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Are you a leader? Do you want to be?

Tuesday, November 17, 2009
Got an email from ESA recently. Time is slipping away if you're interested in joining in their 2010 Leadership Summit for free (that's right: FREE). If you miss the early registration deadline of Dec. 14, a $125 registration fee applies... If you are a leader (or want to be), don't waffle; now's the time to make a command decision to attend and save $125. Good leaders don't spend $125 when they could spend $0 to get the same result. According to ESA's email, one of the benefits of participating in the Leadership Summit is that attending will earn you CEUs. The National Training School will issue .1 CEU per workshop and you'll get your certificate at the end of each session. SSN has been reporting on CEUs a lot lately. Workshops being offered this year include: The future of communication and attention in the age of social media Megatrends 2010: Trends that will impact how you conduct business Achieving board excellence Innovative income--looking beyond membership dues The Summit takes place from Jan. 12-14 in Fort Worth, Texas. There are worse places to spend a couple days in January than Fort Worth. You can register here.

I should have known the email was from Wayne's World

Tuesday, November 17, 2009
If you're one of those poor souls who thinks that security can be boring, get yourself on Wayne Wahrsager's mailing list. There's nothing like an email blast from Wayne on a Tuesday morning to wake you up. In case you don't know Wayne, his family has been in security for like 100 years. They are the family behind New York Merchants Protective Company, NationWide Digital Monitoring, and, most recently, started the Smith & Wesson Security Services dealer program. In addition to admiring his work ethic and his discipline in sticking to the message, I get such a kick out of Wayne's marketing madness. He's always looking for an opportunity. Witness today's email blast from "Alarm Industry News" with the subject line: "A sad day for GE security dealers." I should have known it was Wayne. His message inside, surrounded in stars and stripes trumpets: Brink's is now Broadview GE is now UTC What's next? Time to become a Smith & Wesson Security Services Dealer. Join a program that has staying power! Click here to see the blast.

A tale of two companies: GVI and Mace

Tuesday, November 17, 2009
3Q results for both GVI and Mace were released yesterday, and I couldn't help thinking that the two companies are more than a little comparable, and that Mace could maybe look to GVI's success as instructive. When I first started covering GVI, newly installed management team of Steve Walin and Joe Restivo came to the company swimming in debt and in a somewhat desperate search for funding. Coming off a $4.5 million quarterly loss, "This has led to a situation where the company has just $1.8 million in cash and a working capital deficit of $3.6 million." As in, yikes! However, the company issued a billion shares, raised $4.75 million, and got itself back on track by cutting all non-core business operations, focusing on the Samsung brand and product line, and running a top-notch operation in terms of service and dealer support. Now, even in an economy that continues to lag, especially for those depending on the construction market, GVI is reporting its 11th straight profitable quarter, just as it moves into the private sector, escaping a million bucks a year in money spent to be compliant with government regulations. It's barely profitable, of course: "[N]et income was approximately $84,000 or $0.00 per diluted share, as compared to net income of approximately $254,000, or $0.01 per diluted share, in the quarter ended September 30, 2008." But if you can report profit in this economy, you're pretty happy. Just ask Mace. Despite the efforts of Dennis Raefield, the company continues to struggle. Mace's third quarter results aren't that pretty:
Net loss for the three months ended September 30, 2009 was approximately ($2.4) million, or ($0.15) per share, compared to a net loss of approximately ($2.1) million, or ($0.13) per share, for the three months ended September 30, 2008.
Further, that larger net loss is on smaller revenues: "Total revenues for the third quarter ended September 30, 2009 were $8.2 million, as compared to $10.3 million for the same period in 2008." Raefield is understandably disappointed and sounding frustrated:
“The third quarter was disappointing in that we were not able to achieve the revenue growth we had anticipated. The effects of the economic downturn which began in 2008 were much longer lasting, limiting new building construction, which continues to delay projects requiring our security products, and separately, negatively impacting our Digital Media business through a tightening of credit availability for our customers. Even with continued rising monthly sales in our Security Segment, we were not able to achieve our overall sales and profit goals. We recognize that, while we are recovering, it is still not fast enough.
At this point, even with the CSSS buy, Mace may very well find itself right where GVI was three years back:
The Company’s net book value was $35.8 million, or $2.23 per share, at September 30, 2009. In addition, Mace had $49.2 million in total assets, including $4.6 million of cash and short-term investments, at September 30, 2009.
Losing $2 million a quarter and just $4.6 million in the bank, will Raefield be seeking funding the same way Walin and Restivo were? Very possible. Is the environment for such a placement far worse now than it was in 2006/2007? Um, yes. Might the best option for Mace be a similar acquisition by a private equity firm, getting rid of those pesky public reporting requirements and getting some of the pressure for instant profit off of Raefield's back so he can build the recurring portion of the business without quarterly reports hanging over his head? That kind of makes sense to me. We'll see what happens.

Some earnings numbers: SCM, HSCC

Monday, November 16, 2009
For all of the promise of the security industry, not many of the public companies reporting lately have been reporting profits. A couple more came in today. First, SCM Microsystems put out their second earnings report since the merge with Hirsch. Not surprisingly, they've doubled their revenues (they added Hirsch, after all), but they're still not making money, and they only have more cash on hand because they sold off a building in India. I don't have a link because it's a password-protected press release I'm looking at, but here are the details:
Revenue from the Security and Identity Solutions business was $12.5 million in the third quarter of 2009, up 113% from $5.9 million in the third quarter of 2008. The primary reason for this increase was the inclusion of revenue from the Hirsch subsidiary. ... In aggregate, total revenue in the third quarter of 2009 was $13.3 million, up 109% from $6.4 million in the third quarter of 2008.
So, they're now about a $50-$55 million company. Unfortunately,
Operating loss was $(1.6) million in the third quarter of 2009, compared with operating loss of $(2.0) million in the third quarter of 2008. Loss from continuing operations in the third quarter of 2009 was $(2.3) million, or $(0.09) per share, compared with loss from continuing operations of $(3.3) million, or $(0.21) per share in the third quarter of 2008. Cash and cash equivalents at the end of the third quarter of 2009 were $6.2 million, up from $5.3 million at the end of the previous quarter. The increase in cash in the 2009 third quarter resulted from the gain on the sale of SCM's office building in India during the quarter.
So, they're losing $2 million a quarter and they've got $6.2 million in the bank. Anybody want to buy some stock? The economy's bad, but SCM has to find a way to get closer to profitability in a hurry to make the Hirsch and Blue Hill deals make sense. Also losing money is Homeland Security Capital Corp., Tom McMillen's holding company that owns Safety & Ecology Holdings Corporation, Nexus Technologies Group, Inc., and Polimatrix, Inc. Here's a link to their latest earnings report. The company is losing money, but seems to be edging toward a cash-flow-positive position:
Revenue for the quarter was $20.8 million compared to $17.7 million for the same period last year. EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter was $0.4 million compared to a negative $0.9 million last year, and EBITDAS (EBITDA after stock based compensation) was $0.7 million compared to $0.1 million last year. Operating loss for the quarter was $0.1 million compared to $1.3 million last year. Net loss attributable to common stockholders for the quarter of was $1.2 million, or $0.02 per share compared to $2.3 million, or $0.05 per share, for the same period last year. The Company's net loss attributable to common stockholders includes $0.4 million in preferred stock dividends in each year's first quarter. At September 30, 2009 there were 49,699,729 common shares outstanding.
The piece of HSCC I care most about is Nexus, which is an integrator. Funnily, according to the home page, Nexus is a privately held company, but when you go to the about us page, it says, "A member of the elite family of Homeland Security Capital Fund." They may have a different definition of "privately held" than I do.

What I learned about UTC

Friday, November 13, 2009
The great thing about public companies, if you're a journalist, is that they tell you everything about their company's finances - because they have to. Still, you have to know where to look and when to listen. Yesterday, Ari Bousbib, who heads all of UTC's commercial businesses, just happened to be presenting to the Citi Industrial Manufacturing & Transportation Conference as the news of the acquisition of GE Security broke. Thus, when I called UTC for comment, I was simply referred to the webcast of Ari's presentation and I got basically all the information I needed, and then some. Since only so much was appropriate for the story, I thought I'd share some deeper information about where UTC stands now, their opinions on the recession and how we'll pull out of it, and give you a few of the slides that Bousbib shared yesterday (sorry about the slide resolution - that's what happens with screen shots of stuff from the web). First, it was interesting to hear Bousbib's opinions on how we'll recover from the recession: "Some of the short-term businesses are showing a pattern of improvement and one could see here a u-shaped type of recovery, and based on indications, this pattern is likely to continue. Now, on the minus side, our longer cycle businesses, commercial HVAC, elevator, fire and security in mature markets, we are not seeing any sign of recovery there, and frankly, based on indications I don’t see a recovery for these markets until at the very least the back end of 2010, and most likely 2011. In some markets, Spain, maybe, not until 2012. I feel cautiously optimistic that we are indeed turning the corner, and we will see modest improvements in the market, and, overall, the balance will net out positively." You'll see in this chart that the long-term-sale businesses haven't exactly seen the recovery happen yet: picture-1 Also, this is a nice graphic representation of how much of UTC those businesses actually represent. As you can see, a prolonged recession for those businesses will hurt UTC significantly. picture-2 This next graph is pretty fascinating for me. If you want to show somebody just how fragmented the security industry is, this is the way to do it: picture-3 Now, on to the part about GE Security. I talked in the Motley Fool post about being surprised by the $1.2 billion in 2009 revenue. Well, for good reason: It's down $300 million (20 percent) from 2008. Here's how UTC assesses GE Security: picture-4 In my story on the deal you can hear from Bousbib why he considers GE Security such a good fit, but let's just say it was the fire business they were most excited about. It's about 40 percent of GE Security as a whole. So, going forward, what are they going to do? First thing is to cut costs. Check this chart - the overhead is killing them: picture-5 And you can see that the majority of that overhead is the branch network. Expect to see some serious consolidation of branches for UTC, basically combining the fire and security offices into singular offices that handle all of UTC's Fire & Security capabilities: Bousbib: "The second reason why our return on investment wasn’t that special up to now is the heavy load of overhead that we still have at Fire and Security. We’ve moved manufacturing to low cost locations, but when you look at $1.4 billion in overhead, almost three quarters of that resides in branches. We have 550 around the world, so we’re reducing that overhead in the branches by merging branches in the field. We’re going to take fire specific branches, and security specific branches and move from a product-centric model and to a customer-centric branch, with one face to the customer and a full array of maintenance, monitoring, and repair services ... We expect to reduce the number of branches by 40 percent. We've started this and overhead rates have improved by 300 basis points." Theoretically, this will lead the company from a pretty pedestrian nine-percent operating margin for Fire & Security to something close to 15 percent. At least according to the projections on this chart: picture-7 Or, as Bousbib put it: "With all of these actions we believe that we have a very clear path to 15 percent-plus operating margins at Fire and Security. We’ve moved margins nicely since 2003, from 5 percent to 9 percent in 2008, so it’s approximately 1 point a year. A year ago we said we need to accelerate that to go to 2 points of expansion a year, and we’re now on track to do that. Our margin expansion in Q2 and Q3, was closer to 2 percent [on an annual rate], and now we expect we’ll reach that goal of 15 percent earlier." So, with all of this in mind, is UTC going to continue to buy in the sector, or just focus on fine-tuning what they've got? Bousbib: "It’s very fragmented, so there are a lot of small players. Even though GE relatively is a big deal for us, it’s still a bolt on, they’re all bolt ons. With products and technologies, there are a couple of niches we don’t have ... But it’s about building density, as we merge those branches, increase revenue per branch, increase revenue per field technician, we want more of that, so any companies that have a network in a given market where we can combine our branches and generate more density, that’s a winner. It’s specific geographic markets." I'd say to look for buys of small, smart, well-located integrators, maybe overseas, but also in North American markets that Red Hawk doesn't cover well currently. Since Red Hawk comes with a traditional financial services background, maybe something in the Gulf area that's great with the petro-chem market would make sense.

DICE wants to know: Should we let current PBX & telecommunications SOP roll?

Friday, November 13, 2009
I'm really starting to dig my LinkedIn blasts. Got one from DICE vis-a-vis the CSAA group on LinkedIn. They're asking about standards. SSN is no stranger to standards discussions, and it couldn't hurt to check out DICE's discussion and offer some feedback. Here's the pitch from DICE:
Should standards be developed to promote hot-redundant phone switches and failover to a DR center? As new soft switches or software-run switches are deployed in more and more centers, a new area of failure points in the central station develops. Should there be a standard to promote and enforce the failover and redundancy specifications of PBXes and telecommunications equipment to ensure proper testing and performance? Furthermore, should alarm companies be required to have redundancy within the alarm center regarding such items as phone switches, multi-path IP and Telco signaling? Also, what standards do you feel should be enforced when routing your entire Telco infrastructure to a DR center?
In my opinion, anything that assures accepted practices are followed, fights errors, and more regularly ensures quality is a good thing. Rock on DICE.

GE-UTC round up, v.1

Thursday, November 12, 2009
There's a ton of stuff out there on the UTC-GE deal. It's nice being part of the mainstream once in a while: Lots to link to. First up, the Motley Fool take on the deal, which raises some interesting points. Just look at his first four bullets:
• Strapped for cash, and carrying the same kind of underperforming financial services division that's hobbled Textron (NYSE: TXT) and Harley-Davidson (NYSE: HOG), GE plays the part of "motivated seller" today. • It's unloading its Security division on United Tech (UTC), selling off GE Security's $1.2 billion annual revenue stream for a mere $1.82 billion -- about 1.5x sales. • GE Security is part of GE's Technology Infrastructure business, where GE earns a 17.6% operating margin. • UTC's own Fire & Security division gets only an 8.4% operating margin on $6.5 billion in annual revenues.
First: It's hard to believe the GE is so hard up for cash it needs to sell off the Security division, but Rich Smith would know more than me. Good for UTC for seizing on an opportunity and playing from a position of strength. They tried to hammer Diebold that way last year, but it didn't work out. Probably something to pat the Diebold board on the back for, really. Second: This is an interesting point that I haven't seen made much, and it makes me feel a little more sane. Taking notes today on the UTC webcast with Ari Bousbib, I had him putting Edwards at $500 million, a locking business I didn't really know about at $150-$200 million, and the rest of the systems business at $500-$600 million. I didn't put it in the story, though because I thought I was missing a piece, and GE doesn't break out its Security revenues. But, no, that's really what they're at: $1.2 billion. Dean Seavers has put the company at $2 billion as early as 2010. Was that all bluff? Or has the economy hit them hard? Third and fourth: Ari claimed today that the Fire and Security business at UTC was increasing operating margin by a point a year right now, and had accelerated that to a 1.5 percent annual pace over the last two quarters. He says they can hit 15 percent by 2012 or so. Where are all those efficiencies coming from? Has to be a major leveraging of a central station and other RMR service in there somewhere. There's no way UTC gets that with product sales alone in this environment right now. Thus, you've got to think channel conflict, like Jeff Kessler mentioned when I spoke with him, is going to be a major hurdle for UTC. Everybody sells Lenel, but if Red Hawk is getting the sweetheart deal, people are going to be looking for another partner in a hurry. But then here's the Fool's takeaway:
• Increase its Fire & Security revenue stream by 19%. • Buy what are, in all probability, product lines that earn higher profit margins than its own. • Do all this without paying much of a premium to its own market valuation.
I understand points 1 and 3, but why is the assumption that GE's product lines earn a higher profit margin? I heard talk from Ari today that GE's manufacturing facilities are still in "high cost" areas, and that UTC might be ahead of them in off-shore cheap manufacturing. Maybe I'm missing something, but it seems like a leap there.

Is a Stanley spin-off the next big deal?

Thursday, November 12, 2009
In all the hubbub surrounding the GE-UTC deal, perhaps the most interesting post I've seen came from Kenneth Klee at the Deal. Here's the crux of it:
Yet the [Black & Decker] deal does steer Stanley back into the consumer/retail arena, reducing security's contribution to only about 25% of the new company's sales. That already has some folks speculating about unlocking the value of the $2 billion-sales unit. A Nov. 3 Raymond James research report endorsed the merger while also speculating that it increased the odds of a security sale or spinoff.
He's got a point. Everything coming out of Stanley has been about RMR and service, and the security portion, as Klee notes, actually contributed 43 percent of the company's profit last year. Brett Bontrager, president of Stanley CSS, told me on more than one occasion that Stanley was eager to get away from box store sales because the margin was crap and you're in a constant battle with the retailers over price. So, what do they do? Merge with Black & Decker, which is pretty heavily dependent on the Home Depots of the world, it would appear to me. Of course - huzzah! - they'll be able to lay off a bunch of people, which we all know Wall Street loves right now (you should have heard the pride in the voice of UTC's Ari Bousbib today when he talked about cutting 10,000 positions at Carrier over the course of 2010. (Note: I don't think he takes personal enjoyment in the layoffs. I just think he's been crazily pressured to increase margin and cut costs and this plan to cut so much margin and cost with layoffs was clearly well received by one and all on the Street. Thus the pride. But at what point do employers step up and declare they're going to live with slightly smaller margins and employ more people and be the bedrock of a community or something? You'd think there would be one rogue out there, right?). But why, when you've made this huge push into service would you merge with Black & Decker, which has no recurring model whatsoever (unless I'm missing something)? So, I can see why shareholders might clamor for security, with its unbelievable margins and recurring revenue that has crazy value, to be sold off for a high multiple, or spun off into a very lucrative second company, a la Broadview. Great post by Klee, though. Really got me thinking.

Bloomberg's right: UTC-GE Security buy announced

Thursday, November 12, 2009
We'll have more on the wire in a little bit, but for now know that the rumors were true: UTC is buying GE Security for $1.82 billion. Not much to the press release really, but some food for thought:
"This acquisition enhances UTC Fire & Security’s status as a leading franchise in the $100 billion global fire safety and electronic security industry," UTC President and Chief Executive Officer Louis Chenevert said. "It strengthens our North America footprint, extends our capabilities and complements our existing fire and security businesses.
"A" leading franchise? Should he go so far as to say "the" leading franchise now? Also, $100 billion? Are people comfortable with that number?

Does anyone have a use for Gen Y?

Wednesday, November 11, 2009
Just got a blast from LinkedIn through the CSAA group. Wanda Valenteen, central station manager at The Protection Bureau, is looking for some best practices on training of Gen Y employees. Here's her posting:
Y-Gen Training: We studied them and know that they are unique in their behavior and work ethic. We discussed the studies and behavior and then began to hire them. We've all developed our own unique ways of training and retaining them. Does anyone want to share their training efforts, successes and failures relating to the Y-Gen employees?
Drop on by and give her some feedback. ESA, or the evolved NBFAA, sponsored the creation of a group earlier in 2009 called the Young Security Professionals group which is intended as a resource to get those younger security pros involved in the stewardship of their industry. If you really want some input from younger security professionals who are going above and beyond, check out SSN's most recent 20 Under 40 feature. The young cream of the crop are highlighted therein.