NAPCO Security Technologies Inc (NSSC) 2010 Q3 法說會逐字稿

Greetings, ladies and women, and welcome to the Napco Security Technologies Inc. third-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. Good morning and thank you all for joining us on today's compass call to discuss Napco's financial results for the third quarter ended March 31, 2010. 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 to you either by fax or e-mail the release. On the call today is Mr. Richard Soloway, Chairman and Chief Executive Officer of Napco Security Technologies and Mr. Kevin Buchel, Senior Vice President of Operations and Finance.

Before I ask our host, Dick Soloway, Chairman and CEO of Napco, to discuss the particulars of this morning'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 and Exchange Commission. With that out of the way, let me turn the discussion over to Richard Soloway. Dick, please proceed.

Thanks, Don. Good morning, everyone. Thank you for joining Napco's quarterly conference call to discuss the financial results for the three and nine months ending March 31, 2010. Net sales for the third quarter were $16.015 million, a 14% increase over the year ago, and sales levels held steady at the same rate as of the second quarter of fiscal 2010. The quarterly sales report, which showed a year-over-year improvement, came primarily from our intrusion and door locking divisions. As we have previously reported on prior calls, the financial crisis continues to have an adverse impact on our distributors. We are pleased to see that backlog levels remain higher than historic levels, which we think is an indication of improved demand levels from that of the year ago. Our backlog level amounted to approximately $2.9 million at the end of the third quarter.

We are also continuing the transition of production of the Marks product to our cost effective plants in the Dominican Republic. This along with several other cost containment does measures we have implemented in the last year puts us in position for improved profitability when economic conditions improve and the reflected in our sales levels. We expect to complete the integration of Marks reduction in the US to the Dominican Republic facility during 2010. Upon the completion of the integration of Marks, Napco's cost savings should approximate $2 million per year and take full effect in fiscal 2011. 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 this challenging economic environment, we expect the complaint to emerge from this slowdown in a superior competitive position. We are confident in the growth opportunities presented by our new products and a recovering revenues generated by many of them. The response that we received these products at the recent International Security Conference Public Safety Expo at the Sands Convention Center in Las Vegas was especially encouraging. As crime, terrorism, and the other violence issues remain of public concern, our unique products should continue to gain support through our larger security dealer network. 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. Now for the three months ended March 31, 2010, increased by approximately 14% to $16.015 million as compared to $14.021 million for the same period a year ago. Sales for the nine months ended March 31, 2010 decreased by approximately 7% to $47.121 million as compared to $50.586 million for the same period a year ago. The increase in sales for the three months ended March 31, 2010 was primarily due to increased sales of the Company's intrusion products as well as its door locking products. Gross profits for the three months ended March 31, 2010 increased to $4.151 million or 25.9% of sales as compared to a loss of $196,000 or negative 1.4% of sales for the same period a year ago. The gross margin has now shown a sequential increase for four straight quarters. Gross product for the nine months ended March 31, 2010 decreased to $11.482 million, but the margin improved to 24.4% of sales as compared to $11.626 million, or 23% of sales for the same period a year ago. The increase in gross profit in dollars and as a percentage of sales for the three months was primarily due to the restructuring charge incurred in the quarter ended March 31, 2009 as was cost-cutting measures and operating efficiency that have occurred during the last 12 months.

Selling, general and administrative expenses for the three months ended March 31, 2010 remain relatively constant at $4.978 million or 31.1% of sales as compared to $4.919 million or 35.1% of sales a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2010 decreased by $1.07 million to $14.072 million or 29.9% of sales as compared to $15.142 million or 29.9% of sales a year ago. The decrease in expenses as a percent of sales for the three months was primarily due to the increase in sales in the quarter ended March 31, 2010 as compared to the same period a year ago. The decrease in expenses for the nine months ended March 31, 2010 was due primarily to the decrease in sales as well as reductions in personnel costs in response to the decrease in sales. These reductions were initiated in the quarter ended March 31, 2009.

During the three months ended March 31, 2010, the Company recorded a non-cash adjustment for goodwill impairment of $923,000. Interest expense net for the three months ended March 31, 2010 increased by $165,000 to $591,000 as compared to $426,000 for the same period a year ago. Interest expense net for the nine months ended March 31, 2010 increased by $589,000 to $1.759 million as compared to $1.17 million for the same period a year ago. The increase in interest expense for the three months ended March 31, 2010 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 nine months resulted primarily from the $25 million acquisition loan dated August 17, 2008 being outstanding for the 39 weeks in the nine months ended March 31, 2010 as compared to 32 weeks in the nine months ended March 31, 2009 as well as the higher interest rates previously mentioned.

The Company's benefit for income taxes for the three months ended March 31, 2010, decreased by $369,000 to a benefit of $491,000 as compared to a benefit of $859,000 for the same period a year ago. The Company's benefit for income taxes for the nine months ended March 31, 2010 increased by $96,000 to a benefit of $672,000 as compared to $574,000 for the same period a year ago. The decrease in the benefit for income taxes in the three months was due primarily to pretax earnings improving by $3.4 million versus the pretax loss of $5.8 million a year ago. The decrease in benefits for income taxes for nine months was primarily due to be slightly higher pretax loss of approximately $300,000 versus a year ago. As a result, the Company's effective rate for income taxes was 20.8% and 12.7% for the three and nine months ended March 31, 2010 effectively as compared to 14.6% and 11.6% for the same period a year ago.

Net income increased by $3.151 million to a net loss of $1.864 million or negative $0.10 per diluted share for the three months ended March 31, 2010 as compared to a net loss of $5.015 million or negative $0.26 per diluted share for the same period a year ago. Net income decreased by $234,000 to a net loss of $4.594 million or negative $0.24 per diluted share in the nine months ended March 31, 2010 as compared to a net loss of $4.36 million or negative $0.23 per diluted share for the same period a year ago. The changes for the three and nine months ended March 31, 2010 were primarily due to the items just mentioned as well as previously mentioned non-cash impairment to goodwill adjustment of $923,000 charged in the quarter ended March 31, 2010. 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 is $218,000 for the three months ended March 31, 2010 versus the $4.399 million reported in the same quarter last year. For the nine months ended March 31, 2010, the adjusted EBITDA was $308,000 as compared to a loss of $1.591 million for the same nine-month period a year ago.

Napco's balance sheet continues to be sound. We ended the quarter with $5.8 million in cash and debt net of cash has been reduced by $11 million from $35.9 million to $24.9 million since acquiring Marks USA in August of 2008. $4.4 million of this reduction occurred in the nine months ended March 31, 2010. Cash generated from operations was approximately $4.6 million for the nine months ended March 31, 2010. Inventory reduction in the nine months ended March 31, 2010 was approximately $2.8 million as a result of the aggressive utilization of existing inventories. Inventory reduction for the last 12 months amounts to $8.7 million. Inventory did, however, increase by $1 million this past quarter in response to increased customer demand and the anticipated significantly improved sales during our fourth fiscal quarter ending June 30, 2010. Historically, sales levels are highest during our fourth quarter.

That concludes my formal remarks. And I'd 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 and markets the most technologically advanced 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 products, several of which that have 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 the premier provider of unique top-notch cutting-edge security technology products. Our long-term growth prospects are strong, as demand for security protection is on the rise due to more crime stemming from a difficult economic environment. In addition, as a result of less police visibility due to federal, state, and city budget constraints, we believe that the value proposition for Napco's products only increases during times like these for property management and homeowners alike. Terrorism and violence issues both in the homeland and abroad continue to remain at the forefront, enabling further interest in our technologies to protect people and property.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is coming from David Ratliff with to Doucet Asset Management. Please proceed with your question.

Good morning, gentleman. Thanks for taking my questions. You had two consecutive quarters with $16 million sales or better. And you just stated that basically Q4 is historically your best quarter. Would you say that sales bottomed out at around $16 million going forward?

I would say, and we know Q4 is always going to be better than whatever one, two, and three are. So the $16 million that we had this quarter, the $60 million that we had quarter two, we know four is much better historically. Whether $16 million is the bottom, we hope so. We can't say for sure, but we hope so. We see that we're a lot busier than we used to be. We did put factory workers and production workers here and in [Abbeville] on four-day work weeks, and we've been unable to continue doing that because we're so busy now. So our hope is that from now on, everybody stays at five days. But we can't be sure. That's the hope.

Right. And at least in the last couple of quarters, this -- just seems like the first quarter were you had a year-over-year increase in sales. So that should be, hopefully, a positive sign. Can you give me an update on what's going on with the -- you had all your long-term debt moved into basically a current maturity. What's going on with the covenants and where you stand with the bank line?

Right now, what we're doing is we are negotiating with our lenders a restructuring plan that makes sense for both sides. And we're working hard towards doing that. And we're making a lot of progress. And we hope to have it done fairly soon. And I think once we can get that done, then will see the classification change. But for right now, until it's done, we show it all as current. But we're working hard with our lenders and they're working well with us. And our hope is that in another few weeks, we'll get it done.

We do have a 15-year relationship with our lender. And the relationship has been good. We haven't had any interest or pencil payments and things are firming up very, very nicely for us. As you can see, our numbers are getting sequentially a little bit better and we are now in our fourth quarter, so we'd expect that through cooperation, mutual cooperation, we should be able to take care of our covenants and our loan restructuring in a way that's mutually beneficial.

Okay. And the last question I have, you probably don't give guidance of any sort, but your backlog was mentioned in a press release, $2.9 million higher than historic levels. You seeing -- can you give any color, like had he seen any follow through in Q4, we are halfway May 17, today, we're halfway through the quarter. Are you seeing follow through with orders and things like that? In Q4 to this point?

What we see is increased interest in security and protection due to the unstable environment that the US is in. You read about it all the time in newspapers about theft of materials, home invasions, increases of burglary, less police force on the beat. In fact, in New York, they even canceled I think Jones these -- Beach canceled the fourth of July fireworks because of the fact they were not enough police due to furlough of police. So we have an environment here for people want to be more secure and have more protection and the type of products that we offer do just that for property and people. Our dealers seem to be busier. They seem to be seeing more of recurring revenue type products that we manufacture, which is very important for us for the future. And we also are working very hard on bringing our backlog down, which was at a very high height. We are trying to balance out inventory turns and backlog and then with the increases of demand for security products, our goal is to reduce the backlog down as much as possible. And that, along with the fourth quarter numbers, should be helpful to have stronger results for the fourth.

Okay. I appreciate the color and congratulations on a good positive EBITDA quarter. And we look forward to good results in Q4.

Thank you.

Great to speak with you.

Thank you. Our next question is coming Tim Hasara, with Kennedy Capital Management. Please proceed with your question.

Can you just explain why the fourth quarter is seasonally your best quarter, first of all?

Typically, we call it -- it's a strong selling season for security leader's, meaning that there is a lot of people that are closing for vacation time, a lot of companies, a lot of people going on vacation. So the security security people seem to be very busy putting in property protection, security protection on with the central stations. So it's just very, very busy. In addition to that, we close a factory in the beginning of July so in order to get continuity of our -- all our SKUs, people want to make sure that they have enough merchandise available. Also, what you read in the newspapers seems to help the security dealers market better because they're making products and protection services more available. Everybody is out and very concerned about what's going on. So all that together, every fourth quarter brings higher sales.

Just to clarify, so everyone is out, and there's press. Why is that different in the June quarter than in the other's? That doesn't make sense to me.

It's just the security season, and people closing, going away, and they want to have more protection. So it seems to have every year about this time. So it probably has to do with the flying out of the country, where people are not as active, stay home, so when there away from their premises or their closing down their premises, they want to have more security and protection while they're away. So all those things together.

Okay, makes sense. And where do you stand on doing other acquisitions here in the future? Are you close to some? How do you see prices and where do you stand with that?

When we did the Marks in August of 2008, which was the largest of the ones we have done, before that we did Alarm Lock Corporation, and we did, Continental Corporation, and Marks was a $25 million one. There were two or three other companies that are smaller niche players in the field that were in, security, meaning access control, intrusion, fire, and locking. But we elected to do the Marks one because that was larger and because for the same amount of work you can do a larger one than a smaller one, and the economy was booming at that time. So there are a couple of people that are interested in us doing some other acquisitions. But this time, we want to finish our Marks acquisition and we're not really looking at any other acquisitions because Marks is big enough for us. As Kevin pointed out, there are a couple of million dollars worth of savings in the year once we fully finished the acquisition. So while there are others available, and they are smaller in size, we are sticking close to our knitting. We're not going to do additional acquisitions in the foreseeable future until we can absorb this one. The type of acquisitions that are out there our supplementary products which our dealers to use, both in fire, intrusion, and locking area. But we have a very stable group of companies and we offer a very wide range of products to our dealers where we can be virtually a one-stop shop, and we've got all the attributes that we really need right now. Certain things that we buy from others, we can manufacture ourselves for some of these other companies, but we elect to continue to buy from others and not put any extra stress on the Company.

Great. Thanks a lot. Appreciate it.

Thank you.

(Operator Instructions). There are apparently no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, everyone, for participating in today's conference call. As always, should you have any additional questions, please feel free to call Don 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 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.