NAPCO Security Technologies Inc (NSSC) 2012 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Napco Security Technologies Incorporated 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 James Carbonara from Hayden Investor Relations. Thank you, Mr. Carbonara. You may begin.

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, 2012. 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, Hayden IR at 646-419-4300 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, 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 particulars of this morning's news, let me take a moment to read the forward-looking statements. This conference may contain certain forward-looking statements that involve numerous risks and uncertainties. Actual results of 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, James. 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, 2012. Sales for the quarter were up in the intrusion and access control divisions and down for Marks door locking products due to soft demand in the traditional mechanical door locking products market, leading to a decrease in net sales by 3%. Quarterly operating income increased 5% and cash generated by operating activities was up 90% to $1.9 million. We are cautiously optimistic that the Marks business, which is primarily driven by commercial high-rise construction, is improving, as evidenced by the large percentage increases in new building permits issued in New York City, one of the largest areas for Marks products.

In addition, over the next six months, we will be greatly expanding the Marks range of products to address all the sales opportunities in the commercial building, refurb market. We will be supplying products for all entry and exit doors in this market in order to decrease Marks products reliance on new construction. The overall security industry continues to experience more intrusions and break-ins and we have seen concern over protecting buildings of all types. Schools are also having security concerns from students safety to computer and equipment getting stolen. This is all top of mind and leading to increased business in our other divisions. Several new products rolling out, including Starlink 2, IC Video, GEMC and Networks. The initial reaction has been very favorable, and these new products will build upon the legacy products that have continuous sales to our dealer network as well as adding recurring monthly revenue in the case of Starlink 2 and IC Video.

Because our highly technical products are not impulse sales items, we need to educate the thousands upon thousands of security dealers to learn about the product, trial it, gain confidence in its technology and use it over a period of time and then get adoption for all future jobs. We are in the midst of this educational process right now. At the end of March, we exhibited at the security industry's key trade show, the International Security Conference, ISC West, which drew about 23,000 security professionals with over $50 billion in buying power in attendance. At this conference, we won the Best Product Award for the iBridge keypad touch screen tablet which offers a full suite of recurring revenue services for Napco and its dealers, and we will be rolling it out to dealers in the next few months. In addition to trade shows, we're holding counter days at distributors, direct meetings with dealers on jobs and their offices, advertising and issuing press releases in the trade magazines as a multi-tiered approach to educate, train, get trial and receive adoption of our new products. Our target market is 30,000 to 40,000 security dealers. This takes a few years with anticipated sales increasing logarithmically over that period.

Soon, Napco Fusion technology is also rolling out. Fusion is our new enterprise platform which marries the technologies of all of the Company's divisions, providing total integration of a building's access control system, alarm system and locking system in a hybrid, hardwire and/or wireless configuration. Our Fusion generation one received feedback that it needed some additional features, and within the next two months, we'll be rolling out generation two. This is something that has never been done before in the security industry. Fusing together intrusion fire, video, access control, into one stop shopping for dealers so they get a fully integrated solution from only Napco. This will enable Napco to sell across all of our product lines, and we're very excited about the potential of Fusion.

We are also very pleased to have agreed on a term sheet with our current bank regarding an extension and restructuring of our expiring credit facilities. The contemplated five-year agreement offers more advantageous payment and interest terms than our existing facilities. I'd now like to turn the call over to Kevin to briefly review the financial details of the financial results. Kevin?

Thank you, Dick, and good morning, everyone. Sales for the three months March 31, 2012 decreased by 3% to $17.236 million as compared to $17.76 million for the same period a year ago. Sales for the nine months ended March 31, 2012 increased by 1% to $51.056 million as compared to $50.695 million for the same period a year ago. The decrease in sales for the three months was primarily due to decreased sales in the Company's Marks division, as partial offset by increases in the Company's intrusion and access control products. The increase in sales for the nine months was primarily due to increased sales in the Company's intrusion products, access control products and along with door locking products as partially offset by a decrease in the Marks door locking products.

Gross profit for the three months ended March 31, 2012 decreased 8% to $5.064 million, or 29.4% of sales as compared to $5.513 million, or 31% of sales for the same period a year ago. Gross profit for nine months ended March 31, 2012 increased 4% to $14.115 million, or 27.6% of sales, as compared to $13.626 million, or 26.9% of sales for the same period a year ago. The decrease in gross profit of dollars and a percentage of sales for the three months was primarily due to an unfavorable product mix as well as the decrease in net sales. The increase in gross profit in dollars and as a percentage of sales for the nine months was primarily due to the aforementioned increase in sales, as well as the Company reducing its overhead expenditures.

Selling, general and administrative expenses for the three months ended March 31, 2012 decreased 10%, or $481,000 to $4.375 million, or 25.4% of sales as compared to $4.856 million, or 27.3% of sales a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2012, decreased 4%, or $482,000 to $12.673 million, or 24.8% of sales, as compared to $13.155 million, or 25.9% of sales a year ago. The decrease in selling, general and administrative expenses for the three and nine months was due primarily to reductions in legal and other professional fees as well as the consolidation of the Company's European warehouse and sales office into its corporate headquarters in New York.

Operating income for the three months ended March 31, 2012 increased by $32,000, or 5% to $689,000 as compared to $657,000 for the same quarter a year ago. Operating income for the nine months ended March 31, 2012 increased by $971,000, or 206% to $1.442 million, as compared to $471,000 for the same period a year ago. Interest expense net for the three months ended March 31, 2012 decreased by $41,000, or 13% to $287,000 as compared to $328,000 for the same period a year ago. Interest expense net for the nine months ended March 31, 2012, decreased by $444,000, or 33% to $889,000 as compared to $1.333 million for the same period a year ago. The decrease in interest expense for the three and nine months ended March 31, 2012 resulted from lower interest rates charged by the Company's banks, as well as lower outstanding debt in the current period. The recently signed term sheet with our current bank that Dick mentioned earlier includes reduced interest terms, which should lead to further reductions in interest expense in the upcoming quarters.

Income before income taxes for the three months ended March 31, 2012 increased 22%, or $71,000 to $387,000 as compared to $316,000 for the same period a year ago. Income before income taxes for the nine months ended March 31, 2012, increased $1.414 million to $511,000 as compared to negative $903,000 for the same period a year ago. Provision for income taxes for the three months ended March 31, 2012 increased by $463,000 to a provision of $84,000 as compared to a benefit of $379,000 for the same period a year ago. Provision for income taxes for the nine months ended March 31, 2012 increased by $687,000 to $66,000 as compared to a benefit of $621,000 for the same period a year ago. The changes in the provision for income taxes were primarily due to a tax benefit recognized in the third quarter of last year as a result of R&D credits relating to prior years.

Net income decreased by $392,000 to $303,000, or $0.02 per diluted share for the three months March 31, 2012 as compared to $695,000, or $0.04 per diluted share for the same period a year ago. Net income increased by $727,000 to $445,000, or $0.02 per diluted share for the nine months ended March 31, 2012 as compared to a net loss of $282,000, or negative $0.01 per share for the same period a year ago. The change for the three and nine months ended March 31, 2012 were primarily due to the aforementioned items.

With a lot of non-cash and one time expenses as well as our interest expense, it's important to point out that our adjusted EBITDA as per the schedule included in this morning's release increased by $1,000 to $1.247 million as compared to $1.246 million for the same period a year ago. For the nine months ended March 31, 2012 adjusted EBITDA increased by $576,000, or 23% to $3.087 million from $2.511million for the same period a year ago. Napco's balance sheet continues to show improvement. Cash at the end of the quarter amounted to $3 million, cash generated by operating activities increased 90% to approximately $1.9 million for the three months ended March 31, 2012 as compared to $1 million for the same period a year ago. Cash generated by operating activities increased 30% to $3 million for the nine months ended March 31, 2012, as compared to $2.3 million for the same period a year ago. Debt net of cash has been reduced by $17.8 million from $35.9 million to $18.1 million since acquiring Marks USA in August of 2008. That concludes my formal remarks, and I would now like to return the call back to Dick.

Thanks, Kevin. We are pleased that our recent efforts have begun to generate higher sales in all divisions, Marks withstanding, and profitability -- and higher profitability. We're making improvements to the Marks line to make it less pegged to new construction, while also optimistic about the new commercial building permits that we've seen in New York as well as other areas. New products are rolling out, dealer feedback is positive, and the education process continues. The second generation of Fusion will be launched in the next two months, as will our award-winning iBridge keypad touch screen tablet, which offers a full suite of additional recurring monthly revenue services for Napco and its dealers. We believe that all of these initiatives should enable our Company to generate increased sales and with it, increased gross profits and net income. Especially when you consider the potential of the recurring revenue products and the leverage of our low cost manufacturing facility in the Dominican Republic. That 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) Our first question comes from Peter [Revere] with Island Capital. Please proceed with your question.

Yes, good morning. Can you tell us more about the bank deal that you spoke of briefly on the call?

Hello, Peter. Yes. The bank deal, we've been working on this, as many of you know, for many months, and we had a few choices to go with, which was good for us, because our balance sheet has improved a lot over the last couple of years, which makes us attractive to many different banks, and we decided to go with our current bank. There were other offers out there, but we decided that our current bank was the best deal for us, most efficient way of doing things. I can't disclose the specifics of it because we didn't close on it yet, but it does offer better interest rate, longer -- a five-year deal and more attractive payment, payback clauses and other things. So, we weighed all the options between the various offers that we had, we'd like to close on it pretty rapidly and get this behind us and move on to improving the profitability of the Company, concentrating on the business.

Okay.

(Operator Instructions) One moment while we poll for more questions. Our next question comes from Rick Federman with Federman Investments, please proceed with your question.

Good morning, Dick and Kevin.

Good morning Rick.

Dick, I'd wonder if you'd like to comment on how the Business in Europe has been proceeding since you've moved the sales and support out of Europe and back to the New York headquarters? What's the sales, what are some -- well, just comment on the Business in general there?

Okay. Basically the volume of business in Europe has decreased. It's roughly running about 5% of our overall volume. We find that in Europe, what's been happening is there's all kinds of new certifications in every country. And as an example, in the US we have Underwriters Laboratory. So, to get security products saleable for insurance companies to recommend them, you have to have UL in the United States.

In Europe, each country has now developed their own version of UL, so that they're blocking a lot of the American products because of the fact that the European specs are different than the American specs, and they're different for every country. So, we are exporting a lot of product to other countries besides European block, which traditionally has been a very good market for us. Countries that don't have all these type of specifications, South America, Africa, certain European non-EEC countries and so on. So, that's kind of our direction.

We're not spending a fortunate of money to get everything recertified. We're selling what we have. Certain countries, we're doing a few of the specs, but not everything from soup to nuts. It's just too expensive, and it's too much of a, I would say sap sucker of our engineering energy. We want to put our engineering energy into developing software driven, recurring revenue products, and specifically IP related products, that's the future.

Do you intend to remain in Europe, or just concentrate on many of these other areas that you just referenced, where you are doing more business?

We are going to market as demand is in Europe. We're going to the International Security Conference, which is going to be in London very shortly. We're going to pick up distributors in these countries in Europe, which are not very specified countries, and grow our business anywhere we can. The whole idea is so pick up as much as volume as we can so we can have our factory leverage unleashed. The more volume we push through the factory, the better it is for us, so we're picking up business wherever we can.

Our sales efforts in -- around the world for exports are such that we go to a lot of the US exhibit areas in a lot of the different foreign countries. In the Pacific Rim, Europe, London and things like that. So, we have a group that goes to these shows and tries to pick up as much as volume as we can.

One other question. This is regarding here at home. AT&T recently announced they're going to get into the home security business, and I wonder, I can't imagine that they haven't laid some groundwork in terms of hardware and suppliers. I just wonder, what part, if at all, you see Napco playing in their efforts?

Well, what happens is all boats rise when the tide comes in, and AT&T is going to help bring security to be top of mind to consumers. It's an interesting fact that we happen to be in a metropolitan area, New York, and a lot of other metropolitan areas there's a high concentration of alarms, but nationwide, only about 22% of residences have alarm systems.

So, they're going to -- AT&T is going to bring this to more top of mind. And we believe that it's going to help out our network of dealers, because there are thousands and thousands of security dealers all over the country. And a lot of people use their local dealer in their neighborhood that they can feel comfortable with rather than using a big national company where you never know where your burglar alarm signals or fire alarm signals go to. So, we believe that our dealers will have an advantage, and with the advertising all about security and whatever advertising they do, will help our dealers. We look at this as something positive.

I certainly would agree with your conclusion that it would be positive for all. I'm just curious if there have been any contact regarding specifically supplying the AT&T customers or the efforts that AT&T is going to be making to get into the residential market?

We, we don't make comments about specific accounts and customers for competitive reasons, Rick, so I'd rather not talk about that.

All right. Thank you very much.

Thank you.

(Operator Instructions) One moment while we poll for more questions. There are no further questions in queue at this time. I would like to turn the call back over to management 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 Brett Moss, James Carbonara, Kevin Buchel or myself. We thank you for your interest and support and look forward to meeting with all of you again in a few months to discuss Napco's fourth quarter and year-end results. Thank you, and bye-bye.

This concludes today's teleconference, you may disconnect your lines at this time, and thank you for your participation.