What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-05 compared with 2026-02-02 · 84 added, 75 removed, 88 unchanged (64% of the section changed)

18 unchanged sentences

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.

Since 1969, NAPCO has established a heritage and proven record in the professional security community for 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 and six months ended December 31, 2025 compared with the comparable period included:

Highlights from the three and nine months ended March 31, 2026 compared with the comparable period included:

● Total revenue increased 11.8% and 11.9% to $49.2 million and $146.5 million, respectively.

● Equipment revenue increased 8.4% and 10.9% to $24.2 million and $74.3 million, respectively, while recurring service revenues (“RSR”) increased 15.4% and 13.0% to $24.9 million and $72.2 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.

● Total gross profit margin increased from 57.2% to 60.0% and from 56.7% to 58.4% for the three and nine months ended March 31, 2026 and 2025, respectively.

Industry Landscape

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

Our industry is dynamic and highly competitive;

our competitors are continually developing new products and solutions for consumers and businesses with frequent changes in both technologies and business models.

Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business.

Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces.

Napco continually innovates through a broad range of research and development activities that seek to identify and address the changing demands of customers, industry trends, and competitive forces to adapt and respond to customer and user preferences over an extended time in pace with this changing environment...

We must continue to evolve and

Economic Conditions and Other Factors

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

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.

The United States economy continues to experience various macroeconomic pressures, including pricing pressure from tariffs and inflation, sustained high interest rates, increased fuel costs and general economic and political uncertainty.

On February 20, 2026, the U.S.

Supreme Court ruled that certain tariffs imposed under the International Emergency Economic Powers Act (“IEEPA”) were invalid, and in March 2026, the U.S.

Court of International Trade further ruled that importers that paid such tariffs are due refunds.

Although we may be entitled to refunds of previously paid IEEPA tariffs, the amount and timing of any such refunds remain uncertain, and as of March 31, 2026, we have not recorded any amounts related to potential recoveries.

Following these rulings, new tariffs under other laws and on imports from more countries were imposed, in addition to existing non-IEEPA tariffs.

We will continue to monitor these developments and assess their potential impacts, and are actively monitoring the changing global trade policies 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 because of 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.

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.

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

Additionally, increased fuel costs resulting from the conflict in Iran and geopolitical tensions in the region has increased macroeconomic uncertainty generally and may lead to higher freight expense and cost pressure on the products offered by the Company.

These pressures have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations.

Critical Accounting Policies and Estimates

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Results of Operations

Three months ended December 31,

Six months ended December 31,

Three months ended March 31,

Nine months ended March 31,

(dollars in thousands)

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Selling, general and administrative as a percentage of net revenue

Operating income

Litigation settlement cost

Operating (loss) income

Interest income, net

Other income (expense), net

Other income, net

Provision for income taxes

Net (loss) income

Revenue by major product lines is as follows:

Three months ended December 31,

Six months ended December 31,

Three months ended March 31,

Nine months ended March 31,

(dollars in thousands)

6 unchanged sentences

Total Revenue

Three Months Ended December 31, 2025:

Three Months Ended March 31, 2026:

Total Revenue for the three months ended December 31, 2025, increased $5,206,000 (11.8%) to $49,167,000 as compared to $43,961,000 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.

Net equipment revenues for the three months ended March 31, 2026, increased $1,887,000 (8.4%) to $24,238,000 as compared to $22,351,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in sales of door locking products of $1,484,000 (10.4%) and intrusion and access products of $403,000 (5.0%).

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 increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 5.0%) with the balance a result of general increase in sales volume (approximately 5.4%).

The increased revenue in our intrusion and access alarm products was primarily a result of the

impact of pricing increases (approximately 10.1%), offset by a decrease in volume (approximately 5.1%) primarily related to our access products.

Net service revenues for the three months ended March 31, 2026, increased $3,319,000 (15.4%) to $24,929,000 as compared to $21,610,000 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.

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.

Nine Months Ended March 31, 2026:

Revenue for the nine months ended March 31, 2026, increased $15,610,000 (11.9%) to $146,507,000 as compared to $130,897,000 in the comparable period.

Net equipment revenues for the nine months ended March 31, 2026, increased $7,307,000 (10.9%) to $74,300,000 as compared to $66,993,000 in the comparable period.

The increase in net equipment revenue was attributable to increases in the sales of door locking products of $6,494,000 (15.3%) and intrusion and access products of $813,000 (3.3%).

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 increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 6.3%) with the balance a result of general increase in sales volume (approximately 9.0%).

The increased revenue in our intrusion and access alarm products was primarily a result of the impact of pricing increases (approximately 10.8%), offset by a decrease in volume (approximately 7.5%) primarily related to our access products.

Net service revenues for the nine months ended March 31, 2026, increased $8,303,000 (13.0%) to $72,207,000 as compared to $63,904,000 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.

Three Months Ended March 31, 2026

Overall gross profit for the three months ended March 31, 2026, increased $4,362,000 to $29,489,000, or 60.0% of net revenue, as compared to $25,127,000, or 57.2% of net revenue, for the comparable period.

Gross profit from equipment revenue was $6,949,000, or 28.7% of equipment revenue, as compared to $5,499,000, or 24.6% 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, price increases that went into effect during Fiscal 20206 and reductions in sales discounts during the period.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume in our locking products which improved the absorption rate of our fixed overhead costs, price increases that went into effect during Fiscal 2026 and reductions in sales discounts during the period.

Gross profit as a percentage of service revenue was consistent in both periods.

Gross profit on service revenues was $22,540,000, or 90.4% of net service revenues, as compared to $19,628,000, or 90.8% of net service revenues, for the comparable period a year ago.

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.

Nine Months Ended March 31, 2026

Overall gross profit for the nine months ended March 31, 2026, increased $11,341,000 to $85,573,000, or 58.4% of net revenue, as compared to $74,232,000, or 56.7% of net revenue, for the comparable period.

Gross profit from equipment revenue was $20,358,000, or 27.4% of equipment revenue, as compared to $16,025,000, or 23.9% 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.

The increase in gross profit percentage from equipment revenue was primarily a result of product mix, increased volume in our locking products 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 as a percentage of service revenue was consistent in both periods.

Gross profit on service revenues was $65,215,000, or 90.3% of net service revenues, as compared to $58,207,000, or 91.1% of net service revenues, for the comparable period a year ago.

Research and Development

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).

Research and development expenses for the three months ended March 31, 2026, increased by $233,000 to $3,418,000, or 7.0% of net revenue, as compared to $3,185,000, or 7.2% of net revenue, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor compensation and benefit costs ($156,000).

Research and development expenses for the nine months ended March 31, 2026, increased by $782,000 to $10,131,000, or 6.9% of net revenue, as compared to $9,349,000, or 7.1% of net revenue, for the comparable period.

The increase in research and development expenses was primarily a result of increased labor compensation and benefit costs ($766,000).

Selling, General and Administrative

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 December 31,

Six months ended December 31,

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2026, increased by $463,000 to $11,259,000 as compared to $10,796,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increases in our tradeshow related expenses ($896,000) wages, bonus compensation and benefits ($205,000), commission related expenses ($215,000), 401(k) matching contributions ($86,000) and insurance expense ($59,000) offset by decreases in legal fees (net of insurance reimbursements) related to the litigation discussed in Note 13 ($880,000) and stock-based compensation ($96,000).

SG&A expenses for the nine months ended March 31, 2026, increased by $1,524,000 to $32,234,000 as compared to $30,710,000 for the comparable period.

The increase in SG&A expenses was primarily attributable to increases in commission expense ($716,000), wages, bonus compensation and benefits ($397,000), tradeshow related expenses ($980,000), insurance ($151,000) and 401(k) matching contributions ($92,000), offset by decreases in accounting expenses ($498,000), legal fees related to the litigation discussed in Note 13 ($243,000) and stock-based compensation $(359,000).

Litigation settlement costs

Litigation settlement costs for the three and nine months ended March 31, 2026 was $16,000,000, net of any insurance reimbursements, as a result of the settlement described in Note 13.

The effect of such settlement was to reduce operating income by $16,000,000 and net income by $14,267,000 (giving effect to the lower income taxes resulting from the litigation expense).

Interest and Other Income, Net

Three months ended March 31,

Nine months ended March 31,

% Increase (Decrease)

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**Percentage change not meaningful.

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.

Interest income increased for the three months ended March 31, 2026, as compared to the comparable period, primarily due to higher interest rates.

Interest income remained consistent for the nine months ended March 31, 2026 as compared to the comparable period.

The Company’s provision for income taxes for the three months ended March 31, 2026 decreased by $1,680,000 to $206,000 as compared to $1,886,000 for the same period a year ago.

The Company’s effective rate for income tax was (102.0)% and 15.7% for the three months ended March 31, 2026 and 2025 respectively.

The Company’s provision for income taxes for the nine months ended March 31, 2026 decreased by $414,000 to $4,912,000 as compared to $5,326,000 for the same period a year ago.

The Company’s effective rate for income tax was 16.3% and 14.4% for the nine months ended March 31, 2026 and 2025 respectively.

The Company’s effective tax

rate for the three months ended March 31, 2026 decreased due to the litigation settlement costs lowering pre-tax income offset by discrete items incurred during the quarter.

The Company’s effective tax rate for the nine months ended March 31, 2026 increased due to lower taxable income.

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.

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 $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.

Our cash and cash equivalents increased by $31,327,000 during the nine months ended March 31, 2026, and our cash and cash equivalents and short-term investments were $124,952,000 as of March 31, 2026.

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 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:

As of March 31, 2026, 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 March 31, 2026.

A summary of the cash flow activity for the nine months ended March 31, 2026 and 2025 is as follows:

Cash Flows from Operating Activities

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.

Net cash provided by operating activities was $43.5 million for the nine months ended March 31, 2026 and was due to net income of $25.3 million and increase in adjustments for non-cash items of $6.4 million and from changes in operating assets and liabilities of $11.9 million.

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

Net cash provided by operating activities was $38.9 million for the nine months ended March 31, 2025 and was due to net income of $31.8 million and increase in cash flow from changes in operating assets and liabilities of $6.9 million and adjustments for non-cash items of $0.3 million.

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

Cash Flows from Investing Activities

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 net cash provided by investing activities of $4.3 million during the nine months ended March 31, 2026 was primarily attributable to the redemption of marketable securities of $13.7 million partially offset by expenditures used for capital expenditures of $1.5 million and purchase of marketable securities of $7.8 million.

The cash provided by investing activities of $15.1 million during the nine months ended March 31, 2026, was primarily attributable to redemption of other investments of $27.3 million partially offset by expenditures used for capital expenditures of $1.9 million and purchase of investments of $10.2 million.

The change in use of cash for investing activities from 2025 to 2026 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 $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.

The cash used in financing activities of $16.5 million for the nine months ended March 31, 2026 was primarily related to the payment of stockholder dividends and payment of tax withholdings related to stock option exercises.

The cash used in financing activities of $45.9 million for the nine months ended March 31, 2025 was primarily related to the repurchase of treasury shares of $36.8 million and the payment of stockholder dividends of $9.2 million.

Contractual Obligations and Commitments

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.

As of March 31, 2026, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

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

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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