What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-02-02 compared with 2025-11-03 · 89 added, 58 removed, 74 unchanged (67% of the section changed)

17 unchanged sentences

We have established a national network of trusted independent security dealers and integrators that are experts at selling, installing and supporting our various technologies.

These dealers are dependent on our platform for communication services to our radio communicators and smart security devices, and they pay us a monthly fee for these services to operate and manage their businesses efficiently.

These dealers are dependent on our platform for communication services to our radio communicators and smart security devices, and they pay us a monthly fee for these services.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, NAPCO Access Pro, Marks USA, and other popular product lines.

We are dedicated to developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks.

Highlights from the three months ended September 30, 2025 compared with the comparable period in fiscal 2024 included:

● Total revenue increases 11.7% to $49.2, while equipment revenue increased 12.3% to $25.7 million and recurring service revenues (“RSR”) increased 11.1% to $23.4 million.

● Total gross profit margin increased from 55.9% to 56.6% .

● Gross margin for equipment revenue increased from 23.6% to 26.0% while gross margin on RSR decreased to 90.3% as compared to 91.1% .

● Operating income increased 15.1% to $13.6 million.

Highlights from the three and six months ended December 31, 2025 compared with the comparable period included:

● Total revenue increased 12.2% and 12.0% to $48.2 million and $97.3 million, respectively.

● Equipment revenue increased 12.0% and 12.1% to $24.3 million and $50.1 million, respectively, while recurring service revenues (“RSR”) increased 12.5% and 11.8% to $23.8 million and $47.3 million, respectively.

● Total gross profit margin increased from 57.0% to 58.6% and from 56.5% to 57.6% for the three and six months ended December 31 2025 and 2024, respectively.

● Operating income increased 32.1% to $14,753 million and 23.3% to $28,396 million for the three and six months ended December 31 2025 and 2024, respectively.

Industry Landscape

4 unchanged sentences

We are subject to the effects of general macroeconomic and market conditions.

On April 2, 2025, the U.S.

announced a new universal baseline tariff of 10%, (which includes imports from the Dominican Republic where we manufacture most of our products) plus significant additional country-specific tariffs for select trading partners, on all U.S.

The reciprocal country-specific tariffs were subsequently paused for 90 days on most countries.

The uncertainty around the long-term tariff rates that could be applied to our importation of products into the U.S.

presents significant challenges to our operations and supply chain and could impact future result.

We cannot predict what additional actions might be considered or implemented by the U.S.

or its trade partners, particularly in the current geopolitical environment.

We anticipate that the imposition of the baseline 10% tariff will increase the cost of our products and could impact product margins.

government implemented new tariff measures affecting a broad range of imported materials.

Certain countries have responded to the U.S.

tariffs by imposing or threatening retaliatory tariffs.

While we are actively monitoring the changes in global trade policy and the effects they may have on our business and broader macroeconomic environment, we have not experienced a material impact on our financial position to date and do not expect them to have a material detrimental impact on our business operations in the near term.

However, given the uncertainty surrounding global markets as a result of the new U.S.

tariff policy, we do not have clarity at this point over the potential medium to long term impacts our business may face.

The availability of certain goods could be affected if foreign suppliers choose to limit their exposure to U.S.

markets in response to unfavorable trade policies, which could negatively impact our suppliers ability to deliver materials or manufacture equipment for us and, therefore, delay or impede our product deliveries.

Furthermore, rising inflation, slower economic growth and increases in unemployment that may result from global trade disruptions could further deflate consumer demand and impact the demand for our products.

The universal baseline tariff of 10% includes imports from the Dominican Republic where we manufacture most of our products.

The imposition of the baseline 10% tariff increased the cost of our products and could impact future product margins.

The uncertainty could also cause disturbances in ocean shipping capacity that could affect our ability to secure ocean freight containers for our products, and create inflationary effects on our costs, in addition to the direct impact of tariffs.

We are closely monitoring the evolving tariff landscape and attempting to mitigate these impacts, including using pricing adjustments, sourcing strategies and other cost-mitigation measures.

However, there can be no assurance that we will be able to fully mitigate the impacts of such tariffs or that the imposition of tariffs, and the resulting economic impact on the U.S.

market and consumer, will not be material to our financial results.

We primarily source our manufacturing materials from Asia, including Taiwan, India and China, with additional sourcing from other producers throughout the world.

There have been significant 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.

7 unchanged sentences

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.

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.

Results of Operations

Three months ended September 30,

Three months ended December 31,

Six months ended December 31,

(dollars in thousands)

Equipment revenue

8 unchanged sentences

Selling, general and administrative

Selling, general and administrative as a percentage of net sales

Selling, general and administrative as a percentage of net revenue

Operating income

Interest income, net

Other income, net

Other income (expense), net

Provision for income taxes

Three Months Ended September 30, 2025:

Revenue for the three months ended September 30, 2025, increased $5,165,000 to $49,168,000 as compared to $44,003,000 in the comparable period.

Net equipment revenues for the three months ended September 30, 2025, increased $2,822,000 to $25,739,000 as compared to $22,917,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in the sales of door locking devices of $3,229,000, while revenue from intrusion products decreased $407,000.

The increased volume in our door locking products was primarily due to increased sales to one of our larger distributors, net of decreases resulting from the timing of large construction project work that is supplied through our distributors.

Equipment revenues were also positively impacted by certain pricing increases that went into effect in the quarter.

Net service revenues for the three months ended September 30, 2025, increased $2,343,000 to $23,429,000 as compared to $21,086,000 in the comparable period.

Revenue by major product lines is as follows:

Three months ended December 31,

Six months ended December 31,

(dollars in thousands)

Equipment Revenue

Intrusion and access alarm products

Door locking devices

Total equipment revenue

Service revenue

Total Revenue

Three Months Ended December 31, 2025:

Total Revenue for the three months ended December 31, 2025, increased $5,239,000 (12.2%) to $48,172,000 as compared to $42,993,000 in the comparable period.

Net equipment revenues for the three months ended December 31, 2025, increased $2,598,000 (12.0%) to $24,323,000 as compared to $21,725,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in sales of door locking products of $1,781,000 (12.6%) and intrusion and access products of $817,000 (10.8%).

The increased revenue in our door locking products was primarily a result of the impact of pricing increases (approximately 7%) that went into effect in Fiscal 2026 in addition to general increase in sales volume (approximately 5.6%).

The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases that went into effect in Fiscal 2026.

Net service revenues for the three months ended December 31, 2025, increased $2,641,000 (12.5%) to $23,849,000 as compared to $21,208,000 in the comparable period.

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

Three Months Ended September 30, 2025

Overall gross profit for the three months ended September 30, 2025, increased $3,230,000 to $27,846,000, or 56.6% of net sales, as compared to $24,616,000, or 55.9% of net sales, for the comparable period.

Six Months Ended December 31, 2025:

Revenue for the six months ended December 31, 2025, increased $10,404,000 (12.0%) to $97,340,000 as compared to $86,936,000 in the comparable period.

Net equipment revenues for the six months ended December 31, 2025, increased $5,420,000 (12.1%) to $50,062,000 as compared to $44,642,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in the sales of door locking products of $5,011,000 (17.9%) and intrusion and access products of $409,000 (2.5%).

The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases that went into effect in Fiscal 2026, offset by reductions in the sales of certain access control products.

Net service revenues for the six months ended December 31, 2025, increased $4,984,000 (11.8%) to $47,278,000 as compared to $42,294,000 in the comparable period.

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

Three Months Ended December 31, 2025

Overall gross profit for the three months ended December 31, 2025, increased $3,749,000 to $28,238,000, or 58.6% of net revenue, as compared to $24,489,000, or 57.0% of net revenue, for the comparable period.

Gross profit from equipment revenue was $6,716,000, or 27.6% of equipment revenue, as compared to $5,119,000, or 23.6% of equipment revenue, for the comparable period.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs and certain price increases that went into effect during the quarter.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs, price increases that went into effect during Fiscal 20206 and reductions in sales discounts during the period.

Gross profit on service revenues was $21,522,000, or 90.2% of net service revenues, as compared to $19,370,000, or 91.3% of net service revenues, for the comparable period a year ago.

The decrease in gross profit percentage was a result of increased data costs due to the increase in the number of active dual Sim radio communicators which require data service from multiple carriers.

The decrease in gross profit percentage was a result of increased royalty costs due to certain one-time credits received in the comparable period and increased data costs to run our network operations center.

Six Months Ended December 31, 2025

Overall gross profit for the six months ended December 31, 2025, increased $6,979,000 to $56,084,000, or 57.6% of net revenue, as compared to $49,105,000, or 56.5% of net revenue, for the comparable period.

Gross profit from equipment revenue was $13,409,000, or 26.8% of equipment revenue, as compared to $10,526,000, or 23.6% of equipment revenue, for the comparable period.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume which improved the absorption rate of our fixed overhead costs, certain price increases that went into effect during the previous quarter and reductions in sales discounts during the period.

Gross profit on service revenues was $42,675,000, or 90.3% of net service revenues, as compared to $38,579,000, or 91.2% of net service revenues, for the comparable period a year ago.

Research and Development

Research and development expenses for the three months ended September 30, 2025, increased by $183,000 to $3,240,000, or 6.6% of net sales, as compared to $3,057,000, or 6.9% of net sales, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor ($194,000) and UL approval ($17,000) costs, offset by reduced consulting fees ($34,000).

Research and development expenses for the three months ended December 31, 2025, increased by $366,000 to $3,473,000, or 7.2% of net revenue, as compared to $3,107,000, or 7.2% of net revenue, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor and benefit costs ($366,000).

Research and development expenses for the six months ended December 31, 2025, increased by $549,000 to $6,713,000, or 6.9% of net revenue, as compared to $6,164,000, or 7.1% of net revenue, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor and benefit costs ($560,000) offset by a reduction in consulting charges ($41,000).

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2025, increased by $1,260,000 to $10,963,000 as compared to $9,703,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increases in legal fees related to the litigation discussed in Note 13 ($943,000), and increases in commission expense ($354,000), offset by reductions in bonus compensation and benefit ($82,000).

Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2025, decreased by $199,000 to $10,012,000 as compared to $10,211,000 for the comparable period.

The decrease in SG&A expenses was primarily attributable to decreases in legal fees (net of insurance reimbursements) related to the litigation discussed in Note 13 ($307,000), accounting expenses ($212,000) and stock-based compensation ($202,000), offset by increases in wages, bonus compensation and benefits ($275,000), commission related expenses ($147,000) and insurance expense ($50,000).

SG&A expenses for the six months ended December 31, 2025, increased by $1,061,000 to $20,975,000 as compared to $19,914,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increases in legal fees related to the litigation discussed in Note 13 ($637,000), commission expense ($501,000), wages, bonus compensation and benefits ($192,000) and insurance ($92,000) offset by decreases in accounting expenses ($464,000) and stock-based compensation $(263,000).

Interest and Other Income (Expense)

Three months ended September 30,

Three months ended December 31,

Six months ended December 31,

% Increase (Decrease)

Interest income

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Interest income decreased for the three months ended September 30, 2024, as compared to the comparable period, primarily due to lower interest rates.

The Company’s provision for income taxes for the three months ended September 30, 2025 increased by $655,000 to $2,470,000 as compared to $1,815,000 for the same period a year ago.

The Company’s effective rate for income tax was 16.9% and 14.0% for the three months ended September 30, 2025 and 2024 respectively.

The Company’s effective tax rate for the three months ended September 30, 2025 increased as a result of a larger portion of the Company’s taxable income being attributable to United States operations, and the remeasurement of certain deferred tax liabilities due to tax rate changes enacted in the One Big Beautiful Bill Act (“OBBBA”) in the current period.

Interest income decreased for the three and six months ended December 31, 2025, as compared to the comparable period, primarily due to lower interest rates.

The Company’s provision for income taxes for the three months ended December 31, 2025 increased by $611,000 to $2,236,000 as compared to $1,625,000 for the same period a year ago.

The Company’s effective rate for income tax was 14.2% and 13.4% for the three months ended December 31, 2025 and 2024 respectively.

The Company’s provision for income taxes for the six months ended December 31, 2025 increased by $1,266,000 to $4,706,000 as compared to $3,440,000 for the same period a year ago.

The Company’s effective rate for income tax was 15.5% and 13.7% for the six months ended December 31, 2025 and 2024 respectively.

The Company’s effective tax rate for the three and six months ended December 31, 2025 increased as a result of a larger portion of the Company’s taxable income being attributable to United States operations, and the remeasurement of certain deferred tax liabilities due to tax rate changes enacted in the One Big Beautiful Bill Act (“OBBBA”) in the current period.

Liquidity and Capital Resources

We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months.

We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, tariffs, bans, or other measures or events that increase the effective price of products.

events that increase the effective price of products.

We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

Our cash and cash equivalents increased by $12,319,000 during the three months ended September 30, 2025, and our cash and cash equivalents and short-term investments as of September 30, 2025 was $105,758,000.

Our cash and cash equivalents increased by $21,838,000 during the six months ended December 31, 2025, and our cash and cash equivalents and short-term investments were $104,919,000 as of December 31, 2025.

We believe that there is minimal credit risk associated with the investments in cash equivalents and short-term investments due to the types of investment entered.

As of September 30, 2025, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, none of which has been drawn.

The Company has no outstanding debt.

A summary of the cash flow activity for the three months ended September 30, 2025 and 2024 is as follows:

As of December 31, 2025, the Company’s available revolving credit line was $20,000,000, which expires in February 2029, there were no outstanding borrowings on the line as of December 31, 2025.

A summary of the cash flow activity for the six months ended December 31, 2025 and 2024 is as follows:

Cash Flows from Operating Activities

Net cash provided by operating activities was $11.6 million for the three months ended September 30, 2025 and was due to net income of $12.2 million and increase in adjustments for non-cash items of $2.1 million offset by cash outflow from changes in operating assets and liabilities of $2.6 million.

The changes in operating assets and liabilities were largely attributable to increases in accounts receivables, inventories, prepaid expenses and income tax receivables partially offset by decreases in accounts payable and accrued expenses.

Net cash provided by operating activities was $12.0 million for the period ended September 30, 2024 and was due to net income of $11.2 million and increase in cash flow from changes in operating assets and liabilities of $1.3 million, partially offset by adjustments for non-cash items of $.4 million.

Net cash provided by operating activities was $26.7 million for the six months ended December 31, 2025 and was due to net income of $25.7 million and increase in adjustments for non-cash items of $4.3 million offset by cash outflow from changes in operating assets and liabilities of $3.2 million.

The changes in operating assets and liabilities were largely attributable to increases in inventories and income tax receivables and decreases in accounts payable and accrued expenses partially offset by decreases in accounts receivables.

Net cash provided by operating activities was $25.5 million for the six months ended December 31, 2024 and was due to net income of $21.7 million and increase in cash flow from changes in operating assets and liabilities of $4.0 million, partially offset by adjustments for non-cash items of $.2 million.

The changes in operating assets and liabilities were largely attributable to increases in accounts receivables and decreases in inventories and accounts payable and accrued expenses.

Cash Flows from Investing Activities

The net cash provided by investing activities of $5.6 million during the three months ended September 30, 2025 was primarily attributable to the redemption of marketable securities of $8.4 million partially offset by expenditures used for capital expenditures of $.2 million and purchase of marketable securities of $2.5 million.

The cash provided by investing activities of $15.5 million during the three months ended September 30, 2024, was primarily attributable to redemption of other investments partially offset by expenditures used for capital expenditures and purchase of investments.

The net cash provided by investing activities of $5.1 million during the six months ended December 31, 2025 was primarily attributable to the redemption of marketable securities of $11.1 million partially offset by expenditures used for capital expenditures of $.8 million and purchase of marketable securities of $5.2 million.

The cash provided by investing activities of $17.7 million during the six months ended December 31, 2025, was primarily attributable to redemption of other investments of $27.3 million partially offset by expenditures used for capital expenditures of $1.8 million and purchase of investments of $7.6 million.

The change in use of cash for investing activities from 2024 to 2025 was a increase in the redemption of investments in term deposits (other investments).

Cash Flows from Financing Activities

The cash used in financing activities of $5.0 million for the three months ended September 30, 2025 was primarily related to the payment of stockholder dividends.

The cash used in financing activities of $7.2 million for the three months ended September 30, 2024 was primarily related to the repurchase of treasury shares.

The cash used in financing activities of $10.0 million for the six months ended December 31, 2025 was primarily related to the payment of stockholder dividends.

The cash used in financing activities of $22.6 million for the six months ended December 31, 2024 was primarily related to the repurchase of treasury shares of $18.0 million and the payment of stockholder dividends of $4.6 million.

Contractual Obligations and Commitments

As of September 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.

As of December 31, 2025, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, on which the Company’s principal manufacturing facility is located, at an annual base rent of approximately $235,000 and $105,000 in annual service charges.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis