NAPCO Security Technologies Inc (NSSC) 2010 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Napco Security Technologies Incorporated second-quarter 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 your host, Mr. Don Weinberger, of Wolfe Axelrod Weinberger Associates. Thank you. Mr. Weinberger, you may begin.

Thank you, Melissa. Good morning and thank you all for joining us for today's conference call to discuss Napco's financial results for the second quarter ended December 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 Associates, at 212-370-4500 and we will immediately send it to you either by fax or e-mail.

On the call with me today is Mr. Richard Soloway, Chairman and Chief Executive Officer 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 this morning'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 Technologies. 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 three and six months ended December 31, 2009.

The second quarter of fiscal 2010 marked the first complete quarter with the Napco and MARKS USA operations under one roof. Just a few months ago, Napco completed the move of all of the operations of the MARKS subsidiary, acquired in August 2008, into Napco's headquarters in Amityville, New York. The Company expects to complete the integration of production from the US to its Dominican Republic facility on or before its fiscal year ending June 30, 2010.

Upon the completion of the integration of MARKS, Napco's cost savings should approximate $2 million per year, and we believe that with these cost-saving positions, the Company takes advantage of emerging opportunities when economic conditions begin to improve.

We also saw that at the sales levels, which had shown some improvement at the end of last quarter and did not regress in the current quarter, and we were able to show additional cost containment relative to one year ago, as well as the first quarter of 2010.

As previously reported, the financial crisis continues to have an adverse effect on our distributors, and as a result, they have been carrying less inventory than usual. That situation improved at the end of last quarter, which led to a considerable increase in the Company's backlog as of September 30, 2009 to $3,270,000, which was 95% higher than the June 30, 2009 level of $1,675,000.

After shipping most of that backlog, there was once again an increase in the level of sales orders received by the Company at the end of the recently-completed quarter ending December 31, 2009. That situation led to a considerable increase in the Company's backlog at December 31, 2009, which amounted to $2,817,000, which is considerably higher than the aforementioned $1,675,000 at June 30, 2009.

We continue to be hopeful that these sales levels are an indication that the effects of the economic recession have possibly bottomed out. As efficiencies increase for the MARKS consolidation, we are cautiously optimistic that sales and profitability will begin to improve during the remainder of this fiscal year.

Despite the challenging economic environment, we expect the Company to emerge from this slowdown in a superior competitive position. Throughout this downturn, we have not sacrificed strategic product development and continue to devote a percentage of revenues to research and development.

In each of its served markets, Napco will continue to offer engineering products that are of high customer value and the highest caliber of technology, including strategic recurring revenue products such as iSee Video and StarLink.

Due to the significant number of new product offerings recently introduced, we are currently planning for the next major trade show, which attracts the largest professional security audience. Napco will present at the upcoming International Security Conference and Public Security and Safety Expo, both at the Sands Convention Center on March 24 through March 26, 2010, and we expect strong interest from attendees with regard to several newer strategic products.

And 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. Sales for the three months ended December 31, 2009 decreased by approximately 13% to $16,641,000, as compared to $19,079,000 for the same period a year ago. Sales for the six months ended December 31, 2009 decreased by approximately 15% to $31,106,000 as compared to $36,562,000 for the same period a year ago. The decrease in sales for the three and six months ended December 31, 2009 was primarily from the decreased sales of the Company's intrusion products and door locking products, as well as decreased sales in the Middle East.

The Company's sales continue to be adversely affected by the worldwide economic downturn, primarily since the quarter ended March 31st, 2009. But as Dick mentioned, we are encouraged by the increase in the level of sales orders that we received at the end of the recently completed quarter.

Gross profit for the three months ended December 31, 2009 decreased to $3,992,000, or 24% of sales, as compared to $6,214,000, or 32.6% of sales, for the same period a year ago, and up from the 23.1% in the first quarter of fiscal 2010.

Gross profit for the six months ended December 31, 2009 decreased to $7,331,000, or 23.6% of sales, as compared to $11,820,000, or 32.3% of sales, for the same period a year ago. The decrease in gross margin for the three and the six months was primarily due to the decrease in sales of the Company's products and the resulting reduction in overhead absorption in the engineering and production of those products. The gross margin, however, has now shown a sequential increase for three straight quarters.

Selling, general and administrative expenses for the three months ended December 31, 2009 decreased by $1,046,000 to $4,402,000, or 26.5% of sales, as compared to $5,448,000, or 28.6% of sales, a year ago.

Selling, general and administrative expenses for the six months ended December 31, 2009 decreased by $1,130,000 to $9,094,000, or 29.2% of sales, as compared to $10,224,000, or 28% of sales, a year ago. They decrease in dollars for the three and six months ended December 31, 2009 was $822,000 and $1,442,000 respectively, and was due primarily to the Company's cost-cutting and restructuring measures initiated in the quarter ended June 30, 2009.

For the six months, these cost savings were partially offset by having a full 26 weeks of MARKS expenses in the six months ended December 31, 2009, and only 19 weeks of these expenses in the same period a year ago, due to the acquisition occurring mid quarter.

The increase as a percentage of sales for the six-month period are due primarily to the decreases in sales.

Interest expense net for the three months ended December 31, 2009 increased by $168,000 to $597,000 as compared to $429,000 for the same period a year ago. Interest expense net for the six months ended December 31, 2009 increased by $424,000 to $1,168,000 as compared to $744,000 for the same period a year ago. The increase in interest expense for the three months ended December 31, 2009 resulted from higher interest rates charged by the Company's banks, as partially offset by lower outstanding debt in the current period.

The increase in interest expense for the six months resulted primarily from the $25 million acquisition loan dated August 17, 2008 being outstanding for the entire 26 weeks in the six months ended December 31, 2009, as compared to 19 weeks in the six months ended December 31, 2008, as well as the higher interest rates.

The Company's provision for income taxes for the three months ended December 31, 2009 decreased by $190,000 to a benefit of $61,000 as compared to a provision of $129,000 for the same period a year ago.

The Company's provision for income taxes for the six months ended December 31, 2009 decreased by $293,000 to a benefit of $181,000 as compared to a provision of $112,000 for the same period a year ago.

The decrease in provision for income taxes for the three and six months was due primarily to the decrease in income before provision for income taxes. As a result, the Company's effective rate for income tax was 6.3% and 6.2% for the three and six months ended December 31, 2009, respectively, as compared to 33% and 13.5% for the same period a year ago.

Net income decreased by $1,244,000 to a net loss of $912,000, or a loss of $0.05 per diluted share for the three months ended December 31, 2009, as compared to net income of $322,000, or $0.02 per diluted share, for the same period a year ago.

Net income decreased by $3,384,000 to a net loss of $2,730,000, or $0.14 per diluted share, for the six months ended December 31, 2009, as compared to net income of $654,000, or $0.03 per diluted share, for the same period a year ago.

With a lot of non-cash and one-time expenses, as well as our interest expense, it is important to point out that our adjusted EBITDA, as per the schedule included in this morning's release, was $467,000 for the three months ended December 31, 2009, the highest level the Company has recorded in the last 12 months, or since the $1,477,000 reported in the same quarter latest year.

For the six months ended December 31, 2009, the adjusted EBITDA was $90,000 as compared to $2,808,000 for the same six-month period a year ago.

Napco's balance sheet continues to show strong improvement. We ended the quarter with $7.8 million in cash, and our total debt position, net of cash, was reduced this quarter by approximately $2.5 million to $23.8 million and has now been reduced by $5.5 million for the six months ended December 31, 2009, and by $12.1 million since acquiring MARKS USA in August 2008. Cash generated from operations was $2.6 million in the second quarter and $5.7 million for the six-month period.

Inventories were reduced by $1.3 million in the quarter and by $3.8 million in the first half of fiscal 2010. Over the last nine-month period, inventories have now been decreased by approximately $9.7 million. We plan to continue to implement our aggressive utilization plan for our existing inventories.

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

Thanks, Kevin. As we look ahead, we remain confident in our ability to building 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 has helped us expand our reach and rounds out our product portfolio and will, over time, continue to improve efficiencies.

We believe that our exciting new product offerings, including those with recurring revenue opportunities, along with the final integration of MARKS, will add value to our Company's position in the marketplace and build Napco into a premium provider of unique, top-notch, cutting-edge security technology products.

As we continue into our seasonally stronger quarters of fiscal 2010, we will continue to examine areas in which to continue to improve operational efficiencies, inventory utilization and return on investment of our expenses. We remain focused on reducing our costs and pursuing every sales opportunity.

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

(Operator Instructions) Joe Giamichael, Rodman & Renshaw.

Good morning, guys. I'll be brief because that was a fairly extensive readthrough.

So for quite a while, I've seen that it seems that sort of the song has remained the same here. We are seeing indications of stabilizing. But what is the basic message that you would like to get out to investors as to what's going to happen, in your view, over the next six to nine months?

Hi, Joe. We believe that there is an increase in security purchases, and we believe that our distributors and our dealers are doing more installations. We have more than 10,000 dealers that install our products. So we are getting indications from them, with an influx of orders, that things are turning around for them and that they are doing more work, which bodes well for us.

We also are excited over the fact that we are introducing new strategic products for the Company at the Security Conference -- Homeland Security Conference that is coming up in Las Vegas.

At that show, we expect to have more than 10,000 security professionals attend. They are going to see us there. We have great positioning. We are going to show the new products which strategically will help pull demand in for our products to help sell the entire line of products.

We have also added new people on the international sales front. We reinvigorated that, and we expect that we are going to have a lot of customers from overseas that will be there also, seeing these new products. So it's an exciting time for us and it bodes well for the future.

Our R&D expenses are coming to fruition. Some of these projects that we've been working on have been in the works for more than two years, because they require Underwriters Laboratories approval, because they are in the fire area, and fire is a very strong part of the industry; it's a legislative part.

So we expect that by the end of our fiscal year, June 30 this year, we will be shipping some of these products. And over the next 12 months or so, it should ramp up the volume of these products and pull through our regular small commercial residential products.

We are also going to be showing our new locking products, which are remote-controlled locking, where you can actually control the functionality of a lock in all types of commercial buildings over the Internet. So security directors, large universities, managers of big buildings, can control all the locking. And we have a very unique system, and it bodes well for our Alarm Lock division, being the forerunner in locking. So we are excited about that.

And we have other products which have recurring revenue components. We are going to be showing our dealers those products, which communicate security signals over the cellular network, and also allow video to be piped to people's cell phones and computers from anywhere in the world on a recurring revenue service using our server.

So there is a lot of exciting things happening. And with the economy firming up a little bit, with what you are reading about in the papers, of home invasions, more thefts, more needs for security at airports and ports and government offices, it means that Napco will have the products and is on the right track in the right industry.

Okay. So obviously, new product introductions and this upcoming conference will be a large catalyst for growth. Would you anticipate if orders are generated in that conference, giving us some form of a press release, just so we can externally track progress on some of these new products?

Well, what happens is you have a booth there -- and I invite any people that would like to come to see it, it's going to be quite something and it's going to be very exciting, because it's kind of exciting new products for the industry that they haven't seen from us and products that really expand our market share.

But you don't take orders at the show. What happens is you have the presidents of the securities companies and you have the service managers looking at the equipment. And during the week that we are there, they get a feeling for what's going on at the show. And we believe that they are going to see things that are going to be very exciting to them. And then they go back and caucus and decide, let's do sampling, and let's meet with the reps of Napco and -- for training.

And over a 12-month period or so, it starts to amount to volume that adds on, and we bolt this volume onto our existing volume. That is how it works. But it's not a show where you take orders.

Got it. Okay. And then just one last question and I will get out of the way. As it relates to the covenants on the debt, I know there had been some issues with that as of the end of the September quarter. What is being done to address that at this point, or has it been addressed?

We are in discussions with our lenders. Both sides agree that the covenants that were put in place when we did the MARKS acquisition don't make sense any longer, because the world has changed, we're in a different time.

So what we are doing is we are negotiating what the new covenants should look like and what the conditions regarding the covenants will be going forward; basically, restructuring the deal. Our hope is to have something done maybe by the next couple of months. We are meeting all the time and trying to get this thing done so it's good for every side.

And just on a directional basis, where are rates now relative to -- the rates that you are in discussions on relative to where they were?

Well, the rate that we are paying now is about 7.5%, and that is higher than it has been when we first did the MARKS acquisition. It was much lower then. But with the conditions changing, it has been tweaked up a bunch of times; we're presently at 7.5%.

Whether that rate would change going forward, I can't say, I can't really comment on it. Hopefully, it will go down, the rate. But for now, that is what it is, 7.5%. I think as we continue to get stronger and pay down debt and generate cash, which is what we are doing, as you can see from the stats, it puts us in a better position going forward.

Okay, great. Thank you very much, guys.

(Operator Instructions) Gentlemen, there are no questions in queue at this time. I'd like to turn the call back over to management for closing comments.

Okay. Thank you, everybody, for participating in today's conference call. As always, should you have any additional questions, please feel free to call Don, Kevin or myself for more information.

And we thank you all for your interest and support and look forward to speaking to you again in a few months to discuss Napco's third-quarter results. Thanks again. Take care. Bye-bye.

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