What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2026-08-24 compared with 2025-08-25 · 109 added, 60 removed, 122 unchanged (58% of the section changed)

10 unchanged sentences

Highlights from fiscal year 2026 compared with fiscal year 2025 included:

● Net sales for the year decreased 4% to $181.6 million.

● Net revenues for the year increased 11.4% to $202.3 million.

● Recurring service revenue (“RSR”) for the year increased 13% to $97.5 million.

● Gross margin for recurring service revenue was 90.3% for fiscal 2026.

● Gross margin for equipment revenue was 23.6% as compared to 29.4%.

● Net income decreased 13% to $43.4 million.

● Overall gross margin increased to 59.2%, which included a benefit of approximately 50 basis points from tariffs for fiscal 2026

● Net income decreased 1% to $43.0 million after giving effect to a one-time litigation settlement charge of $16 million.

● Non-GAAP Adjusted EBITDA, a measurement of operating performance increased 27.9% to $66.7 million.

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

Industry Landscape

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.

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 enacted and proposed reciprocal tariffs on certain of these countries.

At this time, the overall impact on our business related to tariffs remains uncertain and depends on multiple factors, including the duration and potential expansion of current tariffs, future changes to tariff rates, scope, or enforcement, reciprocal measures by impacted trade partners, inflationary effects, changes to consumer purchasing behavior, and the effectiveness of our responses in managing these challenges.

On February 20, 2026, the U.S.

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

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

Although certain tariffs imposed under IEEPA have been invalidated by courts and are subject to refund claims, replacement tariffs have been imposed under Section 122 and Section 301, and other trade authorities may continue, expand, or be modified.

The ultimate scope, duration, and economic impact of these measures remain uncertain.

As of June 30, 2026 the Company has received or accrued certain IEPPA refund claims.

The Company has submitted additional claims which the Company cannot ensure the probability of collection and therefore, no refund receivable has been recognized related to these claims.

The AI data center buildout has increased demand across a broad range of electronic components, including microcontrollers, memory devices, power management integrated circuits, networking components and other semiconductors used in our products.

Suppliers may allocate limited manufacturing capacity to customers serving AI and cloud infrastructure markets, reducing availability for security and access control manufacturers such as us.

Consequently, we may experience longer lead times, cost increases, allocation restrictions or reduced product availability from suppliers.

If we are unable to obtain sufficient quantities of critical components, identify alternative sources, or pass increased costs to customers, our ability to manufacture and deliver products could be adversely affected.

The markets for security devices and services are dynamic and highly competitive.

1 unchanged sentence

We must continue to evolve and adapt to respond to customer and user preferences over an extended time in pace with this changing environment.

Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.

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

Critical Accounting Policies and Estimates

38 unchanged sentences

Liquidity and Capital Resources

Our cash and cash equivalents and short-term investments are as follows:

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

June 30, 2026

1 unchanged sentence

Money Market Fund

Certificate of Deposits

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

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

A summary of the cash flow activity for the year ended June 30, 2025 and 2024 is as follows:

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

Cash Flows from Operating Activities

Fiscal Year ended June 30,

(in thousands)

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Change in accrued Interest on other investments

Unrealized (gain) loss on marketable securities

Realized (gain) loss on sales of marketable securities

Unrealized gain on marketable securities

Realized gain on sales of marketable securities

(Recovery of) credit losses

5 unchanged sentences

Net cash provided by operating activities was $61.1 million for the year ended June 30, 2026 and was due to net income of $43.0 million, adjustments for non-cash items of $4.8 million and an increase in cash flow from changes in operating assets and liabilities of $13.3 million.

The changes in operating assets and liabilities were largely attributable to decreases in inventories, accounts receivables and prepaid expenses offset by decreases in accounts payables and accrued expenses.

Net cash provided by operating activities was $45.4 million for the year ended June 30, 2024 and was due to net income of $49.8 million and adjustments for non-cash items of $2.7 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $7.1 million.

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

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

Net cash provided by operating activities was $53.5 million for the year ended June 30, 2025 and was due to net income of $43.4 million, adjustments for non-cash items of $3.1 million and an increase in cash flow from changes in operating assets and liabilities of $7.0 million.

The changes in operating assets and liabilities were largely attributable to decreases in inventories, accounts receivable and prepaid expenses offset by decreases in accounts payables and accrued expenses.

Cash Flows from Investing Activities

3 unchanged sentences

Proceeds from sales of marketable securities

Purchases of other investments

Redemption of other investments

Net Cash Provided by (Used in) Investing Activities

Net Cash Provided by Investing Activities

The cash provided by investing activities during the year ended June 30, 2026 was primarily attributable to proceeds from the sale of marketable securities.

The Net cash provided by investing activities was partially offset by net cash used for capital expenditures and purchase of marketable securities.

The cash provided by investing activities during the year ended June 30, 2025 was primarily attributable to proceeds from the sale of marketable securities as well as the redemption of our Certificate of Deposits which were classified as other investments.

The Net cash provided by investing activities was partially offset by net cash used for capital expenditures and purchase of marketable securities.

The cash used in investing activities during the year ended June 30, 2024 was primarily attributable to cash used for capital expenditures and purchase of certificates of deposits.

The change in cash for investing activities from 2024 to 2025 was an increase in proceeds received from marketable securities and other investments.

Cash Flows from Financing Activities

2 unchanged sentences

Dividends paid

Repurchase of common stock

Purchase of treasury shares

Payment of tax withholdings related to stock option exercises

Net Cash Used in Financing Activities

The cash used in financing activities for the year ended June 30, 2025 was primarily related to the payment of stockholder dividends as well as purchase of treasury shares while the year ended June 30, 2024 was primarily related to the payment of stockholder dividends.

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

As of June 30, 2026, the Company’s available revolving credit line was $20,000,000, which expires in February 2029.

5 unchanged sentences

Working Capital.

Working capital decreased by $8,147,000 to $138,387,000 at June 30, 2025 from $146,534,000 at June 30, 2024.

Working capital increased by $27,142,000 to $165,529,000 as of June 30, 2026 from $138,387,000 at June 30, 2025.

Working capital is calculated by deducting Current Liabilities from Current Assets.

1 unchanged sentence

As of June 30, 2026, the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business.

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

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

The service charges increase 2% annually over the remaining life of the lease.

2 unchanged sentences

Fiscal year ended June 30, (dollars in thousands)

equipment revenues

service revenues

Equipment revenue

Service revenue

Total revenue

Gross Profit:

Gross profit:

Total gross profit

Gross profit as a % of net sales

2 unchanged sentences

Selling, general and administrative as a % of net sales

Litigation settlement cost

Operating income

Interest and other income (expense), net

Interest income, net

Other income, net

Provision for income taxes

Net sales in fiscal 2025 decreased by $7,199,000 to $181,621,000 as compared to $188,820,000 in fiscal 2024.

Net equipment revenue in fiscal 2025 decreased $17,780,000 to $95,291,000 as compared to $113,071,000 in fiscal 2024.

The decrease in net sales was primarily due to decreased sales of the Alarm Lock brand door-locking products of $7,183,000, Marks brand door-locking products of $4,309,000, Napco Access Pro brand access control products of $2,274,000 and Napco brand intrusion products of $4,014,000.

The overall decrease in net equipment sales was attributable to the reduction of sales of approximately $6.4 million to one of the Company’s larger distributors, which purchases both our intrusion and locking products.

In addition, the reduction in door locking device sales was primarily attributable to reduced purchases by three of the Company’s locking customers of approximately $9.4 million.

The decrease in equipment revenue was a result of these larger distributors extended destocking strategies throughout the year, in addition to the timing of large project work for our door-locking business and to a lesser extent general softness in demand due to customer uncertainty related to global tariff policies.

In fiscal 2024 our door-locking revenue was positively impacted by a large commercial real estate project.

The timing of project work is difficult to predict from period to period due to numerous factors.

Revenue by major product lines is as follows:

Year ended June 30,

(dollars in thousands)

Equipment Revenue

Intrusion and access alarm products

Intrusion products

Access alarm products

Total intrusion and access alarm products

Door locking devices

Total equipment revenue

Service revenue

Total Revenue

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

Net equipment revenue in fiscal 2026 increased $9,497,000 to $104,788,000 as compared to $95,291,000 in fiscal 2025.

The increase in net equipment revenues was due to increased revenue from door-locking products of $6,925,000, or 11.1% and increased revenue of intrusion and access products of $2,573,000 million or 7.8%.

The increased revenue from our door locking products was primarily a result of the impact of pricing increases (approximately 6.1%) with the balance due to increased sales volume (approximately 5.0%).

The impact of price increases was a result of both our Alarm Lock and Marks USA locking divisions (approximately 6.7% and 4.8%, respectively), sales volume on Alarm Lock grew approximately 13% and Marks USA volume decreased approximately 8.2% as compared to Fiscal 2025.

The increased revenue in our intrusion and access alarm division was primarily a result of the impact of pricing increases (approximately 9.1%), offset by a decrease in volume (approximately 1.3%) .

Intrusion product revenue increased by approximately 14.3% because of price increases of 10.4% and increased volume of 3.9%, primarily driven by the sale of our fire radio communicators.

Access alarm products revenue decreased approximately 11.0% because of price increases of 4.2%, offset by decreased volume of approximately 15.2%.

Net service revenues for fiscal 2026 increased $11,198,000 to $97,528,000 as compared to $86,330,000 in fiscal 2025.

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

The Company's gross profit decreased by $724,000 to $101,030,000 in fiscal 2025 as compared to $101,754,000 in fiscal 2024.

Gross profit on equipment sales was $22,496,000 or 23.6% of net equipment sales in fiscal 2025 and $33,209,000 or 29.4% of net equipment sales, in fiscal 2024.

Gross profit on service revenues was $78,534,000 or 91% of net service revenues in fiscal 2025 and $68,545,000 or 90.5% of net service revenues, in fiscal 2024.

Overall, gross margins increased to 56% of net sales in 2025 from 54% in 2024.

The decrease in Gross profit margins on equipment sales was primarily a result of overall lower equipment sales levels which results in less absorption of fixed manufacturing overhead costs in addition to the impact of tariff costs in the fourth quarter of Fiscal 2025 as a result of distributors pulling forward orders before our announced price increase went into effect.

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

The main driver of new activations was new installations of our fire radio communicators installed by our dealer network.

The Company's gross profit increased by $18,761,000 to $119,791,000 in fiscal 2026 as compared to $101,030,000 in fiscal 2025.

Overall, gross margins increased to 59.2% of net revenue in 2026 from 55.6% in 2025.

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

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

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

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

Research and Development

Research and Development expenses increased by $1,818,000 in fiscal 2025 as compared to fiscal 2024, primarily due to increases of $1,750,000 in personnel-related expenses mainly from merit increases and the hiring of additional engineering staff.

The head count of engineering staff increased by 11% from 72 at the end of Fiscal 2024 to 80 at the end of Fiscal 2025.

Research and Development expenses increased by $1,210,000 to $13,791,000 or 6.8% of net revenue in fiscal 2026 as compared to $12,581,000 or 6.9% of net revenue in fiscal 2025.

The increase is primarily due to increases of $1,040,000 in personnel-related expenses mainly from annual merit increases of engineering staff, and additional cost of obtaining UL approvals $106,000 for new products.

Selling, General and Administrative

Selling, general and administrative expenses for fiscal 2025 increased by $5,017,000 as compared to fiscal 2024, primarily due to increases of $3,451,000 in personnel-related expenses mainly from merit increases and the hiring of additional personnel in the finance and information technology departments, $500,000 in insurance, $370,000 in advertising, $313,000 in legal and professional fees, offset by decreases in $130,000 in Director fees and $500,000 in transactions costs associated with the Company’s Form S-3 filing during fiscal 2024.

Selling, general and administrative expenses for fiscal 2026 increased by $2,172,000 to $44,362,000 or 21.9% of net revenue as compared $42,190,000 or 23.2% of net revenue in fiscal 2025.

The increase is primarily due to increases of $767,000 in personnel-related expenses mainly from merit increases and the hiring of additional personnel in the sales and information technology departments, $775,000 in commission payments mainly from the aforementioned increases in equipment revenue, $327,000 in tradeshow related activities, $184,000 in insurance and $152,000 in 401(k) matching expenses, $104,000 in credit card processing fees related to our service revenue, and $110,000 in other administrative costs, offset by decreases in professional fees of $247,000.

Litigation settlement costs

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

Interest and Other Income (Expense)

5 unchanged sentences

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

The Company’s provision for income taxes for fiscal 2025 remained consistent at $6,663,000 as compared to $6,568,000 for the same period a year ago.

The Company’s effective tax rate for fiscal 2025 increased to 13% as compared to 12% for fiscal 2024 as a result of a larger portion of the Company’s taxable income being attributable to United States operations.

The Company’s provision for income taxes for fiscal 2026 increased by $132,000 to $6,795,000 as compared to $6,663,000 for the same period a year ago.

The Company’s effective tax rate (13.6% fiscal 2026 and 13.3% fiscal 2025) was consistent in both periods.

Non-GAAP Measures

We define non-GAAP adjusted EBITDA as our GAAP net income plus income tax expense, net interest income, stock-based compensation, legal costs and settlement fees incurred and received in connection with non-ordinary course litigation and other disputes, litigation settlement costs, and depreciation and amortization expense.

We do not consider these items to be indicative of our core operating performance.

The non-cash items include amortization and depreciation expense and stock-based compensation expense related to equity compensation.

We define non-GAAP adjusted EBITDA margin as Adjusted EBITDA divided by net revenue.

Non-GAAP adjusted EBITDA and adjusted EBITDA margin are not a measure calculated in accordance with GAAP.

See the table below for a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

We have included non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin in this report because they are key measure our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make strategic investment decisions.

Further, we believe the exclusion of certain expenses in calculating non-GAAP adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of litigation settlement costs and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance.

Accordingly, we believe non-GAAP adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP.

Some of these limitations are:

(a) although amortization and depreciation are non-cash charges, the assets being amortized and depreciated may have to be replaced in the future, and non-GAAP adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

(b) non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

(d) non-GAAP adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

and (e) other companies, including companies in our industry, may calculate non-GAAP adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin alongside our other GAAP-based financial performance measures, net income and our other GAAP financial results.

The following table presents a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):

Year ended June 30,

Non-GAAP adjusted EBITDA:

Net income, as reported

Interest income, net

Provision for income taxes

Depreciation and amortization

Non-GAAP EBITDA

Stock based compensation

Nonrecurring legal expense

Litigation settlement cost

Total adjustments

Non-GAAP adjusted EBITDA

Non-GAAP adjusted EBITDA margin

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-K

Item 7. Management’s Discussion and Analysis