Ladies and gentlemen, thank you for standing by. Welcome to the NAPCO Security Technologies Fiscal Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Peter Seltzberg from Hayden IR. Please go ahead, sir.

Good morning, and thank you, all, for joining us for today's conference call to discuss NAPCO's financial results for the fourth quarter ended June 30, 2013. By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, please call our office, Hayden IR, at (646) 419-4300, we'll immediately send it to you by either fax or e-mail. On the call today is Richard Soloway, President and Chairman of NAPCO Security Technologies; and Kevin Buchel, Senior VP of Operations and Finance. Before I ask our host, Richard Soloway, to discuss the particulars of today's news, let me take a moment to read the forward-looking statement. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance or achievements may 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 SEC. With that out of the way, let me turn the call over to Richard Soloway, President and Chairman of NAPCO Security Technologies. Dick, please proceed.

Thanks, Peter. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the 3 and 12 months ending June 30, 2013. Our fourth quarter delivered a strong finish for our fiscal year of 2013 and contributed to positive financial metrics for the quarter and year. We generated our highest quarterly revenue level in 5 years and matched our best quarter ever in net income. Gross margin improved 270 points to 38.1% for the quarter. Gross margin increased due to favorable product mix as demand for our more sophisticated, higher-margin products increased. In addition, as we have reiterated on numerous occasions, when our top line exceeds $20 million, we're able to more effectively leverage our low-cost manufacturing infrastructure. These top line results contributed favorably to the bottom line, in part, due to our careful management of expenses and decrease in interest expense, which resulted from lower interest rate and lower debt levels. As a result, we matched our best-ever quarterly net income of $3.2 million, up 74% from the year-ago period. Earnings per share for the quarter rose to $0.17 per diluted share, an 89% increase over the $0.09 per share diluted in the year-ago quarter. Adjusted EBITDA for the quarter increased as well by just under $1 million to $4.4 million from $3.5 million in the year-ago quarter. Please see our press release issued earlier today to review the reconciliation of GAAP to non-GAAP adjusted EBITDA financial metrics. These favorable metrics demonstrate the traction of our comprehensive line, which is beginning to deliver to our top and bottom line results and includes products introduced in the last 18 months and those with recurring monthly revenues. We are excited about our positioning as a technology leader, with new products out in the marketplace. Our…

Thank you, Dick, and good morning, everybody. Revenues for the 3 months ended June 30, 2013, increased 10% to $21.8 million compared to $20 million in the same period a year ago. For the 12 months, sales increased 1% to $71.4 million from $70.9 million in the same period a year ago. The increase in sales for the 3 and 12 months was due to increased sales of the company's Marks brand door-locking products, Access Control products and Alarm Lock brand door-locking products, partially offset by decreases in the company's intrusion products. Gross profit for the 3 months ended June 30, 2013, increased 18% to $8.3 million or 38.1% of sales, compared to $7 million or 35.4% of sales for the same period a year ago. Gross profit for the 12 months increased 3% to $21.7 million or 30.4% of sales, compared to $21.2 million or 29.8% of sales for the same period a year ago. The increase in gross profit for the 3 and 12 months occurred even though the company committed an additional $900,000 in research and development spending during the year to bring our new products to market faster and was primarily due to a positive shift in product mix to higher-margin products. It also demonstrates the impact of increased recurring revenue, as well as our overall efficiency as our sales volume increases. Selling, general and administrative expenses for the quarter were $4.7 million, unchanged for the same period last year. Selling, general and administrative expenses for the 12 months increased by $600,000 or 3% to $17.9 million or 25.1% of sales, compared to $17.3 million or 24.4% of sales a year ago. The increase in selling, general and administrative expenses for the 12 months was due primarily to additional sales personnel and increased advertising and trade…

Okay, thanks, Kevin. Fiscal 2013 has been a pivotal year for NAPCO, with significant milestones that reflect our delivery of a more diversified, sophisticated product line encompassing intrusion, fire alarms, video systems, building access control systems and electronic locking devices to meet changing and heightening demand for security products. We have committed to provide our customer base with the most advanced and integrated technology, to stay at the forefront of the security marketplace. I am pleased with NAPCO's 2013 performance, in particular, our strong finishing fourth quarter. The fiscal year was not without its challenges, including the lingering effects of Superstorm Sandy in our revenue goals, midyear. However, more diversified product lines and the momentum that is building with our recurring revenue model, allowed us to deliver overall strong top and bottom line performance. We expect this momentum to continue in fiscal 2014. While fiscal quarter 1 is historically our slowest period, we expect that it may be more robust than a year ago, since some of the aforementioned university product did not ship until after June 30. We are optimistic for fiscal 2014 and we'll continue to pursue our strategy of expanding our products and services, which will add incremental recurring revenue, as well as expanding gross margins. We expect that we can consistently deliver 40-plus percent gross margins as we approach $100 million in revenues by more fully leveraging our low-cost manufacturing facility in the Dominican Republic. And this is without factoring in the full impact of increased recurring revenues. Concurrent with gross margin expansion, we will be able to focus on further reducing our debt. Both of these initiatives will have a favorable effect on our overall financial performance in 2014 and beyond. We look forward to a continued increase in and support of NAPCO as we move forward and you track our continuous growth and financial success. That concludes our formal remarks. Kevin and I would like to open the call for questions. Operator, please proceed.

[Operator Instructions] And your first question will come from the line of Orin Hirschman from AIGH Investment Partners.

In terms of some of those school lockdown products, can you kind of talk about the pipelines and when you might see some additional projects even if they're not of the same magnitude that -- I know, perhaps, you've seen some smaller ones already that have shipped, but just talk about that in general and also talk about if there's additional opportunity at that large customer that just purchased, whether there's beyond that initial $1.5 million?

The school lockdown projects come in every day. We get different projects with different schools, universities. And we have 3 different products for the application. We've got mechanical products, as well as electronic and then radio-controlled products. So we're constantly seeing school orders for these different products. And as school administrators and school marketing is in play, we're identifying our customer base and trying to target them, to show them what the new applications are. And we have salespeople and we go to the school shows and electronic shows to demonstrate the products so we can pick up more and more momentum. The big university project that we did, where we expect to get additional pieces from that project because we've done part of the university, but there's more administrative and other areas around the university, plus, the consultants that work with us, that get us involved with these universities and colleges, are putting out a lot of our literature. So we would expect that, that would bring additional business.

Okay, and just the -- I mean, are there projects out there that are coming up for bid that are of this of magnitude, $1 million deals?

There's all kinds of projects, small ones, mid-size and big ones, also. So it's a matter of landing them. The lock is very -- the lock -- the radio-controlled lock as an example, is very unique and adaptable for office buildings, as well as for government installations. So we would expect to see more of this through all of these different facets, verticals of our marketing.

When we get the big one, believe me, we will announce it.

Can this new area, just because of what's going on, unfortunately, out there, begin to offset some of your seasonality, in general?

I would say that it could help our seasonality. This was an installation that had to be designed and installed during summer months. So there's probably going to be more of that. Usually, right before the summer is our biggest quarter, like you've seen, the June 30 quarter. But the seasonality should be a little less lumpy with this type of work and also, the recurring revenue that keeps on building in the sequential order. So I would say, that's going to be -- help level things out.

Okay, and my final question, if I may, it's just in terms of the recurring revenue aspect, obviously, the percentage growth is extremely meaningful, when does it become a big enough piece of the pie, maybe, that you break it out? Could it be this year or next year?

It could be, it could be. We report the sequential growth of it, and it's doing very well. And then, we have the new 3G version of that, which is -- was introduced, then the iBridge version and the iRemote and a lot of things. So there's a lot going on. We -- for purposes of confidentiality and competitiveness, we don't like to talk about exact numbers but -- so we talk in these general terms. But eventually, we will release the numbers when we have to do that.

And your next question comes from the line of George Santana from Ascendiant.

Two quick judgment [ph] questions. First, I may have missed it, I apologize if I did, what was the capacity utilization in the last quarter for the Dominican Republic facility?

The Dominican Republic, with 1,000 workers on one shift, it's our estimate that we can do $100 million. Right now, we have about 700 workers on one shift, and we can run a second shift. So we could do in that building on 2 shifts, $200 million. We're aiming at pushing to do that.

So, George, if you do the math, and we had a $22 million quarter and you annualize it to $88 million, you could say we were at 88% capacity for that quarter, from one shift.

So this is really what's strengthening and the reason behind the margins. Should -- the margin improvement should continue as you continue to fill up that plan, correct?

Exactly. See how explosive the GP was when you could put a $22 million quarter on the board. And we want to do that every quarter, not just one quarter.

That's great. And second question, had there been any changes in the competitive landscape over the last 3 to 6 months?

There's always companies trying to get into security business. Basically, we find ourselves in a very unique aspect of it, because we're the only company, anywhere, that has an access control division, making access control for buildings; locking products, both mechanical and electronic locking products; and intrusion and fire systems. So when it comes to competitors coming into the business, they may have one facet of it, or 2 facets of it, but nobody has all the facets that we have. So as we talked about, it allows us come out with our integrated platform called Fusion, where we're a one-stop shop for integrators and dealers, and they can get everything from us. So while we watch what goes on out there, it's very hard for other companies to have all the facets of the security that we have. So we think we have a big advantage, now, and going forward in the future.

Your next question will come from the line of Walter Ramsley from Walrus Partners.

Got a couple of questions. Like you mentioned in your text, the dealer network took a dip early in the year due to the Sandy storm. Can you give us an update on what that situation looks like now?

Well, a lot of the dealers are back in shape and doing installations. And because -- and that's in the intrusion area, specifically, intrusion and fire. That was the area that really took a hit because it affected a lot of residential and commercial buildings along the seacoast, all the way from Maine down to Carolina. So while some of the buildings have not come back online, the focus with our marketing has been to supply the dealers for these buildings as they come back online, but also to push the remote control locking school security and recurring revenue services. So because we are so diversified, one facet of our business got hurt, and it was a big facet, but other ones have made up the difference in this year. So we feel strong because we're diversified. And the training courses are doing well and people are adopting it, adopting the products and you have a new demographic of homeowner and business owner, which are more smartphone-oriented, which want to have apps and be able to control their systems remotely over smartphones, and we've done a lot of engineering and spent money on doing that, developing apps and that technology. So we want to be on the cutting edge of all of this, and we want to be diversified, and we want to come out with as many products as we can, which have recurring revenue, because that's a sale that keeps on giving and that's what we like.

So the dealers, they had a few that consolidated last year, too. Did they bounce back to their original volume or have they remained lower than before?

It's a mixed bag. Typically, a dealer, when it consolidates, sells its accounts and merges into another company. So we have that going on. We have other dealers that got stronger by doing that. We have other dealers, it's a very diversified thing that maybe the head mechanic left and started his own alarm company and likes the NAPCO product, he's familiar with it, and he has his own alarm company, a new alarm company. So it's all of these things.

Okay, have you guys been able to expand your dealer network?

That's what we're working on. We have more dealers, we're adding more dealers and integrators all the time. In the alarm business, it's alarm dealers; in the access control, it's integrators; and the locking, it's door professionals. And then you have integrators that do all of these things, where they can do hospitals or schools completely and supply everything, from us with one technical call to us, and we can help them do specific applications. So we're always expanding our dealer base. There's probably about 20,000 security dealers, there's at least 15,000 integrators, there's 20,000 locking door specialists. So it's a big universe of people. And we try to hit them at all the shows, and we have people in the field working for each of our units. And that's what we do, to train and get them familiar with what we're doing.

So, in general, do you see the intrusion business really accelerating in the near term? Or is it still kind of so-so?

I think we're going to see an acceleration in the intrusion business this year, and I think it's going to grow, and it brings a lot of recurring revenue along with it.

And your next question comes from the line of Mr. Rick Federman from Federman Investments.

You used to -- before the housing market collapsed, break out the percentage of business that was commercial and residential, and I was curious, with housing staging a fairly decent recovery here in the last 18 months or so, can you quantify the impact on the residential part of your business? And I wonder if you could breakout what percent is residential, and what is commercial?

Well, the way we always talk about it, Rick, is we say that NAPCO intrusion and fire is 50-50, residential and commercial. And we say that Continental is 100% commercial because it's [ph] access control systems. And Marks USA is 100% commercial because it's ANSI Grade 1 industrial locks. And Alarm Lock is 100% commercial because it's push-button and card-reading commercial locks for offices. So I would say that we're 20% residential, 80% commercial. In the residential portion of our business, the new demographic is younger households, no dial-up phones, use a radio communicator. We have the best radio communicator in the business, it's priced right, it's on the best radio network, on multiple radio networks, and it's really easy for the dealers to install, so it's doing very, very well and generates recurring revenue for us. We've also added to that demographic, the fact that these consumers like to use smartphones, they like to control their life on the telephone. You see more around tables, they're controlling everything by their phone. Now we're giving them the ability to control their thermostats, their lighting, their heating, their door locks, watch video, all on the smartphone. So we see that as very, very strong growth in the years to come. And each of those services is bought by the dealer for the consumer, and there is recurring revenue fee that you charge for using our cloud computing. So we look at that as a very strong area. We put a lot of R&D into it. It's very complicated stuff to get it to work on all the different types of cell phones and to get it to work on all the different type of networks, there's a lot to it. But we have been told and demonstrated that we have the best system on the market, easiest to install, and we expect big things out of this.

And your next question comes from the line of Jeff from Imperial Capital.

In going to market, you've obviously had to deal with -- you've dealt with dealers and then integrators. On the lock, when you get involved with some of the more sophisticated projects though, it isn't just integrator, but you're dealing with specifiers and consultants. How has going to market changed for you, and are you having to make any big adjustments inside the company with regard to dealing with who is going to get you into that end user?

Well, the larger jobs, we have to work many levels. First of all, we have to have a set of drawings on everything that meets the specifications, depending on which jurisdiction. Could be ANSI specifications, could be National Fire Alarm Association specifications, or the like. So we have sets of drawings for the architects, which have all the specs on them. Then we have people that are specializing in calling on architects and showing them our specifications and why our products are great and what the heredity is of our products, so they get put on to the drawings. Then we do a lot of field training, plus training here at NAPCO, because these products are more sophisticated, they're heavy duty industrial life safety type of products, so we have to do a lot of training on that. And, of course, you have to work with the facilities, facility management with consultants to get into the different facilities. So it's a more complex sale, but it's a very stable sale and comes with big dollars.

Okay, one other question. Even though, obviously, your backlogs are quite different when it comes to different types of businesses you're in, based on what you see in the order rate, what for -- you've mentioned already that you see a stronger -- you're starting to see a stronger first quarter, at least in one of your segments than you had before, probably, because of weather-related issues. But what I'm -- the question I'm asking is, specifically, is that based on what you are seeing in terms of the various order rates as they come in, in the various segments, what are you looking for in terms of strength per segment into the first and second quarter?

What we're doing is, each of the segments we're in, there's some parallel labor that we get, sales labor, training labor, so we share that with each of different groups. We foresee growth in the intrusion communication area because of what's going on with dial-up disappearing and having the best radio on the market at the right price, with the easiest installation, very important. We see the smartphone taking hold, with everybody has a smartphone, and people want to control what's going on in their premise or see what's going on in their office or their store or whatever. We see all of that coming on, so that's a very hot area. We've been doing video for more than 5 years, from the point of view of getting it to this level of performance, where it has the clearest image and real time and storage and all the other things that are required with video over smartphone and service. So we have that going on. Then we have our Networx locking, which takes our commercial locking and allows you to put nodes throughout buildings, so you don't have to rip up the walls and run wiring, just drop nodes into the drop ceiling or closet. Each of those nodes talks hundreds of feet to the lock, and you can get all of the data out of the lock back to the security office for changing codes, or the security office can lock it down, either from their office or from a remote station with key fobs, so we have that going on. And then we have that whole network thing, which is brand new, which is going to be -- we expect to be a very hot part of our business. We're a one-stop shop because, as you know, there's no one company that has access control, video, locking, intrusion and fire, right, Jeff, in the industry, right? We're the only ones. So when you can put all of that in one network, you become a powerful force. And that's what we're going to do, building towards the $100 million number, as our first stop, and then going to full capacity of a couple of hundred million, second stop, in our factory. And that's why it's a very exciting time.

All right. One follow-up, quick question, that is on the 20% of your business that is residential, the elephant in the room for the last year, 1.5 years, has been supposed intrusion of the large carriers, both telco and cable, into the business. We're seeing that for life safety and security types of -- security types of marketing, they're incursion has not been as great as some people have feared initially. The question is this, I'm putting it, as to you, on your residential side, what type of competition are you seeing from the carriers? Or is it still mainly between you and other residential alarm companies?

Well, what happens is, we supply the technology, the tools, the boxes, to all of the alarm companies. We have...

And that's why I asked the question, because you would have a window on this.

Yes, it's more than 10,000 dealers in the residential side. And these dealers select equipment that they want to use. And In certain parts of the country, they're seeing the big cable companies offering security services of the new technology. Of course, it's only residential, and it's only limited in its performance, and the small entrepreneurial dealers, which usually like to have other people advertising for them, they don't want to spend the dollars, so they don't have to spend of dollars, but they get called in to their customer, Mr. Smith's house. He says, "I saw these thing on TV, you can control your heat from the airport when I'm flying. Do you have that?" He says, "Yes, I have the best one. And we've been testing it. You know, I've been monitoring your alarm for the last 10 years. I'll install it for you very easily." And we find that the big cable companies are helping to market to the smaller guys who do most of the business anyway. And as we know, 75% of the business is done by the smaller alarm companies, not the giants. So I would expect it's going to continue that way. And it's also helping us to get our products and the training of the smaller dealers because we're explaining to them, "Hey, listen. You don't want the big boys to eat your lunch, you got to learn how to combat them, and here's what you use, and this is better than their offering and, plus, you're local serviced and they know you, so they're going to do business with you." And it's kind of this marketing thing and that's what we see that's going on. It's still in its infancy. There's millions of systems that have to be upgraded that are installed every year, and this is a big part of it. This is the future.

And your next question comes from the line of Fred Hart from Henley & Company.

I noticed you didn't identify the name of the university. Is that public information?

We signed up with them. We have a non-disclosure with them.

It's a non-disclosure?

Mmm hmm.

You mentioned that came from -- by way of a consultant. Could you elaborate on that at all? What are the consultants, what role do they play for you?

Well, the consultants do roles a lot in the commercial big jobs, where -- particularly, the university or school doesn't know exactly what is really out there, and they go to somebody who's a specialist, and the consultant says, "Let me show you the options," and that type of thing. The consultants help explain, with us, as to the options, understanding the network of the system that we make, understanding how the facility operates and kind of makes it easy for the institution to make a decision.

I see. Are you free to say if that university is on Long Island or is it away from Long Island?

We're not free to say anything, Fred.

And your next question comes from the line of Walter Ramsley from Walrus Partners.

Again, just a quick follow-up. The tax rate in the future, this year was pretty low. I mean, do you see that getting back to around 20%?

For modeling purposes, Walter, I would use 20%. There's a lot of factors that affect the rate, which is -- in this year's case, it become lower than 20%. But for modeling purposes, I would use 20%.

Okay. And the share count, you had like 500,000 that were repurchased and looks like about 700,000 that came in from options, what do you think the share count's going to be next year?

Probably a little more than it is right now. Again, for modeling purposes, maybe add a couple hundred thousand more.

Okay. And you mentioned that the R&D was up $900,000 for the year, I guess, it was.

Right. Full year.

Can you say how much it was, altogether?

I can. It was over $5 million. One second, I'll tell you the number, $5,119,000.

Okay. And next year, do you see that as going up even more? Or are you going to hold the line there?

I would think we're going to -- it'd be similar, similar number.

[Operator Instructions] Gentlemen, we have no further questions at this time.

Okay. All right. It was great to speak to everybody. Thank you, everyone, for participating in today's conference call. As always, should you have any further questions, please feel free to call Hayden IR, Kevin or myself. We thank you for your interest and support, and we look forward to speaking to you all, again, in a few months to discuss NAPCO's first quarter results of fiscal 2014. Goodbye, and have a great day.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your line.