What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-03 compared with 2025-05-05 · 78 added, 93 removed, 54 unchanged (76% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q and the documents we incorporate by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

All statements, other than statements of historical fact, included or incorporated in this prospectus regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements.

The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements.

See “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2024 for more information.

These factors and the other cautionary statements made in this prospectus and the documents we incorporate by reference should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus and the documents we incorporate by reference.

In addition, any forward-looking statements represent our estimates only as of the date that this prospectus is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date.

We do not assume any obligation to update any forward-looking statements.

We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.

Napco is a leading manufacturer and designer of high-tech electronic security devices, wireless communication services for intrusion and fire alarm systems as well as a provider of school safety solutions.

We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products, used for commercial, residential, institutional, industrial and governmental applications.

We have experienced significant growth in recent years, primarily driven by our recurring service revenues from wireless communication services for intrusion and fire alarm systems.

NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions.

Forward Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended June 30, 2025 included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 filed on August 25, 2025, or Annual Report, with the Securities and Exchange Commission, or SEC.

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.

Such statements are based upon current expectations that involve risks and uncertainties.

Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.

For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below.

All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements.

These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report.

Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Napco” refer to Napco Security Technologies, Inc.

and our subsidiaries.

NAPCO is one of the leading manufacturers and designers of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems as well as a leading provider of school safety solutions.

We offer a diversified array of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products.

These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold principally to independent distributors, dealers and installers of security equipment.

We have established a national network of trusted independent security dealers and integrators that are experts at selling, installing and supporting our various technologies.

These dealers are dependent on our platform for communication services to our radio communicators and smart security devices, and they pay us a monthly fee for these services to operate and manage their businesses efficiently.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, NAPCO Access Pro, Marks USA, and other popular product lines.

We are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks.

Highlights from the three and nine months ended March 31, 2025 compared with the comparable periods in fiscal 2024 included:

● Net sales decreased 10.8% to $44.0 million and 5.5% to $130.9 million, for the three and nine months.

● Recurring service revenue (“RSR”) increased 10.6% and 15.4% to $21.6 and $63.9 million for the three and nine months.

● Total gross profit margin increased from 53.8% to 57.2% and 53.4% to 56.7% for the three and nine months.

● Gross margin for RSR decreased to 90.8% as compared to 91.8% for the three months and increased to 91.1% as compared to 90.5% for the nine months.

● Generated $38.9 million in cash flows from operations for the nine months ended March 31, 2025 as compared to $31.0 in fiscal 2024.

Industry Trends

Highlights from the three months ended September 30, 2025 compared with the comparable period in fiscal 2024 included:

● Total revenue increases 11.7% to $49.2, while equipment revenue increased 12.3% to $25.7 million and recurring service revenues (“RSR”) increased 11.1% to $23.4 million.

● Total gross profit margin increased from 55.9% to 56.6% .

● Gross margin for equipment revenue increased from 23.6% to 26.0% while gross margin on RSR decreased to 90.3% as compared to 91.1% .

● Operating income increased 15.1% to $13.6 million.

Industry Landscape

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models.

27 unchanged sentences

The results of our evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves, valuation of intangible assets, share based compensation and income taxes.

Critical estimates include management’s judgments associated with reserves for sales returns and allowances, allowance for credit losses, overhead expenses applied to inventory, inventory reserves,

valuation of intangible assets, share based compensation and income taxes.

These estimates may change in the future if underlying assumptions or factors change, and actual results may differ from these estimates.

Results of Operations

Three months ended March 31,

Nine months ended March 31,

(dollars in thousands)

Three months ended September 30,

(dollars in thousands)

equipment revenues

service revenues

Total net sales

Equipment revenue

Service revenue

Total revenue

Gross Profit:

Total gross profit

Gross profit as a % of net sales:

Gross profit as a % of revenue:

Research and development

2 unchanged sentences

Operating income

Interest and other income, net

Interest income, net

Other income, net

Provision for income taxes

Three Months Ended March 31, 2025:

Net sales for the three months ended March 31, 2025 decreased $5,306,000 to $43,961,000 as compared to $49,267,000 in the comparable period.

Net equipment revenues for the three months ended March 31, 2025, decreased $7,384,000 to $22,351,000 as compared to $29,735,000 in the comparable period.

The decrease in net equipment sales was attributable to decreases in intrusion and access alarm products of $2,090,000 and door locking devices of $5,294,000.

The overall decrease in net equipment revenue was primarily due to reduced sales of approximately $5.1 million at three of our larger distributors as follows;

(i) a distributor who purchases both our intrusion and locking products, and decided to reduce corporate-wide purchases to stabilize their existing inventory levels;

(ii) a locking distributor whose reduced purchases was primarily driven by the timing of project work with their customer;

and (iii) a second locking distributor who was looking to reduce their inventory levels.

Net service revenues for the three months ended March 31, 2025, increased $2,078,000 to $21,610,000 as compared to $19,532,000 in the comparable period.

The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.

Nine Months Ended March 31, 2025 :

Net sales for the nine months ended March 31, 2025 decreased $7,593,000 to $130,897,000 as compared to $138,490,000 in the comparable period.

Net equipment revenues for the nine months ended March 31, 2025, decreased $16,140,000 to $66,993,000 as compared to $83,133,000 in the comparable period.

The decrease in net equipment sales was attributable to decreases in intrusion and access alarm products of $6,025,000 and door locking devices of $10,115,000.

Of the overall decrease in net equipment sales approximately $5.8 million was attributable to one of the Company’s larger distributors, which purchases both our intrusion and locking products, and made a decision to reduce corporate-wide purchases to stabilize their existing inventory levels.

In addition, the reduction in door

locking device sales was primarily attributable to reduced purchases by four of the Company’s locking customers of approximately $8.3 million, which was partially driven by the timing of project work with one of the customers.

Net service revenues for the nine months ended March 31, 2025, increased $8,547,000 to $63,904,000 as compared to $55,357,000 in the comparable period.

Three Months Ended September 30, 2025:

Revenue for the three months ended September 30, 2025, increased $5,165,000 to $49,168,000 as compared to $44,003,000 in the comparable period.

Net equipment revenues for the three months ended September 30, 2025, increased $2,822,000 to $25,739,000 as compared to $22,917,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in the sales of door locking devices of $3,229,000, while revenue from intrusion products decreased $407,000.

The increased volume in our door locking products was primarily due to increased sales to one of our larger distributors, net of decreases resulting from the timing of large construction project work that is supplied through our distributors.

Equipment revenues were also positively impacted by certain pricing increases that went into effect in the quarter.

Net service revenues for the three months ended September 30, 2025, increased $2,343,000 to $23,429,000 as compared to $21,086,000 in the comparable period.

The increase in net service revenues was due to an increase in the number of our cellular (radio) communication devices put into service and activated.

Three Months Ended March 31, 2054

Overall gross profit for the three months ended March 31, 2025 decreased $1,357,000 to $25,127,000, or 57.2% of net sales, as compared to $26,484,000, or 53.8% of net sales, for the comparable period.

Gross profit from equipment sales was $5,499,000, or 24.6% of equipment sales, as compared to $8,556,000, or 28.8% of net equipment sales, for the comparable period.

The decrease in gross profit percentage from equipment sales is primarily a result of product mix and lower absorption of fixed overhead costs as a result of the decrease in equipment revenue.

Gross profit on service revenues was $19,628,000, or 90.8% of net service revenues, as compared to $17,928,000, or 91.8% of net service revenues, for the comparable period a year ago.

The decrease in gross profit percentage was a result of a negotiation of a one-time lower royalty payment in the comparable quarter.

Nine Months Ended March 31, 2025 :

Overall gross profit for the nine months ended March 31, 2025 increased $323,000 to $74,232,000, or 56.7% of net sales, as compared to $73,909,000, or 53.4% of net sales, for the comparable period.

Gross profit from equipment sales was $16,025,000, or 23.9% of equipment sales, as compared to $23,801,000, or 28.6% of equipment sales, for the comparable period.

The decrease in gross profit percentage from equipment sales is primarily a result of product mix and lower absorption of fixed overhead costs as a result of the decrease in equipment revenue.

Three Months Ended September 30, 2025

Overall gross profit for the three months ended September 30, 2025, increased $3,230,000 to $27,846,000, or 56.6% of net sales, as compared to $24,616,000, or 55.9% of net sales, for the comparable period.

Gross profit from equipment revenue was $6,693,000, or 26.0% of equipment revenue, as compared to $5,407,000, or 23.6% of equipment revenue, for the comparable period.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs and certain price increases that went into effect during the quarter.

Gross profit on service revenues was $21,153,000, or 90.3% of net service revenues, as compared to $19,209,000, or 91.1% of net service revenues, for the comparable period a year ago.

The increase in gross profit percentage was a result of renegotiation of royalty arrangements and volume rebates received from carriers.

The decrease in gross profit percentage was a result of increased data costs due to the increase in the number of active dual Sim radio communicators which require data service from multiple carriers.

Research and Development

Research and development expenses for the three months ended March 31, 2025 increased by $428,000 to $3,185,000, or 7.2% of net sales, as compared to $2,757,000, or 5.6% of net sales, for the comparable period.

The increase in research and development expenses was primarily a result of annual compensation increases and hiring of additional resources.

Research and development expenses for the nine months ended March 31, 2025 increased by $1,613,000 to $9,349,000, or 7.1% of net sales, as compared to $7,736,000, or 5.6% of net sales, for the comparable period.

The increase in research and development expenses was primarily a result of annual compensation increases and hiring of additional resources.

Research and development expenses for the three months ended September 30, 2025, increased by $183,000 to $3,240,000, or 6.6% of net sales, as compared to $3,057,000, or 6.9% of net sales, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor ($194,000) and UL approval ($17,000) costs, offset by reduced consulting fees ($34,000).

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2025 increased by $1,563,000 to $10,796,000 as compared to $9,233,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increased legal fees related to the litigation discussed in Note 13 of $704,000, compensation and benefit increases and hiring of additional staff of $586,000, increases in insurance costs of $162,000 and increases in advertising of $138,000, offset by reductions in investor relations expenses.

Selling, general and administrative (“SG&A”) expenses for the nine months ended March 31, 2025 increased by $4,391,000 to $30,710,000 as compared to $26,319,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to compensation and benefit increases and hiring of additional staff of $2,900,000, increases in professional and consulting fees of $665,000, increases in insurance costs of $456,000, and increases in advertising of $442,000, offset by an insurance recovery of legal fees.

Other Income (Expense)

Interest and other income, net for the three months ended March 31, 2025 increased by $225,000 to income of $862,000 as compared to income of $637,000 for the comparable period.

The increase in income was primarily due to an increase in interest income on short-term investments as a result of higher interest rates and larger deposit balances.

Interest and other income, net for the nine months ended March 31, 2025 increased by $1,121,000 to income of $2,927,000 as compared to income of $1,806,000 for the comparable period.

The increase in income was primarily due to an increase in interest income on short-term investments as a result of higher interest rates and larger deposit balances.

The Company’s provision for income taxes for the three months ended March 31, 2025 of $1,886,000 remained consistent as compared to $1,935,000 for the same period a year ago.

The Company’s effective rate for income tax was 15.7% and 12.8% for the three months ended March 31, 2025 and 2024 respectively.

The Company’s effective tax rate for the three months ended March 31, 2025 increased as a result of lower estimated R&D tax credits for the period.

The Company’s provision for income taxes for the nine months ended March 31, 2025 of $5,326,000 remained consistent as compared to $5,376,000 for the same period a year ago.

The Company’s effective rate for income tax was 14.4% and 12.9% for the nine months ended March 31, 2025 and 2024 respectively.

The Company’s effective tax rate for the nine months ended March 31, 2025 increased as a result of lower estimated R&D tax credits for the period and higher non-deductible stock based compensation.

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2025, increased by $1,260,000 to $10,963,000 as compared to $9,703,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increases in legal fees related to the litigation discussed in Note 13 ($943,000), and increases in commission expense ($354,000), offset by reductions in bonus compensation and benefit ($82,000).

Interest and Other Income (Expense)

Three months ended September 30,

% Increase (Decrease)

Interest income

Investment income

**Percentage change not meaningful.

Interest income decreased for the three months ended September 30, 2024, as compared to the comparable period, primarily due to lower interest rates.

The Company’s provision for income taxes for the three months ended September 30, 2025 increased by $655,000 to $2,470,000 as compared to $1,815,000 for the same period a year ago.

The Company’s effective rate for income tax was 16.9% and 14.0% for the three months ended September 30, 2025 and 2024 respectively.

The Company’s effective tax rate for the three months ended September 30, 2025 increased as a result of a larger portion of the Company’s taxable income being attributable to United States operations, and the remeasurement of certain deferred tax liabilities due to tax rate changes enacted in the One Big Beautiful Bill Act (“OBBBA”) in the current period.

Liquidity and Capital Resources

Our cash and cash equivalents increased by $8,072,000 during the nine months ended March 31, 2025, and our cash and cash equivalents and short-term investments as of March 31, 2025 was $89,297,000.

We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months.

As of March 31, 2025, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, none of which has been drawn.

We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, tariffs, bans, or other measures or events that increase the effective price of products.

We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

Our cash and cash equivalents increased by $12,319,000 during the three months ended September 30, 2025, and our cash and cash equivalents and short-term investments as of September 30, 2025 was $105,758,000.

We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

As of September 30, 2025, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, none of which has been drawn.

The Company has no outstanding debt.

A summary of the cash flow activity for the nine months ended March 31, 2025 and 2024 is as follows:

A summary of the cash flow activity for the three months ended September 30, 2025 and 2024 is as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities was $38.9 million for the nine months ended March 31, 2025 and was due to net income of $31.8 million and increase in cash flow from changes in operating assets and liabilities of $6.9 million offset by adjustments for non-cash items of $0.3 million.

The changes in operating assets and liabilities were largely attributable to decreases in accounts receivables, inventories and prepaid expenses partially offset by increases in income tax receivable and decreases in accounts payable and accrued expenses.

Net cash provided by operating activities was $31.0 million for the nine months ended March 31, 2024 and was due to net income of $36.3 million and adjustments for non-cash items of $.8 million, partially offset by a decrease in cash flow from operating activities due to changes in operating assets and liabilities of $6.1 million.

The changes in operating assets and liabilities was largely attributable to an increase in accounts receivable and inventories partially offset by an increase in and accounts payable and accrued expenses.

Net cash provided by operating activities was $11.6 million for the three months ended September 30, 2025 and was due to net income of $12.2 million and increase in adjustments for non-cash items of $2.1 million offset by cash outflow from changes in operating assets and liabilities of $2.6 million.

The changes in operating assets and liabilities were largely attributable to increases in accounts receivables, inventories, prepaid expenses and income tax receivables partially offset by decreases in accounts payable and accrued expenses.

Net cash provided by operating activities was $12.0 million for the period ended September 30, 2024 and was due to net income of $11.2 million and increase in cash flow from changes in operating assets and liabilities of $1.3 million, partially offset by adjustments for non-cash items of $.4 million.

The changes in operating assets and liabilities were largely attributable to increases in accounts receivables and decreases in inventories and accounts payable and accrued expenses.

Cash Flows from Investing Activities

The net cash provided by investing activities of $15.1 million during the nine months ended March 31, 2025 was primarily attributable to the redemption of other investments of $27.3 million partially offset by expenditures used for capital expenditures of $1.8 million and purchase of investments of $10.2 million.

The cash used in investing activities of $2.3 million during the nine months ended March 31, 2024, was primarily attributable to expenditures used for capital expenditures and purchase of investments.

The net cash provided by investing activities of $5.6 million during the three months ended September 30, 2025 was primarily attributable to the redemption of marketable securities of $8.4 million partially offset by expenditures used for capital expenditures of $.2 million and purchase of marketable securities of $2.5 million.

The cash provided by investing activities of $15.5 million during the three months ended September 30, 2024, was primarily attributable to redemption of other investments partially offset by expenditures used for capital expenditures and purchase of investments.

The change in use of cash for investing activities from 2024 to 2025 was a increase in the redemption of investments in term deposits (other investments).

Cash Flows from Financing Activities

The cash used in financing activities of $45.9 million for the nine months ended March 31, 2025 was primarily related to the purchase of treasury shares and the payment of stockholder dividends.

The cash used in financing activities of $9.1 million for the nine months ended March 31, 2024 was primarily related to the payment of stockholder dividends.

The cash used in financing activities of $5.0 million for the three months ended September 30, 2025 was primarily related to the payment of stockholder dividends.

The cash used in financing activities of $7.2 million for the three months ended September 30, 2024 was primarily related to the repurchase of treasury shares.

Contractual Obligations and Commitments

As of March 31, 2025, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principle manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges.

As of September 30, 2025, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principal manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges.

The service charges increase 2% annually over the remaining life of the lease.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis