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.
Since 1969, NAPCO has established a heritage and proven record in the professional security community for 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, 2026 compared with the comparable period included:
● Total revenue increased 11.8% and 11.9% to $49.2 million and $146.5 million, respectively.
● Equipment revenue increased 8.4% and 10.9% to $24.2 million and $74.3 million, respectively, while recurring service revenues (“RSR”) increased 15.4% and 13.0% to $24.9 million and $72.2 million, respectively.
● Total gross profit margin increased from 57.2% to 60.0% and from 56.7% to 58.4% for the three and nine months ended March 31, 2026 and 2025, respectively.
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Industry Landscape
Our industry is dynamic and highly competitive; our competitors are continually developing new products and solutions for consumers and businesses 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 to adapt and respond to customer and user preferences over an extended time in pace with this changing environment... We must continue to evolve and
Economic Conditions and Other Factors
We are subject to the effects of general macroeconomic and market conditions.
The United States economy continues to experience various macroeconomic pressures, including pricing pressure from tariffs and inflation, sustained high interest rates, increased fuel costs and general economic and political uncertainty.
On February 20, 2026, the U.S. Supreme Court ruled that certain tariffs imposed under the International Emergency Economic Powers Act (“IEEPA”) were invalid, and in March 2026, the U.S. Court of International Trade further ruled that importers that paid such tariffs are due refunds. Although we may be entitled to refunds of previously paid IEEPA tariffs, the amount and timing of any such refunds remain uncertain, and as of March 31, 2026, we have not recorded any amounts related to potential recoveries. Following these rulings, new tariffs under other laws and on imports from more countries were imposed, in addition to existing non-IEEPA tariffs.
We will continue to monitor these developments and assess their potential impacts, and are actively monitoring the changing global trade policies and the effects they may have on our business and broader macroeconomic environment; we have not experienced a material impact on our financial position to date and do not expect them to have a material detrimental impact on our business operations in the near term. However, given the uncertainty surrounding global markets because of U.S. tariff policy, we do not have clarity at this point over the potential medium to long term impacts our business may face. The availability of certain goods could be affected if foreign suppliers choose to limit their exposure to U.S. markets in response to unfavorable trade policies, which could negatively impact our supplier’s ability to deliver materials or manufacture equipment for us and, therefore, delay or impede our product deliveries.
Additionally, increased fuel costs resulting from the conflict in Iran and geopolitical tensions in the region has increased macroeconomic uncertainty generally and may lead to higher freight expense and cost pressure on the products offered by the Company. These pressures have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations.
Furthermore, rising inflation, slower economic growth and increases in unemployment that may result from global trade disruptions could further deflate consumer demand and impact on the demand for our products.
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, 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.
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Results of Operations
Three months ended March 31,
Nine months ended March 31,
(dollars in thousands)
(dollars in thousands)
% Increase/
% Increase/
2026
2025
(decrease)
2026
2025
(decrease)
Revenue:
Equipment revenue
$
24,238
$
22,351
8.4
%
$
74,300
$
66,993
10.9
%
Service revenue
24,929
21,610
15.4
%
72,207
63,904
13.0
%
Total revenue
49,167
43,961
11.8
%
146,507
130,897
11.9
%
Gross Profit:
Gross Profit: equipment
6,949
5,499
26.4
%
20,358
16,025
27.0
%
Gross Profit: service
22,540
19,628
14.8
%
65,215
58,207
12.0
%
Total gross profit
29,489
25,127
17.4
%
85,573
74,232
15.3
%
Gross profit as a % of revenue:
60.0
%
57.2
%
4.9
%
58.4
%
56.7
%
3.0
%
Equipment
28.7
%
24.6
%
16.7
%
27.4
%
23.9
%
14.6
%
Services
90.4
%
90.8
%
(0.4)
%
90.3
%
91.1
%
(0.9)
%
Research and development
3,418
3,185
7.3
%
10,131
9,349
8.4
%
Selling, general and administrative
11,259
10,796
4.3
%
32,234
30,710
5.0
%
Selling, general and administrative as a percentage of net revenue
22.9
%
24.6
%
(6.9)
%
22.0
%
23.5
%
(6.4)
%
Litigation settlement cost
16,000
—
N/A
16,000
—
N/A
Operating (loss) income
(1,188)
11,146
(110.7)
%
27,208
34,173
(20.4)
%
Interest income, net
881
762
15.6
%
2,618
2,631
(0.5)
%
Other income, net
105
100
5.0
%
346
296
16.9
%
Provision for income taxes
206
1,886
(89.1)
%
4,912
5,326
(7.8)
%
Net (loss) income
(408)
10,122
(104.0)
%
25,260
31,774
(20.5)
%
Revenue
Revenue by major product lines is as follows:
Three months ended March 31,
Nine months ended March 31,
(dollars in thousands)
(dollars in thousands)
% Increase
% Increase
2026
2025
(decrease)
2026
2025
(decrease)
Revenue:
Equipment Revenue
Intrusion and access alarm products
$
8,452
$
8,049
5.0
%
$
25,481
$
24,668
3.3
%
Door locking devices
15,786
14,302
10.4
%
48,819
42,325
15.3
%
Total equipment revenue
24,238
22,351
8.4
%
74,300
66,993
10.9
%
Service revenue
24,929
21,610
15.4
%
72,207
63,904
13.0
%
Total Revenue
$
49,167
$
43,961
11.8
%
$
146,507
$
130,897
11.9
%
Three Months Ended March 31, 2026:
Total Revenue for the three months ended December 31, 2025, increased $5,206,000 (11.8%) to $49,167,000 as compared to $43,961,000 in the comparable period.
Net equipment revenues for the three months ended March 31, 2026, increased $1,887,000 (8.4%) to $24,238,000 as compared to $22,351,000 in the comparable period. The increase in net equipment revenue was attributable to increases in sales of door locking products of $1,484,000 (10.4%) and intrusion and access products of $403,000 (5.0%). The increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 5.0%) with the balance a result of general increase in sales volume (approximately 5.4%). The increased revenue in our intrusion and access alarm products was primarily a result of the
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impact of pricing increases (approximately 10.1%), offset by a decrease in volume (approximately 5.1%) primarily related to our access products.
Net service revenues for the three months ended March 31, 2026, increased $3,319,000 (15.4%) to $24,929,000 as compared to $21,610,000 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, 2026:
Revenue for the nine months ended March 31, 2026, increased $15,610,000 (11.9%) to $146,507,000 as compared to $130,897,000 in the comparable period.
Net equipment revenues for the nine months ended March 31, 2026, increased $7,307,000 (10.9%) to $74,300,000 as compared to $66,993,000 in the comparable period. The increase in net equipment revenue was attributable to increases in the sales of door locking products of $6,494,000 (15.3%) and intrusion and access products of $813,000 (3.3%). The increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 6.3%) with the balance a result of general increase in sales volume (approximately 9.0%). The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases (approximately 10.8%), offset by a decrease in volume (approximately 7.5%) primarily related to our access products.
Net service revenues for the nine months ended March 31, 2026, increased $8,303,000 (13.0%) to $72,207,000 as compared to $63,904,000 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 March 31, 2026
Overall gross profit for the three months ended March 31, 2026, increased $4,362,000 to $29,489,000, or 60.0% of net revenue, as compared to $25,127,000, or 57.2% of net revenue, for the comparable period.
Gross profit from equipment revenue was $6,949,000, or 28.7% of equipment revenue, as compared to $5,499,000, or 24.6% 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 in our locking products which improved the absorption rate of our fixed overhead costs, price increases that went into effect during Fiscal 2026 and reductions in sales discounts during the period.
Gross profit as a percentage of service revenue was consistent in both periods. Gross profit on service revenues was $22,540,000, or 90.4% of net service revenues, as compared to $19,628,000, or 90.8% of net service revenues, for the comparable period a year ago.
Nine Months Ended March 31, 2026
Overall gross profit for the nine months ended March 31, 2026, increased $11,341,000 to $85,573,000, or 58.4% of net revenue, as compared to $74,232,000, or 56.7% of net revenue, for the comparable period.
Gross profit from equipment revenue was $20,358,000, or 27.4% of equipment revenue, as compared to $16,025,000, or 23.9% 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 in our locking products which improved the absorption rate of our fixed overhead costs, certain price increases that went into effect during the previous quarter and reductions in sales discounts during the period.
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Gross profit as a percentage of service revenue was consistent in both periods. Gross profit on service revenues was $65,215,000, or 90.3% of net service revenues, as compared to $58,207,000, or 91.1% of net service revenues, for the comparable period a year ago.
Research and Development
Research and development expenses for the three months ended March 31, 2026, increased by $233,000 to $3,418,000, or 7.0% of net revenue, as compared to $3,185,000, or 7.2% of net revenue, for the comparable period. The increase in research and development expenses was primarily a result of increased labor compensation and benefit costs ($156,000).
Research and development expenses for the nine months ended March 31, 2026, increased by $782,000 to $10,131,000, or 6.9% of net revenue, as compared to $9,349,000, or 7.1% of net revenue, for the comparable period. The increase in research and development expenses was primarily a result of increased labor compensation and benefit costs ($766,000).
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2026, increased by $463,000 to $11,259,000 as compared to $10,796,000 for the comparable period. The increase in SG&A expenses was primarily attributable to increases in our tradeshow related expenses ($896,000) wages, bonus compensation and benefits ($205,000), commission related expenses ($215,000), 401(k) matching contributions ($86,000) and insurance expense ($59,000) offset by decreases in legal fees (net of insurance reimbursements) related to the litigation discussed in Note 13 ($880,000) and stock-based compensation ($96,000).
SG&A expenses for the nine months ended March 31, 2026, increased by $1,524,000 to $32,234,000 as compared to $30,710,000 for the comparable period. The increase in SG&A expenses was primarily attributable to increases in commission expense ($716,000), wages, bonus compensation and benefits ($397,000), tradeshow related expenses ($980,000), insurance ($151,000) and 401(k) matching contributions ($92,000), offset by decreases in accounting expenses ($498,000), legal fees related to the litigation discussed in Note 13 ($243,000) and stock-based compensation $(359,000).
Litigation settlement costs
Litigation settlement costs for the three and nine months ended March 31, 2026 was $16,000,000, net of any insurance reimbursements, as a result of the settlement described in Note 13. The effect of such settlement was to reduce operating income by $16,000,000 and net income by $14,267,000 (giving effect to the lower income taxes resulting from the litigation expense).
Interest and Other Income, Net
Three months ended March 31,
Nine months ended March 31,
2026
2025
% Increase (Decrease)
2026
2025
% Increase (Decrease)
Interest income
$
881
$
762
16%
$
2,618
$
2,631
**
Investment income
105
100
**
346
296
**
$
986
$
862
$
2,964
$
2,927
**Percentage change not meaningful.
Interest income increased for the three months ended March 31, 2026, as compared to the comparable period, primarily due to higher interest rates. Interest income remained consistent for the nine months ended March 31, 2026 as compared to the comparable period.
Income Taxes
The Company’s provision for income taxes for the three months ended March 31, 2026 decreased by $1,680,000 to $206,000 as compared to $1,886,000 for the same period a year ago. The Company’s effective rate for income tax was (102.0)% and 15.7% for the three months ended March 31, 2026 and 2025 respectively. The Company’s provision for income taxes for the nine months ended March 31, 2026 decreased by $414,000 to $4,912,000 as compared to $5,326,000 for the same period a year ago. The Company’s effective rate for income tax was 16.3% and 14.4% for the nine months ended March 31, 2026 and 2025 respectively. The Company’s effective tax
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rate for the three months ended March 31, 2026 decreased due to the litigation settlement costs lowering pre-tax income offset by discrete items incurred during the quarter. The Company’s effective tax rate for the nine months ended March 31, 2026 increased due to lower taxable income.
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.
Our cash and cash equivalents increased by $31,327,000 during the nine months ended March 31, 2026, and our cash and cash equivalents and short-term investments were $124,952,000 as of March 31, 2026. 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 March 31, 2026, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, there were no outstanding borrowings on the line as of March 31, 2026.
A summary of the cash flow activity for the nine months ended March 31, 2026 and 2025 is as follows:
Cash Flows from Operating Activities
Net cash provided by operating activities was $43.5 million for the nine months ended March 31, 2026 and was due to net income of $25.3 million and increase in adjustments for non-cash items of $6.4 million and from changes in operating assets and liabilities of $11.9 million. The changes in operating assets and liabilities were largely attributable to increases in inventories and income tax receivables and increases in accounts payable and accrued expenses partially offset by decreases in accounts receivables.
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 and 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.
Cash Flows from Investing Activities
The net cash provided by investing activities of $4.3 million during the nine months ended March 31, 2026 was primarily attributable to the redemption of marketable securities of $13.7 million partially offset by expenditures used for capital expenditures of $1.5 million and purchase of marketable securities of $7.8 million. The cash provided by investing activities of $15.1 million during the nine months ended March 31, 2026, was primarily attributable to redemption of other investments of $27.3 million partially offset by expenditures used for capital expenditures of $1.9 million and purchase of investments of $10.2 million. The change in use of cash for investing activities from 2025 to 2026 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 $16.5 million for the nine months ended March 31, 2026 was primarily related to the payment of stockholder dividends and payment of tax withholdings related to stock option exercises. The cash used in financing activities of $45.9 million for the nine months ended March 31, 2025 was primarily related to the repurchase of treasury shares of $36.8 million and the payment of stockholder dividends of $9.2 million.
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Contractual Obligations and Commitments
As of March 31, 2026, 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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