to be a long-term commitment to profitable growth by providing Security Solutions to our many customers, which incorporate state-of-the-art technologies. Additionally, despite the uncertain economic environment, we continue to invest in our growing recurring revenue businesses, which will provide sustained ability against future cyclical downturns.

For now, our number one prior is managing through the current economic slowdown, so that we can mitigate its impact by regaining profitability and emerge as a stronger, more efficient Company. And now I would like to turn the call over to Kevin to review the details of the financial results. Kevin?

Thank you Dick. Good morning, everybody.

Sales for the three months ended March 31, 2009, decreased by approximately 14%, to $14.024 million, and compared to $16,222,000 for the same period a year ago. Sales for the nine months ended March 31, 2009, increased by approximately 9%, to $50,586,000, as compared to $46,264,000 for the same period a year ago. The decrease in sales for the three months ended March 31, 2009, was primarily from the decreased sales of the Company's Intrusion products, products specific to the Company's Middle-Eastern operation, Door Locking products, and Access Control products, and that was partially offset by the net sales added from the Marks acquisition.

The decline in Intrusion and Locking product sales was primarily due to the aforementioned decline in distribution inventory levels. The decrease in Middle East sales was due to large [bi-sell] sales that occurred last year, but not this year. Also, it should be noted that the Access Control sales decrease was only a few hundred thousand dollars, and that was attributable to timing, more than anything else.

The increase in sales for the nine months end March 31, 2009, was primarily the results of the net sales added from the Marks acquisition and an increase in the Company's Door Locking products, as partially offset by the decreases in the Company's Intrusion products, products specific to the Company's Middle East operation, and a small decrease in Access Control producted. With the weak sales level comes a tremendous lack of overhead absorption. Our Company's infrastructure is based on a much higher sales level.

When that level of sales temporarily suffers, the overhead we incur gets spread over a much lower sales base. The result is a significant decline in gross profit. Thus gross profit before restructuring costs for the three months ended March 31, 2009, was $914,000, a decrease of 84%, compared to the $5,716,000 for the same period a year earlier.

And for the nine months ended March 31, 2009, gross profit before restructuring costs was $12,734,000, a decrease of 22%, compared to the $16,387,000 for the same nine-month period a year earlier. In addition, we recognized approximately $1.1 million in restructuring costs, relating to the consolidation of the European and Middle Eastern warehousing operations into our headquarters in am Amityville, New York.

As we have stated many times, our margins are impacted by sales volume because of overhead absorption. We are cautiously optimistic that normalized sales levels will return in the near term. However, there is no guarantees when that will occur, so it's important to once again note that we have restructured the Company to allow us to be profitable at reduced sales level. In addition, we expect gross profit to be enhanced throughout the balance of the calendar year, as a result of the continued Marks integration.

Selling, general, and administrative expenses for the three months ended March 31, 2009, increased by $771,000 to $4,919,000, or 35.1% of sales, as compared to $4,148,000, 25.6% of sales a year ago. Selling general and administrative expenses for the nine months ended March 31, 2009, increased by $2,411,000, to $15,142,000, or 29.9% of sales, as compared to $12,731,000, or 27.5% of sales a year ago. The increases in dollars for the three and nine months ended March 31, 2009, was due primarily to the additional expenses relating to adding Marks. And the increases as a percentage of sales are due primarily to the decreases in net sales.

Interest expense for the three months ends March 31, 2009, increased by $210,000, to $426,000, as compared to $216,000 for the same period a year ago. Interest expense for the nine month ended March 31, 2009, increased by $535,000, to $1,170,000, as compared to $635,000 for the same period a year ago. The increase in interest expense for the three and nine months resulted primarily from the increase in the Company's average outstanding debt, which was due to the $25 million term utilized for the Marks acquisition, which occurred in August of 2008.

The Company's provision for income taxes for the three months ended March 31, 2009, increased by $1,045,000, to a benefit of $859,000, and that compares to a benefit of $1,904,000 for the same period a year ago. The Company's provision for income taxes for the nine months ended March 31, 2009, increased by $1,167,000, to a benefit of $574,000, as compared to a benefit of $1,741,000 for the same period a year ago.

The increase in the provision for income taxes for the three and the nine months resulted primarily from the benefits recognized in the third quarter of fiscal 2008, for the reversal of certain tax reserves that were no longer needed, and also in the second quarter of fiscal 2008, which related to the Company's corporate restructuring. As a result, the Company's effective rate for income tax was 17.5% and 13.2% for the three and nine months ended March 31, 2009, respectively, as compared to a negative 58.1%, and a negative 36.1% for the same periods a year ago.

Net income for the three months ended March 31, 2009, was negative $5,015,000 or negative $0.26 per fully diluted share, which is a decrease of $0.43 from the $3,277,000 or $0.17 per fully diluted share last year. Net income for the nine months ended March 31, 2009, was negative $4,360,000 or negative $0.23 per fully diluted share, which is a decrease of $0.47 from the $4,824,000, or $0.24 per fully diluted share last year. Per share results are based on $19,095,713, and $19,626,043, fully diluted weighted average shares outstanding for the three months ended March 31, 2009, and 2008 respectively, and $19,269,896 and $19,873,655, fully diluted weighted average shares outstanding for the nine months ended March 31, 2009, and 2008 respectively.

With regard to the balance sheet, I just want to reiterate what Dick stated, we generated $4.1 million in cash flow from operations thus far this year, we ended the quarter with $2.6 million in cash, and our total debt position was reduced this quarter by approximately $3.8 million. As of March 31, 2009, there was $11.1 million outstanding under the revolving credit facility, and $23,214,000 outstanding under the term loan, each with an interest rate of approximately 5%. Our net debt position, inclusive of cash, stands at $31.9 million.

We continue to work hard on inventory reduction, and we were encouraged by the $1.9 million decline that occurred this quarter, and our aggressive efforts in this area will most definitely continue. That concludes my formal remarks, and I would now like to turn the call back over to Dick.

Thanks, Kevin. As we look ahead to the remainder of fiscal 2009 and beyond, we remain confident in our ability to building Napco into a Company that develops the most technologically advanced, intuitively designed Security Solutions for the vast Security marketplace. We continue to believe strongly in our business model, and believe the acquisition of Marks USA has helped us expand our reach and rounds out our product portfolio. We believe that our exciting new product offerings, including those with recurring revenue opportunities, along with the integration of Marks, will add value to our Company's position in the marketplace, and build Napco into the premier provider of unique, top-notch, cutting-edge, Security Technology products.

While we don't know what the troubled economy brings in the short-term, we do know, given our 30-year track record, that our formula works in the long term. Our high-quality products keep dealers and installers returning for more. As we complete the integration of Marks along with our other expense-cutting initiatives, we continue to anticipate consistent cash flow that will help us continue our R&D efforts, as well as reduce debt levels.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions) One moment, please, while we poll for questions. Our first question comes from Joe Giamichael with Rodman & Renshaw. Please proceed with your question.

Thanks, good morning, guys.

Good morning.

Good morning, Joe.

I'm a little surprised, I guess at how fast and how badly the wheels came off, and I guess, as an outsider looking in, I'm wondering if communication somewhere along the lines could have be a little bit better. I've got four companies with earnings out today, and this is a pretty big negative surprise. So I guess, backing out the restructuring costs, your gross margins are still about half of what they have historically been. What else is going on there?

Basically, Joe, at a very low volume, which is what we incurred this quarter, a $14 million volume is very low for us. This place is built to do a lot more. Our Company last year without Marks did $16 million. So this year with Marks, $14 million, you could see that's a big drop. And at that low level of sales, the margins are going to get hammered because we have our factory setup, and our structure, and all of the overhead, and we need that sales volume, that top line, in order to absorb it to show any sort of a decent GP.

When the volumes get much higher, our profits go up, and the reverse is true, the margins will go way down when the volume is very low. That's what we had this period. So we have adjusted our structure here to be at much lower volumes, and we have adjusted it in such a way that when the volume comes back, we could react really quickly.

So a lot of this happens at the end of our quarters, that's what happens. It's not like we're rolling along in the quarter and see it coming. A lot of our business comes towards the end, so a lot of this negativity happened at the very end.

Okay. Can you walk us through what some of the cost-cutting initiatives have been, short of what you are doing with Marks?

We did a cut of wages, across cross the board; that's number one. So everybody is taking a pay cut, everybody top to bottom, here, DR, Marks, everywhere. That's number one.

Number two, we have laid off a bunch of people here and in the DR, and we did that effective, probably the beginning of April. So that takes effect this period. The consolidation of the warehouses, we have two warehouse operations going, both in the Middle East and in the UK area for Europe, and we have closed both down, and all sales transactions will come out of this facility or out of the DR facility.

Those are the main steps we have taken. We have cut a lot of other costs; any discretionary types of costs have been cut, all contracts are being reviewed, every area is being scrubbed going through to reduce cost.

Okay. And so I guess on an SG&A basis, you have been trending up to approaching $5 million a quarter. Where do you foresee that going forward with, after these reductions?

I'm not prepared on this call to give you numbers, but we will save money because of the salary cuts. A lot of the SG&A is salary driven. The SG&A will be lower because commissions is part of SG&A. Freight out is also part of it, so that will be reduced. And then there are other areas within the different categories, a lot of contracts that are being cut out or reduced, so I'm not prepared on this call to put out a number, but it will be less than the $5 million run rate.

Okay. And taking a look at Marks, can you walk us through, and I know this is all publicly available information, but just to get handle on the order of magnitude of the change of moving the manufacturing abroad, can you walk us through what this business looked looked like independently on a (inaudible) month basis, and then talk about what the outsourcing can do to it?

Well, we don't break out the Marks piece. But let me just talk a little bit about the Marks sales this quarter. Marks sales this quarter was down, but it wasn't any lower than we anticipated. Marks business is a little different, it's not distributor related.

A lot of what occurred this quarter was anticipated, and so while we don't break it down, the Marks piece was not a disaster this quarter. It did kind of what we expected, lower than the level that we were at when we bought the company, obviously, because the world changed after he did the acquisition, but not at a ridiculously low level.

So what we have done with Marks is they have reduced their costs as well. They have taken pay cuts just like us, but we have begun the process of moving a lot of the manufacturing. And the first line of production was moved in March, and we ran parallel, and then we did the same thing in April, we pulled the plug on running parallel for that line. We added another line in April, running parallel, doing the same thing in May. And so what we're doing is basically one production line after another, we are doing the same thing.

Okay. And then you have a lot of money tied up in your working capital, and I know that had a lot to do with building inventories with Marks and the anticipated transition, so I'm assuming we should expect to see reductions in your working capital coming as a material source of cash over the next few quarters. Can you give us some sense of what your targeted working capital numbers are on a normalized basis?

The thing that will help our working capital levels is inventory reduction, that's number one. We're working very hard on inventory reductions; that's going to help us. The movement on the Marks integration will help a lot, but that will all occur at the back end the calendar year, and so you'll see more of that improvement towards the back end of the year, more in the January through June back end of the fiscal 2010 period.

But right now, inventory reduction is going to help working capital the most, plus all of these cost-cutting measures that we've taken are going to help immediately.

Joe, if it's okay with you, it's Don Weinberger, let's get on with some other questions. There are many people on the line and we'll come back to you as we go through the call, if that's okay.

Our next question comes from Richard Molinsky with Max Communications. Please proceed with your question.

Hi, guys.

Hi.

In the news release you say as of March 31st, the Company was not in compliance with certain financial covenants contained in its credit facility. You received a proposed waiver in amendment from its lenders, [expect that] to be done. Can you explain what you weren't in compliance with, if you don't mind me asking, and why do you feel so certain you will have that done within 30 days?

There were three financial covenants. All three we violated. We also violated it last quarter as well, and we got a waiver.

Right.

And probably the one before that as well. So this is the third time in a row, and what we're trying to do is fix the covenants to a point where we can not have to keep going back to the bank. So we're going back and forth with them.

We have now, we believe, have hit the bottom of where we're going to be, and we have given them projections, and on those projections we're going to set new covenant levels, and based on those new covenant levels, we're going to have a new arrangement going forward in terms of what those three covenants are, and - -

And you feel pretty confident you will have a deal done on that?

Yeah, this process has been going on with our lenders for a while, and now as a result of finishing the Q we probably will finish this within 30 days.

Okay.

That's kind of our commitment to them, and their commitment to us. We'll get it done within 30 days. It's not going to drag along.

Okay.

We would expect the next quarter, which is our year end, we won't be going through this, because we will have set the covenants at some more realistic levels, based on today's economy.

This is the last question. How much more expensive do you think (inaudible) it will be going forward with the banks. It must be asking for high interest, doing something?

It's hard to say, Rich.

Okay.

The new goods is we have a very good relationship that goes way back, with our lender.

Okay.

If we had a bank that didn't really understand our business, I would be a lot more worried. We've been through this before, not like this, but you have ups and downs and they usually work with us pretty well. You'll see it within 30 days.

Okay, any [insight] of buying that you expect from any Board members in the next - - coming in has anyone inquired about it at these prices, or, I mean that shows confidence when the insiders are buying after news like this comes out. I don't know if that's been talked about.

They are independent directors, and it's up to them. But the opportunity is such that everybody needs more security, and that we expect to bounce back from where we are. This was a very unusual time, because of the fact that there was a lot of de-leveraging of inventory by our distributors.

The primary demand by the dealers that do the installation of all of the Security products is about what it was a year ago, but the distributors that supply, they were de-leveraging, but that is going to balance out, because as the dealers pull out the inventory supply from these distributors, the distributors are going to have to reload to get additional product. So we expect this to happen, and everything to become more normalized, but this was quite an aberration.

I hope so. I hope it doesn't happen again, I'll tell you that. But thank you very much guys, I know you'll make it work.

Thank you.

Our next question comes from Otis Bradley with Gilford Securities. Please proceed with your question.

Hi, good morning.

Hi, Otis.

Could you describe the pay cuts a little bit more, the range and what happened at the top and the bottom, just a little more description?

Basically everybody, from us all the way down, took a pay cut, and that's how we have done it. In addition to that, our factory, the same way, in the Dominican Republic, and then we had some additional layoffs of labor that we didn't need right now, which could be brought back on, as the business starts picking up. We're poised to operate at a much lower cost of operation, kind of in balance with what the sales are at this low point, but quickly we could ramp up, as the sales comes back, and that's what we have done.

We didn't do anything that damages the characteristics of our business, where major people that are important to the growth of the business were terminated. We have just all taken pay cuts in order to get everything balanced out.

Yeah, but describe it, did the CEO take a 1% pay cut, and the bottom guy 199%, or give a little flavor to it.

All of us took the same ratio.

Okay. That's good.

Everybody.

That's very good. Thank you.

Okay.

(Operator instructions) Our next question comes from Rick Fetterman of Fetterman Investments. Please proceed with your question.

Good morning, everyone. Just a comment you just made with the previous caller, did you say that with the restructuring that you have done, that you will now be able to operate profitably at the current level of revenue, annualized?

We believe that that's the level that we can operate profitably at, although we don't expect to be at that level.

I understand that, certainly hope not.

Right. That was the goal, that to be able to structure something that we could operate at this low level going forward, and if we go past this level, which we're in our fourth quarter, which is usually better, maybe it won't be as good as it was last year, but should be better than the prior quarters, it should be better than what you saw this round.

Yeah, the fourth quarter, typically is stronger quarter, and we're geared now operate at profitability at this lower level. So if the fourth quarter holds true, which we would expect it has always been, we would see profitability. That's our estimation.

Well, along the same lines, is there any color, or do you have any indicators thus far, that lead you to believe that the de-inventorying process that you described in the news release is in fact bottoming, and are you seeing any increase in orders here in the first half of the fourth quarter?

I think that what we have seen so far on the direct accounts that we have. The ones that we sell direct to, that their business has been holding its own. So that's the first sign that we see. Then we get statistics - -

It is not getting worse, but it seems to have bottomed?

Right, it's not getting worse. It looks like it reached its bottom. And we also get reports and statistics on what we call the sell-through data. The sell-through data shows us that this is how much we're selling to our customers. These are the distributors sales to the the ultimate installers, the dealers.

We look at that data, that looks like it is starting to pick up, at the very least, holding its own. So, from our perspective, these guys that are reducing their inventory, if things hold their own from the sell-through point of view, they have got to come back to us, so it's hard to measure it exact. I think what we just saw is the worst; whether it is going to get much better in Q4 or not, that's hard to say, but we think we hit the bottom.

The dealers for the most part get used to using the products, because they know they are reliable, they know how to program them, and they install them, and they're out bidding for jobs and winning jobs in all aspects, in all areas, of building security. It could be commercial buildings, retail, even residential.

A lot of the dealers are doing after-market sales, so all of these different areas of building, and building security. And they keep specifying and using our products in all of our different divisions. The de-inventorying by the distributors is such that eventually, the distributors get to such a low level that they are not going to be able to support the dealers, and the dealers, for the most part, shop around at different distributors, because there are a lot of distributors that are selling our product, as we said, 90% of our products are sold through distribution.

So unless the distributor is going to lose business and have it shift, because the dealers must get these products, the dealers don't buy lots of inventory. They buy by job, and they shop around for the best deals. Unless they get this product from the distributor, the distributor is going to lose business. So when the distributor's inventory gets very, very thin, he is going to have to reload his inventory, and that's what we would expect is going to be happening in the quarters going forward.

But the vitality sign of the dealers, doing installations, buying product, and we get the feedback on that through the reports, seems to be the same as it was a year ago, and that's when the economy was doing a lot better, so we would expect this to balance out. We can't exactly predict when, but we think this is the bottomed-out quarter, especially because the percentage of growth in the fourth is always stronger. It's kind of the busy season for Security, when everybody gets very, very busy, so that's what we are feeling and seeing right now.

Going to Europe and the Middle East, closing the warehousing operations, I'm wondering what the potential negative impact is there on sales and service, does it lead to the perception in those areas that you are exiting those markets, or are in fact, are you exiting those markets?

Well, we're keeping our sales force and our sales technical over there, but the actual inventory and having warehouses doesn't really pay for us, because of the fact that it's expensive to operate those; in addition to that, we have to supplement, on a fairly regular basis, product from the US. So having inventory spread out across the globe, and not having enough inventory because we have so many SKUs, was not efficient for us.

It is better to keep the sales force and technical services in the local markets and ship the quantities from New York. We have one consolidated inventory, and we have all of the pieces in one area, and then the distributors will have to wait a little bit longer to get their merchandise, but we figure that's more effective today. And that's what we have decided to do, and we have actually done it.

And we have done this before, before we had these warehouses we shipped out of this area. The European customers are not going to lose the advantage of getting duty-free product if we ship out of the Dominican Republic. That's a big factor too. So while the timing won't be the same, there are other advantages they are going to keep.

In fact we have also brought on a new VP of international that has been with us now a month or so, and has seen a lot of our customers and talked to all of our customers, and we believe that we can grow our business into more of the products that we manufacture. And last year, we had a lot of sales with the buy/sell products. The buy/sell products were items which customers has asked us to supply them. We bought it from one person, one manufacturer, and then sold it along with our products. The margins weren't very good, and we didn't absorb any overhead with that.

So this new year that we're in now, we don't want to do a lot of buy/sells, we want to have a focus and concentration on products that we manufacture, and we manufacture wonderful products, and a lot of the foreign companies realize that US technology is the best, and we have excellent products, and we want to focus on selling products that we manufacture so we can amortize our overhead costs into items that we manufacture. And that's the big drive with our new VP of sales, and with the consolidation that we're doing.

The first caller asked a question that you didn't really answer, and I would kind of like to go back to it again. I think it would be helpful and not at all out of line asking for some kind of yardstick or amount for you to give us for expected, or hoped-for cost savings from the restructuring and cost-cutting, and the Marks integration, say beginning in January of next year. There's no way for us to know whether you are doing as well as you had hoped, better than you had hoped, worse. I mean, if you save $0.5 million, you can say look what we did, we saved $0.5 million, but what we were really trying to do is save $5 million. I just think this is something - -

Rick - -

Most companies are not reluctant to respond to this.

I think we have said in the release several million, we have put that in the release. To me that's $3 million [plus]. That's the level of savings. So it gives you guys some barometer of what we're talking about. How much of that do you expect to be permanent and how much temporary, I mean because when things get a little better, I imagine the payroll reductions are going to - - ? Right. So the Marks integration integration piece, which is permanent, and the warehouse, let's assume that those are permanent, and not the salary, so you are talking in the range of $2 million out of the $3 million , let's say, we're talking rough here.

Okay. That's fair enough. Two last questions, and I'll get out of the way, and let the next guy in. What's the target, let's say six months from now, for inventory level, where you would like to see it?

Probably repeat the performance that we just did, we reduced by about $2 million in this quarter. I'm hopeful we could reduce even more in Q4 if the sales levels are high like their usually are. That's usually our best inventory reduction.

We want to have a $2 million plus every quarter, so if you are talking about six months from now, at least reduced by $5 million by then, $5 million more.

Okay. Last question is, obviously this is a tough time for everybody, and it appears that you may not generate the sales level even after the Marks acquisition that you had last year, the $68 million or so; are there any bright spots out there, or are things, are they kind of bleak across the board?

Well, from the point of view of the recurring revenue products, the two recurring revenue products which is IC Video, Video View, the StarLink, those type of products, we're building a very nice dealer following on those, and these are the first group of products where we get recurring revenue as a piece of the monthly recurring revenue sales which we get from the dealers who put the consumers on to our servers and networks, and we lease the space to them. So that's very, very encouraging. We see very positive signs and we see upward graph of growth in that area.

When it comes to our Locking area, we just did the International Security Conference Show about 45 days ago, and we showed our new Radio Control Locking, and that was very, very well received. And we're starting to ship that in this quarter that we're in right now, and we believe that that is a very strong growth area, and a change for the Locking industry, and we have done it in a way that our dealer base seems to have adopted it, and likes it very much, because they don't have to learn how to re-program in a different way to use the radio control locks.

These are locks that put in to hallways, and are controlled by a radio-controlled network, so you can actually control the locks over the internet, and don't have to go to a door, and re-key a door, or change the codes of a door manually, you can actually do it over the internet. So that was very well received.

Our new Control Panel Cosmetics, which show blue LCD, and bigger numerals, and more features, those products were well received at the show also. So there are a lot of positive things that we see for the future, and the dealers, as we said, are busy. They are not doing much worse than they were doing last year, and as the economy continues to go along, if we see high unemployment, which is higher than it is now, right now, I think it's about 9%, and if it goes above 10%, we expect that there is going to be more needs for Security, because we have a very unstable world out there, and people are going to have to protect their possessions and their businesses, and that's what we do.

Our dealers are in their prime busy season now, and we expect to get additional business from them. We should look at the de-inventorying by distribution, as abnormality, a speed bump, and not as the way it is going to be. Within this quarter or next quarter, all of that should level out, because the dealers are still pulling the merchandise out of those distributors, and they are going to have to reload, so that's what we see.

Guys, thanks a lot. I appreciate all of the help.

Thank you, Rick.

(Operator instructions) There are no further questions in queue at this time. I would like to turn the call back over to management 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 Don, 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 fourth quarter and year-end results. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.