Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Overview
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 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% .
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● 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. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces.
Economic Conditions and Other Factors
We are subject to the effects of general macroeconomic and market conditions.
On April 2, 2025, the U.S. announced a new universal baseline tariff of 10%, (which includes imports from the Dominican Republic where we manufacture most of our products) plus significant additional country-specific tariffs for select trading partners, on all U.S. imports. The reciprocal country-specific tariffs were subsequently paused for 90 days on most countries. The uncertainty around the long-term tariff rates that could be applied to our importation of products into the U.S. presents significant challenges to our operations and supply chain and could impact future result. We cannot predict what additional actions might be considered or implemented by the U.S. or its trade partners, particularly in the current geopolitical environment. We anticipate that the imposition of the baseline 10% tariff will increase the cost of our products and could impact product margins. The uncertainty could also cause disturbances in ocean shipping capacity that could affect our ability to secure ocean freight containers for our products, and create inflationary effects on our costs, in addition to the direct impact of tariffs. We are closely monitoring the evolving tariff landscape and attempting to mitigate these impacts, including using pricing adjustments, sourcing strategies and other cost-mitigation measures. However, there can be no assurance that we will be able to fully mitigate the impacts of such tariffs or that the imposition of tariffs, and the resulting economic impact on the U.S. market and consumer, will not be material to our financial results.
We primarily source our manufacturing materials from Asia, including Taiwan, India and China, with additional sourcing from other producers throughout the world. There have been significant proposed reciprocal tariffs on certain of these countries. At this time, the overall impact on our business related to tariffs remains uncertain and depends on multiple factors, including the duration and potential expansion of current tariffs, future changes to tariff rates, scope, or enforcement, reciprocal measures by impacted trade partners, inflationary effects, changes to consumer purchasing behavior, and the effectiveness of our responses in managing these challenges.
The markets for security devices and services are dynamic and highly competitive. Our competitors are continually developing new products and solutions for consumers and businesses. We must continue to evolve and adapt to respond to customer and user preferences over an extended time in pace with this changing environment.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are fully described in Note 1 to the Company’s consolidated financial statements included in its 2025 Annual Report on Form 10-K.
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires a high degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. We continuously evaluate our estimates and judgments based on historical experience, as well as other factors that we believe to be reasonable under the circumstances. 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,
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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 September 30,
(dollars in thousands)
% Increase/
2025
2024
(decrease)
Revenue:
Equipment revenue
$
25,739
$
22,917
12.3
%
Service revenue
23,429
21,086
11.1
%
Total revenue
49,168
44,003
11.7
%
Gross Profit:
Gross Profit: equipment
6,693
5,407
23.8
%
Gross Profit: service
21,153
19,209
10.1
%
Total gross profit
27,846
24,616
13.1
%
Gross profit as a % of revenue:
56.6
%
55.9
%
1.3
%
Equipment
26.0
%
23.6
%
10.2
%
Services
90.3
%
91.1
%
(0.9)
%
Research and development
3,240
3,057
6.0
%
Selling, general and administrative
10,963
9,703
13.0
%
Selling, general and administrative as a percentage of net sales
22.3
%
22.1
%
0.9
%
Operating income
13,643
11,856
15.1
%
Interest income, net
854
940
(9.1)
%
Other income, net
138
204
(32.4)
%
Provision for income taxes
2,470
1,815
36.1
%
Net income
12,165
11,185
8.8
%
Revenue
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.
Gross Profit
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.
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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 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 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 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,
2025
2024
% Increase (Decrease)
Interest income
$
852
$
941
(9)%
Investment income
138
203
**
$
990
$
1,144
**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.
Income Taxes
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
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. 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.
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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 three months ended September 30, 2025 and 2024 is as follows:
Cash Flows from Operating Activities
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 $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 $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 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.
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