ITEM 7: 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, 2025 compared to the year ended June 30, 2024. For a discussion of the year ended June 30, 2024 compared to the year ended June 30, 2023, 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, 2024.
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 2025 compared with fiscal year 2024 included:
● 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 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 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. 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
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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. 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 these factors and other risks.
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 ofintangible 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.
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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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:
Certificate of Deposits — 5,402
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, 2025 and 2024 is as follows:
Cash Flows from Operating Activities
Fiscal Year ended June 30,
(in thousands)
Depreciation and amortization 2,276 2,163
Change in accrued Interest on other investments — 31
Unrealized (gain) loss on marketable securities (177) (56)
Realized (gain) loss on sales of marketable securities (56) —
(Recovery of) credit losses (7) (99)
Change to inventory reserve 643 1,691
Deferred income taxes (1,048) (2,776)
Stock-based compensation expense 1,513 1,733
Changes in operating assets and liabilities: 6,977 (7,137)
Net Cash Provided by Operating Activities $ 53,527 $ 45,368
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.
Cash Flows from Investing Activities
Fiscal Year ended June 30,
Purchases of property, plant, and equipment $ (2,116) $ (1,594)
Purchases of marketable securities (12,835) (206)
Proceeds from sales of marketable securities 2,556 —
Purchases of other investments — (1,351)
Redemption of other investments 26,980 —
Net Cash Provided by (Used in) Investing Activities $ 14,585 $ (3,151)
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.
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Cash Flows from Financing Activities
Fiscal Year ended June 30,
Proceeds from stock option exercises $ 54 $ 427
Repurchase of common stock (36,794) —
Net Cash Used in Financing Activities $ (50,372) $ (12,831)
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. As of June 30, 2025 and 2024, the Company has no outstanding debt.
The Company takes into consideration several factors in measuring its liquidity, including the ratios set forth below:
As of June 30,
Current Ratio 6.8 to 1 7.6 to 1
Sales to Receivables 6.0 to 1 5.9 to 1
Working Capital. 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 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.
Results of Operations
Fiscal 2025 Compared to Fiscal 2024
Fiscal year ended June 30, (dollars in thousands)
% Increase/
Gross profit as a % of net sales 55.6 % 53.9 % 3.2 %
Selling, general and administrative as a % of net sales 23.2 % 19.7 % 17.8 %
Interest and other income (expense), net 3,810 2,568 48.4 %
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Net Sales
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.
Gross Profit
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. 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 $1,818,000 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 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.
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Interest and Other Income (Expense)
Year ended June 30, (dollars in thousands)
Investment income 444 262 **
Other, net 9 (69) **
**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.
Income Taxes
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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We internally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $16.1 million at June 30, 2025. These securities are subject to interest rate risk and, based on our investment portfolio at June 30, 2025, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately $322,000. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Income unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business with non-U.S. customers, however all foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto its foreign customers.
If changes in exchange rates were to negatively effect these customers, the Company could have trouble collecting unsecured receivables, and or experience the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations.
We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of a 10% strengthening or weakening in the U.S. dollar to the RD$ would result in an annual increase or decrease in income from operations of approximately $844,000.
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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements: Financial statements required pursuant to this Item are presented on pages FS-1 through FS-35 of this report as follows:
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
Page
Report of Independent Registered Accounting Firm (PCAOB ID 34) FS-2
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) FS-4
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2025 and 2024 FS-5
Notes to Consolidated Financial Statements FS-10
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Napco Security Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Napco Security Technologies, Inc. and subsidiaries (the "Company") as of June 30, 2025 and 2024, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for the years ended June 30, 2025 and 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2025 and 2024, and the results of its operations and its cash flows for the years ended June 30, 2025 and 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 25, 2025, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Excess and Slow-Moving Inventory Reserve — Refer to Note 1 and 6 to the financial statements
Critical Audit Matter Description
Management records a reserve for excess and slow-moving inventory, which represents any excess of the cost of the inventory over its estimated net realizable value. The reserve is calculated using an estimated reserve 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. The reserve for excess and slow-moving inventory was $5.5 million at June 30, 2025.
We identified the reserve for excess and slow-moving inventory as a critical audit matter because of the significant estimates and assumptions management makes to determine the reserve, specifically the reserve percentage and forecasted inventory usage. This
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required a high degree of auditor judgment when performing audit procedures to evaluate the reasonableness of management’s reserve for excess and slow-moving inventory.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant estimates and assumptions used in the excess and slow-moving inventory reserve included the following, among others:
o Testing the mathematical accuracy of management’s calculations.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
August 25, 2025
We have served as the Company's auditor since fiscal year 2024.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Napco Security Technologies, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of income, stockholders’ equity, and cash flows of Napco Security Technologies, Inc. and Subsidiaries (the “Company”) for the year ended June 30, 2023, and the related notes (collectively referred to as the "consolidated financial statements").
In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
/s/BAKER TILLY US, LLP
We served as the Company's auditor from 2008 to 2023.
New York, New York
September 8, 2023
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets
Current Assets
Investments - other — 26,980
Income tax receivable — 73
Prepaid expenses and other current assets 3,198 4,269
Property, plant and equipment, net 9,233 9,077
Deferred income taxes 6,476 5,428
Operating lease - Right-of-use asset 5,188 5,487
Liabilities and Stockholders' Equity
Current Liabilities
Accrued salaries and wages 4,398 3,907
Dividends payable 4,992 —
Accrued income taxes 213 —
Operating lease liability 5,335 5,512
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 29,535 28,863
Commitments and Contingencies (Note 14)
Stockholders' Equity
Accumulated other comprehensive income 160 —
Total Liabilities and Stockholders' Equity $ 198,141 $ 207,752
See accompanying notes to consolidated financial statements.
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
(in thousands, except for share and per share data)
Net Sales:
Cost of Sales:
Operating Expenses:
Other Income:
Income Per Share:
Weighted Average Number of Shares Outstanding:
See accompanying notes to consolidated financial statements.
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHNSIVE INCOME
Year Ended June 30,
Other comprehensive income, net of tax — —
Other comprehensive income, net of tax 160 — —
See accompanying notes to consolidated financial statements.
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands except for share data)
Common Stock Treasury Stock
Number of Additional Accumulated
Issued Amount Capital Shares Amount Earnings Income Total
Stock options exercised 35,615 1 84 — — — — 85
Stock-based compensation expense — — 1,464 — — — — 1,464
Net income — — — — — 27,127 — 27,127
Stock options exercised 104,374 1 426 — — — — 427
Stock-based compensation expense — — 1,733 — — — — 1,733
Stock options exercised 2,849 — 54 — — — — 54
Stock-based compensation expense — — 1,514 — — — — 1,514
See accompanying notes to consolidated financial statements.
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year ended June 30,
(in thousands)
Cash Flows from Operating Activities
Gain on disposal of fixed asset — — (15)
Change in accrued Interest on other investments — 31 (470)
Unrealized (gain) loss on marketable securities (177) (56) 80
Realized (gain) loss on sales of marketable securities (56) — —
(Recovery of) credit losses (7) (99) (112)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 1,071 (867) (564)
Income tax receivable 48 2 (75)
Cash Flows from Investing Activities
Purchases of property, plant, and equipment (2,116) (1,594) (2,962)
Proceeds from disposal of fixed asset — — 38
Purchases of marketable securities (12,835) (206) (148)
Proceeds from sales of marketable securities 2,556 — —
Purchases of other investments — (1,351) (35,281)
Redemption of other investments 26,980 — 10,091
Cash Flows from Financing Activates
Proceeds from stock option exercises 54 427 85
Repurchase of common stock (36,794) — —
Net increase (decrease) in Cash and Cash Equivalents 17,740 29,386 (5,775)
Supplemental Cash Flow Information
Interest paid $ — $ 14 $ 16
Non-Cash Investing and Financing Transactions
Dividends declared and not paid $ 4,992 — —
See accompanying notes to consolidated financial statements.
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NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business:
Napco Security Technologies, Inc (“NAPCO”, “the Company”, “we”, “our”) 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 and installers 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.
Basis of Presentation:
The consolidated financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of NAPCO and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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.
Significant Accounting Policies:
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of debt for footnote disclosure purposes, including current maturities, if any, is estimated using recently quoted market prices of the instrument, or if not available, a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of instruments.
Cash and Cash Equivalents
All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market funds, certificate of deposit and time deposit accounts. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. Certificate of deposits with an original maturity greater than three months are classified as Investments – other.
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The Company’s cash and cash equivalents included approximately $66,355,000 of short-term time deposits as of June 30, 2025. Cash and cash equivalents include approximately $46,518,000 of short-term time deposits, consisting of a certificate of deposit totaling $5,402,000 and $41,116,000in a money market fund as of June 30, 2024.
Cash and cash equivalents consists of the following as of (in thousands):
Certificate of Deposits — 5,402
Investments-other consists of the following as of (in thousands):
Certificate of Deposits $ — $ 26,980
Certificate of deposits are recorded at the original cost plus accrued interest. There were no certificate of deposits outstanding at June 30, 2025. The Company’s certificate of deposits as of June 30, 2024 consisted of the following (in thousands):
Balance Sheet Classification Interest Rate Maturity Date Cost Carrying Value
The Company has cash balances in banks in excess of the maximum amount insured by the FDIC and other international agencies as of June 30, 2025. The Company has not historically experienced any credit losses with balances in excess of FDIC limits.
Marketable Securities
Investments in debt securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, a systematic methodology is employed that considers available quantitative and qualitative evidence. In addition, specific adverse conditions are considered related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment
charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Investments in equity securities with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). The Company performs a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
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Accounts Receivable
Accounts receivable is stated net of the reserves for credit losses of $25,000 and $32,000 as of June 30, 2025 and 2024, respectively. In accordance with ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), the Company recognizes an allowance for credit losses for trade and other receivables to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of past events and historical loss experience, current events and also future events based on our expectation as of the balance sheet date. Receivables are written off when the Company determined that such receivables are deemed uncollectible. The Company pools its receivables based on similar risk characteristics in estimating its expected credit losses. In situations where a receivable does not share the same risk characteristics with other receivables, the Company measures those receivables individually. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company’s historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all the following: past due receivables, the customer creditworthiness, changes in the terms of receivables, effect of other external forces such as competition, and legal and regulatory requirements on the level of estimated credit losses in the existing receivables.
Inventories
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 any excess of the cost of the inventory over 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. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. 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 (See Note 6).
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.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.
Depreciation is recorded over the estimated service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter.
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Long-Lived and Intangible Assets
Long-lived assets are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. Impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset.
Changes in intangible assets are as follows (in thousands):
Carrying Accumulated Net book Carrying Accumulated Net book
value amortization value value amortization value
Amortization expense for intangible assets subject to amortization was approximately $315,000, $337,000 and $361,000 for the fiscal years ended June 30, 2025, 2024 and 2023, respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2026 - $297,000; 2027 - $283,000; 2028 - $269,000; 2029 - $210,000; and 2030 - $202,000. The weighted average remaining amortization period for intangible assets was 14.1 years and 14.8 years at June 30, 2025 and 2024, respectively.
Revenue Recognition
Revenue from contracts with customers 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. Revenue from all sales types is recognized at the transaction price, which is the amount we expect to be entitled to in exchange for transferring goods or providing 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 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.
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 for a refund.
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Cost of Sales
Equipment Cost of Sales
Equipment cost of sales is primarily comprised of direct materials and supplies consumed in the manufacturing of products, as well as manufacturing labor, depreciation expense and direct and indirect overhead expenses necessary to acquire and convert the purchased materials and supplies into finished products.
Service Cost of Sales
Service cost of sales is primarily the cost of operating our network operations center to manage and deliver telecommunication services.
Shipping and Handling Sales and Costs
The Company records the amount billed to customers for shipping and handling in net sales ($419,000, $349,000 and $450,000 in the fiscal years ended June 30, 2025, 2024 and 2023, respectively) and classifies the costs associated with these sales in cost of sales ($1,589,000, $1,573,000 and $1,697,000 in the fiscal years ended June 30, 2025, 2024 and 2023, respectively).
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the consolidated statements of income and are expensed as incurred. Advertising expense for fiscal years ended June 30, 2025, 2024 and 2023 was $3,753,000, $3,262,000 and $2,931,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense as incurred and are included in operating expenses in the consolidated statements of income.
Income Taxes
The Company records provisions for income taxes in the consolidated financial statements using the asset and liability method. Under this method, income tax liabilities or receivables are recognized for the current year, in addition deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. When necessary, a valuation allowance is recorded to reduce deferred tax assets to the net amount that is believed is more likely than not to be realized. That assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing the future taxable income on a jurisdictional basis, the Company considers the effect of the transfer pricing policies on that income.
The Company recognizes tax benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The Company’s policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties.
Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act introduced the global intangible low-taxed income (“GILTI”) provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of a U.S. company in
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excess of a deemed return on their tangible assets. The Company recognizes the tax on GILTI as a period cost when the tax is incurred.
Net Income per Share
Basic net income per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share (Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents and convertible securities then outstanding.
The following provides a reconciliation of information used in calculating the per share amounts for the fiscal years ended June 30 (in thousands, except per share data):
Net Income per
Net Income Weighted Average Shares Share
Effect of Dilutive Securities:
Options to purchase 110,375, 19,663 and 7,534 shares of common stock for the fiscal years ended June 30, 2025, 2024 and 2023, respectively, were not included in the computation of Diluted EPS because their inclusion would be anti-dilutive. These options were still outstanding at the end of the respective periods.
Stock-Based Compensation
The Company has established five share incentive programs as discussed in Note 10.
Stock-based awards exchanged for services are accounted for under the fair value method. Accordingly, stock-based compensation cost is measured at the grant date based on the estimated fair value of the award. The expense for awards is recognized over the requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility, among other factors.
Stock-based compensation costs of $1,513,000, $1,733,000 and $1,464,000 were recognized for the fiscal years ended June 30, 2025, 2024 and 2023, respectively.
Foreign Currency
The Company has determined the functional currency of all foreign subsidiaries is the U.S. Dollar. All foreign operations are considered a direct and integral part or extension of the Company’s operations. The day-to-day operations of all foreign subsidiaries are dependent on the economic environment of the U.S. Dollar. Therefore, no realized and unrealized gains and losses associated with foreign currency translation are recorded for the fiscal years ended June 30, 2025, 2024 or 2023.
Comprehensive Income
For the fiscal years ended June 30, 2024 and 2023, the Company’s operations did not give rise to material items includable in comprehensive income, which were not already included in net income. Accordingly, the Company’s comprehensive income approximates its net income for the year ending June 30, 2024 and 2023.
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Segment Reporting
The Company operates its business under one operating segment, which is also its reportable segment. The Company's Chief Operating Decision maker (“CODM”), who is our President and Chief Operating Officer, reviews financial information presented at the consolidated level and decides how to allocate resources based on financial metrics, including net income. The measure of segment assets is reported on the balance sheet as total consolidated assets. The CODM uses such financial metrics, including net income, to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits or allocate to other parts of the organization, such as working capital needs, mandatory and discretionary capital expenditures or other growth opportunities that may arise that are in the Company’s best interest and the best interest of the stockholders. See Note 15 – Segment and geographical data for additional accounting policies and disclosures.
Leases
The Company determines at contract inception if an arrangement is a lease, or contains a lease, of an identified asset for which the Company has the right to obtain substantially all of the economic benefits from its use and the right to direct its use. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit discount rate in the Company’s leases generally cannot readily be determined, and therefore the Company uses its incremental borrowing rate based on information available at lease commencement date in determining the present value of future payments. If the Company has options to renew or terminate certain leases, those options are included in the determination of lease term when it is reasonably certain that the Company will exercise such options. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less. See Note 14 – Commitments and Contingencies; Leases for additional accounting policies and disclosures.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a 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.
Recently Adopted Accounting Standards
The Company adopted Accounting Standards Update (“ASU”) 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. Refer to Note 15, Segment and Geographic Information for the adoption of this guidance and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,which modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Among the various codification amendments, Topic 470 Debt is applicable to the Company which requires the disclosure of amounts, terms and weighted-average interest rates of unused lines of credit. The effective date is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirement by that date, with early adoption prohibited. The adoption of this new standard will not have a material impact on our financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures,which requires on an annual basis to (1) disclose specific categories in the rate reconciliation, (2) provide additional information for reconciling items
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that meet a quantitative threshold, and (3) income taxes paid disaggregated by jurisdiction. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement: Reporting Comprehensive Income - Expense Disaggregation Disclosures, Disaggregation of Income Statement Expenses, which improves disclosure requirements and mandates enhanced transparency about the types of expenses in commonly presented expense captions in financial statements. This guidance is effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and is effective on either a prospective basis or retrospective basis. The Company is currently evaluating the impact that this guidance may have on our financial statements and related disclosures.
The Company is evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.
NOTE 2 – Revenue Recognition and Contracts with Customers
The Company is engaged in one major line of business: the development, manufacture, and distribution of security products, encompassing access control systems, door security products, intrusion and fire alarm systems, alarm communication services, and video surveillance products for commercial and residential use. The Company also provides wireless communication service for intrusion and fire alarm systems on a monthly basis. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. Sales to unaffiliated customers are primarily shipped from the United States.
As of June 30, 2025 and 2024, the Company included refund liabilities of approximately $4,790,000 and $6,295,000, respectively, in accrued expenses within the Consolidated Balance Sheets. As of June 30, 2025 and 2024, the Company included return-related assets of approximately $1,152,000 and $1,586,000, respectively, in other current assets.
As a percentage of gross sales, sales returns, rebates and allowances were 6%, 7% and 7% for the fiscal years ended June 30, 2025, 2024 and 2023, respectively.
The Company disaggregates revenue from contracts with customers into major product lines. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted in the accounting policy footnote, the Company’s business consists of one operating segment. Following is the disaggregation of revenues based on major product lines (in thousands):
Fiscal year ended June 30,
Major Product Lines:
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The following table represents the allowance for credit losses accounts as of the respective years ending June 30 (in thousands):
For the Year Ended June 30, 2023:
Allowance for credit losses $ 243 $ 6 $ (118) $ 131
For the Year Ended June 30, 2024:
Allowance for credit losses $ 131 $ — $ (99) $ 32
For the Year Ended June 30, 2025:
Allowance for credit losses $ 32 $ — $ (7) $ 25
NOTE 3 – Business and Credit Concentrations
Financial instruments that potentially subject the Company to a concentration of credit risk mainly consist of cash equivalents, short-term investments and accounts receivable. Our cash equivalents and short-term investments primarily consist of government securities and money market funds which are held and managed by high credit quality financial institutions.
The Company had one customer with an accounts receivable balance that comprised 11%, 17% and 19% of the Company’s accounts receivable at June 30, 2025, 2024 and 2023, respectively. Sales to this customer did not exceed 10% of net sales during fiscal years ended June 30, 2025 and 2024. Sales to this customer were 10% of net sales for the fiscal year ended June 30, 2023. The Company had another customer with an accounts receivable balance that comprised 13%, 12% and 14% of the Company’s accounts receivable at June 30, 2025, 2024 and 2023, respectively. Sales to this customer did not exceed 10% of net sales in any of the fiscal years ended June 30, 2025, 2024 and 2023, respectively.
NOTE 4 – Fair Value Measurements
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.
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The following table presents the Company’s assets that were measured at fair value on a recurring basis at June 30, 2025 and 2024:
Level 1 Level 2 Level 3 Total
Cash equivalents
Marketable securities
Cash equivalents
Short-term investments
Marketable securities
The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets, as well as certificates of deposits and time deposits that are classified as Level 1 due to their short-term nature. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources with reasonable levels of price transparency.
For the years ended June 30, 2025 and 2024, there were no transfers between Levels 1 and 2 investments and no transfers in or out of Level 3.
NOTE 5 – Marketable Securities
A summary of the fair value of the Company’s investment in marketable securities as of June 30, 2025 and 2024 is as follows:
Debt Securities (available-for-sale) 10,243 —
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Investments in Equity Securities
The disaggregated net gains and losses on the equity securities recognized within the accompanying consolidated statements of income for the years ended June 30, 2025, 2024 and 2023 are as follows (in thousands):
Year ended June 30,
The following tables summarize the Company’s investment in equity securities as of June 30, 2025 and 2024, respectively (in thousands):
Unrealized Unrealized
Cost Fair Value Gain (Loss) Cost Fair Value Gain (Loss)
Investment income is recognized when earned and consists principally of interest income from fixed income mutual funds. Realized gains and losses on sales of investments are determined on a specific identification basis.
Investments in Debt Securities
The Company had no investments in debt securities as of June 30, 2024. The following tables summarize the Company’s investments in debt securities as of June 30, 2025 (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
The debt investments all mature within one year or less, and the Company did not recognize any credit or non-credit related losses related to its det securities during the year ended June 30, 2025.
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NOTE 6 - Inventories
Inventories, net of reserves are valued at lower of cost (first-in, first-out method) or net realizable value. Inventories, net of reserves consist of the following (in thousands):
Classification of inventories:
The reserve for excess and slow-moving inventory, which reduces inventory in our consolidated balance sheets were $5,515,000 and $5,026,000 as of June 30, 2025 and 2024, respectively.
NOTE 7 - Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
Building improvements 3,657 3,129 Shorter of the lease term or life of asset
Less: accumulated depreciation and amortization (46,645) (44,780)
Depreciation and amortization expense on property, plant, and equipment was approximately $1,961,000, $1,826,000 and $1,569,000 in fiscal 2025, 2024 and 2023, respectively.
NOTE 8 - Income Taxes
The provision for income taxes represents Federal, foreign, and state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions, global intangible low-taxed income (“GILTI”), tax benefit of R&D credits, and certain nondeductible expenses. Our effective tax rate will change based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income taxes.
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The amounts of income before income taxes attributable to domestic and foreign operations were as follows:
For the Year ended June 30,
The provision for income taxes is comprised of the following (in thousands):
For the Year ended June 30,
Current income taxes:
Deferred income taxes:
A reconciliation of the U.S. Federal statutory income tax rate to our actual effective tax rate on earnings before income taxes is as follows for the years ended June 30, (dollars in thousands):
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
Increases (decreases) in taxes resulting from:
Executive Compensation 183 0.4 % 47 0.1 % — — %
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Deferred tax assets and deferred tax liabilities at June 30, 2025 and 2024 are as follows (in thousands):
Deferred Tax Assets (Liabilities)
Accounts receivable $ 6 $ 8
Accrued liabilities 675 676
Stock based compensation expense 474 452
Revenue reserves 520 439
Unrealized loss on marketable securities 69 136
Capitalized research and development cost 6,181 5,447
Other — 2
Total Deferred Tax Assets $ 8,558 $ 7,701
Valuation allowance — —
Deferred income tax assets, net of valuation allowance $ 8,558 $ 7,701
Property, plant and equipment (667) (786)
Other deferred tax liabilities (613) (613)
Total Deferred Tax Liability $ (2,082) $ (2,273)
Net Deferred Tax Asset $ 6,476 $ 5,428
The Company has identified the United States and New York State as its major tax jurisdictions. Fiscal years 2021 and forward are still open for examination, in addition to fiscal year 2018, which is subject to a six year statute of limitations. In addition, the Company has a wholly-owned subsidiary which operates in a Free Zone in the Dominican Republic (“DR”) and is exempt from DR income tax.
The provision for income taxes represents Federal, foreign, and state and local income taxes. The effective rate differs from statutory rates due to the effect of tax rates in foreign jurisdictions, state and local income taxes, tax benefit of R&D credits, certain nondeductible expenses, uncertain tax positions and global intangible low-taxed income ("GILTI").
During the year ending June 30, 2025, the Company decreased its reserve for uncertain income tax positions due to lapses in Federal and state statutes. The result of this decrease was a tax benefit of $825,000. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes. As of June 30, 2025, the Company had accrued interest totaling $5,000, penalties totaling $5,000, and $22,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. The Company does not expect that its unrecognized tax benefits will significantly change within the next twelve months. The Company claims R&D tax credits on eligible research and development expenditures. The R&D tax credits are recognized as a reduction to income tax expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Subsequent to year end, on July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was signed into law. Key income tax-related provisions of the OBBBA relevant to the Company include the removal of mandatory capitalization of domestic research and development expenditures, permanent extension of bonus depreciation and revisions to international tax regimes. The Company is evaluating the financial implications of the OBBBA and will begin reflecting its effects in its first quarter of fiscal 2026.