NAPCO Security Techs (NASDAQ:NSSC) held its third-quarter earnings conference call on Monday. Below is the complete transcript from the call.
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Summary
NAPCO Security Technologies Inc reported a 12% year-over-year increase in total sales for fiscal Q3 2026, with recurring service revenue growing by over 15% and making up 51% of total sales.
The company's recurring service revenue now has an annualized run rate of over $100 million, with gross margins exceeding 90%, contributing significantly to its profitability and financial predictability.
NAPCO Security Technologies Inc settled a $16 million litigation charge, which management views as a positive step to remove uncertainty, and the company maintains a strong cash position of $125 million with no debt.
Management highlighted strong performance in the hardware business, especially in locking products, with equipment revenue up 8% year-over-year and gross margins improving due to disciplined pricing and favorable product mix.
Future strategic priorities include further growth in recurring service revenue, enhanced product margins, and maintaining strong cash generation and profitability, with a focus on long-term shareholder value.
Full Transcript
OPERATOR
Good morning ladies and gentlemen and welcome to the NAPCO Security Technologies Inc fiscal Q3 2026 earnings conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during the call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, May 4, 2026. I would now like to turn the conference over to Francis Okinesky, Vice President of Investor Relations. Please go ahead.
Francis Okinesky
Thank you, Matthew and good morning everyone. This is Fran Okonesky, Vice President of Investor Relations for NAPCO Security Technologies Inc. Thank you all for joining today's conference call to discuss financial results for fiscal third quarter 2026. By now, all of you should have had the opportunity to review our earnings press release discussing our quarterly results. If you have not, a copy of the release is available in the Investor Relations section of our website, www.napcosecurity.com. on the call today are Dick Soloway, our Chairman and CEO of Napco Security Technologies, Kevin Buchelle, President and Chief Operating Officer and Chief Financial Officer Andrew Vono. Before we begin, let me take a moment to read the forward looking statement as this presentation contains forward looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment beliefs, current trends and anticipated product performance. These forward looking statements include without limitation statements relating to growth drivers of the company's business such as school security products, reoccurring revenue services, potential market opportunities, the benefits of our reoccurring revenue products to customers and dealers, our ability to control expenses and costs, and expected annual run-rate for our software as a service. Reoccurring Monthly Revenue Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements. These factors include, but are not limited to, such risk factors described in our Securities and Exchange Commission (SEC) filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward looking statements. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward looking statements. All information provided in today's press release in this conference call are as of today's date unless otherwise stated and we undertake no duty to update such information except as required under applicable law. Throughout the presentation, Management will address certain non Generally Accepted Accounting Principles (GAAP) financial results. We encourage you to refer to our reconciliation between Generally Accepted Accounting Principles (GAAP) and non Generally Accepted Accounting Principles (GAAP) results, which you can find in our press release. I'll turn the call over to Dick in a moment, but I'd first like to highlight our upcoming investor relations engagement plans. We're actively building out our investor relations calendar with a series of non-deal roadshows and conference appearances. Investor outreach remains a top priority for Napco, and I want to thank everyone who helps support these efforts. We're looking ahead to a full and dynamic schedule this quarter. Later this week, we'll Participate in Oppenheimer's 21st Annual Industrial Growth Conference, followed by a virtual non deal roadshow with KeyBanc Capital Markets on Thursday, May 7th. On May 13th, we'll be in New York City for Needham's 21st Annual Technology, Media and Consumer Conference, and later in May, we'll attend Cowen's 54th Annual Global TMT Conference, also in New York. In June, we'll participate in Baird's 2026 Consumer Technology & Services Conference, New York City. We'll wrap up this stretch at the Wells Fargo Industrials and Materials Conference in Chicago on June 11th. These events provide valuable opportunities to share our story, strengthen our relationships with the investment community, and continue building momentum around our strategy and performance. With that out of the way, let me turn the call over to Dick Soloway, Chairman and CEO of Napco Security Technologies, who will make a brief introductory comment, after which our President and COO Kevin Buchel will make a comment on some operational and financial performance highlights. Following Kevin's remarks, our CFO Andrew Vono will go through the financials in more detail and then Kevin will return to delve deeper into Napco's strategies and market outlook. Dick, the floor is yours.
Kevin Buchel
Good morning everyone. Thank you for joining. Kevin Buchel will take you through the highlights of fiscal Q3. Kevin, the floor is yours. Thank you, Dick. Good morning everyone. I'd like to focus my remarks on the operational drivers behind our performance this quarter, with particular emphasis on the continued growth of our recurring service revenue, improvements in product margins, and the strong expansion in profitability metrics that demonstrate the effectiveness of our business model.
Kevin Buchel
During the quarter, total company sales grew nearly 12% year over year, reflecting steady demand across both our recurring services and and hardware product lines. This level of growth, combined with disciplined cost management allowed us to deliver meaningful expansion in profitability and operating leverage. Our recurring service revenue once again delivered outstanding performance, increasing more than 15% year over year and representing approximately 51% of total company sales.
Kevin Buchel
The scale of this business is particularly important as it now reflects an annualized run rate of over $100 million. Just as important, the quality of this revenue remains exceptional with gross margins once again exceeding 90%, providing strong visibility and predictability to our financial results. The continued expansion of recurring services as a percentage of total revenue is one of the most significant achievements for the company. This shift towards a higher proportion of recurring revenue strengthens the overall margin profile of the business and enhances long term earnings stability. It also reflects the growing installed base of connected devices and the increasing adoption of our subscription based solutions by security dealers and integrators.
Kevin Buchel
In our hardware business, we also achieved solid performance and meaningful margin improvement. Equipment revenue grew over 8% year over year, predominantly driven by continued demand for our locking products. At the same time, equipment gross margins improved to approximately 29% reflecting disciplined pricing, favorable product mix and continued operational efficiencies. Within our manufacturing operations. Our teams executed exceptionally well in managing materials, labor and overhead expenses while maintaining consistent product quality and delivery performance. These efforts allowed us to expand overall gross margins to approximately 60% for the quarter and that represented a significant improvement from the prior year period and demonstrates the effectiveness of our operational discipline.
Kevin Buchel
From a bottom line perspective, we delivered particularly strong growth in profitability. Non GAAP net income increased nearly 37% year over year reflecting the combined impact of revenue growth, margin expansion and disciplined expense management. This level of earnings growth demonstrates the scalability of our business model and the benefits of our increasing mix of high margin recurring revenue. We also generated impressive growth in adjusted EBITDA which increased more than 20% compared to the prior year.
Kevin Buchel
Our adjusted EBITDA margin expanded to over 32% highlighting improved operating leverage and the strength of our core operations. These results demonstrate our ability to convert revenue growth into meaningful earnings and cash flow. Cash flow generation remained another key strength of the business. Free cash flow increased more than 20% during the quarter, providing the financial flexibility to invest in innovation, support growth initiatives and returning capital to shareholders through our dividend program which continues with this morning's announcement of another dividend of $0.15 per share payable on July 3, 2026 to shareholders of record
Kevin Buchel
on June 12, 2026. As was noted in our press release, we recorded a charge of $16 million in connection with the settlement of outstanding litigation. We are pleased to have that uncertainty behind us and the distractions it presents Operationally, we continue to focus on execution across the organization. Our manufacturing and supply chain teams maintained reliable production levels and ensured product availability for our customers. Our sales and technical support organization remain highly engaged with dealers and distributors, helping them deploy our solutions efficiently and expand their use of our recurring service offerings. Looking ahead, our priorities remain clear. We will continue to drive growth in recurring service revenue, further improve product margins through operational discipline and efficiency initiatives, and maintain a strong focus on on profitability and cash generation. We believe these priorities position us well to deliver consistent financial performance and long term value for our shareholders. This quarter demonstrated the strength of our operating model and the dedication of our employees across the organization.
Kevin Buchel
Their commitment to execution, innovation and customer service is what enables us to achieve strong financial results and continue building momentum. I will now turn the call over to our Chief Financial Officer, Andy Vono to review the financial details.
Andy Vono
Andy thank you, Kevin, and good morning everyone. Net revenue for the quarter ended March 31, 2026 increased 11.8% to 49.2 million as compared to 44 million for the same period a year ago. Net revenue for the nine months ended March 31, 2026 increased 11.9% to 146.5 million as compared to 130.9 million for the same period one year ago. Recurring monthly service revenue in Quarter 3 grew 15.4% to 24.9 million as compared to 21.6 million the same period last year, and recurring monthly service revenue for the nine months ended March 2026 increased 13% to 72.2 million as compared to 63.9 million last year.
Andy Vono
Our recurring service revenue now has a prospective annual run rate of approximately 101 million based on April 2026 recurring revenue, which compares to 99 million based on January 2026 recurring service revenue, which we reported back in February. The increase in service revenues for the three and nine months was due to the increase in number of our cellular radio communication devices put into service and activated equipment. Revenue for the quarter increased 8.4% to 24.2 million as compared to 22.4 million last year.
Andy Vono
Equipment revenue for the nine months increased 10.9% to 74.3 million as compared to 67 million for the same period last year. The increase in net equipment revenue for the quarter and for the nine months was primarily due to increased volume of our door locking products and the impact of price increases, both locking and our intrusion and access products. Gross profit for the three months ended March 2026 increased 17.4% to 29.5 million with a gross margin of 60% as compared to 25.1 million with a gross margin of 57.2% for the same period last year.
Andy Vono
Gross profit for the nine months increased 15.3% to $85.6 million with a gross margin of 58.4% as compared to 74.2 million with a gross margin of 56.7% a year ago. Gross profit as a percentage of service revenue was consistent in both the quarter and the nine months ended March 2026 as compared to the prior year. Gross profit for recurring service revenue for the quarter increased 14.8% to $22.5 million with a gross margin of 90.4% as compared to 19.6 million with a gross margin of 90Point8% last year. Gross profit for recurring service Revenue for the nine months increased 12% to 65.2 million with a gross margin of 90.3% as compared to 58.2 million with a gross margin Of 91.1% last year. Gross profit from equipment revenue in Quarter 3 increased 26.4% to 6.9 million with a gross margin of 28.7% as compared to 5.5 million with a gross margin of 24.6% last year. Gross profit from Equipment revenue for the nine months increased 27% to 20.4 million with a gross margin of 27.4% as compared to 16 million with a gross margin of 23.9% for the same period last year.
Andy Vono
The two hundred and eighty and one hundred and seventy basis point increases in overall gross margin for the quarter and the nine months ended March 2026 is due to the substantial profitability of recurring revenue plus the overall improved margins on our equipment revenue. The increase in gross profit percentage from equipment revenue for the quarter and the nine months was primarily a result of product sales mix increased volume in our locking products, which improved the absorption rate of our fixed overhead costs and certain price increases that went into effect during fiscal 2026 and reduction in sales discounting during the periods.
Andy Vono
Research and development expense for the quarter increased 7.3% to 3.4 million or 7% of net revenues as compared to 3.2 million or 7.2% of net revenues for the same period a year ago. Research and development costs for the nine months ended March 2026 increased 8.4% to 10.1 million or 6.9% of net revenues as compared to 9.3 million or 7.1% of net revenue for the same period a year ago. Increase for the three and nine months primarily resulted from annual compensation and benefit increases and hiring of additional resources selling. General administrative expenses for the quarter increased 4.3% to $11.3 million or 22.9% of net revenues as compared to 10.8 million with 24.6% of net revenues for the same period last year. SG&A expenses for the nine months ended March 2026 increased 5% to 32.2 million or 22% of net revenue as compared to 30.7 million with 23.5% of revenue for the same period last year. The increase for the three and nine months was primarily attributable to increases in trade show related expenses.
Andy Vono
The ISD west show occurred in Quarter 3 this year as compared to Q4 last year wages, bonuses, compensation and benefits, sales commissions and related expenses and insurance expense, which was offset by decreases in professional fees and legal fees. As Kevin previously mentioned, for the three and nine months ended March 2026 we recorded a litigation settlement expense of $16 million as a result of settling existing litigation subsequent to the end of Quarter 3. Non Generally Accepted Accounting Principles (GAAP) operating income for the quarter increased 32.9% to $14.8 million as compared to $11.1 million for the same period last year. Non Generally Accepted Accounting Principles (GAAP) operating income for the nine months ended March 2026 increased 26.4% to $43.2 million as compared to $34.2 million for the same period last year. Other income for the quarter increased 14.4% to 986,000 as compared to 862,000 last year.
Andy Vono
For the nine months, other income increased 1.3% to 3 million as compared to 2.9 million last year. The increases for both the three and nine months ended March 2026 was due to increased interest income from larger depository masters as a result the aforementioned litigation settlement. The provision for income taxes for the quarter was 200,000 as compared to 1.9 million last year. For the nine months, the provision for income taxes was 4.9 million, which represents an effective tax rate of 16.3% as compared to 5.3 million for the same period last year when an effective tax rate of 14.4% the company's effective tax rate for the nine months ended
Andy Vono
March 2026 increased as a result of an increase in the portion of taxable income allocated to the United States as a result of the litigation settlement offset by windfall benefits from the exercise of employee stock options during the period. Non Generally Accepted Accounting Principles (GAAP) net income for the quarter increased 36.9% to 13.9 million, or $0.39 per diluted share as compared to 10.1 million or $0.28 per diluted share for the same period last year and represents 28.2% of net revenue as compared to 23% for the same period last year. Non Generally Accepted Accounting Principles (GAAP) net income for the nine months ended March increased 24.4% to 39.5 million, or $1.10 per diluted share, as compared to 31.8 million, or $0.86 per diluted share for the same period last year and represents 27% of net revenue as compared to 24.3% for the same period last year. Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for The quarter increased 20.2% to 15.8 million, or $0.44 per diluted share as compared to 13.2 million, or $0.36 per diluted share for the same period a year ago and equates to an adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin of 32.2% as compared to 29.9% for the same period last year. Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the nine months ended March 2026 increased 21.7% to 46.1 million, were $1.28 per diluted share as compared to 37.9 million, or $1.03 per diluted share for the same period last year and equates to an adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin of 31.5% as compared to 28.9% for the same period last year. Free cash flows for the quarter increased 20.3% to 16 million as compared to 13.3 million for the same period a year ago and equates to a free cash flow margin of 32.6% this year compared to 30.3% last year. Free cash flows for the nine months increased 13.4% to 42 million as compared to 37 million for the same period a year ago and equates to a free cash flow margin of 28.7% this year compared to 28.3% last year. Moving on to our balance sheet, as of March 2026, the company had 125 million in cash in cash equivalents and multiple securities AS compared to 99.1 million as of June 2025. The company had no debt as of March. Working capital as of March 2026 was 158 153.8 million as compared to working capital of 138.4 million as of June 2025. Our current ratio was 4.9 to 1 as of March 2026 as compared to 6.8 to 1 as of June 2025. Capital Expenditures (CapEx) for the quarter was 734,000 as compared to 65,000 in the prior year and 1.5 million for the nine months as compared to 1.9 million last year. That concludes my formal remarks and I would like to return the call back to Kevin
OPERATOR
thank you, Andy. As you've heard Today, our fiscal third quarter 2026 results reflect another strong period of execution and meaningful progress against our long term strategy. These results reinforce that our business model is working exactly as intended. Our inclusion in the S and P small cap 600 is an important milestone for Napco Security Technologies and and it reflects the progress we've made in scaling the business and delivering consistent results. While this enhances our visibility and broadens our shareholder base, our focus remains firmly on execution and long term value creation. At the core of our strategy is our recurring service revenue platform which continues to deliver consistent high margin growth. Recurring Service revenue exceeded 50% of our total Q3 sales supported by sustained gross margin above 90% with an annualized run rate exceeding $100 million. This provides a predictable high quality revenue stream that drives strong cash generation and long term value creation. A key contributor to this performance is our Starlink commercial fire radio platform, which has firmly established itself as the industry standard for commercial fire alarm communicators. Demand remains healthy across both new installations and our growing installed base, and we continue to see meaningful Runway ahead, particularly as the transition away from legacy copper phone lines to cellular connectivity accelerates. With connectivity across AT and T, Verizon and now T Mobile networks, Starlink is well positioned to capture additional market share across millions of commercial buildings that have not yet converted to a cellular solution. We also saw a strong validation of that demand at ISC West 2026 at the end of March, which was a tremendous success for us and generated a record number of leads across all Napco platforms. Our sales and marketing teams are now actively qualifying and pursuing these opportunities, building a robust pipeline that supports continued growth. On the equipment side, we are equally encouraged by the continued momentum driven by door locking installations and in our intrusion and alarm product segments. Pricing actions, more disciplined discounting and rebate practices and favorable mix have led to significantly improved equipment gross margins and we believe more improvements can be made. Profitability remains a major strength of the company. Non GAAP operating income, net income and adjusted EBITDA all grew significantly faster than revenue, demonstrating continued strong operating leverage. With ebitda margins exceeding 30%, we're generating substantial cash flow while continuing to invest in innovation, infrastructure and growth initiatives. Our balance sheet further differentiates us with $125 million in cash and marketable securities and no debt, which gives us exceptional financial flexibility and enables us to invest organically, pursue strategic opportunities and continue returning capital to shareholders. Operationally, our team continues to execute at a very high level. We're managing inventory tightly while investing in product development, compliance, automation and infrastructure, all while maintaining a debt free balance sheet. Our manufacturing facility in the Dominican Republic remains a key competitive advantage, providing cost efficiency, stable logistics and lower tariff exposure as compared to many competitors operating in higher tariff regions. We're also driving a new phase of commercial expansion by entering the architectural and engineering specification market, positioning ourselves for specification driven opportunities across the entire Napco portfolio. In parallel, we continue to broaden our distribution footprint through new and expanding channel partnerships. These initiatives are expanding our reach across a broader branch network and enhancing product availability in the field. Innovation remains central to our strategy. We continue to enhance our MVP cloud based access control platform incorporating customer driven features based on continual customer feedback. MVP represents a meaningful step forward, introducing a subscription based revenue model for both Napco and our locking and access control dealers. We believe MVP has the potential to be a game changer, extending our leadership into the hosted access control market while reinforcing our strategy of pairing innovative hardware with cloud based services to drive high margin recurring revenue. In addition, our new smart and interconnected deadbolt platform positions both the company and our dealers to capitalize on the fast growing US Multifamily market, expanding beyond traditional security hardware into unit level access control at scale. Beyond access control, our alarm, lock and marks hardware lines continue to grow across key verticals including healthcare, retail, multi dwelling housing, airport infrastructure and especially school security where our integrated solutions are viewed favorably alongside enterprise scale access control systems. Napco platforms are secure, scalable and aligned with the partner alliance for Safer Schools guidelines. Amid ongoing market and geopolitical uncertainty, we remain grounded in what we can control, our strategy, our execution and our commitment to creating sustainable shareholder value. Looking ahead, we remain optimistic about the remainder of fiscal 2026 and beyond. Demand across our product portfolio remains strong, our recurring revenue base continues to expand and our operating discipline remains firmly in place. Dick and I would like to thank you all for your continued support and confidence in Napco. Our formal remarks are now concluded and we would now like to open the call up for the Q and A session Operator, Please proceed. Thank you ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press STAR followed by the number one. On your touchtone phone you will hear a prompt that your hand has been raised. Should you wish a decline from the polling process, please Press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. And your first question comes from Matt Somerville, fda, Davidson, please go ahead. Your line is open.
Matt Somerville
Thanks. Apologize for background noise with the airport. But I was curious how we should be thinking about pricing actions for 2020, for fiscal 27, and ultimately how you're balancing your discounting programs in that if discounting is coming down, that would theoretically have an impact on equipment volume, which would then theoretically have a downstream impact on the growth rate in RSR (Recurring Service Revenue). How should I be thinking about that dynamic? And then I have a follow up.
Kevin Buchel
Last year at this time we had two price increases. We announced. We announced a tariff-related one and a general one. And that drove a lot of business into Quarter 4 as the distributors tried to avoid these increases. This year we have a general price increase and so we don't have as much of pricing increases this year as we did last year, but we still have the general one. So it's not going to be the same from that point of view. And also we are much more disciplined in our discounting now than we've ever been. And the good part of that is our margins go up, and they did go up this quarter to close to 29%. And we're going to continue to be disciplined like that. What we want to do is generate more hardware sales, but also not give away margin along the way. So we're working hard to, to have both. And so as we enter, as we're into this fourth quarter that we're in now, it might be a little different than it was a year ago, but from a profitability point of view, it should be better than it was a year ago.
Matt Somerville
Got it. And And, can you talk about whether or not you're starting to see any traction, discernible traction in revenue and recurring from MVP and how we should be thinking about kind of uses of cash ma wise over the next six months.
Kevin Buchel
So MVP, we have said it's an 18. Give it 18 months. I started the clock from ISC west last year. 18 months puts us about October of this year. That's when we expect meaningful recurring revenue to begin. That's when I expect we could talk to you about it and give you say, hey, it's X percent of our total recurring or it's X dollars. So we're not there yet. We're encouraged to those of you who were at the show, you saw a mob scene in our booth wanting to see MVP getting A lot of great interest. We're doing a lot of training. We don't want to screw this thing up. We want to do it right, get everybody's feedback and then we think it'll be super successful. So give it a few more months, Matt, and then I think we'll start to feel it. And then with regard to M&A activity, we have a lot that's being served up to us. We have a lot of bankers who are interested in working with us. We have a couple that particularly were interested in nothing imminent, but as you guys know, we have the cash to do it. It's a good time. The last one we did was many years ago and at that time we had lots of debt, minimal cash. It's a much different story now. So we're in a good position to do something, but as we've said, got to be right. We're not going to just do one for the sake of doing it. It's got to check all the boxes of things like being accretive from day one, paying a fair multiple, utilizing our Dominican factory so we can get the leverage from the factory, pay a fair multiple, want to stick in our lane if it has those things we're interested in. There's a couple that we've got our eye on and we'll keep you posted as things develop.
Matt Somerville
Thanks, Kevin.
OPERATOR
Thank you. And your next question comes from the line of Jim Ricudi of Needham. Please go ahead. Your line is open.
Jim Ricudi
Thank you. Good morning. Curious on the door locking side of the business, what kind of activity are you seeing? Both from the standpoint of school security and then the efforts you've been talking about each quarter now about potentially larger project, architectural, engineering related parts of the business. How are we thinking about that area of the business?
Kevin Buchel
Well, the school segment remains strong. We always are asked, and I'm sure you know, you asked us as well, well, how much is it of your locking? And I wish we could tell you. We sell, as you know, to distributors for the most part and the distributors are the ones that sell to the schools. In some cases we'll sell directly to the integrator who will do the installation at a large school. And we know about those, but it's hard for us to tell you exactly how much is school security. But we know it's been very strong. It's very good, our locking sales, which you guys will see when you look at the queue and you see the breakout between our segments. Locking was very strong once again this quarter. It's a reflection of all These areas, whether it's airports, hospitals, schools, all of that, it's clicking on all cylinders.
Jim Ricudi
There are some big projects. When we can tell you about it, we will. Sometimes there's a hesitation. They don't want it publicized. But there are some that are out there that we expect to be contributors in the future. And we'll keep you posted on that. And generally speaking, we're very happy with the way the locking area is going and there's more work to be done. We want to get locking to be even stronger. We want the radio business to get stronger. The radio business contributes to the recurring revenue. We want MVP to start to contribute because MVP gives us more recurring revenue. So each of these areas we're focused heavily on generally, you know, the return service revenue margins have remained elevated, which I'm assuming, and I think you guys have said so, is being helped by mix. How much of that is associated with fire radios versus, say, a year ago? Are you able to give us that?
Kevin Buchel
Yeah, we can. So we started the recurring revenue journey 10 years ago, roughly at that time when we first started, we didn't even have a fire radio. And the first few years was just burglary radio. Maybe three years in, fire radio came out and it has become the dominant piece of the pie. We have roughly a million radios active out there, and I'd say 75% of them are fire radios. That's why you see the margins, the strong margins, because we get more money for the fire radios and it's keeping up. I was very happy to see 15.4%. That was a higher increase than we've seen in a while. Very happy to see the 90% plus margin. It actually went up a bit to 90.4. That's all very good. We expect it to continue. And there's lots more buildings that have not yet converted to copper, away from copper to cellular. As you remember, with the 3G sunset,
Jim Ricudi
a lot of dealers wait for the end. They wait to the bitter end. By 2029, 2030, they're going to have to convert because the carriers are not going to fix it anymore. So we're seeing steady growth. There'll probably be a big push a few years from now, but in the meantime, steady growth, lots of radios. And also, just to remind everybody, we sell fire panels with the radio built in. So that's for new work. So it's for existing. Who wants to convert away from copper? And it's also for new. But this has been going on now for a while. It remains strong. It remains a key Part of our future. Thank you.
Kevin Buchel
Thanks, Jeff.
OPERATOR
Thank you. And your next question comes from Jason Smith. Please go ahead. Your line is open.
Jason Smith
Hey, guys, thanks for taking my questions. Kevin, just curious if you could comment on what you're seeing from the distributor channel and kind of what sell through stats you saw in this past quarter. Distributor channel seems stable. You know, as you know, it has its ups and downs. Sometimes they're too light, sometimes they're too heavy. They're in a good spot now and we like to keep it that way. Sometimes when we do these big deals with these distributors, give big discounts, they carry too much inventory. From their point of view, they forget that we gave them an incentive to do that, the discount, without giving huge discounts. It's just kind of nice. The, the channel seems smooth. Nice. I hope it stays that way. You could never tell, but right now it's, it's in a good spot. Jason. Okay, that makes sense. And then just following up on that, as you noted, kind of you doing less discounting and seeing some nice margin on that equipment. Equipment revenue line. When you think about the path back to sort of 30% plus gross margins on equipment, what are going to be the primary drivers there? Well, you need volume. Besides doing less discounting, you need volume. The reason you need volume is you get overhead absorption from the Dominican Republic factory. The more goods that flows through the Dominican Republic factory, the higher the margins go. Because if you think about it, we have the facility. The facility in the Dr. Could do $300 million of revenue. So the facility could handle additional volume. We have lots of machines. It could handle the volume. We have supervision. They could handle the volume. But you have to add more direct labor. Luckily, in the doctor we can get all the labor we want and they all want to work for us compared to others, other companies down there. So if you're only adding direct labor and that's it, the margins expand, that helps get into the 30s so that less discounting and mix. Remember, you get more money for a locking product than you do for a radio. Now, a radio we love because it gives us the recurring revenue from a hardware point of view, it's, you know, it makes modest profit. Locking access, they do better. So you need a good mix, you need less discounting, you need volume. You get all of that. We're in the 30s, pushing to 40. Okay, perfect. Thanks a lot, guys.
Kevin Buchel
Thanks, Jason.
OPERATOR
Thank you. And your next question comes from Jeremy Hamblin of Craig Hallam Capital Group. Please go ahead. Your line is open.
Jeremy Hamblin
Thanks. Congrats on the strong results and the record gross margins. I wanted to just get into the cost side of the equation a little bit. And just in terms of a little bit of noise in the quarter, obviously related to the litigation settlement. But in terms of the underlying opex of the business, whether it's your R and D, the SG and A side of your business, I know you had, I think, ISC west expenses really in the March quarter. I think next year that shifts into Q4 in fiscal 27. But in terms of the hiring that you might need to do on the R and D portion of your team, and then, you know, in terms of kind of the corporate staffing and the rest of your sga, can you just give a sense for, you know, what you might be looking to build out here over the next, you know, four or five quarters?
Kevin Buchel
Well, the biggest thing we can comment on with regard to this quarter that we're in is what you mentioned, that ISC west was in Q3 March. We had it. It's already reflected in the numbers as we in Q4 now of fiscal 26. We won't have that last year we did. So that's a nice favorable comparison. It's in the range of, I don't know, seven to 800,000, something like that. So that's a big plus. And next year will be in April. Usually it is in April this year because of the calendar and the holidays that fell in March. In general, we do not anticipate any huge increases in SG&A. The things that drive SGA. Higher commissions. You have higher sales, you can have more commissions, you might have higher freight costs. Also, there's salary increases that you give out every year.
Jeremy Hamblin
The wild card within SGA is legal now. Settling this lawsuit is good. It'll put more predictability into our. The legal portion of the sga. On the R and D side, we try to keep the R and D as a percentage of sales, somewhere in the 7 to 7.5% range. Our sales obviously are growing, and so is our number of our engineers. We are expanding as fast as we can. We're adding more engineers all the time. What we want more products, get them to market faster, get products to market faster that have recurring revenue. And so we want to be the first guy out there with the new product, not the second or the third guy. So hence add more people. But we watch it. It's not just higher. Wildly. We're still, even though we've added many more engineers, we're still in the seven to seven and a half percent of sales range and I expect it to stay in that range. Got it. And then wanted to ask a question on tariffs. So in terms of, you know, we've got some change since you guys last reported with the Supreme Court ruling the doctor you know, you know, we run a trade surplus with the doctor and then I think under the current kind of tariff guidelines being applied, it looks like those would expire at the end of July if no new tariffs are slapped on. Can you give us a sense for what on an annual basis kind of the range of what you're paying in terms of tariffs under the kind of the current rate what you paid and then whether or not you expect to recover some of what you might have paid here in the last year or so.
Kevin Buchel
So I will refer to my tariff experts.
Jeremy Hamblin
Andy, Go ahead, Andy. So Jeremy, just from a tariff perspective, so I mean we're at 10% now. We were pre ruling EBIT rates were 10% for us. We were the, we were the baseline rate. We can't predict, you know, what, if anything will happen legislatively with Congress if they're going to make any of these existing tariffs permanent. We are going through the process of the refund claim like many companies are. So the portal opened up I believe a week or so ago. So we're in the process of submitting our claims. You know, on average our TAV course was running about just under $2 million, I would say on an annual basis at that 10% level. You know, we have the bulk of our tariff is the movement of goods from the doctor up to the U.S. we have to a less extent importing directly into the US since most of the manufacturing happens in the Dr. But as of now, we wouldn't expect our tariff exposure to increase from where it is today. And you know, absent, you know, some legislation, you know, potentially the doctor could go back to where we were prepar liberation day to zero. So it's wait and see for us. Great. Thanks for taking the questions.
OPERATOR
And your next question comes from Lance Vitanza of TD Cowan. Please go ahead. Your line is open.
Lance Vitanza
Thank you. Let me start just to go back to the equipment revenue and the discounting. And I understand that the discounting is great not just for the margin but for gross profit dollars. But is it going to create a drag on recurring service revenues in either Q4 or next year? I feel like we've kind of been talking around this question, but I just want to ask you real direct.
Kevin Buchel
No, it won't. The discounting, whatever discounting we've done or haven't done. It's never around radios. Radios is what gives us the recurring.
Lance Vitanza
It's almost unaffected. Radios. Got it. People want them. That's not an issue in the least. Very good. Thank you. Okay, so just a couple questions on cash flow. The first is I've consistently been overestimating your working capital as a use of cash, and it's surprising just given the growth that we're seeing in the business. Right. Normally, I would expect working capital to build more quickly given the growth that we're seeing here. So the question is, should we expect sort of like a catching up, like a big uptick in working capital in either the fourth quarter of this year or perhaps next year?
Kevin Buchel
Andy, you want to take that one?
Lance Vitanza
Yeah, I'm not sure I'm following that. It's not growing at a rate you were expecting, Lance? I'm not sure what the question. That's correct. Right. So the working capital has been relatively flat. It's really not been consuming much cash. And so my question is, do you expect there to be a big bump up in the amount of working capital such that your cash flow is going to be negatively impacted in the fourth quarter or next year?
Kevin Buchel
No, because I think we have done a much better job in the last 12, 18 months of managing inventory. So, you know, we're trying to manage the levels of inventory. We've worked down our inventory substantially from going back its heights probably two years ago. So from a use of cash perspective, you know, I would expect us to, you know, not eat into our cash and continue to grow.
Lance Vitanza
Okay, great. And then last question for me, just, you know, again, on the cash flow side, the settlement, I'm very glad that you got it behind you. I was surprised by the size of the payment given, you know, the lack of merit in these claims. Question, does this sort of $16 million outflow, which I assume is coming in the current quarter, does this put any pressure on the dividend or your ability to continue increasing the dividend or. Or given the reduction maybe in litigation expense going forward, is it kind of a wash? You know, we have 125 million in
Kevin Buchel
cash, so we could afford this. We don't love it. Who loves it? In the end, it's good to get rid of it, but we could afford it.
Lance Vitanza
No, it's not going to affect our ability to do dividends. The one thing we did, we didn't increase it this round. You know, you. You've been with us for a while, so, you know, we've increased the amount of the dividend three, four, or five times already. We kept it the same. Yeah, but there'll be more increases down the road. And this. This company generates a lot of cash, so there's no issue on continuing dividends. And last question, I'm going to squeeze one more in. Someone earlier had asked about your stance toward M and A going forward. What about your stance towards share repurchase, given, as you point out, you got 125 million of cash?
Kevin Buchel
We don't like to mess with the
Lance Vitanza
float, but as you know, we've done it before. Depending upon where the stock is, we could do it again. We have authorization, we have the money, but we don't need to do it if the stock is performing well. And I don't want to force anything. I like where our float is at and so do a lot of our investors. Thank you.
Kevin Buchel
Thanks, Lance.
OPERATOR
Thank you again. Should you have a question, please press star followed by the number one. On your touchstone phone, you will hear a prompt that your hand has been raised. Thank you and there are no further questions at this time. I'd now like to turn the call back over to Kevin Bouchel, President and Chief Operating Officer, for closing comments.
Kevin Buchel
Thank you, Matt. Thank you everybody for participating in today's conference call. As always, should you have any further questions, feel free to call Dick, Andy, Fran or myself for further information. We thank you for your interest and support and we look forward to speaking to you all again in a few months to Discuss Napco's fiscal Q4 and full year results. Thanks again,
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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