What happened
Last Friday, after markets closed, Napco Security Technologies (NSSC -1.04%) released preliminary fourth-quarter results that were underwhelming and warned it had to restate its financials for the prior three quarters. Investors ran for the exits beginning on Monday morning, sending shares down about 40% for the week as of Thursday afternoon, according to data provided by S&P Global Market Intelligence.
So what
Napco is a maker of high-tech electronic security products, including automated locks and access equipment. On Aug. 18, after markets closed, the company reported “preliminary” net sales and net income for the fiscal fourth quarter ending June 30 and provided updates to the prior periods of the fiscal year.
Napco said it generated $44.7 million in sales in the period, short of the $48.1 million that analysts had expected. But the restatements are what really caught investors off guard.
The company said that during preparations for its full-year release, it discovered errors related to its calculation of costs of goods sold and inventory. As a result, inventories were overstated, and costs of goods sold were understated, resulting in an overstatement of gross profit for the first three quarters of the fiscal year.
The difference is substantial. The company estimates net income for the first three quarters of the fiscal year came in at about $16.1 million, compared to the $25.6 million previously reported.
Now what
The news wasn’t all bad. Even after the restatement, Napco is showing steady growth in net income, and the company also announced it was raising its quarterly dividend by 28% to $0.08 per share. But the real issue now for investors is credibility.
In the days that followed the restatement, Napco was downgraded by at least three analysts, with two others lowering their price targets. William Blair analyst Matthew Pfau, in downgrading Napco to market perform from outperform, wrote that although management says the issue is resolved, “the optics are bad,” and it will take time for management to regain investor confidence.
Over the long term, if the company can show solid growth and not run into any more accounting issues, there is ample opportunity for the shares to outperform. But for now, expect Napco shares to be stuck in the penalty box.
Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
