Annual Report for Fiscal Year Ending June 30, 2026 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of Napco Security Technologies, Inc. ("NAPCO"). MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended June 30, 2026 compared to the year ended June 30, 2025. For a discussion of the year ended June 30, 2025 compared to the year ended June 30, 2024, please refer to, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended June 30, 2025.

Overview

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. 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 fiscal year 2026 compared with fiscal year 2025 included:

Please see Non-GAAP Measures below in this section of this Annual Report for a discussion of the limitations of non-GAAP adjusted EBITDA (a non-GAAP measure) and a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable measurement in accordance with GAAP, for the years ended June 30, 2026 and 2025.

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 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.

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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 certain tariffs imposed under IEEPA have been invalidated by courts and are subject to refund claims, replacement tariffs have been imposed under Section 122 and Section 301, and other trade authorities may continue, expand, or be modified. The ultimate scope, duration, and economic impact of these measures remain uncertain. As of June 30, 2026 the Company has received or accrued certain IEPPA refund claims. The Company has submitted additional claims which the Company cannot ensure the probability of collection and therefore, no refund receivable has been recognized related to these claims.

The AI data center buildout has increased demand across a broad range of electronic components, including microcontrollers, memory devices, power management integrated circuits, networking components and other semiconductors used in our products. Suppliers may allocate limited manufacturing capacity to customers serving AI and cloud infrastructure markets, reducing availability for security and access control manufacturers such as us.

Consequently, we may experience longer lead times, cost increases, allocation restrictions or reduced product availability from suppliers. If we are unable to obtain sufficient quantities of critical components, identify alternative sources, or pass increased costs to customers, our ability to manufacture and deliver products could be adversely affected.

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.

Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of various risk factors that could affect us.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our 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.

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

Equipment Revenue

Equipment revenue, which includes shipping and handling costs, is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single performance obligation and revenue is recognized at a single point in time when ownership, risks and rewards transfer, which is typically the date of shipment of the related equipment when the product is picked up by the carrier or customer. A provision for product returns, credits and rebates is recorded as a reduction of equipment revenue in the same period the revenue is recognized.

The Company provides a limited standard warranty for defective products, usually for a period of 24 to 36 months, and accepts returns for such defective products as well as for other limited circumstances. 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 most likely amount method.

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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.

Service Revenue

Service revenue is primarily generated from the sale of monthly cellular communication services to customers. Those sales predominantly contain a single performance obligation and revenue is recognized ratably with the delivery of cellular communication service over the related monthly period, and when ownership, risks and rewards transfer to the customer.

The services are billed monthly, and customers have the right to cancel the cellular communication services at any time, however the contract with the customer does not provide.

Inventory Valuation

Inventories are valued at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (FIFO) method. The reported net value of inventory includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. 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. 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.

The Company records a reserve for excess and slow-moving inventory, which represents the difference between the cost of the inventory and its estimated realizable value. This reserve is calculated using an estimated excess and slow-moving percentage applied to the inventory based on age, historical trends, product life cycle, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated excess and slow-moving percentage. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

Liquidity and Capital Resources

Our cash and cash equivalents and short-term investments are as follows (in thousands):

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.

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A summary of the cash flow activity for the year ended June 30, 2026 and 2025 is as follows (in thousands):

Cash Flows from Operating Activities

Net cash provided by operating activities was $61.1 million for the year ended June 30, 2026 and was due to net income of $43.0 million, adjustments for non-cash items of $4.8 million and an increase in cash flow from changes in operating assets and liabilities of $13.3 million. The changes in operating assets and liabilities were largely attributable to decreases in inventories and increases in accrued expenses offset by increases in accounts receivables, income tax receivable and prepaid expenses.

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 receivable and prepaid expenses offset by decreases in accounts payables and accrued expenses.

Cash Flows from Investing Activities

The cash provided by investing activities during the year ended June 30, 2026 was primarily attributable to proceeds from the sale of marketable securities. The Net cash provided by investing activities was partially offset by net cash used for capital expenditures and purchase of marketable securities. 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.

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Cash Flows from Financing Activities

The cash used in financing activities for the year ended June 30, 2026 was primarily related to the payment of stockholder dividends as well as payment of tax withholdings related to stock option exercises while the year ended June 30, 2025 was primarily related to the payment of stockholder dividends and the purchase of treasury shares.

As of June 30, 2026, the Company's available revolving credit line was $20,000,000, which expires in February 2029. As of June 30, 2026 and 2025, the Company has no outstanding debt.

The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below:

Working Capital. Working capital increased by $27,142,000 to $165,529,000 as of June 30, 2026 from $138,387,000 at June 30, 2025. Working capital is calculated by deducting Current Liabilities from Current Assets.

Contractual Obligations and Commitments

As of June 30, 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 for 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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Results of Operations

Fiscal 2026 Compared to Fiscal 2025

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Revenue

Revenue by major product lines is as follows:

Net revenue in fiscal 2026 increased by $20,695,000 to $202,316,000 as compared to $181,621,000 in fiscal 2025.

Net equipment revenue in fiscal 2026 increased $9,497,000 to $104,788,000 as compared to $95,291,000 in fiscal 2025. The increase in net equipment revenues was due to increased revenue from door-locking products of $6,925,000, or 11.1% and increased revenue of intrusion and access products of $2,573,000 million or 7.8%.

The increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 6.1%) with the balance due to increased sales volume (approximately 5.0%). The impact of price increases was a result of both our Alarm Lock and Marks USA locking divisions (approximately 6.7% and 4.8%, respectively), sales volume on Alarm Lock grew approximately 13% and Marks USA volume decreased approximately 8.2% as compared to Fiscal 2025.

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The increased revenue in our intrusion and access alarm division was primarily a result of the impact of pricing increases (approximately 9.1%), offset by a decrease in volume (approximately 1.3%). Intrusion product revenue increased by approximately 14.3% because of price increases of 10.4% and increased volume of 3.9%, primarily driven by the sale of our fire radio communicators. Access alarm products revenue decreased approximately 11.0% because of price increases of 4.2%, offset by decreased volume of approximately 15.2%.

Net service revenues for fiscal 2026 increased $11,198,000 to $97,528,000 as compared to $86,330,000 in fiscal 2025. The increase in net service revenues was due to an increase in the number of our cellular communication devices (radios) put into service and activated. The main driver of new activations was new installations of our fire radio communicators installed by our dealer network.

Gross Profit

The Company's gross profit increased by $18,761,000 to $119,791,000 in fiscal 2026 as compared to $101,030,000 in fiscal 2025. Overall, gross margins increased to 59.2% of net revenue in 2026 from 55.6% in 2025.

Gross profit from equipment revenue was $31,757,000 or 30.3% of net equipment revenue, as compared to $22,496,000 or 23.6% of net equipment revenue, in fiscal 2025.

The increase in gross profit percentage from equipment revenue was primarily a result of price increases (inclusive of lower sales discounts and allowance), the impact of the refund of tariffs paid in fiscal 2025 (1.0%), reduced charges related to inventory reserves (0.5%), offset by increased technical services costs (0.5%) as a result of investments in AI automation solutions.

Gross profit as a percentage of service revenue was consistent in both periods. Gross profit on service revenue was $88,034,000 or 90.3% of net service revenue in fiscal 2026 and $78,534,000 or 91.0% of net service revenue, in fiscal 2025.

Research and Development

Research and Development expenses increased by $1,210,000 to $13,791,000 or 6.8% of net revenue in fiscal 2026 as compared to $12,581,000 or 6.9% of net revenue in fiscal 2025. The increase is primarily due to increases of $1,040,000 in personnel-related expenses mainly from annual merit increases of engineering staff, and additional cost of obtaining UL approvals $106,000 for new products.

Selling, General and Administrative

Selling, general and administrative expenses for fiscal 2026 increased by $2,172,000 to $44,362,000 or 21.9% of net revenue as compared $42,190,000 or 23.2% of net revenue in fiscal 2025. The increase is primarily due to increases of $767,000 in personnel-related expenses mainly from merit increases and the hiring of additional personnel in the sales and information technology departments, $775,000 in commission payments mainly from the aforementioned increases in equipment revenue, $327,000 in tradeshow related activities, $184,000 in insurance and $152,000 in 401(k) matching expenses, $104,000 in credit card processing fees related to our service revenue, and $110,000 in other administrative costs, offset by decreases in professional fees of $247,000.

Litigation settlement costs

Litigation settlement costs, net of any insurance reimbursements of $16,000,000 was recognized in fiscal 2026 as a result of the settlement described in Note 14.

Interest and Other Income (Expense)

**Percentage change not meaningful.

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Interest income increased for fiscal 2026, compared to fiscal 2025, primarily due to the increase in our cash and cash equivalents as well as higher interest rates.

Income Taxes

The Company's provision for income taxes for fiscal 2026 increased by $132,000 to $6,795,000 as compared to $6,663,000 for the same period a year ago. The Company's effective tax rate (13.6% fiscal 2026 and 13.3% fiscal 2025) was consistent in both periods.

Non-GAAP Measures

We define non-GAAP adjusted EBITDA as our GAAP net income plus income tax expense, net interest income, stock-based compensation, legal costs and settlement fees incurred and received in connection with non-ordinary course litigation and other disputes, litigation settlement costs, and depreciation and amortization expense. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense and stock-based compensation expense related to equity compensation. We define non-GAAP adjusted EBITDA margin as Adjusted EBITDA divided by net revenue. Non-GAAP adjusted EBITDA and adjusted EBITDA margin are not a measure calculated in accordance with GAAP. See the table below for a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

We have included non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin in this report because they are key measure our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make strategic investment decisions. Further, we believe the exclusion of certain expenses in calculating non-GAAP adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of litigation settlement costs and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe non-GAAP adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although amortization and depreciation are non-cash charges, the assets being amortized and depreciated may have to be replaced in the future, and non-GAAP adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) non-GAAP adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) non-GAAP adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate non-GAAP adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

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