What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-08-25 compared with 2024-08-29 · 69 added, 54 removed, 113 unchanged (52% of the section changed)

10 unchanged sentences

Highlights from fiscal year 2025 compared with fiscal year 2024 included:

● Net sales for the year increased 11% to a record $188.8 million as compared to $170.0 million.

● Recurring service revenue (“RSR”) for the year increased 26% to $75.7 million as compared to $59.9 million.

● Gross margin for recurring service revenue increased to 90.5% as compared to 89.0%.

● Net sales for the year decreased 4% to $181.6 million.

● Recurring service revenue (“RSR”) for the year increased 14% to $86.3 million.

● Gross margin for recurring service revenue was 91.0% for fiscal 2025.

● Gross margin for equipment revenue was 23.6% as compared to 29.4%.

● Net income increased 84% to a fiscal year record $49.8 million as compared to $27.1 million.

Industry Trends

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

● Net income decreased 13% to $43.4 million.

Industry Landscape

Our industry continues to be 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.

Napco continually strives to innovate 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.

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 enacted and 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.

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Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.

Our revenue fluctuates quarterly and is generally higher in the fourth quarter of our fiscal year.

Critical Accounting Policies and Estimates

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The Company also provides rebates to customers for meeting specified purchasing targets and other coupons or credits in limited circumstances.

Reserves are established for the estimated returns, rebates and credits and such variable consideration is measured based on the expected value method.

Reserves are established for the estimated returns, rebates and credits and such variable consideration is measured based on the most likely amount method.

The Company analyzes product sales returns and is able to make reasonable and reliable estimates of product returns based on several factors including actual returns and expected return data communicated to the Company by its customers.

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Inventory costs include raw materials, direct labor and overhead.

The Company’s overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are related to procuring and storing

raw materials as compared to the manufacture and assembly of finished products.

The Company’s overhead expenses are applied based, in part, upon estimates of the proportion of those expenses that are related to procuring and storing raw materials as compared to the manufacture and assembly of finished products.

These proportions, the method of their application, and the resulting overhead included in ending inventory, are based in part on subjective estimates and actual results could differ from those estimates.

17 unchanged sentences

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 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.

A summary of the cash flow activity for the year ended June 30, 2025 and 2024 is as follows:

4 unchanged sentences

Depreciation and amortization

Gain on disposal of fixed asset

Interest expense (income) on other investments

Change in accrued Interest on other investments

Unrealized (gain) loss on marketable securities

(Recovery of) Provision for credit losses

Realized (gain) loss on sales of marketable securities

(Recovery of) credit losses

Change to inventory reserve

3 unchanged sentences

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $53.5 million for the year ended June 30, 2025 and was due to net income of $43.4 million, adjustments for non-cash items of $3.1 million and an increase in cash flow from changes in operating assets and liabilities of $7.0 million.

The changes in operating assets and liabilities were largely attributable to decreases in inventories, accounts receivables and prepaid expenses offset by decreases in accounts payables and accrued expenses.

Net cash provided by operating activities was $45.4 million for the year ended June 30, 2024 and was due to net income of $49.8 million and adjustments for non-cash items of $2.7 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $7.1 million.

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

Net cash provided by operating activities was $24.7 million for the year ended June 30, 2023 and was due to net income of $27.1 million offset by a decrease in cash flow from operating activities due to changes in operating assets and liabilities of $2.0 million and an adjustment for non-cash items of $0.4 million.

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

Cash Flows from Investing Activities

1 unchanged sentence

Purchases of property, plant, and equipment

Proceeds from disposal of fixed asset

Purchases of marketable securities

Proceeds from sales of marketable securities

Purchases of other investments

Redemption of other investments

Net Cash Used in Investing Activities

The cash used in investing activities during the year ended June 30, 2024 was primarily attributable to net cash used for capital expenditures and purchase of investments.

The cash used in investing activities during the year ended June 30, 2023 was primarily attributable to the net change in investments, as well as capital expenditures.

The change in use of cash for investing activities from 2023 to 2024 was a reduction in investments in term deposits (other investments).

Net Cash Provided by (Used in) Investing Activities

The cash provided by investing activities during the year ended June 30, 2025 was primarily attributable to proceeds from the sale of marketable securities as well as the redemption of our Certificate of Deposits which were classified as other investments.

The Net cash provided by investing activities was partially offset by net cash used for capital expenditures and purchase of marketable securities.

The cash used in investing activities during the year ended June 30, 2024 was primarily attributable to cash used for capital expenditures and purchase of certificates of deposits.

The change in cash for investing activities from 2024 to 2025 was an increase in proceeds received from marketable securities and other investments.

Cash Flows from Financing Activities

1 unchanged sentence

Proceeds from stock option exercises

Cash paid for dividend

Net Cash (Used in) Provided by Financing Activities

The cash used in financing activities for the years ended June 30, 2024 and 2023 was primarily related to the payment of stockholder dividends.

Dividends paid

Repurchase of common stock

Net Cash Used in Financing Activities

The cash used in financing activities for the year ended June 30, 2025 was primarily related to the payment of stockholder dividends as well as purchase of treasury shares while the year ended June 30, 2024 was primarily related to the payment of stockholder dividends.

As of June 30, 2025, the Company’s available revolving credit line was $20,000,000, which expires in February 2029.

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Working Capital.

Working capital increased by $34,861,000 to $146,534,000 at June 30, 2024 from $111,673,000 at June 30, 2023.Working capital is calculated by deducting Current Liabilities from Current Assets.

Working capital decreased by $8,147,000 to $138,387,000 at June 30, 2025 from $146,534,000 at June 30, 2024.

Working capital is calculated by deducting Current Liabilities from Current Assets.

Contractual Obligations and Commitments

As of June 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 principle manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease for 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.

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

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Provision for income taxes

Net sales in fiscal 2024 increased by $18,823,000 to $188,820,000 as compared to $169,997,000 in fiscal 2023.

The increase in net sales was primarily due to increased sales of the Company’s recurring alarm communication services of $15,814,000, Alarm Lock brand door-locking products of $4,099,000, Marks brand door-locking products of $6,882,000 as partially offset by a decrease in sales of Continental brand access control products of $206,000 and Napco brand intrusion products of $7,766,000.

The Company's gross profit increased by $28,521,000 to $101,754,000 or 54% of net sales in fiscal 2024 as compared to $73,233,000 or 43.1% of net sales in fiscal 2023.

Net sales in fiscal 2025 decreased by $7,199,000 to $181,621,000 as compared to $188,820,000 in fiscal 2024.

Net equipment revenue in fiscal 2025 decreased $17,780,000 to $95,291,000 as compared to $113,071,000 in fiscal 2024.

The decrease in net sales was primarily due to decreased sales of the Alarm Lock brand door-locking products of $7,183,000, Marks brand door-locking products of $4,309,000, Napco Access Pro brand access control products of $2,274,000 and Napco brand intrusion products of $4,014,000.

The overall decrease in net equipment sales was attributable to the reduction of sales of approximately $6.4 million to one of the Company’s larger distributors, which purchases both our intrusion and locking products.

In addition, the reduction in door locking device sales was primarily attributable to reduced purchases by three of the Company’s locking customers of approximately $9.4 million.

The decrease in equipment revenue was a result of these larger distributors extended destocking strategies throughout the year, in addition to the timing of large project work for our door-locking business and to a lesser extent general softness in demand due to customer uncertainty related to global tariff policies.

In fiscal 2024 our door-locking revenue was positively impacted by a large commercial real estate project.

The timing of project work is difficult to predict from period to period due to numerous factors.

Net service revenues for fiscal 2025 increased $10,581,000 to $86,330,000 as compared to $75,749,000 in fiscal 2024.

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

The Company's gross profit decreased by $724,000 to $101,030,000 in fiscal 2025 as compared to $101,754,000 in fiscal 2024.

Gross profit on equipment sales was $22,496,000 or 23.6% of net equipment sales in fiscal 2025 and $33,209,000 or 29.4% of net equipment sales, in fiscal 2024.

Gross profit on service revenues was $78,534,000 or 91% of net service revenues in fiscal 2025 and $68,545,000 or 90.5% of net service revenues, in fiscal 2024.

The increase in Gross profit on equipment sales was primarily the result of the higher equipment sales, which increased overhead absorption, as well as the stabilization of component costs as partially offset by increased labor costs in both the U.S.

and Dominican Republic.

Overall, gross margins increased to 56% of net sales in 2025 from 54% in 2024.

The decrease in Gross profit margins on equipment sales was primarily a result of overall lower equipment sales levels which results in less absorption of fixed manufacturing overhead costs in addition to the impact of tariff costs in the fourth quarter of Fiscal 2025 as a result of distributors pulling forward orders before our announced price increase went into effect.

Research and Development

Research and Development expenses increased by $1,435,000 to $10,763,000 in fiscal 2024 as compared to $9,328,000 in fiscal 2023.

This increase was due primarily to salary increases and additional staff.

Research and Development expenses increased by $1,818,000 in fiscal 2025 as compared to fiscal 2024, primarily due to increases of $1,750,000 in personnel-related expenses mainly from merit increases and the hiring of additional engineering staff.

The head count of engineering staff increased by 11% from 72 at the end of Fiscal 2024 to 80 at the end of Fiscal 2025.

Selling, General and Administrative

Selling, general and administrative expenses for fiscal 2024 increased by $3,593,000 to $37,173,000 as compared to $33,580,000 in fiscal 2023.

Selling, general and administrative expenses as a percentage of net sales remained consistent at 19.7% in fiscal 2024 compared to 19.8% in fiscal 2023.

The increases was a result of transaction costs associated with the Company’s Form S-3 filing, increased employee compensation costs, as well as increased accounting and legal expenses, partially offset by lower credit card fees.

Other Income (Expense)

Other income (expense) for fiscal 2024 increased by $1,665,000 to $2,568,000 as compared to income of $903,000 for the same period a year ago.

This increase was due primarily to interest and dividend income from the Company’s cash and short-term investments.

The Company’s provision for income taxes for fiscal 2024 increased by $2,467,000 to $6,568,000 as compared to $4,101,000 for the same period a year ago.

The Company’s effective tax rate for fiscal 2024 decreased to 12% as compared to 13% for fiscal 2023 as a result of a larger portion of the Company’s taxable income being attributable to foreign operations.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 actually 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.

Selling, general and administrative expenses for fiscal 2025 increased by $5,017,000 as compared to fiscal 2024, primarily due to increases of $3,451,000 in personnel-related expenses mainly from merit increases and the hiring of additional personnel in the finance and information technology departments, $500,000 in insurance, $370,000 in advertising, $313,000 in legal and professional fees, offset by decreases in $130,000 in Director fees and $500,000 in transactions costs associated with the Company’s Form S-3 filing during fiscal 2024.

Interest and Other Income (Expense)

Year ended June 30, (dollars in thousands)

% Increase (Decrease)

Interest income

Investment income

**Percentage change not meaningful.

Interest income increased for fiscal 2025, compared to fiscal 2024, primarily due to the increase in our cash and cash equivalents as well as higher interest rates.

The Company’s provision for income taxes for fiscal 2025 remained consistent at $6,663,000 as compared to $6,568,000 for the same period a year ago.

The Company’s effective tax rate for fiscal 2025 increased to 13% as compared to 12% for fiscal 2024 as a result of a larger portion of the Company’s taxable income being attributable to United States operations.

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-K

Item 7. Management’s Discussion and Analysis