NAPCO Security Technologies Inc (NSSC) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Napco Security Technologies Incorporated year-end financial results 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 you host, Mr. Don Weinberger of Wolfe Axelrod Weinberger Associates. Thank you, Mr Weinberger, you may begin.

Thank you, Manny. Good afternoon and good morning to those of you on the West Coast. Thank you all for joining us for today's conference call to discuss Napco's financial results for the fourth quarter and year ended June 30, 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 Associates, at 212-370-4500 and we will immediately send you the release either by fax or e-mail. 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, CEO of Napco, to discuss the particulars of this morning's news, please 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 Technologies. Dick, please proceed.

Thank you, Don. Good afternoon, everyone, and good morning to those on the West Coast. Thank you for joining Napco's quarterly conference call to discuss the financial results for the three and 12 months ended June 30, 2009. Fiscal 2009 has been a transitional year for Napco. Early in the year we completed the largest acquisition in our history, Marks USA. As many of you know, we completed the integration of Marks USA a few weeks ago by transferring all of Marks' operations from the separate lease facility into our existing Company owned facilities in Amityville, New York and the Dominican Republic. The transition was a smooth one and has begun to save costs now that Marks USA is housed under one roof with our other businesses. By combining Alarm Lock, Continental Access Control and Marks USA, Napco now offers one of the most comprehensive range of door technology products available in the marketplace.

More importantly, it should also enable Napco to grab additional market share within the industrial and commercial security markets. During this past year, we also saw the largest economic downturn in the US and foreign markets in the past 35 years. This affected Napco, as 90% of the Company's sales are conducted through distributors that sell to thousands of our alarm and locking dealers, both domestically and internationally. As a result of the economic downturn, which led to major credit line and banking pressures, these distributors were forced to dramatically reduce their carrying inventory levels in the second half of fiscal 2009. This inventory reduction process, although expected to be temporary, hurt the Company's sales and profits in the back half of the fiscal year, particularly in the third quarter, despite primary demand remaining steady from our dealers who buy from those distributors.

While certain economic indicators are beginning to signal that the recession has bottomed out, we believe we are close to bottoming out on this de-inventorying process at the distribution level as well. An increasing need for security as a result of the decline in the economy and the resultant increase in crime levels has kept dealer demand for alarm and locking products at respectable levels and we continue to be cautiously optimistic that such demand will lead to increased sales and profits during the upcoming fiscal year. Looking forward, the cost saving measures that we implemented and disclosed during the second half of fiscal 2009 will continue and we expect to see the full measure of those savings during fiscal 2010. Furthermore, we intend to continue to examine all operating expenses for additional savings, especially in these difficult times.

We are also continuing to observe -- absorb certain production of the Marks products into our production facility in the Dominican Republic, which will lower both the labor and overhead costs as compared to producing those in New York. Napco's cost savings from the completed integration of Marks should approximate $2 million per year. We believe that the restructuring and cost saving measures we completed this year and which will continue during fiscal 2010 positions Napco to take advantage of emerging opportunities when economic conditions begin to improve. And now I'd like to turn the call over to Kevin Buchel to briefly review the financial details of the financial results. Kevin?

Thank you, Dick, and good morning and good afternoon to everybody. As for our financial performance, Napco revenues were for the quarter $19 million and that's a 35% sequential increase over revenues of $14 million in the third quarter of fiscal 2009. And it's a 14.1% decrease from the $22.1 million revenue for the fourth quarter of fiscal 2008. Total revenues for the 12 months increased 2% to $69.6 million from $68.4 million. Gross profit was $3.5 million for the fourth quarter, as compared to $4 million last year. Gross profit before any restructuring costs was $16.2 million for the year ended June 30, 2009, as compared to $20.4 million for the prior year. Restructuring costs of $1.1 million were recognized in fiscal 2009 and it related to the consolidation of our European and middle Eastern warehousing operations into Napco's headquarters in New York.

The decreasing gross profit for the fiscal year in both absolute dollars and as a percentage of net sales was due primarily to the decrease in net sales of the Company's non-Marks products and the resulting reduction in overhead absorption in the production of these products. In addition, overhead absorption was further impacted in the fourth quarter and here's why. At the end of the March 2009 quarter, we announced that production and overhead levels were reduced to better align with the lower sales levels in the third quarter. By aggressively utilizing existing inventories in the fourth quarter, we were able to reduce our production levels even further below the previously lowered expected sales levels. The result was we reduced our inventory by $6 million. While beneficial to cash flow and most other financial metrics, one effect of reducing production levels significantly below the sales level is reduced absorption of fixed overhead expenses.

The Company also recorded two noncash charges during the fourth quarter of fiscal 2009. A noncash charge of $894,000 in amortization expense for Marks USA intangibles and a noncash impairment charge to goodwill of $9.686 million relating to acquisitions made in 1985 and 2000. There was no impairment charges related to the Marks USA acquisition, which was completed during fiscal 2009. Selling, general and administrative expenses increased to approximately $5 million in the fourth quarter, from $4.5 million in the same quarter one year ago. For the fiscal year, SG&A expenses were $20.2 million, up $2.9 million from $17.3 million in the prior year period. These increases resulted primarily from the addition of Marks expenses in fiscal 2009, including $1.231 million in amortization expense on goodwill and other intangible assets. Interest expense increased by nearly $300,000 to approximately $500,000 during the fourth quarter, as compared to the same period in the prior year.

For the fiscal year, interest expense was $1.6 million, up $800,000 in the prior year period. These increases were due to the increase in the average outstanding borrowings due to the additional debt incurred to purchase Marks USA. The outstanding borrowings net of cash under our lines of credit stood at $29.3 million at the year-end and that's a $2.7 million decrease compared to the end of the third quarter ended March 31, 2009, and it's down $6.6 million from the $35.9 million level since acquiring Marks USA in August 2008. Napco's loss before the benefit of income taxes was $11.7 million in the quarter and that's versus a loss of $0.7 million in the prior year's results, primarily due to the aforementioned two noncash charges during the fourth quarter of fiscal 2009. For the fiscal year, the loss before the benefit for income taxes was approximately $16.7 million, versus income before benefit for income taxes of $2.3 million in the prior fiscal year.

Net loss was $9 million during the quarter, in comparison to a net loss of $1.1 million in the fourth quarter of fiscal 2008. For the fiscal year the net loss was $13.4 million, compared to net income of $3.7 million in the prior year period. We reported fully diluted loss per share of $0.48 during the fourth quarter, compared to the prior year's quarter loss of $0.06 a share, and for the year the fully diluted loss per share was $0.70 compared to $0.19 per share in the prior fiscal year. Now as previously mentioned, we've had a lot of noncash and in some cases onetime expenses. It's therefore important to point out that our adjusted EBITDA as per the schedule included in this morning's release, which hopefully you've all seen, was a positive $13,000 for the fourth quarter as compared to a negative adjusted EBITDA of $125,000 last year. And for the year ended June 30, 2009, our adjusted EBITDA was negative $159,000, compared to $4.6 million last year. Napco's balance sheet continues to show further improvements.

Inventory reduction in the quarter ended June 30 was approximately $6 million and that's as a result of aggressive utilization of existing inventories. Our cash generated from operating activities was approximately $6.8 million for the year and $2.7 million for the quarter ended June 30, 2009. As a result of the cash flow, debt, net of cash, was reduced by $6.6 million from $35.9 million to $29.3 million since acquiring Marks USA in August of 2008, and $2.4 million of this reduction occurred in the fourth quarter of fiscal 2009. That concludes my formal remarks. And I'd now like to turn the call back over to Dick.

Thanks, Kevin. As we look ahead to fiscal 2010 and beyond, we remain confident in our ability to build Napco into a Company that develops the most technologically advanced and 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 reoccurring revenue, 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.

We believe that our long-term prospects are excellent, due to the profound value of our products provided across the broad security market. Our strong product offerings and ongoing emphasis on advanced security technology solutions to our customers should enable us to weather the current economic downturn better than many other companies. To sum it all up, we are clearing the decks for growth. That concludes our formal remarks. Kevin and I would like to open the call for questions. Operator, please proceed.

(Operator Instructions) Our first question comes from the line of Joe Giamichael with Rodman & Renshaw. Please go ahead.

Good afternoon, gentlemen.

Hi, Joe, how are you?

Not too bad. Just a couple quick questions for you. First it seems that from a working capital standpoint you've done what you said you were going to do in terms of working down inventories. Receivables still seem a bit high, at least from a DSO standpoint, given where the revenue run rates are. Can you talk a little bit about whether that has to do with dealers asking for better terms or extensions or what's really driving that?

I think, Joe, that the receivables we've tried to pull in and not give longer terms. We're being more cautious, more aggressive. The terms in this industry tend to be long and we've tried to pull them in, whatever they've been, by about 30 days and not go the other way. In this economy, you can't be too careful, obviously. So we're not giving longer terms. We're giving shorter terms. And we just have to aggressively be vigilant about collecting it. And we think we could ring out a lot more money from the receivables and the inventory to continue to improve our cash flow as we go forward.

Had the inventory build been largely a result of the intentions of the transition with Marks and now that's kind of reversing itself?

No, I would say -- I would say our inventory build-up was based on the projections that we thought we needed to have based on having a sales level of $90 million plus, because when we bought Marks that's where our sales level would have put us and obviously the economy changed and our inventory levels were high. We were all caught short, so-to-speak, and now we've just aggressively tried to bring down inventory. That's what any Company has to do in this day and age, just not rely on their lenders, rely on themselves and bring down their inventory level and that's what we're going to keep doing.

And just one last question regarding covenants. Can you just remind us what the covenants on your existing debt is and what if any changes there have been to them?

Well, the covenants that are in place were violated as a result primarily of that goodwill impairment. That knocked us out. And so what we need is we need a waiver and and amendment. What will happen is hopefully our lenders will get this done this week. We will get our waiver and it will amend the agreement somewhat and we will move forward to, hopefully, not need waivers every quarter. This part, this time we got caught short because of the goodwill impairment, kind of an unusual thing. Hopefully as we go forward, we will have projections in place, deliver on those projections and won't need waivers as we go forward, but we expect to get the waiver this week.

Okay. Great. Thank you for taking the questions.

Okay, Joe.

Thank you. Our next question is from the line of Jack Granahan of Granahan Investments. Please go ahead.

Thanks. Kevin, you were talking about the under-absorption due to low production as you were trying to whittle down the inventories back in that June quarter. I'm just wondering, I know your September quarter seasonally is lower in sales, but do you expect to see a significant production build there to at least lessen that penalty to earnings?

I think we can expect to have as big a reduction in Q1 that we just had. Our goal is to continue to try to reduce the inventory as aggressively as we can, even if it has negative P&L ramifications. I don't expect it to be anywhere near what we had this quarter, but we do expect more inventory reduction as we go forward.

Okay. Okay. All right. Thanks.

Okay, Jack.

(Operator Instructions) And our next question is from the line of Tony Fitzgerald with Axiom Capital. Please go ahead.

Hi, Dick, it's Tony Fitzgerald. Thank you for taking the question. To what extent were product overlaps from the Marks acquisition going to displace some of the products in your inventory?

There was about a $1 million overlap. The original sales of Marks was $24 million and about $1 million overlapped. Most of their products are very unique to the industry and of course unique to our Alarm Lock division, so that's great for us because it allows us to offer a much broader array of products to our installation companies. And we've become a one stop shop and we're going to see the advantages and leverage of that going forward because of the fact that Marks and Alarm Lock become 90% commercial, convert Napco's business to 90% commercial, and that's very good for us. So it's going to help a lot in our distribution and it really supplies a broad array of products to us.

Great. Thank you.

Thank you. Our next question comes from the line of Rick Fetterman with Fetterman Investments. Please go ahead.

Good afternoon, everyone. I've got several questions, Dick and Kevin. Do you -- do you still anticipate the completion of the move to the Dominican by the end of this calendar year?

That's our goal. Our goal is to get the products that we're working on, which can be mass manufactured, to the Dominican Republic by the end of the year.

Do you expect at this point any additional cash or noncash charges as a result of the completion of the move?

No, the only noncash charges that we will have going forward is we have to continue amortizing the intangibles relating to the Marks acquisition.

Right. I understand that. But I mean in terms of just the physical move.

I think the worst is over, whatever we've spent. We spent -- we've spent some money moving them into our facility. They're now here. So I don't anticipate any real expenditures going forward.

All right. With the move of the Marks manufacturing to the Dominican, if -- if revenues stay at the run rate we just saw this past quarter, can gross profit margins get back up around the 30% range?

I think they could, but we've got to be careful with the inventory reduction aspect of things. Under normalized, non-growth or decline of inventory, I think that's a real possibility. We were hit this quarter because we really lowered our production levels dramatically to try to wring out inventory and we are going to keep trying to do that. Again, I don't think it will be as dramatic as it was this quarter, but there is more to wring out and in that wringing out process, that could lower GP by a few points other than what we would normally see. So after we get more normalized with inventory levels, then I think you could hope for a 30% level on these type of revenue levels.

All right. Can you talk about, either Dick or Kevin, the business that creates the recurring revenue stream and possibly quantify the current level of that recurring level -- revenue. I realize it's just at the early stages but be interesting to know where you are right now.

Okay, the recurring revenue products that we have are IC video, which is a video system that consumers can watch video in their home or their business on their cell phone, on multiple cameras and that is sold by our dealer network to clients of the alarm companies. So many of our dealers have thousands and thousands of consumers that they're monitoring their burglar and fire alarm for. This is an additional product that they're marketing to those consumers and we have steady increases in that product. Every single month, more and more of the dealers are getting into it. We're creating a new market and we have a steady growth in that from our average dealers. We also have a branded product that we make for the largest alarm companies, different brands, because the large alarm companies want their own name on the products. But it's ours. Some of them are now shown on TV commercials on TV.

I'm not at liberty to discuss the companies, but when you see video of a cell phones on some of the major commercials on TV, that's the Napco product being sold by these companies. And those large companies also have steady, steady growth, month after month, adding more accounts onto the servers, which are our servers which make the system work. So we're -- we're optimistic that this is going to be and will continue to be a very substantial portion of our business, of our recurring revenue business. That's recurring revenue business, number one. Recurring revenue business number two is our star link backup radio and primary radio transmitters. This is sold to consumers because in a lot of homes today, there are no dial-up telephones. People under 30 years old, for example, don't really put up dial-up phones and the only way you can communicate a fire or burglary is through a radio system.

And we have star link, which is a radio system which hooks onto our alarms and any alarms that are out there and transmits over the cellular network to the central station. And this is growing steadily also. So the dealers are putting on our star links and as they put on the accounts on our star link system, our network system, we get recurring revenue for utilizing our system. So those are two things that we're doing which are growing steadily every single month.

Can you -- can you give us an idea of what kind of monthly or annual revenues are currently coming in from these two programs?

I can't -- I can't break it out for you because it's proprietary information, but there're tens of thousands of these systems that are online now and we keep adding more and more every single month.

Okay. Can you -- how are things in Europe and the Middle East?

Well, European sales also have been hurt, like in the US, so the European sales are down compared to a year ago and the same thing in the Middle East. We were doing a lot of work around Dubai and those areas and those economies have stalled over there, especially Dubai. I guess everybody's heard about that. So that business has stalled. So it's like in the states. Probably the Middle East is a little worse. And that's what's happening over there. We do have a new Vice President of International, who came from a large system companies and is an experienced man for more than 20 years and he's running that business for us, both in Europe and Middle East and Southeast Asia. So that's -- that's basically the story on that.

Now that the first quarter is a day away from being over, can you -- do you want to make any comment about how revenues look relative to -- I'll say this, the quarter that just ended?

Rick, we can't really comment on it. We do feel better about our position here than we did in the third quarter. The third quarter to us was the bottom and really it was the bottom for two reasons. One, the revenue level was low and also, our expense level was high. We can't predict -- we can't comment on where our revenue is going to go. Our first quarter is our weakest of our four but we could say this, we're positioned to, from an expense point of view, to give a much better presentation no matter what the sales level is going to be. And then as the year goes on, we all know, those that have been with us for a while, we know the sales get progressively better and we have no reason to feel otherwise, even in this year. And the hope is with the encouraged fourth quarter results from a revenue point of view that that trend will continue throughout fiscal 2010. It made us feel good.

The last item before I get out of the way and let someone else in, is the last call you had commented that at $65 million, $68 million in revenue that the Company would be profitable. And ignoring the nonrecurring, noncash charges and the one time items, if you had not been in a position of having or choosing to liquidate inventory at the level that you did, at the pace that you did in this last quarter, would the Company have been profitable and is $65 million to $68 million still a number where you can breakeven?

I think so, because if you look at the schedule that was part of our release this morning, you saw that it was, from a, at least from an EBITDA point of view, was basically a breakeven. And that's with a hit to GP because of the inventory reduction. If you don't have that kind of inventory reduction, that breakeven bottom-line number would obviously be a lot better. And that's -- that's what the Company's set up to do. It's set -- it's set up to make a nice living at these lower levels and when sales comes back, then we start to get to the better, higher GPs, high 30%, pushing towards 40%. That's the plan. How fast that comes, from our perspective it can't come fast enough. But we can't predict when that will be.

Thank you so much. Appreciate you taking all my questions.

Okay, Rick.

Thank you.

(Operator Instructions) We have further questions in the queue at this time.

Okay. Thank you everyone for participating in today's conference call. As always, should you have any further questions, please feel free to call Don Weinberger, Kevin Buchel or myself. We thank you all for your interest and support and look forward to speaking with all of you again in a few weeks to discuss Napco's first quarter results. Thank you.

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