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NAPCO Security Technologies Inc  (NASDAQ:NSSC)
Q2 2019 Earnings Conference Call
Feb. 04, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the NAPCO Security Technologies, Inc. Fiscal Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Patrick McKillop, Director of Investor Relations. Thank you. You may begin.

Patrick McKillop -- Director of Investor Relations

Thank you. Good morning, my name is Patrick McKillop and I'm the Director of Investor Relations for NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2019. By now all of you should have had the opportunity to review the press release discussing the results. If you have not, a copy of the release is available in the Investor Relations section of our website www.napcosecurity.com.

On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies; and Kevin Buchel, Senior Vice President and CFO. Before we begin, 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.

During the call, we may also present certain Non-GAAP financial measures, such as adjusted EBITDA and certain ratios that are used with these measures. In the press release and on the financial tables issued earlier today, you'll find the definition of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP financial measure as well as a discussion about why we think these non-GAAP financial measures are relevant to our results. These financial measures are included for the benefit of investors and should not be considered instead of GAAP measures.

I will turn the call over to Dick in a moment, but before I do, I just want to mention a few things on the IR front. In terms of upcoming investor outreach, we will be marketing in Dallas, on February 7th and on March 18th, we will be attending the ROTH Conference in Dana Point, California. Also recently we received a new sell-side coverage from William Blair that found, that the team did a great job on the report that was issued. Investor outreach is crucial, especially for small cap companies, such as NAPCO and we'd like to thank all those folks that assisted us in these conferences and marketing trips.

With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.

Richard L. Soloway -- President and Chief Executive Officer

Thank you, Patrick. Good morning, everyone, welcome to our conference call. Thank you for joining us today to discuss our results. The second fiscal 2019 marked another record revenue and profitability performance for NAPCO. We now have 18 consecutive quarters of year-over-year record sales. Our recurring revenue continues to grow at a rapid rate. The annual run rate is now $17.2 million as of December 2018. Our strategy of targeting professional installations and mostly commercial end market is driving our continuous growth.

Our balance sheet remained strong with zero debt as of this report and our cash balances continue to grow. We remain focused on capitalizing on key industry trends. These trends include smart connected home, recurring revenue growth in cellular alarm communications and the creation of school security and safety products. The key metrics of growth, profits and returns on equity are equally important to both shareholders and the management team here at NAPCO. Our business strategy is executing well and our interests are aligned with our shareholders as senior management at NAPCO owns 38% of the the equity.

Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel, who will provide an overview of our fiscal second quarter financial results. And then I'll be back with more on our strategies and outlook. Kevin?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Thank you, Dick, and good morning, everybody. For the second quarter, net sales increased 18% to $24.8 million, which was a record second quarter performance and the 18th consecutive quarter of year-over-year record sales, as compared the $21.1 million last year. For the six months ended December 31, 2018, net sales increased 14% to $48.2 million, as compared to $42.3 (ph) million last year. The increase in sales for the three and six months ended December 31, 2018, were primarily related to increased sales of our door locking products, alarm communications and intrusion products and access products.

Recurring monthly revenue increased 46% for the quarter to $4.1 million versus $2.8 million a year ago and for the six months increased 46% to $7.9 million from $5.4 million last year. Recurring revenue now has an annual run rate of $17.2 million, based on December 2018 recurring revenues. Gross profit for the second quarter increased 26% to $10.7 million with a gross margin of 43% as compared to $8.5 million with a gross margin of 40% last year. Through the six months, gross profit increased 19% to $20.2 million with a gross margin of 42% as compared to $17 million with a gross margin of 40% last year.

The increase in gross profit and gross margin for the three and six months was primarily due to the increase in sales. R&D expenses for the second quarter increased 8% to $1.8 million or 7% of sales compared to $1.6 million or 8% of sales last year. For the six months, R&D expenses decreased 8% to $3.5 million or 7% of sales as compared to $3.2 million or 8% of sales last year.

The increase for the three and the six months was primarily due to increased salaries and some additional personnel. SG&A expenses for Q2 decreased 1% year-over-year to $5.6 million or 23% of sales as compared to $5.7 million or 27% of sales last year. For the six months, SG&A expenses increased 2% to $11.7 million or 24% of sales as compared to $11.5 million or 27% of sales last year.

The SG&A decrease for the quarter was primarily due to lower sales promotion costs and increased for the six months was primarily due to higher commission and freight driven by higher sales level. Operating income for the three months ended December 31, 2018 increased 183% to $3.3 million as compared to $1.2 million last year. Operating income for the six months increased 127% to $5.1 million as compared to $2.2 million a year ago.

Income tax expense for the quarter increased by $508,000 to $419,000 as compared to a benefit of $89,000 last year. The Company's effective tax rate was 13% for fiscal Q2 '19 as compared to negative 8% for fiscal Q2 '18. For the six months, income tax expense increased $613,000 to $667,000 as compared to $54,000 last year. The Company's effective tax rate for the six months was 13% as compared to 2% for the same period last year. The increased income tax expenses for both the three and the six months was primarily due to the aforementioned increase operating income. Net income for the first quarter increased 133% to a second quarter record of $2.9 million or $0.15 per diluted share, as compared to $1.2 million or $0.07 per diluted share last year.

Net income for the six months increased to 106% to $4.4 million, or $0.23 per diluted share, as compared to $2.1 million or $0.11 per diluted share for the same period last year. The increased net income for the three and six months was due to the items previously mentioned. Adjusted EBITDA for the quarter as outlined in the schedule included in today's press release increased to 135% to $3.8 million or $0.20 per diluted share as compared to $1.6 million or $0.09 per diluted share last year. Adjusted EBITDA for the six months increased 94% to $5.9 million or $0.31 per diluted share as compared to $3 million or $0.16 per diluted share last year.

Moving on to the balance sheet. The cash balance at December 31, 2018 was $7.9 million as compared to $5.3 million at June 30, 2018. Our working capital as of December 31, 2018 was $43.3 million as compared to $44.3 million at June 30, 2018 and the current ratio was 4.3:1 at December 31, 2018, as compared with 5.7:1 at June 30, 2018 and debt remained at zero at December 31, 2018.

Net cash provided by operating activities for the three months ended December 31, 2018 increased to 144% to $3.2 million as compared to $1.3 million last year; and for the six months, net cash provided by operating activities increased to 125% to $6.3 million as compared to $2.8 million for the same period last year. CapEx was $695,000 during the quarter and for the six-month period was $1.1 million. Our stock buyback remains open and we make purchases opportunistically as we have strong belief that the future remains bright for NAPCO. We bought back 147,000 shares during the quarter ended December 31, 2018 and have bought back approximately 186,000 shares for the six months ended December 31, 2018.

That concludes my formal remarks and I would now like to return the call back to Dick.

Richard L. Soloway -- President and Chief Executive Officer

Kevin, thank you. We continue to be excited about the growth in our business, which is being driven by the addition of recurring revenue and school security products. We expect that the growth trend and recurring revenue at school security as well as the other parts of our business to continue in the future. We continue to see demand for recurring revenue products coming from a alarm communications including fire, intrusion and the growth of the smart home category.

The topic of school security remains an important issue in the United States and we continue to believe there is a significant opportunity in this vertical. During 2018, there were 82 reported school shooting incidences at K through 12 school. The most since reporting of incidences was started in 1970. As you all know, last year we witnessed many horrific school shooting tragedies. We remain dedicated to providing solutions and products that the schools desperately need.

We believe that this market is very large with over 100,000 K through 12's, and 10,000 colleges and universities in the U.S. In total, states support approximately $1 billion into school security since February 2018. As an example recently, Senator Clausen in Minnesota recently stated that he will be proposing legislation, which will appropriate $500 million for violence, protection and facility security. During 2018, Minnesota budgeted $25 million to school security and a grant request totaling 10 times that amount or roughly $250 million. The pipeline for school security projects looks robust and we will continue to announce new wins when we can, as we need to receive approval from the schools prior to doing so.

The professional alarm monitoring market will continue to grow over the next few years, we believe, as the demand for connected systems over traditional systems continue. In the U.S., there are approximately 133 million homes and just 22% have alarm system. The growth of the connected home market is in its infancy and the best is yet to come in our estimation.

Our StarLink alarm communicators are the most extensive product offerings in the industry currently. We offer four different versions Intrusion, Fire both Single Path and Dual Path and the Connect. The Fire versions are commercial, while the Intrusion and Connect our primarily residential and small business. The StarLink communicators allow for the transmission of alarm signals over the cellular networks in lieu of the traditional phone lines and have the new setup and use for many years. The use of traditional phone lines has been declining in residential homes for years.

The commercial market is being impacted as well with the major telecommunications companies declining to support old-fashioned telephone lines and building. Last quarter, we announced the latest addition to our smart home offering, the video doorbell. The video doorbell has become a popular product and our dealers have been asking for us to offer one. Our new video doorbell can be integrated with NAPCO systems as well as many of our major competitors brands. Additionally, our video doorbell will contribute to our recurring revenue line, which as you know has been growing at a very strong rate for the past few years.

Another recent addition to our product portfolio is the commercial FireLink fire alarm control panel. FireLink is in all-in-one fire alarm control panel with a built-in cellular StarLink powered alarm communicator for use in commercial building. It comes pre-configured and pre-activated, enabling easy installation and cost savings for dealers. We believe that it can become a new strong contributor to our recurring revenue for years to come. This April, we will be at the ISC West Trade Show in Las Vegas. It is the largest industry trade show with over 30,000 security installing professionals attending.

NAPCO will be showing some strategic products that are a combination of hardware and recurring revenue and we expect them to become a great drivers in our business for the future. The show is taking place from April 10th through the 12th. We invite all investors and our covering analysts to attend. You'll be able to see our products as well, as meet the dealers who are purchasing them, driving our sales to record level. If you are interested please contact Patrick, our Director of Investor Relations and he can arrange your pass so you can enter the show.

Our R&D team continues to work on developing more products that will bring recurring revenue to our business. We have had great success with our current recurring revenue products and our goals include the continued growth of that product line. The potential application of access control as a service is one example that our engineers are working on. We will begin our Q&A session portion of this call in a moment. Our second fiscal quarter 2019 was a very successful record-breaking quarter for us, as we continue to grow the Company and deliver strong profits.

Our shareholders have been rewarded with very healthy returns and stock performance. NAPCO is in a strong position to continue its growth in sales and profits going forward. We are excited about the rest of the fiscal year 2019 and beyond. NAPCO senior managers maintain a higher level of ownership in our equity, approximately 38%, and I would like to thank everyone for their support and for joining us in this exciting future we have. Our formal remarks have now been concluded, we would now like to open the call for the Q&A session. Operator, please proceed.

Questions and Answers:

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Matt Pfau with William Blair. Please proceed with your question.

Matthew Pfau -- William Blair & Company -- Analyst

Hey guys, thanks for taking my questions and nice job on the quarter. I wanted to start off with the recurring revenue business, and nice result there in the quarter. Maybe just an update on how you feel about attaining your $40 million in recurring revenue goal? And then relative to non-StarLink recurring revenue products, when do you think we could start seeing a contribution from those products and the results?

Richard L. Soloway -- President and Chief Executive Officer

Thanks so much. Our goal is to come out with many new products, which have a recurring revenue component and it all piles onto our successful results. We keep adding new installed and communications and we're adding integrated control panels with communicators inside of them and then at the ISC Show, we're going to show some new products, and it's all part of our goal. So if you take the growth rate that we've been talking about between 45% and 50%, if we compound that out, we should be into that $40 million number in a couple of years.

Matthew Pfau -- William Blair & Company -- Analyst

Got it. And then wanted to hit on the school security opportunity. It seems like there was a significant driver of some of those hardware out performance in the quarter. These school shootings incidents have been happening for quite some time, obviously 2018 was a bad year, but I guess where do you think in terms of the results in the quarter and what you're seeing in the pipeline. Where are we at in terms of a tipping point in school of getting more serious about their security?

Richard L. Soloway -- President and Chief Executive Officer

Well Matt, we've been saying that we saw the tide turning, so to speak. After the shooting in Parkland in Florida about a year ago, February 2018, as a result, that it seems to be a tipping point, changed where schools were waking up and finally doing something about this horrible problem for school security. And so for us, we've seen a lot of coding activity, we've had more wins, we've had more press release announcement. Sometimes they don't let us announce it, but a lot of times now they are. And this is just the beginning we feel, but there's been a lot of money that's come down government, schools to make it easier, especially K through 12, who has always faced with budget issues. And the universities, who have big endowments are starting to spend that money. So what you saw this quarter I think is the beginning. I think that there's a lot more to go. We talk of this in terms of early stages or early innings of school security, much more to come, much more to be done and we are there for the schools. I think you could expect to see more of these in the quarters to come.

Matthew Pfau -- William Blair & Company -- Analyst

Got it. And then just one more on the school opportunity. One of the deals you press released this quarter was the Lewisville ISD in Texas, that seemed like based on the press release, a more comprehensive deal, at least for a school district than you've done in the past, so maybe can you just talk about is, is that the case? What drove them to you, perhaps purchase and more comprehensive set of products than other school districts and then is this -- can this potentially be the trend going forward?

Richard L. Soloway -- President and Chief Executive Officer

We like to cross sell in all our divisions and we're the only Company that has locking, access control and alarm. Our business cards have all our different divisions and a brief description of what they do and when the school closes in for school safety and security, we always like to present the full NAPCO compliments of products. In this case they needed more burglary products, so our assisted divisions did that job. That's kind of the ammo (ph) that we're going for. Typically, the security department or the locking department, Lock Shop department will call you in, we have dealers, that we have access control specialists in all these territories around the country, because we have thousands of dealers, more than 12,000, we 2000 -- we have 10,000 security dealers, 2000 system integrators and they are in every territory, so they get called in and then they call us and we try to figure out what is the best mix of products that we're protecting for.

So we go beyond the normal school locking products, we go in with fire, burglary and access, because we have it -- the only Company with that and because we have a fusion backbone network, which is our software network, everything integrates well together and that's the good -- it helps us a lot. We try to sell to schools because we're one integrated solution, rather than dealing with a bunch of different companies, where they to cobble together a system. So that's going to advantage. So that's a big marketing push that we have going on here.

Matthew Pfau -- William Blair & Company -- Analyst

Great and just one last one for me in terms of the hardware revenue, I believe this is the first non-fourth quarter to have hardware revenue over $20 million, which is obviously an important important mark for you guys. How should we think about this going forward? Is this something that you think you can reach on a more regular basis now, or was there something sort of one-off in the quarter that -- it's still -- we're still a bit of ways before you can hit $20 million hardware revenue on a non-fourth quarter on a more regular basis?

Richard L. Soloway -- President and Chief Executive Officer

Our long-term goal in a couple of years -- couple or three years is to be $100 million worth of hardware revenue, at $40 million worth of recurring monthly revenue. Put those together, just talking about much greater profitability for the Company. So this hardware growth, this quarter is part of what you're going to be seeing going forward in the future. But our goal is -- we don't look at it quarter-to-quarter, but it seems to be coming together pretty quick and we expect to hit our goals a couple of years out. And I think the Kevin has been modeling with you guys and where we could be profitably wise and it's very, very positive for the Company.

Matthew Pfau -- William Blair & Company -- Analyst

Great, that's it from me guys. I'll pass the line. Thanks.

Richard L. Soloway -- President and Chief Executive Officer

Thank you, Matt.

Operator

Thank you. Our next question comes from the line of Mike Walkley from Canaccord Genuity. Please proceed with your question.

Anthony -- Canaccord Genuity -- Analyst

Hi, this is Anthony (ph) on for Mike. Thanks for taking my questions and congrats again on the strong quarter. Just in terms of the hardware gross margin expansion we saw, was that attributed primarily to higher margin projects like -- with the schools or are you starting to see some progress on the cost saving initiatives as far as like sourcing components from Asia?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

It's a combination, Anthony. So we've talked a lot about how we get leverage from our Dominican factory when it grows to a certain point. So when we're over the $20 million mark, that's the key for us. And so the leverage starts to kick in on getting margin expansion overhead absorption, we saw that. We see a lot of that in Q4, but when you go over $20 million, you're going to see it in other quarters. It started in this quarter as well. The initiative from major (ph) that begun as well, that takes time to get the true long-term effect, but there's a little bit of that too. There's a lot more of that to come in the future. And also school jobs, they can be very profitable depends on what the schools buy. We had some of that in this quarter also. So we had a little bit of everything, but if you get to the point with the $20 million level is exceeded, going to get that margin expansion on the hardware side, but great margins on the recurring, get both things working to get numbers like we saw in this quarter.

Anthony -- Canaccord Genuity -- Analyst

Got it, got it. Great. And then on the R&D, it remained elevated, let's say relative to last year, similar to Q1 levels and is this kind of uptick in investment? I think you'd mentioned, you're more focused on the recurring revenue side, any sense for the types of offerings we might expect? I know you had just mentioned in your prepared remarks, access control as a service, any other color you can provide on what's coming out of the R&D investment there?

Richard L. Soloway -- President and Chief Executive Officer

Well, we talked about the integrated alarm -- fire alarm systems with recurring revenue communications side. So, you're going to see more of that type of thing. And we'd like to get recurring revenue from all our divisions and we're working very diligently to do that. We have 50 engineers now, we increased their engineering budget, so we can get more people and do these exciting things. We have a lot of ideas and turned them into the finished products, but it all bodes very well for our Company for years and years to come. Everybody needs more security. We've got the creative concepts. Now we have more engineers, so we can turn more products out. I would say come to the ISC Show and see a couple of things, which are going to be pretty revolutionary for our industry. And then you can talk to some of the dealers that are using our products, see how they're going to be responding to the new things we're going to be showing. So it could be a real eye opener.

Anthony -- Canaccord Genuity -- Analyst

Great. Great. And then just lastly from me, I'm just coming off the holiday quarter, any data points or colors from dealers on StarLink Connect relative to some of the other --

Richard L. Soloway -- President and Chief Executive Officer

StarLink Connect has a very, very large market. It's a market that we are penetrating. It's a good contributor to our growth and it'll continue for years and years. As you know the StarLink Connect modernized 20 million, 30 million alarms that were build previously by dealers before, such thing as Connected Home was invented. So the StarLink Connect makes the systems, which many of them are working fine. They just don't have app control, the thermostats, locks, light and live video, makes all of that available to those existing alarms and the dealers love it because, they can be in and out of the premise in an hour, whereas days and days where they have to rip out the old alarm system and put a new modernized connected home alarm. Now with StarLink Connect, it's all done in an hour and it's quite an innovation. It works on every brand of control panel that's out there, that's been installed and like big project here to get it done and it's reaping nice benefits for the Company.

Operator

Thank you. Our next question comes from the line of Gary Mobley with The Benchmark Company. Please proceed with your question.

Gary Mobley -- The Benchmark Company -- Analyst

Hi guys, good morning. Congratulations to the strong quarter. Want to start out asking about the accelerating RSR or pretty soon it's RMR revenue. The quarter-to-quarter delta has been growing consecutively for the past three quarters and so I'm wondering if that is mostly a function of the two-way radios, which I believe carries about five-fold increase over that normal or the average for the different radios?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

We have a very large assortment of radios now, because we make the original burglar radio, which was small business and residential, stores, shopping centers and things like that and that was $5 to $9 a month. And then we have fire radios, which are -- get us up to $25 a month, both single path and dual path fire radios and they've been just approved in the most strict jurisdiction, a replacement for leased phone lines that commercial buildings have to have, the competitive substitute to get up to $25 a month for those and then we have the Connect radios, which are the ones with a home automation hub built in to get up to $13 for those. And now we came out with the StarLink with the integrated radio built into it's fire -- commercial fire, big business for us -- a big -- new growth area for us. And as we would like to say Fire is on fire. So we expect more and more business from the integrated solutions that we offer to the dealers that go in very quick and very modern, and don't have to rely on the telecommunications carriers. Now the dealers could make a profit by installing it, whereas the money is going to the telecommunications company, it goes to the dealer and also to the property owner. They split the difference, that the telecom companies would normally be getting. Those are a lot of exciting things and at the ISC Show will show more exciting things with recurring revenues. So it's a good scenario for us and for our dealers and for people to be protected.

Gary Mobley -- The Benchmark Company -- Analyst

Okay. I know in the past you haven't broken out the Continental Access business, it contributes to the overall revenue. But I wanted to ask about the diversity of the Continental Access business or in general of the building access security business. How much diversity was there in the quarter, which contributed to the overall product revenue strength and any level of detail with respect to overall revenue contribution for Continental Access would be helpful as well?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

We break out the revenues somewhat and you'll see it when the Q is published. We combine our locking companies together. The locking piece was up about 11% for the quarter, 7% for six months. Recurring was up 46% for the quarter, that's up 46% for the six month. The intrusion and access, combine that, because they're kind of related in many ways, and so the best I could give you in terms of the breakout of that piece was up 16% for the quarter and 13% for the six months.

Gary Mobley -- The Benchmark Company -- Analyst

Okay. And then with respect to the --

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

(Multiple speakers) specifically with an idea, everything was going, also on this we'll be working.

Gary Mobley -- The Benchmark Company -- Analyst

What's the diversity that growth, was it driven by one or two specific installations?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

I would say it was across the board. We're always saying, we're not a one trick pony, we got a lot of things going and with a lot of things clicking this quarter, on all divisions and on all fronts. And that's -- we work hard to do. We want everything clicking. We don't just want the recurring working, we want the hardware working. We want each of the divisions within the hardware to do well. So there is more that could be done. We could do better even yet, like we said earlier, the goal is $25 million quarter or $100 million of hardware, that's our goal. We're going to work hard to hit that fast as we can get there.

Gary Mobley -- The Benchmark Company -- Analyst

Okay, helpful. That's it from me. Thanks guys.

Operator

Thank you. Our next question comes from the line of Joseph Osha, JMP Securities. Please proceed with your question.

Joseph Amil Osha -- JMP Securities LLC -- Analyst

Hi, there. My compliments on the quarter.

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Thank you.

Joseph Amil Osha -- JMP Securities LLC -- Analyst

I'm wondering if we could return to this issue of integration with third-party hardware. Obviously, you're doing very well with your own products, but you've got some companies out there all out (ph) for example, really pushing on price points for third parties. I'm just wondering when you interact with your dealers, what type of feedback you're getting in terms of in-house versus third-party? It interests me that you still see this 60-40 hardware versus recurring revenue mix, even -- even a couple of years out. I'm wondering if you can comment on that? Thank you.

Richard L. Soloway -- President and Chief Executive Officer

Well, some of our products, the access products work with competitors products -- the key competitors products. So we integrate with those. There are some jobs that we run into, where they want to use our locking systems and our access systems. They want to that worked up with the existing system on large building or a campus, so we integrate with those other systems. But we're very diversified, in fact that we have our totally integrated solution that we'd like to sell, what we make. But we try to make our stuff attached to the key software platforms that our industry, so we're getting using a lot of that.

Joseph Amil Osha -- JMP Securities LLC -- Analyst

Do you think that -- obviously you've got this very nice operating leverage out of the DR, which is great. Do you -- I mean there will come a point at which you have to decide whether to add to that scale or perhaps tip more to third parties. Do you see the mix shifting over time, or is the idea even over the longer term to be there to bar your phrase, sell, what you make?

Richard L. Soloway -- President and Chief Executive Officer

We're going to constantly drive forward to increase our sales, both with the integration into others, and also with our total vertically integrated product line. We have lot of capacity in Dominican Republic. We can do $100 million per shift (ph). We can get all the people we need to make all these products. So we're going to keep building up the factory. As we hit this magic numbers of $100 million, $40 million profitability really starts jumping tremendously and that's our goal. That's where we want to be in a couple of years from now.

Joseph Amil Osha -- JMP Securities LLC -- Analyst

Okay. Thank you very much.

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Thanks Joseph.

Operator

Thank you. Our next question comes from the line of Peter Enderlin with MAZ Partners. Please proceed with your question.

Peter Enderlin -- MAZ Partners -- Analyst

Thank you. Good morning.

Richard L. Soloway -- President and Chief Executive Officer

Good morning Peter.

Peter Enderlin -- MAZ Partners -- Analyst

I have a few longer term questions. First, is there any realistic way -- practical way that you can address the international potential of some of your products and thereby of course help fill up that plant as well?

Richard L. Soloway -- President and Chief Executive Officer

A lot of the international -- we used to sell more overseas, but it became complicated because different countries have different specs, and we didn't want to have all these different product lines and invest all the engineering into all of these different product lines because it's just diffuses our growth area, which is still in South America, which has plenty of needs and plenty of business. So we decided that we'll make a couple of universal items like our access control for overseas, but a lot of the other items we don't spend a lot of times developing because it's just be a (inaudible) sucker to our engineering efforts. We try to keep our expenses in line, we did spend more money on engineering and choosing more new products coming out to the North and South American market, which is a big market. Schools are big market, modernizing alarm systems for commercial building is a big market and we can go into really high volume and profitability with just focusing on these things. So that's kind of direction.

Peter Enderlin -- MAZ Partners -- Analyst

Okay, fair enough. And also another -- your debt-free and generating increasing cash flow, would you consider a dividend?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

It's one of our considerations, yes, that's analytics. So we will keep that in mind.

Peter Enderlin -- MAZ Partners -- Analyst

Okay, and then lastly, Dick, you know, you've done a great job and lot of this is coming for fruition. What can you tell us about potential succession planning for the Company?

Richard L. Soloway -- President and Chief Executive Officer

Well, we have a very good group here with Kevin, George and Michael and executive team. And we're going to get to a point where these guys can take over and run the place. But we will run it together now and we will -- you'll know what we're all doing. We have many management discussions and meetings as far as where we're going. Kevin is involved and not just in the finance, but in the operations of the business, the direction, product where we're going with product and marketing. Jorge Hevia is involved in all aspects of the business, also so is Michael Carrieri, our Engineering Vice President. So that's how we operate the business and we've been doing it for a lot of years together, and now that the business has hit these paradigm shifts, we're really making a lot of hay out of it, with the recurring revenue products and the technology that we've developed over the years and it's great that the industry is going in more tech, because it's kind of suits us just right, and all of our guys here that I mentioned, our -- in these meetings and having discussions and we come up with great direction and ideas. This quarter was very nice representation to that.

Peter Enderlin -- MAZ Partners -- Analyst

That's very helpful. Thanks very much .

Operator

Thank you. Our next question comes from the line of Abba Horwitz with OS Capital. Please proceed with your question.

Abba Horwitz -- OS Capital -- Analyst

Hi guys. Congratulations on a wonderful quarter. You guys are in a unique position today because you have no debt to pay down and your cash is building and I assume over the next two years through the excess cash flow, you'll generate, you'll have quite a bit of money on the balance sheet and -- and from what I understand also is that you really are not interested in acquisition because there is enough to do in the Company itself today, that I actually would say, don't do an acquisition. So you're going to have a real serious cash build and I'm wondering what do you propose to do with that cash build that you have?

Richard L. Soloway -- President and Chief Executive Officer

No, that's a high-class problem that we're starting to face. We've been generating a lot of cash for a number of years. It's accelerating. We paid off the debt originally with the cash, now it's building. So -- there's a lot of people that are asking what are you going to do with it. The previous caller also used it, once you start giving dividends. So we have a list of how to solve this high-class cash problem and that's what we are facing now. So that's it -- is our goal.

Abba Horwitz -- OS Capital -- Analyst

Okay. Is there a limit in the stock purchase price? Do you have a little bit where you'll buy it, at what level there a number here on -- based on free cash flow or free cash flow yield or something like that or --

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

When we buyback stock Abba?

Abba Horwitz -- OS Capital -- Analyst

Yes. Is there -- do you have a certain price, would you buyback stock at $20 or is it more closer to $14?

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Very strict guideline. And so we do -- I always say we do it opportunistically and we keep our eye on it. It's worked out well for us. If you look at our average price over the time that we've been doing it versus the stock price today. We've done a really good job at this.

Abba Horwitz -- OS Capital -- Analyst

We keep watching it.

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

One of the way is we spend the cash. I wouldn't rule out an acquisition either, but it has to be perfect. We always say, it is the buyer's criteria that we want, that's the possible to (inaudible) use of cash. The five criteria being -- got to be a -- got to pay for multiple, got to be accretive from day one, it's got to utilize our dealer network, got to be able to manufacture in the Dominican Republic. Now, we'd like to have an earn-out associated with it. So if we can hit on those five points, an acquisition could be on the table too, but we don't need to. We have plenty to do with here.

Abba Horwitz -- OS Capital -- Analyst

Okay. Wonderful. When can we get some more color on the products that will be coming out? To understand better what they do and how I guess the model works?

Richard L. Soloway -- President and Chief Executive Officer

Are you talking about the new products?

Abba Horwitz -- OS Capital -- Analyst

Yes.

Richard L. Soloway -- President and Chief Executive Officer

Yes. Well, they'll be shown at the ISC Show as they out there. And there will be press releases about that. So, that's in April.

Abba Horwitz -- OS Capital -- Analyst

Okay. Wonderful. Guys, thank you very much.

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Thanks Abba.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Soloway for any closing remarks.

Richard L. Soloway -- President and Chief Executive Officer

Thank you, everyone, for participating in today's conference call. As always, should you have any further questions, please feel free to call Patrick, 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 fiscal Q3 '19 result. Bye-bye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 50 minutes

Call participants:

Patrick McKillop -- Director of Investor Relations

Richard L. Soloway -- President and Chief Executive Officer

Kevin S. Buchel -- Senior Vice President of Operations & Finance, Chief Financial Officer, Treasurer and Director

Matthew Pfau -- William Blair & Company -- Analyst

Anthony -- Canaccord Genuity -- Analyst

Gary Mobley -- The Benchmark Company -- Analyst

Joseph Amil Osha -- JMP Securities LLC -- Analyst

Peter Enderlin -- MAZ Partners -- Analyst

Abba Horwitz -- OS Capital -- Analyst

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