UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
--- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File number: 0-10004
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NAPCO SECURITY TECHNOLOGIES, INC.
--------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-2277818
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation of organization) Number)
333 Bayview Avenue
Amityville, New York 11701
---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(631) 842-9400
---------------------------------------------------
(Registrant's telephone number including area code)
NAPCO SECURITY SYSTEMS, INC.
(Former name, former address and former fiscal year if
changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
------ ------
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or such shorter period that the registrant was required to
submit and post such files). Yes No
------ ------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller reporting company X
--- --- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No X
------ ------
Number of shares outstanding of each of the issuer's classes of common stock, as
of: May 19, 2009
COMMON STOCK, $.01 PAR VALUE PER SHARE 19,095,713
1
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Page
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX - MARCH 31, 2009
Condensed Consolidated Balance Sheets March 31, 2009 and
June 30, 2008 3
Condensed Consolidated Statements of Operations for the Three
Months ended March 31, 2009 and 2008 4
Condensed Consolidated Statements of Operations for the Nine
Months ended March 31, 2009 and 2008 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended March 31, 2009 and 2008 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II: OTHER INFORMATION 21
SIGNATURE PAGE 22
2
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 2009 (unaudited) 2008 (audited)
------ ---------------- ----------------
(in thousands, except share data)
Current Assets:
Cash and cash equivalents $ 2,567 $ 2,765
Accounts receivable, net of reserves 18,574 25,823
Inventories, net 26,012 19,548
Prepaid expenses and other current assets 748 1,121
Income tax receivable 790 --
Deferred income taxes 861 769
---------------- ----------------
Total Current Assets 49,552 50,026
Inventories - non-current, net 8,777 7,724
Property, plant and equipment, net 9,215 8,989
Intangible assets, net 16,103 --
Goodwill 10,609 9,686
Other assets 440 298
---------------- ----------------
Total Assets $ 94,696 $ 76,723
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Loans payable (Note 6) $ 34,314 $ --
Accounts payable 4,946 4857
Accrued expenses 1,603 1,333
Accrued salaries and wages 1,982 2,543
Accrued restructuring costs 350 --
---------------- ----------------
Total Current Liabilities 43,195 8,733
Long-term debt -- 12,400
Accrued income taxes 210 294
Deferred income taxes 1,823 1,607
Minority interest in subsidiary -- 147
---------------- ----------------
Total Liabilities 45,228 23,181
---------------- ----------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.01 per share;
40,000,000 shares authorized, 20,095,713
and 20,092,473 shares issued and
19,095,713 and 19,092,473 shares
outstanding, respectively 201 201
Additional paid-in capital 13,710 13,424
Retained earnings 41,172 45,532
---------------- ----------------
55,083 59,157
Less: Treasury Stock, at cost (1,000,000
shares) (5,615) (5,615)
---------------- ----------------
Total stockholders' equity 49,468 53,542
---------------- ----------------
Total Liabilities and Stockholders'
Equity $ 94,696 $ 76,723
================ ================
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended
March 31,
------------------------------------
2009 2008
--------------- --------------
(in thousands, except share and
per share data)
Net sales $ 14,024 $ 16,222
Cost of sales 13,110 10,506
Restructuring costs 1,110 --
--------------- --------------
Gross (Loss) Profit (196) 5,716
Selling, general and administrative expenses 4,919 4,148
Restructuring costs 145 --
--------------- --------------
Operating (Loss) Income (5,260) 1,568
--------------- --------------
Other expense:
Interest expense, net 426 216
Other expense, net 76 12
--------------- --------------
Total Other expense 502 228
--------------- --------------
(Loss) Income Before Minority Interest and
Benefit for Income Taxes (5,762) 1,340
Minority interest in (income) loss of
subsidiary (112) 33
--------------- --------------
(Loss) Income Before Benefit for Income
Taxes (5,874) 1,373
Benefit for income taxes (859) (1,904)
--------------- --------------
Net (Loss) Income $ (5,015) $ 3,277
(Loss) Earnings per share:
Basic $ (0.26) $ 0.17
=============== ===============
Diluted $ (0.26) $ 0.17
=============== ===============
Weighted average number of shares
outstanding:
Basic 19,095,713 19,092,487
=============== ==============
Diluted 19,095,713 19,626,043
=============== ==============
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Nine Months Ended
March 31,
------------------------------------
2009 2008
--------------- ---------------
(in thousands, except share and
per share data)
Net sales $ 50,586 $ 46,264
Cost of sales 37,852 29,877
Restructuring costs 1,110 --
--------------- ---------------
Gross Profit 11,624 16,387
Selling, general and administrative expenses 15,142 12,731
Restructuring costs 145 --
--------------- ---------------
Operating (Loss) Income (3,663) 3,656
--------------- ---------------
Other expense:
Interest expense, net 1,170 635
Other expense, net 101 30
--------------- ---------------
Total Other expense 1,271 665
--------------- ---------------
(Loss) Income Before Minority Interest and
Provision for Income Taxes (4,934) 2,991
Minority interest in loss of subsidiary -- 92
--------------- ---------------
(Loss) Income Before Provision for Income
Taxes (4,934) 3,083
(Benefit) Provision for income taxes (574) (1,741)
--------------- ---------------
Net (Loss) Income $ (4,360) $ 4,824
=============== ===============
(Loss) Earnings per share:
Basic $ (0.23) $ 0.25
=============== ===============
Diluted $ (0.23) $ 0.24
=============== ===============
Weighted average number of shares
outstanding:
Basic 19,095,595 19,319,967
=============== ===============
Diluted 19,095,595 19,873,655
=============== ===============
See accompanying notes to condensed consolidated financial statements
(unaudited).
5
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended March 31,
------------------------------------
2009 2008
------------------------------------
(in thousands)
Cash Flows from Operating Activities:
Net (loss) income $ (4,360) $ 4,824
Adjustments to reconcile net (loss)
income to net cash
provided by operating activities:
Depreciation and amortization 1,440 854
Provision for doubtful accounts 126 40
Change to inventory obsolescence reserve (20) 150
Deferred income taxes 124 730
Non-cash stock based compensation
expense 280 216
Change in minority interest (147) --
Changes in operating assets and
liabilities, net of acquisition effects:
Accounts receivable 8,959 3,731
Inventories (756) (6,607)
Prepaid expenses and other current
assets 485 (120)
Income tax receivable (790) (443)
Other assets 4 (113)
Accounts payable, accrued expenses,
accrued salaries and
wages, and accrued income taxes (1,558) (2,061)
Accrued restructuring costs 350 --
--------------- ---------------
Net Cash Provided by Operating Activities 4,137 1,201
--------------- ---------------
Cash Flows Used in Investing Activities:
Cash used in business acquisition, net of
cash acquired of $520 (24,581) --
Purchases of property, plant and equipment (428) (668)
--------------- ---------------
Net Cash Used in Investing Activities (25,009) (668)
--------------- ---------------
Cash Flows from Financing Activities:
Proceeds from exercise of employee stock
options 6 4
Proceeds from acquisition financing 25,000 --
Proceeds from long-term debt borrowings 2,200 5,000
Principal payments on long-term debt (6,286) (2,000)
Cash paid for deferred financing costs (246) --
Cash paid for purchase of treasury stock -- (3,225)
--------------- ---------------
Net Cash Provided by (Used in) Financing
Activities 20,674 (221)
--------------- ---------------
Net (decrease) increase in Cash and Cash
Equivalents (198) 312
Cash and Cash Equivalents, Beginning of
Period 2,765 1,748
--------------- ---------------
Cash and Cash Equivalents, End of Period $ 2,567 $ 2,060
=============== ===============
Cash Paid During the Period for:
Interest $ 1,034 $ 589
=============== ===============
Income taxes $ 130 $ 102
=============== ===============
Non-cash Investing activities:
Adjustment to Retained earnings relating
to adoption of FIN 48 $ -- $ 485
=============== ===============
Accrued Business Acquisition costs $ 295 $ --
=============== ===============
Debt assumed in the Acquisition $ 1,000 $ --
=============== ===============
See accompanying notes to condensed consolidated financial statements
(unaudited).
6
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1.) Summary of Significant Accounting Policies and Other Disclosures
----------------------------------------------------------------
The accompanying Condensed Consolidated Financial Statements are unaudited.
In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made. The
results of operations for the periods ended March 31, 2009 are not
necessarily indicative of results that may be expected for any other
interim period or for the full year.
The unaudited Condensed Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended
June 30, 2008. The accounting policies used in preparing these unaudited
Condensed Consolidated Financial Statements are consistent with those
described in the June 30, 2008 Consolidated Financial Statements. However,
for interim financial statements, inventories are calculated using a gross
profit percentage. In addition, the Condensed Consolidated Balance Sheet
was derived from the audited financial statements but does not include all
disclosures required by Generally Accepted Accounting Principles ("GAAP").
The consolidated financial statements include the accounts of Napco
Security Technologies, Inc. and all of its wholly-owned subsidiaries,
including those of Marks USA I, LLC ("Marks"), a newly formed subsidiary
which acquired substantially all of the assets and certain liabilities of
G. Marks Hardware, Inc. acquired on August 18, 2008 . The Company has also
consolidated a 51%-owned joint venture. The 49% interest, held by a third
party, is reflected as minority interest. All inter-company balances and
transactions have been eliminated in consolidation.
The Company has made a number of estimates and assumptions relating to the
assets and liabilities, the disclosure of contingent assets and liabilities
and the reporting of revenues and expenses to prepare these financial
statements in conformity with accounting principles generally accepted in
the United States. Actual results could differ from those estimates.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30.
Historically, the end users of Napco's products want to install its
products prior to the summer; therefore sales of its products historically
peak in the period April 1 through June 30, the Company's fiscal fourth
quarter, and are reduced in the period July 1 through September 30, the
Company's fiscal first quarter. To a lesser degree, sales in Europe are
also adversely impacted in the Company's first fiscal quarter because of
European vacation patterns, i.e., many distributors and installers are
closed for the month of August. In addition, demand is affected by the
housing and construction markets. The severity of the current economic
downturn may also affect this trend.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and
Administrative" expenses in the condensed consolidated statements of
operations and are expensed as incurred. Advertising expense for the three
months ended March 31, 2009 and 2008 was $91,000 and $100,000,
respectively. Advertising expense for the nine months ended March 31, 2009
and 2008 was $711,000 and $817,000, respectively.
Research and Development Costs
Research and development costs are included in "Cost of Sales" in the
condensed consolidated statements of operations and are expensed as
incurred. Research and development expense for the three months ended March
31, 2009 and 2008 was $1,259,000 and $1,375,000, respectively. Research and
development expense for the nine months ended March 31, 2009 and 2008 was
$3,823,000 and $4,097,000, respectively.
Business Concentration and Credit Risk
An entity is more vulnerable to concentrations of credit risk if it is
exposed to risk of loss greater than it would have had if it mitigated its
risk through diversification of customers. Such risks of loss manifest
themselves differently, depending on the nature of the concentration, and
vary in significance.
The Company had two customers with accounts receivable balances that
aggregated 31% and 34% of the Company's accounts receivable at March 31,
2009 and June 30, 2008, respectively. Sales to neither of these customers
exceeded 10% of net sales in any of the past three fiscal years.
7
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Allowance for Doubtful Accounts
In the ordinary course of business, the Company has established a reserve
for doubtful accounts and customer deductions in the amount of $492,000 and
$405,000 as of March 31, 2009 and June 30, 2008, respectively. The
Company's reserve for doubtful accounts is a subjective critical estimate
that has a direct impact on reported net earnings. This reserve is based
upon the evaluation of accounts receivable agings, specific exposures and
historical trends.
Stock Options
During the three months ended March 31, 2009 the Company granted no stock
options under its 2002 Employee Incentive Stock Option Plan. During the
nine months ended March 31, 2009 the Company granted 100,000 stock options
under its 2002 Employee Incentive Stock Option Plan. These grants have an
exercise price of $4.25, a fair value of approximately $198,000 and vest
over a two-year period from the date of grant. There were no options
granted under its 2000 Non-employee Incentive Stock Option Plan. During the
three months ended March 31, 2009 there were no options exercised under
either plan. During the nine months ended March 31, 2009 there were 3,240
options exercised, with proceeds of approximately $6,000, under the 2002
Employee Incentive Stock Option Plan and no exercises under the 2000
Non-employee Incentive Stock Option Plan.
Intangible Assets
Under the Statement of Accounting Standards ("SFAS") No.142, "Goodwill and
Other Intangible Assets", all goodwill and certain intangible assets
determined to have indefinite lives will not be amortized but will be
tested for impairment at least annually. Intangible assets other than
goodwill will be amortized over their useful lives and reviewed for
impairment at least annually at the Company's fiscal yearend of June 30 or
more often whenever there is an indication that the carrying amount may not
be recovered.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of
$16,440,000 on the date of acquisition. In accordance with the requirements
of SFAS No. 141, "Business Combinations", the Company recorded the
estimated value of $9,800,000 related to the customer relationships,
$340,000 related to a non-compete agreement and $6,300,000 related to the
Marks trade name within intangible assets. The remaining excess of the
purchase price of $922,000 was assigned to Goodwill. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the
intangible assets will be amortized over their estimated useful lives of
twenty years (customer relationships) and seven years (non-compete
agreement). The Marks USA trade name was deemed to have an indefinite life.
The goodwill recorded as a result of the acquisition is deductible for
Federal and New York State income tax purposes over a period of 15 years.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 161, "Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133. This statement changes
the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. The Company's adoption
of SFAS No. 161 is not expected to have a material effect on its condensed
consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS
157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13." This
FSP amends SFAS No. 157 to exclude certain leasing transactions accounted
for under previously existing accounting guidance. However, this scope
exception does not apply to assets acquired and liabilities assumed in a
business combination, regardless of whether those assets and liabilities
are related to leases.
In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of
FASB Statement No. 157". This FSP delays the effective date of SFAS No.
157, "Fair Value Measurements", for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
This FSP defers the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP.
In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active"
("FSP 157-3"). FSP 157-3 classified the application of SFAS No. 157 in an
inactive market. It demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FSP 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of FSP 157-3 did not
have a material effect on the Company's condensed consolidated financial
statements.
8
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In April 2008, the FASB issued FASB Staff Position SFAS 142-3,
"Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3").
FSP SFAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and
Other Intangible Assets. The objective of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141R, Business Combinations, and other
U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years
beginning after December 31, 2008. The adoption of FSP SFAS 142-3 is
effective July 1, 2009 and is not expected to have a material effect on the
Company's condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141,
"Business Combinations," however, it retains the fundamental requirements
of the former Statement that the acquisition method of accounting
(previously referred to as the purchase method) be used for all business
combinations and for an acquirer to be identified for each business. SFAS
No. 141(R) defines the acquirer as the entity that obtains control of one
or more businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control. Among
other requirements, SFAS No. 141(R) requires the acquiring entity in a
business combination to recognize the identifiable assets acquired,
liabilities assumed and any non-controlling interest in the acquiree at
their acquisition-date fair values, with limited exceptions;
acquisition-related costs generally will be expensed as incurred. SFAS No.
141(R) requires certain financial statement disclosures to enable users to
evaluate and understand the nature and financial effects of the business
combination. SFAS No. 141(R) must be applied prospectively to business
combinations that are consummated beginning in the Company's fiscal 2010.
The Company's adoption of SFAS No. 141(R) is not expected to have a
material effect on its condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS
No. 160") to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Among other requirements, SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is to be reported as a separate component of equity in
the consolidated financial statements. SFAS No. 160 also requires
consolidated net income to include the amounts attributable to both the
parent and the non-controlling interest and to disclose those amounts on
the face of the consolidated statement of income. SFAS No. 160 must be
applied prospectively for fiscal years, and interim periods within those
fiscal years, beginning in the Company's fiscal 2010, except for the
presentation and disclosure requirements, which will be applied
retrospectively for all periods. The Company's adoption of SFAS No. 160 is
not expected to have a material effect on its condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Most of the provisions
of this Statement apply only to entities that elect the fair value option.
However, the amendment to SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", applies to all entities with
available-for-sale and trading securities. Some requirements apply
differently to entities that do not report net income. SFAS No. 159 became
effective for the Company in its fiscal year ending June 30, 2009. The
Company's adoption of SFAS No. 159 did not have a material effect on its
condensed consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. Where applicable, this statement simplifies and
codifies related guidance within generally accepted accounting principles.
SFAS No. 157 became effective for the Company in its fiscal year ending
June 30, 2009. The Company's adoption of SFAS No. 157 did not have a
material effect on its condensed consolidated financial statements.
Reclassification.
Certain expenses in Cost of sales for fiscal 2008 have been reclassified to
Selling, general and administrative expenses to conform with the current
period's presentation.
9
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2.) Stock-based Compensation
------------------------
The Company has established two share incentive programs as discussed in
more detail in the Consolidated Financial Statements and related notes
contained in the Company's annual report on Form 10-K for the year ended
June 30, 2008. The Company accounts for its stock options and share units
granted in accordance with SFAS No. 123(R), "Share-Based Payment" ("SFAS
No. 123(R)") which requires that all stock-based compensation must be
recognized as an expense in the financial statements and that cost be
measured at the fair market value of the award. SFAS No. 123(R) also
requires that excess tax benefits related to stock option exercises be
reflected as financing cash inflows instead of operating cash inflows.
Stock-based compensation costs of $73,000 and $64,000 were recognized in
three months ended March 31, 2009 and 2008, respectively. Stock-based
compensation costs of $280,000 and $216,000 were recognized in nine months
ended March 31, 2009 and 2008, respectively. Unearned stock-based
compensation cost was $370,000 as of March 31, 2009.
The fair values of stock options granted during the nine months ended March
31, 2009 were estimated on the date of grant using the Black-Scholes
option-pricing model that used the following weighted average assumptions:
Expected life in years 5
Risk-free interest rates 3.07%
Volatility 49.86%
Dividend yield 0%
3.) Inventories, net
----------------
For interim financial statements, inventories are calculated using a gross
profit percentage. The Company regularly reviews parts and finished goods
inventories on hand and, when necessary, records a reserve for excess or
obsolete inventories. As of March 31, 2009 and June 30, 2008, the balance
in this reserve amounted to $1,412,000 and $1,200,000, respectively. The
Company also regularly reviews the period over which its inventories will
be converted to sales. Any inventories expected to convert to sales beyond
12 months from the balance sheet date are classified as non-current.
Inventories, net of reserves consist of the following (in thousands):
March 31, June 30,
2009 2008
---------- ----------
Component parts $ 18,651 $ 12,924
Work-in-process 4,798 4,114
Finished product 11,340 10,234
$ 34,789 $ 27,272
========== ==========
Classification of inventories, net of reserves:
Current $ 26,012 $ 19,548
Non-current 8,777 7,724
---------- ----------
$ 34,789 $ 27,272
========== ==========
4.) Earnings (Loss) Per Common Share
--------------------------------
The Company follows the provisions of SFAS No. 128, "Earnings Per Share".
In accordance with SFAS No. 128, earnings per common share amounts ("Basic
EPS") were computed by dividing earnings by the weighted average number of
common shares outstanding for the period. Earnings per common share
amounts, assuming dilution ("Diluted EPS"), were computed by reflecting the
potential dilution from the exercise of stock options. SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face of
the condensed consolidated statements of income.
A reconciliation between the numerators and denominators of the Basic and
Diluted EPS computations for earnings is as follows (in thousands except
per share data):
Three months ended March 31, 2009
----------------------------------------
Net (Loss) Shares Per Share
(numerator) (denominator) Amounts
------------ ------------ ------------
Basic EPS
---------
Net loss, as reported $ (5,015) 19,096 $ (0.26)
Effect of dilutive securities
-----------------------------
Employee Stock Options $ -- -- $ -
------------ ------------ ------------
10
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Diluted EPS
-----------
Net loss, as reported and
assumed option exercises $ (5,015) 19,096 $ (0.26)
============ ============ ============
1,321,000 options to purchase shares of common stock in the three months
ended March 31, 2009 were excluded in the computation of Diluted EPS
because their inclusion would be anti-dilutive.
Three months ended March 31, 2008
----------------------------------------
Net (Loss) Shares Per Share
(numerator) (denominator) Amounts
------------ ------------ ------------
Basic EPS
---------
Net income, as reported $ 3,277 19,092 $ 0.17
Effect of dilutive securities
Employee Stock Options $ -- 534 $ --
------------ ------------ ------------
Diluted EPS
-----------
Net income, as reported and
assumed option exercises $ 3,277 19,626 $ 0.17
============ ============ ============
196,000 options to purchase shares of common stock in the three months
ended March 31, 2008 were excluded in the computation of Diluted EPS
because the exercise prices were in excess of the average market price for
this period and their inclusion would be anti-dilutive.
Nine months ended March 31, 2009
----------------------------------------
Net (Loss) Shares Per Share
(numerator) (denominator) Amounts
------------ ------------ ------------
Basic EPS
---------
Net loss, as reported $ (4,360) 19,096 $ (0.23)
Effect of dilutive securities
Employee Stock Options $ -- -- $ --
------------ ------------ ------------
Diluted EPS
-----------
Net loss, as reported and
assumed option exercises $ (4,360) 19,096 $ (0.23)
============ ============ ============
970,000 options to purchase shares of common stock in the nine months ended
March 31, 2009 were excluded in the computation of Diluted EPS because
their inclusion would be anti-dilutive.
Nine months ended March 31, 2008
----------------------------------------
Net (Loss) Shares Per Share
(numerator) (denominator) Amounts
------------ ------------ ------------
Basic EPS
---------
Net income, as reported $ 4,824 19,320 $ 0.25
Effect of dilutive securities
Employee Stock Options $ -- 554 $ (0.01)
------------ ------------ ------------
Diluted EPS
-----------
Net income, as reported and
assumed option exercises $ 4,824 19,874 $ 0.24
============ ============ ============
187,000 options to purchase shares of common stock in the nine months ended
March 31, 2008 were excluded in the computation of Diluted EPS because the
exercise prices were in excess of the average market price for this period
and their inclusion would be anti-dilutive.
Option activity during the nine months ended March 31, 2009 is summarized
as follows:
Weighted Average
Options Exercise Price
------------ --------------
Outstanding at July 1, 2008 1,323,480 $ 2.89
Granted 100,000 4.25
Cancelled -- --
Exercised (3,240) (1.90)
------------
Outstanding at March 31, 2009 1,420,240 2.99
============
Exercisable at March 31, 2009 1,255,588
============
11
================================================================================
5.) Acquisition of Business
-----------------------
On August 18, 2008, the Company acquired substantially all of the assets
and business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the
repayment of $1 million of bank debt and the assumption of current
liabilities as described more fully in the Asset Purchase Agreement. As
such, the operations of Marks have been included in the Company's Statement
of Operations for the period August 18, 2008 to March 31, 2009. The Marks
business involves the manufacturing and distribution of door-locking
devices. The Company completed this acquisition at a price in excess of the
value of the net identifiable assets because it believes that the
combination of the two companies offers the potential for manufacturing and
operational synergies as the Company combines the Marks operations and
production into its own door-locking operations and production structure.
The Company funded the acquisition with a term loan from its lenders as
described in Note 6.
The acquisition described above was accounted for as a purchase and was
valued based on management's estimate of the fair value of the assets
acquired and liabilities assumed. The estimates of fair value are
preliminary and subject to adjustment for a period of up to one year from
the date of acquisition. Based on the Company's evaluation, the allocation
of the purchase price for the acquisition was as follows (in thousands):
Assets Acquired:
Cash $ 520
Accounts receivable 1,836
Inventory 6,740
Prepaid expenses and other current assets 112
Property and equipment 801
Goodwill 922
Intangible assets 16,440
------------
27,371
------------
Less: Liabilities Assumed:
Line of credit borrowings outstanding 1,000
Accounts payable 637
Accrued expenses 339
------------
1,976
Total consideration (including acquisition
Costs of $222) $ 25,395
============
In accordance with the requirements of SFAS No. 141, "Business
Combinations", the Company recorded the estimated value of $9,800,000
related to the customer relationships, $340,000 related to a non-compete
agreement and $6,300,000 related to the Marks trade name within intangible
assets and the excess of the purchase price over the fair value of the
acquired assets of $922,000 was assigned to Goodwill. In accordance with
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the
intangible assets will be amortized over their estimated useful lives of
twenty years (customer relationships) and seven years (non-compete
agreement). The weighted average amortization period of these assets is
19.6 years. The Marks trade name was deemed to have an indefinite life. The
goodwill recorded as a result of the acquisition is deductible for Federal
and New York State income tax purposes over a period of 15 years.
Unaudited pro-forma consolidated financial information is presented below
as if the acquisition had occurred as of the first day of the earliest
period presented. Results have been adjusted to account for: (1) the
initial $25,000,000 cash borrowing and related interest expense under the
term loan, (2) cash used to repay $1,000,000 in assumed bank debt at
closing of the purchase transaction, (3) deferred financing costs and
related amortization associated with the term loan, (4) additional salary
and employee stock option expense for employees not previously included in
salary expense, and (5) amortization expense of acquired intangible assets.
The pro-forma information presented below does not purport to present what
actual results would have been if the acquisition had occurred at the
beginning of such periods, nor does the information project results for any
future period. The unaudited pro-forma consolidated financial information
should be read in conjunction with the historical financial information
included in other reports and documents filed with the United Stated
Securities and Exchange Commission.
The unaudited pro-forma consolidated financial information for the three
and nine months ended March 31, 2009 and 2008 is as follows (in thousands,
except share and per share data):
12
================================================================================
Three Months ended Nine Months ended
March 31, March 31,
---------------------- ----------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Pro-forma:
Net sales $ 14,024 $ 22,169 $ 53,105 $ 64,901
Net income (loss) $ (5,015) $ 3,390 $ (4,267) $ 5,242
Net income (loss) per
share:
Basic $ (0.26) $ 0.18 $ (0.22) $ 0.27
Diluted $ (0.26) $ 0.17 $ (0.22) $ 0.26
Weighted average number
of shares:
Basic 19,095,713 19,092,487 19,095,595 19,319,967
Diluted 19,095,713 19,626,043 19,095,595 19,873,655
6.) Long Term Debt
--------------
On August 18, 2008, the Company and its banks amended and restated the
existing $25,000,000 revolving credit agreement. The amended facility was
$50,000,000 and provides for a $25,000,000 revolving credit line as well as
a $25,000,000 term portion of which the entire $25,000,000 was utilized to
finance the asset purchase agreement as described in Note 5. The amended
revolving credit agreement and term loan was amended in November 2008 to
$20,000,000 and is secured by the accounts receivable, a portion of
inventory, the Company's headquarters building in Amityville, New York,
certain other assets of Napco Security Technologies, Inc. and the common
stock of three of the Company's subsidiaries. The agreements bear interest
based on either the Prime Rate or an alternate rate based on LIBOR as
described in the agreement. The August amendment extended the revolving
credit agreement to August 2012. Any outstanding borrowings are to be
repaid or refinanced on or before that time. As of March 31, 2009 there was
$11,100,000 outstanding under the revolving credit facility with an
interest rate of 5.0% and $23,214,000 outstanding under the term loan with
an interest rate of 5.0%. The term loan is being repaid in 19 quarterly
installments of $893,000 each, commencing in December 2008, and a final
payment of $8,033,000 due in August 2013.
The agreements contain various restrictions and covenants including, among
others, restrictions on payment of dividends, restrictions on borrowings
and compliance with certain financial ratios, as defined in the agreement.
As of March 31, 2009 the Company was not in compliance with three of the
covenants; the ratio of Funded Debt to EBITDA, Debt Service Coverage Ratio
and a Modified Quick Ratio. As a result, the banks have notified the
Company that they have limited the revolving line of credit to the amount
currently outstanding of $11,100,000 until the credit facilities can be
amended with the Company. The Company is currently in discussions with its
banks regarding waivers for the non-compliance with the covenants at March
31, 2009 and amendments to the existing credit facilities. The Company
expects to amend the existing credit facilities and receive the appropriate
waivers from its banks but this has not been completed as of the date of
this filing. As a result, the Company has classified the amount outstanding
under these facilities as a current liability until it completes the
amendment with the banks.
7.) Geographical Data
-----------------
The Company is engaged in one major line of business: the development,
manufacture, and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers
are primarily shipped from the United States. The Company has customers
worldwide with major concentrations in North America, Europe, and South
America.
The Company observes the provisions of SFAS No. 131. The following
represents selected consolidated geographical data for the three and nine
months ended March 31, 2009 and 2008 (in thousands):
Three Months ended Nine Months ended
March 31, March 31,
---------------------- ----------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Sales to external
customers(1):
--------------------------
Domestic $ 12,953 $ 13,288 $ 45,504 $ 38,255
Foreign 1,071 2,934 5,082 8,009
---------- ---------- ---------- ----------
Total Net Sales $ 14,024 $ 16,222 $ 50,586 $ 46,264
========== ========== ========== ==========
13
================================================================================
As of
----------------------
March 31, June 30,
2009 2008
---------- ----------
Identifiable assets:
United States $ 68,045 $ 50,056
Dominican Republic (2) 21,614 19,841
Other foreign countries 5,037 6,826
---------- ----------
Total Identifiable
Assets $ 94,696 $ 76,723
========== ==========
(1) All of the Company's sales occur in the United States and are shipped
primarily from the Company's facilities in the United States and United
Kingdom. There were no sales into any one foreign country in excess of 10%
of Net Sales.
(2) Consists primarily of inventories ($16,818,000 and $14,754,000) and
fixed assets ($4,713,000 and $4,970,000) located at the Company's principal
manufacturing facility in the Dominican Republic as of March 31, 2009 and
June 30, 2008, respectively.
8.) Commitments and Contingencies
-----------------------------
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations. In
August 2008, the Company entered into a lease for the building where Marks
has maintained its operations. The lease provides for an annual base rent
of $288,750 plus maintenance and real estate taxes, expires in August 2009
and provides for two annual extensions thereafter at similar terms and
conditions. In March 2009, the Company began a Restructuring Plan, as
described in Note 10, which includes consolidating the operations of Marks
from this building into the Corporate Headquarters in Amityville, NY and
its production facility in the Dominican Republic. The move from the leased
building described above is expected to be completed prior to the
expiration of the lease. The Marks business involves the manufacturing and
distribution of door-locking devices.
9.) Income Taxes
------------
The provision for income taxes represents Federal, foreign, and state and
local income taxes. The effective rate differs from statutory rates due to
the effect of state and local income taxes, tax rates in foreign
jurisdictions and certain nondeductible expenses. Our effective tax rate
will change from quarter to quarter based on recurring and non-recurring
factors including, but not limited to, the geographical mix of earnings,
enacted tax legislation, and state and local income taxes. In addition,
changes in judgment from the evaluation of new information resulting in the
recognition, de-recognition or re-measurement of a tax position taken in a
prior annual period are recognized separately in the quarter of the change.
The Company does not expect that our unrecognized tax benefits will
significantly change within the next twelve months. We file a consolidated
U.S. income tax return and tax returns in certain state and local and
foreign jurisdictions. There are no current tax examinations in progress.
Accordingly, as of March 31, 2009, we remain subject to examination in all
tax jurisdictions for all relevant jurisdictional statutes.
The Company adopted the provisions of FIN 48 as of July 1, 2007. The
Company has identified its U.S. Federal income tax return and its State
return in New York as its major tax jurisdictions. During the three and
nine months ending March 31, 2009 the Company decreased its reserve for
uncertain income tax positions by $95,000 and $84,000, respectively. As a
result, as of March 31, 2009 the Company has a long-term accrued income tax
liability of $210,000.
10.) Restructuring Costs
-------------------
In March 2009, the Company began a Restructuring Plan consisting of a
series of actions to consolidate its Sales, Production and Warehousing
operations of Marks and those in Europe and the Middle East into the
Corporate Headquarters in Amityville, NY and its production facility in the
Dominican Republic. We expect these restructuring initiatives to cost
between $1,200,000 and $1,500,000. The majority of these actions are
expected to be completed by July 31, 2009, while certain Production-related
actions are expected to be completed by December 31, 2009. Accordingly, the
Company recognized Restructuring costs of $1,255,000 in the three and nine
months ended March 31, 2009. Of this amount, $210,000 relates to Workforce
Reductions communicated in March 2009 and $1,045,000 to Business Exits and
related costs associated with inventory and lease impairments related to
the closure of the Marks, European and Middle East facilities. As of March
31, 2009, $905,000 of the $1,255,000 in Restructuring costs has been
incurred and $350,000 remains in accrued expenses.
14
================================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Quarterly Report on Form 10-Q and the information incorporated by reference
may include "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The
Company intends the Forward-Looking Statements to be covered by the Safe Harbor
Provisions for Forward-Looking Statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
Forward-Looking Statements. The Forward-Looking Statements are based on current
estimates and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such Forward-Looking Statements. The Forward-Looking Statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any Forward-Looking Statements. For example,
the Company is highly dependent on its Chief Executive Officer for strategic
planning. If he is unable to perform his services for any significant period of
time, the Company's ability to continue growing could be adversely affected. In
addition, factors that could cause actual results to differ materially from the
Forward-Looking Statements include, but are not limited to, the ability to
maintain adequate financing to fund operations, adverse tax consequences of
offshore operations, significant fluctuations in the exchange rate between the
Dominican Peso and the U.S. Dollar, distribution problems, unforeseen
environmental liabilities, the uncertain economic, military and political
conditions in the world and the successful integration of Marks into our
existing operations.
Overview
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. International sales accounted for approximately 10% and 17% of our
revenues for the nine months ended March 31, 2009 and 2008, respectively.
The Company owns and operates manufacturing facilities in Amityville, New York
and the Dominican Republic. A significant portion of our operating costs are
fixed, and do not fluctuate with changes in production levels or utilization of
our manufacturing capacity. As production levels rise and factory utilization
increases, the fixed costs are spread over increased output, which should
improve profit margins. Conversely, when production levels decline our fixed
costs are spread over reduced levels, thereby decreasing margins.
On August 18, 2008, the Company acquired substantially all of the assets and
business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment
of $1 million of bank debt and the assumption of certain current liabilities.
The Company also entered into a lease for the building where Marks has
maintained its operations. The lease provides for an annual base rent of
$288,750 plus maintenance and real estate taxes, expires in August 2009 and
provides for two annual extensions thereafter. In March 2009 the Company began
to move the Marks operations into its existing facilities. The Company plans on
completing the majority of this consolidation by July 31, 2009. The Marks
business involves the manufacturing and distribution of door-locking devices.
The security products market is characterized by constant incremental innovation
in product design and manufacturing technologies. Generally, the Company devotes
7-8% of revenues to research and development (R&D) on an annual basis. Products
resulting from our R&D investments in fiscal 2008 did not contribute materially
to revenue during this fiscal year, but should benefit the Company over future
years. In general, the new products introduced by the Company are initially
shipped in limited quantities, and increase over time. Prices and manufacturing
costs tend to decline over time as products and technologies mature.
Economic and Other Factors
Since October 2008, the U.S. and international economies have experienced a
significant downturn and continue to be very volatile. In the event that the
downturn in the U.S. or international financial markets is prolonged, our
revenue, profit and cashflow levels could be materially adversely affected in
future periods. This could effect our ability to maintain adequate financing. If
the current worldwide economic downturn continues, many of our current or
potential future customers may experience serious cash flow problems and as a
result may, modify, delay or cancel purchases of our products. Additionally,
customers may not be able to pay, or may delay payment of, accounts receivable
that are owed to us. Furthermore, the current downturn and market instability
makes it difficult for us to forecast our revenues.
Restructuring Costs
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. We expect
these restructuring initiatives to cost between $1,200,000 and $1,500,000. The
majority of these actions are expected to be completed by July 31, 2009, while
certain Production-related actions are expected to be completed by December 31,
2009. Accordingly, the Company recognized Restructuring costs of $1,255,000 in
the three and nine months ended March 31, 2009. Of this amount, $210,000 relates
to Workforce Reductions communicated in March 2009 and $1,045,000 to Business
Exits and related costs associated with inventory and lease impairments related
to the closure of the Marks, European and Middle East facilities. As of March
31, 2009, $905,000 of the $1,255,000 in Restructuring costs has been incurred
and $350,000 remains in accrued expenses.
15
================================================================================
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. To a
lesser degree, sales in Europe are also adversely impacted in the Company's
first fiscal quarter because of European vacation patterns, i.e., many
distributors and installers are closed for the month of August. In addition,
demand is affected by the housing and construction markets. The severity of the
current economic downturn may also affect this trend.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventories; intangible
assets; goodwill; and income taxes.
Revenue Recognition
Revenues from merchandise sales are recorded at the time the product is shipped
or delivered to the customer pursuant to the terms of sale. We report our sales
levels on a net sales basis, which is computed by deducting from gross sales the
amount of actual returns received and an amount established for anticipated
returns and other allowances.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales and income. This accrual is calculated based on a
history of gross sales and actual sales returns, as well as management's
estimate of anticipated returns and allowances. As a percentage of gross sales,
sales returns, rebates and allowances were 10% and 6% for the nine months ended
March 31, 2009 and 2008, respectively.
Concentration of Credit Risk
An entity is more vulnerable to concentrations of credit risk if it is exposed
to risk of loss greater than it would have had if it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
The Company had two customers with accounts receivable balances that aggregated
31% and 34% of the Company's accounts receivable at March 31, 2009 and June 30,
2008, respectively. Sales to neither of these customers exceeded 10% of net
sales in any of the past three fiscal years.
In the ordinary course of business, we have established a reserve for doubtful
accounts and customer deductions in the amount of $492,000 and $405,000 as of
March 31, 2009 and June 30, 2008, respectively. Our reserve for doubtful
accounts is a subjective critical estimate that has a direct impact on reported
net earnings. This reserve is based upon the evaluation of accounts receivable
agings, specific exposures and historical trends.
Inventories
For interim financial statements, inventories are calculated using a gross
profit percentage. The Company regularly reviews parts and finished goods
inventories on hand and, when necessary, records a reserve for excess or
obsolete inventories. As of March 31, 2009 and June 30, 2008, the balance in
this reserve amounted to $1,412,000 and $1,200,000, respectively. This reserve
is based in part on subjective estimates and approximations and actual results
could differ from those estimates. The Company also regularly reviews the period
over which its inventories will be converted to sales. Any inventories expected
to convert to sales beyond 12 months from the balance sheet date are classified
as non-current.
16
================================================================================
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its estimated
market value, based on various product sales projections. The balance in this
reserve was $1,412,000 and $1,200,000 as of March 31, 2009 and June 30, 2008,
respectively. This reserve is calculated using an estimated obsolescence
percentage applied to the inventory based on age, historical trends,
requirements to support forecasted sales, and the ability to find alternate
applications of its raw materials and to convert finished product into alternate
versions of the same product to better match customer demand. There is inherent
professional judgment and subjectivity made by both production and engineering
members of management in determining the estimated obsolescence percentage. In
addition, and as necessary, the Company may establish specific reserves for
future known or anticipated events.
The Company also regularly reviews the period over which its inventories will be
converted to sales. Any inventories expected to convert to sales beyond 12
months from the balance sheet date are classified as non-current.
Goodwill and Other Intangible Assets
The Company accounts for Goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. These statements established accounting
and reporting standards for acquired goodwill and other intangible assets.
Specifically, the standards address how acquired intangible assets should be
accounted for both at the time of acquisition and after they have been
recognized in the financial statements. In accordance with SFAS No. 142,
intangible assets, including purchased goodwill, must be evaluated for
impairment. Intangible assets are reviewed for impairment at least annually at
the Company's fiscal year-end of June 30 or more often whenever there is an
indication that the carrying amount may not be recovered. Those intangible
assets that are classified as goodwill or as other intangibles with indefinite
lives are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. At the conclusion of fiscal 2008, the Company
performed its annual impairment evaluation required by this standard and
determined that its goodwill is not impaired.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of $16,440,000
on the date of acquisition. In accordance with the requirements of SFAS No. 141,
"Business Combinations", the Company recorded the estimated value of $9,800,000
related to the customer relationships, $340,000 related to a non-compete
agreement and $6,300,000 related to the Marks trade name within intangible
assets and Goodwill of $922,000 subject to further adjustment. In accordance
with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the
intangible assets will be amortized over their estimated useful lives of twenty
years (customer relationships) and seven years (non-compete agreement). The
Marks USA trade name was deemed to have an indefinite life. The goodwill
recorded as a result of the acquisition is deductible for Federal and New York
State income tax purposes over a period of 15 years.
Income Taxes
The provision for income taxes represents Federal, foreign, and state and local
income taxes. The effective rate differs from statutory rates due to the effect
of state and local income taxes, tax rates in foreign jurisdictions and certain
nondeductible expenses. Our effective tax rate will change from quarter to
quarter based on recurring and non-recurring factors including, but not limited
to, the geographical mix of earnings, enacted tax legislation, and state and
local income taxes. In addition, changes in judgment from the evaluation of new
information resulting in the recognition, de-recognition or re-measurement of a
tax position taken in a prior annual period are recognized separately in the
quarter of the change.
We do not expect that our unrecognized tax benefits will significantly change
within the next twelve months. We file a consolidated U.S. income tax return and
tax returns in certain state and local and foreign jurisdictions. There are no
current tax examinations in progress. Accordingly, as of March 31, 2009, we
remain subject to examination in all tax jurisdictions for all relevant
jurisdictional statutes.
17
================================================================================
Results of Operations
Three months ended March 31, Nine months ended March 31,
(dollars in thousands) (dollars in thousands)
----------------------------------------- -----------------------------------------
% Increase/ % Increase/
2009 2008 (decrease) 2009 2008 (decrease)
--------------------------------------------------------------------------------------
Net sales $ 14,024 $ 16,222 (13.5)% $ 50,586 $ 46,264 9.3%
Gross profit (loss) (196) 5,716 (103.4)% 11,624 16,387 (29.1)%
Gross profit (loss) as a % of net sales (1.4)% 35.2% (36.6)% 23.0% 35.4% (12.4)%
Selling, general and administrative 4,919 4,148 18.6% 15,142 12,731 18.9%
Selling, general and administrative as
a percentage of net sales 35.1% 25.6% 9.5% 29.9% 27.5% 2.4%
Operating income (loss) (5,260) 1,568 (435.5)% (3,663) 3,656 (200.2)%
Interest expense, net 426 216 97.2% 1,170 635 84.3%
Other (income) expense 76 12 533.3% 101 30 236.7%
Minority interest in net (loss) income
of subsidiary (112) 33 (439.4)% -- 92 (100.0)%
Provision (Benefit) for income taxes (859) (1,904) 54.9% (574) (1,741) 67.0%
Net income (loss) (5,015) 3,277 (253.0)% (4,360) 4,824 (190.4)%
Sales for the three months ended March 31, 2009 decreased by approximately 14%
to $14,024,000 as 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
decreased sales of the Company's intrusion products ($2,974,000), products
specific to the Company's Middle East operation ($1,595,000), door locking
products ($1,441,000) and access control products ($369,000) as partially offset
by the net sales added from the Marks acquisition ($4,177,000). The increase in
sales for the nine months ended March 31, 2009 was primarily the result of the
net sales added from the Marks acquisition ($12,265,000) and an increase in the
company's door-locking products ($379,000) as partially offset by decreases in
the Company's intrusion products ($6,725,000), products specific to the
Company's Middle East operation ($1,484,000) and access control products
($114,000). The Company's sales were adversely affected by the worldwide
economic downturn to a greater extent in the quarter ended March 31, 2009 as
compared to previous quarters.
Gross profit for the three months ended March 31, 2009 decreased to a loss of
$196,000 or (1.4)% of sales as compared to a profit of $5,716,000 or 35.2% of
sales for the same period a year ago. Gross profit for the nine months ended
March 31, 2009 decreased to $11,624,000 or 23.0% of sales as compared to
$16,387,000 or 35.4% of sales for the same period a year ago. The decrease in
Gross profit in dollars and as a percentage of sales for the three and nine
months was primarily due to the decrease in sales of the Company's non-Marks
products as described above as well as $1,110,000 in restructuring costs in the
three and nine months ended March 31, 2009 as partially offset by the addition
of the Gross profit of Marks ($1,118,000 and $3,732,000, respectively) resulting
from the acquisition on August 18, 2008.
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, or 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 Marks ($820,000
and $2,415,000, respectively). The increases as a percentage of sales are due
primarily to the decreases in sales as described above.
Interest expense, net for the three months ended March 31, 2009 increased by
$210,000 to $426,000 as compared to $216,000 for the same period a year ago.
Interest expense, net for the nine months 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 $25,000,000 term loan utilized for the Marks acquisition in August
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 as compared 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 provision for income taxes for the three and nine
months resulted primarily from the benefits recognized in the third quarter of
fiscal 2008 for the reversal of certain tax reserves for which the statute of
limitations expired and also in the second quarter of fiscal 2008 relating to
the Company's corporate restructuring. As a result, the Company's effective rate
for income tax was 14.6% and 11.6% for the three and nine months ended March 31,
2009, respectively as compared to (138.7)% and (56.4)% for the same periods a
year ago.
18
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Net income decreased by $8,292,000 to a loss of $5,015,000 or $(0.26) per
diluted share for the three months ended March 31, 2009 as compared to income of
$3,277,000 or $0.17 per diluted share for the same period a year ago. Net income
decreased by $9,184,000 to a loss of $4,360,000 or $(0.23) per diluted share for
the nine months ended March 31, 2009 as compared to income of $4,824,000 or
$0.24 per diluted share for the same period a year ago. The decrease for the
three and nine months ended March 31, 2009 was primarily due to the decrease in
net sales and gross profit in the Company's intrusion product lines.
Liquidity and Capital Resources
-------------------------------
During the nine months ended March 31, 2009 the Company utilized all of its cash
from operations and additional borrowings to complete the Marks acquisition
($26,173,000, which includes payment of the $1,000,000 of assumed debt),
purchase inventory ($756,000) and property, plant and equipment ($428,000). As a
result of the Company not being in compliance with the financial ratios
described below, the Company's banks have notified the Company that they have
limited the revolving line of credit to the amount currently outstanding of
$11,100,000 until the credit facilities can be amended with the Company. The
Company is currently in discussions with its banks regarding waivers for the
non-compliance with the covenants at March 31, 2009 and amendments to the
existing credit facilities. The Company expects to amend the existing credit
facilities and receive the appropriate waivers from its banks but this has not
been completed as of the date of this filing. As a result, the Company has
classified the amount outstanding under these facilities as a current liability
until it completes the amendment with the banks. While the Company expects to be
able to negotiate amended credit facilities, should it fail to do so its current
working capital, cash flows from operations and its revolving credit agreement
may not be sufficient to fund the Company's operations through the next twelve
months.
Accounts Receivable at March 31, 2009 decreased $7,249,000 to $18,574,000 as
compared to $25,823,000 at June 30, 2008. This decrease is primarily the result
of the lower sales volume during the quarter ended March 31, 2009 as compared to
the quarter ended June 30, 2008, which is typically the Company's highest, as
partially offset by the Accounts Receivable generated by Marks ($2,179,000).
Inventories at March 31, 2009 increased by $7,517,000 to $34,789,000 as compared
to $27,272,000 at June 30, 2008. This increase was primarily the result of the
Marks acquisition ($5,064,000) as well as the Company level-loading its
production schedule in anticipation of its historical sales cycle where a larger
portion of the Company's sales occur in the latter fiscal quarters as compared
to the earlier quarters. The Company initiated several steps in order to reduce
inventory levels in fiscal 2008 and is continuing them in fiscal 2009. These
efforts were mitigated by the decreased sales volume that has occurred during
the first nine months of fiscal 2009 (exclusive of the sales resulting from the
Marks acquisition) and which was below the sales forecast used by the Company to
plan and build it's inventory. These forecasts have been adjusted subsequent to
March 31, 2009.
On August 18, 2008, the Company and its banks amended and restated the existing
$25,000,000 revolving credit agreement. The amended facility was $50,000,000 and
provides for a $25,000,000 revolving credit line as well as a $25,000,000 term
portion of which the entire $25,000,000 was utilized to finance the asset
purchase agreement as described in Note 5. The amended revolving credit
agreement and term loan was amended in November 2008 to $20,000,000 and amended
in May 2009 to $11,100,000 and is secured by all the accounts receivable,
inventory, the Company's headquarters in Amityville, New York and certain other
assets of Napco Security Technologies, Inc. and the common stock of three of the
Company's subsidiaries. The agreements bear interest based on either the Prime
Rate or an alternate rate based on LIBOR as described in the agreement. The
August amendment extended the revolving credit agreement to August 2012. Any
outstanding borrowings are to be repaid or refinanced on or before that time. As
of March 31, 2009 there was $11,100,000 outstanding under the revolving credit
facility with an interest rate of 5.0% and $23,214,000 outstanding under the
term loan with an interest rate of 5.0%. The term loan is being repaid in 19
quarterly installments of $893,000 each, commencing in December 2008, and a
final payment of $8,033,000 due in August 2013. The agreements contain various
restrictions and covenants including, among others, restrictions on payment of
dividends, restrictions on borrowings and compliance with certain financial
ratios, as defined in the agreement. The Company is currently not in compliance
with the covenants relating to the ratio of Funded Debt to EBITDA, Debt Service
Coverage Ratio and a Modified Quick Ratio, which constitutes an event of default
under its credit facilities, and is currently in discussions with it's banks
regarding the appropriate waivers as well as amendments to the existing credit
facilities as discussed above.
As of March 31, 2009 the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders issued in the
normal course of business.
19
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ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit facility and term loan) that provides for interest based on the
prime rate or an alternate rate based on LIBOR as described in the agreement.
The Company is affected by market risk exposure primarily through the effect of
changes in interest rates on amounts payable by the Company under this credit
facility. At March 31, 2009, an aggregate principal amount of approximately
$34,314,000 was outstanding under the Company's credit facility with a weighted
average interest rate of approximately 5.0%. If principal amounts outstanding
under the Company's credit facility remained at this level for an entire year
and the prime rate increased or decreased, respectively, by 1% the Company would
pay or save, respectively, an additional $343,000 in interest that year.
A significant number of foreign sales transactions by the Company are
denominated in U.S. dollars. As such, the Company has shifted foreign currency
exposure onto many of its foreign customers. As a result, if exchange rates move
against foreign customers, the Company could experience difficulty collecting
unsecured accounts receivable, the cancellation of existing orders or the loss
of future orders. The foregoing could materially adversely affect the Company's
business, financial condition and results of operations. In addition, the
Company transacts certain sales in Europe in British Pounds Sterling, therefore
exposing itself to a certain amount of foreign currency risk. Management
believes that the amount of this exposure is immaterial. We are also exposed to
foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"),
the local currency of the Company's production facility in the Dominican
Republic. The result of a 10% strengthening in the U.S. dollar to our RD$
expenses would result in an annual decrease in income from operations of
approximately $315,000.
ITEM 4: Controls and Procedures
-------------------------------
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
At the conclusion of the period ended March 31, 2009, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in alerting them in a timely manner to information relating to the
Company required to be disclosed in this report except as follows:
Management's review over its internal controls at the conclusion of fiscal 2008
identified conditions which they deemed to be material weaknesses, (as defined
by standards established by the SEC and the Public Company Accounting Oversight
Board) with respect to certain of our inventory valuation methods both at
year-end and relating to the Gross profit method used to calculate Gross profit
and Inventories for interim reporting purposes. Management has informed its
independent auditors and the Audit Committee that it has corrected its method of
calculating its gross profit and inventory for interim reporting by including a
more comprehensive review of changes within the business and accounting for
those changes where appropriate. The Company has also initiated a review of the
ways in which we can more accurately cost its inventory for year-end reporting
and will continue to monitor the effectiveness of these actions and will make
any other changes or take such additional actions as management determines to be
appropriate. Management expects to complete the actions relating to the year-end
inventory valuation during fiscal 2009.
The Company has excluded from this assessment the internal control over
financial reporting of Marks USA, which was acquired in August 2008. Total
assets and total net sales subject to Marks USA internal control over financial
reporting, represented 26% and 24%, respectively, of the Company's consolidated
total assets and net sales for the nine months ended March 31, 2009.
During the third quarter of fiscal 2009, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting except for the procedure described above which has corrected
the weakness relating to interim Gross profit and inventory calculations.
20
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PART II: OTHER INFORMATION
Item 1A. Risk Factors
------------
Information regarding the Company's Risk Factors are set forth in the
Company's Annual Report on Form 10-K for the year ended June 30, 2008.
There have been no material changes in the risk factors previously
disclosed in the Company's Form 10-K for the year ended June 30, 2008
during the three months ended March 31, 2009 except as follows:
Our Business Could Be Materially Adversely Affected as a Result of the
---------------------------------------------------------------------------
Inability to Maintain Adequate Financing
----------------------------------------
Our business is dependent on maintaining the financing used in the Marks
acquisition and to fund operations. The current debt facilities provide for
certain minimum payments on the Marks term loan and financial covenants
relating to ratios affected by profit and debt levels. If profits or
cash-flow levels decline below the minimums required to meet these
covenants or make the minimum debt payments, the debt facilities may be
materially adversely affected. Effects on the Company's financing could
include higher interest costs, reduction in borrowing availability or
revocation of the existing credit facilities.
Our Business Could Be Materially Adversely Affected as a Result of General
---------------------------------------------------------------------------
Economic and Market Conditions
------------------------------
We are subject to the effects of general economic and market conditions. If
these conditions deteriorate, our business, results of operations or
financial condition could be materially adversely affected. In addition,
since October 2008, the U.S. and international economies have experienced a
significant downturn and continue to be very volatile. In the event that
the downturn in the U.S. or international economies is prolonged, our
revenue levels could be materially adversely affected in future periods. If
the current worldwide economic downturn continues, many of our current or
potential future customers may experience serious cash flow problems and as
a result may, modify, delay or cancel purchases of our products.
Additionally, customers may not be able to pay, or may delay payment of,
accounts receivable that are owed to us. Furthermore, the current downturn
and market instability makes it difficult for us to forecast our revenues.
Our Business Could Be Materially Adversely Affected by the Inability to
---------------------------------------------------------------------------
Reduce Expenses Relative to the Current Decreases in Sales Levels
-----------------------------------------------------------------
While Management has begun implementation of a restructuring plan to reduce
expense levels relative to current sales levels, if this plan is
unsuccessful, delayed or sales levels decrease further, our business may be
adversely affected.
Our Business Could Be Materially Adversely Affected by the Integration of
---------------------------------------------------------------------------
Marks into Our Existing Operations
----------------------------------
Our business is dependent on the orderly, effective integration of the
acquired Marks business, technologies, product lines and employees into our
organization. If this integration is unsuccessful, our business may be
materially adversely affected.
Item 6. Exhibits
--------
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L.
Soloway, Chairman of the Board and President
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel,
Senior Vice President of Operations and Finance
32.1 Section 1350 Certifications
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 21, 2009
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By: /s/ RICHARD L. SOLOWAY
-------------------------------------------------------------
Richard L. Soloway
Chairman of the Board of Directors, President and Secretary
(Chief Executive Officer)
By: /s/ KEVIN S. BUCHEL
-------------------------------------------------------------
Kevin S. Buchel
Senior Vice President of Operations and Finance and Treasurer
(Principal Financial and Accounting Officer)
22
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